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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
1-1443 Central and South West Corporation 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
0-346 Central Power and Light Company 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300
0-343 Public Service Company of Oklahoma 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 Southwestern Electric Power Company 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 222-2141
0-340 West Texas Utilities Company 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock Outstanding at July 31, 1997 Shares
Central and South West Corporation 212,235,310
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> 2
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1997
PAGE
GLOSSARY OF TERMS..............................................................3
FOWARD LOOKING INFORMATION.....................................................4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Central and South West Corporation and Subsidiary Companies...........5
Central Power and Light Company......................................15
Public Service Company of Oklahoma...................................23
Southwestern Electric Power Company..................................30
West Texas Utilities Company.........................................37
Notes to Financial Statements........................................44
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................60
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................67
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.............................................69
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................69
SIGNATURES....................................................................71
<PAGE> 3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are defined below:
Abbreviation or Acronym Definition
AFUDC..............................Allowance for funds used during construction
ANI................................American Nuclear Insurance
Arkansas Commission................Arkansas Public Service Commission
Burlington Northern................Burlington Northern Railroad Company
Cajun..............................Cajun Electric Power Cooperative, Inc.
Committee of Certain Members.......The members committee of Cajun, which
currently represents 7 of the 12 Louisiana
member distribution cooperatives that are
served by Cajun
Court of Appeals...................Court of Appeals, Third District of Texas,
Austin, Texas
CPL................................Central Power and Light Company, Corpus
Christi, Texas
CPL 1996 Fuel Agreement............Fuel settlement agreement entered into by
CPL and other parties in March 1996
CPL 1997 Rate Order................Final order issued on March 31, 1997 by
Texas Commission in CPL's current rate case
CSW................................Central and South West Corporation, Dallas,
Texas
CSW Communications.................CSW Communications, Inc., Austin, Texas
CSW Energy.........................CSW Energy, Inc., Dallas, Texas
CSW International..................CSW International, Inc., Dallas, Texas
CSW PMI............................CSW Power Marketing, Inc., Dallas, Texas
CSW System.........................CSW and its subsidiaries
CWIP...............................Construction work in progress
ECOM...............................Excess cost over market
El Paso............................El Paso Electric Company
El Paso Merger.....................The proposed merger whereby El Paso would
have become a wholly-owned subsidiary of CSW
EnerShop...........................EnerShopSM Inc., Dallas, Texas
Entergy Gulf States................Gulf States Utilities Company
EPA................................Environmental Protection Agency
ERCOT..............................Electric Reliability Council of Texas
Exchange Act.......................Securities Exchange Act of 1934, as amended
FERC...............................Federal Energy Regulatory Commission
IRS................................Internal Revenue Service
ITC................................Investment tax credit
LIFO...............................Last-in First-out (inventory accounting
method)
MD&A...............................Management's Discussion and Analysis of
Financial Condition and Results of Operations
MDEQ...............................Mississippi Department of Environmental
Quality
Merger Agreement...................Agreement and Plan of Merger between El Paso
and CSW, dated as of May 3, 1993, as amended
MGP................................Manufactured gas plant or coal gasification
plant
Mirror CWIP........................Mirror Construction Work in Progress
Mississippi Power..................Mississippi Power Company
MMbtu..............................Million Btu (British thermal unit)
MWH................................Megawatt-hour
National Grid......................National Grid Group plc
NEIL...............................Nuclear Electric Insurance Limited
OCC Staff..........................Staff of the Oklahoma Commission
Oklahoma Commission................Corporation Commission of the State of
Oklahoma
Oklaunion..........................Oklaunion Power Station
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
<PAGE> 4
GLOSSARY OF TERMS (continued)
Abbreviation or Acronym ...........Definition
SEEBOARD...........................SEEBOARD plc., Crawley, West Sussex, United
Kingdom
SEEBOARD U.S.A.....................CSW's investment in SEEBOARD consolidated and
converted to U.S. Generally Accepted
Accounting Principles
SFAS...............................Statement of Financial Accounting Standards
SFAS No. 52........................Foreign Currency Translation
SFAS No. 71........................Accounting for the Effects of Certain Types
of Regulation
SFAS No. 87........................Employers' Accounting for Pensions
STP................................South Texas Project nuclear electric
generating station, jointly owned by CPL,
Houston Lighting & Power Company, City of
Austin, and City of San Antonio
Subsidiary obligated, mandatorily
redeemable, trust preferred
securities.....................Collective term for securities issued by
business trusts of CPL, PSO andSWEPCO
SWEPCO.............................Southwestern Electric Power Company,
Shreveport, Louisiana
SWEPCO Plan........................The plan of reorganization for Cajun filed by
the Committee of Certain Members, SWEPCO and
Entergy Gulf States on October 26, 1996
with the U.S. Bankruptcy Court for the Middle
District of Louisiana
Texas Commission...................Public Utility Commission of Texas
Transok............................Transok, Inc. and subsidiaries, a former
wholly owned subsidiary of CSW U.S.
Electric(s) or U.S. Electric
Operating Companies............CPL, PSO, SWEPCO and WTU
WTU................................West Texas Utilities Company, Abilene, Texas
FORWARD LOOKING INFORMATION
This report and other presentations made by CSW and its subsidiaries contain
forward looking statements within the meaning of Section 21E of the Exchange
Act. Although CSW and each of its subsidiaries believe that, in making any such
statements, 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. and in countries in which CSW either currently has
made or in the future may make investments; the impact of deregulation on the
U.S. electric utility business; increased competition and electric utility
industry restructuring in the U.S.; federal and state regulatory developments
and changes in law which may have a substantial adverse impact on the value of
CSW System assets; timing and adequacy of rate relief; adverse changes in
electric load and customer growth; climatic changes or unexpected changes in
weather patterns; changing fuel prices, generating plant and distribution
facility performance; decommissioning costs associated with nuclear generating
facilities; uncertainties in foreign operations and foreign laws affecting CSW's
investments in those countries; the effects of retail competition in the natural
gas and electricity distribution and supply businesses in the United Kingdom;
and the timing and success of efforts to develop domestic and international
power projects. In the non-utility area, the aforementioned factors would also
apply, and, in addition, would include: the ability to compete effectively in
new areas, including telecommunications, power marketing and brokering, and
other energy related services, as well as evolving federal and state regulatory
legislation and policies that may adversely affect those industries generally or
the CSW System's business in areas in which it operates.
<PAGE> 5
CSW
CENTRAL AND SOUTH WEST CORPORATION
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 6
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(millions, except per share amounts)
OPERATING REVENUES
<S> <C> <C> <C> <C>
U.S. Electric $765 $861 $1,508 $1,527
United Kingdom 403 394 923 931
Other diversified 16 12 31 24
------- ------- ------- -------
1,184 1,267 2,462 2,482
OPERATING EXPENSES AND TAXES
U.S. Electric fuel 261 290 522 538
U.S. Electric purchased power 17 24 43 40
United Kingdom cost of sales 282 287 651 687
Operating and maintenance 264 217 515 438
Provision for CPL 1997 Rate Order (26) -- 15 --
El Paso Merger litigation 10 -- 35 --
Depreciation and amortization 120 119 239 234
Taxes, other than income 46 46 94 89
Income taxes 41 70 52 98
------- ------- ------- -------
1,015 1,053 2,166 2,124
------- ------- ------- -------
OPERATING INCOME 169 214 296 358
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
U.S. Electric reserves for utility
plant development costs, net of
tax benefit of $1 for 1997 and
$33 for 1996 -- (84) (2) (84)
Other 11 (5) 17 5
------- ------- ------- -------
11 (89) 15 (79)
------- ------- ------- -------
INCOME BEFORE INTEREST CHARGES 180 125 311 279
------- ------- ------- -------
INTEREST AND OTHER CHARGES
Interest on long-term debt 85 82 167 160
Distributions on Subsidiary obligated,
mandatorily redeemable, trust
preferred securities 4 -- 4 --
Interest on short-term debt and other 15 28 35 55
------- ------- ------- -------
104 110 206 215
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS 76 15 105 64
DISCONTINUED OPERATIONS
Income from discontinued operations,
net of income tax expense of $2 and
$6 for 1996 -- 4 -- 12
Gain on the sale of discontinued
operations, net of tax of $71 -- 113 -- 113
------- ------- ------- -------
-- 117 -- 125
------- ------- ------- -------
NET INCOME 76 132 105 189
Less: Preferred stock dividends 3 4 7 9
Gain on reacquired preferred stock 10 -- 10 --
------- ------- ------- -------
NET INCOME FOR COMMON STOCK $83 $128 $108 $180
======= ======= ======= =======
Average Common Shares Outstanding 212.2 209.5 212.0 204.2
Earnings per Share of Common Stock
from Continuing Operations $0.39 $0.05 $0.51 $0.27
Earnings per Share of Common Stock
from Discontinued Operations -- 0.56 -- 0.61
------- ------- ------- -------
Earnings per Share of Common Stock $0.39 $0.61 $0.51 $0.88
======= ======= ======= =======
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.
</TABLE>
<PAGE> 7
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
------- -------
(millions)
ASSETS
FIXED ASSETS
Electric
Production $5,800 $5,830
Transmission 1,553 1,538
Distribution 4,321 4,237
General 1,369 1,318
Construction work in progress 185 230
Nuclear fuel 193 184
------- -------
Total Electric 13,421 13,337
Other diversified 171 84
------- -------
13,592 13,421
Less - Accumulated depreciation and amortization 5,050 4,940
------- -------
8,542 8,481
------- -------
CURRENT ASSETS
Cash and temporary cash investments 268 254
Accounts receivable 1,004 837
Materials and supplies, at average cost 181 185
Electric utility fuel inventory 83 102
Under-recovered fuel costs 59 46
Prepayments and other 86 85
------- -------
1,681 1,509
------- -------
DEFERRED CHARGES AND OTHER ASSETS
Deferred plant costs 506 509
Mirror CWIP asset 292 299
Other non-utility investments 343 371
Income tax related regulatory assets, net 236 236
Goodwill 1,463 1,525
Other 360 402
------- -------
3,200 3,342
------- -------
$13,423 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 8
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
------- -------
(millions)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity
Common stock: $3.50 par value
Authorized: 350.0 million shares
Issued and outstanding: 212.2
million shares in 1997 and
211.5 million shares in 1996 $743 $740
Paid-in capital 1,039 1,022
Retained earnings 1,887 1,963
Foreign currency translation
adjustment and other 38 77
------- -------
3,707 3,802
Preferred stock
Not subject to mandatory redemption 176 292
Subject to mandatory redemption 28 33
Subsidiary obligated, mandatorily
redeemable, trust preferred securities 324 --
Long-term debt 3,979 4,024
------- -------
8,214 8,151
------- -------
CURRENT LIABILITIES
Long-term debt and preferred stock
due within twelve months 204 204
Short-term debt 400 364
Short-term debt - CSW Credit, Inc. 708 579
Loan notes 67 76
Accounts payable 494 630
Accrued taxes 245 324
Accrued interest 102 82
Other 249 166
------- -------
2,469 2,425
------- -------
DEFERRED CREDITS
Accumulated deferred income taxes 2,244 2,272
Investment tax credits 284 291
Other 212 193
------- -------
2,740 2,756
------- -------
$13,423 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 9
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-------------------
1997 1996
------- -------
OPERATING ACTIVITIES (millions)
Net Income $105 $189
Non-cash Items Included in Net Income
Depreciation and amortization 256 269
Deferred income taxes and investment
tax credits (15) 5
Utility plant and other development costs 3 148
Provision for CPL 1997 Rate Order 15 --
Gain on sale of subsidiary -- (184)
Changes in Assets and Liabilities
Accounts receivable (171) (148)
Fuel recovery (13) (64)
Accounts payable -- (92)
Accrued taxes (79) (20)
Other 69 (52)
------- -------
170 51
------- -------
INVESTING ACTIVITIES
Construction expenditures (243) (224)
Acquisition expenditures -- (1,346)
CSW Energy/CSW International projects (97) (15)
Sale of National Grid assets -- 99
Cash proceeds from sale of subsidiary -- 690
Other (5) --
------- -------
(345) (796)
------- -------
FINANCING ACTIVITIES
Common stock sold 20 434
Proceeds from issuance of long-term debt -- 39
SEEBOARD acquisition financing -- 501
Retirement of long-term debt (51) (28)
Reacquisition and retirement of
preferred stock (110) --
Proceeds from issuance of Subsidiary
obligated, mandatorily redeemable,
trust preferred securities 324 --
Other financing activities 39 --
Change in short-term debt 164 (71)
Payment of dividends (194) (183)
------- -------
192 692
------- -------
Effect of exchange rate changes on cash
and cash equivalents (3) 5
Net change in cash and cash equivalents 14 (48)
Cash and cash equivalents - beginning of period 254 401
------- -------
Cash and cash equivalents - end of period $268 $353
======= =======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $190 $179
======= =======
Income taxes paid $174 $98
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 10
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, 1997 and
June 30, 1996. For information concerning the results of operations for each of
the U.S. Electric Operating Companies, see the discussions under the heading
RESULTS OF OPERATIONS following the financial statements of each of the U.S.
Electric Operating Companies.
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1997 AND 1996
Net income for common stock decreased to $83 million in the second
quarter of 1997 from $128 million in the second quarter of 1996 due primarily to
lower sales attributable to milder weather in 1997, the impact of the CPL 1997
Rate Order which decreased earnings approximately $12 million in the second
quarter of 1997 and an after-tax charge of $6.5 million in the second quarter of
1997 to reflect CSW's final settlement of litigation with El Paso. Partially
offsetting these reductions in net income for common stock was a gain of
approximately $10 million recognized on the reacquisition of a portion of the
U.S. Electric Operating Companies' preferred stock. See NOTE 6. CPL RATE REVIEW
- - DOCKET NO. 14965 for additional information relating to the CPL 1997 Rate
Order and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information on CSW's litigation with El Paso.
In addition, several items that occurred in the second quarter of 1996
were not present in the comparable period in 1997. In the second quarter of
1996, CSW recognized earnings from Transok of $4 million and an after-tax gain
of approximately $113 million on the sale of Transok. However, the U.S. Electric
Operating Companies and CSW Energy recorded reserves and write-offs totaling
$102 million after-tax for certain investments and contingencies in 1996 to
offset most of the gain. See NOTE 9. DISCONTINUED OPERATIONS for details
concerning Transok operations.
In the second quarter of 1997, the U.S. Electric Operating Companies
and SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
----------------------------------------------------
Operating Revenues 65% 34% 99% 1% 100%
Operating Income 81% 19% 100% -- 100%
Net Income for CSW Common 110% 11% 121% (21)% 100%
U.S. Electric revenues decreased $96 million, or 11%, in the second
quarter of 1997 compared to the same period a year ago due to several factors.
Mild weather in 1997 caused a reduction in retail base revenues of $38 million
on retail MWH sales that were 4.6% lower than 1996, and fuel revenue also
decreased by approximately $38 million. In addition, during the second quarter
of 1997, CPL recorded a provision for rate refund of $36 million as a result of
the reclassification of the provision for the CPL 1997 Rate Order. These
decreases were partially offset by $17 million of new transmission access
revenues at CPL and WTU related to FERC Order No. 888 and the Texas Commission's
rules regarding transmission access and pricing, the effect of which was almost
entirely offset by a corresponding increase in transmission expense. United
Kingdom revenues increased $9 million, or 2%, in the second quarter of 1997
<PAGE> 11
compared to the second quarter of 1996 due primarily to the effect of the
exchange rate movement between the British pound and the U.S. dollar, partially
offset by the effect of mild weather on sales volume and a reduction in the
fossil fuel levy collected on behalf of the United Kingdom government. Other
diversified revenues increased $4 million, or 33%, in the second quarter of 1997
compared to the same period last year due primarily to increased revenues from
CSW Energy and CSW International, with each company contributing approximately
$2 million to the increase.
U.S. Electric fuel expense decreased $29 million to $261 million in the
second quarter of 1997 compared to the second quarter of 1996 due in part to a
decrease in the average cost of fuel to $1.69 per MMbtu from $1.86 per MMbtu,
reflecting lower spot market natural gas prices and lower cost coal. Also
contributing to the decrease was a change in the overall energy mix as a result
of utilizing a larger percentage of the lower cost coal. The decrease in
weather-related customer demand led to a 5% reduction in generation that also
contributed to lower fuel costs. Purchased power decreased $7 million to $17
million in the second quarter of 1997 compared to the same period a year ago due
primarily to a decrease in economy energy purchases. United Kingdom cost of
sales decreased $5 million, or 2%, in the second quarter of 1997 due primarily
to the reduced fossil fuel levy collected on behalf of the United Kingdom
government and the impact of mild weather on sales volume, partially offset by
the effect of the exchange rate movement between the British pound and the U.S.
dollar.
Operating and maintenance expense increased $47 million to $264 million
in the second quarter of 1997 compared to the same period last year due in part
to the absence in 1997 of a $27 million pension adjustment recorded in the
second quarter of 1996 at SEEBOARD. The effect of the exchange rate movement
between the British pound and U.S. dollar also contributed to the increase in
operating and maintenance expense of SEEBOARD U.S.A. In addition, approximately
$16 million in new transmission access expense was recorded at CPL and WTU in
the second quarter of 1997 related to FERC Order No. 888 and the Texas
Commission rules regarding transmission access and pricing. A second quarter
1997 adjustment related to the CPL 1997 Rate Order further increased operating
and maintenance expense by approximately $6 million, $4 million of which was
decommissioning expense. Partially offsetting the increase in operating and
maintenance expense were reduced pension expense in 1997 resulting from changes
made to CSW's pension plan and the absence in 1997 of restructuring charges of
approximately $8 million recorded in the second quarter of 1996. See NOTE 8.
PENSION PLAN AMENDMENT for details concerning changes to CSW's pension plan. A
$4 million decrease in maintenance expense in 1997, due primarily to the
scheduled refueling outage of CPL's STP Unit 1 and production inventory
write-offs at the U.S. Electric Operating Companies that occurred during the
second quarter of 1996, also partially offset the increase in operating and
maintenance expense. Income tax expense decreased $29 million to $41 million in
the second quarter of 1997 due primarily to lower pre-tax income.
CPL recorded a $41 million contingency in the first quarter of 1997
related to the CPL 1997 Rate Order issued by the Texas Commission in Docket No.
14965. In the second quarter of 1997, CPL reclassified most of the effects of
the contingency recorded in the first quarter of 1997 to reflect the effects of
the CPL 1997 Rate Order and the Texas Commission's hearings on June 20, 1997 in
its specific accounts. Approximately $15 million remains as the Provision for
the CPL 1997 Rate Order, the final classification of which is pending approval
from the FERC. See NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965 for additional
information.
Other income and deductions increased $100 million to $11 million in
the second quarter of 1997 as compared to the same period in 1996 due primarily
to the reserves for certain investments and contingencies recorded in the second
quarter of 1996 of approximately $84 million, after tax, at the U.S. Electric
Operating Companies and $18 million at CSW Energy. Long-term interest expense
<PAGE> 12
increased $3 million, or 4%, in the second quarter of 1997 due primarily to the
addition in 1997 of interest expense resulting from a fourth quarter 1996 debt
issuance by CSW Energy. Short-term and other interest expense decreased $13
million to $15 million in the second quarter of 1997 when compared to the same
period a year ago due primarily to lower levels of short-term borrowings. New
distributions on Subsidiary obligated, mandatorily redeemable, trust preferred
securities increased interest and other charges by $4 million in the second
quarter of 1997, the effect of which was partially offset by lower dividend
requirements resulting from the preferred stock reacquisitions at the U.S.
Electric Operating Companies. See NOTE 7. LONG-TERM FINANCING for additional
information on the new securities.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net income for common stock decreased to $108 million in the first six
months of 1997 from $180 million in the same period of 1996 due primarily to
lower sales resulting from mild weather in the second quarter of 1997, the
effect of the CPL 1997 Rate Order that decreased earnings approximately $37
million and the impact of CSW's final settlement of litigation with El Paso of
approximately $23 million, after tax. Partially offsetting the lower earnings
was the gain of approximately $10 million on the reacquisition of a portion of
the U.S. Electric Operating Companies' preferred stock. See NOTE 6. CPL RATE
REVIEW - DOCKET NO. 14965 for additional information relating to the CPL 1997
Rate Order and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information on CSW's litigation with El Paso.
In addition, several items that occurred in the first six months of
1996 were not present in the comparable period in 1997. In the first six months
of 1996, CSW recognized $12 million of earnings from Transok's operations and an
after-tax gain of approximately $113 million on the sale of Transok. However,
the U.S. Electric Operating Companies and CSW Energy recorded reserves and
write-offs totaling $102 million after-tax for certain investments and
contingencies in 1996 to offset most of the gain. See NOTE 9. DISCONTINUED
OPERATIONS for details concerning Transok operations.
In the first six months of 1997, the U.S. Electric Operating Companies
and SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
----------------------------------------------------
Operating Revenues 62% 37% 99% 1% 100%
Operating Income 73% 31% 104% (4)% 100%
Net Income for CSW Common 99% 37% 136% (36)% 100%
U.S. Electric revenues decreased approximately $19 million, or 1%, in
the first six months of 1997 compared to the same period a year ago due
primarily to mild weather in the second quarter of 1997 that caused retail base
revenues to decline by approximately $42 million. Also contributing to the
decline in revenues was a decrease in fuel revenues of approximately $21
million, as it relates to fuel expense discussed below. Partially offsetting
these decreases in U.S. Electric revenues was new transmission access revenues
at CPL and WTU of approximately $33 million related to FERC Order No. 888 and
the Texas Commission's rule regarding transmission access and pricing, the
effect of which was almost entirely offset by a corresponding amount of
transmission expense and the absence in 1997 of the provision for refund at CPL
related to the CPL 1996 Fuel Agreement. United Kingdom revenues decreased $8
million to $923 million in the first half of 1997 compared to the first half of
1996 due primarily to a reduction in the fossil fuel levy collected on behalf of
<PAGE> 13
the United Kingdom government and the adverse effect of mild weather on sales
volume in the first half of 1997, partially offset by the effect of the exchange
rate movement between the British pound and the U.S. dollar. Other diversified
revenues increased $7 million, or 29%, in the first six months of 1997 compared
to the first six months of 1996 due primarily to increased revenues from CSW
Energy, CSW International, CSW Communications and EnerShop.
U.S. Electric fuel expense decreased $16 million to $522 million in the
first half of 1997 compared to the same period last year due in part to a
decrease in fuel costs to $1.76 per MMbtu from $1.82 per MMbtu. The decrease in
fuel expense is partially attributable to lower cost coal and a change in the
fuel mix of generation in favor of lower cost coal. Mild weather in the first
half of 1997 lead to a 4% reduction in generation which decreased fuel expense
as well. Partially offsetting these decreases was the absence in 1997 of a
one-time reduction to fuel expense of approximately $9 million in the first
quarter of 1996 related to the CPL 1996 Fuel Agreement. Purchased power
increased $3 million, or 8%, in the first half of 1997 due primarily to
increased economy energy purchases and other first quarter 1997 purchases at CPL
which resulted from a scheduled nuclear refueling at STP Unit 2 and an overhaul
of a coal-fired generating plant. United Kingdom cost of sales decreased
approximately $36 million to $651 million in the first half of 1997 compared to
the same period a year ago due primarily to a reduction in the fossil fuel levy
collected on behalf of the United Kingdom government and the adverse effect of
mild weather on sales volume in the first half of 1997, partially offset by the
effect of the exchange rate movement between the British pound and the U.S.
dollar.
Operating and maintenance expense increased $77 million to $515 million
in the first half of 1997 compared to the same period last year due in part to
the absence in 1997 of a $27 million pension adjustment recorded in the second
quarter of 1996 at SEEBOARD. The effect of the exchange rate movement between
the British pound and U.S. dollar also contributed to the increase in operating
and maintenance expense of SEEBOARD U.S.A. In addition, approximately $31
million in new transmission access expense was recorded at CPL and WTU in the
first six months of 1997 related to FERC Order No. 888 and the Texas Commission
rules regarding transmission access and pricing. An adjustment recorded in the
second quarter of 1997 related to the CPL 1997 Rate Order further increased
operating and maintenance expense by approximately $6 million, $4 million of
which was decommissioning expense. Additional charges recorded in the first
quarter of 1997 related to CSW's 1996 restructuring also contributed to the
increase. Partially offsetting the increase in operating and maintenance expense
were reduced pension expense in 1997 resulting from changes made to CSW's
pension plan and the absence in 1997 of restructuring charges of approximately
$8 million recorded in the second quarter of 1996. See NOTE 8. PENSION PLAN
AMENDMENT for details concerning changes to CSW's pension plan. A $3 million
decrease in maintenance expense, due primarily to the scheduled refueling outage
of CPL's STP Unit 1 and the write-down of production inventory at the U.S.
Electric Operating Companies in 1996, also partially offset the increase in
operating and maintenance expense. Income tax expense decreased $46 million to
$52 million in the first six months of 1997 due primarily to lower pre-tax
income.
CPL recorded a $41 million contingency in the first quarter of 1997
related to the CPL 1997 Rate Order issued by the Texas Commission in Docket No.
14965. In the second quarter of 1997, CPL reclassified most of the effects of
the reserve contingency in the first quarter of 1997 to reflect the effects of
the CPL 1997 Rate Order and the Texas Commission's hearings on June 20, 1997 in
its specific accounts. Approximately $15 million remains as the Provision for
the CPL 1997 Rate Order, the final classification of which is pending approval
from the FERC. See NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965 for additional
information.
Other income and deductions increased $94 million to $15 million in the
first six months of 1997 as compared to the same period in 1996 due primarily to
the reserves for certain investments and contingencies recorded in the second
<PAGE> 14
quarter of 1996 of approximately $84 million, after tax, at the U.S. Electric
Operating Companies and $18 million at CSW Energy. Long-term interest expense
increased $7 million, or 4%, in the first half of 1997 due primarily to the
addition in 1997 of interest expense resulting from a fourth quarter 1996 debt
issuance by CSW Energy. Short-term and other interest expense decreased $20
million to $35 million in the first six months of 1997 when compared to the same
period a year ago due primarily to lower levels of short-term borrowings. New
distributions on Subsidiary obligated, mandatorily redeemable, trust preferred
securities increased interest and other charges by $4 million in the first six
months of 1997, the effect of which was partially offset by lower dividend
requirements resulting from the preferred stock reacquisitions at the U.S.
Electric Operating Companies. See NOTE 7. LONG-TERM FINANCING for additional
information on the new securities.
<PAGE> 15
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 16
CENTRAL POWER AND LIGHT COMPANY
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands) (thousands)
<S> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES $301,121 $362,065 $615,782 $615,453
OPERATING EXPENSES AND TAXES
Fuel 83,936 90,478 162,196 154,495
Purchased power 10,550 16,865 28,151 29,300
Other operating 70,153 59,242 145,924 109,762
Provision for CPL 1997 Rate Order (25,885) -- 15,038 --
Maintenance 14,450 18,766 29,433 29,110
Depreciation and amortization 39,534 42,542 77,907 82,137
Taxes, other than income 19,671 20,987 40,928 39,341
Income taxes 23,482 33,033 20,771 43,031
--------- --------- --------- ---------
235,891 281,913 520,348 487,176
--------- --------- --------- ---------
OPERATING INCOME 65,230 80,152 95,434 128,277
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of tax
benefit of $779 for 1997 and
$5,893 for 1996 -- (15,481) (1,282) (15,481)
Allowance equity for funds used
during construction 288 -- 773 --
Other 1,788 1,462 2,784 3,210
--------- --------- --------- ---------
2,076 (14,019) 2,275 (12,271)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 67,306 66,133 97,709 116,006
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 27,143 27,396 54,118 54,665
Interest on short-term debt and other 1,083 4,467 8,211 11,130
Distributions on CPL obligated,
mandatorily redeemable, trust
preferred securities 1,548 -- 1,548 --
Allowance for borrowed funds used
during construction (633) (537) (1,126) (1,216)
--------- --------- --------- ---------
29,141 31,326 62,751 64,579
--------- --------- --------- ---------
NET INCOME 38,165 34,807 34,958 51,427
Less: Preferred stock dividends 2,177 3,360 5,610 6,797
Gain on reacquired preferred stock 2,706 -- 2,706 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $38,694 $31,447 $32,054 $44,630
========= ========= ========= =========
The accompanying notes to financial statements as
they relate to CPL are an integral part of these statements.
</TABLE>
<PAGE> 17
CENTRAL POWER AND LIGHT COMPANY
BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $3,109,521 $3,102,929
Transmission 509,110 505,801
Distribution 983,821 956,928
General 281,266 271,347
Construction work in progress 84,201 95,336
Nuclear fuel 193,199 184,229
---------- ----------
5,161,118 5,116,570
Less - Accumulated depreciation and amortization 1,759,539 1,697,552
---------- ----------
3,401,579 3,419,018
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 25,884 3,299
Advances to affiliates 51,826 --
Accounts receivable 93,927 53,038
Materials and supplies, at average cost 72,607 75,732
Fuel inventory 11,008 15,461
Under-recovered fuel costs 31,580 26,298
Prepayments and other 6,343 4,484
---------- ----------
293,175 178,312
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred STP costs 485,677 486,978
Mirror CWIP asset 292,422 298,708
Income tax related regulatory assets, net 329,182 335,226
Other 101,579 110,021
---------- ----------
1,208,860 1,230,933
---------- ----------
$4,903,614 $4,828,263
========== ==========
The accompanying notes to financial statements as
they relate to CPL are an integral part of these statements.
<PAGE> 18
CENTRAL POWER AND LIGHT COMPANY
BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
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 854,986 868,932
---------- ----------
1,428,874 1,442,820
Preferred stock 163,204 250,351
CPL obligated, mandatorily redeemable,
trust preferred securities 144,861 --
Long-term debt 1,326,917 1,323,054
---------- ----------
3,063,856 3,016,225
---------- ----------
CURRENT LIABILITIES
Long-term debt due within twelve months 200,000 200,000
Advances from affiliates -- 52,525
Payables to affiliates 23,465 23,995
Accounts payable 82,812 45,946
Accrued taxes 66,764 64,207
Accrued interest 30,701 31,566
Refund due customers 98,951 43,266
Provision for CPL 1997 Rate Order 15,038 --
Accumulated deferred income taxes 9,322 7,310
Other 16,420 19,048
---------- ----------
543,473 487,863
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 1,136,592 1,162,051
Investment tax credits 144,296 147,191
Other 15,397 14,933
---------- ----------
1,296,285 1,324,175
---------- ----------
$4,903,614 $4,828,263
========== ==========
The accompanying notes to financial statements as
they relate to CPL are an integral part of these statements.
<PAGE> 19
CENTRAL POWER AND LIGHT COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-----------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $34,958 $51,427
Non-cash Items Included in Net Income
Depreciation and amortization 89,050 93,333
Deferred income taxes and
investment tax credits (20,298) 3,981
Establishment of regulatory assets -- 6,682
Provision for CPL 1997 Rate Order 15,038 --
Utility plant development costs 2,061 21,374
Inventory reserve -- 487
Changes in Assets and Liabilities
Accounts receivable (40,889) (8,036)
Fuel inventory 4,453 7,016
Accounts payable 36,022 25,852
Accrued taxes 2,557 8,020
Fuel recovery (5,282) (17,009)
Refund due customers 55,685 22,977
Other 12,067 (26,597)
--------- ---------
185,422 189,507
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (73,603) (45,845)
Other 9,239 (344)
--------- ---------
(64,364) (46,189)
--------- ---------
FINANCING ACTIVITIES
Reacquisition of long-term debt -- (231)
Redemption of preferred stock (84,441) --
Proceeds from issuance of CPL
obligated, mandatorily redeemable,
trust preferred securities 144,861 --
Change in advances from affiliates (52,525) (86,327)
Payment of dividends (54,501) (56,925)
Other (41) (109)
--------- ---------
(46,647) (143,592)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 74,411 (274)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 3,299 2,883
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $77,710 $2,609
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on trust
preferred securities) $57,212 $60,137
========= =========
Income taxes paid $25,912 $12,753
========= =========
The accompanying notes to financial statements as
they relate to CPL are an integral part of these statements.
<PAGE> 20
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1997 AND 1996
Net income for common stock increased $7.2 million, or 23%, from $31.4
million during the second quarter of 1996 to $38.7 million during the second
quarter of 1997. This increase was due primarily to a $15.5 million, net of tax,
one-time charge associated with certain investments for plant sites, engineering
studies and lignite reserves which was recorded in 1996. The increase was
partially offset by a decrease in non-fuel revenues in the second quarter of
1997 resulting from decreased weather-related demand as well as the impact of
the CPL 1997 Rate Order which decreased earnings approximately $12 million. See
NOTE 6. CPL RATE REVIEW DOCKET NO. 14965 for more information related to the CPL
1997 Rate Order.
Total electric operating revenues decreased approximately $61 million,
or 17%, in the second quarter of 1997 compared to the second quarter of 1996 due
primarily to the effects of recording a provision for rate refund in the second
quarter of 1997 as a result of the reclassification of a portion of the
provision for CPL 1997 Rate Order and the resulting recording to specific
accounts. Also contributing to the decrease was a 4.9% reduction in retail MWH
sales resulting from milder weather. Additionally, fuel revenues decreased
because of lower fuel costs, as discussed below. Partially offsetting these
decreases was an increase in transmission revenues of approximately $11.8
million as a result of the implementation of open access tariffs in accordance
with FERC Order No. 888 and the Texas Commission rules regarding transmission
access and pricing, the effect of which was almost entirely offset by a
corresponding increase in transmission expense.
Fuel and purchased power expense decreased $12.9 million in the second
quarter of 1997 to $94.5 million compared to the second quarter of 1996. Fuel
expense decreased $6.5 million, or 7%, in the second quarter of 1997 compared
with the second quarter of 1996 primarily as a result of a decrease in the
average unit cost of fuel from $1.68 per MMbtu in the second quarter of 1996 to
$1.56 per MMbtu in the second quarter of 1997. This decrease resulted primarily
from lower spot market prices for natural gas and lower coal costs during the
second quarter of 1997. Purchased power expense decreased 37% from $16.9 million
during the second quarter of 1996 to $10.6 million in the second quarter of 1997
due primarily to a lower volume of economy energy purchases.
Other operating expense increased 18% to $70.2 million in the second
quarter of 1997 when compared to the second quarter of 1996 due primarily to an
approximate $11.5 million increase in transmission expenses resulting from the
implementation of open access tariffs in accordance with FERC Order No. 888 and
the Texas Commission rules regarding transmission access and pricing, the effect
of which was more than offset by a corresponding increase in transmission
revenue. This increase was partially offset by decreased property insurance
expense resulting from an insurance refund and decreased employee pension
expense. Maintenance expenses decreased to approximately $14.5 million in the
second quarter of 1997 from approximately $18.8 million in the second quarter of
1996 due primarily to the scheduled refueling outage of STP Unit 1 that occurred
during the second quarter of 1996.
CPL recorded a $40.9 million contingency in the first quarter of 1997
related to the CPL 1997 Rate Order issued by the Texas Commission in Docket No.
14965. In the second quarter of 1997, CPL reclassified most of the effects of
<PAGE> 21
the contingency recorded in the first quarter in order to reflect the effects of
the CPL 1997 Rate Order and the hearings on June 20, 1997 in its specific
accounts. Approximately $15 million remains as the Provision for CPL 1997 Rate
Order, the final classification of which is pending approval from the FERC. See
NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965 for additional information.
Depreciation and amortization expenses decreased approximately $3
million, or 7%, compared to the second quarter of 1996 due to the implementation
in 1997 of lower depreciation rates in accordance with the CPL 1997 Rate Order.
Income taxes decreased approximately $9.6 million to $23.5 million in the second
quarter of 1997 compared with the second quarter of 1996 resulting from lower
pre-tax income in the second quarter of 1997 and prior year tax adjustments that
were recorded in the second quarter of 1996, which resulted in an increase in
the 1996 income tax expense.
Other income and deductions increased $16.1 million due primarily to
the one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $15.5 million, net of
tax, recorded in the second quarter of 1996. Interest on short-term debt and
other decreased from $4.5 million in the second quarter of 1996 to approximately
$1.1 million in the second quarter of 1997 due primarily to a true-up in the
accrual for interest associated with the provision for rate refund in Docket No.
14965 and a decrease in short-term borrowings from affiliates.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net income for common stock decreased $12.6 million, or 28%, from $44.6
million for the first six months of 1996 to $32.1 million for the first six
months of 1997. The major reason for the decrease was the impact of the CPL 1997
Rate Order which decreased earnings approximately $37 million. This decrease was
partially offset by an increase in other income and deductions due to a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of approximately $15.5 million, net of tax, recorded in the
second quarter of 1996. See NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965 for more
information related to the CPL 1997 Rate Order.
Total electric operating revenues increased slightly for the first six
months of 1997 compared to the first six months of 1996. There were two main
factors that contributed to the increase, including an increase in transmission
revenues of approximately $23.6 million as a result of the implementation of
open access tariffs in accordance with FERC Order No. 888 and the Texas
Commission rules regarding transmission access and pricing, and the absence in
1997 of the provision for refund related to the CPL 1996 Fuel Agreement. These
increases in revenue were almost entirely offset by the effects of the recording
of a provision for rate refund of approximately $43 million during 1997
associated with Docket No. 14965. The impact of the increase in transmission
access revenues was almost entirely offset by a corresponding increase in
transmission expense.
Fuel and purchased power expense increased approximately $6.6 million
in the first six months of 1997 compared to the first six months of 1996. Fuel
expense increased $7.7 million as a result of an increase in the average unit
cost of fuel from $1.54 per MMbtu in the first six months of 1996 to $1.66 per
MMbtu in the first six months of 1997. This increase resulted primarily from
higher spot market prices for natural gas. Also contributing to this increase
was a one-time $8.8 million reduction in fuel expense recorded in the first
quarter of 1996 in accordance with the CPL 1996 Fuel Agreement. Purchased power
expense decreased 4% from $29.3 million during the first six months of 1996 to
$28.2 million in the first six months of 1997 due primarily to decreased economy
energy purchases.
<PAGE> 22
Other operating expense increased 33% to $145.9 million in the first
six months of 1997 due primarily to a $23 million increase in transmission
operations expenses as a result of the implementation of open access tariffs in
accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing, the effect of which was more than offset by a
corresponding increase in transmission revenue; the write-off of approximately
$11 million in previously deferred rate case expenses in accordance with the
settlement in principle of the rate case expense phase of CPL's current rate
case; and additional expenses recorded in 1997 associated with the restructuring
that CSW undertook in 1996. These increases were offset in part by reductions in
pension expense and other employee related expenses.
CPL recorded a $40.9 million contingency in the first quarter of 1997
related to the CPL 1997 Rate Order issued by the Texas Commission in Docket No.
14965. In the second quarter of 1997, CPL reclassified most of the effects of
the contingency recorded in the first quarter in order to reflect the effects of
the CPL 1997 Rate Order and the hearings on June 20, 1997 in its specific
accounts. Approximately $15 million remains as the Provision for CPL 1997 Rate
Order, the final classification of which is pending approval from the FERC. See
NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965 for additional information.
Depreciation and amortization expenses decreased approximately $4.2
million compared to the first six months of 1996 due to the implementation in
1997 of lower depreciation rates in accordance with the CPL Rate Review. Income
taxes decreased approximately $22.3 million in the first six months of 1997
compared with the first six months of 1996 resulting primarily from the income
tax effect of the CPL 1997 Rate Order.
Other income and deductions increased approximately $14.5 million to
$2.3 million due primarily to the one-time charge associated with certain
investments for plant sites, engineering studies and lignite reserves of
approximately $15.5 million, net of tax, recorded in the second quarter of 1996.
Interest on short-term debt and other decreased from $11.1 million in the first
six months of 1996 to approximately $8.2 million in the first six months of 1997
due primarily to the recording of a true-up in the accrual for interest
associated with the provision for rate refund in Docket No. 14965 and a decrease
in short-term borrowings from affiliates.
<PAGE> 23
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 24
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands) (thousands)
ELECTRIC OPERATING REVENUES $166,692 $181,586 $321,857 $329,006
OPERATING EXPENSES AND TAXES
Fuel 58,949 68,695 121,808 131,244
Purchased power 12,515 9,776 24,440 18,439
Other operating 30,363 29,442 58,075 57,522
Maintenance 9,420 11,512 15,356 17,710
Depreciation and amortization 20,034 19,400 39,817 38,431
Taxes, other than income 7,104 6,633 14,404 13,409
Income taxes 6,696 9,778 9,668 11,896
--------- --------- --------- ---------
145,081 155,236 283,568 288,651
--------- --------- --------- ---------
OPERATING INCOME 21,611 26,350 38,289 40,355
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Allowance for equity funds
used during construction 167 (22) 257 (23)
Reserve for utility plant
development costs, net of
tax benefit of $48 for 1997
and $15,302 for 1996 -- (35,552) (75) (35,552)
Other 862 (21) 685 222
--------- --------- --------- ---------
1,029 (35,595) 867 (35,353)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 22,640 (9,245) 39,156 5,002
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 7,619 7,677 15,237 15,116
Interest on short-term debt
and other 1,054 1,633 2,666 3,322
Distributions on PSO obligated,
mandatorily redeemable, trust
preferred securities 968 -- 968 --
Allowance for borrowed funds used
during construction (443) (340) (920) (699)
--------- --------- --------- ---------
9,198 8,970 17,951 17,739
--------- --------- --------- ---------
NET INCOME (LOSS) 13,442 (18,215) 21,205 (12,737)
Less: Preferred stock dividends 53 204 257 408
Gain on reacquired preferred stock 4,444 -- 4,444 --
--------- --------- --------- ---------
NET INCOME (LOSS) FOR COMMON STOCK $17,833 $(18,419) $25,392 $(13,145)
========= ========= ========= =========
The accompanying notes to consolidated financial
statements as they relate to PSO are an integral part of these statements.
<PAGE> 25
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $902,723 $902,813
Transmission 372,046 368,280
Distribution 799,840 773,590
General 203,720 186,252
Construction work in progress 39,784 59,241
---------- ----------
2,318,113 2,290,176
Less - Accumulated depreciation and amortization 1,015,724 987,283
---------- ----------
1,302,389 1,302,893
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 5,293 1,479
Advances to affiliates 7,446 --
Accounts receivable 24,952 11,069
Materials and supplies, at average cost 33,976 34,542
Fuel inventory 15,842 14,061
Accumulated deferred income taxes 6,192 2,558
Prepayments and other 4,143 2,991
---------- ----------
97,844 66,700
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 64,958 62,004
---------- ----------
$1,465,191 $1,431,597
========== ==========
The accompanying notes to consolidated financial
statements as they relate to PSO are an integral part of these statements.
<PAGE> 26
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $15 par value
Authorized shares: 11,000,000
Issued shares: 10,482,000
Outstanding shares: 9,013,000 $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 155,335 145,943
---------- ----------
492,565 483,173
Preferred stock 5,292 19,826
PSO obligated, mandatorily redeemable,
trust preferred securities 72,520 --
Long-term debt 421,062 420,301
---------- ----------
991,439 923,300
---------- ----------
CURRENT LIABILITIES
Advances from affiliates -- 42,867
Payables to affiliates 23,985 27,425
Accounts payable 43,427 47,604
Payables to customers 15,309 14,329
Accrued taxes 26,500 12,306
Accrued interest 8,742 9,193
Other 5,374 7,421
---------- ----------
123,337 161,145
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 254,030 251,007
Investment tax credits 42,046 43,438
Income tax related regulatory liabilities, net 43,977 46,007
Other 10,362 6,700
---------- ----------
350,415 347,152
---------- ----------
$1,465,191 $1,431,597
========== ==========
The accompanying notes to consolidated financial
statements as they relate to PSO are an integral part of these statements.
<PAGE> 27
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $21,205 $(12,737)
Non-cash Items Included in Net Income
Depreciation and amortization 42,756 41,419
Deferred income taxes and
investment tax credits (4,033) (8,434)
Utility plant development costs 123 50,854
Inventory reserve -- 3,945
Changes in Assets and Liabilities
Accounts receivable (13,883) (9,243)
Accounts payable (7,340) (10,498)
Accrued taxes 14,194 (13,334)
Other (3,441) (3,276)
-------- --------
49,581 38,696
-------- --------
INVESTING ACTIVITIES
Construction expenditures (38,793) (39,166)
Other (1,713) (3,128)
-------- --------
(40,506) (42,294)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 39,415
Retirement of long-term debt -- (25,000)
Reacquisition of preferred stock (10,090) --
Proceeds from issuance of PSO obligated,
mandatorily redeemable, trust
preferred securities 72,520 --
Change in advances from affiliates (42,867) (3,127)
Payment of dividends (17,378) (7,431)
-------- --------
2,185 3,857
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 11,260 259
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,479 744
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,739 $1,003
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on trust
preferred securities) $17,558 $16,493
======== ========
Income taxes paid $8,788 $16,867
======== ========
The accompanying notes to consolidated financial
statements as they relate to PSO are an integral part of these statements.
<PAGE> 28
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1997 AND 1996
Net income for common stock increased $36.3 million during the second
quarter of 1997 to $17.8 million compared to an $18.4 million loss in the second
quarter of 1996. The increase resulted primarily from a 1996 one-time charge for
certain investments for plant sites, engineering studies and lignite reserves of
approximately $35.6 million, net of taxes.
Electric operating revenues were $166.7 million during the second
quarter of 1997, an 8% decrease from $181.6 million during the second quarter of
1996. The decrease was due primarily to a decline in residential and commercial
MWH sales of 13% and 4%, respectively, resulting from mild weather conditions.
Additionally, a decrease in fuel related revenues of $6.9 million and a
provision established for a rate refund contributed to the decreased revenues.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information.
Fuel expense decreased $9.7 million, or 14%, during the second quarter
of 1997 compared to the second quarter of 1996 due primarily to a decrease in
the average unit cost of fuel from $2.03 per MMbtu in the second quarter of 1996
to $1.85 per MMbtu for the same period in 1997. The decline in the average unit
cost of fuel was due primarily to utilizing lower cost coal in place of higher
cost spot market natural gas. A decrease in generation attributable to lower MWH
sales also contributed to this decrease. Partially offsetting the decrease in
fuel expense was a decline in under-recovered fuel costs in the second quarter
of 1997 compared to the same period in 1996. Purchased power expenses increased
approximately 28% to $12.5 million for the second quarter of 1997 from $9.8
million in the same period of 1996. The increase was due primarily to increases
in the amount of economy energy purchased.
Other operating expenses were relatively stable during the second
quarter of 1997 compared to the second quarter of 1996. Maintenance expense
decreased 18% to $9.4 million in the second quarter of 1997 from $11.5 million
in the second quarter of 1996 primarily as a result of the 1996 write-down of
production inventory partially offset by an increase in tree trimming expense in
1997. Depreciation and amortization expense increased 3% to $20.0 million in the
second quarter of 1997 from $19.4 million in the second quarter of 1996
primarily as a result of an increase in depreciable property. Operating income
taxes were $6.7 million in the second quarter of 1997 compared to $9.8 million
in the same period of 1996 due primarily to lower taxable income in 1997.
Other income and deductions increased $36.6 million in the second
quarter of 1997 compared to the same period in 1996 primarily as a result of the
1996 one-time charge for certain investments for plant sites, engineering
studies and lignite reserves of approximately $35.6 million, net of tax.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net income for common stock increased to $25.4 million in the first
half of 1997 from a loss of $13.1 million in the first half of 1996. The
increase resulted primarily from the 1996 one-time charge for certain
investments for plant sites, engineering studies and lignite reserves of
approximately $35.6 million, net of tax.
<PAGE> 29
Electric operating revenues were $321.9 million during the first half
of 1997, a 2% decrease from $329.0 million during the same period in 1996. The
decrease was due primarily to a decline in residential and commercial MWH sales
of 7% and 2%, respectively, resulting from mild weather. Additionally, a
decrease in fuel related revenues of $2.3 million and a provision established
for a possible rate refund contributed to the lower revenues. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for additional information related to the
PSO rate review.
Fuel expense decreased $9.4 million during the first half of 1997
compared to the first half of 1996 due primarily to a decrease in the average
unit cost of fuel from $2.06 per MMbtu in the first half of 1996 to $1.90 per
MMbtu for the same period in 1997. The decline in the average unit cost of fuel
was due primarily to utilizing lower cost coal in place of higher cost spot
market natural gas. A decrease in generation attributable to lower MWH sales
also contributed to this decrease. Offsetting the decrease in part was an
over-recovery of fuel costs in the first half of 1997 compared to an
under-recovery of fuel costs in the first half of 1996. Purchased power expenses
increased approximately 33% to $24.4 million for the first six months of 1997
from $18.4 million in the same period of 1996. The increase was due primarily to
increases in the amount of economy energy purchased.
Other operating expenses were relatively stable during the first six
months of 1997 compared to the first half of 1996. Maintenance expense decreased
13% to $15.4 million in the first six months of 1997 from $17.7 million in the
first six months of 1996 primarily as a result of the 1996 write-down of
production inventory. Depreciation and amortization expense increased 4% to
$39.8 million in the first half of 1997 from $38.4 million in the first six
months of 1996 as a result of an increase in depreciable property. Taxes, other
than income were $14.4 million in 1997, a 7% increase from $13.4 million in the
first half of 1996. This increase was due primarily to higher ad valorem taxes
in the first six months of 1997. Operating income taxes were $9.7 million in the
first half of 1997 compared to $11.9 million in the same period of 1996 due
primarily to higher taxable income in 1996.
Other income and deductions increased $36.2 million in the first six
months of 1997 compared to the same period in 1996 primarily as a result of a
1996 one-time charge for certain investments for plant sites, engineering
studies and lignite reserves of approximately $35.6 million, net of tax.
<PAGE> 30
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 31
SOUTHWESTERN ELECTRIC POWER COMPANY
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands) (thousands)
<S> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES $227,327 $236,563 $430,607 $437,444
OPERATING EXPENSES AND TAXES
Fuel 90,987 95,606 178,583 184,918
Purchased power 5,309 10,764 10,440 16,098
Other operating 33,208 31,579 65,756 63,473
Maintenance 12,399 11,932 21,439 21,038
Depreciation and amortization 23,604 22,698 47,028 44,939
Taxes, other than income 12,698 11,501 26,093 23,412
Income taxes 10,765 12,462 16,837 17,196
--------- --------- --------- ---------
188,970 196,542 366,176 371,074
--------- --------- --------- ---------
OPERATING INCOME 38,357 40,021 64,431 66,370
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $260 for
1997 and $7,847 for 1996 -- (21,743) (483) (21,743)
Allowance for equity funds
used during construction 176 2 176 326
Other 678 163 864 925
--------- --------- --------- ---------
854 (21,578) 557 (20,492)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 39,211 18,443 64,988 45,878
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 10,278 10,995 20,820 21,995
Distributions on SWEPCO obligated,
mandatorily redeemable, trust
preferred securities 1,398 -- 1,398 --
Interest on short-term debt and other 1,479 2,534 3,591 4,957
Allowance for borrowed funds used
during construction (343) (471) (742) (1,226)
--------- --------- --------- ---------
12,812 13,058 25,067 25,726
--------- --------- --------- ---------
NET INCOME 26,399 5,385 39,921 20,152
Less: Preferred stock dividends 575 758 1,333 1,537
Gain on reacquired preferred stock 2,180 -- 2,180 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $28,004 $4,627 $40,768 $18,615
========= ========= ========= =========
The accompanying notes to financial statements
as they relate to SWEPCO are an integral part of these statements.
</TABLE>
<PAGE> 32
SOUTHWESTERN ELECTRIC POWER COMPANY
BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $1,370,027 $1,407,134
Transmission 466,503 463,425
Distribution 848,496 844,503
General 309,775 283,878
Construction work in progress 45,412 45,374
---------- ----------
3,040,213 3,044,314
Less - Accumulated depreciation 1,189,058 1,192,356
---------- ----------
1,851,155 1,851,958
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 5,240 1,879
Advances to affiliates 5,472 --
Accounts receivable 55,986 68,140
Materials and supplies, at average cost 27,832 29,265
Fuel inventory 41,256 55,775
Under-recovered fuel costs 12,236 9,120
Prepayments and other 14,408 13,499
---------- ----------
162,430 177,678
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 75,055 69,520
---------- ----------
$2,088,640 $2,099,156
========== ==========
The accompanying notes to financial statements as
they relate to SWEPCO are an integral part of these statements.
<PAGE> 33
SOUTHWESTERN ELECTRIC POWER COMPANY
BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $18 par value
Authorized shares: 7,600,000
Issued and outstanding shares: 7,536,640 $135,660 $135,660
Paid-in capital 245,000 245,000
Retained earnings 334,569 321,801
---------- ----------
715,229 702,461
Preferred stock
Not subject to mandatory redemption 4,710 16,032
Subject to mandatory redemption 28,306 32,464
SWEPCO obligated, mandatorily redeemable,
trust preferred securities 106,393 --
Long-term debt 547,523 597,151
---------- ----------
1,402,161 1,348,108
---------- ----------
CURRENT LIABILITIES
Long-term debt and preferred stock due
within twelve months 3,679 3,760
Advances from affiliates -- 57,495
Accounts payable 57,664 48,826
Payable to affiliates 61,908 68,708
Customer deposits 11,006 10,497
Accrued taxes 33,417 25,241
Accumulated deferred income taxes 5,312 4,162
Accrued interest 13,597 14,782
Other 12,027 27,449
---------- ----------
198,610 260,920
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 376,443 372,552
Investment tax credits 69,176 71,507
Income tax related regulatory
liabilities, net 32,967 36,106
Other 9,283 9,963
---------- ----------
487,869 490,128
---------- ----------
$2,088,640 $2,099,156
========== ==========
The accompanying notes to financial statements as
they relate to SWEPCO are an integral part of these statements.
<PAGE> 34
SOUTHWESTERN ELECTRIC POWER COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------
1997 1996
--------- --------
OPERATING ACTIVITIES (thousands)
Net Income $39,921 $20,152
Non-cash Items Included in Net Income
Depreciation and amortization 49,272 50,074
Deferred income taxes and investment
tax credits (429) (2,526)
Utility plant development costs 743 29,590
Inventory reserve -- 1,130
Changes in Assets and Liabilities
Accounts receivable 12,154 (19,617)
Fuel inventory 14,519 (5,381)
Deferred charges and other assets (5,535) (10,772)
Accounts payable 9,320 15,407
Payable to affiliates (6,800) 14,772
Accrued taxes 8,176 2,082
Accrued interest (1,185) (1,052)
Fuel recovery (3,116) (18,396)
Other (13,706) 1,668
--------- --------
103,334 77,131
--------- --------
INVESTING ACTIVITIES
Construction expenditures (48,708) (44,663)
Other (2,125) (4,059)
--------- --------
(50,833) (48,722)
--------- --------
FINANCING ACTIVITIES
Retirement of long-term debt (51,200) (1,839)
Redemption of preferred stock (13,300) (1,200)
Proceeds from issuance of SWEPCO
obligated, mandatorily redeemable,
trust preferred securities 106,393 --
Change in advances from affiliates (57,495) (14,572)
Payment of dividends (28,066) (10,834)
--------- --------
(43,668) (28,445)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,833 (36)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,879 1,702
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,712 $1,666
========= ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on trust
preferred securities) $25,645 $25,610
========= ========
Income taxes paid $12,441 $13,950
========= ========
The accompanying notes to financial statements as they
relate to SWEPCO are an integral part of these statements.
<PAGE> 35
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1997 AND 1996
Net income for common stock increased $23.4 million to $28.0 million
during the second quarter of 1997 from $4.6 million during the second quarter of
1996. The increase resulted primarily from a 1996 one-time charge associated
with certain investments for plant sites, engineering studies and lignite
reserves of approximately $21.7 million, net of tax, and the gain on
reacquisition of preferred stock of $2.2 million recorded during the second
quarter of 1997.
Electric operating revenues decreased $9.2 million to $227.3 million
during the second quarter of 1997 from $236.6 million during the second quarter
of 1996. The decrease was attributable to a decrease in retail non-fuel revenue
of $5.4 million as a result of a 6% decrease in retail MWH sales due to reduced
weather-related demand and a $8.3 million decrease in fuel revenue. The decrease
was offset in part by an increase in non-fuel wholesale sales of $4.5 million.
Fuel and purchased power expense decreased in the second quarter of
1997 compared to the second quarter of 1996. Fuel expense decreased $4.6
million, or 5%, due primarily to a decrease in average unit fuel costs from
$1.86 per MMbtu in 1996 to $1.70 per MMbtu in 1997. Average unit fuel costs
decreased due to a decline in the delivered cost of coal resulting from lower
transportation charges as well as purchases of lower priced spot market coal. A
decrease in natural gas generation because of its relative higher costs per
MMbtu also contributed to the lower fuel expense during the second quarter of
1997. Purchased power expenses decreased $5.5 million in the second quarter of
1997 compared to the second quarter of 1996 as a result of a decrease in economy
energy purchases.
Other operating expenses increased $1.6 million, or 5%, in the second
quarter of 1997 compared to the same period of 1996. The increase was
attributable to higher open access transmission expenses, higher steam
generation production expenses, increased customer assistance expenses,
increased outside services expenses and increased employee related expenses,
offset in part by decreased pension expenses. Taxes, other than income increased
$1.2 million, or 10%, as a result of increased ad valorem taxes due to higher
assessed values. Income taxes decreased $1.7 million due primarily to lower
taxable income.
Other income and deductions increased $22.4 million for the second
quarter of 1997 compared to the same period of 1996 due primarily to a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of approximately $21.7 million, net of tax, recorded in
1996.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net income for common stock increased $22.2 million to $40.8 million
for the six months ended June 30, 1997 compared to $18.6 million for the same
period of 1996. The increase resulted primarily from a 1996 one-time charge
associated with certain investments for plant sites, engineering studies and
lignite reserves of approximately $21.7 million, net of tax, and the gain on
reacquisition of preferred stock of $2.2 million recorded during the second
quarter of 1997.
<PAGE> 36
Electric operating revenues decreased $6.8 million to $430.6 million
during the six months ended June 30, 1997 from $437.4 million during the same
period in 1996. The decrease was due primarily to a decrease in retail non-fuel
revenue of $1.9 million, which resulted from a 4% decrease in retail MWH sales
due to less weather-related demand and a $10.5 million decrease in fuel revenue.
The decrease in electric operating revenues was offset in part by an increase in
non-fuel wholesale sales of $5.6 million.
Fuel and purchased power expense decreased for the six months ended
June 30, 1997 compared to the same period of 1996. Fuel expense decreased $6.3
million, or 3%, due primarily to a decrease in average unit fuel costs from
$1.85 per MMbtu in 1996 to $1.69 per MMbtu in 1997 which resulted from a decline
in the delivered cost of coal resulting from lower transportation charges as
well as purchases of lower priced spot market coal. A decrease in natural gas
generation because of its relative higher costs per MMbtu also contributed to
the lower fuel expense during the six months ended June 30, 1997. Purchased
power expenses decreased $5.7 million, or 35%, in the six months ended June 30,
1997 compared to the same period in 1996 as a result of a decrease in economy
energy purchases.
Other operating expenses increased $2.3 million to $65.8 million for
the six months ended June 30, 1997 compared to the same period in 1996. The
increase was attributable to increased transmission access expenses, higher
steam generation production expenses and increased customer assistance expenses,
offset in part by decreased pension expenses. Depreciation and amortization
expenses increased $2.1 million, or 5%, due primarily to increased depreciable
plant. Taxes, other than income increased $2.7 million to $26.1 million as a
result of increased ad valorem taxes due to higher assessed values.
Other income and deductions increased $21 million for the six month
period ended June 30, 1997 compared to the same period of 1996 due primarily to
a one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $21.7 million, net of
tax, recorded during the second quarter of 1996.
<PAGE> 37
WTU
WEST TEXAS UTILITIES COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 38
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1997 1996 1997 1996
-------- --------- --------- ---------
(thousands) (thousands)
<S> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES $91,237 $101,587 $183,883 $182,376
OPERATING EXPENSES AND TAXES
Fuel 27,026 35,822 59,911 67,805
Purchased power 7,028 6,608 18,425 12,524
Other operating 22,408 18,227 43,118 34,702
Maintenance 4,071 4,472 7,155 7,691
Depreciation and amortization 10,236 9,832 20,327 19,510
Taxes, other than income 5,704 5,583 11,800 11,181
Income taxes 2,789 4,870 3,287 5,035
-------- --------- --------- ---------
79,262 85,414 164,023 158,448
-------- --------- --------- ---------
OPERATING INCOME 11,975 16,173 19,860 23,928
-------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $20 for
1997 and $3,988 for 1996 -- (10,917) (38) (10,917)
Allowance for equity funds
used during construction -- (10) 99 128
Other 351 280 437 529
-------- --------- --------- ---------
351 (10,647) 498 (10,260)
-------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 12,326 5,526 20,358 13,668
-------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 5,088 5,296 10,176 10,592
Interest on short-term debt and other 1,469 1,367 2,783 2,745
Allowance for borrowed funds used
during construction (237) (218) (467) (504)
-------- --------- --------- ---------
6,320 6,445 12,492 12,833
-------- --------- --------- ---------
NET INCOME (LOSS) 6,006 (919) 7,866 835
Less: Preferred stock dividends 26 66 92 132
Gain on reacquired preferred stock 1,183 -- 1,183 --
-------- --------- --------- ---------
NET INCOME (LOSS) FOR COMMON STOCK $7,163 $(985) $8,957 $703
======== ========= ========= =========
The accompanying notes to financial statements
as they relate to WTU are an integral part of these statements.
</TABLE>
<PAGE> 39
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $417,330 $417,467
Transmission 205,755 200,688
Distribution 355,351 347,328
General 101,199 92,622
Construction work in progress 15,887 30,036
---------- ----------
1,095,522 1,088,141
Less - Accumulated depreciation and amortization 426,671 414,777
---------- ----------
668,851 673,364
---------- ----------
CURRENT ASSETS
Cash 661 664
Accounts receivable 32,941 24,123
Materials and supplies, at average cost 16,160 15,966
Fuel inventory 8,177 8,140
Coal inventory 7,063 8,534
Accumulated deferred income taxes -- 1,079
Under-recovered fuel costs 13,912 7,857
Prepayments and other 1,038 2,435
---------- ----------
79,952 68,798
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred Oklaunion costs 20,501 22,365
Restructuring costs 9,910 10,854
Other 41,961 34,998
---------- ----------
72,372 68,217
---------- ----------
$821,175 $810,379
========== ==========
The accompanying notes to financial statements as
they relate to WTU are an integral part of these statements.
<PAGE> 40
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
June 30, December 31,
1997 1996
(unaudited) (audited)
-------- --------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $25 par value
Authorized shares: 7,800,000
Issued and outstanding shares: 5,488,560 $137,214 $137,214
Paid-in capital 2,236 2,236
Retained earnings 124,034 123,077
-------- --------
263,484 262,527
Preferred stock 2,484 6,291
Long-term debt 276,855 275,070
-------- --------
542,823 543,888
-------- --------
CURRENT LIABILITIES
Advances from affiliates 25,761 14,833
Payables to affiliates 32,316 13,578
Accounts payable 8,057 19,669
Accrued taxes 8,761 13,463
Accrued interest 5,140 5,403
Accumulated deferred income taxes 1,534 --
Other 2,520 4,124
-------- --------
84,089 71,070
-------- --------
DEFERRED CREDITS
Accumulated deferred income taxes 144,621 144,146
Investment tax credits 28,579 29,239
Income tax related regulatory liabilities, net 16,511 16,918
Other 4,552 5,118
-------- --------
194,263 195,421
-------- --------
$821,175 $810,379
======== ========
The accompanying notes to financial statements as
they relate to WTU are an integral part of these statements.
<PAGE> 41
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $7,866 $835
Non-cash Items Included in Net Income
Depreciation and amortization 21,195 19,414
Deferred income taxes and
investment tax credits 2,021 (1,481)
Utility plant development costs 58 14,905
Inventory reserve -- 1,103
Changes in Assets and Liabilities
Accounts receivable (8,818) 7,508
Accounts payable 7,605 6,179
Accrued taxes (4,702) (2,429)
Fuel recovery (6,055) (7,589)
Other (5,065) (3,267)
-------- --------
14,105 35,178
-------- --------
INVESTING ACTIVITIES
Construction expenditures (13,495) (16,722)
Other (785) (868)
-------- --------
(14,280) (17,590)
-------- --------
FINANCING ACTIVITIES
Redemption of preferred stock (2,624) --
Change in advances from affiliates 10,928 (7,403)
Payment of dividends (8,132) (10,066)
Other -- (27)
-------- --------
172 (17,496)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3) 92
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 664 717
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $661 $809
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $10,534 $10,470
======== ========
Income taxes paid $2,931 $1,220
======== ========
The accompanying notes to financial statements
as they relate to WTU are an integral part of these statements.
<PAGE> 42
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1997 AND 1996
Net income for common stock increased to $7.2 million during the second
quarter of 1997 from a net loss of $1.0 million in the second quarter of 1996.
The increase resulted primarily from a one-time charge in 1996 associated with
certain investments for plant sites, engineering studies and lignite reserves of
approximately $10.9 million, net of tax, and the gain on reacquisition of
preferred stock of $1.2 million recognized in 1997.
Electric operating revenues decreased approximately $10.4 million, or
10%, in the second quarter of 1997 compared to the second quarter of 1996 due to
several factors, including a $10.1 million decrease in fuel revenues because of
lower fuel costs, which are discussed below. The remaining decrease resulted
from lower non-fuel revenues due to a 6% decrease in retail MWH sales resulting
from mild weather. Partially offsetting the decrease in electric operating
revenues was an increase of approximately $5.2 million in transmission revenues
as a result of the implementation of open access tariffs in accordance with FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing, the effect of which was almost entirely offset by a corresponding
increase in transmission expense.
Fuel expense decreased $8.8 million, or 25%, for the second quarter of
1997 compared to the second quarter of 1996 due primarily to a 13% decrease in
generation, resulting primarily from decreased natural gas generation because of
its relative higher cost per MMbtu. Also contributing to the decrease was a
decrease in average unit fuel costs from $2.04 per MMbtu in 1996 to $1.78 per
MMbtu in 1997 resulting from lower-priced spot market coal.
Other operating expenses increased approximately $4.1 million, or 23%,
during the second quarter of 1997 compared to the second quarter of 1996. The
increase was primarily due to a $4.9 million increase in transmission expenses
as a result of the implementation of open access tariffs in accordance with FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing, the effect of which was more than offset by a corresponding increase in
transmission revenue. Partially offsetting the increase in other operating
expenses was a decrease in employee-related expenses. Income taxes decreased
$2.0 million, or 43%, in the second quarter of 1997 as compared to the same
period a year ago due primarily to lower taxable income.
Other income and deductions increased by $11.0 million during the
second quarter of 1997 compared with the second quarter of 1996 as a result of a
one-time charge incurred in 1996 associated with certain investments for plant
sites, engineering studies and lignite reserves of appropriately $10.9 million,
net of tax.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
For the first six months of 1997, net income for common stock increased
to $9.0 million from $0.7 million in the first six months of 1996. The increase
resulted primarily from a one-time charge incurred in 1996 associated with
certain investments for plant sites, engineering studies and lignite reserves of
approximately $10.9 million, net of tax, and the gain on reacquisition of
preferred stock of $1.2 million recognized in 1997.
<PAGE> 43
Electric operating revenues increased approximately $1.5 million in the
first six months of 1997 compared to the first six months of 1996. The increase
was due primarily to $9.0 million in transmission revenues as a result of the
implementation of open access tariffs in accordance with FERC Order No. 888 and
the Texas Commission rules regarding transmission access and pricing, the effect
of which was almost entirely offset by a corresponding increase in transmission
expense. The increase was offset primarily by a $4.0 million decrease in fuel
revenues resulting from lower fuel costs as discussed below. Also contributing
to the decease was a 3% decrease in retail MWH sales resulting from decreased
sales due to adverse weather conditions.
Fuel expense decreased $7.9 million, or 12%, for the first six months
of 1997 compared to the first six months of 1996 due primarily to lower fuel
costs, resulting from lower-priced spot market coal and an 11% decrease in
natural gas generation resulting from relative higher costs per MMbtu. Partially
offsetting the decrease were the increased purchases of higher-priced spot
market natural gas. Purchased power expenses increased approximately $5.9
million during the first six months of 1997 as compared to the first six months
of 1996, primarily as a result of additional economy purchases at a higher cost
per MWH.
Other operating expenses increased approximately $8.4 million during
the first six months of 1997 compared to the first six months of 1996 due
primarily to an $8.2 million increase in transmission expenses as a result of
the implementation of open access tariffs in accordance with FERC Order No. 888
and the Texas Commission rules regarding transmission access and pricing, the
effect of which was more than offset by a corresponding increase in transmission
revenue. Partially offsetting the increase in other operating expenses was a
decrease in pension expense. Income taxes decreased $1.7 million in the first
six months of 1997 compared to the same period a year ago due primarily to lower
taxable income in 1997.
Other income and deductions increased $10.8 million during the first
six months of 1997 compared with the first six months of 1996 as a result of a
one-time charge incurred in 1996 associated with certain investments for plant
sites, engineering studies and lignite reserves of approximately $10.9 million,
net of tax.
<PAGE> 44
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS
BY REGISTRANT
NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU
NOTE 2. LITIGATION AND REGULATORY CSW, CPL, PSO, SWEPCO, WTU
PROCEEDINGS
NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES CSW, CPL, PSO, SWEPCO, WTU
NOTE 4. COMMON STOCK AND DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU
NOTE 5. INCOME TAXES CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. CPL RATE REVIEW - DOCKET CSW, CPL
NO. 14965
NOTE 7. LONG TERM FINANCING CSW, CPL, PSO, SWEPCO, WTU
NOTE 8. PENSION PLAN AMENDMENT CSW, CPL, PSO, SWEPCO, WTU
NOTE 9. DISCONTINUED OPERATIONS CSW
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF PREPARATION
The condensed financial statements of the Registrants included herein
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
thereto included in the Registrants' Combined Annual Report on Form 10-K for the
year ended December 31, 1996 and the Registrants' Combined Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
The unaudited financial information furnished herewith reflects all
adjustments which are, in the opinion of management of such Registrant,
necessary for a fair statement of the results of operations for the interim
periods. Information for quarterly periods is affected by seasonal variations in
sales, rate changes, timing of fuel expense recovery and other factors.
The financial statements of SEEBOARD and its related entities have been
translated from British pounds to U.S. dollars in accordance with SFAS No. 52.
SFAS No. 52 requires the translation of income statement items at average rates
and balance sheet accounts at current rates. All resulting translation
adjustments are recorded directly to Foreign Currency Translation Adjustment on
CSW's consolidated balance sheets.
Effective January 1, 1997, CPL and WTU began utilizing the LIFO method
for the valuation of all fossil fuel inventories. Previously, CPL had used the
weighted average cost method and WTU had used the LIFO method for coal and the
weighted average cost method for other fuel inventories. PSO utilizes the LIFO
method. SWEPCO continues to utilize the weighted average cost method pending
approval of the Arkansas Commission to utilize the LIFO method. The change in
accounting did not affect the results of operations due to the regulatory
treatment of such costs.
Cash equivalents are considered to be highly liquid debt instruments
purchased with a maturity of three months or less. Accordingly, temporary cash
investments and advances to affiliates are considered cash equivalents.
Certain financial statement items for prior years have been
reclassified to conform to the 1997 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1996 for additional discussion of litigation and regulatory
proceedings. Reference is also made to NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES, NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965 and PART II - ITEM 1.
for additional discussion of litigation matters.
<PAGE> 46
Settlement of Litigation Related to Termination of El Paso Merger
In May 1993, CSW entered into a merger agreement pursuant to which El
Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. In
June 1995, following CSW's notification that it was terminating the Merger
Agreement, El Paso filed suit against CSW seeking a $25 million termination fee
from CSW, unspecified damages for various contract and tort claims, punitive
damages, interest as permitted by law and certain other costs. Subsequently, CSW
filed suit against El Paso seeking a $25 million termination fee from El Paso
due to El Paso's breach of the Merger Agreement, at least $3.6 million in rate
case expenses incurred by CSW on behalf of El Paso related to state regulatory
merger proceedings and a declaratory judgment that CSW properly terminated the
Merger Agreement. In June 1996, CSW filed an amended complaint seeking a first
priority administrative expense claim of $50 million from El Paso based upon El
Paso's alleged breach of the Merger Agreement.
The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding, the trial of which was completed on January 30, 1997. On
April 11, 1997, the court issued an interim order in which it ruled that CSW
owed El Paso the $25 million termination fee pursuant to the terms of the Merger
Agreement. The court reserved judgment on CSW's liability for interim interest
on the termination fee which El Paso alleged to total $18 million.
In July 1997, CSW and El Paso reached a settlement agreement that
resolved all of the pending litigation resulting from the termination of the
proposed merger. Under the terms of the settlement, CSW and El Paso agreed to
dismiss all pending claims in the litigation and give a mutual release from any
potential claims related to the Merger Agreement or the pending litigation, and
CSW paid $35 million to El Paso, various of its creditor groups under its plan
of reorganization and its attorneys.
As previously reported, CSW recorded a charge of $25 million in the
first quarter of 1997 following the court's interim order. As a result of the
settlement with El Paso, CSW recorded an additional charge of $10 million in the
second quarter of 1997 to fully recognize the $35 million settlement amount. The
interim order of the bankruptcy court was vacated.
PSO Regulatory Matters
As previously reported, in July 1996, the OCC Staff filed an
application seeking a review of PSO's earnings and rate structure. In accordance
with the established schedule, PSO filed financial information with the OCC
Staff on November 1, 1996, and cost of service and rate design testimony on
January 10, 1997, supporting current rates assuming an increase in future
depreciation expense. The OCC Staff and intervenors filed their revenue
requirements testimony on July 17, 1997. The OCC Staff recommended to the
Oklahoma Commission that PSO decrease its rates by $76.8 million annually, but
included a fuel cost-based performance incentive that would allow PSO the
opportunity to achieve an additional $15 million in annual revenues. The OCC
Staff's revenue requirement calculations include an overall rate of return of
9.308% including a return on equity of 11.0%. Other parties to PSO's rate review
have filed testimony with the Oklahoma Commission which recommend rates that are
comparable to the OCC Staff's recommendation. A hearing on the merits of the
review is scheduled to begin on September 24, 1997.
On January 14, 1997, the Oklahoma Commission approved a joint
settlement which provides that all bills rendered to PSO's customers beginning
with PSO's June 1997 billing cycle shall be considered interim rates subject to
refund in the event the permanent final order grants less than the current
revenue produced by the existing rates. The OCC Staff's recommended rate
<PAGE> 47
reduction and PSO's preliminary analysis of the estimated earnings impact that
would result therefrom is detailed and reconciled with PSO's existing rate level
as follows (annualized effect, in millions).
OCC Staff recommended denial of PSO's requested
depreciation increase (1) $ (27.5)
Additional OCC Staff depreciation decrease (18.7)
Working capital (accounts receivable factoring) (3.3)
Construction work in progress (2.8)
Recovery of Inola Plant costs (6.3)
Marketing and advertising expense (7.4)
Payroll and benefits reduction (8.2)
Other (2.6)
-----------
OCC Staff recommended rate decrease (76.8)
Decrease current depreciation expense 18.7
Storm cost recovery (2) 1.2
Recovery of deferred customer incentive costs (2) 0.5
Rate case expenses (0.2)
Income taxes 22.2
-----------
Estimated impact on net income $ (34.4)
===========
(1) OCC Staff exhibits reflect this decrease as a denial of PSO's requested
depreciation increase. However, since PSO has not recorded the depreciation
increase on its books, this item is effectively a reduction in PSO's
allowed return.
(2) If the OCC Staff recommendation is accepted, an additional one-time
after-tax write off of the unamortized balance of these costs, totaling
$6.4 million, would be required. Consequently, there would be no ongoing
amortization of these costs.
The OCC Staff's recommended rate reduction includes the effect of its
recommendation of a rate base decrease of $109 million for PSO from $997 million
to $888 million as shown below.
PSO's current rate base $ 997.0
Construction work in progress (21.1)
Recovery of Inola Plant costs (27.6)
Capitalized marketing incentives (7.2)
Working capital (accounts receivable factoring) (25.0)
Capitalized expenditures (6.6)
Pension funding level (7.8)
Other (13.7)
============
OCC Staff recommended rate base $ 888.0
============
A final order of the Oklahoma Commission is expected in late 1997.
Management cannot predict the ultimate outcome of PSO's rate review. However, if
PSO ultimately is unsuccessful in reaffirming adequate rates, PSO could
experience a material adverse effect on its consolidated results of operations
and financial condition, and CSW could experience a material adverse effect on
its results of operations but not on its financial condition.
The foregoing discussion of PSO Regulatory Matters constitutes forward
looking information. Actual results may differ materially from such projected
information.
CPL Fuel Proceeding
As previously reported, CPL filed with the Texas Commission an
Application for Authority to Implement an increase in fuel factors of $34.4
million, or 15.4%, on an annual basis. In addition, CPL proposed to implement a
fuel surcharge of $23.4 million, including accumulated interest, over a twelve
month period. On February 10, 1997, CPL filed a stipulation with the Texas
<PAGE> 48
Commission which would surcharge customers the $23.4 million and would
coordinate the surcharge with any refund in CPL's current rate case as described
in NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965. In the Stipulation, CPL's fuel
factors were increased approximately $29.4 million, or 13.2%, on an annual
basis. The Texas Commission's interim approval of the stipulated fuel factors
permitted a March 1997 implementation of the fuel factors. The CPL 1997 Rate
Order confirmed the stipulated fuel factors.
SWEPCO Fuel Proceeding
In April 1997, SWEPCO filed with the Texas Commission an application
concerning fuel cost under-recoveries and a possible fuel surcharge which
included a motion to either abate the requested interim surcharge and
consolidate the surcharge with a filed fuel reconciliation as discussed below,
or alternatively, implement an interim surcharge in the months of July 1997
through June 1998. The Office of Policy Development, on behalf of the Texas
Commission, approved such consolidation. In addition, the Texas Commission has
waived the requirement that SWEPCO file biannual surcharge requests through the
pendency of this proceeding, and has deferred the implementation of any
surcharge and interest until after final disposition.
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
commence, SWEPCO did not establish a proposed surcharge period or a total
surcharge amount which would reflect interest through the entire surcharge
period in its filing. In its filing, SWEPCO indicated that it had an
under-recovered Texas jurisdictional fuel cost balance 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.
SWEPCO Burlington Northern Transportation Contract
In January 1995, a state district court in Bowie County, Texas entered
judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding
rates charged under two rail transportation contracts for delivery of coal to
SWEPCO's Welsh and Flint Creek power stations. The court awarded SWEPCO
approximately $72 million that would inure to the benefit of customers, if
collected, representing damages for the period from April 27, 1989 through
September 26, 1994, as well as post-judgment interest and attorneys' fees and
granted certain declaratory relief requested by SWEPCO. Burlington Northern
appealed the state district court's judgment to the Texarkana, Texas Court of
Appeals and, in April 1996, that court reversed the judgment of the state
district court. In October 1996, SWEPCO filed an application with the Supreme
Court of Texas to grant a writ of error to review and reverse the judgment of
the Texarkana, Texas Court of Appeals. In June 1997, the Supreme Court of Texas
granted SWEPCO's application for writ of error. Oral argument is scheduled for
October 1997.
WTU Fuel Proceeding
As previously reported, in February 1997, WTU filed with the Texas
Commission an Application for Authority to Implement an increase in fuel factors
of $4.2 million, or 4.2%, on an annual basis. Additionally, WTU proposed to
implement a fuel surcharge of $13.3 million, including accumulated interest,
over a twelve month period to collect its under-recovered fuel costs. WTU
requested authority to implement the revised fuel factors with its May 1997
billings and to commence the surcharge with its June 1997 billings.
On April 14, 1997, an agreement in principle was reached among the
parties to settle this docket. Under the proposed settlement, WTU agreed not to
<PAGE> 49
increase the fuel factors. Also, the $13.3 million surcharge will be implemented
over the period June 1997 through February 1999. The Texas Commission approved
this stipulation in May 1997.
3. COMMITMENTS AND CONTINGENT LIABILITIES
CPL Deferred Accounting
By orders issued in 1989 and 1990, the Texas Commission authorized CPL
to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court of Texas in 1994 sustained deferred
accounting as an appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of CPL, but remanded CPL's case to the Court
of Appeals to consider certain substantial evidence points of error not
previously decided by the Court of Appeals. On August 16, 1995, the Court of
Appeals rendered its opinion in the remand proceeding and affirmed the Texas
Commission's order in all respects.
By orders issued in October 1990 and December 1990, the Texas
Commission quantified the STP Unit 1 and Unit 2 deferred accounting costs and
authorized the inclusion of the amortization of the costs and associated return
in CPL's retail rates. These Texas Commission orders were appealed to the Travis
County District Court, where the appeals are still pending. Language in the
opinion of the Supreme Court of Texas on the appeal of the deferred accounting
authorization case suggests that the appropriateness of including deferred
accounting costs in rates charged to customers is dependent on a finding, in the
first case in which the deferred STP costs are to be recovered through rates,
that the deferral was actually necessary to preserve the utility's financial
integrity. If, in the appeals of the October 1990 and December 1990 rate orders,
the courts decide that subsequent review under the financial integrity standard
is required and was not made in those orders, then such rate orders would be
remanded to the Texas Commission for the purpose of entering findings applying
the financial integrity standard. Pending the ultimate resolution of CPL's
deferred accounting issues, CPL is unable to predict how its deferred accounting
orders will ultimately be resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably resolved, CSW
and CPL could experience a material adverse effect on their respective results
of operations and financial condition. While CPL's management is unable to
predict the ultimate outcome of these matters, management believes either CPL
will receive approval of its deferred accounting amounts or CPL will be
successful in renegotiation of its rate orders, so that there will be no
material adverse effect on CSW's or CPL's results of operations or financial
condition.
The foregoing discussion of CPL Deferred Accounting constitutes forward
looking information. Actual results may differ materially from such projected
information.
CPL Nuclear Insurance
In connection with the licensing and operation of STP, the owners have
purchased nuclear property and liability insurance coverage as required by law,
and have executed indemnification agreements with the Nuclear Regulatory
Commission in accordance with the financial protection requirements of the
Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory
arrangement providing limitations on nuclear liability and governmental
indemnities, is in effect until August 1, 2002. The limit of liability under the
Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per
incident, effective as of December 1996. The owners of STP are insured for their
<PAGE> 50
share of this liability through a combination of private insurance amounting to
$200 million and a mandatory industry-wide program for self-insurance totaling
$8.72 billion. The maximum amount that each licensee may be assessed under the
industry-wide program of self-insurance following a nuclear incident at an
insured facility is $75.5 million per reactor, which may be adjusted for
inflation, plus a five percent charge for legal expenses, but not more than $10
million per reactor for each nuclear incident in any one year. CPL and each of
the other STP owners are subject to such assessments, which CPL and the other
owners have agreed will be allocated on the basis of their respective ownership
interests in STP. For purposes of these assessments, STP has two licensed
reactors.
The owners of STP currently maintain on-site decontamination liability
and property damage insurance in the amount of $2.75 billion provided by ANI and
NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy
proceeds must be used first to pay decontamination and cleanup costs before
being used to cover direct losses to property. Under project agreements, CPL and
the other owners of STP will share the total cost of decontamination liability
and property insurance for STP, including premiums and assessments, on a pro
rata basis, according to each owner's respective ownership interest in STP.
CPL purchased, for its own account, a NEIL I Business Interruption
and/or Extra Expense policy. This insurance will reimburse CPL for extra
expenses incurred for replacement generation or purchased power as a result of a
covered accident that shuts down production at one or both of the STP Units for
more than 21 consecutive weeks. In the event of an outage of STP Units 1 and 2
and the outage is the result of the same accident, such insurance will reimburse
CPL up to 80% of the single unit recovery. The maximum amount recoverable for a
single unit outage is $118.6 million for both Units 1 and 2. CPL is subject to
an additional assessment of up to $1.9 million for the current policy year in
the event insured losses at a nuclear facility covered under the NEIL I policy
exceeds the accumulated funds available under the policy. For further
information relating to litigation associated with CPL nuclear insurance claims,
reference is made to PART II-ITEM 1.
SWEPCO Biloxi, Mississippi Manufactured Gas Plant Site
As previously reported, SWEPCO was notified by Mississippi Power in
1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was
formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has
worked with Mississippi Power on both the investigation of the extent of
contamination on the site as well as on the subsequent sampling of the site. The
sampling results indicated contamination at the property as well as the
possibility of contamination of an adjacent property. A risk assessment was
submitted to the MDEQ, and MDEQ requested that a future residential exposure
scenario be evaluated for comparison with commercial and industrial exposure
scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to
a residential scenario is appropriate since this site has been
industrial/commercial for more than 100 years, and Mississippi Power plans to
continue this type of usage. Mississippi Power and SWEPCO also presented a
report to the MDEQ demonstrating that the ground water on the site was not
potable, further demonstrating that cleanup to residential standards is not
necessary.
The MDEQ has not agreed to a non-residential future land use scenario
and has requested further testing. Following the additional testing and
resolution of whether cleanup is necessary to meet a residential usage scenario
or if cleanup to a commercial/industrial scenario is appropriate, a feasibility
study will be conducted to more definitively evaluate remedial strategies for
the property. The feasibility study process will require public input prior to a
final decision being made.
<PAGE> 51
A final range of cleanup costs has not been determined, but based on
preliminary estimates, SWEPCO has incurred to date approximately $200,000 for
its portion of the cleanup of this site and anticipates that an additional $2
million may be required. Accordingly, SWEPCO has accrued $2 million for the
cleanup of the site.
SWEPCO Voda Petroleum Superfund Site
As previously reported, in April 1996, SWEPCO received correspondence
from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for
the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO is
conducting a records review to compile documentation relating to SWEPCO's past
use of the Voda Petroleum site. The proposed cleanup of the site is estimated by
the EPA to cost approximately $2 million and to take approximately twelve months
to complete. An option for over 30 PRPs to conduct the cleanup in lieu of EPA
conducting the cleanup is under consideration. Any SWEPCO liability associated
with this project is not expected to have a material adverse effect on its
results of operations or financial condition.
SWEPCO Henry W. Pirkey Power Plant
In connection with the South Hallsville lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of June 30, 1997, the
maximum amount SWEPCO would have to assume was $61.8 million. The maximum amount
may vary as the mining contractor's need for funds fluctuates. The contractor's
actual obligation outstanding as of June 30, 1997 was $52.5 million.
SWEPCO South Hallsville Lignite Mine
As part of the process to receive renewal of a Texas Railroad
Commission permit for lignite mining at the South Hallsville lignite mine and
expansion into the Marshall South Lignite Project area, SWEPCO has agreed to
provide guarantees of mine reclamation in the amount of $85 million. Since
SWEPCO uses self-bonding, the guarantee provides for SWEPCO to commit to use its
resources to complete the reclamation in the event the work is not completed by
the third party miner. The current cost to reclaim the mine is estimated to be
approximately $36 million.
United Kingdom Windfall Profits Tax
As previously reported, in the general election held in the United
Kingdom on May 1, 1997, the Labour Party won control of the government with a
considerable majority. Prior to the general election, the Labour Party had
announced that, if elected, it would impose a windfall profits tax on certain
industries in the United Kingdom, including the privatized utilities, to fund a
variety of social improvement programs. On July 2, 1997, the one-time windfall
profits tax was introduced in the Labour Party's budget by Chancellor Gordon
Brown. It is anticipated that legislation enacting the tax will be passed during
the second half of 1997.
CSW is currently analyzing the impact of the tax on its SEEBOARD
subsidiary. Based upon its initial analysis of the proposed tax, CSW estimates
the impact to be a one-time charge against net income for common stock of
approximately (pound)110 million, approximately $180 million when converted at
the current prevailing exchange rates. The tax itself is computed based on an
imputed increase in value of SEEBOARD since it was privatized in 1990 by the
United Kingdom government. The actual amount of the tax when converted to
dollars would depend upon the exchange rates in effect at the time the tax is
accrued. The timing of the actual charge against CSW's net income for common
stock has not been determined at this time, but CSW anticipates that the tax
will be accrued in the period in which the tax is enacted. The proposed tax is
expected to be payable in two equal installments, with the first due by December
1, 1997 and the second due by December 1, 1998. SEEBOARD is currently evaluating
<PAGE> 52
alternatives for financing the tax payments. There can be no assurance that any
windfall profits tax will be ultimately enacted or that, if enacted, it will be
the same or substantially similar to that proposed by Chancellor Brown. If
enacted in the form proposed, the tax would have a material adverse effect on
CSW's results of operations.
The foregoing discussion of United Kingdom Windfall Profits Tax
constitutes forward looking information. Actual results may differ materially
from such projected information.
4. COMMON STOCK AND DIVIDENDS
CSW's earnings per share of common stock are computed by dividing net
income for common stock by the average number of common shares outstanding for
the respective periods. CSW's dividends per common share reflect per share
amounts paid during the periods. See MD&A - LIQUIDITY AND CAPITAL RESOURCES -
Capital Structure for information related to changes in CSW's common stock
plans.
The U.S. Electric Operating Companies' mortgage indentures, as amended
and supplemented, contain certain restrictions on the use of their retained
earnings for cash dividends on their common stock. These restrictions do not
currently limit the ability of CSW to pay dividends to its shareholders. At June
30, 1997, approximately $1.8 billion of the subsidiary companies' retained
earnings were available for payment of cash dividends by such subsidiaries to
CSW. The amounts attributable to the U.S. Electric Operating Companies were as
follows.
CPL - $766 million PSO - $155 million SWEPCO - $335 million WTU - $124 million
5. INCOME TAXES
The following tables provide a reconciliation of the differences
between total income tax expense (income taxes included in Operating Expenses
and Taxes as well as Other Income and Deductions) at the federal statutory tax
rate and the effective tax rate for the Registrants.
CSW CPL PSO SWEPCO WTU
----------------------------------------------------
(millions) (thousands)
----------------------------------------------------
Quarter Ended June 30, 1997
Income before taxes
attributable to:
Domestic operations $102
Foreign operations 13
-----
Income before taxes $115 $60,499 $20,079 $36,702 $8,821
Tax at U.S. statutory rate $40 $21,175 $7,028 $12,846 $3,087
Differences
Amortization of ITC (4) (1,447) (696) (1,166) (330)
Non-deductible goodwill
amortization 3 -- -- -- --
Prior period adjustments 1 -- -- 150
Other -- 2,606 427 (1,527) 59
----------------------------------------------------
Tax expense $40 $22,334 $6,759 $10,303 $2,816
----------------------------------------------------
Effective tax rate 35% 37% 34% 28% 32%
<PAGE> 53
CSW CPL PSO SWEPCO WTU
----------------------------------------------------
(millions) (thousands)
----------------------------------------------------
Quarter Ended June 30, 1996
Income before taxes
attributable to:
Domestic operations $200
Foreign operations 46
-----
Income before taxes $246 $61,242 $(23,903) $9,658 $(111)
Tax at U.S. statutory rate $86 $21,435 $(8,366) $3,380 $(39)
Differences
Amortization of ITC (4) (1,447) (696) (1,182) (330)
Non-deductible goodwill
amortization 3 -- -- -- --
State Income Taxes from the
Sale of Transok 7 -- -- -- --
Permanent differences
related to a one-time
charge 9 1,390 4,382 2,330 977
Prior period adjustments 4 3,198 549 269 143
Other 8 1,859 (1,661) (506) 57
---------------------------------------------------
Tax expense $113 $26,435 $(5,792) $4,291 $808
---------------------------------------------------
Effective tax rate 46% 43% 24% 45% 727%
Six Months Ended June 30, 1997
Income before taxes
attributable to:
Domestic operations $95
Foreign operations 58
-----
Income before taxes $153 $53,135 $30,401 $55,589 $10,978
Tax at U.S. statutory rate $54 $18,597 $10,640 $19,456 $3,842
Differences
Amortization of ITC (7) (2,895) (1,392) (2,331) (661)
Non-deductible goodwill
amortization 6 -- -- -- --
Prior period adjustments (2) (1,720) (261) (48) (124)
Other (3) 4,196 256 (1,413) 54
--------------------------------------------------
Tax expense $48 $18,178 $9,243 $15,664 $3,111
--------------------------------------------------
Effective tax rate 31% 34% 30% 28% 28%
Six Months Ended June 30, 1996
Income before taxes
attributable to:
Domestic operations $252
Foreign operations 72
-----
Income before taxes $324 $86,695 $(16,746) $28,291 $1,616
Tax at U.S. statutory rate $113 $30,343 $(5,861 $9,902 $566
Differences
Amortization of ITC (7) (2,895) (1,392) (2,365) (661)
Non-deductible goodwill
amortization 6 -- -- -- --
State Income Taxes from the
Sale of Transok 7 -- -- -- --
Permanent differences related
to a one-time charge 9 1,390 4,382 2,330 977
Prior period adjustments 4 3,198 549 269 143
Other 4 3,233 (1,899) (1,962) (244)
----- ----------- ------------ ----------- -------
Tax expense $136 $35,269 $(4,221) $8,174 $781
------ ----------- ------------ ----------- -------
Effective tax rate 42% 41% 25% 29% 48%
<PAGE> 54
6. CPL RATE REVIEW - DOCKET NO. 14965
Overview
As previously reported, in November 1995, CPL filed with the Texas
Commission a request to increase its retail base rates $71 million. In a
preliminary order issued December 21, 1995, the Texas Commission expanded the
scope of the rate review proceeding to address certain competitive issues facing
the electric utility industry including estimates of CPL's potential stranded
costs based upon various possible structures of the electric industry. In May
1996, CPL placed a $70 million base rate increase into effect under bond. The
bonded rates are subject to refund based on the final order of the Texas
Commission. On July 17, 1997, CPL restored its rates, with two exceptions, to
levels existing prior to the implementation of bonded rates. For additional
information, see Implementation of New Rates.
CPL 1997 Rate Order
On March 31, 1997, the Texas Commission issued the CPL 1997 Rate Order
in CPL's Rate Review Docket No. 14965. The CPL 1997 Rate 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 rate reduction
methodology whereby CPL's rates will be reduced by an additional $16 million in
mid-1998 and another $16 million in mid-1999. The preliminary estimated
financial impact of the order is described in Estimated Financial Impact of CPL
1997 Rate 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 CPL 1997 Rate Order. The CPL
1997 Rate 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 approximate $30 million decrease in CPL's rate request. The
CPL 1997 Rate Order provides for the disallowance of approximately $21 million
of affiliate transactions. In addition, the CPL 1997 Rate Order denied CPL's
request to use straight line amortization for CPL's deferred accounting costs.
Instead, the CPL 1997 Rate 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 CPL 1997 Rate Order also
decreases other depreciation and amortization by $21 million from CPL's rate
request.
Another major provision of the CPL 1997 Rate Order was the Texas
Commission's categorization of approximately $859 million, or 32%, of CPL's
investment in STP, including Mirror CWIP and deferred accounting, as 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 CPL 1997 Rate Order
reduced CPL's return on the ECOM portion of CPL's investment in STP to 7.96%,
compared to 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 CPL 1997 Rate 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. CPL has a 25.2% ownership
interest in STP.
Based upon management's preliminary evaluation of the CPL 1997 Rate
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 by the order. If the IRS determines that a
normalization violation has occurred and no changes to the CPL 1997 Rate Order
are made to remedy the violation, the IRS could disallow certain significant
accelerated tax deductions and investment tax credits previously taken by CPL,
<PAGE> 55
which would have a material adverse effect on the financial condition of CSW and
CPL.
CPL filed a motion for rehearing on April 21, 1997. The motion for
rehearing requests reconsideration by the Texas Commission of numerous issues in
the rate case including the following issues.
(i) The calculation of a portion of STP as ECOM and the decision to allow
only a 7.96% return on equity on the ECOM amount.
(ii) The disallowance of $21 million of affiliate transactions.
(iii) The Texas Commission glide path rate reductions in 1998 and 1999.
(iv) The amount of nuclear decommissioning expense included in cost of
service.
CPL requested that the Texas Commission revise the CPL 1997 Rate Order
on other issues including tax normalization, post-test year adjustments,
deferred accounting and depreciation. In addition, motions for rehearing were
filed by eight other parties including the General Counsel of the Texas
Commission, certain cities in CPL's service territory that filed as intervenors
in CPL's rate case and the Office of Public Utility Counsel.
On June 20, 1997, the Texas Commission, in response to the motions for
rehearing filed by CPL and the other parties, modified the CPL 1997 Rate Order.
The modifications would result in a rate reduction of $24 million on an annual
basis as compared with the $27 million reduction in the CPL 1997 Rate Order. The
Texas Commission also decided to rehear some issues, including $21.5 million of
affiliate expenses originally disallowed in the CPL 1997 Rate Order and the tax
normalization issues. The June 20, 1997 modifications also reduced the Texas
Commission's amount of ECOM from $859 million to $800 million and increased the
level of recovery for costs associated with the decommissioning of STP. However,
the Texas Commission upheld its prior decision on the glide path rate reductions
for 1998 and 1999 as well as the use of the lower return on equity for the
portion of STP designated as ECOM.
On August 6, 1997, the administrative law judge reviewing the rehearing
issues issued a proposal for decision and proposed order that recommended the
recovery by CPL of a significant portion, approximately $19 million, of the
affiliate expenses the Texas Commission originally disallowed in the CPL 1997
Rate Order. The original disallowance was based on the Texas Commission's
decision that CPL had not provided adequate information during the discovery
process to justify recovery of the expenses. In his proposal for decision and
proposed order, the administrative law judge ruled instead that CPL had provided
adequate information to justify the recovery of the expenses. However, the Texas
Commission is not bound to follow the administrative law judge's recommendation.
Also as part of the remand process, CPL has entered into an agreement
on two of the potential tax normalization violations whereby the parties agree
that corrections should be made to the CPL 1997 Rate Order for these issues. CPL
has entered into an agreement on the third potential tax normalization violation
whereby the issue would be withheld from rates until CPL obtains a ruling from
the IRS. Should the IRS determine that it is not in violation of the
normalization rules, revenues related to this issue would be refunded. The Texas
Commission has not yet approved the settlement agreements but is expected to
rule on these issues in its new final order.
The Texas Commission will consider all the issues remanded for
rehearing during the latter part of August 1997 and a new final order is expect
by the end of August 1997. Regardless of the resolution of the remaining issues,
CPL will likely appeal the new final order to the Texas State District Court
after the rehearing process is concluded.
<PAGE> 56
The foregoing discussion of CPL 1997 Rate Order constitutes forward
looking information. Actual results may differ materially from such projected
information.
Rate Case Expense Phase
The CPL 1997 Rate Order established a separate docket, Docket No.
17280, to consider the recoverability of $20 million of rate case expenses
incurred in the current rate case and in two prior dockets. CPL reached a
settlement with all parties to resolve Docket No. 17280. The settlement resulted
in CPL's agreement to recover $14 million out of the total $20 million of rate
case expenses originally requested. Approximately $8 million of the rate case
expenses will be recovered as an offset to the refund in the rate case, and the
remaining $6 million of expenses will be surcharged to customers over three
years. CPL expensed the $6 million in foregone rate case expenses during the
first quarter of 1997.
Estimated Financial Impact of CPL 1997 Rate Order
If ultimately upheld after rehearing and any appeals, management
expects the CPL 1997 Rate Order to have a material adverse impact on CSW's and
CPL's results of operations for the next several years as compared to what they
otherwise would have been, beginning with an estimated reduction of 1997
earnings by approximately $53.5 million and reductions in succeeding years due
to the effects of applying the glide path methodology in 1998 and 1999. The
table below details management's most recent estimate of the financial impact of
the CPL 1997 Rate Order. The estimated reduction in 1997 earnings includes the
annualized impact of the CPL 1997 Rate Order (including the Texas Commission's
June 20, 1997 modifications) on 1997, the recognition of the retroactive impact
of the CPL 1997 Rate Order on 1996 results of operations from the implementation
of bonded rates in May 1996, subject to refund, and also the effects of the
settlement in Docket No. 17280 described in Rate Case Expense Phase.
1997 1998 1999
------ ------ ------
(millions)
Decrease in revenue $(26.0) $(36.4) $(52.1)
Items included in decrease in revenue
with an offsetting effect on expense
Accelerated recovery of STP (ECOM) (40.0) (40.0) (40.0)
Change in depreciation/amortization 25.4 25.4 25.4
Decommissioning (4.3) (4.3) (4.3)
Other (4.3) (2.6) (2.6)
----- ----- -----
(23.2) (21.5) (21.5)
----- ----- -----
Change in current year income before tax (49.2) (57.9) (73.6)
Federal income taxes 16.4 19.5 25.0
----- ----- -----
Current year impact on net income (32.8) (38.4) (48.6)
1996 effect (20.7) -- --
----- ----- -----
Estimated impact on net income $(53.5) $(38.4) $(48.6)
----- ----- -----
Due to the uncertainty of the outcome of any rehearing or any appeals
process, CSW and CPL are unable to predict how the final resolution of the
issues raised in the CPL 1997 Rate Order will ultimately impact CSW's and CPL's
results of operations and financial condition. In the event the CPL 1997 Rate
Order is ultimately upheld after rehearing and any appeals, CSW and CPL would
continue to experience a material adverse effect on their results of operations
as compared to what they otherwise would have been.
The foregoing discussion of Estimated Financial Impact of CPL 1997 Rate
Order constitutes forward looking information. Actual results may differ
materially from such projected information.
<PAGE> 57
Implementation of New Rates
As previously stated, CPL implemented bonded rates subject to refund in
May 1996. On July 17, 1997, CPL restored its rates, with two exceptions, to
levels existing prior to the implementation of the bonded rates. The two
exceptions are for industrial interruptible rates and customer service charges
for which the Texas Commission has indicated it will approve the increases
requested by CPL. Based upon the CPL 1997 Rate Order (and the modifications made
by the Texas Commission on June 20, 1997), which is still subject to change
resulting from CPL's and any other party's motions for rehearing, CPL's refund
obligation through June 1997, including interest, is approximately $99 million.
The ultimate amount subject to refund will depend upon the final rates ordered
by the Texas Commission after any rehearing. Any such refunds, which will be
coordinated with any fuel surcharge as described in NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and will be applied to customers' bills over one or more
months as ordered by the Texas Commission, are expected to be issued no earlier
than February 1998.
Accounting Policies
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had
recorded approximately $1.2 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 management concludes that
as a result of changes in regulation, legislation, the competitive environment,
or other factors, including the CPL 1997 Rate 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.
The foregoing discussion of Accounting Policies constitutes forward
looking information. Actual results may differ materially from such projected
information.
7. LONG-TERM FINANCING
The following trust preferred securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at June 30,
1997. They are classified on the balance sheets as Subsidiary obligated,
mandatorily redeemable, trust preferred securities.
<TABLE>
<CAPTION>
Amount Description of Underlying
Business Trust Security Units (millions) Debentures of Registrant
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CPL Capital I 8.00% Series A 6,000,000 $150 CPL, $154.6 million, 8.00%, Series A
PSO Capital I 8.00% Series A 3,000,000 75 PSO, $77.3 million, 8.00%, Series A
SWEPCO Capital I 7.875% Series A 4,400,000 110 SWEPCO, $113.4 million, 7.875%, Series A
---------- ---
13,400,000 $335
========== ===
</TABLE>
Each of the business trusts will be treated as a subsidiary of its
parent company. The only assets of the business trusts are the subordinated
debentures issued by their parent company as specified above. In addition to the
obligations under their subordinated debentures, each of the parent companies
has also agreed to a security obligation which represents a full and
unconditional guarantee of its capital trust's obligation. For additional
information concerning these financing activities, see MD&A, Long-Term
Financing.
<PAGE> 58
During the second quarter of 1997, each of the U.S. Electric Operating
Companies reacquired a significant portion of its outstanding preferred stock.
As a result of differences between the coupon rates on the reacquired securities
and prevailing market rates, CSW realized an overall gain of approximately $10
million on the transactions. This gain is shown separately, as Gain on
Reacquired Preferred Stock, on the statements of income. The following table
shows the results of the tender offers, including the gain, for the
reacquisitions of the U.S. Electric Operating Companies' preferred stock.
Shares Shares
Reacquired Remaining
------------- -------------
CPL
Series 4.00% 57,952 42,048
Series 4.20% 57,524 17,476
Series 7.12% 260,000 --
Series 8.72% 500,000 --
Gain (thousands) $2,706
PSO
Series 4.00% 53,203 44,697
Series 4.24% 91,931 8,069
Gain (thousands) $4,444
SWEPCO
Series 4.28% 52,614 7,386
Series 4.65% 23,092 1,908
Series 5.00% 37,228 37,772
Series 6.95% 41,990 298,010
Gain (thousands) $2,180
WTU
Series 4.40% 36,306 23,694
Gain (thousands) $1,183
8. PENSION PLAN AMENDMENT
CSW maintains a tax qualified, non-contributory defined benefit pension
plan covering substantially all CSW employees in the United States. The CSW
Board of Directors approved an amendment, effective July 1, 1997, which converts
the existing pension plan into a cash balance pension plan. The purpose of the
plan change is to continue to provide retirement income benefits which are
competitive both within the utility industry as well as with other companies
within the United States.
As the plan sponsor, CSW will continue to reflect the costs of the
pension plan according to the provisions of SFAS No. 87 and allocate such costs
to each of the participating employers. As a result of the July 1, 1997
amendment, preliminary estimates indicate that CSW will realize a savings in
1997 of approximately $20 million in pension expense as compared to the previous
pension plan and will realize significant ongoing reductions in operating and
maintenance expense because of the change. The change to the pension plan was
applied retroactively to the beginning of 1997, so these savings will be
recognized evenly throughout 1997 with a portion being capitalized. The
estimated amounts of savings attributable to the U.S. Electric Operating
Companies for 1997 are as follows.
CPL - $5.0 million PSO - $3.9 million SWEPCO - $4.5 million
WTU - $2.7 million
<PAGE> 59
9. DISCONTINUED OPERATIONS
On June 6, 1996, CSW sold Transok, an intrastate natural gas pipeline
and gas marketing company that was previously a wholly owned subsidiary of CSW,
to Tejas Gas Corporation. Accordingly, the results of operations for Transok
have been reported as discontinued operations and no assets or liabilities
related to Transok are contained in CSW's Consolidated Balance Sheets. Since
Transok was sold in June 1996, CSW's results of operations do not reflect any
earnings from Transok for either the three or six month periods ended June 30,
1997. Operating results of Transok that are included in CSW's Statements of
Income for the three and six month periods ended June 30, 1996 are summarized in
the following table (in millions, transactions with CSW affiliates have not been
eliminated).
Three Months Six Months
Ended Ended
June 30, 1996 June 30, 1996
------------- -------------
(millions)
Total revenue $107 $362
Operating income before income taxes 8 23
Earnings before income taxes 6 18
Income taxes 2 6
---- ----
Net income from discontinued operations $4 $12
---- ----
<PAGE> 60
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, 1996 and the Registrants'
Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
Reference is also made to each Registrant's unaudited Financial Statements and
related Notes to Financial Statements included herein. The information included
therein should be read in conjunction with, and is essential in understanding,
the following discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three and six month periods ended
June 30, 1997.
Factors Impacting CSW's 1997 Annual Earnings
CSW expects its 1997 net income for common stock to be substantially
lower than it has been in the past. Several factors discussed in this Form 10-Q
or disclosed previously that have had or are expected to have a material adverse
effect on CSW's 1997 results of operations. These items include the proposed
windfall profits tax in the United Kingdom, the settlement of litigation related
to the termination of the proposed merger with El Paso and the impact of the
Texas Commission's order in CPL's current rate case. The proposed windfall
profits tax and the charge for the settlement with El Paso are one-time events.
However, the rate case at CPL will likely have an ongoing material adverse
impact on CSW's consolidated results of operations compared to prior periods.
The estimated after-tax impact of these items for 1997 compared to 1996's net
income for common stock is shown in the following table.
Estimated
Factors Impacting 1997 Earnings Impact
- ----------------------------------------------------- -----------
(millions)
Proposed United Kingdom windfall profits tax $180
Settlement of El Paso litigation 23
CPL 1997 Rate Order (1996 effect) 21
CPL 1997 Rate Order (1997 effect) 33
-----------
Total estimated 1997 impact $257
1996 Net Income for Common Stock $429
Percentage of prior year 60%
This table is intended to highlight several items that are expected to
adversely impact CSW's 1997 results of operations. Although CSW is unable at
this time to quantify all of the items with certainty, it is management's best
estimate at this time. In addition, if PSO ultimately is unsuccessful in
reaffirming adequate rates in its current rate proceeding, CSW could experience
a material adverse effect on its consolidated results of operations related to
this matter. However, management is unable to predict the outcome of PSO's rate
proceeding and is uncertain what the impact will be in 1997, so no estimate is
provided in this table. For additional information related to these items, see
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, NOTE 3. COMMITMENTS AND
CONTINGENT LIABILITIES and NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965.
<PAGE> 61
The foregoing discussion of Factors Impacting CSW's 1997 Annual
Earnings 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.
LIQUIDITY AND CAPITAL RESOURCES
Overview of CSW Operating, Investing and Financing Activities
Net cash flows from operating activities increased $119 million during
the first six months of 1997 compared to same period in 1996. The increase was
attributable in part to the higher rates that CPL has collected since
implementing the bonded rates in May 1996, improved fuel recovery positions and
changes in other working capital accounts. These increases were offset in part
by federal and state income tax payments for the gain of CSW's 1996 sale of
Transok which totaled approximately $122 million (after being offset in part by
the utilization of Alternative Minimum Tax credits that CSW had previously
generated).
Net cash outflows from investing activities decreased substantially
during the first six months of 1997 compared to the same period in 1996. There
were no acquisition expenditures during 1997 while SEEBOARD acquisition
expenditures were made during 1996. In addition, during 1996, the National Grid
shares were sold in conjunction with SEEBOARD acquisition activities and CSW
also received cash proceeds of $690 million on the sale of Transok. CSW Energy
obtained permanent external financing during March 1997 for the Orange
Cogeneration project and subsequently reduced its equity investment in the
project. For additional information related to this transaction, see Long-Term
Financing. CSW Energy made its final purchase agreement payment on the Ft.
Lupton cogeneration project and also incurred approximately $83 million in
construction expenditures on the Sweeny project which were not present in the
comparable period in 1996. CSW International continued to provide the
construction financing for its Altamira project. Construction on the project
began in the third quarter of 1996.
Net cash inflows from financing activities decreased substantially
during the first six months of 1997 compared to same period in 1996. During
1996, CSW incurred substantial amounts of debt to finance the acquisition of
SEEBOARD. In addition, during 1996, CSW sold approximately 15.5 million shares
of common stock and received net proceeds of approximately $398 million in a
primary public offering. The proceeds were subsequently used to repay a portion
of the debt incurred in connection with the SEEBOARD acquisition. In addition,
in April 1997, CSW made changes in its common stock plans and stopped issuing
original shares through these plans. However, partially offsetting these
activities, the business trusts of CPL, PSO and SWEPCO issued approximately $324
million of preferred securities during 1997. A portion of these proceeds was
used to redeem preferred stock of these companies. See Capital Structure and
Long-Term Financing for additional information related to these matters.
Construction Expenditures
CSW's construction expenditures, including AFUDC, totaled $246 million
for the six months ended June 30, 1997. Such expenditures for the U.S. Electric
Operating Companies totaled $76 million, $40 million, $50 million and $14
million, for CPL, PSO, SWEPCO and WTU, respectively. Construction expenditures
at the U.S. Electric Operating Companies were primarily for improvements to
existing production, transmission and distribution facilities. The improvements
are required to meet the needs of new customers and to satisfy the changing
requirements of existing customers. CSW anticipates that all funds required for
construction for the remainder of the year will be provided from internal
sources.
<PAGE> 62
Capital Structure
The CSW System is committed to maintaining financial flexibility by
having a strong capital structure and favorable securities ratings which help to
assure future access to capital markets when required. At June 30, 1997, the
capitalization ratios of each of the Registrants is presented in the following
table.
Trust
Common Preferred Preferred Long
Stock Equity Stock Securities (1) Term Debt Total
------------ --------- -------------- --------- -----
CSW 45% 2% 4% 49% 100%
CPL 47% 5% 5% 43% 100%
PSO 50% 1% 7% 42% 100%
SWEPCO 51% 2% 8% 39% 100%
WTU 48% 1% --% 51% 100%
(1) classified on the balance sheet as Subsidiary (CPL, PSO, SWEPCO) obligated,
mandatorily redeemable, trust preferred securities
CSW can issue common stock, either through open market purchases or
original issue shares, through a long-term incentive plan, the PowerShare
Dividend Reinvestment and Stock Purchase Plan and the ThriftPlus plan. Following
the issuance of the CPL 1997 Rate Order and the decline in the market price of
CSW's common stock, which management believes is attributable in part to the CPL
1997 Rate Order, management determined that it was appropriate for CSW to begin
funding these plans through open market purchases, effective April 1, 1997.
Long-Term Financing
On April 24, 1997, PSO's business trust, PSO Capital I, sold to
underwriters in a negotiated offering $75 million, 8.00% Series A, Trust
Originated Preferred Securities due April 2037. The proceeds from the sale of
these securities were used by PSO to repay short-term debt, to reimburse PSO's
treasury for the cost of reacquiring approximately $14.5 million of 4.00% Series
and 4.24% Series preferred stock, to provide working capital and for other
general corporate purposes. Settlement of the transaction occurred on May 2,
1997. PSO Capital I will be treated as a subsidiary of PSO whose only assets are
the approximately $77.3 million principal subordinated debentures issued by PSO.
In addition to PSO's obligation under the subordinated debentures, PSO has also
agreed to a security obligation which represents a full and unconditional
guarantee of PSO Capital I's trust obligations.
On April 30, 1997, SWEPCO's business trust, SWEPCO Capital I, sold to
underwriters in a negotiated offering $110 million, 7.875% Series A, Trust
Preferred Securities due April 2037. The proceeds from the sale of these
securities were used by SWEPCO to repay short-term debt, to reimburse SWEPCO's
treasury for the cost of reacquiring approximately $15.5 million of 4.28%
Series, 4.65% Series, 5.00% Series and 6.95% Series preferred stock, to provide
working capital and for other general corporate purposes. Settlement of the
transaction occurred on May 8, 1997. SWEPCO Capital I will be treated as a
subsidiary of SWEPCO whose only assets are the approximately $113.4 million
principal subordinated debentures issued by SWEPCO. In addition to SWEPCO's
obligation under the subordinated debentures, SWEPCO has also agreed to a
security obligation which represents a full and unconditional guarantee of
SWEPCO Capital I's trust obligations.
On May 8, 1997, CPL's business trust, CPL Capital I, sold to
underwriters in a negotiated offering $150 million, 8.00% Series A, Quarterly
Income Preferred Securities due April 2037. The proceeds from the sale of these
securities were used by CPL to repay short-term debt, to reimburse CPL's
treasury for the cost of reacquiring approximately $87.5 million of 4.00%
Series, 4.20% Series, 7.12% Series and 8.72% Series preferred stock, to provide
<PAGE> 63
working capital and for other general corporate purposes. Settlement of the
transaction occurred on May 14, 1997. CPL Capital I will be treated as a
subsidiary of CPL whose only assets are the approximately $154.6 million
principal subordinated debentures issued by CPL. In addition to CPL's obligation
under the subordinated debentures, CPL has also agreed to a security obligation
which represents a full and unconditional guarantee of CPL Capital I's trust
obligations.
In March 1997, an affiliate of Orange Cogeneration Limited Partnership,
an entity that is indirectly 50% owned by CSW Energy and accounted for by the
equity method of accounting, issued $110 million, 8.175% Senior Secured Bonds,
due 2022. The bonds are unconditionally guaranteed by Orange Cogeneration
Limited Partnership. Concurrently, $53.2 million was distributed to CSW Energy
representing its equity investment in the Orange Cogeneration project.
Short-Term Financing
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, 1997, CSW had revolving credit facilities totaling $1.2
billion to back up its commercial paper program.
RATES AND REGULATORY MATTERS
CPL Regulatory Matters
Reference is made to NOTE 6. CPL RATE REVIEW - DOCKET NO. 14965.
PSO Regulatory Matters
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
Other
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
STRATEGIC INITIATIVES
A vital part of CSW's future business strategy involves initiatives
that are outside of the traditional United States electric utility industry.
This is due in large measure to the well-documented fundamental changes
currently impacting the electric utility industry. CSW has undertaken several
such initiatives in the past, and will continue to pursue them in the future
provided they are consistent with the overall vision for the company which is
articulated as "CSW is an innovative leader in the global energy and related
services markets." During the first half of 1997, several new initiatives were
undertaken in support of this vision. These initiatives include activities in
both CSW's Energy Trading and Energy Services lines of business.
In June 1997, the FERC approved the request of CSW PMI to sell power
and energy at market-based rates, rather than prices based on cost-of-service,
in the wholesale electricity market. Although CSW PMI is subject to the
jurisdiction of the FERC, it will not be subject to rate jurisdiction of any
state utility commissions.
<PAGE> 64
During the second quarter of 1997, CSW made an equity investment in a
firm that provides technical consulting services to both the nuclear industry
and to governmental agencies associated with the energy industry. In addition,
CSW is in the process of forming a group that will spearhead CSW's competitive
efforts in the retail electricity markets of states outside of CSW's historical
service territories. This initiative will not only attempt to secure electricity
supply business in the few markets which soon will have retail competition, but
will also permit CSW to extend its business reach and name recognition beyond
CSW's traditional customer base.
RECENT DEVELOPMENTS
FERC Order No. 888/Texas Commission ERCOT Transmission Rules
As previously reported, the FERC issued Order No. 888, which is the
final comparable open access transmission service rule, in 1996. The provisions
of FERC Order No. 888 provide for comparable transmission service between
utilities and their transmission customers by requiring utilities to take
transmission service under their open access tariffs for all of their new
wholesale sales and purchases and by requiring utilities to rely on the same
information that their transmission customers rely on to make wholesale
purchases and sales.
In addition, the Texas Commission adopted a rule governing transmission
access and pricing for ERCOT in 1996. The pricing method adopted by the Texas
Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering
70% of total ERCOT transmission costs and a distance-sensitive component which
recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began
recording transmission revenues and expenses in accordance with the Texas
Commission's rule on January 1, 1997.
FERC Order No. 888 requires holding companies to offer single system
transmission rates. However, because the transmission rates of PSO and SWEPCO
are under the exclusive jurisdiction of the FERC while the transmission rates of
CPL and WTU are under the exclusive jurisdiction of the Texas Commission and the
two commissions have different approaches to defining and implementing
comparable open access transmission service, Order No. 888 granted the U.S.
Electric Operating Companies an exemption permitting them an opportunity to
propose a solution that provides comparability to all wholesale users. On
November 1, 1996, the U.S. Electric Operating Companies filed a system-wide
tariff to comply with Order No. 888 and, on December 31, 1996, the FERC accepted
for filing the system-wide tariff which become effective on January 1, 1997,
subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of both the FERC and the Texas Commission although the tariff
does not offer a single system rate.
Industry Restructuring Initiatives
As previously reported, several initiatives regarding restructuring the
electric utility industry have recently been undertaken in the four states in
which the U.S. Electric Operating Companies operate. Such actions have taken
various forms, including proposed legislation. Legislation was enacted in
Oklahoma that provides for retail competition by July 2002. However, legislative
activities in Texas, Louisiana and Arkansas stopped short of any such definitive
action.
In April 1997, the Oklahoma Legislature enacted legislation dealing
with industry restructuring in Oklahoma, which provides for retail competition
by July 1, 2002. The legislation directs the Oklahoma Commission to study all
<PAGE> 65
relevant issues relating to restructuring and develop a framework for a
restructured industry. The legislation divides the study of restructuring issues
by the Oklahoma Commission into four parts: (i) independent system operator
issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues.
At the end of each of these studies, the Oklahoma Commission must provide
reports along with legislative recommendations. The legislation directs the
Oklahoma Tax Commission to study the impact of electric utility restructuring on
state tax revenues and the existing tax structure, consider the establishment of
a uniform consumption tax, and report to the Oklahoma Legislature by December
31, 1998. The legislation prohibits the establishment of retail competition
until a uniform tax policy is established. The legislation also creates a Joint
Electric Utility Task Force, a 14-member panel composed of an equal number of
representatives from the Oklahoma House of Representatives and the Oklahoma
Senate. The duties of this task force include the oversight and direction of the
studies by the Oklahoma Commission and the Oklahoma Tax Commission. Management
is unable to predict the outcome of these studies or their ultimate impact on
the results of operations and financial condition of CSW or PSO.
In March 1997, the Arkansas Legislature passed a resolution directing
interim legislative committees to study competition in the electric power
industry in Arkansas. The study will begin on December 1, 1997, or when the
Arkansas Commission issues a final order in a currently pending rate proceeding
filed by Entergy Arkansas, Inc., whichever occurs first. Although several bills
addressing industry restructuring and retail competition were introduced in the
recent sessions of the Texas and Louisiana legislatures, no such legislation was
adopted. The Louisiana Senate did adopt a resolution creating a special
committee to assess the impact of retail competition on the state of Louisiana.
The committee will begin meeting in the fall of 1997 and is scheduled to issue a
report before the next regular session of the Louisiana Legislature. Management
cannot predict the outcome of either of the studies in Arkansas and Louisiana or
their ultimate impact on the results of operations and financial condition of
CSW or SWEPCO.
MERGER AND ACQUISITION ACTIVITIES
SWEPCO Cajun Asset Purchase Proposal
As previously reported, Cajun filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is
currently operating under the supervision of the United States Bankruptcy Court
for the Middle District of Louisiana. In October 1996, SWEPCO, together with
Entergy Gulf States and the Committee of Certain Members, which currently
consists of seven of the twelve distribution cooperatives served by Cajun, filed
the SWEPCO Plan in the bankruptcy court. In April 1997, the Committee of Certain
Members as well as another cooperative signed term sheets that support the
SWEPCO Plan. In signing the term sheets, the Committee of Certain Members agreed
to support the SWEPCO Plan throughout the confirmation process, and if the
SWEPCO Plan is confirmed, to sign power supply agreements that meet the
conditions of the term sheets.
Under the SWEPCO Plan, which amended other plans filed earlier in 1996,
a SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun for approximately $780 million in cash and up to an additional $20 million
to pay certain other bankruptcy claims and expenses. SWEPCO would acquire claims
of unsecured creditors of up to $7 million. In addition, the SWEPCO Plan
provides for the Cajun member cooperatives to enter into new 25-year power
supply agreements which will provide the Cajun member cooperatives with two
wholesale rate options while permitting the Cajun member cooperatives the
flexibility to acquire power on the open market when their requirements exceed
mutually agreed upon levels of generating capacity. The cooperatives could also
elect, once every five years, to move from one rate option to the other. The
<PAGE> 66
SWEPCO Plan would settle power supply contract claims and related litigation in
the bankruptcy case. The term sheets signed by the eight cooperatives contain
the major provisions of the SWEPCO Plan.
Two competing plans of reorganization for Cajun have also been filed
with the bankruptcy court, each with different rate paths, asset purchase
proposals and other provisions. One of the competing plans has the support of
both the bankruptcy court-appointed trustee and Cajun's largest creditor, the
Rural Utilities Service of the federal government. It also has the support of
the four cooperatives not currently supporting the SWEPCO plan, although the
support is based upon signed memoranda of understanding which allow the
cooperatives to support other competing parties.
Confirmation hearings in Cajun's bankruptcy case are now scheduled
through the month of October 1997. Consummation of the SWEPCO Plan is
conditioned upon confirmation by the bankruptcy court, the receipt by SWEPCO and
CSW of all requisite state and federal regulatory approvals and receipt of their
corresponding board approvals. If the SWEPCO Plan is confirmed, CSW and SWEPCO
expect initially to finance the $807 million required to consummate the
acquisition of Cajun's non-nuclear assets through a combination of external
borrowings and internally generated funds.
The foregoing discussion of SWEPCO Cajun Asset Purchase Proposal
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.
Termination of El Paso Merger
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
DERIVATIVE INSTRUMENTS
The U.S. Electric Operating Companies experience commodity price
exposures related to the purchase of both fuel supplies for the generation of
electricity and for the purchase of power and energy from other generation
sources. Contracts that provide for the future delivery of these commodities can
be considered forward contracts which contain pricing and/or volume terms which
are designed to stabilize the cost of the commodity. Consequently, the U.S.
Electric Operating Companies hedge their price exposure by balancing their
commodity purchases through a combination of long-term and short-term
(spot-market) agreements.
Since the purchase of SEEBOARD in 1995, CSW has been exposed to
currency and interest rate risks which reflect the changing exchange rate that
exists between the U.S. dollar and the British pound. For accrual accounting
purposes, transactions are recorded at differing times than when the actual
transfer of dollars or pounds occurs. To enable CSW to protect itself from an
adverse change in the exchange rates between the currencies during this time
span, various risk management tools may be utilized.
<PAGE> 67
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, 1996 and Combined Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
ITEM 1. LEGAL PROCEEDINGS.
CPL Municipal Franchise Fee Litigation
In May 1996, the city of San Juan, Texas filed a class action in
Hidalgo County, Texas District Court on behalf of all cities served by CPL based
upon CPL's alleged underpayment of municipal franchise fees. The city of San
Juan asserts various contract and tort claims against CPL as well as certain
audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed
a counterclaim for any overpayment of franchise fees it may have made as well as
its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County,
Texas, and a plea to the jurisdiction and pleas in abatement asserting that the
Texas Commission has primary jurisdiction over the claims filed by the city of
San Juan. In January, 1997, CPL filed an original petition at the Texas
Commission requesting the Texas Commission to declare its jurisdiction over
CPL's collection and payment of municipal franchise fees.
In April 1997, the Texas Commission issued a declaratory order in which
it declined to assert jurisdiction over the claims of the city of San Juan. CPL
appealed the Texas Commission's decision to the Travis County, Texas District
Court. After the Texas Commission's order, the Hidalgo County court overruled
CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo
County court entered an order certifying the case as a class action. CPL
appealed this order to the Corpus Christi Court of Appeals. In May 1996 and
December 1996, respectively, the cities of Pharr, Texas and San Benito, Texas
filed individual suits making claims identical to those claimed by the city of
San Juan.
Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, CPL cannot predict the outcome of these lawsuits.
CPL Nuclear Insurance Claims
In 1994, CPL filed a claim under its NEIL I policy relating to the
1993-1994 outage at STP Units 1 and 2. NEIL formally denied CPL's claim in 1995.
In April 1996, CPL filed an action in state district court in Corpus Christi,
Texas, against NEIL and Johnson & Higgins of Texas, Inc., the former insurance
broker for STP, seeking recovery under the policy and other relief. NEIL
responded by filing a suit against CPL in the United States District Court for
the Southern District of New York seeking a declaratory judgment to enforce an
arbitration provision contained in the policy. In May 1996, the New York court
ordered the dispute, including the issue of whether the arbitration provision is
enforceable, to arbitration and stayed the Texas proceeding. NEIL also canceled
CPL's current NEIL I policy effective July 31, 1996. NEIL also filed a claim in
arbitration seeking a determination that NEIL properly terminated CPL's coverage
and that CPL has caused NEIL damages by opposing NEIL's attempt to compel
arbitration and seeking recovery of NEIL's attorneys' fees.
In June 1996, CPL filed a notice of appeal of the New York court's
order in the United States Court of Appeals for the Second Circuit.
Subsequently, CPL and NEIL agreed to dismiss all litigation between them
concerning CPL's claim for NEIL coverage. CPL and NEIL also agreed to submit
<PAGE> 68
their disputes over coverage to a non-binding, neutral evaluation process,
although both CPL and NEIL reserved the right to take their dispute to binding
arbitration. CPL and NEIL also agreed that CPL's NEIL I policy would be
reinstated. Evidentiary hearings were held by the neutral evaluator in February
1997. A final oral argument was held before the neutral evaluator on April 4,
1997. On April 22, 1997, the neutral evaluator made the recommendation that
CPL's claim was not covered by its NEIL I policy. CPL will abide by the neutral
evaluator's recommendation.
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, PART 1 - NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES
and PART I - NOTE 6. CPL RATE REVIEW DOCKET NO. 14965.
<PAGE> 69
ITEM 5. OTHER INFORMATION
PSO Union Negotiations
As previously reported, PSO and its Local Union 1002 of the
International Brotherhood of Electrical Workers have been engaged in contract
renewal negotiations. The underlying agreement expired in September 1996 and, to
date, the parties have been unable to reach an agreement. In December 1996, PSO
implemented portions of its final proposal after declaring an impasse. The
principal issue of disagreement involves PSO's need for flexibility in a
deregulated environment.
In April 1997, Oklahoma's governor signed into law an electric industry
restructuring bill. The new law mandates the implementation of retail
competition to begin on July 1, 2002. PSO believed that the new law also broke
the impasse in the contract negotiations and has resumed negotiations with the
union. At this time, PSO cannot predict the outcome of this matter. However, PSO
is confident that, even in the event of a strike, its operations would continue
without a significant disruption.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
(12) Computation of Ratio of Earnings to Fixed Charges
CPL - (Exhibit 12.1), filed herewith.
PSO - (Exhibit 12.2), filed herewith.
SWEPCO - (Exhibit 12.3), filed herewith.
WTU - (Exhibit 12.4), filed herewith.
(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.
<PAGE> 70
(b) REPORTS FILED ON FORM 8-K:
CSW
Item 5. Other Events, dated April 11, 1997, reporting bankruptcy
judge's interim order in the El Paso terminated merger litigation.
Item 5. Other Events and Item 7. Financial Statements and Exhibits,
dated April 17, 1997, announcing first quarter earnings and dividend
declaration.
Item 5. Other Events, dated July 2, 1997, reporting information
related to the United Kingdom Windfall Profits Tax.
Item 5. Other Events, dated July 16, 1997, reporting the
settlement of litigation related to the termination of the proposed
El Paso merger.
CSW and CPL
Item 5. Other Events, dated March 31, 1997 and filed April 2, 1997,
updating CPL Rate Review Docket No. 14965.
Item 5. Other Events, dated March 31, 1997 and filed April 3,
1997, updating CPL Rate Review Docket No. 14965.
Item 5. Other Events and Item 7. Financial Statements and Exhibits,
dated March 31, 1997 and filed April 10, 1997, reporting (i) the
CPL 1997 Rate Order; (ii) Other Matters including legislative
action in Texas, CSW's dividend policy, and certain
regulation-related accounting issues; (iii) a change in the funding
of CSW stock plans; and (iv) the results of a special meeting of
CPL's shareholders.
Item 5. Other Events, dated April 7, 1997, providing certain
information in anticipation of a preferred securities offering by CPL
Capital I.
CSW and PSO
Item 5. Other Events, dated July 17, 1997, reporting the OCC Staff's
recommendation to the OCC with regard to PSO's current regulatory
matters.
PSO
Item 5. Other Events, dated April 16, 1997, providing certain
information in anticipation of a preferred securities offering by PSO
Capital I.
SWEPCO
Item 5. Other Events, dated April 16, 1997, providing certain
information in anticipation of a preferred securities offering by
SWEPCO Capital I.
WTU
None
<PAGE> 71
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, 1997 /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, 1997 /s/ R. Russell Davis
-----------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
<PAGE> 72
EXHIBIT 12.1
CENTRAL POWER AND LIGHT COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $252,802
Adjustments:
Income taxes 53,588
Provision for deferred income taxes 28,024
Deferred investment tax credits (5,553)
Other income and deductions 2,201
Allowance for borrowed and equity funds
used during construction 2,529
-------
Earnings $333,591
=======
Fixed Charges:
Interest on long-term debt $109,827
Interest on short-term debt and other 17,123
-------
Fixed Charges $126,950
=======
Ratio of Earnings to Fixed Charges 2.63
=========
<PAGE> 73
EXHIBIT 12.2
PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $99,671
Adjustments:
Income taxes 34,209
Provision for deferred income taxes 3,123
Deferred investment tax credits (2,784)
Other income and deductions 138
Allowance for borrowed and equity funds
used during construction 2,222
---------
Earnings $136,579
=========
Fixed Charges:
Interest on long-term debt $30,676
Amortization of debt issuance cost 1,749
Other interest 4,186
---------
Fixed Charges $36,611
=========
Ratio of Earnings to Fixed Charges 3.73
=========
<PAGE> 74
EXHIBIT 12.3
SOUTHWESTERN ELECTRIC POWER COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $136,144
Adjustments:
Income taxes 38,327
Provision for deferred income taxes 4,910
Deferred investment tax credits (4,696)
Other income and deductions (304)
Allowance for borrowed and equity funds
used during construction 1,789
Interest portion of financing leases 1,317
---------
Earnings $177,487
=========
Fixed Charges:
Interest on long-term debt $42,891
Amortization of debt issuance cost 3,501
Other interest 4,912
Interest portion of financing leases 1,317
---------
Fixed Charges $52,621
=========
Ratio of Earnings to Fixed Charges 3.37
=========
<PAGE> 75
EXHIBIT 12.4
WEST TEXAS UTILITIES COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $47,667
Adjustments:
Income taxes 5,376
Provision for deferred income taxes 9,220
Deferred investment tax credits (1,321)
Other income and deductions 443
Allowance for borrowed and equity funds
used during construction 1,210
---------
Earnings $62,595
=========
Fixed Charges:
Interest on long-term debt $20,754
Interest on short-term debt and other 4,964
---------
Fixed Charges $25,718
=========
Ratio of Earnings to Fixed Charges 2.43
=========
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 001
<NAME> CENTRAL AND SOUTH WEST CORPORTION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,371
<OTHER-PROPERTY-AND-INVEST> 171
<TOTAL-CURRENT-ASSETS> 1,681
<TOTAL-DEFERRED-CHARGES> 506
<OTHER-ASSETS> 2,694
<TOTAL-ASSETS> 13,423
<COMMON> 743
<CAPITAL-SURPLUS-PAID-IN> 1,039
<RETAINED-EARNINGS> 1,925
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,707
28
500
<LONG-TERM-DEBT-NET> 3,932
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 40
<COMMERCIAL-PAPER-OBLIGATIONS> 1,108
<LONG-TERM-DEBT-CURRENT-PORT> 200
1
<CAPITAL-LEASE-OBLIGATIONS> 7
<LEASES-CURRENT> 3
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,897
<TOT-CAPITALIZATION-AND-LIAB> 13,423
<GROSS-OPERATING-REVENUE> 2,462
<INCOME-TAX-EXPENSE> 52
<OTHER-OPERATING-EXPENSES> 2,114
<TOTAL-OPERATING-EXPENSES> 2,166
<OPERATING-INCOME-LOSS> 296
<OTHER-INCOME-NET> 15
<INCOME-BEFORE-INTEREST-EXPEN> 311
<TOTAL-INTEREST-EXPENSE> 206
<NET-INCOME> 105
7
<EARNINGS-AVAILABLE-FOR-COMM> 108
<COMMON-STOCK-DIVIDENDS> 184
<TOTAL-INTEREST-ON-BONDS> 112
<CASH-FLOW-OPERATIONS> 170
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 003
<NAME> CENTRAL POWER AND LIGHT COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,401,579
<OTHER-PROPERTY-AND-INVEST> 1,966
<TOTAL-CURRENT-ASSETS> 293,175
<TOTAL-DEFERRED-CHARGES> 5,215
<OTHER-ASSETS> 1,201,679
<TOTAL-ASSETS> 4,903,614
<COMMON> 168,888
<CAPITAL-SURPLUS-PAID-IN> 405,000
<RETAINED-EARNINGS> 854,986
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,428,874
0
308,065
<LONG-TERM-DEBT-NET> 1,326,917
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 200,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,639,758
<TOT-CAPITALIZATION-AND-LIAB> 4,903,614
<GROSS-OPERATING-REVENUE> 615,782
<INCOME-TAX-EXPENSE> 20,771
<OTHER-OPERATING-EXPENSES> 499,577
<TOTAL-OPERATING-EXPENSES> 520,348
<OPERATING-INCOME-LOSS> 95,434
<OTHER-INCOME-NET> 2,275
<INCOME-BEFORE-INTEREST-EXPEN> 97,709
<TOTAL-INTEREST-EXPENSE> 62,751
<NET-INCOME> 34,958
5,610
<EARNINGS-AVAILABLE-FOR-COMM> 32,054
<COMMON-STOCK-DIVIDENDS> 46,000
<TOTAL-INTEREST-ON-BONDS> 54,118
<CASH-FLOW-OPERATIONS> 185,422
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000081027
<NAME> PUBLIC SERVICE COMPANY OF OKLAHOMA
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,302,389
<OTHER-PROPERTY-AND-INVEST> 12,785
<TOTAL-CURRENT-ASSETS> 97,844
<TOTAL-DEFERRED-CHARGES> 4,871
<OTHER-ASSETS> 47,302
<TOTAL-ASSETS> 1,465,191
<COMMON> 157,230
<CAPITAL-SURPLUS-PAID-IN> 180,000
<RETAINED-EARNINGS> 155,335
<TOTAL-COMMON-STOCKHOLDERS-EQ> 492,565
0
77,812
<LONG-TERM-DEBT-NET> 381,062
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 40,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 473,752
<TOT-CAPITALIZATION-AND-LIAB> 1,465,191
<GROSS-OPERATING-REVENUE> 321,857
<INCOME-TAX-EXPENSE> 9,668
<OTHER-OPERATING-EXPENSES> 273,900
<TOTAL-OPERATING-EXPENSES> 283,568
<OPERATING-INCOME-LOSS> 38,289
<OTHER-INCOME-NET> 867
<INCOME-BEFORE-INTEREST-EXPEN> 39,156
<TOTAL-INTEREST-EXPENSE> 17,951
<NET-INCOME> 21,205
257
<EARNINGS-AVAILABLE-FOR-COMM> 25,392
<COMMON-STOCK-DIVIDENDS> 16,000
<TOTAL-INTEREST-ON-BONDS> 14,022
<CASH-FLOW-OPERATIONS> 49,581
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 005
<NAME> SOUTHWESTERN ELECTRIC POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,851,155
<OTHER-PROPERTY-AND-INVEST> 7,125
<TOTAL-CURRENT-ASSETS> 162,430
<TOTAL-DEFERRED-CHARGES> 32,741
<OTHER-ASSETS> 35,189
<TOTAL-ASSETS> 2,088,640
<COMMON> 135,660
<CAPITAL-SURPLUS-PAID-IN> 245,000
<RETAINED-EARNINGS> 334,569
<TOTAL-COMMON-STOCKHOLDERS-EQ> 715,229
28,306
111,103
<LONG-TERM-DEBT-NET> 540,843
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 145
1,200
<CAPITAL-LEASE-OBLIGATIONS> 6,680
<LEASES-CURRENT> 2,334
<OTHER-ITEMS-CAPITAL-AND-LIAB> 682,800
<TOT-CAPITALIZATION-AND-LIAB> 2,088,640
<GROSS-OPERATING-REVENUE> 430,607
<INCOME-TAX-EXPENSE> 16,837
<OTHER-OPERATING-EXPENSES> 349,339
<TOTAL-OPERATING-EXPENSES> 366,176
<OPERATING-INCOME-LOSS> 64,431
<OTHER-INCOME-NET> 557
<INCOME-BEFORE-INTEREST-EXPEN> 64,988
<TOTAL-INTEREST-EXPENSE> 25,067
<NET-INCOME> 39,921
1,333
<EARNINGS-AVAILABLE-FOR-COMM> 40,768
<COMMON-STOCK-DIVIDENDS> 28,000
<TOTAL-INTEREST-ON-BONDS> 19,621
<CASH-FLOW-OPERATIONS> 103,334
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 006
<NAME> WEST TEXAS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 668,851
<OTHER-PROPERTY-AND-INVEST> 952
<TOTAL-CURRENT-ASSETS> 79,952
<TOTAL-DEFERRED-CHARGES> 23,463
<OTHER-ASSETS> 47,957
<TOTAL-ASSETS> 821,175
<COMMON> 137,214
<CAPITAL-SURPLUS-PAID-IN> 2,236
<RETAINED-EARNINGS> 124,034
<TOTAL-COMMON-STOCKHOLDERS-EQ> 263,484
0
2,484
<LONG-TERM-DEBT-NET> 276,855
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 278,352
<TOT-CAPITALIZATION-AND-LIAB> 821,175
<GROSS-OPERATING-REVENUE> 183,883
<INCOME-TAX-EXPENSE> 3,287
<OTHER-OPERATING-EXPENSES> 160,736
<TOTAL-OPERATING-EXPENSES> 164,023
<OPERATING-INCOME-LOSS> 19,860
<OTHER-INCOME-NET> 498
<INCOME-BEFORE-INTEREST-EXPEN> 20,358
<TOTAL-INTEREST-EXPENSE> 12,492
<NET-INCOME> 7,866
92
<EARNINGS-AVAILABLE-FOR-COMM> 8,957
<COMMON-STOCK-DIVIDENDS> 8,000
<TOTAL-INTEREST-ON-BONDS> 10,176
<CASH-FLOW-OPERATIONS> 14,105
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
