-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q4D6ZpjO1F+2IOgEecPo9uTLSYFHP3e7J7lvTS7yakNLaO/c+ew+smXLoaW1xAKn TpgyEiKzzpQYaLEmvPkXDw== 0000018540-99-000028.txt : 19990315 0000018540-99-000028.hdr.sgml : 19990315 ACCESSION NUMBER: 0000018540-99-000028 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 41 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL & SOUTH WEST CORP CENTRAL INDEX KEY: 0000018540 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 510007707 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01443 FILM NUMBER: 99563645 BUSINESS ADDRESS: STREET 1: 1616 WOODALL RODGERS FRWY CITY: DALLAS STATE: TX ZIP: 75202 BUSINESS PHONE: 2147771000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL POWER & LIGHT CO /TX/ CENTRAL INDEX KEY: 0000018734 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 740550600 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12973 FILM NUMBER: 99563646 BUSINESS ADDRESS: STREET 1: 539 N CARANCAHUA ST CITY: CORPUS CHRISTI STATE: TX ZIP: 78401 BUSINESS PHONE: 5128815300 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF OKLAHOMA CENTRAL INDEX KEY: 0000081027 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 730410895 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12945 FILM NUMBER: 99563647 BUSINESS ADDRESS: STREET 1: 212 E 6TH ST CITY: TULSA STATE: OK ZIP: 74119 BUSINESS PHONE: 9185992000 MAIL ADDRESS: STREET 1: P O BOX 201 CITY: TULSA STATE: OK ZIP: 74119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWESTERN ELECTRIC POWER CO CENTRAL INDEX KEY: 0000092487 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 720323455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03146 FILM NUMBER: 99563648 BUSINESS ADDRESS: STREET 1: 428 TRAVIS ST CITY: SHREVEPORT STATE: LA ZIP: 71156 BUSINESS PHONE: 3182222141 MAIL ADDRESS: STREET 1: C/O SOUTHWESTERN ELECTRIC POWER CO STREET 2: 428 TRAVIS STREET CITY: SHREVEPORT STATE: LA ZIP: 71156-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEST TEXAS UTILITIES CO CENTRAL INDEX KEY: 0000105860 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 750646790 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00340 FILM NUMBER: 99563649 BUSINESS ADDRESS: STREET 1: 301 CYPRESS CITY: ABILENE STATE: TX ZIP: 79601 BUSINESS PHONE: 9156747000 10-K 1 1998 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________ to _______ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 1-1443 Central and South West Corporation 51-0007707 (A Delaware Corporation) 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 (214) 777-1000 0-346 Central Power and Light Company 74-0550600 (A Texas Corporation) 539 North Carancahua Street Corpus Christi, Texas 78401-2802 (512) 881-5300 0-343 Public Service Company of Oklahoma 73-0410895 (An Oklahoma Corporation) 212 East 6th Street Tulsa, Oklahoma 74119-1212 (918) 599-2000 1-3146 Southwestern Electric Power Company 72-0323455 (A Delaware Corporation) 428 Travis Street Shreveport, Louisiana 71156-0001 (318) 673-3000 0-340 West Texas Utilities Company 75-0646790 (A Texas Corporation) 301 Cypress Street Abilene, Texas 79601-5820 (915) 674-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange Registrant Title of Each Class on Which Registered - ---------- ------------------- --------------------- Central and South West Corporation Common Stock, $3.50 Par Value New York Stock Exchange, Inc. Chicago Stock Exchange, Inc. CPL Capital I 8.00% Cumulative Quarterly Income Preferred New York Stock Exchange, Inc. Securities, Series A, Liquidation Preference $25 per Preferred Security PSO Capital I 8.00% Trust Originated Preferred Securities New York Stock Exchange, Inc. Series A, Liquidation Preference $25 per Preferred Security SWEPCO Capital I 7.875% Trust Preferred Securities, Series A, New York Stock Exchange, Inc. Liquidation amount $25 per Preferred Security
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Registrant Title of Each Class - ---------- ------------------- Central Power and Light Company Cumulative Preferred Stock, $100 Par Value Public Service Company of Oklahoma Cumulative Preferred Stock, $100 Par Value Southwestern Electric Power Company Cumulative Preferred Stock, $100 Par Value West Texas Utilities Company Cumulative Preferred Stock, $100 Par Value
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 and (2) have been subject to such filing requirements for the past 90 days. Yes __X__ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: Central and South West Corporation[__X__], Central Power and Light Company [__X__], Public Service Company of Oklahoma [__X__], Southwestern Electric Power Company [__X__] and West Texas Utilities Company [__X__] Aggregate market value of the Common Stock of Central and South West Corporation at February 22, 1999 held by non-affiliates was approximately $5.4 billion. Number of shares of Common Stock outstanding at February 22, 1999: 212,612,368. Central and South West Corporation is the sole holder of the common stock of Central Power and Light Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1999 Notice of Annual Meeting and Proxy Statement of Central and South West Corporation are hereby incorporated by reference into Part III hereof. This Combined Form 10-K 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. TABLE OF CONTENTS GLOSSARY OF TERMS................................................ii FORWARD-LOOKING INFORMATION......................................v PART I ITEM 1. BUSINESS ...............................................1 ITEM 2. PROPERTIES .............................................26 ITEM 3. LEGAL PROCEEDINGS ......................................27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....28 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .......................................2-1 ITEM 6. SELECTED FINANCIAL DATA ................................2-2 Registrants ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................2-2 Registrants ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................2-2 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............2-2 Registrants ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .......................2-151 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS ..3-1 ITEM 11. EXECUTIVE COMPENSATION ...............................3-7 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...............................................3-12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......3-14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ..............................................4-1 i GLOSSARY OF TERMS The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition AEP ....................American Electric Power Company, Inc. AEP Merger .............Proposed Merger between AEP and CSW where CSW would become a wholly owned subsidiary of AEP AFUDC ..................Allowance for funds used during construction ALJ ....................Administrative Law Judge Alpek ..................Alpek S.A. de C.V. Altamira................CSW International cogeneration project in Altamira, Tamaulipas, Mexico Anglo Iron..............Anglo Iron and Metal, Inc. APBO ...................Accumulated Postretirement Benefit Obligation Arkansas Commission ....Arkansas Public Service Commission Btu ....................British thermal unit Burlington Northern ....Burlington Northern Railroad Company C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW Communications, Inc.) CAAA ...................Clean Air Act/Clean Air Act Amendments Cajun ..................Cajun Electric Power Cooperative, Inc. CEO ....................Chief Executive Officer CERCLA .................Comprehensive Environmental Response, Compensation and Liability Act of 1980 ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture between C3 Communications and ICG Communications, Inc. CLECO ..................Central Louisiana Electric Company, Inc. Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas CPL ....................Central Power and Light Company, Corpus Christi, Texas CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's rate case Docket No, 14965, including both the order received on September 10, 1997 and the revised order received on October 16, 1997 CPL 1996 Fuel Agreement.Fuel settlement agreement entered into by CPL and other parties CSW ....................Central and South West Corporation, Dallas, Texas CSW Credit .............CSW Credit, Inc., Dallas, Texas CSW Energy .............CSW Energy, Inc., Dallas, Texas CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas CSW International ......CSW International, Inc., Dallas, Texas CSW Investments ........CSW Investments, an unlimited company organized in the United Kingdom through which CSW International owns SEEBOARD CSW Leasing ............CSW Leasing, Inc., Dallas, Texas CSW Power Marketing ....CSW Power Marketing, Inc., Dallas, Texas CSW Services ...........Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW System .............CSW and its subsidiaries CSW UK Finance Company..An unlimited company organized in the United Kingdom through which CSW International owns CSW Investments CSW U.S. Electric System...............CSW and the U.S. Electric Operating Companies CWIP ...................Construction work in progress DeSoto .................Parish of DeSoto, State of Louisiana pollution control revenue bond issuing authority DGES ...................Director General of Electricity Supply DHMV ...................Dolet Hills Mining Venture Diversified Electric ...CSW Energy and CSW International DOE ....................United States Department of Energy ECOM ...................Excess cost over market EITF....................Emerging Issues Task Force El Paso ................El Paso Electric Company EMF ....................Electric and magnetic fields EnerACT.................Energy Aggregation and Control Technology Energy Policy Act ......National Energy Policy Act of 1992 EnerShop ...............EnerShopsm Inc., Dallas, Texas Entergy Texas, Inc. ....Entergy Texas Utilities Company, Inc. EPA ....................United States Environmental Protection Agency EPS ....................Earnings per share of common stock ERCOT ..................Electric Reliability Council of Texas ERISA ..................Employee Retirement Income Security Act of 1974, as amended Exchange Act ...........Securities Exchange Act of 1934, as amended EWG ....................Exempt Wholesale Generator FERC ...................Federal Energy Regulatory Commission FMB ....................First mortgage bond FUCO ...................Foreign utility company as defined by the Holding Company Act Guadalupe ..............Guadalupe-Blanco River Authority pollution control revenue bond issuing authority HL&P ...................Houston Lighting & Power Company Holding Company Act ....Public Utility Holding Company Act of 1935, as amended HVdc ...................High-voltage direct-current ii GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition IPP ....................Independent power producer IBEW ...................International Brotherhood of Electrical Workers ISO ....................Independent system operator ITC ....................Investment tax credit Joint Proxy Statement...The Notice of Annual Meeting and Joint Proxy Statement of American Electric Power Company, Inc. and Central and South West Corporation KW .....................Kilowatt KWH ....................Kilowatt-hour LIFO ...................Last-in first-out (inventory accounting method) Louisiana Commission ...Louisiana Public Service Commission LTIP ...................Amended and Restated 1992 Long-Term Incentive Plan Matagorda ..............Matagorda County Navigation District Number One (Texas) pollution control revenue bond issuing authority Mcfs ...................Thousand cubic feet of gas MD&A ...................Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ ...................Mississippi Department of Environmental Quality MGP ....................Manufactured gas plant or coal gasification plant Mirror CWIP ............Mirror construction work in progress Mississippi Power ......Mississippi Power Company MMbtu ..................Million Btu MW .....................Megawatt MWH ....................Megawatt-hour National Grid ..........National Grid Group plc NEIL ...................Nuclear Electric Insurance Limited NLRB ...................National Labor Relations Board NRC ....................Nuclear Regulatory Commission OASIS ..................Open access same time information system OEFA ...................Oklahoma Environmental Finance Authority pollution control revenue bond issuing authority Oklahoma Commission ....Corporation Commission of the State of Oklahoma Oklaunion ..............Oklaunion Power Station Unit No. I OPEB ...................Other postretirement benefits (other than pension) PCB ....................Polychlorinated biphenyl PCRB ...................Pollution Control Revenue Bond PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock Purchase Plan PRP ....................Potentially responsible party PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma PSO 1997 Rate Settlement Agreement............Joint stipulation agreement reached by PSO and other parties to settle PSO's rate inquiry PURPA ..................Public Utility Regulatory Policies Act of 1978 QF .....................Qualifying Facility as defined in PURPA RCRA ...................Federal Resource Conservation and Recovery Act of 1976 Red River ..............Red River Authority of Texas pollution control revenue bond issuing authority Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU RESCTA .................Rural Electric Supplier Certified Territory Act Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan Retirement Savings Plan.CSW's employee retirement savings plan Rights Plan ............Stockholders Rights Agreement between CSW and CSW Services, as Rights Agent RUS ....................Rural Utilities Service of the federal government Sabine .................Sabine River Authority of Texas pollution control revenue bond issuing authority Siloam Springs .........City of Siloam Springs, Arkansas pollution control revenue bond issuing authority SAR ....................Stock Appreciation Right SEC ....................United States Securities and Exchange Commission SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted to U.S. Generally Accepted Accounting Principles SERP ...................Special Executive Retirement Plan SFAS ...................Statement of Financial Accounting Standards SFAS No. 52 ............Foreign Currency Translation SFAS No. 71 ............Accounting for the Effects of Certain Types of Regulation SFAS No. 87 ............Employers' Accounting for Pensions SFAS No. 88.............Employers' Accounting for Settlements and Curtailments of Defined Pension Plans and for Termination Benefits SFAS No. 106 ...........Employers' Accounting for Postretirement Benefits Other than Pensions SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity Securities SFAS No. 123 ...........Accounting for Stock-Based Compensation SFAS No. 130 ...........Reporting Comprehensive Income iii GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related Information SFAS No. 132 ...........Employers' Disclosures about Pensions and Other Postretirement Benefits SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging Activities SOP 98-5 ...............Statement of Position 98-5, Reporting on the Costs of Start-up Activities SPP ....................Southwest Power Pool STP ....................South Texas Project nuclear electric generating station STPNOC .................STP Nuclear Operating Company, a non-profit Texas corporation, jointly owned by CPL, HL&P, City of Austin, and City of San Antonio SWEPCO .................Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO Plan ............The amended plan of reorganization for Cajun filed by the Members Committee and SWEPCO on March 18, 1998 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas ..................Tejas Gas Corporation Texas Commission .......Public Utility Commission of Texas Titus County ...........Titus County Fresh Water Supply District No. 1 pollution control revenue bond issuing authority TNRCC ..................Texas Natural Resource Conservation Commission Transok.................Transok, Inc. and subsidiaries Trust Preferred Securities...........Collective term for securities issued by business trusts of CPL, PSO and SWEPCO classified on the balance sheet as "Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)" U.K. Electric...........SEEBOARD U.S.A. Union Pacific ..........Union Pacific Railroad Company U.S. Electric Operating Companies or U.S. Electric .....CPL, PSO, SWEPCO and WTU Vale ...................Empresa De Electricidade Vale Paranapanema S/A, a Brazilian Electric Distribution Company Valero..................Valero Refining Company-Texas, Valero Refining Company and Valero Energy Company WTU ....................West Texas Utilities Company, Abilene, Texas Yorkshire ..............Yorkshire plc, a regional electricity company in the United Kingdom iv FORWARD-LOOKING INFORMATION This report made by CSW and certain of its subsidiaries contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Although CSW and each of its subsidiaries believe that their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: - the impact of general economic changes in the United States and in countries in which CSW either currently has made or in the future may make investments, - the impact of deregulation on the United States electric utility business, - increased competition and electric utility industry restructuring in the United States, - the impact of the proposed AEP Merger including any regulatory conditions imposed on the merger, the inability to consummate the AEP Merger, or other merger and acquisition activity including the SWEPCO Plan, - 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, - costs associated with any year 2000 computer related failure(s) either within the CSW System or supplier failures that adversely affect the CSW System, - uncertainties in foreign operations and foreign laws affecting CSW's investments in those countries, - the effects of retail competition in the natural gas and electricity distribution and supply businesses in the United Kingdom, and - the timing and success of efforts to develop domestic and international power projects. In the non-utility area, the previously mentioned factors apply and also include, but are not limited to: - the ability to compete effectively in new areas, including telecommunications, power marketing and brokering, and other energy related services, and - evolving federal and state regulatory legislation and policies that may adversely affect those industries generally or the CSW System's business in areas in which it operates. v PART I ITEM 1. BUSINESS. CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based public utility holding company registered under the Holding Company Act. CSW owns all of the outstanding shares of common stock of the U.S. Electric Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3 Communications, EnerShop and a currently inactive CSW Energy Services and indirectly owns all of the outstanding share capital of SEEBOARD. In addition, CSW owns 80% of the outstanding shares of common stock of CSW Leasing. In 1998, CSW's operating segments, including its four registrants that form the U.S. Electric segment, contributed the following percentages to aggregate operating revenues, operating income and net income. Other and U.S. U.K. Reconciling CPL PSO SWEPCO WTU Electric Electric Items Total ------------------------------------------------------------- Operating Revenues 25 14 17 8 64 32 4 100% Operating Income 32 15 16 10 73 26 1 100% Net Income 35 17 22 9 83 27 (10) 100% The relative contributions of the U.S. Electric, U.K. Electric and Diversified Electric segments and other non-utility subsidiaries to the aggregate operating revenues, operating income and net income differ from year to year due to variations in weather, fuel costs, timing and amount of rate changes and other factors, including but not limited to changes in business conditions and the results of non-utility businesses. Sales of electricity by the U.S. Electric Operating Companies tend to increase during warmer summer months and, to a lesser extent, cooler winter months, because of higher demand for power. The sale of electricity by the U.K. Electric segment tends to increase during colder winter months because of a higher demand for power. For additional detail related to CSW's reportable business segments, see ITEM 8 - NOTE 14. BUSINESS SEGMENTS. For financial results showing CSW's seasonality, see ITEM 8 - NOTE 19. QUARTERLY INFORMATION. The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance, acquisition and sale of securities, the acquisition and sale of utility assets or any interest in any other business and accounting practices, including certain affiliate transactions, and other matters. See RATES AND REGULATION below, and ITEM 7. MD&A for additional information regarding the Holding Company Act. PROPOSED AEP MERGER Background Information On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28 billion at that time. At December 31, 1998, the total market capitalization of the combined company would have been $28 billion ($15 billion in equity; $13 billion in debt), the combined company would have served more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. 1 Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price and would have issued approximately $6.6 billion in stock to CSW stockholders to complete the transaction. At December 31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW stockholders to complete the transaction. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as in 1998, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries. The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two work forces. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from: (i) issuing shares of common stock other than pursuant to employee benefit plans; (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Merger Regulatory Approval The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. The transaction must satisfy many conditions, including the condition that it must be accounted for as a pooling of interests. The parties may not waive some of these conditions. AEP and CSW have initiated the process of seeking regulatory approvals, but there can be no assurances as to when, on what terms or whether the required approvals will be received or whether there will be any regulatory proceedings in the United Kingdom. The proposed AEP merger has a targeted completion date in the fourth quarter of 1999. However, there can be no assurance that the AEP merger will be consummated. See ITEM 7. MD&A and ITEM 8 - NOTE 16. PROPOSED AEP MERGER. U.S. ELECTRIC The U.S. Electric Operating Companies generate, purchase, transmit, distribute and sell electricity. The U.S. Electric Operating Companies serve approximately 1.7 million customers in one of the largest combined service 2 territories in the United States covering approximately 152,000 square miles in portions of Texas, Oklahoma, Louisiana and Arkansas. The customer base includes a mix of residential, commercial and diversified industrial customers. CPL and WTU operate in portions of south and central west Texas, respectively. PSO operates in portions of eastern and southwestern Oklahoma, and SWEPCO operates in portions of northeastern Texas, northwestern Louisiana and western Arkansas. Information concerning each of the U.S. Electric Operating Companies for 1998 is presented in the following table.
Estimated Estimated Service Average Rural Electric State and Year of Population Territory Number of Municipal Cooperatives Registrant Incorporation Served (sq. miles) Customers Customers Served --------------------------------------------------------------------------------------------- CPL Texas - 1945 1,808,000 44,000 642,000 1 4 PSO Oklahoma - 1913 1,112,000 30,000 486,000 2 2 SWEPCO Delaware - 1912 952,000 25,000 419,000 3 8 WTU Texas - 1927 394,000 53,000 188,000 4 13
The largest cities in CPL's service territory are Corpus Christi, Laredo and McAllen. The economic base of CPL's service territory includes manufacturing, mining, agricultural, transportation and public utilities sectors. Major activities in these sectors include oil and gas extraction, food processing, apparel, metal refining, chemical and petroleum refining, plastics and machinery equipment. Contracts with substantially all large industrial customers provide for both demand and energy charges. Demand charges continue under such contracts even during periods of reduced industrial activity, thus mitigating the effect of reduced activity on operating income. The largest cities in PSO's service territory are Tulsa, Lawton, Broken Arrow and Bartlesville. The economic base of PSO's service territory includes petroleum products, manufacturing and agriculture. The principal industries in the territory include natural gas and oil production, oil refining, steel processing, aircraft maintenance, paper manufacturing and timber products, glass, chemicals, cement, plastics, aerospace manufacturing, telecommunications and rubber goods. The largest cities in SWEPCO's service territory are Shreveport/Bossier City, Longview and Texarkana. The economic base of SWEPCO's service territory includes mining, manufacturing, chemical products, petroleum products, agriculture and tourism. The principal industries in the territory include natural gas and oil production, petroleum refining, manufacturing of pulp and paper, chemicals, food processing and metal refining. The territory also has several military installations, colleges and universities. The largest cities in WTU's service territory are Abilene and San Angelo. The economic base of WTU's service territory includes agricultural businesses, such as the production of cattle, sheep, goats, cotton, wool, mohair and feed crops. Significant gains have been made in economic diversification through value added processing of these products. The natural resources of the territory include oil, natural gas, sulfur, gypsum and ceramic clays. Important manufacturing and processing plants served by WTU produce cottonseed products, oil products, electronic equipment, precision and consumer metal products, meat products, gypsum products and carbon fiber products. The territory also has several military installations and state correctional institutions. The U.S. Electric Operating Companies operate on an interstate basis to facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW North HVdc transmission interconnection located at Vernon, Texas. SWEPCO and CPL are interconnected through the 600 MW East HVdc transmission interconnection located at Pittsburg, Texas. CPL and WTU are members of the ERCOT power grid that operates in Texas. Other ERCOT members include Texas Utilities Electric Company, HL&P, Texas Municipal Power Agency, Lower Colorado River Authority, the municipal systems of San Antonio, Austin and Brownsville, the South Texas and Medina Electric Cooperatives, and several other interconnected systems and cooperatives. PSO and 3 SWEPCO are members of the SPP power grid that includes 12 investor-owned utilities, 7 municipalities, 7 cooperatives, 3 state and 1 federal agency as well as IPPs and power marketers operating in the states of Arkansas, Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and Texas. ERCOT members interchange power and energy with one another on a firm, economy and emergency basis, as do the members of the SPP. CSW Services performs, at cost, various accounting, engineering, tax, legal, financial, electronic data processing, centralized economic dispatching of electric power and other services for the CSW System, primarily for the U.S. Electric Operating Companies. The U.S. Electric Operating Companies are functionally organized into power generation, energy delivery and energy services business units, which are centrally managed by CSW Services. Currently, CSW is developing management information systems to report segment information along these business lines. U.K. ELECTRIC SEEBOARD is one of the 12 regional electricity companies formed as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April 1996. SEEBOARD's principal businesses are the distribution and supply of electricity. In addition, SEEBOARD is engaged in other businesses, including gas supply, electricity generation, and electrical contracting. SEEBOARD's service area covers approximately 3,000 square miles in Southeast England. The service area extends from the outlying areas of London to the English Channel, and includes large towns such as Kingston-upon-Thames, Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas. The area has a population of approximately 4.7 million people with significant portions of the area, such as south London, having a high population density. Over the past 25 years, the services sector of the area's economy has grown in importance, while the industrial sector has declined. Considerable commercial development has occurred in a number of towns in the area over the last ten years, in particular in the areas around Gatwick Airport and the English Channel ports. In 1998, the electricity market in the U.K. began a phased in opening of competition, allowing domestic and small business customers in selected areas to choose their electric suppliers. During 1999, competition will be extended to the entire country. SEEBOARD became one of the first regional electricity companies to compete in the open marketplace, with part of its service area being opened to competition in October 1998. SEEBOARD is actively competing to retain its existing customers and win new customers in other regions. In 1998, SEEBOARD streamlined its business by selling its 41 retail appliance superstores to the Dixons Stores Group for about $30 million. SEEBOARD recognized that its retail business would not be able to compete successfully over the long term with the larger national chains. In a joint venture, SEEBOARD Powerlink won a 30 year contract for $1.6 billion to operate, maintain, finance and renew the high-voltage power distribution network of the London Underground, the largest metropolitan rail system in the world. SEEBOARD Powerlink will be responsible for distributing high voltage electricity supply to all 270 London Underground stations and to some 250 miles of the rail system's track. SEEBOARD's partners in the Powerlink consortium are the international electrical engineering group, ABB, and the international cable and construction group, BICC. OTHER CSW BUSINESS OPERATIONS CSW continually seeks opportunities to expand its non-utility business in areas related to energy and energy services. This expansion frequently occurs through strategic domestic and international acquisitions, through marketing 4 initiatives inside and outside of the service territories of the U.S. Electric Operating Companies and through new business investments. Acquisitions of any new assets, or development of any new business opportunities, must meet defined criteria, including the potential to lower CSW System costs, increase long-term efficiency and competitiveness, and provide an acceptable return on investment to CSW. See PROPOSED AEP MERGER for information related to covenants and restrictions on certain business activities. Diversified Electric CSW Energy presently owns interests in six operating power projects totaling 978 MW which are located in Colorado, Florida and Texas. CSW Energy began construction in August 1998 of a 500 MW merchant power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural gas-fired facility should begin simple cycle operation in the summer of 1999 and combined cycle operation by the end of 1999. CSW International was organized to pursue investment opportunities in EWGs and FUCOs and currently holds investments in the United Kingdom, Mexico and South America. In the first quarter of 1998, CSW International and its joint venture partner, Alpek, commenced commercial operations of a 109 MW, gas fired cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. Also during 1998, CSW International provided $100 million of debt, to be converted to equity at the end of 1999, to Vale based in Sao Paulo, Brazil. At December 31, 1998, CSW International had approximately $290 million invested in South America. In late 1998, CSW International and Scottish Power commenced construction of a 400 MW combined cycle gas turbine power station in southeast England. Commercial operation is expected to begin in the year 2000. CSW International has a 50% interest in the project. In addition to these projects, CSW Energy and CSW International have other projects in various stages of development. Energy Services C3 Communications C3 Communications, an exempt telecommunications company, is comprised of two divisions. C3 Communications' Utility Automation Division provides automatic meter reading, interval meter data and related products and services to commercial and industrial customers, electric, gas and water utilities and other energy service providers. C3 Communications' Networks Division was formed from the dissolution of ChoiceCom. C3 Communications' Networks Division offers high capacity inter-city fiber optic network services to telecommunications carriers and wholesale customers in Texas and Louisiana with plans to expand into Arkansas and Oklahoma. C3 Communications' Utility Automation Division entered the direct access market in 1998 and received approval from all three utility distribution companies in California to manage meter data for the state's deregulated electric utility industry. The Utility Automation Division continues to seek other domestic opportunities. In 1998, ChoiceCom expanded its switch-based local dial tone markets from three cities to five by installing state-of-the art Lucent 5ESS(R) switches in Dallas and Houston, Texas. ChoiceCom also expanded its long haul network with the installation and operation of a high capacity fiber optic system linking the Texas cities of Dallas, Houston, Austin and San Antonio in July of 1998. 5 By mutual agreement, the ChoiceCom partnership was terminated December 31, 1998. ICG Communications, Inc. purchased ChoiceCom's local dial tone business while C3 Communications retained the long haul, high-capacity fiber optic network. With the fiber assets, C3 Communications established the Networks Division and plans to focus on CSW's original strategies to build new routes in the states of Texas, Oklahoma, Louisiana and Arkansas. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION. EnerShop EnerShop's two product lines are performance contracting and EnerACT advisory services. Through performance contracting, EnerShop provides energy services to customers in Texas and Louisiana that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis, project management, engineering design, equipment procurement and construction and performance monitoring. EnerACT is an innovative system that communicates with all brands and models of energy management systems and utility meters. EnerACT aggregates load profiles of multiple facilities into a single purchasing entity, optimizes real-time control of buildings simultaneously with real-time energy prices, and predicts energy consumption for operations through building simulation models. Customers in California, Illinois, Louisiana, New York, Texas, and Wisconsin currently subscribe to EnerACT advisory services. Other Ventures The CSW Services' Business Ventures group pursues energy-related projects. Projects for these groups include staffing services for electric utility nuclear power plants, energy management systems, and electric substation automation software. In August 1998, the SEC approved the marketing and distribution of electric bikes, and associated accessories under the TotalEV name. In late 1997, CSW Energy Services was launched to explore the electric utility industry's emerging retail supply markets as they were deregulated on a state-by-state basis. CSW Energy Services began selling retail electric supply to commercial customers in California and Pennsylvania. In March 1998, CSW Energy Services signed its first major supply contract in California. In January 1999, CSW Energy Services announced that it was ceasing its business as a retail electric supplier and that it would assign or terminate its existing electricity supply contracts to other suppliers. In June 1997, the FERC approved the request of CSW Power Marketing to sell power and energy at market-based rates in the wholesale market. AEP is currently pursuing this initiative. As a result, CSW has temporarily suspended this initiative. Other Diversified CSW Credit was originally formed to purchase, without recourse, accounts receivable from the U.S. Electric Operating Companies to reduce working capital requirements. In addition, because CSW Credit's capital structure is more leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost of capital is lower. Subsequent to its formation, CSW Credit's business has expanded to include the purchase, without recourse, of accounts receivable from certain non-affiliated utilities subject to limitations imposed by the SEC under the Holding Company Act. CSW Leasing has investments in leveraged leases. 6 COMPETITION AND INDUSTRY CHALLENGES Competitive forces at work in the electric utility industry are affecting the CSW System and electric utilities generally. Current legislative and regulatory initiatives are likely to result in even greater competition in both the wholesale and retail markets in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time will be at risk of losing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. As a whole, the U.S. Electric Operating Companies believe that their prices for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the marketplace. In light of these anticipated changes, CSW continues to seek opportunities to expand its business operations that are not regulated by state utility commissions (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). To address the anticipated changes in the electric utility industry and to properly align its business operations with its non-regulated activities, CSW manages its business operations in six distinct lines of business. These business lines fall into both the regulated and non-regulated categories. In addition, given the expected restructuring of the utility industry, certain aspects of the business lines will eventually cease to be regulated. Consequently, CSW's operating structure is designed to accommodate both the current business environment as well as the future. The six business lines are: (i) power generation; (ii) energy delivery; (iii) energy services; (iv) international energy operations; (v) energy trading; and (vi) telecommunications. Currently, CSW is developing management information systems to report segment information along these business lines. For additional information regarding competition and industry challenges, including legislative initiatives at both the state and federal level, see ITEM 7. MD&A. RATES AND REGULATION The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance of securities, certain acquisition and divestiture activities, certain affiliate transactions and other matters. The Holding Company Act generally limits the operations of a registered holding company to that of a single integrated public utility system, plus such additional businesses as are functionally related to such system. The U.S. Electric Operating Companies have been classified as public utilities under the Federal Power Act. Accordingly, the FERC has jurisdiction, in certain respects, over their electric utility facilities and operations, wholesale rates, and certain other matters. The U.S. Electric Operating Companies are subject to the jurisdiction of various state commissions as to retail rates, accounting matters, standards of service and, in some cases, issuances of securities, certification of facilities and extensions or divisions of service territories. For a discussion of regulation by the various environmental agencies that applies to the CSW System, see ENVIRONMENTAL MATTERS below. U.S. ELECTRIC Franchises The U.S. Electric Operating Companies hold franchises to provide electric service in various municipalities within their service areas. These franchises have varying provisions and expiration dates including, in some cases, termination and buy-out provisions. CSW considers the franchises of the U.S. Electric Operating Companies to be adequate for the conduct of their business. 7 Texas Rates - CPL, SWEPCO and WTU The Texas Commission has original jurisdiction over retail rates in the unincorporated areas of Texas. The governing bodies of incorporated municipalities have original jurisdiction over rates within their incorporated limits. Municipalities may elect, and some have elected, to surrender this original jurisdiction to the Texas Commission. The Texas Commission has appellate jurisdiction over rates set by incorporated municipalities. In Texas, electric service areas are approved by the Texas Commission. A given tract in a utility's overall service area may be certificated to one utility, to one of several competing electric cooperatives or investor owned utilities, to one of the competing municipal electric systems, or it may be certificated to two or more of these entities. The Texas Commission has changed these certificated areas only slightly since 1976. Three parties have filed applications at the Texas Commission requesting authority to provide retail electric service in CPL's currently certificated areas. Two of the parties requested that the Texas Commission order CPL to permit them to use CPL's distribution facilities, which management believes to be unlawful resulting in mandatory retail wheeling. The third party seeks to operate as a distribution utility that will serve a major economic development project located in the service areas of CPL and an electric cooperative in South Texas. The Texas Commission has docketed the cases for hearings. CPL is actively opposing these applications. In a separate docket, the Texas Commission has determined that three large naval bases, which are currently served as industrial customers by CPL, may qualify as wholesale customers. A second phase of the proceeding has been docketed to analyze all issues pertinent to the bases being able to take electric service from other wholesale providers. Among the issues to be addressed is the extent to which the Navy would have to compensate CPL for costs that may be stranded if the naval facilities were to obtain electric service from another wholesale provider. The Texas Commission's ultimate decision could have ramifications for other industrial customers in the State of Texas who own facilities upon which extensive distribution systems are located and who believe access to wholesale electric power providers would reduce their electric costs. Oklahoma Rates - PSO PSO currently is subject to the jurisdiction of the Oklahoma Commission with respect to retail prices. Pursuant to authority granted under RESCTA, the Oklahoma Commission established service territorial boundary maps in all unincorporated areas for all regulated retail electric suppliers serving Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend retail electric service into the certified territory of another supplier, except to serve its own facilities or to serve a new customer with an initial full load of 1,000 KW or more. RESCTA provides that when any territory certified to a retail electric supplier or suppliers is annexed and becomes part of an incorporated city or town, the certification becomes null and void. However, once established in the annexed territory, a supplier may generally continue to serve within the annexed area. See ITEM 7. MD&A, RECENT DEVELOPMENTS AND TRENDS. Arkansas and Louisiana Rates - SWEPCO SWEPCO is subject to the jurisdiction of the Arkansas Commission and Louisiana Commission with respect to retail rates, as well as the Texas Commission as described above. Nuclear Regulation - CPL Ownership of an interest in a nuclear generating unit exposes CPL and, indirectly, CSW to regulation not common to a fossil fuel generating unit. Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, operation of nuclear plants is intensively regulated by the NRC, which has broad power to impose licensing and safety-related requirements. Along with other federal and state agencies, the NRC also has extensive regulations pertaining to the environmental aspects of nuclear reactors. The NRC has the authority to impose fines and/or shut down a unit until compliance is achieved, depending 8 upon its assessment of the severity of the situation. For additional information regarding STP, see ITEM 7. MD&A. U.K. ELECTRIC SEEBOARD Rates and Franchise Area The distribution and supply businesses of SEEBOARD are principally regulated by the Electricity Act of 1989 and by the conditions contained in SEEBOARD's public electricity supply license. The public electricity supply license generally continues until at least 2025, although it may be revoked upon 25 years prior notice after 2000. In addition, the public electricity supply license may be revoked by the United Kingdom's Secretary of State in certain specified circumstances. Before October 1998, SEEBOARD had the sole right to supply substantially all of the consumers in its authorized area, except where demand exceeds 100 KW. However, commencing in October 1998, on a phased-in basis, SEEBOARD no longer has monopoly supply rights in its franchise area. At December 31, 1998, 10.5% of SEEBOARD's domestic customers had the option to elect an alternative supplier but no more than 0.5% had done so. Most of the income of the distribution business is regulated by a formula set by the DGES based upon, among other factors, the United Kingdom Retail Price Index. The formula generally sets a cap on the average price per unit of electricity distributed, with allowed annual increases based upon changes in the United Kingdom Retail Price Index plus a percentage factor set from time to time by the DGES. The DGES has commenced the review of allowed distribution charges for the regional electricity companies, including SEEBOARD, to take effect from April 1, 2000. The prices charged by SEEBOARD in its franchise supply business are also determined from a formula set from time to time by the DGES, although as competition increases, the significance of the regulatory allowance will decline. The formula provides for a price cap derived from the forecast electricity purchase costs, transmission charges, distribution costs and overheads, together with an allowed margin as determined by the DGES. All holders of a second-tier license, including SEEBOARD, who supply electricity to non-franchise customers must pay charges to the host regional electricity company for the use of its distribution network. FUEL RECOVERY - U.S. ELECTRIC The recovery of fuel costs from retail customers by the U.S. Electric Operating Companies is subject to regulation by the state utility commissions in the states in which they operate. All of the contracts of the U.S. Electric Operating Companies with their wholesale customers contain FERC approved fuel-adjustment provisions for recovery of fuel costs. Texas Fuel Recovery - CPL, SWEPCO and WTU Electric utilities in Texas, including CPL, SWEPCO and WTU, are not allowed to make automatic adjustments to recover changes in fuel costs from retail customers. A utility is allowed to recover its known or reasonably predictable fuel costs through a fixed fuel factor. The Texas Commission established procedures whereby each utility under its jurisdiction may petition to revise its fuel factor every six months according to a specified schedule. Fuel factors may also be revised in the case of emergencies or in a general rate proceeding. Fuel factors are in the nature of temporary rates and the utility's collection of revenues by such factors is subject to adjustment at the time of a fuel reconciliation. Under these procedures, at its semi-annual adjustment date, a utility is required to petition the Texas Commission for a surcharge or to make a refund when it has materially under- or over-collected its fuel costs and projects that it will continue to materially under- or over-collect. Material under- or over-collections including interest are defined as variances of four percent or more of the most recent Texas Commission adopted annual estimated fuel cost for the utility. A utility does not have to revise its fuel factor 9 when requesting a surcharge or refund. An interim emergency fuel factor order must be issued by the Texas Commission within 30 days after such petition is filed by the utility. Final reconciliation of fuel costs is made through a reconciliation proceeding, which may contain a maximum of three years and a minimum of one year of reconcilable data, and must be filed with the Texas Commission no later than six months after the end of the period to be reconciled. In addition, a utility must include a reconciliation of fuel costs in any general rate proceeding regardless of the time since its last fuel reconciliation proceeding. Any fuel costs that are determined to be unreasonable in a reconciliation proceeding are not recoverable from retail customers. Oklahoma Fuel Recovery - PSO In general, MWH sales to PSO's retail customers are made at rates which include a service level fuel cost adjustment factor reflecting the difference between projected fuel and purchased power costs and the fuel rate embedded in PSO's base rates. The factors are determined twice each year and are based upon projected fuel, natural gas transportation, and purchased power costs. Any difference between projected and actual costs is included in the fuel recovery calculation for future periods. Oklahoma law requires that an examination of PSO's retail fuel cost adjustment factor be performed annually by the Oklahoma Commission which approves the utility's embedded fuel rate per KWH. Arkansas and Louisiana Fuel Recovery - SWEPCO SWEPCO's retail rates currently in effect in Louisiana are adjusted based on SWEPCO's cost of fuel in accordance with a fuel cost adjustment which is applied to each billing month based on the second previous month's average cost of fuel. Provision for any over- or under-recovery of fuel costs is allowed under an automatic fuel clause. Under SWEPCO's fuel adjustment rider currently in effect in Arkansas, the fuel cost adjustment is applied to each billing month on a basis which permits SWEPCO to recover the level of fuel cost experienced two months earlier. SWEPCO's fuel recovery mechanisms are subject to the jurisdiction of the Arkansas Commission and the Louisiana Commission. Recoverability of Fuel Costs Under current regulation, the U.S. Electric Operating Companies recover all their material fuel costs from their customers. The inability of any of the U.S. Electric Operating Companies to recover its fuel costs under the procedures described above could have a material adverse effect on such company's results of operations and financial condition. See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for further information with respect to regulatory, rate and fuel proceedings. 10 FUEL SUPPLY AND PURCHASED POWER - U.S. ELECTRIC The U.S. Electric Operating Companies' net dependable summer rating, power generation capabilities and the type of fuel used are set forth in ITEM 2. PROPERTIES. Information concerning energy sources and cost data for the years 1996 through 1998 is presented in the following tables. In addition, detailed fuel cost and consumption information for 1998 is also presented. CSW Source of Energy (based on MW) 1998 1997 1996 ----------------------------------- Natural Gas 38% 36% 36% Coal 39 41 39 Lignite 8 9 9 Nuclear 7 7 8 Other -- -- 1 ----------------------------------- Total Generated 92 93 93 Purchased Power 8 7 7 ----------------------------------- Total 100% 100% 100% ----------------------------------- Fuel Cost data Average Btu per net KWH 10,514 10,405 10,440 Cost per Mmbtu $1.67 $1.83 $1.81 Cost per KWH generated 1.75(cent) 1.90(cent) 1.89(cent) Cost, including purchased power, as a percentage of revenue 37.3% 38.1% 37.4% CPL Source of Energy (based on MW) Natural Gas 51% 50% 42% Coal 20 18 22 Nuclear 21 22 22 ----------------------------------- Total Generated 92 90 86 Purchased Power 8 10 14 ----------------------------------- Total 100% 100% 100% ----------------------------------- Fuel cost data Average Btu per net KWH 10,563 10,386 10,391 Cost per Mmbtu $1.59 $1.83 $1.62 Cost per KWH generated 1.68(cent) 1.90(cent) 1.68(cent) Cost, including purchased power, as a percentage of revenue 30.3% 32.9% 30.8% PSO Source of Energy (based on MW) Natural Gas 43% 39% 43% Coal 43 48 46 ----------------------------------- Total Generated 86 87 89 Purchased Power 14 13 11 ----------------------------------- Total 100% 100% 100% ----------------------------------- Fuel cost data Average Btu per net KWH 10,272 10,264 10,225 Cost per Mmbtu $1.77 $1.98 $2.04 Cost per KWH generated 1.82(cent) 2.03(cent) 2.09(cent) Cost, including purchased power, as a percentage of revenue 47.1% 46.4% 45.1% 11 SWEPCO Source of Energy (based on MW) 1998 1997 1996 ----------------------------------- Natural Gas 15% 12% 15% Coal 51 52 45 Lignite 23 26 26 Other -- -- 4 ----------------------------------- Total Generated 89 90 90 Purchased Power 11 10 10 ----------------------------------- Total 100% 100% 100% ----------------------------------- Fuel cost data Average Btu per net KWH 10,544 10,554 10,606 Cost per Mmbtu $1.63 $1.69 $1.76 Cost per KWH generated 1.72(cent) 1.79(cent) 1.87(cent) Cost, including purchased power, as a percentage of revenue 42.7% 43.4% 45.1% WTU Source of Energy (based on MW) Natural Gas 42% 37% 46% Coal 33 36 35 ----------------------------------- Total Generated 75 73 81 Purchased Power 25 27 19 ----------------------------------- Total 100% 100% 100% ----------------------------------- Fuel cost data Average Btu per net KWH 10,828 10,275 10,568 Cost per Mmbtu $1.83 $1.98 $2.01 Cost per KWH generated 1.98(cent) 2.03(cent) 2.12(cent) Cost, including purchased power, as a percentage of revenue 40.2% 42.6% 43.5% 12 1998 Cost 1998 Consumption Fuel Type per MMbtu (millions) - -------------------------------------------------------------------------------- Mmbtus Mcfs Tons CSW Natural gas $2.21 295 288 Coal 1.40 285 17 Lignite 1.35 59 4 Nuclear .46 55 Composite 1.67 CPL Natural gas $2.12 137 133 Coal 1.37 51 3 Nuclear .46 55 Composite 1.59 PSO Natural gas $2.36 79 77 Coal 1.17 78 4 Composite 1.77 SWEPCO Natural gas $2.18 41 40 Coal 1.58 127 8 Lignite 1.35 59 4 Composite 1.63 WTU Natural gas $2.23 38 38 Coal 1.26 29 2 Composite 1.83 Natural Gas CSW Services purchased approximately 295 billion cubic feet of natural gas during 1998 for the U.S. Electric Operating Companies, which ranks them as the third largest consumer of natural gas in the United States. A majority of the gas fired electric generation plants are connected to at least two natural gas pipelines, which provides greater access to competitive supplies and improves reliability. Natural gas requirements for each plant are supplied by a portfolio of long-term and short-term gas purchase and transportation agreements which were acquired on a competitive basis and are market price based. Coal and Lignite The U.S. Electric Operating Companies purchase coal from a number of suppliers. In 1998, the U.S. Electric Operating Companies purchased approximately 73% of their total coal purchases under long-term contracts with the balance procured on the spot market. The coal for the plants comes primarily from Wyoming and Colorado mines which are located between 1,000 and 1,700 rail miles from the generating plants. Oklaunion - CPL, PSO and WTU The jointly-owned Oklaunion plant purchases coal under a coal supply contract with Caballo Coal Company which accounts for approximately 64% each of the total 1998 Oklaunion coal requirements for CPL, PSO and WTU with the balance procured on the spot market. As of December 31, 1998, CPL's share of the year-end 1998 coal inventory at Oklaunion was approximately 30,000 tons, 13 representing a 39-day supply. PSO's share was approximately 50,000 tons, representing a 32-day supply. WTU's share was approximately 180,000 tons, representing a 34-day supply. Coleto Creek - CPL CPL has a long-term coal supply agreement with Colowyo Coal Company covering approximately 25% of the coal requirements of its Coleto Creek plant. During 1998, this agreement was extended to cover approximately 40% of the plant deliveries. The balance of the plant's coal deliveries came from spot market purchases of Powder River Basin and Colorado coal that was delivered under one spot market rail transportation agreement. Additionally, approximately 102,000 tons of coal were purchased from suppliers in Venezeula and transported via ship to the Port of Corpus Christi where it was then transferred by train and/or truck to the plant. At December 31, 1998, CPL had approximately 334,000 tons of coal in inventory at Coleto Creek, representing a 44-day supply. During 1999, CPL intends to purchase Powder River Basin coal on the spot market for approximately 50% of the Coleto Creek plant requirements and will transport such coal pursuant to a rail transportation agreement with Union Pacific. The remainder of CPL's coal will be purchased from multiple Colorado suppliers. This coal will also be transported by Union Pacific. As a result of the recent merger between Union Pacific and the Southern Pacific Transportation Company, Union Pacific is currently the only rail carrier with access to the Coleto Creek Plant. In 1994, CPL instituted a proceeding at the Interstate Commerce Commission requesting a reasonable rate for the 16 miles transported from Victoria, Texas to Coleto Creek. Southern Pacific Transportation Company moved to dismiss the complaint and, in a decision issued December 31, 1996, the Surface Transportation Board of the U.S. Department of Transportation, successor to the Interstate Commerce Commission, granted the motion. CPL has appealed this decision to the U.S. Court of Appeals for the Eighth Circuit where the matter is pending. Northeastern Station - PSO PSO has a contract with Kerr-McGee Coal Corporation, which substantially covers the coal supply for PSO's Northeastern Station coal units through 2007. In 1998, Kennecott Energy Corporation purchased Kerr-McGee Coal Corporation and assumed the PSO coal contract. Coal delivery is by unit trains from mines located in the Gillette, Wyoming vicinity, a distance of about 1,100 rail miles from the Northeastern Station. PSO owns sufficient railcars for operation of six unit trains. Coal is transported to the Northeastern Station pursuant to a long-term contract with Burlington Northern. The plant is also equipped to accept deliveries from Union Pacific. At December 31, 1998, PSO had approximately 522,000 tons of coal in inventory at Northeastern Station representing a 42-day supply. Welsh and Flint Creek - SWEPCO The long-term coal supply for SWEPCO's Welsh plant and its 50% owned Flint Creek plant is provided under a contract with Cyprus Amax Minerals Company. Coal under this contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100 miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to the plants under rail transportation contracts with Burlington Northern and the Kansas City Southern Railroad Company having expiration dates ranging between 2001 and 2006. SWEPCO owns or leases, under long-term leases, sufficient railcars and spares for the operation of 15 unit trains. SWEPCO has supplemented its railcar fleet from time to time with short-term leases. At December 31, 1998, SWEPCO had coal inventories of approximately 875,000 tons at Welsh, representing a 44-day supply and approximately 503,000 tons at Flint Creek, representing a 67-day supply, See ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional information. Pirkey and Dolet Hills - SWEPCO SWEPCO has acquired lignite leases covering an aggregate of about 27,000 acres near the Henry W. Pirkey power plant. Sabine Mining Company is the contract miner of these reserves. At December 31, 1998, approximately 277,000 tons of lignite were in SWEPCO's inventory at the Pirkey plant representing a 23-day supply. Another 25,000 acres are jointly leased in equal portions by SWEPCO and CLECO in the Dolet Hills area of Louisiana near the Dolet Hills Power 14 Plant. The DHMV is the contract miner for these reserves. At December 31, 1998, SWEPCO had 133,000 tons of lignite in inventory at the Dolet Hills plant, representing a 23-day supply. SWEPCO believes the acreage under lease in these areas contains sufficient reserves to cover the anticipated lignite requirements for the estimated useful lives of the lignite-fired plants. Nuclear Fuel - CPL The supply of fuel for STP involves a complex process. This process includes the acquisition of uranium concentrate, the conversion of uranium concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride into the isotope U235, the fabrication of the enriched uranium into fuel rods and incorporation of fuel rods into fuel assemblies. The fuel assemblies are the final product loaded into the reactor core. The time associated with this process requires that fuel decisions be made years in advance of the actual need to refuel the reactor. Fuel requirements for STP are being handled by the STPNOC. Outages are necessary approximately every 18 months for refueling. Because STP's fuel costs are significantly lower than any of the other CPL units, CPL's average fuel costs are expected to be higher whenever a STP unit is down for refueling or maintenance. CPL and the other STP participants have entered into contracts with suppliers for 100% of the uranium concentrate sufficient for the operation of both STP units through October 2001, with additional flexible contracts to provide 53% of the uranium concentrate needed for STP through 2003. In addition, CPL and the other STP participants have entered into contracts with suppliers for 100% of the nuclear fuel conversion service sufficient for the operation of both STP units through October 2001, with additional flexible contracts to provide at least 40% of the conversion service needed for STP through 2005. Enrichment contracts were secured for a 30-year period from the initial operation of each unit. The STP participants have canceled the enrichment requirements for the period after October 2000 by negotiating a new contract with the initial supplier. The participants believe that other, lower cost options will be available in the future. CPL and the other STP participants have entered into flexible contracts to provide for 100% of enrichment services from October 2000 to December 2004, with additional flexible contracts to provide at least 40% of enrichment services through 2006. Also, fuel fabrication services have been contracted for operation through 2005 for Unit 1 and 2006 for Unit 2. Although CPL and the other STP owners cannot predict the availability of uranium and related services, CPL and the other STP owners do not currently expect to have difficulty obtaining uranium and related services required for the remaining years of STP operation. The Energy Policy Act has provisions for the recovery of a portion of the costs associated with the decommissioning and decontamination of the gaseous diffusion plants used in the enrichment process. These costs are being recovered on the basis of enrichment services purchased by utilities from the DOE prior to October of 1992. The total annual assessment for all domestic utilities is limited to $150 million per federal fiscal year and assessable until October 2007. The STP assessment will be approximately $2.0 million each year with CPL's share being 25.2% of the annual STP assessment. The Nuclear Waste Policy Act of 1982, as amended, required the DOE to develop a permanent high level waste disposal facility for the storage of spent nuclear fuel by 1998. The DOE last estimated that the permanent facility will not be available until 2010. The DOE will take possession of all spent fuel generated at STP as a result of a contract CPL and other STP participants have entered into with the DOE. STP has on-site storage facilities with the capability to store all the spent nuclear fuel generated by the STP units over their lives. Therefore, the DOE delay in providing the disposal facility will not impact the operation of the STP units. Under provisions of the Nuclear Waste Policy Act of 1992, a one-mill per KWH assessment on electricity generated and sold from nuclear reactors funds the DOE waste disposal program. Risks of substantial liability could arise from the operation of STP and from the use, handling, disposal and possible radioactive emissions associated with nuclear fuel. While CPL carries insurance, the availability, amount and coverage thereof is limited and may become more limited in the future. The 15 available insurance may not cover all types or amounts of loss or expense which may be experienced in connection with the ownership of STP. See ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for information relating to nuclear insurance. Governmental Regulation The price and availability of each of the foregoing fuel types are significantly affected by governmental regulation. Any inability in the future to obtain adequate fuel supplies or adoption of additional regulatory measures restricting the use of such fuels for the generation of electricity might affect the U.S. Electric Operating Companies' ability to economically meet the needs of their customers. Such regulatory measures could require the U.S. Electric Operating Companies to supplement or replace, prior to normal retirement, existing generating capability with units using other fuels. This would be impossible to accomplish quickly, would require substantial additional expenditures for construction and could have a significant adverse effect on the financial condition and results of operations of CSW and/or any of the U.S. Electric Operating Companies. The Registrants are unable to predict the future cost of fuel (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information concerning fuel costs. Power Purchases and Sales The U.S. Electric Operating Companies serve various municipalities, electric cooperatives and public power authorities. The U.S. Electric Operating Companies exchange power with various neighboring electric systems and engage in electric interchanges with each other. In addition, they contract with certain suppliers including power marketers and independent power producers for the purchase or sale of capacity, firm energy, responsive reserves and other wholesale services. CPL - Wholesale Customers Certain CPL wholesale customers have given notice of their intent to terminate their contract when they expire in 2001 through 2004. During 1998, these customers represented 3% of CPL's total electric operating revenues. ENVIRONMENTAL MATTERS The CSW System is subject to regulation with respect to air and water quality, solid waste standards and other environmental matters. These authorities have continuing jurisdiction in most cases to require modifications in facilities and operations. Any such changes in environmental statutes or regulations could require substantial additional expenditures to modify the CSW System's facilities and operations and could have a material adverse effect on the results of operations and financial condition of CSW and/or any of the U.S. Electric Operating Companies. Violations of environmental statutes or regulations can result in fines and other costs. EMFs Research is ongoing whether exposure to EMFs may result in adverse health effects. Although earlier studies suggested a correlation between EMFs and some types of effects, the research to date has not established a cause-and-effect relationship between EMFs and adverse health effects from electric lines. Recently, more comprehensive studies have failed to show any correlation. CSW cannot predict the impact on CSW or the electric utility industry if further investigations or proceedings were to establish that the present electricity delivery system is contributing to increased risk or incidence of health problems. 16 Other Environmental Matters From time to time the Registrants are made aware of various other environmental issues or are named as parties to various other legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on the results of operations or financial condition of CSW and/or any of the U.S. Electric Operating Companies. See ITEM 7. MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional information relating to environmental matters. U.S. ELECTRIC ENVIRONMENTAL MATTERS Air Quality Air quality standards and emission limitations are subject to the jurisdiction of state regulatory authorities in each state in which the CSW System operates, with oversight by the EPA. In accordance with regulations of these state authorities, permits are required for all generating units on which construction is commenced or which are substantially modified after the effective date of the applicable regulations. In 1990, the U.S. Congress amended the Clean Air Act. CAAA places restrictions on the emission of sulfur dioxide from gas-, coal- and lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric Operating Companies will be required to hold allowances in order to emit sulfur dioxide. The EPA issues allowances to owners of existing generating units based on historical operating conditions. Based on the CSW U.S. Electric System facilities plan, CSW believes that the allowances of the U.S. Electric Operating Companies are adequate to meet their needs through 2008. Public and private markets are developing for trading of excess allowances. The CAAA also directed the EPA to issue regulations governing nitrogen oxide emissions and requiring government studies to determine what controls, if any, should be imposed on utilities to control toxic air emissions. The acid rain rules have not been released. Accordingly, the impact on CSW and the U.S. Electric Operating Companies cannot be determined at this time. Under the Acid Rain Title IV rules of the CAAA for nitrogen oxide control for coal units, the U.S. Electric Operating Companies have elected alternate standards for their units under an optional provision regarding emission limits. This will eliminate any capital expenses through 2007, if the alternate standards are met. There is a legislative initiative in Texas to have older units, which were grandfathered under the CAAA, operate under permits and reduce emissions. Based upon reduction levels being discussed, the U.S. Electric Operating Companies' compliance cost could be approximately $131 million. The time frame has not been established for these controls. The issue will be considered in the 1999 Texas legislative session. The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission constraints or reductions for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. At the Kyoto Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating 17 Companies could be affected if this treaty, in its present form, is approved by the United States Congress. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot be determined because most of the greenhouse gas emission reduction would come from coal generation that would have to be switched to natural gas or retired. Currently, 47% of the U.S. Electric Operating Companies' MWH generation and 34% of its installed generating capacity was coal and lignite. Water Quality Water quality is subject to the jurisdiction of each of the state regulatory authorities in which the U.S. Electric Operating Companies operate as well as the EPA. These authorities have jurisdiction over all wastewater discharges into state waters, establish water quality standards and issue waste control permits covering discharges which might affect the quality of state waters. The EPA has jurisdiction over point source discharges through the National Pollutant Discharge Elimination System provisions of the Clean Water Act. RCRA and CERCLA The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules provide for comprehensive control of all solid wastes from generation to final disposal. The appropriate state regulatory authorities in the states in which the U.S. Electric Operating Companies operate have received authorization from the EPA to administer the RCRA solid waste control program for their respective states. The operations of the U.S. Electric Operating Companies, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Theoretically, any one PRP can be held responsible for the entire cost of a cleanup. Typically, however, cleanup costs are allocated among PRPs. CSW's subsidiaries incur significant costs for the handling, transportation, storage and disposal of hazardous and non-hazardous waste materials. Unit costs for waste classified as hazardous exceed by a substantial margin unit costs for waste classified as non-hazardous. The U.S. Electric Operating Companies, like other electric utilities, produce combustion and other generation by-products, such as ash, sludge, slag, low-level radioactive waste and spent nuclear fuel. The U.S. Electric Operating Companies own distribution poles treated with creosote or other substances. The EPA currently exempts coal combustion by-products from regulation as hazardous wastes. Distribution poles treated with creosote or other substances are not expected to exhibit characteristics that would cause them to be hazardous waste. In connection with their operations, the U.S. Electric Operating Companies also have used asbestos, PCBs and materials classified as hazardous waste. If additional by-products or other materials generated or used by companies in the CSW U.S. Electric System were reclassified as hazardous wastes, or other new laws or regulations concerning hazardous wastes were put into effect, CSW System disposal and remedial costs could increase materially. The EPA is expected to issue new regulations stating whether certain other materials will be classified as hazardous. EPA Toxic Release Inventory Initiative Beginning July 1, 1999, the EPA is requiring electric utilities to report the amount of certain chemicals released by coal-fired power plants under its Toxic Release Inventory Initiative. The regulations currently require nearly 30,000 facilities nationwide to report their annual emissions of certain chemicals. The Toxic Release Inventory Initiative allows the public to access information on the types and quantities of listed chemicals that are released. The Toxic Release Inventory regulations require reports on the amounts of materials disposed of, transferred offsite, recovered and recycled. 18 U.K. ELECTRIC ENVIRONMENTAL MATTERS SEEBOARD's operations are subject to regulation with respect to water quality standards and other environmental matters by various authorities within the United Kingdom. Under certain circumstances, these authorities may require modifications to SEEBOARD's facilities and operations or impose fines and other costs for violations of applicable statutes and regulations. From time to time SEEBOARD is made aware of various environmental issues or is named as a party to various legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on CSW's consolidated results of operations or financial condition. 19 OPERATING INFORMATION - CSW SYSTEM CSW (excludes SEEBOARD) 1998 1997 1996 Kilowatt-hour sales (millions) -------------------------- Residential 19,757 17,995 17,883 Commercial 15,554 14,546 14,256 Industrial 21,481 21,087 20,266 Other retail 1,906 1,705 1,592 -------------------------- Sales to retail customers 58,698 55,333 53,997 Sales for resale 8,296 7,824 8,428 -------------------------- Total 66,994 63,157 62,425 -------------------------- Average number of electric customers (thousands) Residential 1,480 1,462 1,443 Commercial 218 214 210 Industrial 22 23 24 Other retail 15 13 13 -------------------------- Total 1,735 1,712 1,690 -------------------------- Revenue per KWH Residential 6.60(cent)6.96(cent)6.95(cent) Commercial 5.71 6.13 6.12 Industrial 3.62 3.85 3.85 Sales for Resale 3.16 3.11 3.03 Peak Load and Capability Net system capability (MW) (1) 14,839 14,290 14,377 Maximum coincident system demand (MW) 13,718 13,105 12,613 Percentage increase in peak demand over prior period 4.7% 3.9% 2.4% Generation at time of peak (MW) 13,012 12,817 11,625 Percent of peak demand generated 94.9% 97.8% 92.2% Net purchases at time of peak (MW) 706 288 988 Percent of net purchases at time of peak 5.2% 2.2% 7.8% Date of maximum coincident system demand July 27 July 28 July 22 The preceding table sets forth: (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand; (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities; and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1)Excludes 85 MW of system capability in storage in 1998 as described in ITEM 2. PROPERTIES, 310 MW of system capability in storage and 156 MW of system capability under repair in 1997 and 358 MW of system capability in storage in 1996. 20 CPL 1998 1997 1996 ----------------------------- Kilowatt-hour sales (millions) Residential 7,167 6,771 6,680 Commercial 5,122 4,846 4,773 Industrial 8,350 7,999 7,610 Other retail 553 486 499 ----------------------------- Sales to retail customers 21,192 20,102 19,562 Sale for resale 1,867 1,737 2,029 ----------------------------- Total 23,059 21,839 21,591 ----------------------------- Average number of electric customers Residential 550,000 538,700 529,100 Commercial 82,000 79,700 78,000 Industrial 5,500 5,600 5,700 Other 4,500 3,900 3,900 ----------------------------- Total 642,000 627,900 616,700 ----------------------------- Revenue per KWH Residential 7.35(cent)7.99(cent)7.92(cent) Commercial 7.37 8.26 8.13 Industrial 3.71 4.13 4.05 Sales for resale 3.57 4.06 3.56 Peak Load and Capability Net system capability (MW) (1) 4,542 4,319 4,380 Maximum coincident system demand (MW) 4,537 4,232 4,046 Percentage increase in peak demand over prior period 7.2% 4.6% 4.8% Generation at time of peak (MW) 3,688 4,227 3,484 Percent of peak demand generated 81.3% 99.9% 86.1% Net purchases at time of peak (MW) 849 5 562 Percent of net purchases at time of peak 18.7% 0.1% 13.9% Date of maximum coincident system demand August 13 August 20 August 13 The preceding table sets forth; (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand; (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities; and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1) Excludes 60 MW of system capability in storage in 1997 and 108 MW of system capability in storage in 1996. 21 PSO 1998 1997 1996 ---------------------------------- Kilowatt-hour sales (millions) Residential 5,772 5,054 5,098 Commercial 5,091 4,698 4,621 Industrial 4,873 4,714 4,581 Other retail 265 192 81 ---------------------------------- Sales to retail customers 16,001 14,658 14,381 Sales for resale 861 958 1,487 ---------------------------------- Total 16,862 15,616 15,868 ---------------------------------- Average number of electric customers Residential 423,300 419,600 414,800 Commercial 56,100 55,300 54,400 Industrial 5,000 5,100 5,200 Other 1,600 1,400 1,400 ---------------------------------- Total 486,000 481,400 475,800 ---------------------------------- Revenue per KWH Residential 5.70(cent) 5.88(cent)5.89(cent) Commercial 4.64 4.82 4.80 Industrial 3.34 3.44 3.45 Sales for Resale 3.18 3.23 2.64 Peak Load and Capability Net system capability (MW) (1) 4,042 3,882 3,848 Maximum coincident system demand (MW) 3,683 3,474 3,360 Percentage increase in peak demand over prior period 6.0% 3.4% 2.1% Generation at time of peak (MW) 3,048 3,376 3,009 Percent of peak demand generated 82.8% 97.2% 89.6% Net purchases at time of peak (MW) 635 98 351 Percent of net purchases at time of peak 17.2% 2.8% 10.4% Date of maximum coincident system demand September 4 July 28 August 7 The preceding table sets forth: (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand; (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities: and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1) Excludes 85 MW of system capability in storage in 1998 as described in ITEM 2. PROPERTIES, and 250 MW of system capability in storage in 1997 and 1996. 22 SWEPCO 1998 1997 1996 ------------------------------------ Kilowatt-hour sales (millions) Residential 5,052 4,549 4,487 Commercial 4,039 3,780 3,658 Industrial 6,929 6,968 6,833 Other retail 467 445 432 ------------------------------------ Sales to retail customers 16,487 15,742 15,410 Sales for resale 6,449 6,791 6,395 ------------------------------------ Total 22,936 22,533 21,805 ------------------------------------ Average number of electric customers Residential 358,600 356,600 353,200 Commercial 51,800 50,800 49,600 Industrial 5,800 5,800 5,900 Other 2,800 2,700 2,600 ------------------------------------ Total 419,000 415,900 411,300 ------------------------------------ Revenue per KWH Residential 6.23(cent) 6.37(cent) 6.46(cent) Commercial 4.90 5.08 5.19 Industrial 3.66 3.78 3.85 Sales for Resale 2.17 2.16 2.11 Peak Load and Capability Net system capability (MW) 4,559 4,636 4,554 Maximum coincident system demand (MW) 4,372 4,157 4,018 Percentage increase in peak demand over prior period 5.2% 3.5% 2.2% Generation at time of peak (MW) 4,414 3,839 3,608 Percent of peak demand generated 101.0% 92.4% 89.8% Net purchases (sales) at time of peak (MW) (42) 318 410 Percent of net purchases at time of peak (1.0)% 7.6% 10.2% Date of maximum coincident system demand July 29 July 28 July 22 The preceding table sets forth: (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand; (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities; and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. 23 WTU 1998 1997 1996 ------------------------------- Kilowatt-hour sales (millions) Residential 1,766 1,622 1,620 Commercial 1,302 1,223 1,203 Industrial 1,329 1,406 1,241 Other retail 621 580 581 ------------------------------- Sales to retail customers 5,018 4,831 4,645 Sales for resale 2,622 2,504 2,411 ------------------------------- Total 7,640 7,335 7,056 ------------------------------- Average number of electric customers Residential 147,600 146,900 146,500 Commercial 28,400 27,800 27,600 Industrial 5,800 6,000 6,300 Other 6,200 6,000 5,700 ------------------------------- Total 188,000 186,700 186,100 ------------------------------- Revenue per KWH Residential 7.60(cent) 7.68(cent)7.67(cent) Commercial 5.85 5.99 6.02 Industrial 3.89 4.05 4.22 Sales for Resale 3.72 3.55 3.69 Peak Load and Capability Net system capability (MW) (1) 1,696 1,453 1,595 Maximum coincident system demand (MW) 1,591 1,481 1,433 Percentage increase (decrease) in peak demand over prior period 7.4% 3.3% (0.1)% Generation at time of peak (MW) 1,357 865 1,048 Percent of peak demand generated 85.3% 58.4% 73.1% Net purchases at time of peak (MW) 234 616 385 Percent of net purchases at time of peak 14.7% 41.6% 26.9% Date of maximum coincident system demand August 3 September 17 July 8 The preceding table sets forth: (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand; (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities; and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1) Excludes 156 MW of system capability for under repair 1997. 24 EMPLOYEES AND EXECUTIVE OFFICERS The number of employees in the CSW System at December 31, 1998 is presented in the table below. Of the employees listed below, 562 of the positions at PSO and 788 of the positions at SWEPCO are covered under collective bargaining agreements with the IBEW. In addition, 2,174 employees at SEEBOARD are covered by collective agreements with several different unions. For information related to ongoing union negotiations at PSO, reference is made to ITEM 7. MD&A. CSW SYSTEM EMPLOYEES CPL 1,555 PSO 1,227 SWEPCO 1,461 WTU 913 ----------- U.S. Electric 5,156 UK Electric 3,985 Diversified Electric 137 Other (including CSW Services) 1,678 ----------- 10,956 Age at EXECUTIVE March 1, OFFICERS 1999 Present Position - -------------------------------------------------------------------------------- E. R. Brooks 61 Chairman, CEO and Director T. V. Shockley, III 53 President, Chief Operating Officer and Director Glenn Files 51 Senior Vice President, Electric Operations Ferd. C. Meyer, Jr. 59 Executive Vice President and General Counsel Glenn D. Rosilier 51 Executive Vice President and Chief Financial Officer Thomas M. Hagan 54 Senior Vice President, External Affairs Venita McCellon-Allen 39 Senior Vice President, Customer Relations and Corporate Development and Assistant Corporate Secretary Kenneth C. Raney 47 Vice President, Associate General Counsel and Corporate Secretary Wendy G. Hargus 41 Treasurer Lawrence B. Connors 47 Controller The information in the foregoing table is included in Part I pursuant to Regulation S-K, Item 401 (b), Instruction 3. Each of the executive officers of CSW is elected to hold office until the first meeting of CSW's Board of Directors after the next annual meeting of stockholders. CSW's next annual meeting of stockholders is scheduled to be held April 22, 1999. CSW or an affiliate of CSW has employed each of the executive officers listed in the table above in an executive or managerial capacity for at least the last five years. 25 ITEM 2. PROPERTIES. U.S. ELECTRIC The total capabilities (MW, net dependable summer rating) of the U.S. Electric Operating Companies, which owned the following electric generating units or portions thereof in the case of jointly owned facilities, as of December 31, 1998 are shown in the following table. These properties are all located in either Arkansas, Louisiana, Oklahoma or Texas. Natural Coal Lignite Nuclear Other Total MW Company Stations(a) Gas MW MW MW MW MW(b) (c) - -------------------------------------------------------------------------------- CPL 12 3,142 686 630 6 4,464 PSO 8 2,794 1,008 25 3,827 (d) SWEPCO 9 1,784 1,848 842 4,474 WTU 11 1,018 377 11 1,406 ----------------------------------------------------------------- CSW 40 8,738 3,919 842 630 42 14,171 ----------------------------------------------------------------- (a) CSW actually owns 38 stations. CPL, PSO and WTU each include the jointly owned Oklaunion power station in their respective ownership count. (b) Some plants have the capability of burning oil in combination with gas. Use of oil in facilities primarily designed to burn gas results in increased maintenance expense and a slight reduction in capability. PSO and WTU have 25 MW and 11 MW, respectively, of facilities primarily designed to burn oil. CPL has 6 MW of hydroelectric generation. (c) Data reflects only the U.S. Electric Operating Companies' portion of plants which are jointly owned with non-affiliates. For additional information concerning jointly owned facilities see ITEM 8 - NOTE 6. JOINTLY OWNED ELECTRIC UTILITY PLANT. (d) Excludes 85 MW from units in storage at Tulsa for PSO, which should be available in the summer of 1999. All of the generating facilities described above are located on land owned by the U.S. Electric Operating Companies or, in the case of jointly owned facilities, jointly with other participants. The U.S. Electric Operating Companies' electric transmission and distribution facilities are mostly located over or under highways, streets and other public places or property owned by others, for which permits, grants, easements or licenses have been obtained (which the U.S. Electric Operating Companies believe to be satisfactory, but without examination of underlying land titles). The principal plants and properties of the U.S. Electric Operating Companies are subject to the liens of the first mortgage indentures under which the U.S. Electric Operating Companies' FMBs are issued. 26 DIVERSIFIED ELECTRIC In addition to the generating facilities described above, CSW has ownership interests in other electrical generating facilities, both foreign and domestic. Information concerning these facilities is listed below. Capacity Capacity Ownership Company Location Total Committed Interest Status ---------------------------------------------------------- Operating Facilities - United States Brush II CSW Energy Colorado 68 68 47% QF Ft. Lupton CSW Energy Colorado 272 272 50% QF Mulberry CSW Energy Florida 120 110 50% QF Orange Cogen CSW Energy Florida 103 97 50% QF Newgulf (1) CSW Energy Texas 85 80 100% EWG Sweeny (2) CSW Energy Texas 330 292 50% QF --------------------- 978 919 --------------------- Operating Facilities - International CSW United Medway International Kingdom 675 675 37.5% n/a CSW Altamira International Mexico 109 109 50% FUCO --------------------- 784 784 --------------------- (1) The committed capacity at Newgulf is for the summer of 1999 only. (2) 205 MW of the committed capacity is for the summer of 1999 only. CAPITAL EXPENDITURES The CSW System, including the U.S. Electric Operating Companies, maintains a continuing construction program, the nature and extent of which is based upon current and estimated demands upon the system. In addition, the CSW System requires capital to invest in new enterprises, either through equity investments or loans to projects, when deemed appropriate. See ITEM 7. MD&A for detailed information related to historical and projected capital expenditures. ITEM 3. LEGAL PROCEEDINGS. The Registrants are parties to various legal claims, actions and complaints arising in the normal course of business which are not described herein. Management does not expect disposition of these matters to have a material adverse effect on any of the Registrants' results of operations or financial condition. See ITEM 1. BUSINESS, ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal, environmental and regulatory proceedings. 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CSW None. CPL None. PSO None. SWEPCO None. WTU None. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. CSW COMMON STOCK INFORMATION
1998 1997 Market Price Dividends Market Price Dividends High Low Paid High Low Paid ------------------------------ ----------------------------------- First Quarter $27 13/16 $26 1/4 43.5(cent) $25 3/4 $21 1/4 43.5(cent) Second Quarter 27 5/8 25 5/8 43.5 22 1/8 18 1/4 43.5 Third Quarter 28 3/4 25 1/4 43.5 22 7/16 19 3/4 43.5 Fourth Quarter 30 1/16 27 3/8 43.5 27 5/16 20 5/8 43.5
CSW's common stock is traded under the ticker symbol CSR and listed on the New York Stock Exchange, Inc. and Chicago Stock Exchange, Inc. Market prices were obtained from the composite listing of all closing prices on CSW common stock trades as reported on Bloomberg Financial Commodities News. In January 1999, CSW's board of directors elected to maintain the quarterly dividend, payable on March 1, 1999, to stockholders of record on February 5, 1999, unchanged at $0.435 per share, or an indicated rate of $1.74 per year. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as was paid during 1998, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Traditionally, the CSW board of directors has declared dividends to be payable on the last business day of February, May, August and November. There were approximately 60,000 record holders of CSW's common stock as of February 22, 1999. See NOTE 12. COMMON STOCK for information on CSW common stock. U.S. ELECTRIC COMMON STOCK INFORMATION All of the outstanding shares of common stock of the U.S. Electric Operating Companies are owned by CSW. Consequently, there is no market for their common stock. Cash dividends declared and paid by the U.S. Electric Operating Companies to CSW on their respective common stock for 1998 and 1997 are presented in the following table. CPL PSO SWEPCO WTU ----------------------------------------------------- (thousands) 1998 $249,000 $69,000 $120,000 $40,000 1997 $157,000 $59,000 $90,000 $26,000 2-1 Reference is made to the page numbers noted in the table below for the locations of the following items: ITEM 6. SELECTED FINANCIAL DATA. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See ITEM 7. MD&A - RISK MANAGEMENT and ITEM 8. - NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NOTE 7. FINANCIAL INSTRUMENTS and NOTE 20. SUBSEQUENT EVENT. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page Number CSW CPL PSO SWEPCO WTU ------------------------------------- Selected Financial Data 2-4 2-98 2-112 2-126 2-139 MD&A (1) 2-5 2-5 2-5 2-5 2-5 Results of Operations 2-35 2-99 2-113 2-127 2-140 Quantitative and Qualitative Disclosures About Market Risk 2-2 2-2 2-2 2-2 2-2 Financial Statements and Supplementary Data 2-40 2-102 2-116 2-129 2-142 Report of Independent Public Accountants 2-93 2-109 2-123 2-136 2-149 Report of Management 2-96 2-110 2-124 2-137 2-150 (1) CSW combines the MD&A sections of the Registrants except for the Results of Operations which are located at the page numbers indicated in the table above. 2-2 CENTRAL AND SOUTH WEST CORPORATION 2-3 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CSW. CSW recorded the United Kingdom windfall profits tax in the third quarter of 1997 as an extraordinary item. CSW sold Transok in 1996. Accounting rules require the classification of both the sale and the actual operating results prior to such sale as discontinued operations. In addition to these reclassifications, certain other financial statement items for prior years have been reclassified to conform to the 1998 presentation. 1998 (1) 1997 (1) 1996 (1) 1995 1994 -------------------------------------------------- (millions, except per share and ratio data) INCOME STATEMENT DATA Revenues $5,482 $5,268 $5,155 $3,143 $3,105 Income from continuing operations 440 329 297 377 369 Income before extraordinary item 440 329 429 402 394 Net income for common stock 440 153 429 402 394 Basic and diluted EPS of common stock from continuing operations $2.07 $1.55 $1.43 $1.97 $1.95 Basic and diluted EPS of common stock $2.07 $0.72 $2.07 $2.10 $2.08 Dividends paid per share of common stock $1.74 $1.74 $1.74 $1.72 $1.70 Average common shares outstanding 212.4 212.1 207.5 191.7 189.3 BALANCE SHEET DATA Assets $13,744 $13,451 $13,332 $13,869 $11,066 Long-term obligations (2) 4,120 4,259 4,057 3,948 2,975 Capitalization ratios Common stock equity 46% 45% 47% 43% 48% Preferred stock 2 2 4 4 5 Trust Preferred Securities 4 4 -- -- -- Long-term debt 48 49 49 53 47 (1)See CENTRAL AND SOUTH WEST CORPORATION - RESULTS OF OPERATIONS for factors affecting earnings. (2)Long-term obligations includes long-term debt, Trust Preferred Securities and preferred stock subject to mandatory redemption. 2-4 REGISTRANTS' COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. The RESULTS OF OPERATIONS of CSW and the U.S. Electric Operating Companies precede their financial statements. OVERVIEW The electric utility industry is changing rapidly as it is becoming more competitive. In anticipation of increasing competition and fundamental changes in the industry, CSW's management is implementing a strategic plan designed to help position CSW to be competitive in this rapidly changing environment and is developing a global energy business. CSW has undertaken key initiatives in the implementation of this overall strategy and is determining new directions for the corporation's future. One of these key initiatives is the proposed merger between AEP and CSW that was announced in December 1997. CSW would become a subsidiary of AEP in the proposed merger. The proposed merger would join two companies which are low cost providers of electricity and would achieve greater economies of scale than either company could achieve on its own. In addition, CSW International continues to make investments in South America. CSW continues to pursue the acquisition of the non-nuclear generating assets of Cajun, a Louisiana member electric cooperative. In 1998, C3 Communications sold its interest in ChoiceCom and retained the long haul, high-capacity fiber optic network from that partnership. These initiatives are discussed in more detail below and elsewhere in this report. CSW believes that compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). The CSW System benefits from economies of scale by virtue of its size and is a reliable and relatively low-cost provider of electric power. Specifically, CSW seeks competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additional information. LIQUIDITY AND CAPITAL RESOURCES Overview of Operating, Investing and Financing Activities Net cash inflows from operating activities increased $216 million to $942 million during 1998 compared to 1997. The increase in net cash inflows is due primarily to the absence in 1998 of $190 million of federal and state income tax payments made in the first half of 1997 for the gain on CSW's 1996 sale of Transok. However, these payments were offset in part by the utilization of Alternative Minimum Tax credits that CSW had previously generated. Also contributing to the increase were better fuel recovery positions and a higher accounts payable balance. The increase in net cash inflows was offset in part by an increase in the accounts receivable balance. The second installment of the 2-5 United Kingdom windfall profits tax was paid in December 1998 in the amount of (pound)55 million, or $91 million; however, this cash outflow did not reduce the increase in cash flows from operations when compared to the prior year because a comparable amount was paid in December 1997. Net cash outflows from investing activities decreased $269 million to an outflow of $635 million during 1998 compared to an outflow of $904 million for 1997. CSW Energy obtained permanent external financing during the first half of 1997 for the Orange cogeneration project and subsequently reduced its equity investment in the project. In addition, CSW Energy made its final payment on the Ft. Lupton cogeneration project in the first half of 1997. CSW Energy also experienced a decrease in construction expenditures for the Phillips Sweeny project that began operating in the first quarter of 1998. Further reducing the cash outflows from investing activities was a cash inflow resulting from CSW International's Enertek partner, Alpek, assuming its 50% obligation of that power plant project. Reduced spending at the U.S. Electric Operating Companies for facilities also contributed to the lower net cash outflows from investing activities. Net cash flows from financing activities decreased $229 million to an outflow of $225 million during 1998 compared to an inflow of $4 million for the same period last year. In the second quarter of 1997, CSW received proceeds from the issuance of Trust Preferred Securities. The proceeds were used primarily to reacquire preferred stock and pay down short-term debt in the second quarter of 1997. In April 1997, CSW made changes to its common stock plans and stopped issuing original shares. The decrease in net cash from financing activities was due in part to funding these common stock plans through open market purchases. The decrease in cash flows from financing activities was offset in part by higher amounts of reacquisitions and maturities of long-term debt in 1997 compared to 1998. Also partially offsetting the decrease in cash flows from financing activities was a cash inflow in 1998 from financing CSW Energy's Sweeny project. The non-cash impacts of exchange rate differences on the translation of foreign currency denominated assets and liabilities were recorded on a separate line on the cash flow statement in accordance with accounting guidelines. Internally Generated Funds Internally generated funds, which consist of cash flows from operating activities less common and preferred stock dividends, should meet most of the capital requirements of the CSW System. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non-utility businesses through acquisitions or otherwise, may require additional capital from external sources. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. Productive investment of net funds from operations in excess of capital expenditures and dividend payments is necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of internally generated funds, which totaled $564 million, $343 million and $499 million for 1998, 1997 and 1996, respectively. The amounts of internally generated funds for the U.S. Electric Operating Companies are detailed in the following table. 2-6 1998 1997 1996 -------------------------------- ($ millions) CPL Internally Generated Funds $183 $172 $268 Construction Expenditures Provided by Internally Generated Funds 148% 136% 196% PSO Internally Generated Funds $124 $62 $107 Construction Expenditures Provided by Internally Generated Funds 180% 78% 128% SWEPCO Internally Generated Funds $105 $108 $153 Construction Expenditures Provided by Internally Generated Funds 127% 100% 165% WTU Internally Generated Funds $20 $69 $52 Construction Expenditures Provided by Internally Generated Funds 53% 217% 121% Capital Expenditures The CSW System's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers. The historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. However, current projected capital expenditures are expected to be primarily for existing transmission and distribution systems and for various non-utility investments. The U.S. Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the U.S. Electric Operating Companies for the next three years are primarily to improve and expand transmission and distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. CSW regularly evaluates its capital spending policies and generally seeks to fund only those projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with this strategy, the CSW System is likely to continue to make additional investments in energy-related and non-utility businesses and will continue to search for other electric utility properties to acquire. Primary sources of capital for these expenditures are long-term debt, trust preferred securities and preferred stock issued by the U.S. Electric Operating Companies, long-term and short-term debt issued by CSW, as well as internally generated funds. Historically, the issuance of common stock by CSW has also been a source of capital. CSW Energy and CSW International typically use various forms of non-recourse project financing to provide a portion of the capital required for their respective projects as well as utilizing long-term debt for other investments. Although CSW and each of the U.S. Electric Operating Companies expect to fund the majority of their respective capital expenditures for their existing utility systems through internally generated funds, for any significant investment or acquisition, additional funds from the capital markets may be required. For a description of certain restrictions on CSW's ability to make investments and raise capital from external sources, including through the issuance of common stock, see PROPOSED AEP MERGER. The historical and estimated capital expenditures for the CSW System, including the U.S. Electric Operating Companies, SEEBOARD and other operations are shown in the CAPITAL EXPENDITURES table. The amounts include construction expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and CSW's other operations, construction expenditures and net equity investments. The 1996 CSW amount does not include SEEBOARD acquisition expenditures. The 2-7 majority of the capital expenditures for the U.S. Electric Operating Companies for 1996 through 1998 were spent on transmission and distribution facilities. It is anticipated that the majority of the estimated capital expenditures for 1999 through 2001 will be for transmission and distribution facilities as well. For a description of certain restrictions on CSW's ability to make capital expenditures, including through the issuance of common stock, see PROPOSED AEP MERGER (The table and statements below contain forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). CAPITAL EXPENDITURES Estimated Expenditures 1996 1997 1998 1999 2000 2001 ------------------------------ -------------------------------- (millions including AFUDC) CSW $644 $760 $584 $855 $814 $664 CPL 139 130 127 224 167 152 PSO 85 82 71 91 174 117 SWEPCO 95 110 86 108 121 118 WTU 44 33 38 51 48 49 Estimated capital expenditures for 1999 - 2001 do not include expenditures for acquisition-type investments. Although CSW does not believe that the U.S. Electric Operating Companies will require substantial additions of generating capacity over the next several years, the U. S. Electric system's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases. See Integrated Resource Plan below for additional information regarding the U. S. Electric System's capacity needs. Inflation Annual inflation rates, as measured by the U. S. Consumer Price Index, have averaged approximately 2.3% during the three years ended December 31, 1998. CSW believes that inflation, at this level, does not materially affect CSW's results of operations or financial position. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. Financial Structure, Shelf Registrations and Credit Ratings As of December 31, 1998, the capitalization ratios of CSW were 46% common stock equity, 2% preferred stock, 4% Trust Preferred Securities and 48% long-term debt. CSW is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing activities. The estimated embedded cost of long-term debt for CSW and the U.S. Electric Operating Companies is shown below. CSW 7.3% CPL 6.7 PSO 6.9 SWEPCO 6.8 WTU 6.7 CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, to fund its LTIP, stock option plan, PowerShare plan and Retirement Savings Plan. CSW began funding these plans through open market purchases on April 1, 1997. CPL has shelf registration statements on file for the issuance of up to $60 million of FMBs, up to $75 million of preferred stock, and up to $350 million of Senior Notes. 2-8 PSO has a shelf registration statement on file for the issuance of up to $35 million of Senior Notes. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. The current securities ratings for each of the Registrants is presented in the following table, including the securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I. Standard & Moody's Duff & Phelps Poor's --------------------------------------- CPL First mortgage bonds A3 A A Senior unsecured Baa1 A- A- Preferred stock Baa1 BBB+ BBB+ Trust preferred (CPL Capital I) Baa1 BBB+ BBB+ Junior subordinated deferrable Interest debentures Baa2 -- -- PSO First mortgage bonds A1 AA- AA- Senior unsecured A2 A+ A Preferred stock a3 A+ A- Trust preferred (PSO Capital I) a2 A+ A- Junior subordinated deferrable Interest debentures A3 -- -- SWEPCO First mortgage bonds Aa3 AA AA- Senior unsecured A1 AA- A Preferred stock a1 AA- A- Trust preferred (SWEPCO Capital I) aa3 AA- A- Junior subordinated deferrable Interest debentures A2 -- -- WTU First mortgage bonds A2 A+ A Senior unsecured A3 -- A- Preferred stock a3 A BBB+ CSW Commercial paper P-2 D-2 A-2 These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating. Long-Term Financing CSW Services used short-term debt to repay a $60 million variable rate bank loan due December 1, 2001 in two $30 million installments on January 28, 1998 and April 27, 1998. On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt to fund the $28 million redemption cost. On September 1, 1998, CPL reacquired in its entirety $36 million principal amount outstanding of its 7% Series L FMBs, due February 1, 2001 at a call price of 100.53. On September 1, 1998, PSO reacquired in their entirety $25 million principal amount outstanding of its 7 1/4% Series K FMBs, due January 1, 1999 and $30 million principal amount outstanding of its 7 3/8% Series L FMBs, due March 1, 2002, at call prices of 100 and 100.77, respectively. CPL and PSO used short-term borrowings and internally generated cash to fund the reacquisitions. 2-9 The final installment of (pound)55 million, or $91 million, related to the windfall profits tax, enacted by the United Kingdom government, was paid by SEEBOARD on December 1, 1998. Short-Term Financing and Accounts Receivable Factoring The CSW System uses short-term debt, primarily commercial paper, 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 December 31, 1998, CSW had revolving credit facilities totaling $1.0 billion to back up its commercial paper program. At December 31, 1998, CSW had $811 million outstanding in short-term borrowings. The maximum amount of short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $1.1 billion during June 1998. Information concerning short-term borrowings for each of the U.S. Electric Operating Companies is presented in the following table. Borrowing Borrowing Limit at Limit at date Maximum Year Of Maximum Amount Date of Maximum End Borrowed Borrowed Borrowed ----------------------------------------------------------- (millions) CPL $600 $300 $227 March 10, 1998 PSO 300 125 58 January 30, 1998 SWEPCO 250 250 70 June 2, 1998 WTU 165 165 16 June 2, 1998 CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated electric utility companies. The sale of accounts receivable provides the U.S. Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. In addition, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, so CSW's cost of capital is lowered. CSW Credit issues commercial paper to meet its financing needs. At December 31, 1998, CSW Credit had a $1.0 billion revolving credit agreement, secured by the assignment of its receivables, to back up its commercial paper program, which had $749 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield of 5.6%, was $1.0 billion during September 1998. The average and year end amounts of accounts receivable sold during 1998 by the U.S. Electric Operating Companies to CSW Credit are shown in the following table. 1998 1998 Average End of Year ----------------------- (millions) CPL $124 $145 PSO 80 77 SWEPCO 98 90 WTU 48 43 CSW Energy and CSW International CSW Energy has authority from the SEC to expend up to $250 million for general development activities related to qualifying facilities and independent power facilities. CSW Energy may seek specific authority to spend additional amounts on certain projects subject to limitations contained in the AEP merger agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy projects at December 31, 1998. 2-10 In January 1997, CSW received authority from the SEC under the Holding Company Act to spend an amount up to 100% of consolidated retained earnings on EWG or FUCO investments, subject to certain restrictions. This represents a twofold increase in authority previously granted under the Holding Company Act. However, the amount of any such expenditures is subject to the terms of the AEP merger agreement. As of December 31, 1998, CSW had invested an amount equal to 49% of consolidated retained earnings, as defined by Rule 53 of the Holding Company Act, on EWG and FUCO investments. For a description of certain restrictions on the ability of CSW and its subsidiaries to make capital expenditures in respect of qualifying facilities and independent power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER. RECENT DEVELOPMENTS AND TRENDS AEP Merger In December 1997, AEP and CSW announced that their boards of directors approved a definitive merger agreement. If the merger is completed, the combined company will be a diversified electric utility serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. In 1998, CSW undertook a corporate realignment to more effectively position itself for competition and to better align itself with AEP related to the proposed merger of the two companies. The merger must receive regulatory approval from federal and state authorities and must satisfy a number of other conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated, and if it is, the timing of such consummation or the effect of any regulatory conditions that may be imposed on such consummation. See PROPOSED AEP MERGER. Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail levels in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be less expensive than electricity. In the United Kingdom, the franchised electricity supply business opened to full competition on a phased-in basis beginning October 1998. As a result, SEEBOARD will be able to seek customers while risking the loss of existing customers to other competitors. CSW believes that, overall, its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the energy marketplace (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several current issues affecting the CSW System. Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to: (i) who will bear the costs of prudent utility investments or past commitments incurred under traditional cost-of-service regulation that will be uneconomic in a competitive environment, sometimes referred to as stranded costs; (ii) whether all customers have access to the benefits of competition; (iii) how, and by whom, the rules of competition will be established; (iv) what the impact of deregulation will be on conservation, environmental protection and other regulator-imposed programs; and (v) how transmission system reliability will be ensured. The degree of risk to 2-11 CSW and the U.S. Electric Operating Companies associated with various federal and state restructuring proposals aimed at resolving any or all of these issues will vary depending on many factors, including the proposals' competitive position and treatment of stranded utility investment, primarily at CPL, resulting from such requirements. Although the U.S. Electric Operating Companies believe they are in a position to compete effectively in a deregulated, more competitive marketplace, if stranded costs are not recovered from customers then the U.S. Electric Operating Companies may be required by existing accounting standards to recognize potentially significant losses from unrecovered stranded costs, especially with respect to STP (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See Regulatory Accounting for additional information. A majority of the states, including the four states in which the U.S. Electric Operating Companies operate, have considered industry restructuring including retail competition. Several states have enacted legislation mandating retail competition, including Oklahoma in which PSO operates. CSW and the U.S. Electric Operating Companies cannot predict when and if they will be subject to legislative or regulatory initiatives enacting industry restructuring and retail competition, nor can they predict the scope or effect of such initiatives on their results of operations or financial condition in Texas, Louisiana, Oklahoma and Arkansas. For additional information related to such state initiatives, see Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas. Wholesale Electric Competition in the United States The Energy Policy Act, which was enacted in 1992, significantly altered the way in which electric utilities compete. The Energy Policy Act created exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to own EWGs. EWGs are a relatively new category of non-utility wholesale power producers that are free from most federal and state regulation, including restrictions under the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been increasingly competitive since enactment of the Energy Policy Act. The U.S. Electric Operating Companies must compete in the wholesale energy markets with other public utilities, cogenerators, qualifying facilities, EWGs and others for sales of electric power. While CSW believes the Energy Policy Act will continue to make the wholesale markets more competitive, CSW is unable to predict how the Energy Policy Act will ultimately impact the U.S. Electric Operating Companies. FERC Orders 888 and 889 The FERC issued Order No. 888 in 1996, which is the final comparable open access transmission service rule. 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 wholesale sales and purchases and by requiring utilities to rely on the same transmission 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 2-12 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. In May 1998, the Texas Commission issued an order in Docket No. 17285, Complaint of CPL and WTU against Texas Utilities Electric Company, granting CPL and WTU the relief they sought, which is to net the annual payment paid to Texas Utilities Electric Company under a prior FERC settlement for transmission service in ERCOT against the amounts CPL and WTU would otherwise owe Texas Utilities Electric Company under the Texas Commission's transmission rule. Texas Utilities Electric Company has appealed the order. FERC Order No. 888 requires holding companies to offer single system transmission rates. The transmission rates of the U. S. Electric Operating Companies are under the exclusive jurisdiction of the FERC while the transmission rates of most of the transmitting utilities in ERCOT are under the exclusive jurisdiction of the Texas Commission. Because 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 became effective on January 1, 1997, subject to refund and to the issuance of further orders. On December 10, 1997 the FERC issued an order regarding the U. S. Electric Operating Companies' proposed system-wide tariff filed on November 1, 1996. The FERC's order accepted the proposed tariff subject to several modifications, including revisions to provide for system-wide transmission service under a single system rate. The U.S. Electric Operating Companies filed the required compliance tariff on February 17, 1998. On November 13, 1998, the FERC issued an order that accepted the U.S. Electric Operating Companies' compliance tariff providing for system-wide transmission service under a single system rate, subject to further modifications. In 1996, the FERC issued Order No. 889 requiring transmitting utilities to establish and operate an OASIS for the dissemination of information regarding available transfer capability for their respective transmission systems. The OASIS is an on-line information system that provides the same information about the utility's transmission system to all transmission customers. The U.S. Electric Operating Companies utilize, and participate in the OASIS systems for ERCOT and SPP. Order No. 889 also created standards of conduct requiring utilities to conduct any wholesale power sales business separately from their transmission operations. The standards of conduct are designed to ensure that utilities and their affiliates, as sellers of power, do not have preferential access to information about wholesale transmission prices and availability. The FERC has accepted, subject to minor modifications, the U.S. Electric Operating Companies' standards of conduct. Retail Electric Competition in the United States Most states have considered the adoption of various legislative and regulatory initiatives to restructure the electric utility industry and enact retail competition, and several states have already passed legislation that requires the implementation of retail access for customers. CSW believes that initiatives adopting industry restructuring and retail competition will be in the best interest of CSW and the U.S. Electric Operating Companies only if such initiatives fairly treat customers, utilities and their shareholders. More specifically CSW believes industry restructuring will not be in the best interests of CSW's and the U.S. Electric Operating Companies' security holders, unless CSW and the U.S. Electric Operating Companies receive fair recovery of the full amounts previously invested to serve customers, including amounts invested to finance generation facilities. These investments, which were 2-13 reasonably incurred, were made by the U.S. Electric Operating Companies to meet their obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CSW intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CSW undertook to serve the public's demand for electricity. For additional information related to retail wheeling in the United States, see Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas and Holding Company Act and Legislative Update. Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas Several initiatives to restructure the electric utility industry and enact retail competition have been undertaken in the four states in which the U. S. Electric Operating Companies operate. Legislation was enacted in Oklahoma in 1997 and 1998, while legislative activity in Texas, Louisiana and Arkansas stopped short of any such definitive action. In April 1997, the Oklahoma Legislature passed restructuring legislation providing for retail access by July 1, 2002. The legislation called for a number of studies to be completed on a variety of restructuring issues, including independent system operator issues, technical issues, financial issues, transition issues, and consumer issues. The study on independent system operator issues was completed in January 1998. In 1998, the Oklahoma Legislature passed Senate Bill 888, which accelerated the schedule for completion of the remaining studies to October 1999. These studies are to be conducted under the direction of the Joint Electric Utility Task Force. The Task Force has organized the study effort into several working groups, which have been directed to evaluate assigned issues. The Task Force will develop its report to the Legislature based on the work performed by these working groups. The Task Force's final report will be provided to the Legislature by October 1, 1999. Management is unable to predict the outcome of these studies or their ultimate impact on the results of operations and financial condition of CSW and PSO. In March 1997, the Arkansas Legislature passed a resolution directing interim legislative committees to study competition in the electric power industry in Arkansas. The study began in October 1997, and the committees held hearings throughout 1998. Also, the Arkansas Commission initiated a series of generic restructuring dockets in 1998, and held hearings on restructuring in May 1998. In October 1998, the Arkansas Commission released a report to the Arkansas Legislature, recommending the establishment of retail competition in Arkansas by January 2002. Bills have been filed in the 1999 session of the Arkansas legislature concerning the restructuring of the electric utility industry in Arkansas. In 1998, a special legislative committee created by the Louisiana Senate studied the impact of retail competition on the state of Louisiana. Further, the Louisiana Commission opened a proceeding to study restructuring and retail competition. Comments were submitted and hearings were held throughout 1998 on a number of specific restructuring topics. In addition, utilities filed rate unbundling information with the Louisiana Commission staff. The Louisiana Commission staff recently released its report on industry restructuring in Louisiana, including its recommendations to the Louisiana Commission regarding retail competition in Louisiana. In its report, the Louisiana Commission staff found that electric industry restructuring in Louisiana is not in the public interest at this time, although the staff did approve an electric industry restructuring plan in case the commissioners decide to move forward with electric industry restructuring and retail competition. In 1997, the Texas legislature considered but did not pass legislation enacting industry restructuring, including retail competition. Following the 1997 Texas legislative session, the Texas Lieutenant Governor appointed a Senate interim committee to study retail competition and restructuring. The committee held a series of hearings in late 1997 and throughout 1998, and issued its report to the legislature in late 1998. 2-14 The 1999 session of the Texas legislature has already produced three comprehensive electric industry restructuring bills as electric industry restructuring has become one of the primary topics the legislature will address. Management cannot predict the ultimate outcome of the initiatives concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma and Texas, or their ultimate impact on the results of operations, financial condition, or competitive position of CSW, CPL, SWEPCO and WTU. Texas Independent System Operator An ISO is managing the ERCOT power grid in a competitive wholesale electric market in Texas. Integrated Resource Plan In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a joint integrated resource plan outlining the companies' future electric needs over a 10-year forecast horizon and the manner in which the companies propose to meet those needs. In July 1997, the Texas Commission issued an Interim Order on the Preliminary Plan which adopted a settlement agreement that had been reached with all the parties in the case. The Interim Order approved the load forecast and individual resource needs for each of the companies, as well as the request for proposal documents to be used to procure future resource needs. The Interim Order also approved the targeted purchase goal amounts for renewable and energy efficiency programs, which will result in renewable and energy efficiency programs being included in the companies' resource mix. In June 1997, CSW Services, on behalf of CPL, SWEPCO and WTU, issued a request for proposal for up to 75 MW of renewable resources. In November 1998, the Texas Commission approved the winning contract from that solicitation, a 75 MW wind farm to be constructed near McCamey, Texas. Additionally, CPL, SWEPCO and WTU have each issued solicitations for additional resources to be available in 2001. The contracts awarded as a result of these solicitations will be presented to the Texas Commission for certification during 1999. In May 1997, a separate phase of the Integrated Resource Plan was created to address the value of interruptible resources at CPL. As a result of that proceeding, in January 1999, the Texas Commission approved a new interruptible tariff for CPL. The tariff will go into effect in 2000 prior to the expiration of CPL's current tariffs. Holding Company Act and Legislative Update In 1995, the SEC issued a report to the U.S. Congress advocating repeal of the Holding Company Act, which restricts certain activities of CSW and other registered holding companies, finding the Holding Company Act anachronistic and duplicative of other federal and state regulatory regimes. In the last Congress, and again in February 1999, Holding Company Act repeal legislation was reported out of the U.S. Senate Banking Committee. Management cannot predict the outcome of this, or similar, legislation. Also in the last Congress, several bills which provided for the restructuring and/or deregulating of the electric utility industry were considered but did not pass. Several similar bills have been introduced as of February 1999. Management cannot predict the ultimate outcome of any legislative initiatives. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition of regulatory assets, the U.S. Electric Operating Companies have recognized significant regulatory assets and liabilities. Management believes that the U.S. Electric Operating Companies currently meet the criteria for following SFAS No. 71. However, in the event the U.S. Electric 2-15 Operating Companies or some portion of their business no longer meets the criteria for following SFAS No. 71 due to deregulation or for other reasons, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PSO Union Negotiations PSO and its Local Union 1002 of the IBEW 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 then 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. In October 1998, PSO received an adverse ruling from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ upheld PSO's right to cease collecting union dues through payroll deductions. The ALJ ruled that PSO did negotiate in good faith, but also PSO's position on some issues was too harsh, and therefore the December 1996 implementation should be rolled back and employees made whole. Additionally, the ALJ ruled that PSO had improperly solicited employees to withdraw from the union. In December 1998, PSO appealed the ALJ's ruling to the NLRB. The union is an intervenor in the AEP merger proceedings. PSO continues to negotiate with the union. At this time, PSO cannot predict the outcome of this matter. However, PSO believes that even in the event of a strike, its operations would continue without a significant disruption and that a strike would not have a material adverse effect on its results of operations or financial condition. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Impact of Competition and Industry Restructuring Initiatives CSW believes that compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity. CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry in the United States, and in the United Kingdom or on the CSW System. As the electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. CSW and the U.S. Electric Operating Companies cannot predict the form or effect of any federal or state electric utility restructuring initiatives at this time. Federal and/or state electric utility restructuring may cause impairment of significant recorded assets, material reductions of profit margins, and/or increased costs of capital. No assurance can be made that such events would not have a material adverse effect on CSW's or any of the U.S. Electric Operating Companies' results of operations, financial condition or competitive position. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). CPL - Wholesale Customers Certain CPL wholesale customers have given notice of their intent to terminate their contract when they expire in 2001 through 2004. During 1998, these customers represented 3% of CPL's total electric operating revenues. 2-16 SEEBOARD - Third Party Pension Litigation In the U.K., National Grid Group and National Power have been involved in continuing litigation in respect of their use of actuarial surpluses declared in the electricity industry's occupational pension scheme, the Electricity Supply Pension Scheme. A high court decision in favor of the National Grid Group and National Power was appealed and on February 10, 1999 the court of appeal ruled that the particular arrangements made by these corporations to dispose of the surplus, partly by canceling liabilities relating to additional pension payments resulting from early retirement, were invalid due to procedural defects. SEEBOARD employees are members of the Electricity Supply Pension Scheme, and SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of the payments cancelled was approximately $33 million. The court of appeal did not order the National Grid Group and National Power to make payment to the Electricity Supply Pension Scheme but will hold a further hearing to decide what action to take. It is likely that the case will then be referred to the U.K. House of Lords. The final outcome of the hearing, or any referral to the U.K. House of Lords, cannot be determined and therefore it is not possible to quantify the impact, if any, on the results of operations and financial condition of CSW and/or SEEBOARD. 2-17 RATES AND REGULATORY MATTERS U.S. ELECTRIC CPL Rate Review - Docket No 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million. On October 16, 1997 the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be reduced an additional $13 million on May 1, 1999. CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property; (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999; and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL sought a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology. The court denied the temporary injunction and the "Glide Path" rate reduction was implemented in May 1998. Hearings on the appeal were held during the third quarter of 1998, and a judgment was issued in February 1999 affirming the Texas Commission order, except for a consolidated tax issue in the amount of $6 million, which will be remanded to the Texas Commission. While CPL intends to appeal this most recent order to the Court of Appeals, management is unable to predict how the final resolution of these issues will ultimately affect CSW's and CPL's results of operations and financial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has recorded approximately $1.2 billion of regulatory-related assets at December 31, 1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, CPL, or some portion of its business, no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. CPL would also be required to evaluate whether there was any impairment of any deregulated plant assets. In addition, CPL and CSW could experience, depending on the timing and amount of any write-off, a material adverse effect on their results of operations and financial condition. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information on the CPL 1997 Final Order. SWEPCO Louisiana Rate Review In December 1997, the Louisiana Commission announced it would review SWEPCO's rates and service. SWEPCO's last rate activity was an $8.2 million rate decrease, initiated by SWEPCO and approved for its small and large industrial customers in January 1988. Prior to that SWEPCO's last rate increase was in 1985. The Louisiana Commission has selected consultants and legal counsel to perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of 2-18 service. The Louisiana Commission's legal counsel will issue a report in May 1999, and hearings will begin in September 1999. Management cannot predict the outcome of this review. SWEPCO Arkansas Rate Review In June 1998, the Arkansas Commission indicated that it would conduct a review of SWEPCO's earnings. The review began in July 1998. Management cannot predict the outcome of this review. Other Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding fuel proceedings at CPL, SWEPCO and WTU. U.K. ELECTRIC SEEBOARD Recent Regulatory Actions Following the commencement of the phased-in opening of the United Kingdom domestic and small business electricity market to competition, since September 1998, many customers are now able to choose their electricity supplier. SEEBOARD competes for customers in its own area as well as throughout the rest of the United Kingdom. The DGES has allowed a significant portion of the system development costs associated with the introduction of competition to be recovered by the regional electricity companies through a charge to all customers over the next five years. The DGES has also announced price restraints which set a maximum amount that existing electricity supply companies can charge their domestic and small business customers, taking into account its view of future electricity purchase costs. For SEEBOARD, these price restraints reduce prices in real terms by 6% for the regulatory year ending March 31, 1999 and a further 3% for the following regulatory year ending March 31, 2000. PROPOSED AEP MERGER Background Information On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28 billion at that time. At December 31, 1998, the total market capitalization of the combined company would have been $28 billion ($15 billion in equity; $13 billion in debt), the combined company would have served more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. At December 22, 1997, AEP would have issued approximately $6.6 billion in stock to CSW stockholders to complete the transaction. At December 31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as 1998, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries. 2-19 The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two work forces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Transition teams of employees from both companies will make organizational and staffing recommendations. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from: (i) issuing shares of common stock other than pursuant to employee benefit plans; (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Merger Regulatory Approvals The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. General Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas and at the FERC outlined the expected company-wide benefits of the merger to AEP and CSW customers and shareholders. These benefits would include $2 billion in non-fuel savings over 10 years and $98 million in net fuel savings over 10 years. FERC On April 30, 1998, AEP and CSW jointly filed a request with the FERC for approval of their proposed merger. On July 15, the FERC approved a draft order accepting the proposed transmission service agreements between the Ameren System and PSO. The draft order confirms that PSO's 250 MW firm contract path is available for AEP and CSW to meet the Holding Company Act's requirement that the two systems operate on an integrated and coordinated basis. In November 1998, the FERC issued an order setting issues for hearing. Hearings are scheduled to begin on June 1, 1999. The FERC order indicated that the review of the proposed merger would address the issues of competition, market power and customer protection and instructed AEP and CSW to refile an updated market power study. The updated market power study was filed in January 1999. CSW has filed a 2-20 proposed settlement with the FERC to sell 250 MWs of capacity in the Frontera power plant project, two years after the AEP merger closes to respond to market-power issues. A final order is expected in the fourth quarter of 1999. Arkansas On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas Commission for approval of their proposed merger. The Arkansas Commission issued an order approving the merger, subject to approval of the associated regulatory plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a final order granting conditional approval of a stipulated agreement related to a proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to reduce rates through a net savings merger rider for its Arkansas retail customers by $6 million over the five-year period following completion of the merger. The Arkansas Commission order notes the possibility of decisions in other jurisdictions adversely affecting provisions of the stipulated agreement. Consequently, the Arkansas Commission final orders are conditioned on its consideration of approval of the merger in other state and federal jurisdictions. Louisiana On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana Commission for approval of their proposed merger and for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Louisiana that provides for: - Approximately $2.6 million in fuel cost savings to Louisiana customers of CSW's SWEPCO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for SWEPCO customers in Louisiana and a plan to share with those customers approximately one-half of the savings allocated to Louisiana related to the merger during the first 10 years following the merger. Under this plan, approximately $26 million of these non-fuel merger-related savings will be used to reduce future costs to SWEPCO's Louisiana customers. Hearings in Louisiana are expected to begin in the first quarter of 1999, and a final order is expected in the second quarter of 1999. Oklahoma On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma Commission for approval of their proposed merger. AEP and CSW have proposed a regulatory plan in Oklahoma that provides for - Approximately $11.8 million in fuel cost savings to Oklahoma customers of CSW's PSO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for PSO retail customers and to share approximately one-half of the savings from synergies created by the merger during the first 10 years following the merger. Under this plan, approximately $78.6 million of these non-fuel merger-related savings will be used to reduce future costs to PSO's retail customers. On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling recommending to the Oklahoma Commission that the merger filing be dismissed without prejudice for lack of information regarding the potential impact of the merger on the retail electric market in Oklahoma. The ruling was in response to comments received from intervenors to the merger. A dismissal without prejudice would allow AEP and CSW to submit an amended application with the added information. 2-21 Subsequent meetings with the parties to the merger proceeding resulted in an agreement on criteria for the additional studies. On October 21, 1998, the ALJ approved these criteria, as well as plans by AEP and CSW to file an amended application along with the additional studies. An amended application was filed with the Oklahoma Commission on February 25, 1999. Submission of the amended application reset Oklahoma's 90-day statutory time period for Oklahoma Commission action on the merger. All other material in the written record in the merger case will be preserved since the docket is not being dismissed. AEP and CSW anticipate that the Oklahoma Commission will establish a procedural schedule that will result in a final order in Oklahoma in the second quarter of 1999. Texas On April 30, 1998, AEP and CSW jointly filed a request with the Texas Commission for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Texas that provides for: - Approximately $29 million in fuel cost savings to Texas customers during the 10-year period following completion of the merger; and - A commitment to not raise base rates prior to January 1, 2002 for Texas customers and a plan to share with those customers approximately one-half of the savings allocated to Texas related to the merger during the first 10 years following the merger. In Texas, approximately $183 million of the savings from synergies will be used to reduce future costs to customers. On July 2, 1998, the Texas Commission issued a preliminary order setting forth the issues the Texas Commission will consider in the merger application. In its preliminary order, the Texas Commission also determined that: (i) the merger application was not a rate proceeding; (ii) restructuring issues should not be addressed; and (iii) matters in the jurisdiction of other regulatory bodies should not be addressed. AEP and CSW have reached a settlement in principle with the Texas Office of Public Utility Counsel and several cities in Texas. The proposed settlement provides for combined rate reductions totaling approximately $180 million over a six-year period for CSW's electric operating company customers through two separate rate riders. Both rate reduction riders become effective upon approval of the settlement and completion of the merger. The first rate reduction rider provides for $84.4 million in estimated net merger savings to be credited to Texas customer bills. The reduction would come from a net merger savings rate reduction rider over the six years following completion of the merger with the aggregate rate reductions for customers of the CSW Texas companies as follows: - - $52.7 million for CPL; - - $16.1 million for SWEPCO; and - - $15.6 million for WTU. 2-22 The second rate reduction rider will be implemented to resolve issues associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings in Texas. The $95.6 million rate reductions over the six years following completion of the merger include: - - $61.3 million for CPL; - - $19.9 million for SWEPCO; and - - $14.4 million for WTU. CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction of $13.0 million implemented in May 1998, as well as the second glide-path rate reduction of $13.0 million scheduled to take effect May 1999, if the settlement is approved and the merger between AEP and CSW merger is completed. In addition, as a part of the settlement proposal, CPL, SWEPCO and WTU agree not to seek an increase in base rates prior to January 1, 2003. The Texas Office of Public Utility Counsel and members of the Texas cities will not initiate rate reviews prior to January 1, 2001. The settlement proposal also provides for a sharing of off-system sales margins on the wholesale electricity market after the effective date of the merger. The proposed settlement also includes affiliate transaction standards and provides for the maintenance of service quality for Texas customers. Hearings in Texas are expected to begin in the second quarter of 1999, and a final order is expected by the end of the third quarter of 1999. NRC On June 19, 1998, CPL filed a license transfer application with the NRC requesting the NRC's consent to the indirect transfer of control of CPL's interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue to own its 25.2% interest in STP, and CPL's name would remain on the NRC operating license. On November 5, 1998, the NRC approved the license transfer application on the condition that the merger is completed by December 31, 1999. Other Federal On October 13, 1998, AEP and CSW jointly filed an application with the SEC for approval of the proposed merger. The SEC merger filing is similar to requests currently before other jurisdictions and outlines the expected combined company benefits of the merger to AEP and CSW customers and shareholders. On November 9, 1998, AEP and CSW filed an amendment to the application. AEP and CSW plan to make other required federal merger filings with the Federal Communications Commission and the Department of Justice in the near future. United Kingdom CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in Yorkshire. The proposed merger of CSW into AEP would result in common ownership of the United Kingdom entities. Although the merger of CSW into AEP is not subject to approval of United Kingdom regulatory authorities, the common ownership of the United Kingdom entities could be referred by the United Kingdom Secretary of State for Trade and Industry for an investigation by the United Kingdom Monopolies and Mergers Commission. CSW is unable to predict the outcome of any such regulatory proceeding. AEP AEP has received a request from the staff of the Kentucky Public Service Commission to file an application seeking Kentucky Public Service Commission approval for the indirect change in control of Kentucky Power Company that will 2-23 occur as a result of the proposed merger. CSW understands that although AEP does not believe that the Kentucky Public Service Commission has the jurisdictional authority to approve the merger, AEP will prepare a merger application filing to be made with the Kentucky Public Service Commission, which is expected to be filed by April 15, 1999. Under the governing statute the Kentucky Public Service Commission must act on the application within 60 days. Therefore this matter is not expected to impact the timing of the merger. Completion of the Merger The proposed AEP merger has a targeted completion date in the fourth quarter of 1999. The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. The transaction must satisfy many conditions, including the condition that it must be a pooling of interests. The parties may not waive some of these conditions. AEP and CSW have initiated the process of seeking regulatory approvals, but there can be no assurances as to when, on what terms or whether the required approvals will be received or whether there will be any regulatory proceedings in the United Kingdom. The merger agreement will terminate on December 31, 1999 unless, in certain circumstances, extended by either party as provided in the merger agreement. There can be no assurance that the AEP merger will be consummated. Merger Costs As of December 31, 1998, CSW had deferred $26 million in costs related to the merger on its consolidated balance sheet, which will be charged to expense if AEP and CSW are not successful in completing their proposed merger. See NOTE 16. PROPOSED AEP MERGER. OTHER MERGER AND ACQUISITION ACTIVITIES SWEPCO Cajun Asset Purchase Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million in cash, subject to adjustment pursuant to the terms of the asset purchase agreement proposed as part of the SWEPCO Plan. Two competing plans of reorganization for the non-nuclear assets of Cajun were filed with the bankruptcy court. On September 25, 1998, Enron Capital and Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid. The trustee for Cajun supports the sole remaining competing bid of $1.19 billion by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy, Inc., Northern States Power Company and Zeigler Coal Holding Company. Confirmation hearings in Cajun's bankruptcy case were completed in May 1998. 2-24 On February 11, 1999, the bankruptcy court issued a ruling that denied confirmation of both the Louisiana Generating LLC reorganization plan and the SWEPCO Plan. Although both plans were rejected, the bankruptcy court said its ruling should provide guidance for the bidders to modify their existing plans. SWEPCO expects to modify the SWEPCO Plan consistent with the bankruptcy court's direction and to continue to pursue the acquisition of the non-nuclear assets of Cajun. The bankruptcy court has scheduled a status conference for March 15, 1999 to determine the next step in the process. Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their respective board of directors approvals. If a SWEPCO reorganization plan for Cajun is ultimately confirmed by the bankruptcy court, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external non-recourse borrowings and internally generated funds. There can be no assurance that the bankruptcy court will confirm a SWEPCO reorganization plan for Cajun, or, if it is confirmed, that federal and state regulators will approve it. As of December 31, 1998, SWEPCO had deferred $11.9 million in costs related to the Cajun acquisition on its consolidated balance sheet, which would be expensed if a SWEPCO reorganization plan for Cajun was not ultimately successful. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. OTHER INITIATIVES As described in OVERVIEW, a vital part of CSW's future strategy involves initiatives that are outside of the traditional United States electric utility industry due to increasing competition and fundamental changes in this industry. In addition, lower anticipated growth rates in CSW's core United States electric utility business combined with the previously mentioned industry factors have resulted in CSW pursuing other initiatives. These initiatives have taken a variety of forms; however, they are all consistent with the overall plan for CSW to develop a global energy business. CSW has restrictions on the amounts it may spend under the AEP merger agreement. While CSW believes that such initiatives are necessary to maintain its competitiveness and to supplement its growth in the future, the Holding Company Act may impede or delay its ability to successfully pursue such initiatives. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See OVERVIEW and RECENT DEVELOPMENTS AND TRENDS. DIVERSIFIED ELECTRIC CSW Energy CSW Energy presently owns interests in six operating power projects totaling 978 MW which are located in Colorado, Florida and Texas. CSW Energy began construction in August 1998 of a 500 MW merchant power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural gas-fired facility should begin simple cycle operation in the summer of 1999 and combined cycle operation by the end of 1999. In addition to these projects, CSW Energy has other projects in various stages of development. CSW International CSW International was organized to pursue investment opportunities in EWGs and FUCOs and currently holds investments in the United Kingdom, Mexico and 2-25 South America. In the first quarter of 1998, CSW International and its joint venture partner, Alpek, commenced commercial operations of a 109 MW, gas fired cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. In late 1998, CSW International and Scottish Power commenced construction of a 400 MW combined cycle gas turbine power station in southeast England. Commercial operation is expected to begin in the year 2000. CSW International has a 50% interest in the project. Also during 1998, CSW International invested an additional $100 million in convertible securities of Vale. At December 31, 1998, CSW International had approximately $290 million invested in South America. Through December 31, 1998, CSW International has invested $80 million in Vale to obtain a 36% equity interest. CSW International also issued $100 million of debt to Vale, convertible to equity by the end of 1999. CSW International accounts for its $80 million investment in Vale on the equity method of accounting, and the $100 million as a loan. In mid-January 1999, amid market instability, the Brazilian government abandoned its policy of pegging the currency in a broad range against the dollar. This resulted in a 40% devaluation of the Brazilian currency, the real, by the end of January. Vale will be unfavorably impacted by the devaluation primarily due to the revaluation of foreign denominated debt. CSW International has a put option which requires that Vale purchase CSW International's shares, upon CSW International exercising the put, at a minimum of the purchase price paid for the shares ($80 million). As a result of the put option arrangement, management has reached a preliminary conclusion that CSW International's investment carrying amount will not be reduced below the put option value unless there is deemed to be a permanent impairment. CSW International views its investment in Vale as a long-term investment strategy and believes that the investment in Vale continues to have significant long-term value and is recoverable. Management will continue to closely evaluate the changes in the Brazilian economy, and its impact on CSW International's investment in Vale. As of December 31, 1998, CSW International had invested $110 million in stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the year-end market value of the shares and foreign exchange rates, the value of the investment at December 31, 1998 is $66 million. The reduction in the carrying value of this investment has been reflected in Other Comprehensive Income in CSW's Consolidated Statements of Stockholder's Equity. Management views its investment in Chile as a long-term investment strategy. Management will continue to closely evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company. In addition to these projects, CSW International has other projects in various stages of development. ENERGY SERVICES C3 Communications C3 Communications, an exempt telecommunications company, is comprised of two divisions. C3 Communications' Utility Automation Division provides automatic meter reading, interval meter data and related products and services to 2-26 commercial and industrial customers, electric, gas and water utilities and other energy service providers. C3 Communications' Networks Division was formed from the dissolution of ChoiceCom. C3 Communications' Networks Division offers high capacity inter-city fiber optic network services to telecommunications carriers and wholesale customers in Texas and Louisiana with plans to expand into Arkansas and Oklahoma. C3 Communications' Utility Automation Division entered the direct access market in 1998 and received approval from all three utility distribution companies in California to manage meter data for the state's deregulated electric utility industry. The Utility Automation Division continues to seek other domestic opportunities. In 1998, ChoiceCom expanded its switch-based local dial tone markets from three cities to five by installing state-of-the art Lucent 5ESS(R) switches in Dallas and Houston, Texas. ChoiceCom also expanded its long haul network with the installation and operation of a high capacity fiber optic system linking the Texas cities of Dallas, Houston, Austin and San Antonio in July of 1998. By mutual agreement, the ChoiceCom partnership was terminated December 31, 1998. ICG Communications, Inc. purchased ChoiceCom's local dial tone business while C3 Communications retained the long haul, high-capacity fiber optic network. With the fiber assets, C3 Communications established the Networks Division and plans to focus on CSW's original strategies to build new routes in the states of Texas, Oklahoma, Louisiana and Arkansas. EnerShop EnerShop's two product lines are performance contracting and EnerACT advisory services. Through performance contracting, EnerShop provides energy services to customers in Texas and Louisiana that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis, project management, engineering design, equipment procurement and construction and performance monitoring. EnerACT is an innovative system that communicates with all brands and models of energy management systems and utility meters. EnerACT aggregates load profiles of multiple facilities into a single purchasing entity, optimizes real-time control of buildings simultaneously with real-time energy prices, and predicts energy consumption for operations through building simulation models. Customers in California, Illinois, Louisiana, New York, Texas, and Wisconsin currently subscribe to EnerACT advisory services. Other Ventures The CSW Services Business Ventures group pursues energy-related projects. Projects for these groups include staffing services for electric utility nuclear power plants, energy management systems, and electric substation automation software. In August 1998, the SEC approved the marketing and distribution of electric bikes, and associated accessories under the TotalEV name. In late 1997, CSW Energy Services was launched to explore the electric utility industry's emerging retail supply markets as they were deregulated on a state-by-state basis. CSW Energy Services began selling retail electric supply to commercial customers in California and Pennsylvania. In March 1998, CSW Energy Services signed its first major supply contract in California. In January 1999, CSW Energy Services announced that it was ceasing its business as a retail electric supplier and that it would assign or terminate its existing electricity supply contracts to other suppliers. 2-27 In June 1997, the FERC approved the request of CSW Power Marketing to sell power and energy at market-based rates in the wholesale market. AEP is currently pursuing this initiative, as a result, CSW has temporarily suspended this initiative. SOUTH TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. HL&P owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit 2 was placed in service in June 1989. In November 1997, STPNOC assumed the duties of STP operator. Each of the four STP co-owners are represented on the STPNOC board of directors. STP unit 2 was removed from service during 1998 for a scheduled refueling outage. For the year 1998, Unit 1 and Unit 2 operated at net capacity factors of 99.1% and 91.1%, respectively. For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. ENVIRONMENTAL MATTERS The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. The U.S. Electric Operating Companies are subject to various pending claims alleging that they are PRPs under federal or state remedial laws for investigating and cleaning up contaminated property. CSW believes that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CSW's or any U.S. Electric Operating Company's results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by the U.S. Electric Operating Company, the estimated amount of costs allocated to the U.S. Electric Operating Company and the participation of other parties (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission constraints or reductions for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities 2-28 within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. At the Kyoto Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating Companies could be affected if this treaty is approved by the United States Congress in its present form. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot be determined because most of the greenhouse gas emission reduction would come from coal generation that would have to be switched to natural gas or retired. At December 31, 1998, 34% of the U.S. Electric Operating Companies' installed generating capacity was coal and lignite. For the year ended December 31, 1998, 47% of the U.S. Electric Operating Companies' MWH generation was coal and lignite. RISK MANAGEMENT In 1997, CSW's board of directors adopted a risk management resolution authorizing CSW to engage in currency, interest rate and energy spot and forward transactions and related derivative transactions on behalf of CSW with foreign and domestic parties as deemed appropriate by executive officers of CSW. The risk management program is necessary to meet the growing demands of CSW's customers for competitive prices and price stability, to enable CSW to compete in a deregulated power industry, to manage the risks associated with domestic and foreign investments and to take advantage of strategic investment opportunities. The U.S. Electric Operating Companies experience commodity price exposures related to the purchase of fuel supplies for the generation of electricity and for the purchase of power and energy from other generation sources. Contracts that provide for the future delivery of these commodities can be considered forward contracts which contain pricing and/or volume terms designed to stabilize the cost of the commodity. Consequently, the U.S. Electric Operating Companies manage their price exposure for the benefit of customers by balancing their commodity purchases through a combination of long-term and short-term (spot market) agreements. In response to the development of a more competitive electric energy market, CSW has received regulatory approval, which authorizes the four U.S. Electric Operating Companies to conduct a pilot program which offers power sales agreements at tariffed rates with a fixed fuel cost. To offset the commodity price risk associated with these contracts, CSW has purchased natural gas swaps. These swaps cover natural gas deliveries beginning in January and continuing for the remainder of 1999. Natural gas volumes purchased to serve these contracts for which CSW has secured swap agreements represents approximately 1% of annual natural gas purchases. The table below provides information about the Company's natural gas swaps and electricity forward contracts that are sensitive to changes in commodity prices. The swaps hedge commodity price exposure for the year 1999. Cash outflows on the swap agreements should be offset by increased margins on electricity sales to customers under tariffed rates with fixed fuel costs. The electricity forward contracts hedge a portion of CSW's energy requirements through September 1999. The average contract price for forward purchases is $58 per MWH and the average contract price for forward sales is $80 per MWH. 2-29 Contractual commitments at December 31, 1998 are as follows: Net Notional Fair Value of Products Amount Fair Value of Assets Liabilities ---------------------------------------------------------------------------- (millions) Swaps 6,510,000 MMbtu $-- $1 Forwards: purchases 440,000 MWH 3 -- sales 292,800 MWH 1 -- SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. At December 31, 1998, the gross value of such contracts for differences was approximately 92% of the expected power purchases for 1999. CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound. CSW has utilized certain risk management tools to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. At the end of 1998, CSW had positions in two cross currency swap contracts. The following table presents information relating to these contracts. The market value represents the foreign exchange/interest rate terms inherent in the cross currency swaps at current market pricing. CSW expects to hold these contracts to maturity. At current exchange rates, this liability is included in long-term debt on the balance sheet at a carrying value of approximately $429 million. Expected Expected Cash Cash Inflows Outflows Contract Maturity Date (Maturity Value) (Market Value) - -------------------------------------------------------------------------------- Cross currency swaps August 1, 2001 $200 million $220.4 million Cross currency swaps August 1, 2006 $200 million $236.2 million For information related to currency risk in South America see OTHER INITIATIVES, DIVERSIFIED ELECTRIC, CSW International. For information on commodity contracts see NOTE 7. FINANCIAL INSTRUMENTS. OTHER MATTERS Year 2000 On a system-wide basis, CSW initiated a year 2000 project to prepare internal computer systems and applications for the year 2000. These systems and applications include management information systems that support business operations such as customer billing, payroll, inventory and maintenance. Other systems with computer-based controls such as telecommunications, elevators, building environmental management, metering, plant, transmission, distribution and substations are included in this project as well. Year 2000 readiness is a top priority for CSW. The formal project was initiated in late 1996 at which time an executive sponsor and project manager were named and a centralized project management office was formed. More than 30 Readiness Teams have been initiated and are in various phases of the project. Currently, those teams represent the equivalent of about 90 full-time employee positions working on year 2000 readiness. The teams are using a formal approach that includes inventory, assessment, remediation, testing of systems and development of contingency plans. Formal progress checkpoints are conducted biweekly by the project management team. An executive oversight council 2-30 comprising the functional vice presidents convenes monthly to review progress and address issues. The project executive sponsor updates top management on a weekly basis and at every Board of Directors Audit Committee meeting. CSW has completed a review of its year 2000 project. External consultants assisted in the review. The purpose of the review was to assess the project plans and processes to ensure that the significant risks to CSW associated with the year 2000 are prudently managed. Several changes have been incorporated into the year 2000 project as a result of the review findings. State of Readiness Key milestones for the CSW system-wide year 2000 program excluding SEEBOARD and Vale are listed below: - A detailed inventory and assessment of critical systems was completed in the third quarter of 1998. This includes switchboards, elevators, environmental controls, vehicles, metering systems, and embedded logic or real time control systems in support of generation and delivery of electricity. The findings indicate that less than 15% of installed controls have microprocessors, very few have date logic and over 90% of those with date logic already process new millennium dates correctly. The need for additional functionality in the early 1990's resulted in the modernization of several electric operation systems that has reduced the conversion requirements. Corrective and certification measures are well underway for these systems and completion is targeted for all systems by the second quarter of 1999. - Inventory and assessment of business applications and vendor-supplied software was completed in the first quarter of 1997. Only 25% of the business application programs were determined to require remediation by December 1999. - Plans for modification and certification testing of business application software were completed in the third quarter of 1997. - Remediation plans and schedules for business applications were established in the fourth quarter of 1997, and conversion and certification activities were initiated. As of the end of 1998, 75% of business critical applications were converted and certified. The remaining 25% of applications are targeted for completion by mid-year 1999. SEEBOARD completed an inventory of date dependent assets including, but not limited to, embedded chip technology, software, hardware, applications, telecommunications, access and security systems in the third quarter of 1998. SEEBOARD is on schedule to complete an assessment of all critical systems by the first quarter of 1999 and remediation of those systems in the second quarter of 1999. Final verification of those systems is scheduled for completion by the third quarter of 1999. To date, 70% of the work to be performed in electric operations has been completed. Vale completed an inventory of date dependent assets and critical systems in the fourth quarter of 1998. Vale is on schedule for remediation of these assets and systems by the third quarter of 1999. Most business system remediation has been completed. Cost to Address Year 2000 Issues Work related to the year 2000 project is being performed using a mix of internal and external resources. The funds for year 2000 project expenditures are included in CSW's budget. The majority of costs related to the project are expensed as incurred. The historical cost incurred to date for the year 2000 project is approximately $10 million, $9 million of which was incurred in 1998. 2-31 Remaining testing and conversion is expected to cost an additional $23 million to $28 million over the next 15 months. Approximately 33% of the projected cost is to be covered through the redeployment of existing resources. Approximately 42% of the projected cost is for contract labor. The remaining 25% of the projected cost is for computer hardware and software purchases. Development and upgrade costs totaling approximately $12 million relating to certain SEEBOARD systems have been removed from the projected cost. The primary purpose for implementing those particular systems is related to the competitive electricity markets in the U.K., not an acceleration of expenditure for year 2000 purposes. At present no planned CSW computer information system projects have been affected by the year 2000 project, but that may change as the year 2000 approaches. Accordingly, no estimate has been made for the financial impact of any future projects foregone due to resources allocated to the year 2000 project. Risk of Year 2000 Issues The greatest financial risk to CSW would be a total inability to generate and deliver electricity. Many primary systems and backup systems would have to fail in order for that total inability to occur. The probability of a total inability to generate and deliver electricity by CSW is very low. To date at CSW System power plants, no year 2000 issues have been found that would have caused power plants to fail. Risk of power plant failure is limited because 50% of power plant controls do not operate with date sensitive logic. Additionally, the year 2000 issues, which have been identified in the plants, are generally minor issues typically affecting reporting systems. The vast majority of the transmission and distribution system consists of wires, poles, transformers, switches and fuses where year 2000 is not an issue. Fewer than 15% of control systems that operate transmission and distribution equipment are micro-processor based, and of those, 95% have been found to process year 2000 dates correctly. The standard residential meter is not affected; however, about 10% of industrial and large commercial meters have microprocessors. So far most of those microprocessors process dates correctly. The areas requiring the greatest amount of work are the computers that operate business systems such as customer billing and accounting. CSW is on schedule to have year 2000 issues in these systems resolved by the summer of 1999. Currently, no cost estimate exists related to CSW's year 2000 risk. Contingency Plans Contingency plans have been in place for years to address problems resulting from weather. These plans are being updated to include year 2000 issues. Contingency planning is engineered into the transmission and distribution systems as it is designed with the capability to by-pass failed equipment. A margin of power generation reserve above what is needed is normally maintained. This reserve is a customary operating contingency plan that allows CSW to operate normally even when a power plant unexpectedly quits operating. Backup supplies of fuels are normally maintained at CSW power plants. Natural gas plants have fuel oil as a backup and multiple pipelines provide redundant supplies. At coal plants about 40-45 days of extra coal is kept on hand. The North American Electric Reliability Council is coordinating with all national power regions to assess the risks and to develop contingency plans within the national electric delivery system. During the fourth quarter of 1998, 2-32 CSW developed first drafts of the contingency plans to address year 2000 issues. These contingency plans are currently being further developed and will be completed in the second quarter of 1999. CSW will participate in an industry-wide drill focused on sustaining reliable operations with a simulated partial loss of voice and data communications on April 9, 1999. Additionally, CSW will participate in an industry-wide drill to test its operational preparedness in the third quarter of 1999. Final verification of external interfaces will be performed in the last half of 1999. Contingency plans will continue to be revised as needed as a result of the drills. CSW has contacted over 6,000 suppliers to determine their readiness with 70% responding. Of those responding, 55% say they are prepared for the year 2000. CSW is developing plans for the possible failure of some critical suppliers. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION. NEW ACCOUNTING STANDARDS SFAS No. 130 SFAS No. 130 is effective for fiscal year 1998 and was the basis of preparation for the Consolidated Statements of Stockholders' Equity in this report. The statement adds the requirement to present comprehensive income and all of its components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period except those resulting from investments by owners and distributions to owners. SFAS No. 131 CSW adopted SFAS No. 131 for fiscal year 1998. The statement requires disclosure of selected information about its reportable operating segments. Operating segments are components of an enterprise that engage in business activities that may earn revenues and incur expenses, for which discrete financial information is available and is evaluated regularly by the chief operating decision-maker within a company for making operating decisions and assessing performance. Segments may be based on products and services, geography, legal structure or management structure. SFAS No. 132 SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5. BENEFIT PLANS. This statement standardizes the disclosure requirements for pensions and OPEBs, requires additional information for changes in the benefit obligations and fair value of plan assets and eliminates certain disclosure requirements. SOP No. 98-5 SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998. The statement requires entities to expense the costs of start-up activities as incurred. SOP No. 98-5 broadly defines start-up activities to include: (i) costs that are incurred before operations have begun; (ii) costs incurred after operations have began but before full productive capacity has been reached; (iii) learning costs and non-recurring operating losses incurred before a project is fully operational; and (iv) one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory or with a new class of customer, and initiating a new process in an existing operation. 2-33 CSW adopted SOP No. 98-5 in 1998 and, as a result, CSW Energy and CSW International expensed $4.5 million and $1.5 million, after tax, respectively, of start-up costs, which had previously been capitalized. SFAS No. 133 SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 (January 1, 2000 for calendar year entities). This statement replaces existing pronouncements and practices with a single integrated accounting framework for derivatives and hedging activities and eliminates previous inconsistencies in generally accepted accounting principles. The statement expands the accounting definition of derivatives, which had focused on freestanding contracts (futures, forwards, options and swaps) to include embedded derivatives and many commodity contracts. All derivatives will be reported on the balance sheet either as an asset or liability measured at fair value. Changes in a derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing or the method of adopting SFAS No. 133. EITF Issue 98-10 In December 1998, the EITF reached consensus on Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. In reaching its consensus, the EITF distinguished between energy contracts entered to generate a profit and energy contracts entered to provide for the physical delivery of a commodity. Generally, CSW's energy contracts are entered into for the physical delivery of energy. These contracts, therefore, do not meet the definition of "trading activities" addressed by EITF Issue 98-10. Therefore, adoption of EITF Issue 98-10 will not have a material impact on CSW's results of operations or financial condition. 2-34 CENTRAL AND SOUTH WEST CORPORATION RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis. CSW's results fluctuate, in part, with the weather. CSW's 1998 results reflect an outstanding weather-related year, and that type of weather may not occur in 1999. Also, other than certain one-time items, as discussed throughout the results of operations, CSW's income statement line items as a percentage of total revenues remain fairly consistent, due primarily to the regulatory environment in which CSW operates. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 CSW's earnings increased to $440 million in 1998 from $153 million in 1997. CSW's return on average common stock equity was 12.4% in 1998 compared to 4.2% in 1997. The primary reason for the higher earnings and return on average common stock equity was the absence in 1998 of the accrual of $176 million for the one-time United Kingdom windfall profits tax. Hotter than normal summer weather and increased customer growth and usage at the U.S. Electric Operating Companies were also factors in the increase in earnings over 1997. Additionally, the sale of a telecommunications partnership interest in 1998 and a decrease in the United Kingdom corporate tax rate contributed to the earnings increase. The absence of the impact of CSW's final settlement of litigation with El Paso in 1997 contributed to the increase in earnings in 1998 as well. Also contributing to the increase in earnings was the absence in 1998 of the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the windfall profits tax. Partially offsetting the higher earnings was a charge for accelerated capital recovery of STP and asset write-offs at several of CSW's business segments. Operating revenues increased $214 million in 1998 compared to 1997. The revenue variances are shown in the following table. 1998 REVENUE VARIANCES Increase (decrease) from prior year, millions U.S. Electric KWH Sales, Weather-Related $72 KWH Sales, Growth and Usage 53 Fuel Revenue 31 Sales for Resale 6 Other Electric 5 ------------ 167 United Kingdom (101) Other Diversified 148 ------------ $214 ------------ U.S. Electric revenues increased $167 million, or 5%, in 1998 compared to 1997. Retail MWH sales increased 6% with increases in all customer classes. U.S. Electric revenues increased due primarily to higher MWH sales resulting from 2-35 hotter than normal summer weather and increased customer usage and growth. An increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. United Kingdom revenues decreased $101 million, or 5%, in 1998 compared to 1997 due to the loss of revenues associated with the sale of its retail stores in the second quarter of 1998 and the effect of price control on the supply business. Other diversified revenues increased $148 million in 1998 compared to 1997 due primarily to increased revenues from CSW Energy, CSW Credit and EnerShop. During 1998 and 1997 the U.S. Electric Operating Companies generated 92% and 93% of their electric energy requirements, respectively. U.S. Electric fuel expense increased $13 million in 1998 compared to 1997 due primarily to increased generation offset in part by a decrease in fuel prices to $1.67 per MMbtu in 1998 from $1.83 per MMbtu in 1997. United Kingdom cost of sales decreased $87 million in 1998 compared to 1997 due primarily to lower cost of sales associated with the sale of SEEBOARD's retail stores and a decrease in the cost of purchased power reflecting lower business volumes. Other operating expense increased $48 million in 1998 compared to 1997 due in part to a CSW Energy power plant that went into service in February 1998. The increase in other operating expense was offset in part by the absence in 1998 of the settlement of litigation with El Paso which increased other operating expense $35 million in 1997. Further offsetting the increase in other operating expense in 1998 was the absence of the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan. Depreciation and amortization expense increased $24 million, or 5%, in 1998 due primarily to accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order, a charge for accelerated capital recovery of STP, as well as increases in depreciable property. Income tax expense increased $52 million due primarily to higher pre-tax income. Other income and deductions increased to $42 million in 1998 from $32 million in 1997 due primarily to the sale of a telecommunications partnership interest. Long-term interest expense decreased $22 million in 1998 due primarily to the prepayment of a $60 million variable rate bank loan due December 1, 2001; the maturity of $200 million of CPL FMBs on October 1, 1997 and $28 million of CPL FMBs on January 1, 1998; and the redemption of $91 million of FMBs of certain of the U.S. Electric Operating Companies on September 1, 1998. See NOTE 8. LONG-TERM DEBT for additional information on the redemption of these securities. Short-term debt was used to prepay the variable rate bank loan in two $30 million installments on January 28, 1998 and April 27, 1998. Short-term borrowings and internal cash generation were used to fund the maturities and redemption of the previously mentioned FMBs. Short-term and other interest expense increased $35 million in 1998 when compared to 1997 due primarily to higher levels of short-term borrowings. Distributions on Trust Preferred Securities increased interest and other charges by $10 million in 1998. The Trust Preferred Securities were outstanding for all of 1998, while they were outstanding for only part of 1997. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on these securities. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 CSW's earnings decreased to $153 million in 1997 from $429 million in 1996. CSW's return on average common stock equity was 4.2% in 1997 compared to 12.1% in 1996. The primary reason for the lower earnings and return on average common stock equity was the accrual of the one-time United Kingdom windfall 2-36 profits tax. The impact of CSW's final settlement of litigation with El Paso contributed to the decline in earnings as well. Also contributing to the decrease in earnings was the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the windfall profits tax. Further reducing earnings for 1997 were certain asset write-offs predominately at the U.S. Electric Operating Companies. Partially offsetting the lower earnings was the gain on the reacquisition of a portion of the U.S. Electric Operating Companies' preferred stock and an adjustment to deferred tax balances of $15 million resulting from a 2% reduction in the United Kingdom corporation tax rate. Further offsetting the decline in earnings was an increase in non-fuel electric revenues. Significant items occurring in 1997 that affected earnings are listed below (in millions). Earnings Impact --------------- United Kingdom Windfall Profits Tax $(176) CPL 1997 Final Order (48) Asset Write-offs and Reserves (48) PSO 1997 Rate Settlement Agreement (27) Settlement of Litigation with El Paso (23) Gain on the Reacquisition of Preferred Stock 10 United Kingdom Deferred Tax Adjustment 15 In addition, several items that occurred in 1996 were not present in 1997. Prior to the sale of Transok in 1996, CSW realized $12 million of earnings from Transok's operations. As a result of the sale, CSW also recorded an after-tax gain of approximately $120 million in 1996. However, the U.S. Electric Operating Companies and CSW Energy recorded charges totaling $102 million, after-tax, for certain investments in the second quarter of 1996 which decreased earnings. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information concerning the effects of the sale of Transok. 2-37 Operating revenues increased $113 million in 1997 compared to 1996. The revenue variances are shown in the following table. 1997 REVENUE VARIANCES Increase (decrease) from prior year, millions U.S. Electric CPL and WTU Transmission Revenues $56 KWH Sales, Growth and Usage 41 Fuel Revenue 23 CPL 1996 Fuel Agreement 18 Sales for Resale 12 CPL 1997 Final Order (45) KWH Sales, Weather-Related (37) PSO 1997 Rate Settlement Agreement (32) Other Electric 37 ------ 73 ------ United Kingdom 22 Other Diversified 18 ------ $113 ------ U.S. Electric revenues increased $73 million, or 2%, in 1997 compared to 1996. Retail MWH sales increased 2.5%, with increases in all customer classes. U.S. Electric revenues increased due primarily to higher MWH sales resulting from increased customer usage and new transmission access revenues at CPL and WTU, in accordance with FERC Order No. 888 and the Texas Commission's rule regarding transmission access and pricing. The new transmission revenues had no material effect on earnings because they were almost completely offset by a corresponding amount of transmission expense. Revenues increased due in part to the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel Agreement. An increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. Partially offsetting the revenue increase was a decrease in weather-related demand due to milder weather in the first nine months of 1997. Further offsetting the increase in U.S. Electric revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million, or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate movement between the British pound and the U.S. dollar, partially offset by a reduction in the fossil fuel levy collected on behalf of the United Kingdom government. Other diversified revenues increased $18 million, or 31%, in 1997 compared to 1996 due primarily to increased revenues from CSW International, C3 Communications, CSW Credit and EnerShop. During 1997 and 1996 the U.S. Electric Operating Companies generated 93% of their electric energy requirements. U.S. Electric fuel expense increased $26 million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also contributing to the increase was the absence in 1997 of a one-time reduction to fuel expense of approximately $9 million recorded in the first quarter of 1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these increases in fuel expense was the effect of lower-cost coal. United Kingdom cost of sales decreased approximately $40 million to $1.3 billion in 1997 compared to 1996 due primarily to a reduction in the fossil fuel levy collected on behalf of the United Kingdom government, which was partially offset by the effect of the exchange rate movement between the British pound and the U.S. dollar. Other operating expense increased $196 million to $981 million in 1997 compared to 1996 due in part to the absence in 1997 of a $27 million pension adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased 2-38 pension expense. The effect of the exchange rate movement between the British pound and U.S. dollar also contributed to the increase in other operating expense of SEEBOARD U.S.A. In addition, approximately $56 million in new transmission access expense was recorded at CPL and WTU in 1997 related to FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also increasing other operating expense were asset write-offs of approximately $57 million including certain regulatory assets, capitalized demand side management assets and obsolete inventories. In addition, the settlement of litigation with El Paso increased other operating expense $35 million. Further contributing to the increase in other operating expense was the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Partially offsetting these increases were the absence in 1997 of expenses recorded in 1996 related to inventory write-offs of $10 million and CPL rate case adjustments of $15 million. Further offsetting the increases were charges in 1996 associated with restructuring costs. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan. Depreciation and amortization expense increased $33 million, or 7%, in 1997 due primarily to the implementation of depreciation and amortization in accordance with the CPL 1997 Final Order. As a result of that order, the increase in depreciation due to the accelerated recovery of ECOM property was offset in part by the implementation of lower depreciation rates. Taxes other than income increased $17 million, or 10%, in 1997 compared to 1996 due primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas franchise tax refund and true-up in 1996. Income tax expense decreased $73 million to $151 million in 1997 due primarily to lower pre-tax income and a $15 million adjustment to deferred income tax balances resulting from a 2% reduction in the United Kingdom corporation tax rate. Other income and deductions increased to a gain of $32 million in 1997 from a loss of $61 million in 1996 due primarily to the absence in 1997 of charges for certain investments 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 increased $8 million, or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter 1996 debt issuance by CSW Energy. Short-term and other interest expense decreased $8 million to $86 million in 1997 when compared to 1996 due primarily to lower levels of short-term borrowings. Distributions on newly-issued Trust Preferred Securities increased interest and other charges by $17 million in 1997, which was partially offset by lower dividend requirements resulting from the related preferred stock reacquisitions at the U.S. Electric Operating Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on the new securities. 2-39 CSW Consolidated Statements of Income Central and South West Corporation - ------------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------ 1998 1997 1996 ------------------------------ ($ in millions, except share amounts) Operating Revenues U.S. Electric $ 3,488 $ 3,321 $ 3,248 United Kingdom 1,769 1,870 1,848 Other diversified 225 77 59 ------------------------------ 5,482 5,268 5,155 ------------------------------ Operating Expenses and Taxes U.S. Electric fuel 1,190 1,177 1,151 U.S. Electric purchased power 111 89 77 United Kingdom cost of sales 1,204 1,291 1,331 Other operating 1,029 981 785 Maintenance 169 152 150 Depreciation and amortization 521 497 464 Taxes, other than income 189 195 178 Income taxes 203 151 224 ----------------------------- 4,616 4,533 4,360 ----------------------------- Operating Income 866 735 795 ----------------------------- Other Income and Deductions U.S. Electric charges for investments and plant development costs -- (3) (117) Other 60 29 16 Non-operating income taxes (18) 6 40 ----------------------------- 42 32 (61) ----------------------------- Income Before Interest and Other Charges 908 767 734 ----------------------------- Interest and Other Charges Interest on long-term debt 311 333 325 Distributions of Trust Preferred Securities 27 17 -- Interest on short-term debt and other 121 86 94 Preferred dividend requirements of subsidiaries 8 12 18 Gain on reacquired preferred stock 1 (10) -- ----------------------------- 468 438 437 ----------------------------- Income from Continuing Operations 440 329 297 ----------------------------- Discontinued Operations Income from discontinued operations, net of tax of $6 -- -- 12 Gain on the sale of discontinued operations, -- -- 120 net of tax of $72 ------------------------------ -- -- 132 ------------------------------ Income Before Extraordinary Item 440 329 429 Extraordinary Item - United Kingdom windfall profits tax -- (176) -- ------------------------------ Net Income for Common Stock $440 $ 153 $ 429 ============================== Average Common Shares Outstanding 212.4 212.1 207.5 Basic and Diluted EPS from Continuing Operations $2.07 1.55 $1.43 Basic and Diluted EPS from Discontinued Operations -- -- 0.64 ------------------------------ Basic and Diluted EPS before Extraordinary Item 2.07 1.55 2.07 Basic and Diluted EPS from Extraordinary Item -- (0.83) -- ------------------------------ Basic and Diluted EPS $2.07 $0.72 $2.07 ============================== Dividends Paid per Share of Common Stock $1.74 $1.74 $1.74 ============================== The accompanying notes to consolidated financial statements are an integral part of these statements. 2-40 CSW Consolidated Statements of Stockholders' Equity Central and South West Corporation (millions)
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income (Loss) Total Beginning Balance -- January 1, 1996 $675 $610 $1,893 ($4) $3,174 Sale of common stock 65 412 -- -- 477 Common stock dividends -- -- (358) -- (358) Other -- -- 3 -- 3 ------- 3,296 Comprehensive Income: Foreign currency translation adjustment (net of tax of $35) -- -- -- 75 75 Unrealized gain on securities (net of tax of $1) -- -- -- 2 2 Net Income -- -- 429 -- 429 ------- Total comprehensive income 506 ------ ------ ------ ------ ------- Ending Balance -- December 31, 1996 $740 $1,022 $1,967 $73 $3,802 ============================================= ======= Beginning Balance -- January 1, 1997 $740 $1,022 $1,967 $73 $3,802 Sale of common stock 3 17 -- -- 20 Common stock dividends -- -- (369) -- (369) ------- 3,453 Comprehensive Income: Foreign currency translation adjustment (net of tax of $23) -- -- -- (48) (48) Unrealized loss on securities (net of tax of $0.3) -- -- -- (1) (1) Minimum pension liability (net of tax of $0.3) -- -- -- (1) (1) Net Income -- -- 153 -- 153 ------- Total comprehensive income 103 ------ ------ ------ ------ ------- Ending Balance -- December 31, 1997 $743 $1,039 $1,751 $23 $3,556 ============================================= ======= Beginning Balance -- January 1, 1998 $743 $1,039 $1,751 $23 $3,556 Sale of common stock 1 10 -- -- 11 Common stock dividends -- -- (370) -- (370) Other -- -- 2 -- 2 ------- 3,199 Comprehensive Income: Foreign currency translation adjustment (net of tax of $2) -- -- -- 7 7 Unrealized loss on securities (net of tax of $8) -- -- -- (14) (14) Adjustment for gain included in net income (net of tax of $4) -- -- -- (7) (7) Minimum pension liability (net of tax of $0.6) -- -- -- (1) (1) Net Income -- -- 440 -- 440 ------- Total comprehensive income 425 ------ ------ ------ ------ ------- Ending Balance -- December 31, 1998 $744 $1,049 $1,823 $8 $3,624 ============================================= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 2-41 CSW Consolidated Balance Sheets Central and South West Corporation - ------------------------------------------------------------------------- As of December 31, ------------------------------- 1998 1997 -------------- ------------ (millions) ASSETS Fixed Assets Electric Production $5,887 $ 5,824 Transmission 1,594 1,558 Distribution 4,681 4,453 General 1,380 1,381 Construction work in progress 166 184 Nuclear fuel 207 196 -------------- ------------ 13,915 13,596 Other diversified 333 250 -------------- ------------ 14,248 13,846 Less - Accumulated depreciation and amortization 5,652 5,264 -------------- ------------ 8,596 8,582 -------------- ------------ Current Assets Cash and temporary cash investments 157 75 Accounts receivable 1,110 916 Materials and supplies, at average cost 191 172 Electric utility fuel inventory 90 65 Under-recovered fuel costs 4 84 Notes receivable 109 -- Prepayments and other 90 78 -------------- ------------ 1,751 1,390 -------------- ------------ Deferred Charges and Other Assets Deferred plant costs 497 503 Mirror CWIP asset 257 285 Other non-utility investments 432 448 Securities available for sale 66 103 Income tax related regulatory assets, net 308 329 Goodwill 1,402 1,428 Other 435 383 -------------- ------------ 3,397 3,479 -------------- ------------ $ 13,744 $ 13,451 ============== ============ The accompanying notes to consolidated financial statements are an integral part of these statements. 2-42 CSW Consolidated Balance Sheets Central and South West Corporation - -------------------------------------------------------------------------------- As of December 31, --------------------------- 1998 1997 -------- ------- CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 212.6 million shares in 1998 and 212.2 million shares in 1997 $ 744 $ 743 Paid-in capital 1,049 1,039 Retained earnings 1,823 1,751 Accumulated other comprehensive income 8 23 -------- ------- 3,624 46% 3,556 45% -------- ------ ------- ----- Preferred Stock Not subject to mandatory redemption 176 176 Subject to mandatory redemption -- 26 -------- ------- 176 2% 202 2% Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 335 4% 335 4% Long-term debt 3,785 48% 3,898 49% ------- ------ ------ ----- Total Capitalization 7,920 100% 7,991 100% -------- ------ ------- ----- Current Liabilities Long-term debt and preferred stock due within twelve months 169 32 Short-term debt 811 721 Short-term debt - CSW Credit, Inc. 749 636 Loan notes 32 56 Accounts payable 624 573 Accrued taxes 190 171 Accrued interest 84 87 Other 218 238 -------- ------- 2,877 2,514 -------- ------- Deferred Credits Accumulated deferred income taxes 2,410 2,431 Investment tax credits 267 278 Other 270 237 ------- ------- 2,947 2,946 ------- ------- $13,744 $13,451 ======== ======= The accompanying notes to consolidated financial statements are an integral part of these statements. 2-43 CSW Consolidated Statements of Cash Flows Central and South West Corporation
For the Years Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (millions) OPERATING ACTIVITIES Net income for common stock $ 440 $ 153 $ 429 Non-cash Items and Adjustments Depreciation and amortization 552 529 521 Deferred income taxes and investment tax credits (56) 110 62 Preferred stock dividends 8 12 18 Gain on reacquired preferred stock 1 (10) -- Charges for investments and assets 39 53 147 Gain on sale of investments (13) -- (192) Changes in Assets and Liabilities Accounts receivable (187) (140) (86) Accounts payable 69 45 23 Accrued taxes 20 (153) (14) Fuel recovery 109 (37) (89) Other (40) 164 56 -------- -------- -------- 942 726 875 -------- -------- -------- INVESTING ACTIVITIES Construction expenditures (492) (507) (521) Acquisitions expenditures -- -- (1,394) Disposition of plant (5) -- -- CSW Energy/CSW International projects (184) (382) (124) Sale of National Grid assets -- -- 99 Cash proceeds from sale of investments 56 -- 690 Other (10) (15) (36) -------- -------- -------- (635) (904) (1,286) -------- -------- -------- FINANCING ACTIVITIES Common stock sold 11 20 477 Proceeds from issuance of long-term debt 154 -- 437 SEEBOARD acquisition financing -- -- 350 Reacquisition/Maturity of long-term debt (182) (253) (239) Redemption of preferred stock (28) (114) (1) Trust Preferred Securites sold -- 323 -- Other financing activities (4) (3) 67 Change in short-term debt 202 414 (395) Payment of dividends (378) (383) (376) -------- -------- -------- (225) 4 320 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents -- (5) (56) -------- -------- -------- Net Change in Cash and Cash Equivalents 82 (179) (147) Cash and Cash Equivalents at Beginning of Year 75 254 401 ======== ======== ======== Cash and Cash Equivalents at End of Year $ 157 $ 75 $ 254 ======== ======== ======== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 446 $ 396 $ 356 ======== ======== ======== Income taxes paid $ 357 $ 301 $ 196 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 2-44 CENTRAL AND SOUTH WEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations CSW is a registered holding company under the Holding Company Act subject to regulation by the SEC. The U.S. Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of the U.S. Electric Operating Companies is the generation, transmission, and distribution of electric power and energy. These companies are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission, and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Texas Commission. The principal business of SEEBOARD is the distribution and supply of electricity in Southeast England. SEEBOARD is subject to rate regulation by the DGES. In addition to electric utility operations, CSW has subsidiaries involved in a variety of business activities. CSW Energy and CSW International pursue cogeneration and other energy-related ventures. CSW Credit factors the accounts receivable of affiliated and non-affiliated companies. C3 Communications pursues telecommunications projects. CSW Leasing has investments in leveraged leases. EnerShop offers energy-management services. CSW Energy Services pursued retail energy markets outside of CSW's traditional service territory, until these activities were discontinued in early 1999. The more significant accounting policies of the CSW System are summarized below. Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. The consolidated financial statements for CPL, PSO and SWEPCO include their respective capital trusts. All significant inter-company transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities along with disclosure of contingent liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fixed Assets and Depreciation U.S. Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used during construction. SEEBOARD's fixed assets are stated at their original fair market value which existed on the date of acquisition plus the original cost of property acquired or constructed since the acquisition, less disposals. 2-45 Provisions for depreciation of plant are computed using the straight-line method, generally at individual rates applied to the various classes of depreciable property. The annual average consolidated composite rates of the Registrants are presented in the following table. CSW CPL PSO SWEPCO WTU -------------------------------------------------- 1998 3.4% 3.0% 3.1% 3.3% 3.2% 1997 3.4% 3.0% 3.3% 3.2% 3.3% 1996 3.4% 2.9% 3.6% 3.2% 3.2% CPL Nuclear Decommissioning of STP At the end of STP's service life, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its pre-plant condition. CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalation for expected inflation to the expected time of decommissioning, and is net of expected earnings on the trust fund. CPL's portion of the costs of decommissioning STP was estimated to be $258 million in 1995 dollars based on a site specific study completed in 1995. CPL is accruing and recovering these decommissioning costs through rates based on the service life of STP at a rate of $8.2 million per year. The funds are deposited with a trustee under the terms of an irrevocable trust and are reflected in CPL's consolidated balance sheets as Nuclear Decommissioning Trust with a corresponding amount accrued in Accumulated Depreciation. On CSW's consolidated balance sheets, the irrevocable trust is included in Deferred Charges and Other Assets, Other, with a corresponding amount accrued in Accumulated Depreciation. In CSW's and CPL's consolidated statements of income, the income related to the irrevocable trust is recorded in Other Income and Deductions, Other. In CPL's consolidated statements of income, the interest expense related to the irrevocable trust is recorded in Interest Charges, Interest on Short-term Debt and Other. In CSW's consolidated statements of income the interest expense related to the irrevocable trust is recorded in Interest and Other Charges, Interest on Short-term Debt and Other. At December 31, 1998, the nuclear trust balance was $66.0 million. Electric Revenues and Fuel The U.S. Electric Operating Companies record revenues based upon cycle-billings. Electric service provided subsequent to billing dates through the end of each calendar month are accrued for by estimating unbilled revenues in accordance with industry standards. CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of base rates whereby over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers after Texas Commission approval. The cost of fuel is charged to expense as incurred, with resulting fuel over-recoveries and under-recoveries recorded as regulatory assets and liabilities. PSO recovers fuel costs in Oklahoma through service level fuel cost adjustment factors, and SWEPCO recovers fuel costs in Arkansas and Louisiana through automatic fuel recovery mechanisms. The application of these mechanisms varies by jurisdiction. See ITEM 1. BUSINESS, FUEL RECOVERY - U.S. Electric and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information about fuel recovery. 2-46 CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale customers through formula rates. CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In addition to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including spent fuel disposal fees assessed on the basis of net MWHs sold from STP and DOE special assessment fees for decontamination and decommissioning of the enrichment facilities on the basis of prior usage of enrichment services. Accounts Receivable CSW Credit purchases, without recourse, the billed and unbilled accounts receivable of the U.S. Electric Operating Companies, certain non-affiliated public utility companies and, prior to its sale by CSW in June 1996, Transok. Regulatory Assets and Liabilities For their regulated activities, the U.S. Electric Operating Companies follow SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent probable future revenue to the company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory assets are currently being recovered in rates or are probable of being recovered in rates. The unamortized asset balances are included in the table below.
CSW CPL PSO SWEPCO WTU -------- ---------------------------------------------- (millions) (thousands) As of December 31, 1998 Regulatory Assets Deferred plant costs $ 497 $482,447 $-- $-- $14,910(3) Mirror CWIP asset 257 256,702 -- -- -- Income tax related regulatory assets, net 308 360,482 -- -- -- Deferred restructuring and rate case costs 26 16,236 (1) -- -- 9,765(3) OPEBs 2 -- 2,333 -- -- Under-recovered fuel costs 4 -- -- -- 3,980 Loss on reacquired debt 153 78,944 15,943 36,803 21,307 Fuel settlement 14 -- -- 13,746 (4) -- Other 10 9,159 -- -- 1,196 ======== ============================================== $1,271 $1,203,970 $18,276 $ 50,549 $51,158 ======== ============================================== Regulatory Liabilities Refunds due customers $ 21 $ (498) $15,240 $ 7,239 $ (329) Income tax related regulatory liabilities, net -- -- 35,818 4,931 12,088 ======== ============================================== $ 21 $ (498) $51,058 $ 12,170 $11,759 ======== ==============================================
2-47
CSW CPL PSO SWEPCO WTU -------- ----------------------------------------------- (millions) (thousands) As of December 31, 1997 Regulatory Assets Deferred plant costs $503 $484,277 $ -- $ -- $18,637 (3) Mirror CWIP asset 285 285,431 -- -- -- Income tax related regulatory assets, net 329 390,149 -- -- -- Deferred restructuring and rate case costs 36 24,049 (1) -- -- 12,369 (3) OPEBs 3 -- 2,829 -- -- Under-recovered fuel costs 84 43,229 15,365 (2) 13,013 11,968 Loss on reacquired debt 166 84,070 16,882 39,873 24,710 Fuel settlement 16 -- -- 15,710 (4) -- Other 19 13,338 377 2,140 2,787 ======== =============================================== $1,441 $1,324,543 $35,453 $70,736 $70,471 ======== =============================================== Regulatory Liabilities Refunds due customers $ 64 $ 63,713 $ -- $ -- $366 Income tax related regulatory liabilities, net -- -- 41,793 10,072 9,482 Other 1 1,205 -- -- -- ======== =============================================== $ 65 $ 64,918 $41,793 $10,072 $9,848 ======== ===============================================
(1)Earning no return, amortized by the end of 2000. (2)Earning no return, amortized over twelve month period, recalculated twice each year. (3)Earning no return, amortized through 2002. (4)Earning no return, amortized by the end of 2006. In accordance with orders of the Texas Commission, CPL and WTU deferred carrying costs, as well as operating costs, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began commercial operation until the date the plants were included in rate base. CPL is amortizing and recovering these deferred costs through rates over the life of the plant. WTU began amortizing and recovering such costs over a seven year period beginning January 1, 1996, prior to this date it was amortized over the life of the plant. In accordance with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which is being amortized over the life of STP. For further information regarding the deferred plant costs at CPL and WTU, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. For additional information regarding regulatory accounting, reference is made to NOTE 18. NEW ACCOUNTING STANDARDS and MD&A, RECENT DEVELOPMENTS AND TRENDS, Regulatory Accounting. Goodwill Resulting from SEEBOARD Acquisition The acquisition of SEEBOARD was accounted for as a purchase combination. An allocation of the purchase price has been performed and is reflected in the consolidated financial statements. The goodwill is being amortized on a straightline basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31, 1998 was $1.4 billion. CSW continually evaluates whether circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision. Foreign Currency Translation The financial statements of SEEBOARD U.S.A., which are included in CSW's consolidated financial statements, have been translated from British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are translated at the exchange rate at the end of the period and all income statement items are translated at the average exchange rate for the applicable period. At December 31, 1998 the current exchange rate was approximately (pound)1.00=$1.66, and the average exchange rate for the twelve month period ended December 31, 1998 was approximately (pound)1.00=$1.66. At December 31, 1997 the current exchange rate was approximately (pound)l.00=$1.65, and the average exchange rate for the twelve month period ended December 31, 1997 was 2-48 approximately (pound)l.00=$1.58. At December 31, 1996 the current exchange rate was approximately (pound)l.00=$1.71, and the average exchange rate for the twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56. All the resulting translation adjustments are recorded directly to Accumulated Other Comprehensive Income on CSW's Consolidated Balance Sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The non-cash impact of the changes in exchange rates on cash and cash equivalents, resulting from the translation of items at the different exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in Effect of Exchange Rate Changes on Cash and Cash Equivalents. See NOTE 20. SUBSEQUENT EVENT for information regarding CSW's investments in Brazil. Cash Equivalents Cash equivalents are considered to be highly liquid instruments with a maturity of three months or less. Accordingly, temporary cash investments and advances to affiliates are considered cash equivalents. Risk Management CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound. CSW has utilized certain risk management tools, including cross currency swaps, foreign currency futures and foreign currency options, to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. CSW accounts for these transactions as hedge transactions and any gains or losses associated with the risk management tools are recognized in the financial statements at the time the hedge transactions are settled. CSW believes its credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT; NOTE 7. FINANCIAL INSTRUMENTS; NOTE 18. NEW ACCOUNTING STANDARDS and NOTE 20. SUBSEQUENT EVENT for additional information. Securities Available for Sale CSW accounts for its investments in equity securities in accordance with SFAS No. 115. The investments have been designated as available for sale, and as a result are stated at fair value. Unrealized holding gains and losses, net of related taxes, are included in Accumulated Other Comprehensive Income on CSW's Consolidated Balance Sheets. Information related to these securities available for sale as of December 31, 1998 is presented in the following table. Original Unrealized Holding Cost Gains / (Losses) Fair Value ---------------------------------------- Securities available for sale $110 $(44) $66 As of December 31, 1998, CSW International has invested $110 million in stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the year-end market value of the shares and foreign exchange rates, the value of the investment at December 31, 1998 is $66 million. The reduction in the carrying value of this investment has been reflected in Accumulated Other Comprehensive Income in CSW's Consolidated Balance Sheets. Management views its investment in Chile as a long-term investment strategy. Management will continue to closely 2-49 evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company. Inventory CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil fuel inventories. SWEPCO continues to utilize the weighted average cost method pending approval of the Arkansas Commission to utilize the LIFO method. At December 31, 1998, none of the U.S. Electric Operating Companies had LIFO reserves. LIFO reserves are the excess of the inventory replacement cost over the carrying amount on the balance sheet. Comprehensive Income Consistent with the requirements of SFAS No. 130, CSW discloses comprehensive income. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. See NOTE 18. NEW ACCOUNTING STANDARDS. Components of Other Comprehensive Income The following table provides the components that comprise the balance sheet amount in Accumulated Other Comprehensive Income. Components 1998 1997 1996 ---------------------------------------------------------------- (millions) Foreign Currency Translation Adjustment $34 $27 $34 Unrealized Losses on Securities (20) 1 (20) Minimum Pension Liability (6) (5) (6) --------------------------- $8 $23 $8 --------------------------- Segment Reporting CSW has adopted SFAS No.131, which requires disclosure of select financial information by business segment as viewed by the chief operating decision-maker. See NOTE 18. NEW ACCOUNTING STANDARDS. Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1998 presentation. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information related to the classification of Transok activities. 2. LITIGATION AND REGULATORY PROCEEDINGS Litigation Related to the Rights Plan and AEP Merger Two lawsuits have been filed in Delaware state court seeking to enjoin the AEP Merger. CSW and each of its directors have been named as defendants in both cases. The first suit alleges that the Rights Plan, approved by the CSW Board of 2-50 Directors on September 27, 1997 and which became effective after SEC approval under the Holding Company Act on December 19, 1997, constitutes a "poison pill" precluding acquisition offers and resulting in a heightened fiduciary duty on the part of the CSW Board of Directors to pursue an auction-type sales process to obtain the best value for CSW stockholders. The second suit alleges that the AEP Merger is unfair to CSW stockholders in that it does not recognize the underlying intrinsic value of CSW's assets and its future profitability. The second suit also seeks an auction-type sale process. CSW believes that both suits are without merit and intends to defend them vigorously. CPL Rate Review - Docket No. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million. On October 16, 1997, the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be reduced an additional $13 million on May 1, 1999. CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property; (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999; and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL sought a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology. The court denied the temporary injunction and the "Glide Path" rate reduction was implemented in May 1998. Hearings on the appeal were held during the third quarter of 1998, and a judgment was issued in February 1999 affirming the Texas Commission order, except for a consolidated tax issue in the amount of $6 million, which will be remanded to the Texas Commission. While CPL intends to appeal this most recent order to the Court of Appeals, management is unable to predict how the final resolution of these issues will ultimately affect CSW's and CPL's results of operations and financial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has recorded approximately $1.2 billion of regulatory-related assets at December 31, 1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, CPL, that all or some portion of its business, no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. CPL would also be required to evaluate whether there was any impairment of any deregulated plant assets. In addition, CPL and CSW could experience, depending on the timing and amount of any write-off, a material adverse effect on their results of operations and financial condition. See MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No. 14965 for a discussion of the CPL 1997 Final Order. 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. 2-51 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 Supreme Court of Texas' opinion in 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 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, 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 that CPL will receive approval of its deferred accounting amounts or that 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 operation or financial condition. CPL Fuel Proceeding On December 31, 1998, CPL filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. CPL did not seek a surcharge of the reconciled balance in the filing. During the reconciliation period of July 1, 1995 through June 30, 1998, CPL incurred $828.5 million in eligible fuel and fuel-related expenses. The Texas jurisdictional allocation of such fuel and fuel-related expenses is $783.4 million. In addition to requesting reconciliation of its fuel and fuel-related expenses for the reconciliation period, CPL requested the Texas Commission to authorize CPL to recover the reward that was earned during the reconciliation period under the performance standard adopted in Docket No. 14965 for CPL's share of STP. In Docket No. 14965, the Texas Commission adopted a three-year average capacity factor of 83% performance standard for STP. During the reconciliation period, STP operated at a net capacity factor of 93.1%, saving customers $28.4 million in fuel and purchased power costs, as compared to operation at an 83% capacity factor. CPL proposed an equal sharing with its customers of the benefit, or reward, resulting from STP operation during the reconciliation period above the 83% capacity factor target, net of any reduction of eligible fuel expense as a result of this case. CPL requested that it be authorized to recover the Texas retail amount, or $13.4 million, of its 50% share of the performance standard reward, by including 1/36, or $373,003 in retail eligible fuel expense each month for the three-year period following the Texas Commission's order in this case. These amounts will be included in calculating the monthly over-recovery or under-recovery balances. CPL further requested that it be authorized to apply the amounts of the reward recovered through Texas retail eligible fuel expense as additional amortization of its STP deferred accounting regulatory asset. CPL also made an alternative proposal if consistent and uniform equal sharing of potential penalties and rewards is not intended by the Texas Commission. CPL proposed that it be authorized to recover the Texas portion of 2-52 50% of the reward by including 1/36, or $373,003 in Texas retail eligible fuel expense each month for three years following the Texas Commission order in this case and that the remaining 50% of the reward be "banked" to be used against potential future penalties or other disallowance of fuel costs. CPL Municipal Franchise Fee Litigation In May 1996, the City of San Juan, Texas filed a purported class action in Hidalgo County, Texas District Court on behalf of all cities served by CPL based upon CPL's alleged underpayment of municipal franchise fees. The plaintiffs' petition asserts various contract and tort claims against CPL as well as certain audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed a counterclaim for any overpayment of franchise fees it may have made as well as its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement asserting that the Texas Commission has primary jurisdiction over the claims. In May 1996 and December 1996, respectively, the Cities of Pharr, Texas and San Benito, Texas filed individual suits making claims virtually identical to those claimed by the City of San Juan. In January, 1997, CPL filed an original petition at the Texas Commission requesting the Texas Commission to declare its jurisdiction over CPL's collection and payment of municipal franchise fees. In April 1997, the Texas Commission issued a declaratory order in which it declined to assert jurisdiction over the claims of the City of San Juan. CPL appealed the Texas Commission's decision to the Travis County, Texas District Court, which affirmed the Texas Commission ruling on February 19, 1999. After the Texas Commission's order, the Hidalgo County District Court overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County District Court entered an order certifying the case as a class action. CPL appealed this order to the Corpus Christi Court of Appeals. In February 1998, the Corpus Christi Court of Appeals affirmed the trial court's order certifying the class. CPL appealed the Corpus Christi Court of Appeals ruling to the Texas Supreme Court, which declined to hear the case. In August 1998, the Hidalgo County District Court ordered the case to mediation and suspended all proceedings pending the completion of the mediation. The mediation was completed in December, 1998, but the case was not resolved. On January 5, 1999, a class notice was mailed to each of the CPL cities; the cities have until April 5, 1999, to decide whether or not to participate in the lawsuit as a class member. Although CPL believes that it has substantial defenses to the cities' claims and intends to defend itself against the cities' claims and pursue its counterclaims vigorously, CPL cannot predict the outcome of the municipal franchise fee litigation. CPL Anglo Iron Litigation In April 1998, CPL was sued by Anglo Iron in the United States District Court for the Southern District of Texas, Brownsville Division, for claims arising from the clean up of a site owned and operated by Anglo Iron in Harlingen, Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common law contribution and indemnity for alleged response and clean up costs of $328,139 and damages of $150,000 for "loss of fair market value" of the site. In January 1999, the parties settled the case, and the case was dismissed with prejudice by the court in February 1999. The settlement did not have a material adverse impact on CSW's or CPL's consolidated results of operations or financial condition. CPL Sinton Landfill Litigation CPL, along with over 30 others, is named as a defendant in the district court in San Patricio County, Texas. The plaintiffs, approximately 500 current and former landowners in the vicinity of a landfill site near Sinton, Texas, each of whom alleges $10 million property damage and personal injury as a result of alleged contamination from the site. Plaintiffs made a collective settlement demand upon CPL for $1.1 million. In January, 1999, in exchange for a non-material sum, CPL reached an agreement with Browning Ferris Industries, 2-53 Inc., the operator of the site, for Browning Ferris Industries, Inc. to indemnify CPL for any judgment or settlement amount that CPL may owe to the plaintiffs in this case. CPL Valero Litigation In April 1998, Valero filed suit against CPL in Nueces County, Texas District Court, alleging claims for breach of contract and negligence. Valero's suit seeks in excess of $11 million as damages for property loss and lost profits allegedly incurred after an interruption of electricity to its facility in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of this litigation. However, management believes that CPL has valid defenses to Valero's claims and intends to defend the matter vigorously. Management also believes that the ultimate resolution of this matter will not have a material adverse impact on CSW's or CPL's consolidated results of operations or financial condition. CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285) A joint complaint filed by CPL and WTU with the Texas Commission asserted that since January 1, 1997, Texas Utilities Electric Company had been effectively double charging for transmission service within ERCOT. A proposal for decision received in February 1998 recommended approval of a CPL and WTU proposed reduction of $15.5 million annually of payments to Texas Utilities Electric Company under FERC-approved transmission service agreements against amounts that CPL and WTU would otherwise owe Texas Utilities Electric Company pursuant to Texas Commission rules for transmission service in ERCOT. The Texas Commission approved the proposal in September 1998. Even though Texas Utilities Electric Company has appealed the Texas Commission final order, they refunded $26.6 million to CPL and WTU in November 1998. Prior to the Texas Commission's September 1998 decision, the $15.5 million annual payment to Texas Utilities Electric Company was allocated to the U.S. Electric Operating Companies. As a result of this order the payment is recorded on CPL's and WTU's books as a reduction to ERCOT transmission expense. Transmission Coordination Agreement The Transmission Coordination Agreement provides the means by which the U.S. Electric Operating Companies will operate, plan and maintain the four separate transmission systems as a single system. The agreement also establishes a process for the U.S. Electric Operating Companies to allocate revenues received under open access transmission tariffs. On August 7, 1998, the FERC accepted the Transmission Coordination Agreement for filing, suspended it for a nominal period, and made it effective retroactive to January 1, 1997, subject to refund and investigation. PSO Rate Review In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings and in July 1997 recommended a rate reduction of $76.8 million for PSO. On October 23, 1997, the Oklahoma Commission issued a final order approving a stipulated agreement with parties to settle the rate inquiry. The PSO 1997 Rate Settlement Agreement called for PSO to lower its retail base rates beginning with the December 1997 billing cycle by approximately $35.9 million annually, or a 5.3 percent decrease below the then current level of retail rates. Part of the rate reduction included a reduction in annual depreciation expense of approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement resulted in PSO making a one-time $29 million refund to customers in December 1997. The PSO 1997 Rate Settlement Agreement also called for PSO to eliminate or amortize before its next rate filing approximately $41 million in certain deferred assets, approximately $26 million of which had been expensed in 1996. The remaining $15 million of deferred assets, which included approximately $9 million of costs incurred for customer energy management incentive programs, 2-54 were written off in 1997. The financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations were lower revenues of $31.5 million and lower expenses of $4.1 million which included the write-off of the previously mentioned deferred assets. The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing impact because of the rate decrease. However, it reduced significant risks for PSO related to this regulatory proceeding and should allow PSO's rates to remain competitive for the foreseeable future. PSO PCB Cases PSO has been named a defendant in petitions filed in state court in Oklahoma in February and August 1996. The petitions allege that the plaintiffs suffered personal injury and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April 1982 at the Page Belcher Federal Building in Tulsa, Oklahoma. Each of the plaintiffs seeks actual and punitive damages in excess of $10,000. Other claims arising from this incident have been settled and the suits dismissed. The first case to go to trial is anticipated to begin in May 1999. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Management believes that the remaining claims are covered by insurance. Management also believes that the ultimate resolution of the remaining lawsuits will not have a material adverse effect on CSW's or PSO's results of operations or financial condition. PSO Sand Springs/Grandfield, Oklahoma Sites In 1989, PSO found PCB contamination in a Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to comply with provisions of the Toxic Substances Control Act. The EPA alleged improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual cleanup at the site. The complaint also alleged failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims in the suit by March 1998. The settlement did not have a material adverse effect on CSW's or PSO's results of operations or financial condition. SWEPCO Fuel Proceeding In May 1997, SWEPCO filed with the Texas Commission an application to reconcile fuel costs and implement a 12 month surcharge of fuel cost under-recoveries. Because of the uncertainty as to when a surcharge may be implemented, SWEPCO did not establish in its filing a proposed surcharge period or a total surcharge amount, which would reflect interest through the entire surcharge period. However, SWEPCO indicated that it had 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. On December 8, 1997, SWEPCO and the other parties to the above consolidated proceedings before the Texas Commission filed a settlement on all issues except whether transmission equalization payments should be included in fuel or base revenues. Of the $16.8 million in under-recovered fuel costs as of December 31, 1996, the settlement resulted in a decrease of the under-recovered fuel costs, and the resulting surcharge recovery, by $6.0 million. The settlement also provides that SWEPCO's fuel and fuel-related expenses during the reconciliation period were reasonable and necessary and would allow them to be reconciled as eligible fuel expense. Also, the settlement provides that SWEPCO's actions in litigating and renegotiating certain fuel contracts, together with 2-55 the prices, terms and conditions of the renegotiated contracts were prudent. The $6.0 million reduction was not associated with any particular activity or issue within the fuel proceedings. On April 8, 1998, the ALJ assigned to this proceeding, issued a proposal for decision regarding the one outstanding issue, whether transmission equalization payments should be included in eligible fuel expense. The proposal for decision recommended that SWEPCO be allowed to include transmission equalization expense in eligible fuel expense. On May 19, 1998, the Texas Commission reversed the ALJ and did not allow SWEPCO to recover its transmission equalization payments as a component of eligible fuel expense. This ruling resulted in an earnings reduction of approximately $1.8 million, which was recorded in the second quarter of 1998. On June 8, 1998, SWEPCO filed a motion for rehearing on the transmission equalization issue, which was denied through operation of law. After the Texas Commission's order on May 19, 1998, SWEPCO had still under-recovered its fuel and fuel related expenses. On July 1, 1998, the Texas Commission issued an order allowing SWEPCO to surcharge its Texas retail customers $6.9 million of under-recovered fuel and fuel related expenses and associated interest. The surcharge began in July 1998 and will end in June 1999. SWEPCO has filed an appeal regarding this matter in the State District Court of Travis County, Texas. Management is unable to predict the ultimate outcome of this litigation. However, SWEPCO will drop the appeal if the AEP merger settlement is approved and the merger is consummated. 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 have benefited 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 was held before the Supreme Court of Texas in October 1997. On March 13, 1998, the Supreme Court of Texas affirmed the judgment of the court of appeals. On April 7, 1998, SWEPCO filed a motion for rehearing of the Supreme Court of Texas' decision. On June 5, 1998, the motion for rehearing was denied and the court reaffirmed the judgment of the court of appeals. SWEPCO does not plan additional litigation for this lawsuit. No financial impact resulted from these proceedings other than the legal expenses which were expensed as incurred. SWEPCO Lignite Mining Agreement Litigation SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1 and jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement with the DHMV, a partnership for the mining and delivery of lignite from a portion of these reserves. On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its partners in the United States District Court for the Western District of Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining agreement, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed an answer denying the allegations in the suit and filed a counterclaim asserting various contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have denied the allegations in the counterclaims on the grounds the counterclaims have no merit. On January 8, 1999, SWEPCO and CLECO amended 2-56 the claims against DHVM in the lawsuit to include a request that, if the court agrees that DHMV has breached the lignite mining agreement that the lignite mining agreement be terminated. This federal court suit is set for trial beginning in November 1999. SWEPCO intends to vigorously prosecute the claims against DHMV and defend against the counterclaims which DHMV has asserted. Although SWEPCO cannot predict the ultimate outcome of this matter, management believes that the resolution of this matter will not have a material adverse effect on SWEPCO's results of operations or financial condition. WTU Fuel Proceedings Fuel Reconciliation On December 31, 1997, WTU filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. WTU did not seek a surcharge of the reconciled balance in the December 31, 1997 filing. During the reconciliation period of July 1, 1994 through June 30, 1997, WTU incurred approximately $422 million in eligible fuel and fuel-related expenses to generate and purchase electricity. The Texas jurisdictional allocation of such fuel and fuel-related expenses is approximately $295 million. On June 11, 1998, WTU amended its application to reconcile fuel costs to remove a credit from the calculation of eligible fuel in the amount of $3 million related to transmission equalization payments. This amendment was a result of the Texas Commission's ruling concerning transmission equalization payments in the SWEPCO fuel reconciliation described above. On October 14, 1998, the general counsel of the Texas Commission and WTU agreed to a non-unanimous stipulation regarding WTU's eligible fuel and fuel-related expenses. One party does not accept the stipulation's proposed treatment of transmission equalization payment, discussed above. Parties filed briefs in November 1998, and a proposal for decision from the ALJ was received January 29, 1999. In the proposal for decision, the ALJ recommends recovery of all eligible fuel and fuel-related expenses requested by WTU except for $100,000, or 0.03% of the amount requested. A Texas Commission decision is expected by the end of the first quarter of 1999. Management is unable to predict the outcome of the fuel proceeding. Fuel Factor Filing In March 1998, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $6.8 million, including accumulated interest over a six month period to collect its under-recovered fuel costs. WTU implemented the revised fuel factors with its June 1998 billing. Other The Registrants are party to various other legal claims, actions and complaints 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. 2-57 3. COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that CSW, including the U.S. Electric Operating Companies, SEEBOARD and other operations, will spend approximately $855 million in capital expenditures (but excluding capital that may be required for acquisitions) during 1999. Substantial commitments have been made in connection with these programs. CPL-$224 million PSO-$91 million SWEPCO-$108 million WTU-$51 million Fuel and Related Commitments To supply a portion of their fuel requirements, the U.S. Electric Operating Companies have entered into various commitments for the procurement of fuel. 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 December 31, 1998, the maximum amount SWEPCO believes it could potentially assume is $93 million. However, the maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding at December 31, 1998 was $71 million. SWEPCO South Hallsville Lignite Mine As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining at the South Hallsville lignite mine and expansion into the Marshall South Lignite Project area, SWEPCO has agreed to 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. Other Commitments and Contingencies 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 NRC 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 1997. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self insurance totaling $8.92 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, for anyone nuclear incident payable at $10 million per year per reactor. An additional surcharge of five percent of the maximum may be payable if the total amount of public claims and legal costs exceeds the 2-58 limit. 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. CPL owns 25.2% of each reactor. The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by NEIL. Policies of insurance issued by 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 owners' respective ownership interest in STP. CPL purchases, 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 the result of a covered accident that shuts down production at one or both of the STP Units for more than 23 consecutive weeks. In the event of an outage which is the result of the same accident, insurance will reimburse CPL up to 80 percent of the recovery. The maximum amount recoverable for a single unit outage is $133.8 million for both Units 1 and 2. CPL is subject to an additional assessment of up to $1.54 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceed the accumulated funds available under the policy. CPL renewed its current NEIL I Business Interruption and/or Extra Expense policy on October 1, 1998. SWEPCO Cajun Asset Purchase Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million in cash, subject to adjustment pursuant to the terms of the asset purchase agreement proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for SWEPCO and the Cajun member cooperatives to enter into long-term power supply agreements which will provide the Cajun member cooperatives with rate plan options and market access provisions designed to ensure the long-term competitiveness of the cooperatives. Eight cooperatives and Central Louisiana Electric Company, Inc., successor to Teche Electric Cooperative, agreed to purchase power from SWEPCO, if the bankruptcy court confirms SWEPCO's plan. Two competing plans of reorganization for the non-nuclear assets of Cajun were filed with the bankruptcy court. On September 25, 1998, Enron Capital and Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid. The trustee for Cajun supports the sole remaining competing bid of $1.19 billion by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy, Inc., Northern States Power Company and Zeigler Coal Holding Company. Confirmation hearings in Cajun's bankruptcy case were completed in May 1998. On August 11, 1998, the U.S. Fifth Circuit Court of Appeals overturned a U.S. District Court for the Middle District of Louisiana ruling that disqualified the SWEPCO Plan from being considered in the Cajun bankruptcy reorganization process. The U.S. Fifth Circuit Court of Appeals said the U.S. 2-59 District Court for the Middle District of Louisiana erred in reversing the bankruptcy court, which had originally had determined that $1 million in assistance payments from SWEPCO to the Cajun Members Committee did not constitute vote-buying and were legal. On October 30, 1998, the U.S. Fifth Circuit Court of Appeals rejected requests for rehearing by the Cajun Trustee, the RUS and others of its decision to overturn a U.S. District Court for the Middle District of Louisiana ruling that disqualified the SWEPCO Plan from competing in the Cajun bankruptcy reorganization process. On February 3, 1999, the Cajun Trustee asked the United States Supreme Court to review the U.S. Fifth Circuit Court of Appeals decision that reinstated the SWEPCO Plan in the bankruptcy court. On October 13, 1998, the trustee for Cajun sought an injunction preventing the Louisiana Commission from acting on a rate case involving Cajun, contending that the Louisiana Commission's involvement in the rate case was a violation of the bankruptcy court's jurisdiction over Cajun's assets and thus by extension, its rates. The bankruptcy court enjoined individual commissioners of the Louisiana Commission from acting on issues related to possible changes in wholesale electric rates of Cajun. The bankruptcy court dismissed the Louisiana Commission as a defendant in the case, but permitted the action to continue against the commissioners of the Louisiana Commission and the executive secretary of the Louisiana Commission. On February 11, 1999, the bankruptcy court issued a ruling that denied confirmation of both the Louisiana Generating LLC reorganization plan and the SWEPCO Plan. Although both plans were rejected, the bankruptcy court said its ruling should provide guidance for the bidders to modify their existing plans and a status conference has been scheduled for March 1999. No timetable for modifications was set. Louisiana Generating LLC reorganization plan was denied confirmation due to issues related to power supply agreements with Cajun. SWEPCO and the Cajun Members Committee are co-plaintiffs in litigation regarding a central issue in the bankruptcy case, whether a competing plan supported by the Cajun trustee can force the cooperatives to buy power for 25 years under the non-consensual arrangements contained in that plan. The bankruptcy court ruled that the cooperatives' existing supply agreements with Cajun cannot be assumed in the manner proposed in the Louisiana Generating LLC reorganization plan. The SWEPCO Plan was denied confirmation due to several technical issues upon which the bankruptcy court ruled that the SWEPCO Plan did not meet the requirements of the bankruptcy code. SWEPCO expects to modify the SWEPCO Plan consistent with the bankruptcy court's direction and to continue to pursue the acquisition of the non-nuclear assets of Cajun. The bankruptcy court has scheduled a status conference for March 15, 1999 to determine the next step in the process. Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their respective boards of directors approvals. If a SWEPCO reorganization plan for Cajun is ultimately confirmed by the bankruptcy court, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external non-recourse borrowings and internally generated funds. There can be no assurance that the bankruptcy court will confirm a SWEPCO reorganization plan for Cajun or, if it is confirmed, that federal and state regulators will approve it. As of December 31, 1998, SWEPCO had deferred $11.9 million in costs related to the Cajun acquisition on its consolidated balance sheet, which would be expensed if a SWEPCO reorganization plan for Cajun was not ultimately successful. SWEPCO Rental and Lease Commitments SWEPCO has entered into various financing arrangements primarily with respect to coal transportation and related equipment which are treated as operating leases for rate-making purposes. At December 31, 1998, leased assets of $45.7 million, less accumulated amortization of $41.4 million, were included 2-60 in Electric Utility Plant on the Consolidated Balance Sheets and at December 31, 1997, leased assets were $45.7 million, less accumulated amortization of $39.0 million. SWEPCO Biloxi, Mississippi MGP Site SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as the subsequent sampling of the site. The sampling results indicated contamination at the property as well as the possibility of contamination of an adjacent property. A risk assessment was submitted to the MDEQ, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to a residential scenario is appropriate since this site has been industrial/commercial for more than 100 years, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. Resolution of this issue is still pending. Currently, a feasibility study is being conducted to more definitely evaluate remedial strategies for the property. The feasibility study process will require public input prior to a final decision and will result in a remediation strategy along with associated costs. SWEPCO has incurred approximately $200,000 to date for its portion of the cleanup of this site, and based on its preliminary estimates, anticipates that an additional $2 million may be incurred. Accordingly, SWEPCO has accrued an additional $2 million for the cleanup of the site. The State of Mississippi has passed Brownfield legislation, which provides for levels of cleanup standards. Although regulations implementing this legislation are not expected to be finalized until the summer of 1999, the MDEQ has indicated that it will work with SWEPCO in the interim within the legislation's intent to allow the project to move forward. SWEPCO / CPL Voda Petroleum Superfund Site SWEPCO and CPL received correspondence from the EPA notifying SWEPCO and CPL that they are PRPs to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO and CPL conducted a records review to compile documentation relating to SWEPCO's and CPL's past use of the Voda Petroleum site. The matter was settled through a payment of $1,400 each by SWEPCO and CPL. SWEPCO Wilkes Power Plant Copper Limit Compliance The EPA has issued Wilkes power plant, which is owned by SWEPCO, an administrative order for wastewater permit violations related to copper limits. The administrative order is for a show cause meeting only. Past and future compliance activities, including activities that have been conducted to determine the source of copper were presented by SWEPCO during this meeting, which was held on August 13, 1998, which resulted in continued negotiations. The EPA has not issued an administrative penalty order nor a referral to the United States Department of Justice for judicial action with monetary fines. On December 29, 1998, the TNRCC fined SWEPCO $8,250 for the same issue on the state permit, which was paid in February 1999. SEEBOARD London Underground Commitment SEEBOARD has committed (pound)83 million, or $137 million, for costs associated with its contract related to the London Underground transportation system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a 2-61 $1.6 billion, 30 year contract as a joint venture partner to operate, maintain, finance and renew the high-voltage power distribution network of the London Underground. SEEBOARD - Third Party Pension Litigation In the U.K., National Grid Group and National Power have been involved in continuing litigation in respect of their use of actuarial surpluses declared in the electricity industry's occupational pension scheme, the Electricity Supply Pension Scheme. A high court decision in favor of the National Grid Group and National Power was appealed and on February 10, 1999 the court of appeal ruled that the particular arrangements made by these corporations to dispose of the surplus, partly by canceling liabilities relating to additional pension payments resulting from early retirement, were invalid due to procedural defects. SEEBOARD employees are members of the Electricity Supply Pension Scheme and SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of the payments cancelled was approximately $33 million. The court of appeal did not order the National Grid Group and National Power to make payment to the Electricity Supply Pension Scheme but will hold a further hearing to decide what action to take. It is likely that the case will then be referred to the U.K. House of Lords. The final outcome of the hearing, or any referral to the U.K. House of Lords, cannot be determined and therefore it is not possible to quantify the impact, if any, on the results of operations and financial condition of CSW and/or SEEBOARD. Diversified Electric Loans and Commitments In June 1998, the 330 MW Phillips Sweeny cogeneration facility, an entity 50% owned by CSW Energy, obtained permanent project financing. The $149 million of debt, with an effective interest rate of 7.4%, is unconditionally guaranteed by the project and is non-recourse to CSW Energy and CSW. Concurrently, the project repaid its outstanding note to CSW Energy for construction financing. CSW Energy obtained the funds for this project from CSW's short-term borrowings program, which were also repaid. CSW Energy began construction in August 1998 of a 500 MW power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. At December 31, 1998, CSW Energy had spent approximately $81 million, including development construction and financing of the projected $210 million project costs. The natural gas-fired facility should begin simple cycle operation in the summer of 1999 and combined cycle operation by the end of 1999. The Frontera project is being built as a merchant power plant. Frontera is expected to supply power to the rapidly growing Rio Grande Valley and to supply customers throughout Texas. CSW International and its 50% joint venture partner, Scottish Power, commenced construction of the South Coast Power project, a 400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. Commercial operation is expected to begin in the year 2000. The partners will provide interim construction financing with third party financing expected in the first quarter of 1999. At December 31, 1998, CSW International had spent approximately $12 million, including development, construction and financing of their 50% share of the total $320 million of estimated project costs. CSW, CSW Energy and CSW International have provided letters of credit and guarantees on behalf of independent power projects of approximately $254 million, $13 million, and $201 million, respectively, as of December 31, 1998. 2-62 4. INCOME TAXES CSW files a consolidated United States federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes United States federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the amounts computed by applying the United States federal statutory income tax rate to income before taxes for a number of reasons which are presented in the INCOME TAX RATE RECONCILIATION table below. Information concerning income taxes, including total income tax expense, the reconciliation between the United States federal statutory tax rate and the effective tax rate and significant components of deferred income taxes follow.
------------------------------------------------------- INCOME TAX EXPENSE CSW CPL PSO SWEPCO WTU ----------------------------------------------- 1998 (millions) (thousands) Included in Operating Expenses and Taxes Current (1) $253 $128,942 $52,587 $64,463 $28,542 Deferred (1) (38) (8,253) (1,693) (11,850) (6,578) Deferred ITC (2) (12) (3,858) (1,795) (4,631) (1,321) ------------------------------------------------------- 203 116,831 49,099 47,982 20,643 Included in Other Income and Deductions Current 18 (2,204) (93) (1,868) (454) ------------------------------------------------------- 18 (2,204) (93) (1,868) (454) ------------------------------------------------------- $221 $114,627 $49,006 $46,114 $20,189 ------------------------------------------------------- 1997 Included in Operating Expenses and Taxes Current (1) $47 $43,600 $14,543 $46,358 $11,765 Deferred (1) 117 35,263 8,498 (1,984) (954) Deferred ITC (2) (13) (4,819) (2,278) (4,662) (1,321) -------------------------------------------------------- 151 74,044 20,763 39,712 9,490 Included in Other Income and Deductions Current -- (4,271) (2,230) (1,962) (471) Deferred (6) (779) (50) (260) -- -------------------------------------------------------- (6) (5,050) (2,280) (2,222) (471) -------------------------------------------------------- $145 $68,994 $18,483 $37,490 $9,019 -------------------------------------------------------- 1996 Included in Operating Expenses and Taxes Current (1) $118 $46,588 $26,152 $33,904 $6,953 Deferred (1) 120 57,416 14,190 10,696 9,706 Deferred ITC (2) (14) (5,553) (2,784) (4,730) (1,321) -------------------------------------------------------- 224 98,451 37,558 39,870 15,338 Included in Other Income and Deductions Current (1) 639 (895) (973) (406) Deferred (39) (5,940) (15,518) (7,847) (3,988) -------------------------------------------------------- (40) (5,301) (16,413) (8,820) (4,394) Income Taxes for Discountinued Operations (includes $72 resulting from the gain on the sale) 78 -- -- -- -- -------------------------------------------------------- $262 $93,150 $21,145 $31,050 $10,944 --------------------------------------------------------
(1)Approximately $14 million, $30 million and $49 million of CSW's Current Income Tax Expense was attributable to SEEBOARD U.S.A. operations and was recognized as United Kingdom corporation tax expense for 1998, 1997 and 1996, respectively. In addition, approximately $9 million, $7 million and $19 million of CSW's Deferred Income Tax Expense in 1998, 1997 and 1996, respectively, was attributed to SEEBOARD U.S.A. (2)ITC deferred in prior years are included in income over the lives of the related properties. 2-63
-------------------------------------------------------- INCOME TAX RATE RECONCILIATION CSW CPL PSO SWEPCO WTU ------------------------------------------------ 1998 (millions) (thousands) Income before taxes attributable to: Domestic operations $558 Foreign operations 112 -------- Income before taxes $670 $276,277 $125,849 $144,217 $58,004 Tax at U.S. statutory rate $235 $96,697 $44,047 $50,476 $20,301 Differences Amortization of ITC (13) (3,858) (1,795) (4,631) (1,321) Mirror CWIP 10 10,055 -- -- -- Non-deductible goodwill amortization 12 -- -- -- -- Foreign tax benefits (41) -- -- -- -- Adjustments 15 5,493 3,977 (2,526) (779) Other 3 6,240 2,777 2,795 1,988 --------------------------------------------------------- $221 $114,627 $49,006 $46,114 $20,189 --------------------------------------------------------- Effective rate 33% 41% 39% 32% 35% 1997 Income before taxes attributable to: Domestic operations $327 Foreign operations 147 -------- Income before taxes $474 $197,465 $64,689 $130,392 $30,480 Tax at U.S. statutory rate $166 $69,113 $22,641 $45,637 $10,668 Differences Amortization of ITC (13) (4,819) (2,278) (4,662) (1,321) Mirror CWIP 5 4,647 -- -- -- Non-deductible goodwill amortization 12 -- -- -- -- Foreign tax benefits (19) -- -- -- -- Adjustments (4) (1,361) (1,324) (633) (177) Other (2) 1,414 (556) (2,852) (151) ---------------------------------------------------------- $145 $68,994 $18,483 $37,490 $9,019 ---------------------------------------------------------- Effective rate 31% 35% 29% 29% 30% 1996 Income before taxes attributable to: Domestic operations $562 Foreign operations 146 -------- Income before taxes $708 $240,201 $52,622 $97,605 $27,515 Tax at U.S. statutory rate $248 $84,070 $18,418 $34,162 $9,630 Differences Amortization of ITC (14) (5,553) (2,784) (4,730) (1,321) Mirror CWIP 5 4,584 -- -- -- Non-deductible goodwill amortization 13 -- -- -- -- Foreign tax benefits (18) -- -- -- -- Adjustments 10 5,127 201 1,544 1,467 Other 18 4,922 5,310 74 1,168 ----------------------------------------------------------- $262 $93,150 $21,145 $31,050 $10,944 ----------------------------------------------------------- Effective tax rate 37% 39% 40% 32% 40%
2-64
----------------------------------------------------------- CSW CPL PSO SWEPCO WTU ------------------------------------------------- DEFERRED INCOME TAXES (1) (millions) (thousands) 1998 Deferred Income Tax Liabilities Depreciable utility plant $1,936 $812,335 $299,659 $409,779 $141,627 Deferred plant costs 174 168,856 -- -- 5,219 Mirror CWIP asset 90 89,846 -- -- -- Income tax related regulatory assets 224 165,263 10,086 37,738 11,072 Other 257 72,123 21,881 35,851 18,076 ----------------------------------------------------------- 2,681 1,308,423 331,626 483,368 175,994 Deferred Income Tax Assets Income tax related regulatory liability (117) (39,095) (23,940) (38,251) (15,303) Unamortized ITC (96) (48,480) (15,226) (22,964) (9,309) Alternative minimum tax carryforward (11) -- -- -- -- Other (75) -- (27,068) (28,357) (11,017) ----------------------------------------------------------- (299) (87,575) (66,234) (89,572) (35,629) ----------------------------------------------------------- Net Accumulated Deferred Income Taxes $2,382 $1,220,848 $265,392 $393,796 $140,365 ----------------------------------------------------------- Net Accumulated Deferred Income Taxes Noncurrent $2,410 $1,221,561 $277,181 $398,664 $140,731 Current (28) (713) (11,789) (4,868) (366) ----------------------------------------------------------- $2,382 $1,220,848 $265,392 $393,796 $140,365 ----------------------------------------------------------- DEFERRED INCOME TAXES (1) 1997 Deferred Income Tax Liabilities Depreciable utility plant $1,912 $802,279 $291,547 $410,313 $144,690 Deferred plant costs 176 169,497 -- -- 6,523 Mirror CWIP asset 100 99,901 -- -- -- Income tax related regulatory assets 211 149,834 10,539 38,603 12,284 Other 375 147,513 36,836 36,237 20,651 ----------------------------------------------------------- 2,774 1,369,024 338,922 485,153 184,148 Deferred Income Tax Assets Income tax related regulatory liability (123) (40,552) (26,704) (40,916) (14,969) Unamortized ITC (100) (49,830) (15,920) (24,673) (9,771) Alternative minimum tax carryforward (27) (16,129) -- -- -- Other (72) (3,744) (35,188) (19,061) (9,859) ----------------------------------------------------------- (322) (110,255) (77,812) (84,650) (34,599) ----------------------------------------------------------- Net Accumulated Deferred Income Taxes $2,452 $1,258,769 $261,110 $400,503 $149,549 ----------------------------------------------------------- Net Accumulated Deferred Income Taxes Noncurrent $2,432 $1,237,387 $258,848 $395,909 $149,346 Current 20 21,382 2,262 4,594 203 ----------------------------------------------------------- $2,452 $1,258,769 $261,110 $400,503 $149,549 -----------------------------------------------------------
(1)In 1997, the valuation reserve was reduced to $17 million due to lower levels of excess foreign tax credits. In 1998, the valuation reserve was increased to $145 million due to higher levels of excess foreign tax credits. Other than excess foreign tax credits, CSW did not have other valuation allowances recorded against other deferred tax assets at December 31, 1998 and 1997 due to a favorable earnings history. CSW has not provided for U.S. federal income and foreign withholding taxes on $75 million of non-U.S. subsidiaries' undistributed earnings as of December 31, 1998, because such earnings are intended to be reinvested indefinitely. If these earnings were distributed, foreign tax credits should become available under current law to reduce or eliminate the resulting U.S. income tax liability. 2-65 5. BENEFIT PLANS Pension Plans Prior to June 30, 1997, CSW maintained a tax qualified, non-contributory defined benefit pension plan covering substantially all CSW employees in the United States. Benefits were based on employees' years of credited service, age at retirement, and final average annual earnings with an offset for the participant's primary Social Security benefit. The CSW board of directors approved an amendment effective July 1, 1997, which converted the present value of accrued benefits under the existing pension plan into a cash balance pension plan. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. The applicable percentage is determined by age and years of vested service the participant has with CSW as of December 31 of each year. The fair value of the plan assets are measured as of September 30 of each year. 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. In addition, CSW has a non-qualified excess benefit plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code through the qualified plan. 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. SFAS No. 132 was published in February 1998. SFAS No. 132 amended the disclosure requirements of SFAS No. 87 and SFAS No. 88. The new disclosure requirements under SFAS No. 132 are effective for CSW in 1998 and are currently being implemented. Pension plan assets consist primarily of common stocks and short-term and intermediate-term fixed income investments. The majority of SEEBOARD's employees joined a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee-administered fund that is actuarially valued every three years. SEEBOARD and its participating employees both contribute to the plan. Subsequent to July 1, 1995, new employees were no longer able to participate in that plan. Instead, two new pension plans were made available to new employees, both of which are also separate trustee-administered plans. Information about the separate pension plans (the U.S. plans and the non-U.S. plan), including: (i) change in benefit obligation; (ii) change in plan assets; (iii) reconciliation of funded status; (iv) amount recognized on balance sheets; (v) additional information for pension plans with unfunded benefit obligaitons; (vi) additional information for pension plans with unfunded accumulated benefit obligations; (vii) components of net periodic benefit costs; and (viii) assumptions used in accounting for the pension plan follow. 2-66 1998 ------------------------------------------- Pension/Cash Balance U.S. Plan Retirement Plan ---------------------- Non- Non- CSW Qualified Qualified U.S. Plan ------- --------- --------- --------- (millions) Change in benefit obligation Benefit obligation at beginning of year $1,978 $931 $24 $1,023 Service cost 36 21 1 14 Interest cost 137 68 1 68 Plan participants' contributions 3 -- -- 3 Amendments 58 -- -- 58 Foreign currency translation adjustment 9 -- -- 9 Acquisition 7 -- -- 7 Actuarial gain 11 8 3 -- Benefits paid (128) (65) (1) (62) ------------------------------------------- Benefit obligation at end of year $2,111 $963 $28 $1,120 ------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $2,290 $1,109 $-- $1,181 Actual return on plan assets 143 (30) -- 173 Employer contributions 7 -- 1 6 Plan participants' contributions 3 -- -- 3 Foreign currency translation adjustment 11 -- -- 11 Benefits paid (128) (65) (1) (62) ------------------------------------------- Fair value of plan assets at end of year $2,326 $1,014 $-- $1,312 ------------------------------------------- Reconciliation of Funded Status $214 $50 $(27) $191 Unrecognized net actuarial loss/(gain) 26 149 11 (134) Unrecognized prior service cost (77) (82) 1 4 Unrecognized transition obligation 10 9 1 -- ------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $173 $126 $(14) $61 ------------------------------------------- Amounts Recognized in Balance Sheet Prepaid benefit costs $188 $126 $ -- $62 Accrued benefit (liability)-smaller of (accrued) benefit cost and minimum (liability) (25) -- (25) -- Intangible asset 2 -- 2 -- Accumulated other comprehensive income 8 -- 8 -- ------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $173 $126 $(15) $62 ------------------------------------------- Other comprehensive expense attributable to change in additional minimum pension liability recognition $ 1 $-- $1 $-- Weighted-average assumptions as of December 31 Discount rate 6.75% 6.75% 5.50% Expected return on plan assets 9.00% 9.00% 6.25% Rate of compensation increase 4.96% 4.96% 3.50% 2-67 1997 ------------------------------------------- Pension/Cash Balance U.S. Plan Retirement Plan ---------------------- Non- Non- CSW Qualified Qualified U.S. Plan ------ ---------- --------- --------- (millions) Change in benefit obligation Benefit obligation at beginning of year $1,969 $922 $21 $1,026 Service cost 35 20 -- 15 Interest cost 141 65 2 74 Plan participants' contributions 3 -- -- 3 Amendments and other (85) (85) -- -- Foreign currency translation adjustment (41) -- -- (41) Acquisition 62 56 1 5 Actuarial gain 1 -- 1 -- Benefits paid (107) (47) (1) (59) ---------------------------------------------- Benefit obligation at end of year $1,978 $931 $24 $1,023 ---------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $2,071 $985 $-- $1,086 Actual return on plan assets 351 164 -- 187 Employer contributions 14 7 1 6 Plan participants' contributions 3 -- -- 3 Foreign currency translation adjustment (42) -- -- (42) Benefits paid (107) (47) (1) (59) ---------------------------------------------- Fair value of plan assets at end of year $2,290 $1,109 $ -- $1,181 ---------------------------------------------- Reconciliation of Funded Status $313 $178 $(23) $158 Unrecognized net actuarial loss/(gain) (77) 12 9 (98) Unrecognized prior service cost (92) (88) 1 (5) Unrecognized transition obligation 16 11 1 4 ---------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $160 $113 $(12) $59 ---------------------------------------------- Amounts Recognized in Balance Sheet Prepaid benefit costs $172 $113 $-- $59 Accrued benefit(liability)-smaller of (accrued) benefit cost and minimum (liability) (22) -- (22) -- Intangible asset 3 -- 3 -- Accumulated other comprehensive income 7 -- 7 -- ---------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $160 $113 $(12) $59 ---------------------------------------------- Other comprehensive expense attributable to change in additional minimum pension liability recognition $ 1 $-- $ 1 $-- Weighted-average assumptions as of December 31 Discount rate 7.50% 7.50% 6.75% Expected return on plan assets 9.00% 9.00% 7.25% Rate of compensation increase 5.46% 5.46% 4.75% 2-68 Pension/Cash Balance Retirement Plan Components of net periodic benefit costs U.S. Plan --------------------- Non- Non- 1998 CSW Qualified Qualified U.S. Plan ------ ---------- --------- --------- Service cost $36 $21 $1 $14 Interest cost 137 67 2 68 Expected return on plan assets (175) (97) -- (77) Amortizations of prior service costs (5) (6) -- -- Amortization of unrecognized transition obligation 2 2 -- -- Recognized net actuarial loss -- -- -- -- ------------------------------------------ Net periodic benefit cost $(5) $(13) $3 $5 CPL PSO SWEPCO WTU --- --- ------ --- (thousands) Service cost $4,537 $3,485 $4,109 $2,352 Interest cost 14,693 11,283 13,302 7,614 Expected return on plan assets (21,107) (16,211) (19,111) (10,940) Amortizations of prior service costs (1,301) (999) (1,178) (674) Amortization of unrecognized transition obligation 328 252 297 170 Recognized net actuarial loss -- -- -- -- ----------------------------------------------- Net periodic benefit cost $(2,850) $(2,190) $(2,581) $(1,478) U.S. Plan --------------------- Non- Non- 1997 CSW Qualified Qualified U.S. Plan ------ ---------- --------- --------- (millions) Service cost $34 $20 $-- $14 Interest cost 139 64 2 73 Expected return on plan assets (173) (92) -- (81) Amortizations of prior service costs (6) (6) -- -- Amortization of unrecognized transition obligation 2 2 -- -- Recognized net actuarial loss 1 -- 1 -- ------------------------------------------------ Net periodic benefit cost $(3) $(12) $3 $6 CPL PSO SWEPCO WTU --- --- ------ --- (thousands) Service cost $4,602 $3,421 $4,260 $2,488 Interest cost 15,085 11,214 13,965 8,156 Expected return on plan assets (21,410) (15,892) (19,839) (11,597) Amortizations of prior service costs (1,301) (999) (1,178) (674) Amortization of unrecognized transition obligation 328 252 297 170 Recognized net actuarial loss -- -- -- -- ------------------------------------------------ Net periodic benefit cost $(2,696) $(2,004) $(2,495) $(1,457) As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. 2-69 Pension/Cash Balance Retirement Plan Components of net periodic benefit costs U.S. Plan --------------------- Non- Non- 1996 CSW Qualified Qualified U.S. Plan ------ ---------- --------- --------- (millions) Service cost $37 $22 $1 $14 Interest cost 137 69 1 67 Expected return on plan assets (158) (84) -- (74) Amortizations of prior service costs -- -- -- -- Amortization of unrecognized transition obligation 2 2 -- -- Recognized net actuarial loss 1 -- 1 -- ----------------------------------------------- Net periodic benefit cost $19 $9 $3 $7 CPL PSO SWEPCO WTU --- --- ------ --- (thousands) Service cost $5,367 $4,238 $4,891 $3,005 Interest cost 16,233 12,817 14,793 9,089 Expected return on plan assets (19,747) (15,590) (17,995) (11,056) Amortizations of prior service costs (135) (108) (123) (76) Amortization of unrecognized transition obligation 358 283 327 201 Recognized net actuarial loss -- -- -- -- ----------------------------------------------- Net periodic benefit cost $2,076 $1,640 $1,893 $1,163 As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. Additional Information for Plans Non-Qualified Plan with Unfunded Benefit Obligations (thousands) 1998 1997 ---------------- ---------------- Benefit obligation $27,379 $23,621 Plan assets at fair value -- -- Additional Information for Plans Non-Qualified Plan with Unfunded Accumulated Benefit (thousands) Obligations 1998 1997 ---------------- ---------------- Projected benefit obligation $27,379 $23,621 Accumulated benefit obligation 25,137 22,193 Plan assets at fair value -- -- Post-retirement Benefits Other Than Pensions (U.S. Companies Only) CSW, including each of the U.S. Electric Operating Companies, adopted SFAS No. 106 effective January 1, 1993. The transition obligation established at adoption is being amortized over twenty years, with fourteen years remaining. Prior to 1993, these benefits were accounted for on a pay-as-you-go basis. Pursuant to an order by the Oklahoma Commission, PSO established a regulatory asset of approximately $5 million in 1993 for the difference between the pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is recovering the amortization of this regulatory asset over a ten year period. 2-70 SFAS No. 132 was published in February 1998. Statement No.132 amended the disclosure requirements of SFAS No. 106. The revised rules did not affect either the measurement or recognition of benefit costs. The new disclosure requirements under Standard 132 are effective for fiscal years beginning after December 15, 1997. Information about the non-pension post-retirement benefit plan, including: (i) change in benefit obligation; (ii) change in plan assets; (iii) reconciliation of funded status; (iv) amount recognized on balance sheets; (v) additional information for post-retirement plans with unfunded benefit obligations; (vi) components of net periodic benefit costs; and (vii) assumptions used in accounting for the post-retirement plan follow. Post-retirement Benefits Other Than Pensions U.S. Companies Only 1998 CSW CPL PSO SWEPCO WTU --------- ------------------------------------ (millions) (thousands) Benefit Obligations and Plan Assets Benefit obligation: Retirees $170 $54,805 $46,700 $38,795 $22,958 Other fully eligible participants 30 6,514 6,799 7,973 4,214 Other active participants 75 20,020 14,189 15,579 8,985 --------- ------------------------------------ $275 $81,339 $67,688 $62,347 $36,157 Plan Assets at Fair Value $164 $46,538 $42,728 $39,876 $21,475 Change in Accumulated Post- Retirement Benefit Obligation Benefit obligation at beginning of year $241 $72,991 $61,434 $54,214 $32,516 Service Cost 8 2,201 1,616 1,781 1,132 Interest Cost 17 5,290 4,450 3,941 2,358 Amendments (5) (1,569) (1,322) (1,204) (717) Benefit payments (15) (4,730) (3,984) (3,272) (2,134) Plan participants' contributions 1 228 195 186 119 Actuarial gain 28 6,928 5,299 6,701 2,883 --------- ------------------------------------ Benefit Obligation at end of year $275 $81,339 $67,688 $62,347 $36,157 Change in fair value of plan assets Fair value of plan assets at beginning of year $158 $44,168 $43,366 $39,630 $20,411 Actual return of plan assets 3 201 2,190 487 202 Employer contributions 17 6,671 961 2,845 2,877 Plan participants' contributions 1 228 195 186 119 Benefits Paid (15) (4,730) (3,984) (3,272) (2,134) --------- ------------------------------------ Fair value of plan assets at end of year $164 $46,538 $42,728 $39,876 $21,475 Reconciliation of Funded Status Funded status end of year $(111) $(34,801) $(24,960)$(22,471)$(14,682) Unrecognized: Transition Obligation 126 40,608 35,400 27,535 17,147 Prior Service Cost -- -- -- -- -- (Gain) (15) (5,807) (10,440) (5,064) (2,465) --------- ------------------------------------ Prepaid (accrued) benefit cost before balance sheet adjustments $ -- $ -- $ -- $ -- $ -- Amounts Recognized in Balance Sheet Prepaid Benefit Cost $2 $19 $83 $121 $74 Accrued Benefit cost (2) (19) (83) (121) (74) --------- ------------------------------------ Prepaid (accrued) benefit cost $ -- $ -- $ -- $ -- $ -- 2-71 Post-retirement Benefits Other Than Pensions U.S. Companies Only 1997 CSW CPL PSO SWEPCO WTU --------- ------------------------------------ (millions) (thousands) Benefit Obligations and Plan Assets Benefit obligation: Retirees $158 $51,426 $43,732 $34,906 $21,607 Other fully eligible participants 24 5,449 5,707 6,559 3,184 Other active participants 59 16,116 11,995 12,749 7,725 --------- ------------------------------------ $241 $72,991 $61,434 $54,214 $32,516 Plan Assets at Fair Value $159 $44,168 $43,366 $39,630 $20,411 Change in Accumulated Post- Retirement Benefit Obligation Benefit obligation at beginning of year $236 $73,310 $62,059 $54,009 $33,135 Service Cost 8 2,076 1,694 1,771 1,120 Interest Cost 18 5,663 4,794 4,190 2,564 Amendments -- -- -- -- -- Benefit payments (10) (3,148) (2,836) (2,234) (1,387) Plan participants' contributions -- 55 41 37 29 Actuarial gain (11) (4,965) (4,318) (3,559) (2,945) --------- ------------------------------------ Benefit Obligation at end of year $241 $72,991 $61,434 54,214 $32,516 Change in fair value of plan assets Fair value of plan assets at beginning of year $151 $32,424 $32,067 $28,570 $14,828 Actual return of plan assets 3 4,866 7,292 6,814 2,217 Employer contributions 18 9,972 6,803 6,442 4,723 Plan participants' contributions 1 55 41 37 29 Benefits Paid (15) (3,149) (2,837) (2,233) (1,386) --------- ------------------------------------ Fair value of plan assets at end of year $158 $44,168 $43,366 $39,630 $20,411 Reconciliation of Funded Status Funded status end of year $(82) $(28,823) $(18,068)$(14,584)$(12,105) Unrecognized: Transition Obligation 135 43,508 37,928 29,502 18,372 Prior Service Cost -- -- -- -- -- (Gain) (53) (15,443) (19,018) (14,715) (6,503) --------- ------------------------------------ Prepaid (accrued) benefit cost before balance sheet adjustments $ -- $(758) $842 $203 $(236) Amounts Recognized in Balance Sheet Prepaid Benefit Cost $1 $ -- $1,023 $330 $ -- Accrued Benefit cost (1) (758) (181) (127) (236) --------- ------------------------------------ Prepaid (accrued) benefit cost $-- $(758) $842 $203 $(236) As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. 2-72 Post-retirement Benefits Other Than Pensions U.S. Companies Only Components of Net Periodic Benefit Costs 1998 CSW CPL PSO SWEPCO WTU --------- ------------------------------------ (millions) (thousands) Service Cost $8 $2,201 $1,616 $1,781 $1,132 Interest cost 17 5,290 4,450 3,941 2,358 Expected Return on Plan Assets (12) (3,237) (3,401) (3,387) (1,497) Amortization of Unrecognized: Transition Obligation 9 2,900 2,528 1,967 1,225 Prior Service Cost -- -- -- -- -- (Gain) (2) (555) (824) (629) (216) --------- ------------------------------------ Total Net Period Benefit cost $20 $6,599 $4,369 $3,673 $3,002 1997 Service Cost $8 $2,076 $1,694 $1,771 $1,120 Interest cost 18 5,663 4,794 4,190 2,564 Expected Return on Plan Assets (10) (2,739) (2,998) (2,787) (1,257) Amortization of Unrecognized: Transition Obligation 9 2,900 2,528 1,967 1,225 Prior Service Cost -- -- -- -- -- (Gain) (1) (162) (365) (181) -- --------- ------------------------------------ Total Net Period Benefit cost $24 $7,738 $5,653 $4,960 $3,652 1996 Service Cost $8 $2,077 $1,705 $1,810 $1,111 Interest cost 19 5,887 5,018 4,321 2,602 Expected Return on Plan Assets (9) (2,255) (2,486) (2,268) (1,027) Amortization of Unrecognized Transition Obligation 9 2,900 2,528 1,967 1,225 Prior Service Cost -- -- -- -- -- Gain/(Loss) -- -- -- -- -- --------- ----------------------------------- Total Net Period Benefit cost $27 $8,609 $6,765 $5,830 $3,911 Total CSW CPL PSO SWEPCO WTU --------- ----------------------------------- 1998 (millions) (thousands) Effect of 1% Change in Assumed Health Care Cost Trend Rate 1% Increase Service Cost Plus Interest Cost $4 $1,093 $832 $889 $827 APBO 30 8,539 6,810 6,679 3,903 1% Decrease Service Cost Plus Interest Cost $(3) $(914) $(698) $(740) $(438) APBO (26) (7,390) (5,923) (5,675) (3,370) 2-73 ASSUMPTIONS USED IN THE Tax Rate ACCOUNTING FOR SFAS NO. 106 for Discount Return on Taxable Rate Plan Assets Trusts 1998 6.75% 9.00% 39.6% 1997 7.50% 9.00% 39.6% 1996 8.00% 9.50% 39.6% Health care cost trend rates 1998 Average Rate of 6.5% grading down 0.50% per year to an ultimate average rate of 5.00% in 2001. 1997 Average Rate of 7.0% grading down 0.50% per year to an ultimate average rate of 5.00% in 2001. 1996 Average Rate of 9.0% grading down 0.75% per year to an ultimate average rate of 5.25% in 2001. Additional Information for Post-retirement Benefits Other Plans with Unfunded Benefit Than Pensions Obligations (millions) 1998 1997 -------------- --------------- Benefit obligation $275 $241 Plan assets at fair value 164 159 Health and Welfare Plans CSW provides medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment insurance plans for substantially all active CSW System employees in the United States. The total contributions, recorded on a pay-as-you-go basis, for the years 1996 - 1998 are listed in the following table. CSW CPL PSO SWEPCO WTU ---------------------------------------- (millions) 1998 $35.6 $7.8 $6.2 $7.0 $4.1 1997 35.6 9.0 7.0 8.3 5.1 1996 28.4 7.0 5.5 6.5 4.0 Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority of its employees. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT The U.S. Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for the joint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December 31, 1998, the U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table. SWEPCO SWEPCO CPL Flint SWEPCO Dolet CSW(1) STP Creek Pirkey Hills Oklaunion Nuclear Coal Lignite Lignite Coal Plant Plant Plant Plant Plant --------------------------------------------------- ($ millions) Plant in service $2,336 $81 $439 $230 $400 Accumulated depreciation $657 $49 $190 $91 $132 Plant capacity-MW 2,501 528 675 650 690 Participation 25.2% 50.0% 85.9% 40.2% 78.1% Share of capacity-MW 630 264 580 262 539 2-74 (1)CPL, PSO and WTU have joint ownership agreements with each other and other non-affiliated entities. Such agreements provide for the joint ownership and operation of Oklaunion Power Station. Each participant provided financing for its share of the project, which was placed in service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7% ownership interest represents CSW's 78.1% participation in the plant. The statements of income reflect CPL's, PSO's and WTU's respective portions of the operating costs of Oklaunion Power Station. The total investments, including AFUDC, in Oklaunion Power Station for CPL, PSO and WTU were $37 million, $81 million and $282 million, respectively, at December 31, 1998. Accumulated depreciation was $12 million, $34 million and $86 million for CPL, PSO and WTU, respectively, at December 31,1998. 7. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the following fair values of each class of financial instruments for which it is practicable to estimate fair value. The fair value does not affect any of the liabilities unless the issues are redeemed prior to their maturity dates. Cash, temporary cash investments, accounts receivable, other financial instruments and short-term debt The fair value equals the carrying amount as stated on the balance sheets due to the short maturity of those instruments. Securities available for sale The fair values, which are based on quoted market prices, equal the carrying amounts as stated on the balance sheet as prescribed by SFAS No. 115. See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Long-term debt The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities. Trust Preferred Securities The fair value of the Trust Preferred Securities are based on quoted market prices on the New York Stock Exchange. Preferred stock subject to mandatory redemption The fair value of preferred stock subject to mandatory redemption is estimated based on quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock with the same or similar remaining redemption provisions. Long-term debt and preferred stock due within 12 months The fair value of current maturities of long-term debt and preferred stock due within 12 months are estimated based on quoted market prices for the same or similar issues or on the current rates offered for long-term debt or preferred stock with the same or similar remaining redemption provisions. 2-75 CARRYING VALUE AND ESTIMATED FAIR VALUE CSW CPL PSO SWEPCO WTU ------------------------------------------------- (millions) (thousands) Long-term debt 1998 carrying amount $3,785 $1,146,762 $368,121 $506,939 $282,211 fair value 4,025 1,223,502 389,220 546,450 301,894 1997 carrying amount 3,898 1,302,266 421,821 547,751 278,640 fair value 4,052 1,361,539 435,908 576,387 290,489 Trust Preferred Securities 1998 carrying amount 335 150,000 75,000 110,000 -- fair value 345 154,875 77,640 112,772 -- 1997 carrying amount 335 150,000 75,000 110,000 -- fair value 344 153,375 78,000 112,750 -- Preferred stock subject to mandatory redemption 1998 carrying amount -- -- -- -- -- fair value -- -- -- -- -- 1997 carrying amount 26 -- -- 25,930 -- fair value 27 -- -- 26,809 -- Long-term debt and preferred stock due within 12 months 1998 carrying amount 169 125,000 -- 43,932 -- fair value 169 125,000 -- 43,932 -- 1997 carrying amount 32 28,000 -- 3,555 -- fair value 32 28,000 -- 3,555 -- Commodity Contracts CSW utilizes commodity forward contracts which contain pricing and/or volume terms designed to stabilize market risk associated with fluctuations in the price of natural gas used in generation and electric energy sold under firm commitments with certain of our customers. In 1998, CSW did not utilize any contracts for commodities that would be classified as a financial instrument under generally accepted accounting principles, since physical delivery of natural gas and electricity may, and most frequently does, occur pursuant to these contracts. These contracts are, however, the major part of CSW's risk management program. The table below provides information about the Company's natural gas swaps and electricity forward contracts that are sensitive to changes in commodity prices. The swaps hedge commodity price exposure for the year 1999. Cash outflows on the swap agreements should be offset by increased margins on electricity sales to customers under tariffed rates with fixed fuel costs. The electricity forward contracts hedge a portion of CSW's energy requirements through September 1999. The average contract price for forward purchases is $58 per MWH and the average contract price for forward sales is $80 per MWH. 2-76 Contractual commitments at December 31, 1998 are as follows: Net Notional Fair Value of Products Amount Fair Value of Assets Liabilities ---------------------------------------------------------------------------- (millions) Swaps 6,510,000 MMbtu $-- $1 Forwards: purchases 440,000 MWH 3 -- sales 292,800 MWH 1 -- Cross-currency swaps and SEEBOARD's electricity contracts for differences The fair value of cross currency swaps reflect third-party valuations calculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $57 million at December 31, 1998. This unrealized loss is offset by unrealized gains related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. The fair value of SEEBOARD's contracts for differences is not determinable due to the absence of a trading market. DERIVATIVE CONTRACTS NOTIONAL AMOUNTS Notional Fair AND ESTIMATED FAIR VALUES Amount Value ------------------------- (millions) Cross currency swaps Maturities: 2001 and 2006 $400 $457 8. LONG-TERM DEBT The CSW System's long-term debt outstanding as of the end of the last two years is presented in the following table. Maturities Interest Rates December 31, From To From To 1998 1997 ----------------------------------------------------------------------------- (millions) Secured bonds 1999 2025 5.25% 7.75% $1,824 $2,080 Unsecured bonds 2001 2030 3.33%(1) 8.88% 1,359 1,353 Notes and Lease Obligations 1999 2021 5.89% 9.75% 765 641 Unamortized discount (10) (10) Unamortized cost of Reacquired debt (153) (166) ------------------------- $3,785 $3,898 ------------------------- (1) Variable rate The mortgage indentures, as amended and supplemented, securing FMBs issued by the U.S. Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plant. The U.S. Electric Operating 2-77 Companies may offer additional FMBs, medium-term notes and other securities subject to market conditions and other factors. CSW's year end weighted average cost of long-term debt was 7.3% for 1998 and 7.2% for both 1997 and 1996. For additional information about the U.S. Electric Operating Companies' long term debt, see their Statements of Capitalization in the Financial Statements. Annual Requirements Certain series of outstanding FMBs have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have been, satisfied by the application of net expenditures for bondable property in an amount equal to 166-2/3% of the annual requirements. Certain series of pollution control revenue bonds also have sinking fund requirements. At December 31, 1998, the annual sinking fund requirements and annual maturities (including sinking fund requirements) for all long-term debt for the next five years are presented in the following table. CSW CPL PSO SWEPCO WTU ----------------------------------------------------------------- (millions) (thousands) ------------------------------------ Sinking fund Requirements 1999 $1 $-- $-- $595 $-- 2000 1 -- -- 595 -- 2001 1 -- -- 595 -- 2002 1 -- -- 595 -- 2003 1 -- -- 595 -- Annual Maturities 1999 $169 $125,000 $-- $43,932 $-- 2000 208 100,000 20,000 47,807 40,000 2001 421 -- 20,000 595 -- 2002 151 115,000 -- 595 35,000 2003 206 50,000 100,000 55,595 -- Dividends At December 31, 1998, approximately $1.3 billion of CSW's subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. The amounts of retained earnings available for dividends attributable to each of the U.S. Electric Operating Companies at December 31, 1998. CPL-$739 million PSO-$145 million SWEPCO-$301 million WTU-$117 million Reacquired Long-term Debt In September 1998, PSO reacquired $25 million principal amount outstanding of Series K and $30 million principal amount outstanding of Series L FMBs, in their entirety, at call prices of 100 and 100.77, respectively. In September 1998, CPL reacquired $36 million principal amount outstanding of Series L FMBs, in its entirety, at a call price of 100.53. No long-term debt was reacquired prior to maturity during 1997. Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further information related to long-term debt, including new issues and reacquisitions of long-term debt during 1998. 2-78 9. PREFERRED STOCK The outstanding preferred stock of the U.S. Electric Operating Companies as of the end of the last two years is presented in the following table. Dividend Current Rate December 31, Redemption Price From To 1998 1997 From - To -------------------------------------------- (millions) Not subject to mandatory redemption 182,931 shares 4.00%-5.00% $19 $19 $102.75-109.00 1,600,000 shares Auction 160 160 $100.00 Issuance expenses/premiums (3) (3) ------------- $176 $176 ------------- Subject to mandatory redemption (none outstanding at December 31, 1998) 6.95% $-- $27 $-- To be redeemed within one year -- (1) ------------- $-- $26 ------------- Total authorized shares 6,405,000 All of the outstanding preferred stock is redeemable at the option of the U.S. Electric Operating Companies upon 30 days notice at the current redemption price per share. During 1997, SWEPCO redeemed $1.2 million pursuant to its annual sinking fund requirement. During 1997, each of the U.S. Electrics reacquired a significant portion of its outstanding preferred stock. As a result of differences between the dividend 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 Consolidated Statements of Income. CPL The dividends on CPL's $160 million auction and money market preferred stocks are adjusted every 49 days, based on current market rates. The dividend rates averaged 4.4%, 4.3% and 4.1% during 1998, 1997 and 1996, respectively. SWEPCO On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt to fund the redemption. For additional information about the U.S. Electric Operating Companies' preferred stock, see their Statements of Capitalization in the Financial Statements. 2-79 10. TRUST PREFERRED SECURITIES The following Trust Preferred Securities issued by the wholly-owned statutory business trusts of CPL, PSO and SWEPCO were outstanding at December 31, 1998. They are classified on the balance sheets as CPL, PSO or SWEPCO Obligated, Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures of CPL, PSO or SWEPCO, respectively.
Amount Description of Underlying Business Trust Security Units (millions) Debentures of Registrant - ----------------------------------------------------------------------------------------------------------- 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 ---------------------
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. 11. SHORT-TERM FINANCING The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinate short-term borrowings for certain subsidiaries and also incurs borrowings outside the money pool for other subsidiaries. As of December 31, 1998, CSW had revolving credit facilities totaling $1.0 billion to backup its commercial paper program. At December 31, 1998, CSW had $811 million outstanding in short-term borrowings. The maximum amount of such short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $1.1 billion during June 1998. CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-alone basis. At December 31, 1998, CSW Credit had a $1.0 billion revolving credit agreement that is secured by the assignment of its receivables to back up its commercial paper program which had $749 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield for the year of 5.6%, was $1.0 billion during September 1998. 12. COMMON STOCK CSW's basic earnings per share of common stock are computed by dividing net income for common stock by the average number of common shares outstanding for the respective periods. Diluted earnings per share reflect the potential dilution that could occur if all options outstanding under CSW's stock incentive plan were converted to common stock and then shared in the income for common stock. CSW's basic and diluted earnings per share were the same for the years 1996 - 1998. CSW's dividends per common share reflect per share amounts paid for each of the periods. CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, through the LTIP, a stock option plan, PowerShare and Retirement Savings Plan. CSW began funding these 2-80 plans through open market purchases, effective April 1, 1997. Information concerning common stock activity issued through the LTIP, the stock option plan, PowerShare and the Retirement Savings Plan is presented in the following table.
1998 1997 1996 --------------------------------------------------------- Number of new shares issued (millions) 0.4 0.8 2.9 Range of stock price for new shares $25 5/8-$30 1/16 $21 1/4 - $25 5/8 $24 3/8 - $28 7/8 New common stock equity (millions) $10 $20 $79
During February 1996, CSW sold 15,525,000 shares of CSW Common in a primary stock offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of indebtedness incurred during the acquisition of SEEBOARD. 13. STOCK-BASED COMPENSATION PLANS CSW has a key employee incentive plan. This plan is accounted for under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined consistent with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric Operating Companies' net income for common stock and earnings per share as required by SFAS No. 123 would not have changed significantly from amounts reported. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. CSW may grant options for up to 4.0 million shares of CSW common stock under the stock option plan. Under the stock option plan, the option exercise price equals the stock's market price on the date of grant. The grant vests over three years, one-third on each of the three anniversary dates of the grant and expires 10 years after the original grant date. CSW has granted 2.8 million shares through December 31, 1998. A summary of the status of CSW's stock option plan at December 31, 1998, 1997 and 1996 and the changes during the years then ended is presented in the following table.
1998 1997 1996 --------------------------------------------------------------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (thousands) Exercise Price (thousands) Exercise Price (thousands) Exercise Price Outstanding at beginning of year 1,902 $24 1,412 $26 1,564 $26 Granted -- -- 694 21 70 27 Exercised (337) 24 -- 22 (147) 24 Canceled (119) 24 (204) 28 (75) 27 ---------- ---------- --------- Outstanding at end of year 1,446 24 1,902 24 1,412 26 Exercisable at end of year 1,010 n/a 1,162 n/a 1,004 n/a
2-81 14. BUSINESS SEGMENTS Effective December 31, 1998, CSW adopted SFAS No. 131. CSW's business segments at December 31, 1998 included U.S. Electric (CPL, PSO, SWEPCO and WTU) and U.K. Electric (SEEBOARD U.S.A.). Eight additional non-utility companies are included with CSW in Other and Reconciling Items (CSW Energy, CSW International, C3 Communications, EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and CSW Services). Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business segment information is presented in the following tables. U.S. U.K. Other and CSW Electric Electric Reconciling Consolidated ----------------------------------------- 1998 Operating revenues $3,488 $1,769 $225 $5,482 Depreciation and amortization 399 95 27 521 Interest income 6 6 18 30 Interest expense 197 116 103 416 Operating income tax expense 235 1 (33) 203 Net income from equity method subsidiaries (1) -- -- (1) Income from continuing operations 374 117 (51) 440 Total assets 8,998 3,032 1,714 13,744 Investments in equity method subsidiaries 15 -- -- 15 Capital expenditures 313 106 107 526 1997 Operating revenues $3,321 $1,870 $77 $5,268 Depreciation and amortization 389 92 16 497 Interest income 8 12 -- 20 Interest expense 212 120 82 414 Operating income tax expense 144 31 (24) 151 Windfall profits tax -- (176) -- (176) Net income from equity method subsidiaries (1) -- -- (1) Income from continuing operations 289 117 (77) 329 Total assets 9,172 2,931 1,348 13,451 Investments in equity method subsidiaries 15 -- -- 15 Capital expenditures 346 126 276 748 1996 Operating revenues $3,248 $1,848 $59 $5,155 Depreciation and amortization 362 88 14 464 Interest income 3 18 -- 21 Interest expense 224 116 65 405 Operating income tax expense 191 46 (13) 224 Windfall profits tax -- -- 132 132 Net income from equity method subsidiaries -- -- -- -- Income from continuing operations 262 103 (68) 297 Total assets 9,142 3,061 1,129 13,332 Investments in equity method subsidiaries 10 -- -- 10 Capital expenditures 356 1,543 109 2,008 Products and Services The U.S. Electric Operating Companies' products and services primarily consist of the generation, transmission and distribution of electricity. The U.K. Electric segment's primary lines of business are the supply and distribution of electricity. CSW is currently developing computer systems to provide information by product and services rather than by legal entity. 2-82 Geographic Areas Revenues ------------------------------------------------- United United Other CSW States Kingdom Foreign Consolidated ------------------------------------------------- (millions) 1998 $3,705 $1,769 $8 $5,482 1997 3,390 1,870 8 5,268 1996 3,616 1,848 1 5,465 Long-Lived Assets United United Other CSW States Kingdom Foreign Consolidated ------------------------------------------------- (millions) 1998 $7,831 $2,530 $201 $10,562 1997 7,801 2,551 254 10,606 1996 7,682 2,623 72 10,377 15. TRANSOK DISCONTINUED OPERATIONS On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of operations for Transok have been reported as discontinued operations and prior periods have been restated for consistency. As a wholly owned subsidiary of CSW, Transok operated as an intrastate natural gas gathering, transmission, marketing and processing company that provided natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other gas customers throughout the United States. CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and $200 million in existing long-term debt that remained with Transok after the sale. A portion of the cash proceeds was used to repay borrowings incurred related to the SEEBOARD acquisition and the remaining proceeds were used to repay commercial paper borrowings. CSW recorded an after tax gain on the sale of Transok of approximately $120 million in 1996. Transok's operating results for 1996 are summarized in the following table (transactions with CSW have not been eliminated). 1996 --------- (millions) Total revenue $362 Operating income before income taxes 23 Earnings before income taxes 18 Income taxes (6) --------- Net income from discontinued operations $12 --------- 2-83 16. PROPOSED AEP MERGER On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28 billion at that time. At December 31, 1998, the total market capitalization of the combined company would have been $28 billion ($15 billion in equity; $13 billion in debt), and the combined company would have served more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. At December 22, 1997, AEP would have issued approximately $6.6 billion in stock to CSW stockholders to complete the transaction. At December 31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as 1998, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries. The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two work forces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Transition teams of employees from both companies will make organizational and staffing recommendations. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from: (i) issuing shares of common stock other than pursuant to employee benefit plans; (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ 2-84 materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Merger Regulatory Approvals The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. General Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas and at the FERC outlined the expected company-wide benefits of the merger to AEP and CSW customers and shareholders. These benefits would include $2 billion in non-fuel savings over 10 years and $98 million in net fuel savings over 10 years. FERC On April 30, 1998, AEP and CSW jointly filed a request with the FERC for approval of their proposed merger. On July 15, the FERC approved a draft order accepting the proposed transmission service agreements between the Ameren System and PSO. The draft order confirms that PSO's 250 MW firm contract path is available for AEP and CSW to meet the Holding Company Act's requirement that the two systems operate on an integrated and coordinated basis. In November 1998, the FERC issued an order setting issues for hearing. Hearings are scheduled to begin on June 1, 1999. The FERC order indicated that the review of the proposed merger would address the issues of competition, market power and customer protection and instructed AEP and CSW to refile an updated market power study. The updated market power study was filed in January 1999. CSW has filed a proposed settlement with the FERC to sell 250 MWs of capacity in the Frontera power plant project, two years after the AEP merger closes to respond to market-power issues. A final order is expected in the fourth quarter of 1999. Arkansas On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas Commission for approval of their proposed merger. The Arkansas Commission issued an order approving the merger subject to approval of the associated regulatory plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a final order granting conditional approval of a stipulated agreement related to a proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to reduce rates through a net savings merger rider for its Arkansas retail customers by $6 million over the five-year period following completion of the merger. The Arkansas Commission order notes the possibility of decisions in other jurisdictions adversely affecting provisions of the stipulated agreement. Consequently, the Arkansas Commission final orders are conditioned on its consideration of approval of the merger in other state and federal jurisdictions. Louisiana On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana Commission for approval of their proposed merger and for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Louisiana that provides for: - Approximately $2.6 million in fuel cost savings to Louisiana customers of CSW's SWEPCO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for SWEPCO customers in Louisiana and a plan to share with those customers approximately one-half of the savings allocated to Louisiana related to the merger during the first 10 years following the merger. Under this plan, approximately $26 million of these non-fuel merger-related savings will be used to reduce future costs to SWEPCO's Louisiana customers. 2-85 Hearings in Louisiana are expected to begin in the first quarter of 1999, and a final order is expected in the second quarter of 1999. Oklahoma On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma Commission for approval of their proposed merger. AEP and CSW have proposed a regulatory plan in Oklahoma that provides for - Approximately $11.8 million in fuel cost savings to Oklahoma customers of CSW's PSO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for PSO retail customers and to share approximately one-half of the savings from synergies created by the merger during the first 10 years following the merger. Under this plan, approximately $78.6 million of these non-fuel merger-related savings will be used to reduce future costs to PSO's retail customers. On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling recommending to the Oklahoma Commission that the merger filing be dismissed without prejudice for lack of information regarding the potential impact of the merger on the retail electric market in Oklahoma. The ruling was in response to comments received from intervenors to the merger. A dismissal without prejudice would allow AEP and CSW to submit an amended application with the added information. Subsequent meetings with the parties to the merger proceeding resulted in an agreement on criteria for the additional studies. On October 21, 1998, the ALJ approved these criteria, as well as plans by AEP and CSW to file an amended application along with the additional studies. An amended application was filed with the Oklahoma Commission on February 25, 1999. Submission of the amended application reset Oklahoma's 90-day statutory time period for Oklahoma Commission action on the merger. All other material in the written record in the merger case will be preserved since the docket is not being dismissed. AEP and CSW anticipate that the Oklahoma Commission will establish a procedural schedule that will result in a final order in Oklahoma in the second quarter of 1999. Texas On April 30, 1998, AEP and CSW jointly filed a request with the Texas Commission for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Texas that provides for: - Approximately $29 million in fuel cost savings to Texas customers during the 10-year period following completion of the merger; and - A commitment to not raise base rates prior to January 1, 2002 for Texas customers and a plan to share with those customers approximately one-half of the savings allocated to Texas related to the merger during the first 10 years following the merger. In Texas, approximately $183 million of the savings from synergies will be used to reduce future costs to customers. On July 2, 1998, the Texas Commission issued a preliminary order setting forth the issues the Texas Commission will consider in the merger application. In its preliminary order, the Texas Commission also determined that: (i) the merger application was not a rate proceeding; (ii) restructuring issues should not be addressed; and (iii) matters in the jurisdiction of other regulatory bodies should not be addressed. 2-86 AEP and CSW have reached a settlement in principle with the Texas Office of Public Utility Counsel and several cities in Texas. The proposed settlement provides for combined rate reductions totaling approximately $180 million over a six-year period for CSW's electric operating company customers through two separate rate riders. Both rate reduction riders become effective upon approval of the settlement and completion of the merger. The first rate reduction rider provides for $84.4 million in estimated net merger savings to be credited to Texas customer bills. The reduction would come from a net merger savings rate reduction rider over the six years following completion of the merger with the aggregate rate reductions for customers of the CSW Texas companies as follows: - $52.7 million for CPL; - $16.1 million for SWEPCO; and - $15.6 million for WTU. The second rate reduction rider will be implemented to resolve issues associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings in Texas. The $95.6 million rate reductions over the six years following completion of the merger include: - $61.3 million for CPL; - $19.9 million for SWEPCO; and - $14.4 million for WTU. CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction of $13.0 million implemented in May 1998, as well as the second glide-path rate reduction of $13.0 million scheduled to take effect May 1999, if the settlement is approved and the merger between AEP and CSW merger is completed. In addition, as a part of the settlement proposal, CPL, SWEPCO and WTU agree not to seek an increase in base rates prior to January 1, 2003. The Texas Office of Public Utility Counsel and members of the Texas cities will not initiate rate reviews prior to January 1, 2001. The settlement proposal also provides for a sharing of off-system sales margins on the wholesale electricity market after the effective date of the merger. The proposed settlement also includes affiliate transaction standards and provides for the maintenance of service quality for Texas customers. Hearings in Texas are expected to begin in the second quarter of 1999, and a final order is expected by the end of the third quarter of 1999. NRC On June 19, 1998, CPL filed a license transfer application with the NRC requesting the NRC's consent to the indirect transfer of control of CPL's interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue to own its 25.2% interest in STP, and CPL's name would remain on the NRC operating license. On November 5, 1998, the NRC approved the license transfer application on the condition that the merger is completed by December 31, 1999. Other Federal On October 13, 1998, AEP and CSW jointly filed an application with the SEC for approval of the proposed merger. The SEC merger filing is similar to requests currently before other jurisdictions and outlines the expected combined 2-87 company benefits of the merger to AEP and CSW customers and shareholders. On November 9, 1998, AEP and CSW filed an amendment to the application. AEP and CSW plan to make other required federal merger filings with the Federal Communications Commission and the Department of Justice in the near future. United Kingdom CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in Yorkshire. The proposed merger of CSW into AEP would result in common ownership of the United Kingdom entities. Although the merger of CSW into AEP is not subject to approval of United Kingdom regulatory authorities, the common ownership of the United Kingdom entities could be referred by the United Kingdom Secretary of State for Trade and Industry for an investigation by the United Kingdom Monopolies and Mergers Commission. CSW is unable to predict the outcome of any such regulatory proceeding. AEP AEP has received a request from the staff of the Kentucky Public Service Commission to file an application seeking Kentucky Public Service Commission approval for the indirect change in control of Kentucky Power Company that will occur as a result of the proposed merger. CSW understands that although AEP does not believe that the Kentucky Public Service Commission has the jurisdictional authority to approve the merger, AEP will prepare a merger application filing to be made with the Kentucky Public Service Commission, which is expected to be filed by April 15, 1999. Under the governing statute the Kentucky Public Service Commission must act on the application within 60 days. Therefore this matter is not expected to impact the timing of the merger. Completion of the Merger The proposed AEP merger has a targeted completion date in the fourth quarter of 1999. The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. The transaction must satisfy many conditions, including the condition that it must be a pooling of interests. The parties may not waive some of these conditions. AEP and CSW have initiated the process of seeking regulatory approvals, but there can be no assurances as to when, on what terms or whether the required approvals will be received or whether there will be any regulatory proceedings in the United Kingdom. The merger agreement will terminate on December 31, 1999 unless, in certain circumstances, extended by either party as provided in the merger agreement. There can be no assurance that the AEP merger will be consummated. Merger Costs As of December 31, 1998, CSW had deferred $26 million in costs related to the merger on its consolidated balance sheet, which will be charged to expense if AEP and CSW are not successful in completing their proposed merger. 17. EXTRAORDINARY ITEM In the general election held in the United Kingdom on May 1, 1997, the United Kingdom's 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 and the legislation enacting the tax subsequently was passed during the third quarter of 1997. Accordingly, during the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item, 2-88 (pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a one-time, windfall profits tax enacted by the United Kingdom government. The windfall profits tax was payable in two equal installments, due December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on the difference between nine times the average profits after tax for the four years following flotation in 1990, and SEEBOARD's market capitalization calculated as the number of shares issued at flotation multiplied by the flotation price per share. 18. NEW ACCOUNTING STANDARDS SFAS No. 130 SFAS No. 130 is effective for fiscal year 1998 and was the basis of preparation for the Consolidated Statements of Stockholders' Equity in this report. The statement adds the requirement to present comprehensive income and all of its components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period except those resulting from investments by owners and distributions to owners. SFAS No. 131 CSW adopted SFAS No. 131 for fiscal year 1998. The statement requires disclosure of selected information about its reportable operating segments. Operating segments are components of an enterprise that engage in business activities that may earn revenues and incur expenses, for which discrete financial information is available and is evaluated regularly by the chief operating decision-maker within a company for making operating decisions and assessing performance. Segments may be based on products and services, geography, legal structure or management structure. SFAS No. 132 SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5. BENEFIT PLANS. This statement standardizes the disclosure requirements for pensions and OPEBs, requires additional information for changes in the benefit obligations and fair value of plan assets and eliminates certain disclosure requirements. Adoption of this statement did not have a material effect on the Registrants' results of operations or financial condition. SOP No. 98-5 SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998. The statement requires entities to expense the costs of start-up activities as incurred. SOP No. 98-5 broadly defines start-up activities to include: (i) costs that are incurred before operations have begun; (ii) costs incurred after operations have begun but before full productive capacity has been reached; (iii) learning costs and non-recurring operating losses incurred before a project is fully operational; and (iv) one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory or with a new class of customer, and initiating a new process in an existing operation. CSW adopted SOP No. 98-5 in 1998. CSW Energy and CSW International expensed $4.5 million and $1.5 million, after tax, respectively, of start-up costs which had previously been capitalized. SFAS No. 133 SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 (January 1, 2000 for calendar year entities). This statement replaces existing pronouncements and practices with a single integrated accounting framework for 2-89 derivatives and hedging activities and eliminates previous inconsistencies in generally accepted accounting principles. The statement expands the accounting definition of derivatives, which had focused on freestanding contracts (futures, forwards, options and swaps) to include embedded derivatives and many commodity contracts. All derivatives will be reported on the balance sheet either as an asset or liability measured at fair value. Changes in a derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing or method of adopting SFAS No. 133. EITF Issue 98-10 In December 1998, the EITF reached consensus on Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. In reaching its consensus, the EITF distinguished between energy contracts entered to generate a profit and energy contracts entered to provide for the physical delivery of a commodity. Generally, CSW's energy contracts are entered into for the physical delivery of energy. These contracts, therefore, do not meet the definition of "trading activities" addressed by EITF Issue 98-10. Therefore, adoption of EITF Issue 98-10 will not have a material impact on CSW's results of operations or financial condition. 2-90 19. QUARTERLY INFORMATION (UNAUDITED) The following unaudited quarterly information includes, in the opinion of management all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. QUARTER ENDED 1998 1997 ----------------------------------------------------------------- March 31 Operating Revenues $1,257 $1,278 Operating Income 163 127 Income from Continuing Operations 60 25 Net Income for Common Stock 60 25 Basic and Diluted EPS from Continuing Operations $0.28 $0.12 Basic and Diluted EPS $0.28 $0.12 June 30 Operating Revenues $1,344 $1,184 Operating Income 214 169 Income from Continuing Operations 107 83 Net Income for Common Stock 107 83 Basic and Diluted EPS from Continuing Operations $0.50 $0.39 Basic and Diluted EPS $0.50 $0.39 September 30 Operating Revenues $1,581 $1,477 Operating Income 344 303 Income from Continuing Operations 233 196 Extraordinary Item -- (176) Net Income for Common Stock 233 20 Basic and Diluted EPS from Continuing Operations $1.10 $0.93 Basic and Diluted EPS from Extraordinary Item $-- $(0.83) Basic and Diluted EPS $1.10 $0.10 December 31 Operating Revenues $1,300 $1,329 Operating Income 145 136 Income from Continuing Operations 40 25 Net Income for Common Stock 40 25 Basic and Diluted EPS from Continuing Operations $0.19 $0.11 Basic and Diluted EPS $0.19 $0.11 Total Operating Revenues $5,482 $5,268 Operating Income 866 735 Income from Continuing Operations 440 329 Extraordinary Item -- (176) Net Income for Common Stock 440 153 Basic and Diluted EPS from Continuing Operations $2.07 $1.55 Basic and Diluted EPS from Extraordinary Item $-- $(0.83) Basic and Diluted EPS $2.07 $0.72 2-91 20. SUBSEQUENT EVENT Through December 31, 1998, CSW International has invested $80 million in Vale, a Brazilian electric distribution company, to obtain a 36% equity interest. CSW International also issued $100 million of debt to Vale, convertible to equity by the end of 1999. CSW International accounts for its $80 million investment in Vale on the equity method of accounting, and the $100 million as a loan. In mid-January 1999, amid market instability, the Brazilian government abandoned its policy of pegging the currency in a broad range against the dollar. This resulted in a 40% devaluation of the Brazilian Real by the end of January. Vale will be unfavorably impacted by the devaluation due primarily to the revaluation of foreign denominated debt. CSW International has a put option which requires that Vale purchase CSW International's shares, upon CSW International exercising the put, at a minimum of the purchase price paid for the shares ($80 million). As a result of the put option arrangement, management has reached a preliminary conclusion that CSW International's investment carrying amount will not be reduced below the put option value unless there is deemed to be a permanent impairment. CSW International views its investment in Vale as a long-term investment strategy and believes that the investment in Vale continues to have significant long-term value and is recoverable. Management will continue to closely evaluate the changes in the Brazilian economy, and its impact on CSW International's investment in Vale. 2-92 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Central and South West Corporation: We have audited the accompanying consolidated balance sheets of Central and South West Corporation (a Delaware corporation) and subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows, for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of CSW UK Finance Company (1998 and 1997 - which includes CSW Investments) and CSW Investments (1996), which statements reflect total assets and total revenues of 22 percent and 32 percent in 1998, 22 percent and 35 percent in 1997 and 36 percent of total revenues in 1996, respectively, of the consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Central and South West Corporation and subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas February 12, 1999 2-93 AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY We have audited the consolidated balance sheets of CSW UK Finance Company and subsidiaries as of 31 December 1998 and 1997 and the related consolidated statement of earnings and statements of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW UK Finance Company and subsidiaries at 31 December 1998 and 1997 and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the years ended 31 December 1998 and 1997 to the extent summarised in Note 23 to the consolidated financial statements. /s/ KPMG Audit Plc KPMG Audit Plc Chartered Accountants London, England Registered Auditor 18 January 1999 2-94 AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS We have audited the consolidated balance sheets of CSW Investments and subsidiaries as of 31 December 1996 and the related consolidated statement of earnings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW Investments and subsidiaries at 31 December 1996 and the results of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 1996 to the extent summarised in the notes to the consolidated financial statements. /s/ KPMG Audit Plc KPMG Audit Plc Chartered Accountants London, England Registered Auditor 22 January 1997 2-95 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central and South West Corporation and subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports of independent public accountants are presented elsewhere in this report. CSW, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CSW and its subsidiaries believe that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1998. /s/ E.R. Brooks /s/ Glenn D. Rosilier /s/ Lawrence B. Connors E. R. Brooks Glenn D. Rosilier Lawrence B. Connors Chairman and Executive Vice President Controller Chief Executive Officer and Chief Financial Officer 2-96 CENTRAL POWER AND LIGHT COMPANY 2-97 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CPL. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented.
---------------------------------------------------- 1998 (1) 1997 (1) 1996 (1) 1995 1994 (thousands except ratios) INCOME STATEMENT DATA Revenues $1,406,117 $1,376,282 $1,300,688 $1,073,469 $1,217,979 Net Income 161,650 128,471 147,051 206,447 205,439 Net Income for Common Stock 154,479 121,350 133,488 191,978 191,635 BALANCE SHEET DATA Assets 4,657,245 4,813,310 4,828,263 4,881,136 4,822,699 Long-term obligations (2) 1,296,762 1,452,266 1,323,054 1,517,347 1,466,393 Capitalization ratios Common stock equity 47% 47% 48% 45% 45% Preferred stock 6 5 8 8 8 Trust Preferred Securities 5 5 -- -- -- Long-term debt 42 43 44 47 47 Ratio of earnings to fixed charges 3.21 2.48 2.86 2.63 3.24 (SEC Method)
(1) See CENTRAL POWER AND LIGHT - RESULTS OF OPERATIONS for major factors affecting earnings. (2) Long-term obligations include long-term debt and Trust Preferred Securities. 2-98 CENTRAL POWER AND LIGHT COMPANY RESULTS OF OPERATIONS Reference is made to CPL's Consolidated Financial Statements, related Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Net income for common stock increased $33.4 million to $154.7 million during 1998 from $121.4 million in 1997. This increase was due primarily to increased non-fuel revenues related to weather-related demand and the absence in 1998 of the provision for the CPL 1997 Final Order. The increase in net income for common stock was partially offset by a reduction in base rates associated with the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for more information related to the CPL 1997 Final Order. Total electric operating revenues increased $29.8 million, or 2%, in 1998 as compared to 1997. This increase was mainly attributed to increased non-fuel revenue of $91.6 million, which was a result of a 3% increase in weather related MWH sales and the absence in 1998 of the $76.4 million provision for rate refund in 1997. In addition, electric operating revenues increased due in part to a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.17285). The increase was partially offset by decreased fuel revenues of $30.8 million and by lower base rates resulting from the CPL 1997 Final Order. Fuel and purchased power expenses decreased approximately $27.1 million in 1998 as compared to 1997. Fuel expense decreased $10.7 million as a result of lower average unit cost of fuel declining from $1.83 per MMbtu in 1997 to $1.59 per MMbtu in 1998 due to lower spot market natural gas prices. Purchased power expenses decreased approximately 29% from $56.4 million in 1997 to $40.1 million in 1998 due to decreases in economy energy purchases. Other operating expenses were $260.8 million during 1998, a decrease of $22.8 million when compared to 1997. The decrease is primarily due to a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). Also contributing to the decrease is the absence in 1998 of approximately $15 million write-off of previously capitalized energy efficiency incentives, and rate case related expenses. Maintenance expenses increased $4.0 million due primarily to flood damage, power plant repairs and storm related tree maintenance. Depreciation and amortization expenses increased $13.5 million, or 8%, in 1998 as compared to last year due primarily to the accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order as well as increases in depreciable and amortizable plant. Partially offsetting the increase in depreciation and amortization expenses was lower depreciation rates on non-ECOM property related to the CPL 1997 Final Order. Taxes, other than income decreased $12.0 million for 1998 due to a decrease in Texas ad valorem taxes. Operating income taxes increased $42.8 million for the year compared to 1997 as a result of higher pre-tax income. Other income and deductions decreased approximately $7.5 million due to reduced interest income associated with lower levels of short-term investments in 1998 as well as reduced non-operating taxes. 2-99 Interest charges decreased $9.1 million during 1998 when compared to 1997 primarily as a result of the maturity of CPL's $200 million Series BB, 6% FMBs in October 1997 and $28 million Series J, 6-5/8%, FMBs that matured January 1, 1998; and the reacquisition of $36 million Series L 7% FMBs in September 1998. See NOTE 8. LONG-TERM DEBT for additional information on the reacquisition of long-term debt. The decrease was offset in part by increased distributions on Trust Preferred Securities, which were outstanding for a portion of 1997. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock decreased to $121.4 million, or 9%, compared to $133.5 million in 1996. The major reason for the decrease was the impact of the CPL 1997 Final Order. This decrease was partially offset by an increase in other income and deductions of $19.4 million, due primarily to the absence in 1997 of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $15.6 million, net of tax, recorded in the second quarter of 1996. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for more information related to the CPL 1997 Final Order. Total electric operating revenues increased $75.6 million, or 5.8%, in 1997 compared to 1996 due primarily to a 3% increase in retail MWH sales resulting from increased customers and demand as well as higher fuel related revenue due to higher fuel costs, as discussed below. Another factor that contributed to the increase was a $41.5 million increase in transmission revenues as a result of the January 1997 implementation of open access tariffs in accordance with FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing, offset by a decrease related to provisions for refunds in 1997 and 1996 associated with the CPL rate case. The impact on net income of the increase in transmission access revenues was offset by a corresponding increase in transmission expense. Fuel expense increased $55.7 million, or 16%, during 1997 as compared to 1996. The increase in fuel expense was due primarily to a 13% increase in the average unit cost of fuel from $1.62 per MMbtu in 1996 to $ 1.83 per MMbtu in 1997. The increase in fuel costs reflects an increase in the spot market price of natural gas partially offset by a decrease in the delivery cost of coal. Also contributing to this increase was the absence in 1997 of 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 5% from $59.9 million in 1996 to $56.4 million in 1997 due primarily to decreased economy energy purchases. Other operating expense increased $52.1 million to $283.6 million in 1997 when compared to 1996. The increase is due primarily to an increase in transmission operations expenses as a result of the January 1997 implementation of open access tariffs in accordance with FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing, the write-off of previously deferred rate case expenses in accordance with the settlement in principle of the rate case expense phase of CPL's Rate Review - Docket No. 14965 and the write-off of obsolete inventory of $3.8 million. The increase in other operating expense was offset in part by reductions in pension expense, other employee related expenses and the absence in 1997 of the write-off of a canceled transmission project of $9.5 million. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Maintenance expense increased $6.7 million, or 12%, in 1997 as compared to 1996 due primarily to higher steam and nuclear production and distribution overhead line expenses in 1997. Depreciation and amortization expenses increased $18.5 million compared to 1996 due primarily to the impact of the CPL 1997 Final Order. Taxes, other than income increased approximately $8.8 million during 1997 as compared to 1996 due primarily to an increase in ad valorem and franchise taxes. Other income and deductions increased $19.4 million from a loss of $11.1 million in 1996 to $8.2 million in 1997 due primarily to the absence in 1997 of the one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $15.6 million, net of tax, recorded in 1996. Also contributing to this increase was additional interest income in 1997 due primarily to a higher level of short-term investments. Interest and other charges increased $3.7 million in 1997 due primarily to the new distributions on Trust Preferred Securities of $7.7 million. For additional 2-100 information on these new securities see NOTE 10. TRUST PREFERRED SECURITIES. Partially offsetting this increase was a decrease of $5.3 million in long-term debt expense due primarily to the maturity of CPL's $200 million, Series BB, 6% FMBs in October 1997 and refinancing activities in 1996. 2-101 CPL Consolidated Statements of Income Central Power and Light Company - --------------------------------------------------------------------------------
For the Years Ended December 31, --------------------------------------------------------- 1998 1997 1996 ---------------- --------------- ---------------- (thousands) Electric Operating Revenues Residential $ 527,081 $ 541,169 $ 528,916 Commercial 377,492 400,412 388,008 Industrial 309,543 330,481 308,186 Sales for resale 66,680 70,461 72,164 Other 125,321 33,759 3,414 ---------------- --------------- ---------------- 1,406,117 1,376,282 1,300,688 ---------------- --------------- ---------------- Operating Expenses and Taxes Fuel 385,944 396,707 340,962 Purchased power 40,062 56,475 59,562 Other operating 260,843 283,640 236,129 Maintenance 63,779 59,791 53,077 Depreciation and amortization 184,805 171,349 152,831 Taxes, other than income 70,927 82,909 74,029 Income taxes 116,831 74,044 98,451 ---------------- --------------- ---------------- 1,123,191 1,124,915 1,015,041 ---------------- --------------- ---------------- Operating Income 282,926 251,367 285,647 ---------------- --------------- ---------------- Other Income and Deductions Charges for investments and plant development costs -- (2,060) (21,509) Allowance for equity funds used during construction 51 1,724 427 Other (1,495) 3,563 4,636 Non-operating income taxes 2,204 5,050 5,301 ---------------- --------------- ---------------- 760 8,277 (11,145) ---------------- --------------- ---------------- Income Before Interest Charges 283,686 259,644 274,502 ---------------- --------------- ---------------- Interest Charges Interest on long-term debt 93,301 105,081 110,375 Distributions on Trust Preferred Securities 12,000 7,533 -- Interest on short-term debt and other 19,506 20,613 18,494 Allowance for borrowed funds used during construction (2,771) (2,054) (1,418) ---------------- --------------- ---------------- 122,036 131,173 127,451 ---------------- --------------- ---------------- Net Income 161,650 128,471 147,051 Less: Preferred stock dividends 6,901 9,523 13,563 Gain on reacquired preferred stock -- 2,402 -- ---------------- --------------- ---------------- Net Income for Common Stock $ 154,749 $ 121,350 $ 133,488 ================ =============== ================
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements. 2-102 CPL Consolidated Statements of Retained Earnings Central Power and Light Company - --------------------------------------------------------------------------------
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 --------------- -------------- --------------- (thousands) Retained Earnings at Beginning of Year $833,282 $868,932 $863,444 Net income for common stock 154,749 121,350 133,488 Deduct: Common stock dividends 249,000 157,000 128,000 --------------- -------------- --------------- Retained Earnings at End of Year $739,031 $833,282 $868,932 =============== ============== ===============
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements. 2-103 CPL Consolidated Balance Sheets Central Power and Light Company - --------------------------------------------------------------------------------
As of December 31, ---------------------------------- 1998 1997 ------------ ------------ (thousands) ASSETS Electric Utility Plant Production $3,146,269 $3,106,576 Transmission 527,146 517,903 Distribution 1,090,175 1,021,759 General 298,352 295,974 Construction work in progress 67,300 77,390 Nuclear fuel 206,949 196,147 ------------ ------------ 5,336,191 5,215,749 Less - accumulated depreciation 2,072,686 1,891,406 ------------ ------------ 3,263,505 3,324,343 ------------ ------------ Current Assets Cash 5,195 -- Accounts receivable 51,056 61,311 Materials and supplies, at average cost 59,814 65,290 Fuel inventory 20,340 14,816 Under-recovered fuel costs -- 43,229 Accumulated deferred income taxes 713 -- Prepayments 2,952 2,595 ------------ ------------ 140,070 187,241 ------------ ------------ Deferred Charges and Other Assets Deferred STP costs 482,447 484,277 Mirror CWIP asset 256,702 285,431 Income tax related regulatory assets, net 360,482 390,149 Nuclear decommissioning trust 65,972 45,676 Other 88,067 96,193 ------------ ------------ 1,253,670 1,301,726 ------------ ------------ $4,657,245 $4,813,310 ============ ============
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements. 2-104 CPL Consolidated Balance Sheets Central Power and Light Company - --------------------------------------------------------------------------------
As of December 31, ---------------------------------- 1998 1997 ------------ ------------ (thousands) CAPITALIZATION AND LIABILITIES Capitalization Common stock: $25 par value Authorized shares: 12,000,000 Issued and outstanding shares: 6,755,535 $ 168,888 $ 168,888 Paid-in capital 405,000 405,000 Retained earnings 739,031 833,282 ------------ ----------- Total Common Stock Equity 1,312,919 47% 1,407,170 47% ------------ ------------ Preferred stock 163,204 6% 163,204 5% CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL 150,000 5% 150,000 5% Long-term debt 1,146,762 42% 1,302,266 43% ------------ ------------ Total Capitalization 2,772,885 100% 3,022,640 100% ------------ ------------ Current Liabilities Long-term debt due within twelve months 125,000 28,000 Advances from affiliates 160,298 142,781 Accounts payable 86,998 72,170 Payable to Affiliates 38,331 11,990 Accrued taxes 46,855 13,558 Accumulated deferred income taxes -- 21,382 Accrued interest 27,036 28,379 Over-recovered fuel costs 9,135 -- Refund due customers -- 63,713 Other 18,819 14,551 ------------ ------------ 512,472 396,524 ------------ ------------ Deferred Credits Accumulated deferred income taxes 1,221,561 1,237,386 Investment tax credits 138,513 142,371 Other 11,814 14,389 ------------ ------------ 1,371,888 1,394,146 ------------ ------------ $4,657,245 $4,813,310 ============ ============
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements. 2-105 CPL Consolidated Statements of Cash Flows Central Power and Light Company - --------------------------------------------------------------------------------
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 --------------- -------------- --------------- (thousands) OPERATING ACTIVITIES Net Income $161,650 $128,471 $147,051 Non-cash Items Included in Net Income Depreciation and amortization 206,515 192,775 178,271 Deferred income taxes and investment tax credits (12,111) 29,666 45,923 Refund due customers (63,713) 20,447 43,266 Charges for investments and assets 18,669 2,061 21,374 Inventory reserve -- 3,834 717 Changes in Assets and Liabilities Accounts receivable 10,255 (8,273) (7,852) Fuel inventory (5,524) 645 11,011 Material and supplies 5,476 10,442 (4,620) Accrued interest (1,343) (3,187) 1,176 Accounts payable 40,232 14,219 19,780 Accrued taxes 33,297 (50,649) 2,593 Fuel recovery 52,364 (16,931) (38,884) Other deferred credits (2,575) 2,701 (2,856) Other (4,311) 13,419 (6,672) --------------- -------------- --------------- 438,881 339,640 410,278 --------------- -------------- --------------- INVESTING ACTIVITIES Construction expenditures (123,803) (126,693) (136,901) Other (7,181) 1,185 (3,257) --------------- -------------- --------------- (130,984) (125,508) (140,158) --------------- -------------- --------------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- -- 63,930 Retirement of long-term debt (28,000) -- (231) Reacquisition of long-term debt (36,000) (200,000) (67,720) Redemption of preferred stock -- (84,745) -- Proceeds from issuance of Trust Preferred Securities -- 144,706 -- Change in advances from affiliates 17,517 90,256 (123,809) Payment of dividends (256,219) (167,648) (141,874) --------------- -------------- --------------- (302,702) (217,431) (269,704) --------------- -------------- --------------- Net Change in Cash and Cash Equivalents 5,195 (3,299) 416 Cash and Cash Equivalents at Beginning of Year -- 3,299 2,883 =============== ============== =============== Cash and Cash Equivalents at End of Year $ 5,195 $ -- $ 3,299 =============== ============== =============== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities) $ 99,239 $116,782 $117,974 =============== ============== =============== Income taxes paid $ 94,245 $ 61,509 $ 44,082 =============== ============== ===============
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements. 2-106 CPL Consolidated Statements of Capitalization Central Power and Light Company - -------------------------------------------------------------------------------- As of December 31, -------------------------------- 1998 1997 ------------- ------------- (thousands) COMMON STOCK EQUITY $ 1,312,919 $ 1,407,170 ------------- ------------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 3,035,000 shares Number of Shares Current Series Outstanding Redemption Price - ------------------------------------------------------ Not Subject to Mandatory Redemption 4.00% 42,048 $105.75 4,205 4,205 4.20% 17,476 $103.75 1,748 1,748 Auction Money Market 750,000 $100.00 75,000 75,000 Auction Series A 425,000 $100.00 42,500 42,500 Auction Series B 425,000 $100.00 42,500 42,500 Issuance Expense (2,749) (2,749) ------------- ------------- 163,204 163,204 ------------- ------------- TRUST PREFERRED SECURITIES CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL, 8.00%, due April 30, 2037 150,000 150,000 ------------- ------------- LONG-TERM DEBT First Mortgage Bonds Series J, 6 5/8%, due January 1, 1998 -- 28,000 Series L, 7%, due February 1, 2001 -- 36,000 Series T, 7 1/2%, due December 15, 2014 (Matagorda) * 111,700 111,700 Series AA, 7 1/2%, due March 1, 2020 (Matagorda) * 50,000 50,000 Series CC, 7 1/4%, due October 1, 2004 100,000 100,000 Series DD, 7 1/8%, due December 1, 1999 25,000 25,000 Series EE, 7 1/2%, due December 1, 2002 115,000 115,000 Series FF, 6 7/8%, due February 1, 2003 50,000 50,000 Series GG, 7 1/8%, due February 1, 2008 75,000 75,000 Series HH, 6%, due April 1, 2000 100,000 100,000 Series II, 7 1/2%, due April 1, 2023 100,000 100,000 Series JJ, 7 1/2%, due May 1, 1999 100,000 100,000 Series KK, 6 5/8%, due July 1, 2005 200,000 200,000 Installment Sales Agreements - PCRBs * Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265 Series 1995, 6.10%, due July 1, 2028 (Matagorda) 100,635 100,635 Series 1995, variable rate, due November 1, 2015 (Guadalupe) 40,890 40,890 Series 1996, 6%, due June 1, 2020 (Red River) 6,330 6,330 Series 1996, 6 1/8%, due May 1, 2030 (Matagorda) 60,000 60,000 Unamortized Discount (4,114) (4,484) Unamortized Costs of Reacquired Debt (78,944) (84,070) Amount to be Redeemed Within One Year (125,000) (28,000) ------------- ------------- 1,146,762 1,302,266 ------------- ------------- TOTAL CAPITALIZATION $ 2,772,885 $ 3,022,640 ============= ============= *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements. 2-107 CENTRAL POWER AND LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. TRUST PREFERRED SECURITIES See CSW's NOTE 10. 11. SHORT-TERM FINANCING See CSW's NOTE 11. 12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. 13. NEW ACCOUNTING STANDARDS See CSW's NOTE 18. 2-108 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Central Power and Light Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Central Power and Light Company (a Texas corporation and a wholly-owned subsidiary of Central and South West Corporation) and subsidiary company as of December 31, 1998 and 1997, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Central Power and Light Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Power and Light Company and subsidiary company as of December 31, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas February 12, 1999 2-109 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central Power and Light Company and subsidiary company as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CPL's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. CPL and its subsidiary company believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. CPL, together with its subsidiary company, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that CPL will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CPL or its subsidiary company, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CPL and its subsidiary believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1998. /s/ J. Gonzalo Sandoval /s/ R. Russell Davis J. Gonzalo Sandoval R. Russell Davis General Manager/President - CPL Controller - CPL 2-110 PUBLIC SERVICE COMPANY OF OKLAHOMA 2-111 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for PSO. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented.
---------------------------------------------------------- 1998 (1) 1997 (1) 1996 (1) 1995 1994 (thousands, except ratios) INCOME STATEMENT DATA Revenues $780,159 $712,690 $735,265 $690,823 $740,496 Net Income 76,843 46,206 31,478 81,828 68,266 Net Income for Common Stock 76,630 50,053 30,662 81,012 67,450 BALANCE SHEET DATA Assets 1,466,785 1,447,681 1,431,597 1,480,816 1,465,114 Long-term obligations (2) 443,121 496,821 420,301 379,250 402,752 Capitalization ratios Common stock equity 52% 49% 52% 55% 52% Preferred stock -- -- 2 2 2 Trust Preferred Securities 8 8 -- -- -- Long-term debt 40 43 46 43 46 Ratio of earnings to fixed charges 4.21 2.68 2.45 4.32 4.03 (SEC Method)
(1) See PUBLIC SERVICE COMPANY OF OKLAHOMA - RESULTS OF OPERATIONS for major factors affecting earnings. (2) Long-term obligations includes long-term debt and Trust Preferred Securities. 2-112 PUBLIC SERVICE COMPANY OF OKLAHOMA RESULTS OF OPERATIONS Reference is made to PSO's Consolidated Financial Statements, related Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Net income for common stock increased 53% during 1998 to $76.6 million from $50.1 million in 1997. The increase resulted primarily from higher revenues, decreased transmission expenses and the absence in 1998 of the impact of recording the effects associated with the outcome of the PSO 1997 Rate Settlement Agreement. The increase was offset in part by the absence in 1998 of the $4.2 million gain on the reacquisition of preferred stock recorded in 1997. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to the PSO 1997 Rate Settlement Agreement. Electric operating revenues were $780.2 million during 1998, a 9% increase from $712.7 million for the same period in 1997. This increase was due primarily to higher non-fuel revenues of $39.2 million and fuel-related revenues of $28.3 million. The increase in non-fuel revenues was due primarily to a 9% increase in retail MWH sales resulting from warmer weather as well as the absence in 1998 of a $29.0 million provision for rate refund. The increase in revenues was offset in part by lower base rates resulting from the PSO 1997 Rate Settlement Agreement and a decrease in transmission related revenues resulting from changes to a transmission coordination agreement pending before the FERC. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. The increase in fuel revenues was due primarily to higher fuel expense, as discussed below. Fuel expense increased $31.0 million, or 11%, during 1998 when compared to 1997 due primarily to a $43.3 million increase in the recovery of deferred fuel costs and a 7% increase in generation due primarily to higher weather-related demand. The increase in fuel expense was offset in part by lower average unit fuel costs. The average unit cost of fuel declined from $1.98 per MMbtu in 1997 to $1.77 per MMbtu in 1998 due primarily to lower spot market natural gas and coal prices. Purchased power expenses increased 11% to $57.2 million in 1998 from $51.6 million in 1997. This increase was due primarily to higher off-system and emergency energy purchases associated with higher weather-related demand in 1998 and a plant outage in the first quarter of 1998, partially offset by lower cogeneration purchases. Other operating expenses were $109.4 million in 1998, a decrease of $26.5 million from $135.9 million in 1997. The decrease was due primarily to the absence in 1998 of a write-off of previously capitalized energy efficiency incentives and the write-off of rate case related expenses, both associated with the aforementioned rate settlement agreement. Also contributing to the decline in other operating expenses were lower transmission expenses resulting from a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285). The decrease in other operating expenses was offset in part by additional environmental expenses. Maintenance expenses increased 10% to $37.0 million in 1998 from $33.6 million in 1997. The increase was due primarily to higher production and distribution maintenance activities. Depreciation and amortization expense decreased $8.6 million, or 11%, during 1998 when compared to the prior year. This decrease was due primarily to lower depreciation rates and the absence in 1998 of a write-off of regulatory assets, both resulting from the PSO 1997 Rate Settlement Agreement. This decrease was offset in part by higher depreciable plant. Taxes, other than income were $29.8 million in 1998, a 4% increase from $28.8 million in 1997 as a result of higher ad valorem tax expenses. Operating income taxes were $49.1 million in 1998 compared to $20.8 million in 1997 due primarily to higher pre-tax income in 1998. 2-113 Other income and deductions decreased $1.7 million in 1998 when compared to 1997 primarily as a result of lower miscellaneous non-operating income. Interest charges increased $0.9 million in 1998 when compared to the same period in 1997 due primarily to a full year of distributions in 1998 on Trust Preferred Securities offset in part by a decrease in long-term interest expenses in 1998 as a result of a reduction of long-term debt outstanding during 1998. See NOTE 8. LONG-TERM DEBT. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock increased to $50.1 million for the year ended 1997 from $30.7 million in 1996. The increase resulted primarily from the absence in 1997 of a one-time charge for certain investments for plant sites, engineering studies and lignite reserves of approximately $35.7 million, net of tax, recorded in 1996 partially offset by the impact of recording the effects associated with the outcome of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to the PSO 1997 Rate Settlement Agreement. Electric operating revenues were $712.7 million during 1997, a 3% decrease from $735.3 million for the same period in 1996. The decrease was due primarily to a $29 million provision for rate refund established in September and paid in December related to the PSO 1997 Rate Settlement Agreement. Partially offsetting this decrease was an increase in transmission access and wheeling revenues. Fuel expense decreased $11.4 million during 1997 compared to 1996 due primarily to a 4% reduction in generation. Also contributing to this decrease was a decline in the average unit cost of fuel from $2.04 per MMbtu in 1996 to $1.98 per MMbtu 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. Partially offsetting the decrease in fuel expense was a decline in the amount of under-recovered fuel costs in 1997 when compared to 1996. Purchased power expenses increased 25% to $51.6 million in 1997 from $41.2 million in 1996 as a result of increased purchases of economy energy along with increased cogeneration purchases in 1997. Other operating expenses increased $14.7 million, or 12%, to $135.9 million in 1997 when compared to 1996. The increase was due primarily to the write-off of previously capitalized demand side management energy efficiency incentives of $9.6 million, the write-off of $2.2 million of rate case related expenses, both associated with the aforementioned rate settlement agreement, as well as the write-off of $0.8 million of obsolete inventory. Operating expenses were also affected by a decrease in pension related expenses. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Maintenance expenses decreased 13% to $33.6 million in 1997 from $38.5 million in 1996. The decrease was due primarily to a $3.2 million write-down of production inventory in 1996 and lower tree management expenses in 1997. Depreciation and amortization expense increased $3.8 million, or 5%, during 1997 when compared to the prior year. This increase was due primarily to the write-off of $5.8 million of regulatory assets resulting from the PSO 1997 Rate Settlement Agreement, as well as an increase in depreciable assets, offset in part by a decrease in depreciation expense of $5.2 million also attributable to the agreement. Taxes, other than income were $28.8 million in 1997, a 6% increase from $27.2 million in 1996 as a result of higher ad valorem tax expense in 1997. Operating income taxes were $20.8 million in 1997 compared to $37.6 million in 1996 due primarily to lower pre-tax income in 1997. Other income and deductions increased $37.2 million in 1997 when compared to 1996 primarily as a result of the absence in 1997 of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $35.7 million, net of tax, recorded in 1996. Interest and other charges increased $2.5 million, or 7%, in 1997 when compared to the same period in 1996 due primarily to the new distributions on 2-114 Trust Preferred Securities, partially offset by a decrease in short-term interest expense as a result of a reduction of short-term debt outstanding during 1997. For information on the new securities see NOTE 10. TRUST PREFERRED SECURITIES. 2-115 PSO Consolidated Statements of Income Public Service Company of Oklahoma - --------------------------------------------------------------------------------
For the Years Ended December 31, ------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (thousands) Electric Operating Revenues Residential $ 329,058 $ 297,265 $ 299,550 Commercial 236,258 226,525 221,985 Industrial 162,773 161,974 157,509 Sales for resale 27,413 30,896 39,285 Other 24,657 (3,970) 16,936 ------------ ------------ ------------ 780,159 712,690 735,265 ------------ ------------ ------------ Operating Expenses and Taxes Fuel 309,969 278,976 290,408 Purchased power 57,222 51,619 41,194 Other operating 109,393 135,943 121,235 Maintenance 36,981 33,608 38,469 Depreciation and amortization 72,671 81,227 77,470 Taxes, other than income 29,816 28,778 27,194 Income taxes 49,099 20,763 37,558 ------------ ------------ ------------ 665,151 630,914 633,528 ------------ ------------ ------------ Operating Income 115,008 81,776 101,737 ------------ ------------ ------------ Other Income and Deductions Allowance for equity funds used during construction 860 995 292 Charges for investments and plant development costs -- (123) (51,109) Other (1,044) (1,503) (1,107) Non-operating income taxes 93 2,280 16,413 ------------ ------------ ------------ (91) 1,649 (35,511) ------------ ------------ ------------ Income Before Interest Charges 114,917 83,425 66,226 ------------ ------------ ------------ Interest Charges Interest on long-term debt 29,136 30,474 30,555 Distributions on Trust Preferred Securities 6,000 3,967 -- Interest on short-term debt and other 4,107 4,100 5,623 Allowance for borrowed funds used during construction (1,169) (1,322) (1,430) ------------ ------------ ------------ 38,074 37,219 34,748 ------------ ------------ ------------ Net Income 76,843 46,206 31,478 Less: Preferred stock dividends 213 364 816 Gain on reacquired preferred stock -- 4,211 -- ------------ ------------ ------------ Net Income for Common Stock $ 76,630 $ 50,053 $ 30,662 ============ ============ ============
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 2-116 PSO Consolidated Statements of Retained Earnings Public Service Company of Oklahoma - --------------------------------------------------------------------------------
For the Years Ended December 31, -------------------------------------------- 1998 1997 1996 ------------- ------------ ------------ (thousands) Retained Earnings at Beginning of Year $136,996 $145,943 $150,281 Net income for common stock 76,630 50,053 30,662 Deduct: Common stock dividends 69,000 59,000 35,000 ------------- ------------ ------------ Retained Earnings at End of Year $144,626 $136,996 $145,943 ============= ============ ============
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 2-117 PSO Consolidated Balance Sheets Public Service Company of Oklahoma - --------------------------------------------------------------------------------
As of December 31, ------------------------------------ 1998 1997 ---------------- --------------- (thousands) ASSETS Electric Utility Plant Production $ 913,083 $ 907,735 Transmission 378,719 375,111 Distribution 855,277 818,806 General 211,124 197,264 Construction work in progress 33,519 40,992 ---------------- --------------- 2,391,722 2,339,908 Less - Accumulated depreciation 1,082,081 1,031,322 ---------------- --------------- 1,309,641 1,308,586 ---------------- --------------- Current Assets Cash 4,670 2,171 Accounts receivable 32,916 34,974 Materials and supplies, at average cost 33,006 32,211 Fuel inventory, at LIFO cost 16,441 11,427 Accumulated deferred income taxes 11,789 -- Prepayments and other 2,881 3,366 ---------------- --------------- 101,703 84,149 ---------------- --------------- Deferred Charges and Other Assets 55,441 54,946 ---------------- --------------- $ 1,466,785 $ 1,447,681 ================ ===============
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 2-118 PSO Consolidated Balance Sheets Public Service Company of Oklahoma - --------------------------------------------------------------------------------
As of December 31, ----------------------------------------- 1998 1997 --------------- ---------------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $15 par value Authorized shares: 11,000,000 shares Issued 10,482,000 shares and outstanding 9,013,000 shares $157,230 $157,230 Paid-in capital 180,000 180,000 Retained earnings 144,626 136,996 --------------- ---------------- Total Common Stock Equity 481,856 52% 474,226 49% --------------- ------- ---------------- -------- Preferred stock 5,287 -- % 5,287 -- % PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO 75,000 8% 75,000 8% Long-term debt 368,121 40% 421,821 43% --------------- ------- ---------------- -------- Total Capitalization 930,264 100% 976,334 100% --------------- ------- ---------------- -------- Current Liabilities Advances from affiliates 15,892 4,874 Payables to affiliates 33,489 29,011 Accounts payable 52,888 55,179 Payables to customers 32,608 18,837 Accrued taxes 23,095 -- Accumulated deferred income taxes -- 2,262 Accrued interest 7,606 9,090 Other 6,599 4,178 --------------- ---------------- 172,177 123,431 --------------- ---------------- Deferred Credits Accumulated deferred income taxes 277,181 258,848 Investment tax credits 39,365 41,160 Income tax related regulatory liabilities, net 35,818 41,793 Other 11,980 6,115 --------------- ---------------- 364,344 347,916 --------------- ---------------- $ 1,466,785 $ 1,447,681 =============== ================
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 2-119 PSO Consolidated Statements of Cash Flows Public Service Company of Oklahoma - --------------------------------------------------------------------------------
For the Years Ended December 31, --------------------------------------------- 1998 1997 1996 ------------- ------------ ------------ (thousands) OPERATING ACTIVITIES Net Income $ 76,843 $ 46,206 $ 31,478 Non-cash Items Included in Net Income Depreciation and amortization 75,693 85,459 83,424 Deferred income taxes and investment tax credits (3,488) 6,169 (4,112) Charges for investments and assets 4,159 12,803 50,854 Inventory reserve -- 838 3,150 Changes in Assets and Liabilities Accounts receivable 17,297 (23,905) 6,888 Other investments and property (5,380) (5,682) (6,264) Accounts payable 1,113 13,433 (5,878) Accrued taxes 23,095 (12,306) (14,708) Other deferred credits 5,865 (585) 1,078 Other (2,104) (776) (3,292) ------------- ------------ ------------ 193,093 121,654 142,618 ------------- ------------ ------------ INVESTING ACTIVITIES Construction expenditures (68,897) (79,568) (83,509) Other (8,271) (6,008) (8,596) ------------- ------------ ------------ (77,168) (85,576) (92,105) ------------- ------------ ------------ FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- -- 51,744 Retirement of long-term debt -- -- (25,000) Reacquisition of long-term debt (55,231) -- (13,040) Reacquisition of preferred stock -- (10,329) -- Proceeds from issuance of Trust Preferred Securities -- 72,450 -- Change in advances from affiliates 11,018 (37,993) (27,643) Payment of dividends (69,213) (59,514) (35,839) ------------- ------------ ------------ (113,426) (35,386) (49,778) ------------- ------------ ------------ Net Change in Cash and Cash Equivalents 2,499 692 735 Cash and Cash Equivalents at Beginning of Year 2,171 1,479 744 ------------- ------------ ------------ Cash and Cash Equivalents at End of Year $ 4,670 $ 2,171 $ 1,479 ============= ============ ============ SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities) $ 37,772 $ 35,557 $ 32,488 ============= ============ ============ Income taxes paid $ 33,712 $ 34,244 $ 30,353 ============= ============ ============
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 2-120 PSO Consolidated Statements of Capitalization Public Service Company of Oklahoma - -------------------------------------------------------------------------------- As of December 31, ------------------------------ 1998 1997 ------------- ------------- (thousands) COMMON STOCK EQUITY $481,856 $474,226 ------------- ------------- PREFERRED STOCK (Cumulative $100 Par Value, Authorized 700,000 shares, redeemable at the option of PSO upon 30 days notice) Number Current of Shares Redemption Series Outstanding Price - --------------------------------------------- 4.00% 44,640 $105.75 4,464 4,464 4.24% 8,069 $103.19 807 807 Premium 16 16 ------------ ------------- 5,287 5,287 ------------ ------------- TRUST PREFERRED SECURITIES PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO, 8.00%, due April 30, 2037 75,000 75,000 ------------- ------------- LONG-TERM DEBT First Mortgage Bonds Series K, 7 1/4%, due January 1, 1999 -- 25,000 Series L, 7 3/8%, due March 1, 2002 -- 30,000 Series S, 7 1/4%, due July 1, 2003 65,000 65,000 Series T, 7 3/8%, due December 1, 2004 50,000 50,000 Series U, 6 1/4%, due April 1, 2003 35,000 35,000 Series V, 7 3/8%, due April 1, 2023 100,000 100,000 Series W, 6 1/2%, due June 1, 2005 50,000 50,000 Medium-term Notes, 5.89%-6.43%, due December 15, 2000-March 1, 2001 40,000 40,000 Installment sales agreement - PCRBs * Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700 Series 1996, 6.0%, due June 1, 2020 (Red River) 12,660 12,660 Unamortized discount (3,296) (3,657) Unamortized costs of reacquired debt (15,943) (16,882) ------------- ------------- 368,121 421,821 ------------- ------------- TOTAL CAPITALIZATION $930,264 $976,334 ============= ============= *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 2-121 PUBLIC SERVICE COMPANY OF OKLAHOMA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. TRUST PREFERRED SECURITIES See CSW's NOTE 10. 11. SHORT-TERM FINANCING See CSW's NOTE 11. 12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. 13. NEW ACCOUNTING STANDARDS See CSW's NOTE 18. 2-122 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Public Service Company of Oklahoma: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Public Service Company of Oklahoma (an Oklahoma corporation and a wholly-owned subsidiary of Central and South West Corporation) and subsidiary companies, as of December 31, 1998 and 1997, and the related consolidated statements of income, retained earnings and cash flows, for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Public Service Company of Oklahoma's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of Oklahoma and subsidiary companies as of December 31, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas February 12, 1999 2-123 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Public Service Company of Oklahoma and its subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by PSO's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. PSO and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. PSO, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that PSO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of PSO or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. PSO and its subsidiaries believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1998. /s/ T.D. Churchwell /s/ R. Russell Davis T. D. Churchwell R. Russell Davis President - PSO Controller - PSO 2-124 SOUTHWESTERN ELECTRIC POWER COMPANY 2-125 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for SWEPCO. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. ------------------------------------------------ 1998 (1) 1997 (1) 1996 (1) 1995 1994 (thousands, except ratios) INCOME STATEMENT DATA Revenues $952,952 $939,869 $920,786 $836,705 $825,296 Net Income 98,103 92,902 66,566 117,114 105,712 Net Income for Common Stock 96,542 92,254 63,503 113,870 102,351 BALANCE SHEET DATA Assets 2,049,520 2,094,746 2,099,156 2,116,716 2,079,207 Long-term obligations (2) 616,939 683,681 629,615 632,579 630,661 Capitalization ratios Common stock equity 52% 51% 52% 51% 51% Preferred stock 1 2 4 4 4 Trust Preferred Securities 8 8 -- -- -- Long-term debt 39 39 44 45 45 Ratios of earnings to fixed charges 3.53 3.46 2.81 3.80 3.70 (SEC Method) (1) See SOUTHWESTERN ELECTRIC POWER COMPANY - RESULTS OF OPERATIONS for major factors affecting earnings. (2) Long-term obligations includes long-term debt, preferred stock subject to mandatory redemption and Trust Preferred Securities. 2-126 SOUTHWESTERN ELECTRIC POWER COMPANY RESULTS OF OPERATIONS Reference is made to SWEPCO's Consolidated Financial Statements, related Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential in understanding, the following discussion and analysis. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 AND 1997 Net income for common stock increased 5% during 1998 to $96.5 million from $92.3 million in 1997. The increase resulted primarily from increased non-fuel revenue and the absence in 1998 of certain operating expense charges in 1997. Electric operating revenues increased $13.1 million, to $953.0 million in 1998 from $939.9 million in 1997. The increase was due primarily to higher non-fuel revenues of $26.8 million resulting from a 5% increase in weather-related MWH sales. The increase in electric operating revenues was offset in part by a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285, a provision for rate refund of $5.3 million primarily in connection with the annual determination of cost of service formula rates for SWEPCO's wholesale customers and a $3.2 million reduction in fuel revenues in accordance with a Texas Commission order in SWEPCO's fuel reconciliation regarding transmission equalization expense recovery. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285). Electric operating revenues were also affected by a decrease in fuel revenues of $1.3 million. Fuel expense decreased $11.0 million for 1998 when compared to 1997 due primarily to a decrease in average unit fuel costs for natural gas from $1.69 per MMbtu in 1997 to $1.63 per MMbtu in 1998 as a result of lower priced spot market natural gas. The decrease in fuel expenses was offset in part as a result of a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285). Fuel expense was also affected by an increase in natural gas generation associated with weather-related demand. Purchased power expense increased $9.6 million for 1998 compared to 1997 due primarily to an increase in economy energy purchases. Other operating expenses decreased $16.7 million, or 11%, to $140.5 million during 1998 when compared to 1997. The decrease is due primarily to a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285). The decrease was also affected by the absence in 1998 of costs in 1997 associated with a canceled transmission project of $10.2 million, the write-off of previously capitalized energy efficiency incentives of $4.2 million and the write-off of obsolete inventory of $1.2 million. The decrease was offset in part by increased expenses in 1998 related to a transmission coordination agreement currently pending before the FERC. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. Maintenance expenses increased $7.2 million, or 16%, as a result of increased power station maintenance, wind storm damage and additional tree-trimming maintenance expenses. Depreciation and amortization expense increased $3.3 million, or 3%, during 1998 when compared to 1997 due primarily to increases in depreciable and amortizable plant. Operating income taxes increased $8.3 million, or 21%, as a result of increased pre-tax income. Other income and deductions decreased $1.6 million for 1998 compared to 1997 due primarily to the absence in 1998 of a $ 1.1 million, net of tax, gain on the sale of lignite properties recorded in 1997. 2-127 Interest charges increased $4.6 million due primarily to distributions on Trust Preferred Securities, which were outstanding for a portion of 1997. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock increased 45% during 1997 to $92.3 million from $63.5 million in 1996. The increase resulted primarily from the absence in 1997 of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $21.8 million, net of tax. Electric operating revenues increased $19.1 million, or 2%, to $939.9 million in 1997 from $920.8 million in 1996. The increase was due primarily to an increase in non-fuel revenue of $31.5 million, including $15.9 million in non-fuel wholesale sales, as a result of increased retail customer usage and customer growth, offset in part by a $12.4 million decrease in fuel revenue. Fuel and purchased power expense decreased for 1997 when compared to 1996. Fuel expense decreased $6.1 million, or 2%, due primarily to a decrease in average unit fuel costs from $1.76 per MMbtu in 1996 to $1.69 per MMbtu in 1997, which resulted from lower coal transportation charges as well as purchases of lower priced spot market coal. A decrease in natural gas generation because of its relatively higher cost per MMbtu also contributed to the lower fuel expense for 1997. Purchased power expenses decreased $1.2 million, or 5%, during 1997 when compared to 1996 due primarily to a decrease in economy energy purchases. Other operating expenses increased $15.6 million, or 11%, to $157.2 million during 1997 when compared to 1996. The increase is due primarily to costs associated with a canceled transmission project of $10.2 million, the write-off of previously capitalized energy efficiency incentives of $4.2 million and the write-off of obsolete inventory of $1.2 million. Operating expenses were also positively affected by a decrease in pension expenses. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Depreciation and amortization expense increased $3.7 million, or 4%, during 1997 when compared to 1996 due primarily to increases in depreciable plant. Taxes, other than income, increased $5.6 million, or 11%, during 1997 when compared to 1996 due primarily to an increase in ad valorem taxes due to higher assessed values and the expiration of a 10-year exemption on one of SWEPCO's power plants. Other income and deductions increased $25.2 million for 1997 compared to 1996 due primarily to a onetime charge associated with certain investments for plant sites, engineering studies and lignite reserves of $21.8 million, net of tax, recorded in 1996, and a $1.1 million, net of tax, gain on the sale of lignite properties recorded in 1997. Interest expense on long-term debt decreased $3.6 million due to retirement of long-term debt in 1997. Interest expense on short-term debt decreased $2.6 million resulting from decreased short-term debt outstanding. Offsetting these decreases were the distributions on newly-issued Trust Preferred Securities of $5.6 million. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on the new securities. 2-128 SWEPCO Consolidated Statements of Income Southwestern Electric Power Company - --------------------------------------------------------------------------------
For the Years Ended December 31, --------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (thousands) Electric Operating Revenues Residential $ 314,600 $ 289,723 $ 290,020 Commercial 197,737 192,115 189,954 Industrial 253,458 263,207 262,878 Sales for resale 139,869 146,916 134,836 Other 47,288 47,908 43,098 ------------ ------------ ------------ 952,952 939,869 920,786 ------------ ------------ ------------ Operating Expenses and Taxes Fuel 371,414 382,404 388,450 Purchased power 35,483 25,928 27,160 Other operating 140,460 157,188 141,542 Maintenance 51,219 44,038 43,742 Depreciation and amortization 98,479 95,228 91,566 Taxes, other than income 57,128 55,962 50,373 Income taxes 47,982 39,712 39,870 ------------ ------------ ------------ 802,165 800,460 782,703 ------------ ------------ ------------ Operating Income 150,787 139,409 138,083 ------------ ------------ ------------ Other Income and Deductions Charges for investments and plant development costs -- (743) (29,700) Allowance for equity funds used during construction 1,336 934 325 Other (753) 1,616 (623) Non-operating income taxes 1,868 2,222 8,820 ------------ ------------ ------------ 2,451 4,029 (21,178) ------------ ------------ ------------ Income Before Interest Charges 153,238 143,438 116,905 ------------ ------------ ------------ Interest Charges Interest on long-term debt 39,233 40,440 44,066 Distributions on Trust Preferred Securities 8,662 5,582 -- Interest on short-term debt and other 8,591 5,736 8,381 Allowance for borrowed funds used during construction (1,351) (1,222) (2,098) ------------ ------------ ------------ 55,135 50,536 50,349 ------------ ------------ ------------ Net Income 98,103 92,902 66,556 Less: Preferred stock dividends 705 2,467 3,053 Gain/(Loss) on reacquired preferred stock (856) 1,819 -- ------------ ------------ ------------ Net Income for Common Stock $ 96,542 $ 92,254 $ 63,503 ============ ============ ============
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements. 2-129 SWEPCO Consolidated Statements of Retained Earnings Southwestern Electric Power Company - --------------------------------------------------------------------------------
For the Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (thousands) Retained Earnings at Beginning of Year $ 324,050 $ 321,801 $ 302,334 Net income for common stock 96,542 92,254 63,503 Loss on reacquisition of preferred stock -- (5) (36) Deduct: Common stock dividends 120,000 90,000 44,000 ------------- ------------- ------------- Retained Earnings at End of Year $ 300,592 $ 324,050 $ 321,801 ============= ============= =============
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements. 2-130 SWEPCO Consolidated Balance Sheets Southwestern Electric Power Company - --------------------------------------------------------------------------------
As of December 31, ------------------------------------ 1998 1997 ---------------- --------------- (thousands) ASSETS Electric Utility Plant Production $ 1,397,924 $ 1,391,676 Transmission 474,035 456,401 Distribution 916,293 870,378 General 321,136 311,323 Construction work in progress 48,523 51,665 ---------------- --------------- 3,157,911 3,081,443 Less - Accumulated depreciation 1,317,057 1,225,865 ---------------- --------------- 1,840,854 1,855,578 ---------------- --------------- Current Assets Cash and temporary cash investments 4,444 2,298 Accounts receivable 40,430 81,507 Materials and supplies, at average cost 25,135 24,523 Fuel inventory 40,238 26,415 Under-recovered fuel costs -- 13,013 Accumulated deferred income taxes 4,869 -- Prepayments and other 16,651 13,678 ---------------- --------------- 131,767 161,434 ---------------- --------------- Deferred Charges and Other Assets 76,899 77,734 ---------------- --------------- $ 2,049,520 $ 2,094,746 ================ ===============
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements. 2-131 SWEPCO Consolidated Balance Sheets Southwestern Electric Power Company - --------------------------------------------------------------------------------
As of December 31, ---------------------------------------- 1998 1997 --------------- --------------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $18 par value Authorized: 7,600,000 shares Issued and outstanding: 7,536,640 shares $ 135,660 $ 135,660 Paid-in capital 245,000 245,000 Retained earnings 300,592 324,050 --------------- --------------- Total Common Stock Equity 681,252 52% 704,710 51% --------------- --------------- Preferred stock Not subject to mandatory redemption 4,707 4,709 Subject to mandatory redemption -- 25,930 --------------- --------------- 4,707 1% 30,639 2% SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO 110,000 8% 110,000 8% Long-term debt 506,939 39% 547,751 39% --------------- ------- --------------- ------- Total Capitalization 1,302,898 100% 1,393,100 100% --------------- ------- --------------- ------- Current Liabilities Long-term debt and preferred stock due within twelve months 43,932 3,555 Advances from affiliates 40,705 25,175 Accounts payable 73,507 73,582 Payables to affiliates 37,795 63,583 Customer deposits 13,316 14,359 Accrued taxes 23,189 12,884 Accumulated deferred income taxes -- 4,594 Accrued interest 14,275 13,425 Over-recovered fuel costs 5,378 -- Other 12,538 9,551 --------------- --------------- 264,635 220,708 --------------- --------------- Deferred Credits Accumulated deferred income taxes 398,664 395,909 Investment tax credits 62,213 66,845 Income tax related regulatory liabilities, net 4,931 10,072 Other 16,179 8,112 --------------- --------------- 481,987 480,938 --------------- --------------- $ 2,049,520 $ 2,094,746 =============== ===============
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements. 2-132 SWEPCO Consolidated Statements of Cash Flows Southwestern Electric Power Company - --------------------------------------------------------------------------------
For the Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (thousands) OPERATING ACTIVITIES Net Income $ 98,103 $ 92,902 $ 66,556 Non-cash Items Included in Net Income Depreciation and amortization 104,047 100,015 101,204 Deferred income taxes and investment tax credits (16,481) (6,907) (1,881) Charges for investments and assets 2,140 16,493 29,590 Inventory reserve -- 1,150 1,632 Changes in Assets and Liabilities Accounts receivable 41,077 (13,367) (13,512) Fuel inventory (13,823) 29,360 17,501 Accounts payable 260 24,374 12,253 Payables to affiliates (25,788) (5,125) 16,234 Accrued taxes 10,305 (12,357) (27) Other current liabilities 2,987 (17,699) (3,076) Fuel recovery 18,391 (3,893) (18,043) Other 5,245 (4,458) (8,506) ------------- ------------- ------------- 226,463 200,488 199,925 ------------- ------------- ------------- INVESTING ACTIVITIES Construction expenditures (83,120) (108,126) (92,737) Other (5,202) (4,545) (7,510) ------------- ------------- ------------- (88,322) (112,671) (100,247) ------------- ------------- ------------- FINANCING ACTIVITIES Proceeds from sale of long-term debt -- -- 79,346 Reacquisition of long-term debt -- -- (83,334) Redemption of preferred stock (27,988) (16,043) (1,236) Proceeds from issuance of Trust Preferred Securities -- 106,231 -- Retirement of long-term debt (2,354) (52,600) (3,901) Change in advances from affiliates 15,530 (32,320) (43,734) Payment of dividends (121,183) (92,666) (46,642) ------------- ------------- ------------- (135,995) (87,398) (99,501) ------------- ------------- ------------- Net Change in Cash and Cash Equivalents 2,146 419 177 Cash and Cash Equivalents at Beginning of Year 2,298 1,879 1,702 ------------ ------------- ------------- Cash and Cash Equivalents at End of Year $ 4,444 $ 2,298 $ 1,879 ============= ============= ============= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities) $ 50,341 $ 49,847 $ 53,231 ============= ============= ============= Income taxes paid $ 57,977 $ 57,715 $ 35,549 ============= ============= =============
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements. 2-133 SWEPCO Consolidated Statements of Capitalization Southwestern Electric Power Company - -------------------------------------------------------------------------------- As of December 31, ----------------------------------- 1998 1997 --------------- ---------------- (thousands) COMMON STOCK EQUITY $ 681,252 $ 704,710 --------------- ---------------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 1,860,000 shares Number of Shares Current Series Outstanding Redemption Price - -------------------------------------------------------------------------------- Not Subject to Mandatory Redemption 5.00% 37,729 $109.00 3,773 3,775 4.65% 1,908 $102.75 191 191 4.28% 7,386 $103.90 739 739 Premium 4 4 --------------- ---------------- 4,707 4,709 --------------- ---------------- Subject to Mandatory Redemption 6.95% -- -- -- 27,401 Issuance Expense -- (271) Amount to be redeemed within one year -- (1,200) --------------- ---------------- -- 25,930 --------------- ---------------- 4,707 30,639 --------------- ---------------- TRUST PREFERRED SECURITIES SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO, 7.875%, due April 30, 2037 110,000 110,000 --------------- ---------------- LONG-TERM DEBT First Mortgage Bonds Series V, 7 3/4%, due June 1, 2004 40,000 40,000 Series W, 6 1/8%, due September 1, 1999 40,000 40,000 Series X, 7%, due September 1, 2007 90,000 90,000 Series Y, 6 5/8%, due February 1, 2003 55,000 55,000 Series Z, 7 1/4%, due July 1, 2023 45,000 45,000 Series AA, 5 1/4%, due April 1, 2000 45,000 45,000 Series BB, 6 7/8%, due October 1, 2025 80,000 80,000 1976 Series A, 6.20%, due November 1, 2006 (Siloam Springs) * 6,085 6,230 1976 Series B, 6.20%, due November 1, 2006 (Siloam Springs) * 1,000 1,000 Installment Sales Agreements - PCRBs * 1978 Series A, 6%, due January 1, 2008 (Titus County) 14,420 14,420 1991 Series A, 8.2%, due August 1, 2011 (Titus County) 17,125 17,125 1991 Series B, 6.9%, due November 1, 2004 (Titus County) 12,290 12,290 Series 1992, 7.6%, due January 1, 2019 (DeSoto) 53,500 53,500 Series 1996, 6.1%, due April 1, 2018 (Sabine) 81,700 81,700 Railcar lease obligations 5,549 7,759 Unamortized discount and premium 1,005 955 Unamortized costs of reacquired debt (36,803) (39,873) Amount to be redeemed within one year (43,932) (2,355) --------------- ---------------- 506,939 547,751 --------------- ---------------- TOTAL CAPITALIZATION $ 1,302,898 $ 1,393,100 =============== ================ *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements. 2-134 SOUTHWESTERN ELECTRIC POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. TRUST PREFERRED SECURITIES See CSW's NOTE 10. 11. SHORT-TERM FINANCING See CSW's NOTE 11. 12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. 13. NEW ACCOUNTING STANDARDS See CSW's NOTE 18. 2-135 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Southwestern Electric Power Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Southwestern Electric Power Company (a Delaware corporation and a wholly-owned subsidiary of Central and South West Corporation) and subsidiary company as of December 31, 1998 and 1997, and the rated consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Southwestern Electric Power Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwestern Electric Power Company and subsidiary company as of December 31, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas February 12, 1999 2-136 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Southwestern Electric Power Company and its subsidiary company as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the financial statements. The financial statements have been audited by SWEPCO's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. SWEPCO and its subsidiary believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. SWEPCO, together with its subsidiary, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that SWEPCO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of SWEPCO or its subsidiary, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. SWEPCO and its subsidiary believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1998. /s/ Michael H. Madison /s/ R. Russell Davis Michael H. Madison R. Russell Davis President - SWEPCO Controller - SWEPCO 2-137 WEST TEXAS UTILITIES COMPANY 2-138 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for WTU. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. -------------------------------------------------- 1998 (1) 1997 (1) 1996 (1) 1995 1994 (thousands, except ratios) INCOME STATEMENT DATA Revenues $424,953 $397,778 $377,057 $319,835 $342,991 Net Income 37,814 21,461 16,571 34,530 37,366 Net Income for Common Stock 37,710 22,402 16,307 34,266 36,914 BALANCE SHEET DATA Assets 798,504 802,148 810,379 815,614 771,977 Long-term obligations 282,211 278,640 275,070 273,245 210,047 Capitalization ratios Common stock equity 48% 48% 48% 49% 56% Preferred stock -- -- 1 1 1 Long-term debt 52 52 51 50 43 Ratio of earnings to fixed charges 3.33 2.21 2.05 2.63 3.37 (SEC Method) (1) See WEST TEXAS UTILITIES COMPANY - RESULTS OF OPERATIONS for major factors affecting earnings. 2-139 WEST TEXAS UTILITIES COMPANY RESULTS OF OPERATIONS Reference is made to WTU's Financial Statements, related Notes to Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Net income for common stock for 1998 was $37.7 million compared to $22.4 million for 1997, an increase of $15.3 million or 68%. The increase in net income was due primarily to higher non-fuel revenue. This increase was partially offset by higher maintenance expenses and income taxes. The increase in net income was also offset in part by the absence in 1998 of the recognition of the gain on reacquired preferred stock in 1997. Electric operating revenues were $425.0 million for 1998, an increase of $27.2 million, or 7%, when compared to the year ended 1997. This increase was due primarily to an increase in fuel and non-fuel related revenues of $4.5 million and $22.7 million, respectively. The increase in non-fuel related revenues was due primarily to a 4% increase in retail MWH sales resulting from favorable weather-related demand. Included in non-fuel related revenues were additional transmission related revenues resulting from changes to open access tariff transmission and a transmission coordination agreement currently pending before the FERC. Conversely, non-fuel related revenues were decreased by a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement and CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285). The increase in fuel-related revenues was attributable to higher fuel costs as discussed below. Fuel expense increased to $122.8 million for 1998 from $119.2 million compared to 1997 due primarily to a 6% increase in generation. The increase in generation was due largely to a 4% increase in MWH sales. Partially offsetting the increase was lower average unit cost of fuel. The average unit cost of fuel declined from $1.98 per MMbtu in 1997 to $1.83 per MMbtu in 1998. This decline in the average unit costs of fuel was due primarily to lower spot market natural gas and coal prices. Purchased power expense declined $2.4 million, or 5%, for 1998 compared to 1997 as a result of decreased economy energy purchases. Other operating expenses declined $3.9 million in 1998 when compared to 1997 resulting from a reduction in transmission expenses resulting from a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285) for additional information on the transmission service agreement. Additionally, other operating expenses also decreased due to lower employee-related expenses. The decrease was offset in part by higher production related expenses resulting from the increased utilization of generating stations to meet increased weather-related customer demand. Maintenance expenses rose $2.7 million from 1997 as a result of increased unplanned power plant maintenance activity. Operating income taxes were $20.6 million for 1998 compared to $9.4 million in 1997 for an increase of $11.2 million as a result of higher pre-tax income. Other income and deductions increased $1.2 million due to an increase in interest income on temporary cash investments, merchandise sales and under-recovered fuel cost. 2-140 COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock increased 37% during 1997 to $22.4 million from $16.3 million in 1996. The increase resulted primarily from the absence 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, and the gain on reacquisition of preferred stock of $1.1 million recognized in 1997. Electric operating revenues increased $20.7 million, or 6%, in 1997 when compared to 1996. The increase was due primarily to a $16.0 million increase in transmission revenues as a result of the January 1997 implementation of open access tariffs in accordance with FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also contributing to the increase was a 4% increase in total MWH sales. The impact on net income of the transmission revenues was offset by a corresponding increase of $17.2 million in transmission expense related to these transmission activities. Also contributing to the increase was $2.8 million in additional fuel revenues due to higher purchased power expense as discussed below. Fuel expense decreased $12.9 million, or 10%, for 1997 compared to 1996 due to lower-priced spot market coal and a 16% decrease in natural gas generation. This decrease was also reflected by a decline in the average unit cost of fuel to $1.98 per MMbtu in 1997 from $2.02 per MMbtu in 1996. Purchased power expenses increased $18.7 million for 1997 as compared to 1996, primarily as a result of additional economy purchases at a higher cost per MWH. Other operating expense increased $26.7 million, or 40%, for 1997 compared to 1996 due primarily to a $17.2 million increase in transmission expenses as a result of the Texas Commission rules regarding transmission access and pricing. Also contributing to the increase was a $5.2 million write-off of previously capitalized demand side management energy efficiency incentives and the write-off of obsolete inventory for $1.5 million. Partially offsetting the increase in other operating expense was a decrease in pension expense for 1997 compared to 1996. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Depreciation and amortization increased $1.8 million, or 4.6%, as a result of an increase in depreciable plant. Taxes, other than income increased $1.3 million due to changes in ad valorem, local franchise, and gross receipt taxes. Income taxes decreased $5.8 million in 1997 compared to 1996 due primarily to lower pre-tax income in 1997 and timing differences. Other income and deductions increased $11.4 million for 1997 compared to 1996 as a result of the absence in 1997 of a one-time charge incurred in 1996 associated with certain investments for plant sites, engineering studies, and lignite reserves of $10.9 million, net of tax. 2-141 WTU Statements of Income West Texas Utilities Company - --------------------------------------------------------------------------------
For the Years Ended December 31, ------------------------------------------------ 1998 1997 1996 -------------- ------------- ------------- (thousands) Electric Operating Revenues Residential $ 134,204 $ 124,578 $ 124,214 Commercial 76,155 73,196 72,422 Industrial 51,715 56,928 52,375 Sales for resale 97,560 88,814 88,921 Other 65,319 54,262 39,125 -------------- ------------- ------------- 424,953 397,778 377,057 -------------- ------------- ------------- Operating Expenses and Taxes Fuel 122,836 119,158 132,034 Purchased power 48,131 50,493 31,803 Other operating 89,924 93,796 68,869 Maintenance 16,666 14,013 14,122 Depreciation and amortization 42,750 41,592 39,755 Taxes, other than income 24,638 24,669 23,402 Income taxes 20,643 9,490 15,338 -------------- ------------- ------------- 365,588 353,211 325,323 -------------- ------------- ------------- Operating Income 59,365 44,567 51,734 -------------- ------------- ------------- Other Income and Deductions Charges for investments and plant development costs -- -- (14,949) Allowance for equity funds used during construction 678 227 423 Other 1,580 766 210 Non-operating income taxes 454 471 4,394 -------------- ------------- ------------- 2,712 1,464 (9,922) -------------- ------------- ------------- Income Before Interest Charges 62,077 46,031 41,812 -------------- ------------- ------------- Interest Charges Interest on long-term debt 20,352 20,352 21,169 Interest on short-term debt and other 4,580 4,911 4,925 Allowance for borrowed funds used during construction (669) (693) (853) -------------- ------------- ------------- 24,263 24,570 25,241 -------------- ------------- ------------- Net Income 37,814 21,461 16,571 Less: Preferred stock dividends 104 144 264 Gain on Reaquired Preferred Stock -- 1,085 -- -------------- ------------- ------------- Net Income for Common Stock $ 37,710 $ 22,402 $ 16,307 ============== ============= =============
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 2-142 WTU Statements of Retained Earnings West Texas Utilities Company - --------------------------------------------------------------------------------
For the Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (thousands) Retained Earnings at Beginning of Year $ 119,479 $ 123,077 $ 125,770 Net income for common stock 37,710 22,402 16,307 Deduct: Common stock dividends 40,000 26,000 19,000 ------------- ------------- ------------- Retained Earnings at End of Year $ 117,189 $ 119,479 $ 123,077 ============= ============= =============
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 2-143 WTU Balance Sheets West Texas Utilities Company - --------------------------------------------------------------------------------
As of December 31, ------------------------------------ 1998 1997 ---------------- --------------- (thousands) ASSETS Electric Utility Plant Production $ 429,896 $ 417,849 Transmission 213,630 208,905 Distribution 382,373 363,911 General 108,878 104,026 Construction work in progress 11,805 14,154 ---------------- --------------- 1,146,582 1,108,845 Less - Accumulated depreciation 473,503 441,281 ---------------- --------------- 673,079 667,564 ---------------- --------------- Current Assets Cash 2,093 811 Advances to affiliates -- 19,802 Accounts receivable 31,689 10,570 Materials and supplies, at average cost 14,191 14,246 Fuel inventory 13,186 12,471 Accumulated deferred income taxes 366 -- Under-recovered fuel costs 3,980 11,968 Prepayments and other 5,988 4,006 ---------------- --------------- 71,493 73,874 ---------------- --------------- Deferred Charges and Other Assets Deferred Oklaunion costs 14,910 18,637 Restructuring costs 7,079 8,966 Other 31,943 33,107 ---------------- --------------- 53,932 60,710 ---------------- --------------- $ 798,504 $ 802,148 ================ ===============
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 2-144 WTU Balance Sheets West Texas Utilities Company - --------------------------------------------------------------------------------
As of December 31, ---------------------------------------- 1998 1997 --------------- --------------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $25 par value Authorized: 7,800,000 shares Issued and outstanding: 5,488,560 shares $ 137,214 $ 137,214 Paid-in capital 2,236 2,236 Retained earnings 117,189 119,479 --------------- --------------- Total Common Stock Equity 256,639 48% 258,929 48% --------------- ------- --------------- ------- Preferred stock 2,482 --% 2,483 --% Long-term debt 282,211 52% 278,640 52% --------------- ------- --------------- ------- Total Capitalization 541,332 100% 540,052 100 --------------- ------- --------------- ------- Current Liabilities Advances from affiliates 4,573 -- Payables to affiliates 19,917 21,569 Accounts payable 31,473 29,522 Accrued taxes 10,031 11,375 Accumulated deferred income taxes -- 203 Accrued interest 4,125 4,525 Other 3,797 3,859 --------------- --------------- 73,916 71,053 --------------- --------------- Deferred Credits Accumulated deferred income taxes 140,731 149,346 Investment tax credits 26,597 27,918 Income tax related regulatory liabilities, net 12,088 9,482 Other 3,840 4,297 --------------- --------------- 183,256 191,043 --------------- --------------- $ 798,504 $ 802,148 =============== ===============
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 2-145 WTU Statements of Cash Flows West Texas Utilities Company - --------------------------------------------------------------------------------
For the Years Ended December 31, -------------------------------------------- 1998 1997 1996 ------------- ------------ ------------ (thousands) OPERATING ACTIVITIES Net Income $ 37,814 $ 21,461 $ 16,571 Non-cash Items Included in Net Income Depreciation and amortization 43,826 43,138 41,342 Deferred income taxes and investment tax credits (7,899) (2,275) 4,397 Charges for investments and assets 1,527 5,296 14,905 Inventory reserve -- 1,498 809 Changes in Assets and Liabilities Accounts receivable (21,119) 13,553 4,800 Fuel inventory (715) 4,203 (2,848) Accounts payable 1,952 (4,182) 584 Payables to affiliates (1,652) 7,991 5,334 Accrued taxes (1,344) (2,088) 281 Fuel recovery 7,988 (3,007) (11,917) Other deferred credits (457) 13,284 (5,482) Other (261) (3,626) 1,987 ------------- ------------ ------------ 59,660 95,246 70,763 ------------- ------------ ------------ INVESTING ACTIVITIES Construction expenditures (36,867) (31,817) (42,453) Other (5,782) 261 (1,795) ------------- ------------ ------------ (42,649) (31,556) (44,248) ------------- ------------ ------------ FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- -- 43,256 Reacquisition of long-term debt -- -- (45,639) Redemption of preferred stock -- (2,724) -- Payment of dividends (40,104) (26,184) (19,198) Change in advances from affiliates 4,573 (14,833) (4,987) ------------- ------------ ------------ (35,531) (43,741) (26,568) ------------- ------------ ------------ Net Change in Cash and Cash Equivalents (18,520) 19,949 (53) Cash and Cash Equivalents at Beginning of Year 20,613 664 717 ------------- ------------ ------------ Cash and Cash Equivalents at End of Year $ 2,093 $ 20,613 $ 664 ============= ============ ============ SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 17,250 $ 19,659 $ 20,248 ============= ============ ============ Income taxes paid $ 29,533 $ 15,710 $ 6,295 ============= ============ ============
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 2-146 WTU Statements of Capitalization West Texas Utilities Company - -------------------------------------------------------------------------------- As of December 31, ------------------------------ 1998 1997 ------------- -------------- (thousands) COMMON STOCK EQUITY $ 256,639 $ 258,929 ------------- -------------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 810,000 shares Number Current of Shares Redemption Series Outstanding Price - ----------------------------------------- 4.40% 23,675 $107.00 2,367 2,368 Premium 115 115 ------------- -------------- 2,482 2,483 ------------- -------------- LONG-TERM DEBT First Mortgage Bonds Series P, 7 3/4%, due June 1, 2007 25,000 25,000 Series Q, 6 7/8%, due October 1, 2002 35,000 35,000 Series R, 7%, due October 1, 2004 40,000 40,000 Series S, 6 1/8%, due February 1, 2004 40,000 40,000 Series T, 7 1/2%, due April 1, 2000 40,000 40,000 Series U, 6 3/8%, due October 1, 2005 80,000 80,000 Installment Sales Agreements - PCRBs * Series 1996, 6%, due June 1, 2020 (Red River) 44,310 44,310 Unamortized discount (792) (960) Unamortized costs of reacquired debt (21,307) (24,710) ------------- -------------- 282,211 278,640 ------------- -------------- TOTAL CAPITALIZATION $ 541,332 $ 540,052 ============= ============== *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 2-147 WEST TEXAS UTILITIES COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. SHORT-TERM FINANCING See CSW's NOTE 11. 11. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. 12. NEW ACCOUNTING STANDARDS See CSW's NOTE 18. 2-148 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of West Texas Utilities Company: We have audited the accompanying balance sheets and statements of capitalization of West Texas Utilities Company (a Texas corporation and a wholly-owned subsidiary of Central and South West Corporation) as of December 31, 1998 and 1997, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of West Texas Utilities Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Texas Utilities Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas February 12, 1999 2-149 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the financial statements of West Texas Utilities Company as well as other information contained in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the financial statements. The financial statements have been audited by WTU's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. WTU believes that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. WTU maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that WTU will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of WTU, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. WTU believes that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1998. /s/ Paul J. Brower /s/ R. Russell Davis Paul J. Brower R. Russell Davis General Manager/President - WTU Controller - WTU 2-150 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CSW None. CPL None. PSO None. SWEPCO None. WTU None. 2-151 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. CSW has filed with the SEC its Proxy Statement relating to its 1999 Annual Meeting of Stockholders. The information required by ITEM 10, other than with respect to certain information regarding the executive officers of CSW which is included in ITEM 1-BUSINESS, is hereby incorporated by reference herein from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement. (a) Directors of each of the U.S. Electric Operating Companies, together with certain information with respect to each of them, are listed below. Ages are as of March 1, 1999. Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- CPL JOHN F. BRIMBERRY AGE - 66 1995 CEO of Professional Insurance Agents, Inc., Victoria, Texas. E. R. BROOKS AGE - 61 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. GLENN FILES AGE - 51 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. RUBEN M. GARCIA AGE - 67 1981 President and CEO of Modem Construction Inc. and Modem Machine Shop, Inc., Laredo, Texas. ALPHONSO R. JACKSON AGE - 53 1998 President of CSW-Texas since February 1998. Vice President of CSW Energy, Inc., from 1996 to 1998. President and CEO of The Housing Authority of the City of Dallas, Texas, from 1989 to 1996. Director of Chase Bank of Texas N.A., Dallas, Texas. Director of Chase Bank of Texas, N.A., Houston, Texas. ROBERT A. McALLEN AGE - 64 1983 Robert A. McAllen, Insurance Agency, Weslaco, Texas. 3-1 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- PETE MORALES, JR. AGE - 58 1990 President of Morales Feed Lots, Inc., Devine, Texas. H. LEE RICHARDS AGE - 65 1987 Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas. J. GONZALO SANDOVAL AGE - 50 1992 General Manager/President of CPL since February 1998. General Manager of CPL from 1996 to 1998. Vice President, Operations and Engineering of CPL from 1993 to 1996. GERALD E. VAUGHN AGE - 56 1993 Chairman for the STPNOC since its formation in September 1997. Vice President, Nuclear of CSW Services since 1994. Vice President, Nuclear Affairs of CPL from 1993 to 1994. Each of the directors and executive officers of CPL is elected to hold office until the first meeting of CPL's Board of Directors after the 1999 Annual Meeting of Stockholders. CPL's 1999 Annual Meeting of Stockholders is presently scheduled to be held on April 8, 1999. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. PSO E. R. BROOKS AGE - 61 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. T. D. CHURCHWELL AGE - 54 1996 President of PSO since 1996. Executive Vice President of WTU from 1993 to 1996. HARRY A. CLARKE AGE - 70 1972 General Partner and President of HAC Investments, Afton, Oklahoma. GLENN FILES AGE - 51 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. 3-2 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- PAUL K. LACKEY, JR. AGE - 55 1992 Chief of Staff for the Governor of the State of Oklahoma since 1997. Secretary of Health and Human Services, Executive Director of the Office of Juvenile Affairs, State of Oklahoma, from 1995 to 1997. Consultant, Flint Industries, Inc., a construction, electronics manufacturing, and environmental services company, Tulsa, Oklahoma, during a portion of 1995. President, Flint Industries, Inc. from 1986 to 1995. Director of Bank South, Tulsa, Oklahoma. PAULA MARSHALL-CHAPMAN AGE - 45 1991 President and CEO of Bama Companies, a baked goods products company, Tulsa, Oklahoma. WILLIAM R. McKAMEY AGE - 52 1993 General Manager of PSO since 1996. Vice President, Marketing and Business Development of PSO from 1993 to 1996. DR. ROBERT B. TAYLOR, JR. AGE - 70 1975 Dentist, Okmulgee, Oklahoma. Each of the directors and executive officers of PSO is elected to hold office until the first meeting of PSO's Board of Directors after the 1999 Annual Meeting of Stockholders. PSO's 1999 Annual Meeting of Stockholders is presently scheduled to be held on April 20, 1999. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. SWEPCO KAREN C. ADAMS AGE - 38 1996 General Manager of SWEPCO since 1996. Director of Regulatory Services at CSW from 1995 to 1996. Administrative Director of the El Paso Transition Team at CSW from 1993 to 1995. E. R. BROOKS AGE - 61 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. JAMES E. DAVISON AGE - 61 1993 President and CEO of Davison Terminal Services, Inc. President and CEO of Davison Motor Company, Inc. President and CEO of Davison Insurance Company, Inc. All of the above entities are located in Ruston, Louisiana. Director of Bank One, Louisiana, Baton Rouge, Louisiana. 3-3 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- GLENN FILES AGE - 51 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. DR. FREDERICK E. JOYCE AGE - 64 1990 President of Chappell-Joyce Pathology Association, P.A., Texarkana, Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana, Texas. Director of New Boston Bank Shares, Inc., New Boston, Texas. Director of Century Bank, New Boston, Texas. JOHN M. LEWIS AGE - 59 1997 Chairman and CEO of The Bank of Fayetteville, Fayetteville, Arkansas. WILLIAM C. PEATROSS AGE - 55 1990 President and CEO of United Title of Louisiana, Inc. Director of Deposit Guaranty Bank. Both entities are located in Shreveport, Louisiana. MAXINE P. SARPY AGE - 59 1996 Vice President and Office Manager for Sarpy Medical Clinic, Shreveport, Louisiana. MICHAEL H. MADISON AGE - 50 1998 President of SWEPCO since April 1998. Programme Director of SEEBOARD from 1996 to 1998. Vice President, Operations and Engineering of SWEPCO from 1993 to 1996. Each of the directors and executive officers of SWEPCO is elected to hold office until the first meeting of SWEPCO's Board of Directors after the 1999 Annual Meeting of Stockholders. SWEPCO's 1999 Annual Meeting of Stockholders is presently scheduled to be held on April 14, 1999. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. WTU E. R. BROOKS AGE - 61 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. PAUL J. BROWER AGE - 50 1991 General Manager/President of WTU since February 1998. General Manager of WTU from 1996 to 1998. Vice President, Marketing and Business Development of WTU from 1991 to 1996. 3-4 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- GLENN FILES AGE - 51 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. ALPHONSO R. JACKSON AGE - 53 1998 President of CSW-Texas since February 1998. Vice President of CSW Energy, Inc., from 1996 to 1998. President and CEO of The Housing Authority of the City of Dallas, Texas, from 1989 to 1996. Director of Chase Bank of Texas N.A., Dallas, Texas. Director of Chase Bank of Texas, N.A., Houston, Texas. TOMMY MORRIS AGE - 64 1976 President of The Tommy Morris Agency, an independent insurance and investment agency, Abilene, Texas. DIAN G. OWEN AGE - 58 1994 Chairperson, Mansfeldt Investment Corporation, since 1997. Chairperson, Dian Graves Owen Foundation, a general purpose private foundation, since 1996. Consultant, Owen Healthcare, Inc., a hospital pharmacy management services company from 1997 to present. Corporate Executive/Founder of Owen Healthcare, Inc., from 1976 to 1997. JAMES M. PARKER AGE - 68 1987 President and CEO of J. M. Parker and Associates, Inc., an investment company, Abilene, Texas. Director of First Financial Bankshares, Inc. and First National Bank of Abilene, Abilene, Texas. F. L. STEPHENS AGE - 60 1980 Chairman and CEO of Town & Country Food Stores, Inc., San Angelo, Texas. Each of the directors and executive officers of WTU is elected to hold office until the first meeting of WTU's Board of Directors after the 1999 Annual Meeting of Stockholders. WTU's 1999 Annual Meeting of Stockholders is presently scheduled to be held on March 30, 1999. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. 3-5 (b) The following is a list of officers who are not directors of the registrants, together with certain information with respect to each of them: Year Name, Age, Principal First Elected to Occupation and Business Experience Present Position - -------------------------------------------------------------------------------- U.S. Electric Operating Companies WENDY G. HARGUS AGE - 41 1996 Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services since 1996. Controller of CSW from 1993 to 1996. R. RUSSELL DAVIS AGE - 42 1994 Controller of CPL, PSO, WTU, SWEPCO and CSW Services since 1994. CPL BRENDA L. SNIDER AGE - 45 1996 Corporate Secretary of CPL since 1996. Manager of Planning and Analysis at CPL since 1996. Senior Financial Consultant at CPL from 1994 to 1996. PSO LINA P. HOLM AGE - 58 1997 Corporate Secretary and Executive Secretary to the President of PSO since 1997. Executive Secretary to the President and Assistant Corporate Secretary of PSO from 1992 to 1997. SWEPCO MARILYN S. KIRKLAND AGE - 51 1995 Corporate Secretary of SWEPCO since 1995. Executive Administrator since 1997. Senior Executive Secretary to the President, from 1992 to 1997. WTU MARTHA MURRAY AGE - 53 1992 Corporate Secretary of WTU since 1992. 3-6 ITEM 11. EXECUTIVE COMPENSATION. Cash and Other Forms of Compensation CSW Information required by ITEM 11 with respect to CSW is hereby incorporated by reference herein from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement. The following table sets forth the aggregate cash and other compensation for services rendered for the fiscal years of 1998, 1997 and 1996 paid or awarded to the President of each of the U.S. Electric Operating Companies and the Named Executive Officers as defined below. Because of the functional restructuring undertaken by CSW during 1996, certain of the Executive Officers of the U.S. Electric Operating Companies, Messrs. Files, Bremer, Zemanek and Verret, are not actually employed by any of the U.S. Electric Operating Companies. Instead, they are employed by CSW Services and manage CSW business units and perform policy-making functions that are integral to the U.S. Electric Operating Companies. Therefore, these individuals are included in the Summary Compensation Table as Named Executive Officers due to the functional perspective regarding the management of the companies. U.S. Electric Operating Companies
SUMMARY COMPENSATION TABLE Long-Term Compensation --------------------------------------------------------- Annual Compensation Awards Payouts ----------------------- -------------------- --------------------------------- Other All Annual Restricted Securities Other Name and Compen- Stock Underlying LTIP Compen- Principal Position Salary Bonus sation Award(s) Options/ Payouts sation at Registrant Year ($) ($)(1) ($)(2) ($)(1)(3) SARs(#) ($)(4) ($)(5) - -------------------- ---- ------- ------- ------- ----------- ---------- --------- --------- Glenn Files 1998 392,307 125,000 10,753 -- -- 75,992 23,263 Senior Vice President 1997 374,999 143,099 8,534 -- 31,000 -- 23,757 of CSW Electric 1996 331,135 44,860 66,415 153,750 -- -- 23,992 Operations (2,4,5) Richard H. Bremer 1998 328,154 48,642 2,499 -- -- 87,818 23,263 President of CSW 1997 307,462 99,993 4,648 -- 26,000 -- 21,357 Energy Services 1996 305,910 144,404 73,711 153,750 -- -- 21,742 business unit (2,4,5) Robert L. Zemanek 1998 294,144 9,560 49,818 -- -- 81,702 23,263 President of CSW 1997 283,250 89,279 10,272 -- 24,000 -- 23,757 Energy Delivery 1996 283,250 176,863 6,500 153,750 -- -- 23,992 business unit (2,4,5) Richard P. Verret 1998 270,038 50,953 1,833 -- -- 47,576 7,900 President of CSW 1997 251,230 83,390 2,083 -- 21,000 -- 7,953 Production 1996 236,154 84,788 6,055 89,688 -- -- 7,590 (4,5) J. Gonzalo Sandoval 1998 138,115 8,110 -- -- -- 18,944 6,580 General Manager/ President of CPL(4) T.D. Churchwell 1998 199,904 6,738 2,359 -- -- 37,942 7,900 President of PSO 1997 192,500 53,672 2,167 -- 13,000 -- 6,398 (2,4,5) 1996 192,500 24,097 79,730 38,438 -- -- 5,340 Michael H. Madison 1998 178,593 53,150 28,914 -- -- 18,944 7,900 President of SWEPCO (2,4,5) Paul Brower, 1998 138,115 2,874 15,136 -- -- 18,944 6,344 General Manager/ President of WTU(2,4)
(Notes are on the following page) 3-7 (1) Amounts in these columns are paid or awarded in a calendar year for performance in a preceding year. (2) The following are the perquisites and other personal benefits required to be identified in respect of each Named Executive Officer. In 1998, Mr. Zemanek was reimbursed $12,000 for a company automobile allowance and $19,314 for moving expenses. In 1998, Mr. Madison was reimbursed $8,100 for a company automobile allowance and $6,444 for moving expenses. In 1998, Mr. Brower was reimbursed $8,542 for membership dues. 1996 Relocation Reimbursements ------------------------------------------------ Glenn Files $25,662 Richard H. Bremer 34,117 T.D. Churchwell 38,955 (3) Grants of restricted stock are administered by the Executive Compensation Committee of the CSW Board of Directors, which has the authority to determine the individuals to whom and the terms upon which restricted stock grants, including the number of underlying shares, shall be made. The awards reflected in this column were made in 1996 and have a four-year vesting period with 25 percent of the stock vesting on each anniversary date. Upon vesting, shares of CSW Common Stock are re-issued without restrictions. The individuals receive dividends and may vote shares of restricted stock, even before they are vested. The amount reported in the Summary Compensation Table represents the market value of the shares at the date of grant. As of December 31, 1998, the aggregate restricted stock holdings of each of the Named Executive Officers are presented in the following table. Restricted Stock Held Market Value at At December 31, December 31, Name 1998 1998 --------------------------------------------------------------- Glenn Files 5,808 $159,357 Richard H. Bremer 6,245 171,347 Robert L. Zemanek 6,019 165,146 Richard P. Verret 3,508 96,251 J. Gonzalo Sandoval 1,450 39,784 T. D. Churchwell 2,152 59,046 Michael H. Madison 1,450 39,784 Paul J. Brower 1,450 39,784 (4)The awards reflected in this column are the value of restricted shares paid out under the LTIP in 1998. The awards have a two-year vesting period with 50 percent of the stock vesting on each anniversary date. Upon vesting, shares of CSW Common Stock are re-issued without restrictions. The individual receives dividends and may vote shares of restricted stock, even before they are vested. The amount reported in the Summary Compensation Table represents the market value of the shares at the date of grant. (5)Amounts shown in this column consist of: (i) the annual employer matching payments to CSW's Retirement Savings Plan; (ii) premiums paid per participant for personal liability insurance; and (iii) average amounts of premiums paid per participant in those years under CSW's memorial gift program. Under this program, for certain executive officers, directors and retired directors from the CSW System, CSW will make a donation in a participant's name to up to three charitable organizations in an aggregate of $500,000, payable by CSW upon such person's death. CSW maintains corporate-owned life insurance policies to fund the program. The annual premiums paid by CSW are based on pooled risks and averaged $15,363 per participant for 1998, $15,803 for 1997, and $16,402 for 1996. In 1998, 1997 and 1996, Messrs. Bremer, Files and Zemanek participated. 3-8 Option/SAR Grants No stock options or appreciation rights were granted in 1998. Option/SAR Exercises and Year-End Value Table Shown below is information regarding option/SAR exercises during 1998 and unexercised options/SARs at December 31, 1998 for the Named Executive Officers. Aggregated Option/SAR Exercises in 1998 and Fiscal Year-End Option/SAR Values
Number of CSW Securities Value of Unexercised Value Underlying Unexercised In-the-Money Options/SARs Shares Acquired Realized Options/SARs at Year-End Options/SARs at Year-End Name on Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1) - ------------------------------------------------------------------------------------------------------------ Glenn Files -- -- 33,986/20,677 83,564/138,211 Richard H. Bremer -- -- 36,998/17,334 72,493/115,921 Robert L. Zemanek -- -- 33,430/16,000 69,051/107,000 Richard P. Verret 17,190 73,557 3,135/14,000 (6,858)/93,625 J. Gonzalo Sandoval 4,010 10,524 2,916/-- (6,379)/-- T. D. Churchwell 4,333 28,977 9,268/8,667 9,238/57,961 Michael H. Madison 7,676 35,040 3,135/7,334 (6,858)/49,046 Paul J. Brower -- -- 7,145/-- 3,666/--
(1)Calculated based upon the difference between the closing price of CSW's Shares on the New York Stock Exchange on December 31, 1998 ($27.4375 per share) and the exercise price per share of the outstanding unexercisable and exercisable options ($20.750, $24.813 and $29.625, as applicable). Long-term Incentive Plan Awards in 1998 The following table shows information concerning awards made to the Named Executive Officers during 1998 under the CSW LTIP. Estimated Future Payouts under Non-Stock Price Based Plans -------------------------------- Performance or Other Period Number of Until Shares, Units Maturation or Or Payout Threshold Target Maximum Name Other Rights (1) ($) ($) ($) - -------------------------------------------------------------------------------- Glenn Files 8,314 2 years -- 225,000 337,500 Richard H. Bremer 7,006 2 years -- 189,600 284,400 Robert L. Zemanek 6,280 2 years -- 169,950 254,925 Richard P. Verret 5,720 2 years -- 154,800 232,200 J. Gonzalo Sandoval -- 2 years -- - -- T. D. Churchwell 2,845 2 years -- 77,000 115,500 Michael H. Madison 2,439 2 years -- 66,000 99,000 Paul J. Brower -- 2 years -- -- -- (1) Vesting period for awards paid at end of three year cycle. Payouts of these awards are contingent upon CSW's achieving a specified level of total stockholder return, relative to a peer group of utility companies, for a three-year period, or cycle, and exceeding a certain defined minimum threshold. If the Named Executive Officer's employment is terminated during the performance period for any reason other than death, total and permanent disability or retirement, then the award is canceled. The CSW LTIP contains a provision accelerating awards upon a change in control of CSW. If a 3-9 change in control of CSW occurs, all options and SARs become fully exercisable and all restrictions, terms and conditions applicable to all restricted stock are deemed lapsed and satisfied and all performance-based units are deemed to have been fully earned, as of the date of the change in control. The CSW LTIP also contains provisions designed to prevent circumvention of the above acceleration provisions through coerced termination of an employee prior to a change in control. Retirement Plan CSW maintains the Retirement Plan for eligible employees. In addition, CSW maintains the SERP, a non-qualified ERISA excess plan, that primarily provides benefits that cannot be payable under the Retirement Plan because of maximum limitations imposed on such plans by the Internal Revenue Code. Under the cash balance formula, each participant has an account for recordkeeping purposes only, to which dollar amount credits are allocated annually based on a percentage of the participant's pay. Pay for the Retirement Plan includes base pay, bonuses, overtime, and commissions. The applicable percentage is determined by the age and years of vesting service the participant has with CSW and its affiliates as of December 31 of each year (or as of the participant's termination date, if earlier). The following table shows the applicable percentage used to determine dollar amount credits at the age and years of service indicated. Sum of Age plus Years of Service Applicable Percentage ------------------------------------------------ less than 30 3.0% 30-39 3.5% 40-49 4.5% 50-59 5.5% 60-69 7.0% 70 or more 8.5% As of December 31, 1998, the sum of age plus years of service of the Named Executive Officers for the cash balance formula are as follows: Mr. Files, 78; Mr. Bremer, 71; Mr. Zemanek, 75; Mr. Verret, 78; Mr. Sandoval, 74, Mr. Churchwell, 74; Mr. Madison, 77; Mr. Brower, 71. All dollar amount balances in the accounts of participants earn a fixed rate of interest which is also credited annually. The interest rate for a particular year is the average rate of return of the 30-year Treasury Rate for November of the prior year. For 1998, the interest rate was 6.11%. For 1999, the interest rate is 5.25%. Interest continues to be credited as long as the participant's balance remains in the plan. At retirement or other termination of employment, an amount equal to the vested balance (including qualified and SERP benefit) then credited to the account is payable to the participant in the form of an immediate or deferred lump-sum or annuity. Benefits (both from the Retirement Plan and the SERP) under the cash balance formula are not subject to reduction for Social Security benefits or other offset amounts. The estimated annual benefit payable to each of the Named Officers as a single life annuity at age 65 under the Retirement Plan and the SERP is: Mr. Files, $233,016; Mr. Bremer, $180,955; Mr. Zemanek, $200,710; Mr. Verret, $148,896; Mr. Sandoval, $81,802; Mr. Churchwell; $93,338; Mr. Madison, $114,653; Mr. Brower, $67,063. These projections are based on the following assumptions: (1) participant remains employed until age 65; (2) salary used is base pay paid for calendar year 1998 assuming no future increases plus bonus at 1998 target level; (3) interest credit at 5.25% for 1999 and future years; and (4) the conversion of the lump-sum cash balance to a single life annuity at normal retirement age is based on an interest rate of 5.25% and the 1983 Group Annuity Mortality Table, which sets forth generally accepted life expectancies. 3-10 In addition, certain employees who were 50 or over and had completed at least 10 years of service as of July 1, 1997, also continue to earn a benefit using the prior pension formula. At commencement of benefits, Mr. Verret and Mr. Churchwell have a choice of their accrued benefit using the cash balance formula or their accrued benefit using the prior pension formula. Once the participant selects either the earned benefit under the cash balance formula or the earned benefit under the prior pension formula, the other earned benefit is no longer available. The table below shows the estimated combined benefits payable from both the prior pension formula and the SERP based on retirement age of 65, the average compensation shown, the years of credited service shown, continued existence of the prior pension formula without substantial change and payment in the form of a single life annuity. Annual Benefits After Specified Years of Credited Service Average Compensation 15 20 25 30 or more ---------------------------------------------------------------- $100,000 $25,050 $33,333 $41,667 $50,000 150,000 37,575 50,000 62,500 75,000 200,000 50,100 66,667 83,333 100,000 250,000 62,625 83,333 104,167 125,000 300,000 75,150 100,000 125,000 150,000 350,000 87,675 116,667 145,833 175,000 450,000 112,725 150,000 187,500 225,000 550,000 137,775 183,333 229,167 275,000 650,000 162,825 216,667 270,833 325,000 750,000 187,875 250,000 312,500 375,000 850,000 212,500 283,333 357,000 425,000 950,000 237,975 316,667 395,833 475,000 Benefits payable under the prior pension formula are based upon the participant's years of credited service (up to a maximum of 30 years), age at retirement, and covered compensation earned by the participant. The annual normal retirement benefit payable under the prior pension formula and the SERP are based on 1.67 percent of "Average Compensation" times the number of years of credited service (reduced by no more than 50 percent of a participant's age 62 or later Social Security benefit). "Average Compensation" is covered compensation for the prior pension formula and equals the average annual compensation, reported as salary in the Summary Compensation Table, during the 36 consecutive months highest pay during the 120 months prior to retirement. Respective years of credited service and ages, as of December 31, 1998, for the following officers who continue to earn a benefit under the prior pension formula are: Mr. Verret, 26 and 52, Mr. Churchwell, 20 and 54. 3-11 Meetings and Compensation Those directors who are not also officers of CPL, PSO, SWEPCO and WTU receive annual directors' fees and a fee of $300 plus expenses for each board or committee meeting attended, as described below. They are also eligible to participate in a deferred compensation plan. Under this plan such directors may elect to defer payment of annual directors' and meeting fees until they retire from the board or as they otherwise direct. The number of board meetings and annual directors' fees are presented in the following table. CPL PSO SWEPCO WTU --------------------------------------------- Number of regular board meetings 4 4 4 4 Annual directors' fees $6,000 $6,000 $6,600 $6,000 Compensation Committee Interlocks and Insider Participation No person serving during 1998 as a member of the Executive Compensation Committee of the Board of Directors of CSW served as an officer or employee of any Registrant during or prior to 1998. No person serving during 1998 as an executive officer of the U.S. Electric Operating Companies serves or has served on the compensation committee or as a director of another company whose executive officers serve or has served as a member of the Executive Compensation Committee of CSW or as a director of one of the U.S. Electric Operating Companies. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. CSW The information required by ITEM 12 is incorporated by reference herein from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement. U.S. Electric Operating Companies All of the outstanding shares of common stock of each of the U.S. Electric Operating Companies, presented in the following table, is owned beneficially and of record by CSW. Company Shares Par Value ------------------------------------------------- CPL 6,755,535 $25 PSO 9,013,000 15 SWEPCO 7,536,640 18 WTU 5,488,560 25 Security Ownership of Management The following tables show securities beneficially owned as of December 31, 1998, by each director, the President, Executive Officers and all directors and Executive Officers as a group for each of the U.S. Electric Operating Companies. Share amounts shown in this table include options exercisable within 60 days after December 31, 1998, restricted stock, CSW Common Stock credited to Thrift Plus accounts and all other CSW Common Stock beneficially owned by the listed persons. 3-12 Each of the U.S. Electric Operating Companies has one or more series of preferred stock outstanding. As of December 31, 1998, none of the individuals listed in the following tables owned any shares of preferred stock of any of the U.S. Electric Operating Companies. Beneficial Ownership as of December 31, 1998 CSW Common Underlying CSW Restricted Immediately Common Stock Exercisable Name (1) (2) (3) Options (3) - ------------------------------------------------------------------------ CPL John F. Brimberry 1,097 -- -- E. R. Brooks 139,579 16,307 65,175 Glenn Files 53,388 5,808 33,986 Ruben M. Garcia -- -- -- Robert A. McAllen 250 -- -- Pete Morales, Jr. -- -- -- H. Lee Richards 1,400 -- -- J. Gonzalo Sandoval 5,200 1,450 2,916 Gerald E. Vaughn 10,535 1,450 5,003 Wendy Hargus 12,966 1,450 8,983 Alphonso Jackson 3,783 443 3,333 R. Russell Davis 1,406 -- 1,406 Brenda L. Snider 620 -- -- ------------------------------------------- TOTAL 230,224 26,908 120,802 PSO E. R. Brooks 139,579 16,307 65,175 T. D. Churchwell 13,462 2,152 9,268 Harry A. Clarke -- -- -- Glenn Files 53,388 5,808 33,986 Paul K. Lackey, Jr. -- -- -- Paula Marshall-Chapman -- -- -- William R. McKamey 17,589 1,450 3,323 Dr. Robert B. Taylor, Jr. -- -- -- Wendy Hargus 12,966 1,450 8,983 R. Russell Davis 1,406 -- 1,406 Lina P. Holm 682 -- -- ------------------------------------------- TOTAL 239,072 27,167 122,141 SWEPCO Karen C. Adams 2,587 -- 880 E. R. Brooks 139,579 16,307 65,175 James E. Davison 14,000 -- -- Glenn Files 53,388 5,808 33,986 Dr. Frederick E. Joyce -- -- -- John M. Lewis -- -- -- William C. Peatross -- -- -- Maxine P. Sarpy 100 -- -- Michael H. Madison 9,723 1,450 3,135 Wendy Hargus 12,966 1,450 8,983 R. Russell Davis 1,406 -- 1,406 Marilyn S. Kirkland -- -- -- ------------------------------------------ TOTAL 233,749 25,015 113,565 WTU E. R. Brooks 139,579 16,307 65,175 Paul J. Brower 10,890 1,450 7,145 Glenn Files 53,388 5,808 33,986 Tommy Morris 2,000 -- -- Dian G. Owen -- -- -- James M. Parker -- -- -- F. L. Stephens 8,098 -- -- Alphonso Jackson 3,783 443 3,333 Wendy Hargus 12,966 1,450 8,983 R. Russell Davis 1,406 -- 1,406 Martha Murray 3,209 -- -- ------------------------------------------- TOTAL 235,319 25,458 120,028 (1)Beneficial ownership percentages are all less than one percent and therefore are omitted. (2)These individuals currently have voting power, but not investment power, with respect to these shares. (3)These shares are included in the CSW Common column. 3-13 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CSW The information required by ITEM 13 is incorporated herein by reference from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement. U.S. Electric Operating Companies None. 3-14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report on this Form 10-K. (1) Financial Statements. Reports of Independent Public Accountants on the financial statements for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein. The financial statements filed as a part of this report for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein. (2) Exhibits. Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (c) Index to Exhibits below. (b) Reports on Form 8-K. CSW and PSO Date of earliest event reported: October 1, 1998 Date of report: October 9, 1998 Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting the recommendation of an Oklahoma Commission administrative law judge to dismiss the AEP and CSW merger application due to insufficient information. CSW, CPL, PSO, SWEPCO and WTU Date of earliest event reported: November 19, 1998 Date of report: December 7, 1998 Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting the FERC's procedural schedule for the AEP and CSW merger application and a proposed merger settlement with two intervenors in the Texas merger proceedings. CSW, CPL, PSO, SWEPCO and WTU Date of earliest event reported: December 17, 1998 Date of report: January 5, 1999 Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting developments in the CSW and AEP merger proceedings in Arkansas, as well as, the current status of other regulatory proceedings. 4-1 CSW SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1999. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant and any subsidiaries thereof. CENTRAL AND SOUTH WEST CORPORATION By: Lawrence B. Connors Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 1999. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant and any subsidiaries thereof. Signature Title E. R. Brooks Chairman, CEO and Director (Principal Executive Officer) Glenn D. Rosilier Executive Vice President and Chief Financial Officer (Principal Financial Officer) Lawrence B. Connors Controller (Principal Accounting Officer) *Molly Shi Boren Director *Dr. Donald M. Carlton Director *T. J. Ellis Director *Joe H. Foy Director *William R. Howell Director *Dr. Robert W. Lawless Director *James L. Powell Director *Dr. Richard L. Sandor Director *T. V. Shockley, III President, Chief Operating Officer and Director *Lawrence B. Connors, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: Lawrence B. Connors Attorney-in-Fact 4-2 CPL SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1999. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. CENTRAL POWER AND LIGHT COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 1999. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title J. Gonzalo Sandoval General Manager/President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *John F. Brimberry Director *E. R. Brooks Director *Glenn Files Director *Ruben M. Garcia Director *Alphonso R. Jackson Director *Robert A. McAllen Director *Pete Morales, Jr. Director *H. Lee Richards Director *Gerald E. Vaughn Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-3 PSO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1999. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. PUBLIC SERVICE COMPANY OF OKLAHOMA By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 1999. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title T. D. Churchwell President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *Harry A. Clarke Director *Glenn Files Director *Paul K. Lackey, Jr. Director *Paula Marshall-Chapman Director *William R. McKamey General Manager and Director *Dr. Robert B. Taylor, Jr. Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-4 SWEPCO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1999. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. SOUTHWESTERN ELECTRIC POWER COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 1999. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title Michael H. Madison President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *Karen C. Adams General Manager and Director *E. R. Brooks Director *James E. Davison Director *Glenn Files Director *Dr. Frederick E. Joyce Director *John M. Lewis Director *William C. Peatross Director *Maxine P. Sarpy Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-5 WTU SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1999. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. WEST TEXAS UTILITIES COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 1999. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title Paul J. Brower General Manager/President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *Glenn Files Director *Alphonso R. Jackson Director *Tommy Morris Director *Dian G. Owen Director *James M. Parker Director *F. L. Stephens Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-6 (c) Index to Exhibits. The following exhibits indicated by an asterisk (*) preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filed with the SEC, respectively, as the exhibits and in the file numbers indicated and are incorporated herein by reference. The exhibits marked with a plus (+) are management contracts or compensatory plans or arrangements required to be filed herewith and required to be identified as such by ITEM 14 of Form 10-K. Reference is made to a duplicate list of exhibits being filed as a part of this Form 10-K, which list, prepared in accordance with Item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this Form 10-K. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. CSW and SWEPCO 1 Plan of Reorganization for Cajun Electric Power Cooperative, Inc. submitted jointly by the Members Committee, SWEPCO and Gulf States Utilities Company (incorporated herein by reference to CSW and SWEPCO's Form 8-K dated April 19, 1996). 2 Amended Plan of Reorganization for Cajun Electric Power Cooperative, Inc. submitted jointly by the Members Committee, SWEPCO and Entergy Texas, Inc. (incorporated herein by reference to CSW and SWEPCO's Form 8-K dated September 30, 1996). 3 Amended and Restated Joint Plan of Reorganization for Cajun Electric Power Cooperative, Inc. submitted jointly by the Members Committee and SWEPCO dated March 18, 1998. (incorporated herein by reference to CSW and SWEPCO's Form 10-K dated December 31, 1997). (3) Articles of Incorporation and Bylaws. CSW 1 Certificate of Amendment to Second Restated Certificate of Incorporation of CSW(incorporated herein by reference to Item 10, Exhibit B-1.2 to the 1993 CSW annual report on Form U5S). *2 Bylaws of CSW, as amended January 20, 1999. CPL 3 Restated Articles of Incorporation Without Amendment, Articles of Correction to Restated Articles of Incorporation Without Amendment, Articles of Amendment to Restated Articles of Incorporation, Statements of Registered Office and/or Agent, and Articles of Amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to CPL's Form 10-Q dated March 31, 1997). 4 Bylaws of CPL, as amended (incorporated herein by reference to Exhibit 3.1 to CPL's Form 10-Q dated September 30, 1996, File No. 0-346). PSO 5 Restated Certificate of Incorporation of PSO (incorporated herein by reference to Exhibit B-3.1 of CSW's 1996 Form U5S, File No. 1-1443). 6 Bylaws of PSO, as amended (incorporated herein by reference to Exhibit 3.1 of PSO's Form 10-Q, dated March 31, 1998, File No. 0-343). 4-7 SWEPCO 7 Restated Certificate of Incorporation, as amended through May 6, 1997, including Certificate of Amendment of Restated Certificate of Incorporation (both incorporated herein by reference to Exhibit 3.4 to SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 8 Bylaws of SWEPCO, as amended (incorporated herein by reference to Exhibit 3.3 to SWEPCO's Form 10-Q dated September 30, 1996, File No. 1-3146). WTU 9 Restated Articles of Incorporation, as amended, and Articles of Amendment to the Articles of Incorporation (both incorporated herein by reference to Exhibit 3.5 to WTU's Form 10-K dated March 31, 1997, File No. 0-340). 10 Bylaws of WTU, as amended (incorporated herein by reference to Exhibit 3.4 to WTU's Form 10-Q dated September 30, 1996, File No. 0-340). (4) Instruments defining the rights of security holder, including indentures. CSW 1 Rights Agreement dated as of December 22, 1997 between CSW and Central and South West Services, Inc., as Rights Agent (incorporated herein by reference to Exhibit 1 to CSW Form 8-A/A dated March 19, 1998, File No. 1-1443). CPL (a) Indenture of mortgage or deed of trust date November 1, 1943, executed by CPL to the First National Bank of Chicago and Robert L. Grinnell as trustee, as amended through October 1, 1977 (incorporated herein by reference to Exhibit 5.01 in File No. 2-60712). (b) Supplemental Indentures to the First Mortgage Indenture: Dated File Reference Exhibit September 1, 1978 2-62271 2.02 December 15, 1984 Form U-1, No. 70-7003 17 July 1, 1985 2-98944 4 (b) May 1, 1986 Form U-1, No. 70-7236 4 November 1, 1987 Form U-1, No. 70-7249 4 June 1, 1988 Form U-1, No. 70-7520 2 December 1, 1989 Form U-1, No. 70-7721 3 March 1, 1990 Form U-1, No. 70-7725 10 October 1, 1992 Form U-1, No. 70-8053 10 (a) December 1, 1992 Form U-1, No. 70-8053 10 (b) February 1, 1993 Form U-1, No. 70-8053 10 (c) April 1, 1993 Form U-1, No. 70-8053 10 (d) May 1, 1994 Form U-1, No. 70-8053 10 (e) July 1, 1995 Form U-1, No. 70-8053 10 (f) (c) CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL. 4-8 2 Indenture, dated as of May 1, 1997, between CPL and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). 3 First Supplemental Indenture, dated as of May 1, 1997, between CPL and the Bank of NewYork, as Trustee (incorporated herein by reference to Exhibit 4.2 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). 4 Amended and Restated Trust Agreement of CPL Capital I, dated as of May 1, 1997, among CPL, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.3 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). 5 Guarantee Agreement, dated as of May 1, 1997, delivered by CPL for the benefit of the holders of CPL Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.4 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). 6 Agreement as to Expenses and Liabilities, dated as of May 1, 1997, between CPL and CPL Capital I (incorporated herein by reference to Exhibit 4.5 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). PSO (a) Indenture dated July 1, 1945, as amended, of PSO (incorporated herein by reference to Exhibit 5.03 in Registration No. 2-60712). (b) Supplemental Indentures to the First Mortgage Indenture: Dated File Reference Exhibit June 1, 1979 2-64432 2.02 December 1, 1979 2-65871 2.02 March 1, 1983 Form U-1, No. 70-6822 2 May 1, 1986 Form U-1, No. 70-7234 3 July 1, 1992 Form S-3, No. 33-48650 4 (b) December 1, 1992 Form S-3, No. 33-49143 4 (c) April 1, 1993 Form S-3, No. 33-49575 4 (b) June 1, 1993 Form 10-K, No. 0-343 4 (b) February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.01 February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.02 February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.03 (c) PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO. 7 Indenture, dated as of May 1, 1997, between PSO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.6 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). 8 First Supplemental Indenture, dated as of May 1, 1997, between PSO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.7 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). 9 Amended and Restated Trust Agreement of PSO Capital I, dated as of May 1, 1997, among PSO, as Depositor; the Bank of New York, as Property 4-9 Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.8 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). 10 Guarantee Agreement, dated as of May 1, 1997, delivered by PSO for the benefit of the holders of PSO Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.9 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). 11 Agreement as to Expenses and Liabilities, dated as of May 1, 1997, between PSO and PSO Capital I (incorporated herein by reference to Exhibit 4.10 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). SWEPCO (a) Indenture dated February 1, 1940, as amended through November 1, 1976 (incorporated herein by reference to Exhibit 5.04 in Registration No. 2-60712). (b) Supplemental Indentures to the First Mortgage Indenture: Dated File Reference Exhibit August 1, 1978 2-61943 2.02 January 1, 1980 2-66033 2.02 April 1, 1981 2-71126 2.02 May 1, 1982 2-77165 2.02 August 1, 1985 Form U-1, No. 70-7121 4 May 1, 1986 Form U-1, No. 70-7233 3 November 1, 1989 Form U-1, No. 70-7676 3 June 1, 1992 Form U-1, No. 70-7934 10 September 1, 1992 Form U-1, No. 72-8041 10 (b) July 1, 1993 Form U-1, No. 70-8041 10 (c) October 1, 1993 Form U-1, No. 70-8239 10 (a) (c) SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO. 12 Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.11 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 13 First Supplemental Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.12 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 14 Amended and Restated Trust Agreement of SWEPCO Capital I, dated as of May 1, 1997, among SWEPCO, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.13 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 15 Guarantee Agreement, dated as of May 1, 1997, delivered by SWEPCO for the benefit of the holders of SWEPCO Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.14 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 16 Agreement as to Expenses and Liabilities, dated as of May 1, 1997 between SWEPCO and SWEPCO Capital I (incorporated herein by reference to Exhibit 4.15 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 4-10 WTU (a) Indenture dated August 1, 1943, as amended through July 1, 1973, of WTU, incorporated herein by reference to Exhibit 5.05 in File No. 2-60712. (b) Supplemental Indentures to the First Mortgage Indenture: Dated File Reference Exhibit May 1, 1979 2-63931 2.02 November 15, 1981 2-74408 4.02 November 1, 1983 Form U-1, No. 70-6820 12 April 15, 1985 Form U-1, No. 70-6925 13 August 1, 1985 2-98843 4 (b) May 1, 1986 Form U-1, No. 70-7237 4 December 1, 1989 Form U-1, No. 70-7719 3 June 1, 1992 Form U-1, No. 70-7936 10 October 1, 1992 Form U-1, No. 72-8057 10 February 1, 1994 Form U-1, No. 70-8265 10 March 1, 1995 Form U-1, No. 70-8057 10 (b) October 1, 1995 Form U-1, No. 70-8057 10 (c) (10) Material contracts. CSW +1 Change in Control Agreement between CSW and E. R. Brooks. +2 Change in Control Agreement between CSW and Thomas V. Shockley, III. +3 Change in Control Agreement between CSW and Ferd. C. Meyer, Jr. +4 Change in Control Agreement between CSW and Glenn D. Rosilier. +5 Change in Control Agreement between CSW and Venita. McCellon-Allen. +6 Change in Control Agreement between CSW and Thomas M. Hagan. +7 Change in Control Agreement between CSW and Glenn Files. +8 Change in Control Agreement between CSW and Robert L. Zemanek. +9 Change in Control Agreement between CSW and Richard H. Bremer. +10 Change in Control Agreement between CSW and Richard P. Verret. +11 Change in Control Agreement between CSW and T. J. Ellis. +12 Change in Control Agreement between CSW and Terry D. Dennis. +13 Change in Control Agreement between CSW and Bruce Evans. +14 Change in Control Agreement between CSW and Pete Churchwell. +15 Change in Control Agreement between CSW and Michael D. Smith. +16 Change in Control Agreement between CSW and Floyd Nickerson. +17 Restricted Stock Plan for Central and South West Corporation (incorporated herein by reference to Exhibit 10 (a) to CSW's 1990 Form 10-K, File No. 1-1443). *+18 Central and South West System Special Executive Retirement Plan as amended and restated effective July 1, 1997. +19 Executive Incentive Compensation Plan for Central and South West System (incorporated herein by reference to Exhibit 10 (c) to the Corporation's 1990 Form 10-K, File No. 1-1443). 20 Central and South West Corporation Stock Option Plan (incorporated herein by reference to Exhibit 10 (d) to the Corporation's 1990 Form 10-K, File No. 1-1443). 21 Central and South West Corporation Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10 (e) to the Corporation's 1990 Form 10-K, File No. 1-1443). 4-11 +22 Central and South West Corporation 1992 Long-Term Incentive Plan (incorporated herein by reference to Appendix A to the Central and South West Corporation Notice of 1992 Annual Meeting of Shareholders and Proxy Statement). 23 Agreement and Plan of Merger, dated as of December 21, 1997, by and among American Electric Power Company, Inc.; a New York Corporation, Augusta Acquisition Corporation, a Delaware Corporation and a wholly-owned subsidiary of AEP; and Central and South West Corporation, a Delaware Corporation (incorporated herein by reference to the 1998 Joint Proxy Statement, File No. 1-1443). *+24 Central and South West Corporation Executive Deferred Savings Plan as amended and restated effective as of January 1, 1997. (12) Statements re computation of ratios. CPL, PSO, SWEPCO and WTU * 1 CPL's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1998. * 2 PSO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1998. * 3 SWEPCO's Statement re computation of Ratio of Earnings to Fixed Charges for the five year ended December 31, 1998. * 4 WTU's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1998. * (13) Annual report to security holders. CSW's 1998 Financial Report. * (21) Subsidiaries of the registrant (CSW). (23) Consent of experts and counsel. CSW, CPL, PSO * 1 CSW's Consent of Independent Public Accountants. * 2 CSW UK Finance Company's Consent of Independent Public Accountants. * 3 CPL's Consent of Independent Public Accountants. * 4 PSO's Consent of Independent Public Accountants. (24) Power of attorney. CSW * 1 Power of Attorney. * 2 Power of Attorney. * 3 Power of Attorney. * 4 Power of Attorney. * 5 Board Resolution Authorizing Power of Attorney. 4-12 CPL * 6 Power of Attorney. * 7 Power of Attorney. * 8 Power of Attorney. * 9 Board Resolution Authorizing Power of Attorney. PSO * 10 Power of Attorney. * 11 Power of Attorney. * 12 Power of Attorney * 13 Board Resolution Authorizing Power of Attorney. SWEPCO * 14 Power of Attorney. * 15 Power of Attorney. * 16 Power of Attorney. * 17 Board Resolution Authorizing Power of Attorney WTU * 18 Power of Attorney. * 19 Power of Attorney. * 20 Power of Attorney. * 21 Board Resolution Authorizing Power of Attorney. (27) Financial Data Schedules. CSW, CPL, PSO, SWEPCO and WTU * 1 CSW's Financial Data Schedules. * 2 CPL's Financial Data Schedules. * 3 PSO's Financial Data Schedules. * 4 SWEPCO's Financial Data Schedules. * 5 WTU's Financial Data Schedules. (d) Index to Financial Statement Schedules. Other Schedules. All other exhibits and schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or related notes to financial statements. 4-13 EX-99.12.1 2 EXHIBIT 12.1 Exhibit 12.1 Central Power and Light Company Consolidated Ratio of Earnings to Fixed Charges For Years Ended December 31, 1998 1997 1996 1995 1994 --------------------------------------------------- (thousands, except ratios) Operating income $282,926 $251,367 $285,647 $282,184 $256,251 Adjustments Income taxes 126,738 39,329 47,227 51,755 51,329 Provision for deferred income taxes (8,253) 34,484 51,476 (30,025) 26,659 Deferred investment tax credits (3,858) (4,819) (5,553) (5,789) (5,789) Charges for investments and plant development costs, net of tax -- (1,281) (15,569) -- -- Other income and deductions 709 7,834 3,997 14,880 1,272 Allowance for borrowed and equity funds used during construction 2,822 3,778 1,845 4,514 3,689 Mirror CWIP amortization -- -- -- 41,000 68,000 --------------------------------------------------- Earnings $401,084 $330,692 $369,070 $358,519 $401,411 =================================================== Fixed charges: Interest on long-term debt $93,301 $105,081 $110,375 $116,205 $111,408 Interest on short-term debt 19,506 20,613 18,494 19,926 12,365 Distributions on Trust Preferred Securities 12,000 7,533 -- -- -- =================================================== Fixed Charges $124,807 $133,227 $128,869 $136,131 $123,773 =================================================== Ratio of earnings to fixed charges 3.21 2.48 2.86 2.63 3.24 4-14 EX-99.12.2 3 EXHIBIT 12.2 Exhibit 12.2 Public Service Company of Oklahoma Consolidated Ratio of Earnings to Fixed Charges For Years Ended December 31, 1998 1997 1996 1995 1994 --------------------------------------------------- (thousands, except ratios) Operating income $115,008 $81,776 $101,737 $111,769 $98,258 Adjustments Income taxes 52,494 12,313 25,257 37,490 27,954 Provision for deferred income taxes (1,693) 8,448 (1,328) 2,704 7,779 Deferred investment tax credits (1,795) (2,278) (2,784) (2,789) (2,789) Charges for investments and plant development costs, net of tax -- (75) (35,708) -- -- Other income and deductions (951) 729 (95) 2,274 933 Allowance for borrowed and equity funds used during construction 2,029 2,317 1,722 3,734 2,513 --------------------------------------------------- Earnings $165,092 $103,230 $88,801 $155,182 $134,648 =================================================== Fixed charges: Interest on long-term debt $29,136 $30,474 $30,555 $29,594 $29,594 Interest on short-term debt 4,107 4,100 5,623 6,355 3,844 Distributions on Trust Preferred Securities 6,000 3,967 -- -- -- =================================================== Fixed Charges $39,243 $38,541 $36,178 $35,949 $33,438 =================================================== Ratio of earnings to fixed charges 4.21 2.68 2.45 4.32 4.03 4-15 EX-99.12.3 4 EXHIBIT 12.3 Exhibit 12.3 Southwestern Electric Power Company Consolidated Ratio of Earnings to Fixed Charges For Years Ended December 31, 1998 1997 1996 1995 1994 --------------------------------------------------- (thousands, except ratios) Operating income $150,787 $139,409 $138,083 $162,776 $145,922 Adjustments Income taxes 62,595 44,396 32,931 41,131 20,623 Provision for deferred income taxes (11,850) (2,244) 2,849 6,287 22,248 Deferred investment tax credits (4,631) (4,662) (4,730) (4,786) (4,278) Charges for investments and plant development costs, net of tax -- (483) (21,815) -- -- Other income and deductions 1,115 3,578 312 178 4,656 Allowance for borrowed and equity funds used during construction 2,687 2,156 2,423 9,334 6,097 Interest portion of financing leases 598 1,194 1,514 1,896 2,562 ---------------------------------------------------- Earnings $201,301 $183,334 $151,567 $216,816 $197,830 ==================================================== Fixed charges: Interest on long-term debt $39,233 $40,440 $44,066 $44,468 $43,395 Distributions on Trust Preferred Securities 8,662 5,582 -- -- -- Interest on short-term debt & other 8,591 5,736 8,381 10,706 7,568 Interest portion of financing leases 598 1,194 1,514 1,896 2,562 =================================================== Fixed Charges $57,084 $52,952 $53,961 $57,070 $53,525 =================================================== Ratio of earnings to fixed charges 3.53 3.46 2.81 3.80 3.70 4-16 EX-99.12.4 5 EXHIBIT 12.4 Exhibit 12.4 West Texas Utilities Company Ratio of Earnings to Fixed Charges For Years Ended December 31, 1998 1997 1996 1995 1994 --------------------------------------------------- (thousands, except ratios) Operating income $59,365 $44,567 $51,734 $59,486 $54,763 Adjustments Income taxes 28,088 11,294 6,547 6,456 7,900 Provision for deferred income taxes (6,578) (954) 5,718 1,971 8,377 Deferred investment tax credits (1,321) (1,321) (1,321) (1,321) (1,321) Charges for investments and plant development costs, net of tax -- -- (10,946) -- -- Other income and deductions 2,034 1,237 601 (463) 4,210 Allowance for borrowed and equity funds used during construction 1,347 920 1,276 1,031 474 --------------------------------------------------- Earnings $82,935 $55,743 $53,609 $67,160 $74,403 =================================================== Fixed charges: Interest on long-term debt $20,352 $20,352 $21,169 $21,413 $18,547 Interest on short-term debt & other 4,580 4,911 4,925 4,111 3,534 =================================================== Fixed Charges $24,932 $25,263 $26,094 $25,524 $22,081 =================================================== Ratio of earnings to fixed charges 3.33 2.21 2.05 2.63 3.37 4-17 EX-99.21 6 EXHIBIT 21 Exhibit 21 Central And South West Corporation Subsidiaries of the Registrant As of December 31, 1998 Company Name State or Jurisdiction Business Conducted Under Same Name of Incorporation/Formation Central Power and Light Company Texas 539 North Carancahua Street Corpus Christi, Texas 78401-2802 CPL Capital I Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 Public Service Company of Oklahoma Oklahoma 212 East 6th Street Tulsa, Oklahoma 74119-1212 PSO Capital I Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 Southwestern Electric Power Company Delaware 428 Travis Street Shreveport Louisiana 71156-0001 SWEPCO Capital I Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 West Texas Utilities Company Texas 301 Cypress Street Abilene, Texas 79601-5820 SEEBOARD, plc United Kingdom Registered Office Forest Gate, Brighton Road Crawley, West Sussex RH11 9BH Central and South West Services, Inc. Texas 2 West Second Street Tulsa, Oklahoma 74103-3102 and 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 C3 Communications, Inc. Delaware 1705 South Capital of Texas Highway - Suite 400 Austin, Texas 78746 CSW Credit, Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW Energy, Inc. Texas 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 4-18 Company Name State or Jurisdiction Business Conducted Under Same Name of Incorporation/Formation CSW Energy Services, Inc. Texas 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW International, Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW Leasing, Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 EnerShop Inc. Delaware 2777 Stemmons Freeway - Suite 700 Dallas, Texas 75207-2214 4-19 EX-99.23.1 7 EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Public Accountants To the Stockholders and Board of Directors of Central and South West Corporation: As independent public accountants, we hereby consent to the incorporation of our report dated February 12, 1999, included in this Form 10-K, into Central and South West Corporation's previously filed registration statements on Form S-8 (File Nos. 2-70746, 33-12992, 33-49301, 33-63027 and 33-64233) and on Form S-3 (File Nos. 33-50193 and 333-00911). Arthur Andersen LLP Dallas, Texas March 10, 1999 4-20 EX-99.23.2 8 EXHIBIT 23.2 Exhibit 23.2 Consent of Independent Public Accountants The Board of Directors CSW UK Finance Company: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 2-70746, 33-12992, 33-49301, 33-63027 and 33-64233) and on Form S-3 (Nos. 33-50193 and 333-00911) of Central and South West Corporation of our report dated 19 January 1999, with respect to the consolidated balance sheet of CSW UK Finance Company as of 31 December 1998, and the related consolidated statements of earnings and cashflows for the year then ended, which report appears in the 31 December 1998, annual report on Form 10-K of Central and South West Corporation. KPMG Audit Plc London, England Chartered Accountants 10 March 1999 Registered Auditors 4-21 EX-99.23.3 9 EXHIBIT 23.3 Exhibit 23.3 Consent of Independent Public Accountants To the Stockholders and Board of Directors of Central Power and Light Company: As independent public accountants, we hereby consent to the incorporation of our report with respect to the Consolidated Financial Statements of Central Power and Light Company dated February 12, 1999, included in this Form 10-K, into Central Power and Light Company's previously filed registration statement on Form S-3 (File Nos. 33-49577, 33-52759 and 333-67525). Arthur Andersen LLP Dallas, Texas March 10, 1999 4-22 EX-99.23.4 10 EXHIBIT 23.4 Exhibit 23.4 Consent of Independent Public Accountants To the Stockholders and Board of Directors of Public Service Company of Oklahoma: As independent public accountants, we hereby consent to the incorporation of our report with respect to the Consoldiated Financial Statements of Public Service Company of Oklahoma dated February 12, 1999, included in this Form 10-K, into Public Service Company of Oklahoma's previously filed registration statement on Form S-3 (File No. 333-00973). Arthur Andersen LLP Dallas, Texas March 10, 1999 4-23 EX-99.3.2 11 EXHIBIT 3.2 Exhibit (3) 2 CENTRAL AND SOUTH WEST CORPORATION BYLAWS Revised effective January 20, 1999 CENTRAL AND SOUTH WEST CORPORATION BYLAWS ARTICLE I STOCK AND TRANSFERS SECTION 1. Each holder of fully paid stock shall be entitled to a certificate or certificates of stock stating the number of shares owned by such holder. All certificates shall at the time of their issuance be signed by the Chairman, the Vice Chairman, if any, the President, or a Vice President and also by the Treasurer, the Secretary, an Assistant Treasurer or an Assistant Secretary, shall be countersigned by a Transfer Agent, and shall be authenticated and registered by a Registrar, provided that in case any officer, Transfer Agent or Registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, Transfer Agent or Registrar before such certificate is issued, it may be issued with the same effect as if such officer, Transfer Agent or Registrar had not ceased to be such at the date of its issue. The Board of Directors shall appoint one or more Transfer Agents, none of whom shall be the Corporation or any officer or employee thereof, and one or more Registrars, each of which Registrars shall be a bank or trust company. If a certificate is countersigned manually by either a Transfer Agent or a Registrar, any other signature on the certificate may be a facsimile. SECTION 2. Shares of stock shall be transferable only on the books of the Corporation and, except as otherwise required by law, shall be transferred only upon proper endorsement and surrender of the certificates theretofore issued therefor. If an outstanding certificate of stock shall be lost, stolen or destroyed, there shall be issued to the holder thereof a new certificate upon production of evidence satisfactory to the Board of Directors of such loss, theft or destruction and upon furnishing to the Corporation, the Transfer Agents and the Registrars a bond of indemnity deemed sufficient by the Board of Directors against claims on account of such alleged loss, theft or destruction or on account of the issuance of such new certificate. ARTICLE II STOCKHOLDERS SECTION 1. A meeting of the stockholders shall be held on the third Thursday in April of each year or on such other day as may, in any year, be specified by the Board of Directors. Each such annual meeting shall be held at such place and hour as may be fixed by the Board of Directors. SECTION 2. Special meeting of the stockholders may be called by the Chairman, by the Board of Directors, by a majority of the Directors individually or by the holders of not less than one-third of the total outstanding shares of stock of the Corporation. Each special meeting of the stockholders shall be held at such place, date and hour as may be fixed by the person or persons calling the meeting. SECTION 3. Written notice stating the place, date and hour of each meeting of the stockholders, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten or more than fifty days before the date of the meeting except as otherwise required by law, either personally or by mail, to each stockholder of record entitled to vote at such meeting. SECTION 4. At all meetings of the stockholders a majority of the outstanding shares of stock, excluding such shares as may be owned by the Corporation, represented in person or by proxy, shall constitute a quorum for the transaction of business, but the stockholders represented at a meeting, though less than a quorum, may adjourn the meeting to some other day or sine die. If a quorum is present the affirmative vote of a majority of the shares of stock represented at the meeting shall be the act of the stockholders, unless the vote of a greater number is required by law or the Second Restated Certificate of Incorporation. SECTION 5. At every meeting of the stockholders, each share of stock shall entitle the holder of record on the date fixed by the Board of Directors to one vote upon each matter voted upon. In the election of directors of the Corporation, the principle of cumulative voting shall not apply. Votes may in all cases be cast by duly authorized proxy, but no stockholder shall be entitled to designate more than three persons as proxies to vote shares held by him. SECTION 6. At least ten days before each meeting of the stockholders the Secretary shall prepare a complete list, in alphabetical order, of all the stockholders of the Corporation entitled to vote at the meeting, showing the address of each and the number of shares registered in the name of each. Such list shall be open to the examination of any stockholders, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, at a place specified in the notice of the meeting, within the city where the meeting is to be held, or at the place where the meeting is to be held. SECTION 7. For the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders or an adjournment thereof, or to receive payment of a dividend or other distribution or allotment of rights, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix, in advance, a record date which shall be not more than sixty days nor less than ten days before the date of such meeting, except as otherwise required by law. ARTICLE III BOARD OF DIRECTORS SECTION 1. (a) At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. The directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of the stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors elected at the April 19, 1990 annual meeting and designated as members of such Class. At each annual meeting after the April 19, 1990 annual meeting, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and shall qualify. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. (b) Any director may be removed from office only for cause and only by the affirmative vote of the holders of eighty percent (80%) of the voting power of the outstanding shares of Common Stock. (c) The number of directors constituting the entire Board of Directors shall be not less than nine nor more than fifteen as may be fixed from time to time by resolution adopted by a majority of the entire Board of Directors; provided, however, that no decrease in the number of directors constituting the entire Board of Directors shall shorten the term of any incumbent director. A majority of the entire Board of Directors may adopt a resolution at any time to increase the number of directors to not more than fifteen and, by vote of a majority of the Board of Directors, elect a new director or directors to fill any such newly created directorship. Any such new director shall hold office until the next annual meeting of stockholders and until his successor shall have been duly elected and qualified. (d) Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next succeeding annual meeting of stockholders of the Corporation and until his or her successor shall have been duly elected an qualified. SECTION 2. Except with respect to those persons who were serving as directors of the Corporation on October 12, 1987, and who at that time were 60 years of age or over (all of whom shall be eligible for election as directors until they, respectively, attain the age of 73 years and may continue to serve until the annual meeting of shareholders following the director's 73rd birthday), the Board of Directors shall not elect nor propose for election by the stockholders of the Corporation (a) any non-employee of the Corporation who has attained the age of 70 or who will have attained that age on or before the date of his election by the Board or proposed election by the stockholders, or (b) any employee of the Corporation or any of its subsidiaries (other than a past or present Chief Executive Officer of the Corporation) whose service as such employee has terminated or will in normal course terminate on or before the date of his election by the Board or proposed election by the stockholders. Any such non-employee director who attains the age of 70 years during such director's service shall serve until the next annual meeting of shareholders following such director's 70th birthday. Any person who, under the foregoing provisions of this Section 2, would be eligible for election as a director after age 70 shall, should the director elect to withdraw himself/herself from consideration for such election, be entitled to the retirement benefits the director would have been entitled to receive had the director served as a director until age 73 and the commencement of such benefits shall, in that event, be accelerated to age 70 or such later date as such election may be made. The term "retirement benefits" as used herein shall include but not be limited to deferred compensation payable under any compensation plan of the Corporation for the benefit of its directors. The term of any director who is an employee of the Corporation or any of its subsidiaries shall expire concurrently with the termination of service of that director as such an employee. SECTION 3. A regular meeting of the Board of Directors shall be held immediately or as soon as practicable after the election of Directors in each year, provided a quorum for such meeting can be obtained. Thereafter regular meetings of the Board shall be held on such dates and at such hour and place as to each meeting as the Board by resolution determines. Notice of every regular meeting of the Board, except the first meeting after the election of Directors in each year, stating the date, hour and place at which such meeting will be held, shall be given to each Director personally, by telephone, by telegraph or by mail, at least seven days before the day of such meeting. SECTION 4. Special meetings of the Board of Directors may be called by the Chairman, by the President, the Vice Chairman, if any, or a Vice President, when acting in the Chairman's stead, or by any two Directors. Notice of every special meeting of the Board, stating the time and place at which it will be held, shall be given to each Director personally, by telephone, by telegraph or by mail, at least four days before the day of such meeting. SECTION 5. Notice to a Director of any meeting may be waived in writing by such Director, either before or after the meeting, and shall be deemed to have been waived by his attendance at the meeting. SECTION 6. A majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business at any meeting of the Board, but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn sine die. Except as otherwise provided in the Second Restated Certificate of Incorporation of the Corporation, at every meeting of the Board of Directors at which a quorum is present a majority vote of the Directors present shall be decisive of all questions before the meeting. No Director may participate in meetings of the Board or committees thereof by means of conference telephone or similar communications equipment except upon prior notice to such Director from the Chairman, or in the case of a meeting of a committee, from the chairman thereof, and, in the case of a meeting of the Board, unanimous approval of the Directors present. SECTION 7. Directors who are not officers of the Corporation or an affiliate shall receive annual retainers and fees for attending meetings of the Board or committees of the Board in such amounts as the Executive Compensation Committee of this Board shall from time to time set. No retainers or attendance fees shall be paid to Directors who are also officers of the Corporation or an affiliate. All Directors shall be reimbursed by the Corporation for their out of pocket traveling and other expenses incurred in connection with attending meetings of the Board or committees of the Board. Nothing therein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor, including such compensation as may be specified by the Board of Directors for services as a member of any committee of the Board. ARTICLE IV COMMITTEES SECTION 1. The Board of Directors may from time to time establish, by resolution passed by a majority of the whole Board, standing or special committees, each consisting of two or more directors. Each committee shall have those duties and powers, permitted by law, as the Board may determine. Except for the Chairman of the Corporation, no committee member shall also be an officer or employee of the Corporation or any of its subsidiaries. The whole Board shall appoint the committee members and chairmen, and determine the duties and powers of each committee, annually, upon recommendation of the Chairman of the Corporation, after the conclusion of the Corporation's Annual Stockholders' Meeting. SECTION 2. Meetings of a committee may be called by the chairman of the committee, by any two members of the committee or by the Chairman. Notice of each committee meeting, stating the date, hour and place at which it will be held, shall be given to each member of the committee personally, by telephone, by telegraph or by mail, at least four days before the day of such meeting. A majority of the members of a committee shall constitute a quorum for the transaction of business at any meeting thereof, but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn sine die. A majority vote of those present at a meeting of a committee at which a quorum is present shall be decisive of all questions before the meeting. SECTION 3. In the absence or disqualification of any member of a committee, the remaining member or members present at a meeting and not disqualified from voting, whether or not constituting a quorum, may appoint another Director to act at such meeting in the place of such absent or disqualified member. SECTION 4. Notice to a Director of any committee meeting may be waived in writing by such Director, either before or after the meeting, and shall be deemed to have been waived by his attendance at the meeting. SECTION 5. The Board of Directors may delegate to the Chairman authority to establish Committees, designate their powers, and appoint committee members and chairmen. ARTICLE V OFFICERS SECTION 1. There shall be elected by the Board of Directors at its first meeting after the election of Directors in each year, a Chairman, a President, a Secretary, a Controller, a Treasurer, and a General Counsel. There may be elected by the Board one or more Vice Chairmen and Vice Presidents, including Executive Vice Presidents, as the Board may decide upon; a Chief Financial Officer; and one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Controllers or Assistant Treasurers. The Board may also provide for and elect or appoint, at any time such other officers and prescribe for each of them such duties as in its judgment may be desirable for the conduct of the business and affairs of the Corporation. The Board shall approve the compensation of the chief executive, the operating, the administrative, and the financial and legal officers of the Corporation. The Chairman and the Chief Executive Officer shall be, and any other officers may, but shall not be required to be, Directors of the Corporation. Any two or more offices, except those of Chief Executive Officer and Secretary, may be held by the same person. All officers shall hold their respective offices until the first meeting of the Board of Directors after the next succeeding annual election of Directors and until their respective successors shall have been elected and qualified, or until their earlier resignation or removal. Any officer may be removed from office by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby. Such removal, however, shall be without prejudice to the contract rights, if any, of the persons so removed. Election of an officer shall not of itself create contract rights. SECTION 2. The Chairman shall be the chief executive officer of the Corporation and shall have general authority over all its affairs and over all its other officers, agents and employees. The Chairman shall, when present, preside at all meetings of the stockholders and of the Board of Directors, and may attend any meeting of any committee of the Board whether or not a member, except that attendance at an audit committee meeting may be only upon invitation of that committee. The Chairman shall sign all papers and documents as may be necessary or appropriate and shall have such other powers and duties as usually devolve upon the chief executive officer of a corporation, and such further powers and duties as may be prescribed by the Board of Directors. The Chairman shall have authority to appoint, remove or discharge any agent or employee or any officer not elected or appointed by the Board of Directors and, when the Board is not in session, to suspend the authority of any officer elected or appointed by the Board, subject to the pleasure of the Board at its next meeting. SECTION 3. Any officer not required by these bylaws to be elected under Section 1 above, including but not limited to Vice Chairmen, Vice President and a Chief Financial Officer, shall have such specific powers and duties, and such authority over the affairs of the Corporation, as may be prescribed by the Board or the Chairman. Said officers shall report to the Chairman or such other officer as the Board or Chairman may designate. SECTION 4. The General Counsel shall be responsible for the supervision of the legal affairs of the Corporation and in connection therewith shall have such specific powers and duties as shall be delegated by the Chairman. The General Counsel shall report to the Chairman. SECTION 5. The Controller shall be responsible for the installation and supervision of all accounting records of the Corporation, preparation and interpretation of the financial statements and reports of the Corporation, maintenance of appropriate and adequate records of authorized appropriations, determination that all sums expended pursuant to such appropriations are properly accounted for, and shall ascertain that all financial transactions are properly executed and recorded, and shall have such specific powers and duties as shall be delegated by the Chairman or the Chief Financial Officer, if any. The Controller may be required to give bond to the Corporation for the faithful discharge of his or her duties in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Controller shall report to the Chairman or such other officer as the Board may designate. SECTION 6. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, shall keep a true and faithful record thereof, and shall have the custody and care of the corporate seal, records, minute books and stock books of the Corporation. Except as may be otherwise required by law, the Secretary shall sign and issue all notices required for meetings of stockholders and of the Board of Directors. Whenever requested by the requisite number of stockholders or Directors, the Secretary shall give notice, in the name of the stockholders or Directors making the request, of a meeting of the stockholders or of the Board of Directors, as the case may be. He or she shall sign all documents and papers to which his or her signature may be necessary or appropriate, shall affix and attest the seal of the Corporation to all instruments requiring the seal, and shall have such other powers and duties as are commonly incidental to the office of the secretary of a corporation or as may be prescribed by the Board of Directors, the Chairman or the General Counsel. He or she shall report to the General Counsel. SECTION 7. The Treasurer shall have charge of and be responsible for the collection, receipt, custody and disbursement of the funds of the Corporation, and shall deposit its funds in the name of the Corporation in such banks, trust companies or other depositories as the Board of Directors may direct. Such funds shall be subject to withdrawal only upon checks or drafts signed or authenticated in such manner as may be designated from time to time by resolution of the Board of Directors. The Treasurer shall have the custody of such books and papers as in the practical business operations of the Corporation shall be convenient or as shall be placed in his custody by order of the Board of Directors. The Treasurer shall have such other powers and duties as are commonly incidental to the office of treasurer of a corporation or as may be prescribed by the Board of Directors, the Chairman or the Vice Chairmen or the Chief Financial Officer, if any. Securities owned by the Corporation shall be in the custody of the Treasurer or of such other officers, agents or depositories as may be designated by the Board of Directors. The Treasurer may be required to give bond to the Corporation for the faithful discharge of his or her duties in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Treasurer shall report to the Chairman or such other officer as the Board may designate. SECTION 8. In case of the absence or disability of any officer hereinabove provided, the next succeeding senior officer shall exercise the powers and duties of such absent or disabled officer. ARTICLE VI INDEMNIFICATION Each person who is or was or had agreed to become a Director or officer of the Corporation, or each such person who is or was serving or had agreed to serve at the request of the Board of Directors or an officer of the Corporation as an employee or agent of the Corporation or as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified (including, without limitation, the advancement of expenses and payment of all loss, liability and expenses) by the Corporation to the full extent permitted by the General Corporation Law of the State of Delaware or any other applicable laws as presently in effect or as may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said laws permitted the Corporation to provide prior to such amendment); provided however, that no person shall be indemnified for amounts paid in settlement unless the terms and conditions of such settlement have been consented to by the Corporation and provided further, that no indemnification for employees or agents of the Corporation (other than Directors and officers) will be made without the express authorization of the Corporation's Board of Directors. ARTICLE VII MISCELLANEOUS SECTION 1. No debts shall be contracted by or on behalf of the Corporation, except for current expenses incurred in the ordinary course of business, unless authorized or approved by the Board of Directors, or by the Chairman, the Vice Chairman, if any, the President or Vice President when acting pursuant to authority or approval granted by the Board. SECTION 2. Any and all shares of stock of any corporation owned by the Corporation and any and all voting trust certificates owned by the Corporation calling for or representing shares of stock of any corporation may be voted at any meeting of the stockholders of such corporation or at any meeting of the holders of such certificates, as the case may be, by the Chairman, the Vice Chairman, if any, the President or any Vice President and the Secretary or any Assistant Secretary, in person or by proxy, upon any question which may be presented at such meeting, and such officers may, on behalf of the Corporation, waive any notice required to be given of the calling of such meeting and consent to the holding of such meeting without notice or to the taking of action without a meeting; provided, however, that if any question to be voted upon relates to business of a special or extraordinary nature which has not previously been approved by the Board of Directors of the Corporation, such officers shall vote or act only in accordance with authorization by the Board of Directors. SECTION 3. The fiscal year of the Corporation shall be the calendar year. ARTICLE VIII AMENDMENT OF BYLAWS These Bylaws may be altered, amended or repealed by the Board of Directors at any regular or special meeting of the Board, or by the stockholders, as provided by law. EX-99.10.18 12 EXHIBIT (10) 18 Exhibit (10) 18 CENTRAL AND SOUTH WEST SYSTEM SPECIAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated Effective July 1, 1997) The Central and South West Special Executive Retirement Plan, an unfunded, nonqualified deferred compensation plan originally adopted by Central and South West Corporation in 1979, has been amended and restated effective as of July 1, 1997. The provisions of the Special Executive Retirement Plan as amended and restated below will apply only to eligible employees of Central and South West Corporation and its subsidiaries who are employed by a Participating Employer (as hereinafter defined) on or after July 1, 1997. Special Executive Retirement Plan benefits payable to any employee of a Participating Employer, who retired or otherwise terminated employment before July 1, 1997, will be determined under the terms of the Special Executive Retirement Plan in effect on June 30, 1997. 1. Purpose. The purpose of the Special Executive Retirement Plan is generally to provide (i) benefits in excess of the limitations under Sections 401(a)(17) and 415 of the Code for employees who participate in the Central and South West System Cash Balance Retirement Plan and (ii) benefits that supplement the benefits payable under the Cash Balance Retirement Plan to selected employees. 2. Definitions. The following definitions are used throughout the Special Executive Retirement Plan. Terms that appear in initial capital letters that are not defined in this Section have the meanings set forth in the Cash Balance Retirement Plan. (a) "Board of Directors" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time. (c) "Committee" means the Compensation Committee of the Board of Directors. (d) "Company" means Central and South West Corporation, a Delaware corporation. (e) "Grandfathered Participant" means a Participant who (i) is an employee of a Participating Employer on July 1, 1997, and (ii) has both attained age 50 and completed at least ten years of vesting service under the Retirement Plan on such date. (f) "Participant" means an employee who is eligible to receive benefits under the Special Plan. The term "Participant" will include a deceased Participant's beneficiary who is entitled to receive a death benefit under the Retirement Plan. (g) "Participating Employer" means the Company and each subsidiary of the Company that is a participating employer under the Retirement Plan. (h) "Prior Plan Formula" means the Career Average Pay Formula or the Final Average Pay Formula under the Retirement Plan. (i) "Retirement Plan" means the Central and South West System Cash Balance Retirement Plan sponsored by the Company, as amended and restated effective July 1, 1997, and as further amended and in effect from time to time, which is a defined benefit pension plan intended to qualify under Section 401(a) of the Code. (j) "Special Plan" means the Central and South West System Special Executive Retirement Plan, as amended and in effect from time to time. 3. Excess Benefit. (a) Eligibility. A Participant who is eligible to receive a benefit under the Retirement Plan will be eligible to receive the excess benefit described in subsection (b) or subsection (c) below. (b) Cash Balance Benefit. A Participant who receives a benefit under the cash balance provisions of the Retirement Plan will be entitled to receive a benefit under the Special Plan in an amount equal to the difference between (i) and (ii), where: (i) is the benefit that would be payable to the Participant under the cash balance provisions of the Retirement Plan determined before applying any provision reducing retirement benefits because of the limitation on compensation under Section 401(a)(17) of the Code or the maximum benefit limitations under Section 415 of the Code; and (ii) is the benefit payable to the Participant under the cash balance provisions of the Retirement Plan after applying the limitation on compensation under Section 401(a)(17) of the Code and the maximum benefit limitations of Section 415 of the Code. (c) Prior Formula Benefit. Notwithstanding the foregoing provisions of this Section, if the Retirement Plan benefit paid to a Participant is the benefit the Participant had accrued at July 1, 1997, under a Prior Plan Formula, the Participant's Special Plan benefit (if any) will be the benefit the Participant had earned as of July 1, 1997, determined under the provisions of the Central and South West System Special Executive Retirement Plan in effect on June 30, 1997. 4. Final Average Pay Cash Balance Benefit. (a) Eligibility. A Participant who is eligible to receive a benefit under the cash balance provisions of the Retirement Plan and who at termination of employment holds the office of Vice President of a Participating Employer or any higher corporate office will be entitled to receive the benefit described in subsection (b) below. (b) Benefit. An eligible Participant will be entitled to receive a benefit under the Special Plan in an amount equal to the greater of the benefit described in (i)(A) or (i)(B) below, in either case reduced by the benefit described in (ii) below, where: (i)(A) is the benefit that would be payable to the Participant under the cash balance provisions of the Retirement Plan determined before applying any provision reducing retirement benefits because of the limitation on compensation under Section 401(a)(17) of the Code or the maximum benefit limitations under Section 415 of the Code; (i)(B) is the benefit that would be payable to the Participant under the cash balance provisions of the Retirement Plan if the Participant's Cash Balance Account were credited with an amount determined by multiplying the Participant's Final Average Pay by the sum of the Participant's annual compensation contribution percentages under the Retirement Plan (beginning with the Plan Year for which the Participant is first allocated an annual contribution credit), but without any interest credits under the Retirement Plan, and determined before applying any provision reducing retirement benefits because of the limitation on compensation under Section 401(a)(17) of the Code or the maximum benefit limitations under Section 415 of the Code; and (ii) is the benefit payable to the Participant under the cash balance provisions of the retirement Plan after applying the limitation on compensation under Section 401(a)(17) of the Code and the maximum benefit limitations under Section 415 of the Code. 5. Enhanced Cash Balance Benefit. (a) Eligibility. A Participant who is otherwise eligible to receive a benefit under Section 3 or Section 4 will receive the benefit under this Section if the Participant has been designated by the Committee as eligible to receive an enhanced cash balance benefit. (b) Benefit. The Committee in its complete discretion may provide one or more Participants with an enhanced benefit that is greater than the benefit provided under Section 3 or Section 4. The terms and conditions of the enhanced benefit for each eligible Participant as approved by the Committee will be set forth on a separate Appendix to the Plan. 6. Benefit for Grandfathered Participants. (a) Eligibility. A Participant who is a Grandfathered Participant and whose retirement benefit under the Retirement Plan is determined and paid to the Participant under a Prior Plan Formula will be entitled to the benefit described in subsection (b) below. (b) Benefit. A Grandfathered Participant will be entitled to receive a benefit under the Special Plan in an amount equal to the difference between (i) and (ii) where: (i) is the Retirement Plan benefit that would be payable to the Participant under the Prior Plan Formula determined before applying any provision reducing retirement benefits because of the limitation on compensation under Section 401(a)(17) of the Code or the maximum benefit limitations under Section 415 of the Code; and (ii) is the benefit payable to the Participant under the Prior Plan Formula after applying the limitation on compensation under Section 401(a)(17) of the Code and the maximum benefit limitations under Section 415 of the Code. 7. Nonduplication of Benefits. A Participant who is eligible to receive a Special Plan benefit under more than one Section will receive the benefit determined under Section 3, Section 4, Section 5 or Section 6, whichever Section produces the greatest benefit, but the Participant may not receive a benefit under more than one of such Sections. 8. Vesting. Subject to the rights of general creditors as set forth in Section 11 and the right of the Company to discontinue the Special Plan as provided in Section 14, a Participant will have a vested and nonforfeitable interest in the benefits payable under the Special Plan to the same extent and in the same manner as the Participant's benefit is vested under the Retirement Plan. 9. Commencement of Benefits. The benefits payable under the Special Plan will be paid or will begin at the same time as the Participant's benefit is paid or begins under the Retirement Plan. 10. Form of Benefits. The benefits payable under the Special Plan will be paid to the Participant in the same form as the Participant's benefit is paid under the Retirement Plan. Notwithstanding the foregoing, a Participant may elect in accordance with rules and procedures adopted by the Committee from time to time to receive his Special Plan benefit in a lump sum payment without regard to the form of payment of his Retirement Plan benefit, provided such election is made by the Participant at least 12 months before benefits under the Special Plan are scheduled to be paid. All forms of payment under the Special Plan will be calculated using the same actuarial factors and assumptions that are used under the Retirement Plan to convert a Retirement Plan benefit to the same form of payment. 11. Funding of Benefits. The Special Plan will be unfunded. All benefits payable under the Special Plan will be paid from the Company's general assets, and nothing contained in the Special Plan will require the Company to set aside or hold in trust any funds for the benefit of a Participant, who will have the status of a general unsecured creditor with respect to the Company's obligation to make payments under the Special Plan. Any funds of the Company available to pay benefits under the Special Plan will be subject to the claims of general creditors of the Company and may be used for any purpose by the Company. 12. Administration of the Plan. The Committee will administer the Special Plan and will keep a written record of its action and proceedings regarding the Special Plan and all dates, records, and documents relating to its administration of the Plan. The Committee is authorized to interpret the Special Plan, to make, amend, and rescind such rules as it deems necessary for the proper administration of the Special Plan, to make all other determinations necessary or advisable for the administration of the Special Plan and to correct any defect or supply any omission or reconcile any inconsistency in the Special Plan in the manner and to the extent that the Committee deems desirable to carry the Special Plan into effect. The powers and duties of the Committee will include, without limitation, the following: (i) determining the amount of benefits payable to Participants and authorizing and directing the Company with respect to the payment of benefits under the Special Plan; (ii) construing and interpreting the Special Plan whenever necessary to carry out its intention and purpose and making and publishing such rules for the regulation of the Special Plan as are not inconsistent with the terms of the Special Plan; and (iii) compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Special Plan. Any action taken or determination made by the Committee will, subject to appeals as provided in section 13 below, be conclusive on all parties. 13. Claims Procedure. (a) Claim for Benefits. If a Participant does not, receive the timely payment of the benefits which the Participant believes are due under the Special Plan, the Participant may make a claim for benefits in the manner hereinafter provided. All claims for benefits under the Special Plan will be made in writing and will be signed by the Participant. Claims will be submitted to the Committee, or to a representative designated by the Committee. If the Participant does not furnish sufficient information with the claim for the Committee to determine the validity of the claim, the committee will indicate to the Participant any additional information which is necessary for the Committee to determine the validity of the claim. Each claim hereunder will be acted on and approved or disapproved by the Committee within 90 days following the receipt by the Committee of the information necessary to process the claim. In the event the Committee denies a claim for benefits in whole on in part, the Committee will notify the Participant in writing of the denial of the claim and notify the Participant of his right to a review of the Committee's decision. Such notice by the Committee will also set forth, in a manner calculated to be understood by the Participant, the specific reason for such denial, the specific provisions of the Special Plan on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of the Special Plan's appeals procedure as set forth in this Section. If no action is taken by the Committee on an Participant's claim within 90 days after receipt by the Committee, such claim will be deemed to be denied for purposes of the following appeals procedure. (b) Appeal of Claims Denial. Any Participant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the full Committee. Such appeal must be made within three months after the Participant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (i) request a review by the Committee of the claim for benefits under the Special Plan; (ii) set forth all of the grounds upon which the Participant's request for review is based and any facts in support thereof; and (iii) set forth any issues or comments which the Participant deems pertinent to the appeal. The Committee will regularly review appeals by Participants. The Committee will act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision will be rendered by the Committee as soon as possible but not later than 120 days after the appeal is received by the Committee. The Committee will make a full and fair review of each appeal and any written materials submitted by the Participant in connection therewith. The Committee may require the Participant to submit such additional facts, documents, or other evidence as the Committee in its discretion deems necessary or advisable in making its review. The Participant will be given the opportunity to review pertinent documents or materials upon submission of a written request to the Committee, provided the Committee finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Committee will make an independent determination of the Participant's eligibility for benefits under the Special Plan. The decision of the Committee on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Committee denies an appeal in whole or in part, the Committee will give written notice of the decision to the Participant, which notice will set forth, in a manner calculated to be understood by the Participant, the specific reasons for such denial and which will make specific reference to the pertinent provisions of the Special Plan on which the Committee's decision is based. 14. Miscellaneous. (a) No Right to Employment. Nothing in the special Plan will confer upon a Participant the right to continue in the employ of the Company or an affiliate of the Company or will limit or restrict the right of the Company or any affiliate to terminate the employment of a Participant at any time or without cause. (b) Assignment. Except as otherwise provided in the Special Plan, no right or benefit under the Special Plan will be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge such right or benefit will be void. No such right or benefit will in any manner be liable for or subject to the debts, liabilities or torts of a Participant. (c) Amendment and Termination. The Special Plan may be amended or terminated by the Board of Directors at any time, provided that no such action will have the effect of decreasing a Participant's accrued benefit without the Participant's written consent. (d) ERISA. The Special Plan is intended to qualify as a plan of deferred compensation providing benefits for "management or highly compensated" employees within the meaning of Sections 201, 301 and 401 of ERISA and therefore exempt from Parts 2, 3 and 4 of Title I of ERISA. In the event the Special Plan does not qualify for either exemption, as determined by the final judgment of a court of competent jurisdiction or by an opinion of counsel, the Special Plan will terminate, and, except for accrued benefits and benefits in pay status, no further benefits will accrue or be paid hereunder. Notwithstanding the foregoing or any other provision of the Plan to the contrary, the Company will be obligated to pay all accrued benefits and benefits in pay status at the time of Plan termination. (e) Invalid Provisions. If any provision in the Special Plan is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue to full force and effect without being impaired or invalidated in any way. (f) Governing Law. The special Plan will be construed and governed in all respects in accordance with applicable federal law and, to the extent not preempted by such federal law, in accordance with the law of the State of Texas, including the Texas statute of limitations, but without regard to the conflicts of laws principles of such State. Executed at Dallas, Texas this 1st day of July 1, 1997. CENTRAL AND SOUTH WEST CORPORATION By /s/ E.R. Brooks E. R. Brooks, Chairman and Chief Executive Officer EX-99.10.24 13 EXHIBIT 10.24 Exhibit (10) 24 Central and South West Corporation Executive Deferred Savings Plan (Amended and Restated Effective as of January 1, 1997) Central and South West Corporation Executive Deferred Savings Plan (Amended and Restated Effective as of January 1, 1997) Contents Section Page Article 1. The Plan 1.1 Establishment and Amendment 1 1.2 Purpose 1 Article II. Definitions and Construction 2.1 Definitions 2 2.2 Gender and Number 3 Article Ill. Participation 3.1 Participation 4 Article IV: Restoration Benefits 4.1 Benefit Amount 5 4.2 Earnings 5 4.3 Establishment of Accounts 6 4.4 Vesting 6 4.5 Benefit Payment 6 4.6 Form of Payment 7 Article V. Deferred Savings Benefits 5.1 Types of Contributions 8 5.2 Incentive Deferral Contributions 8 5.3 Salary Deferral Contributions 8 5.4 Matching Contributions 9 5.5 Earnings 10 5.6 Establishment of Accounts 10 5.7 Vesting 11 5.8 Annual Deferral Amounts 11 Central and South West Corporation Executive Deferred Savings Plan (Amended and Restated Effective as of January 1, 1997) Contents Section Page Article VI. Payment of Benefits 6.1 Designation of Time and Form of Payment 12 6.2 Time of Payment 12 6.3 Forms of Payment 12 6.4 Applicable Provisions Upon Termination of Employment 13 6.5 Death Benefit 13 6.6 Disability Benefit 13 6.7 Severe Financial Hardship 14 6.8 Election Changes 14 Article VII. Administration of the Plan 7.1 Administration 15 7.2 Rules; Claims Review Procedures 15 7.3 Finality of Determinations 16 7.4 Indemnification 16 7.5 Withholding of Taxes 16 Article VIII. Funding 8.1 Funding 17 Article IX. Amendment; Termination; Merger 9.1 Amendment and Termination 18 9.2 Merger, Consolidation, or Sale of Assets 18 Article X. General Provisions 10.1 Nonalienation 19 10.2 Beneficiary Designation 19 10.3 Nontransferability 19 10.4 No Guaranty 19 10.5 Binding on Employer, Participant, and Their Successors 20 10.6 Incompetency 20 10.7 Severability 20 10.8 Applicable Law 20 Article 1. The Plan 1.1 Establishment and Amendment Central and South West Corporation, a Delaware corporation ("Company") presently maintains an unfunded deferred compensation plan, known as the "Central and South West Corporation Executive Deferred Savings Plan" in order to provide designated eligible employees of the Company and participating Employers a means of deferring amounts payable to them under the Central and South West Corporation Annual Incentive Plan to a future payment date. This plan was established effective as of January 1, 1994. The Company, exercising its right to amend said plan on behalf of all participating Employers, hereby amends the plan and restates it in its entirety as set forth herein, effective as of January 1, 1997, or such other dates as may be provided herein and such plan, as amended and restated, shall continue to be known as the "Central and South West Corporation Executive Deferred Savings Plan" ("Plan"). 1.2 Purpose The Company sponsors the Central and South West Corporation Thrift Plus Plan for the benefit of its employees and employees of participating affiliates, which plan operates as a "qualified plan" as that term is defined under the Code. As a qualified plan, the Thrift Plus Plan is subject to limitations and restrictions under Code sections 401(a)(17), 401(k), 402(g) and 415 that can result in a diminution of benefits available to certain highly compensated employees. One purpose of this amendment and restatement of the Plan is to offset this diminution, in part and to the extent provided herein, for designated eligible employees. Another purpose of the amendment and restatement is to extend the deferral opportunity (previously existing with respect only to incentive award amounts) for designated eligible employees to compensation paid to such eligible employees in excess of the compensation limitation set forth in Code section 401(a)(17), and to add an employer-provided match equal to 4.5% of the deferred amounts contributed by such eligible employees after June 30, 1997 and 3.0% of deferred amounts contributed from January 1, 1997 to June 30, 1997. All benefits under the Plan are intended as constituting an unfunded deferred compensation plan for a select group of management or highly compensated employees within the meaning of sections 201(a), 301(a)(3), and 401(a)(1) of ERISA and therefore exempt from Parts 2, 3 and 4 of Title I of ERISA. Article II. Definitions and Construction 2.1 Definitions Whenever used in the Plan, the following terms shall have the meaning set forth below unless otherwise expressly provided: (a) "Affiliate means a corporation or non-corporate entity which the Committee determines to be an affiliated entity of the Company. (b) "Annual Deferral Amount" means the Incentive Deferral contributions, salary deferral contributions, and matching contributions for a given Plan Year (together with any credited earnings) as described in Section 5.8. (c) "Beneficiary" means the person, persons or trust designated by a Participant, as provided in Section 11.1. (d) "Code"' means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means the Executive Compensation Committee of the Board of Directors of the Company. (f) "Deferral Payment Date" means the paymen date, as specified by a Participant on his deferral election form, on which he elects to have his applicable Annual Deferral Amount paid or commence being paid. Section 6.2 provides additional information on Deferral Payment Dates. (g) "Eligible Employee means a person who is employed by an Employer and holds the position of vice-president or above with such Employer. (h) "Employer" means the Company and any Affiliate participating under the Plan with the consent of the Committee. (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (j) "Incentive" means any incentive award which an Eligible Employee may become eligible to receive under the Central and South West Corporation Annual Incentive Plan, or any other similar incentive program of an Employer, as designated by the Committee in its sole discretion. (k) "Participant" means an Eligible Employee who has become a participant under the Plan, as provided in Article III. (l) "Plan" means the Central and South West Corporation Executive Deferred Savings Plan as set forth herein, and as it may be amended from time to time. (m) "Plan Year" means the calendar year. (n) "Retirement Savings Plan" means the Central and South West Corporation Retirement Savings Plan (previously the Central and South West Corporation Thrift Plus Plan). 2.2 Gender and Number Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender, and the definition of any term in the singular shall also include the plural. Article III. Participation 3.1 Participation Participation in the Plan shall be extended to such Eligible Employees as the Committee, in its discretion, shall designate from time to time. All determinations as to an Eligible Employee's status as a Participant shall be made by the Committee, whose determinations shall be final and binding on all Eligible Employees. The Committee shall notify each Eligible Employee who has been selected to participate in the Plan, so as to permit such Eligible Employee the opportunity to make the deferral elections provided for under Article V. Such notice may be given at such time and in such manner as the Committee may determine from time to time. Each Eligible Employee who has been selected by the Committee to participate in the Plan and who has had an amount credited to an account under Section 4.3 or 5.6 shall be a Participant and shall continue as a Participant under the Plan so long as there is a balance credited to such account. Article IV: Restoration Benefits 4.1 Benefit Amount Beginning with the 1997 Plan Year, a Participant shall be credited with a benefit equal to the excess of (a) minus (b) below: (a) The total value of the "Company Contributions" (as defined in the Retirement Savings Plan) which would have been allocated to such Participant's "Company Contributions Account" in the Retirement Savings Plan during the relevant Plan Year, if the provisions of the Retirement Savings Plan were administered without regard to: (1) the maximum annual additional limitations of Code section 415, (2) the limitation on employee pre-tax contributions under Code section 402(g), and (3) any percentage of pay restrictions on elective deferrals of "Highly Compensated Employees" (as defined in the Retirement Savings Plan) necessary to pass the actual deferral percentage and actual compensation percentage discrimination tests of Code section 401(k) and 401(m). (b) The value of the annual "Company Contribution"' which is in fact allocated to such Participant's "Company Contributions Account" under the Retirement Savings Plan during said Plan Year. The amount determined under this Section 4.1 will be based on the rate of "Participant Deposits" (as defined in the Retirement Savings Plan) elected by the Participant under the Retirement Savings Plan, subject to the limitation on annual compensation which may be considered under a qualified plan as set forth in Code section 401(a)(17). The provisions of this Section 4.1 are not intended to restore any diminution of benefits under the Retirement Savings Plan as a result of the maximum considered compensation limitation under Code section 401(a)(17). 4.2 Earnings The benefit amount for each Participant pursuant to Section 4.1 shall be adjusted semi-annually to reflect an assumed rate of earnings. In crediting earnings, amounts shall be deemed to have been credited to a Participant's account established under Section 4.3 as of the date such amounts would otherwise have been contributed to the Retirement Savings Plan but for the legal limitations described in Section 4.1. The earnings rate for the applicable Plan Year shall be determined by the Committee, in its sole discretion, and communicated to Participants. Distributions which are triggered by events occurring during the Plan Year shall include prorated earnings determined based on the immediately preceding semi-annual rate and the number of completed calendar months since earnings were last credited to the Participant's account. 4.3 Establishment of Accounts Each Participant who is entitled to a benefit under Section 4.1 shall have a recordkeeping account established and maintained on his behalf on the Company's financial ledgers for purpose of accounting for the Participant's benefit under Section 4.1 and for credited earnings under Section 4.2. A Participant's restoration benefit under Section 4.1 shall be credited to his account on the last day of the Plan Year to which such amount is attributable. Earnings on the balances in a Participant's account shall be credited as provided in Section 4.2. Charges to a Participant's account to reflect benefit payments under the Plan shall be made as of the date of any such payment. As of any relevant date, the balance standing to the credit of a Participant's account shall be the balance in such account as of the close of business on such date, and after all applicable credits and charges have been posted through such date. 4.4 Vesting A Participant shall have a fully vested and nonforfeitable beneficial interest in the account established on his behalf under Section 4.3 as of any relevant date, subject to the conditions and limitations on the payment of amounts from such account as provided in the Plan. 4.5 Benefit Payment (a) Except as otherwise specified in Section 6.5, 6.6 or 6.7, a Participant's account under Section 4.3 shall be payable to the Participant within 90 days following the Participant's termination of employment with the Company and Affiliates, or as soon as practicable thereafter. (b) A Participant who satisfies the requirements of Sections 6.5, 6.6 or 6.7 shall have his account under Section 4.3 paid as provided therein. (c) Pursuant to procedures established by the Committee, a Participant may elect to defer benefit payment or benefit commencement of his account under Section 4.3 to the January 31 following the year in which the Participant terminated employment; provided that any such election to defer has been on file with the Committee for at least 12 months prior to the date the benefit payment to the Participant is made or commences. 4.6 Form of Payment (a) Except as provided in Section 4.6(b), payment of a Participant's account under Section 4.3 shall be made in a single lump sum. (b) Pursuant to procedures established by the Committee, a Participant may elect to receive payment of this Account under Section 4.3 in the form of a lump sum or annual installment payments as designated by the Participant on his election form. Annual payments shall be made on or before January 31. Any such election of installment payments under this Section 4.6(b) shall only be effective if it has been on file with the Committee for at least 12 months prior to the date benefit payments commence. Article V. Deferred Savings Benefits 5.1 Types of Contributions The following types of Contributions are provided for under the Plan: (a) Incentive Deferral Contributions by Participants, as described in Section 5.2; (b) Salary Deferral Contributions by Participants, as described in Section 5.3; and (c) Matching Contributions by an Employer on behalf of Participants, as described in Section 5.4. 5.2 Incentive Deferral Contributions (a) Amount. A Participant may elect to defer all or any portion of any Incentive he may be awarded by the Employer with respect to a Plan Year. The amount of the deferral must be specified in whole percent increments from 0% up to 100%. (b) Election. To make an election of an Incentive deferral, the Participant must file a deferral election form with the Committee as provided herein. Each such election shall be made with respect to a Plan Year and all Incentive awards made by the Employer which are made with respect to such Plan Year and which are payable on or after the last day of the Plan Year. For an Incentive award to be made with respect to a Plan Year, it must be awarded by the Employer during or after such Plan Year and be designated as having been made for such Plan Year. For an election of an Incentive deferral to become effective for a Plan Year, the Participant must file the appropriate deferral election form prior to the beginning of such year; provided that to be effective for an Eligible Employee first becoming eligible to elect an Incentive deferral amount under the terms of this Article V (as amended and restated), such election must be communicated in writing to the Committee no later than 30 days after the date Eligible Employee is notified of eligibility to make such deferral. An election filed for a Plan Year shall only be applicable for such Plan Year, and such election shall not be effective for any subsequent Plan Year. 5.3 Salary Deferral Contributions (a) Amount. Effective February 1, 1997, a Participant may elect to defer any whole percentage of the base salary he may be entitled to receive from an Employer that is in excess of the annual compensation limit specified in Code section 401(a)(17) ($160,000 for 1997). This annual compensation limit shall be adjusted for cost of living increases as provided in Code section 401(a)(17)(B). (b) Election. To make an election of a salary deferral amount, the Participant must file a deferral election form with the Committee, as described herein. To be effective for a Plan Year, a deferral election under this Section 5.3(b) must be communicated in writing to the Committee prior to the beginning of such year; provided that to be effective for an Eligible Employee first becoming eligible to elect a salary deferral amount, such election must be communicated in writing to the Committee no later than 30 days after the date the Eligible Employee is notified of eligibility to make such deferral, in which event the election shall be effective only with respect to salary paid after the Committee receives such written election. An election shall be effective only for the applicable Plan Year, and such election shall not be effective with respect to any subsequent year. 5.4 Matching Contributions Effective beginning with the 1997 Plan Year, each Participant who elected to make Incentive deferral contributions as provided in Section 5.2 or salary deferral contributions as provided in Section 5.3 or both for a Plan Year shall be entitled to a matching contribution equal to the "applicable percentage" multiplied by the lesser of (a) or (b), where: (a) is the aggregate amount of Incentive deferral contributions and salary salary deferral contributions made by the Participant during the Plan Year, (e.g., for the 1997 Plan Year, the matching contribution would be calculated on a Participants 1997 annual salary and 1996 Incentive (paid in 1997), (b) is 6% of the sum of (1) the Participant's full annual Incentive and (2) the Participant's annual salary in excess of the annual compensation limit specified in Code section 401(a)(17). The "applicable percentage" shall be 50% on deferred amounts contributed from January 1, 1997 to June 30, 1997 and 75% on deferred amounts contributed after June 30, 1997. The matching contributions to be made on behalf of a Participant for a Plan Year shall be determined by the Committee and credited to such Participant's account established under Section 5.6 at the same time as the Incentive deferral contributions and/or salary deferral contributions to which such matching contributions are attributable. 5.5 Earnings Each Participant shall be credited semi-annually with earnings on the balances in his account established under Section 5.6. In crediting such earnings, Incentive deferral contributions shall be credited to a Participant's account as of the date the Incentive would been actually paid to the Participant in the absence of the deferral election; salary deferral contributions shall be deemed to have been credited to a Participant's account on a prorata basis throughout the Plan Year; and matching contributions shall be deemed to have been credited to a Participant's account at the same time as the Incentive deferral contribution or salary deferral contribution to which such matching contribution is attributable. The earnings rate for the applicable Plan Year shall be determined by the Committee, in its sole discretion, and communicated to Participants. Distributions which are triggered by events occurring during the Plan Year shall include prorated earnings determined based on the immediately preceding semi-annual rate and the number of completed calendar months since earnings were last credited to the Participant's account. 5.6 Establishment of Accounts Each Participant who is entitled to a benefit under Section 5.2, 5.3 or 5.4 shall have a bookkeeping account established and maintained on his behalf on the Company's financial ledgers for the purpose of accounting for the Participant's benefit under Sections 5.2, 5.3, and 5.4, as well as the credited earnings under Section 5.5. Since Participants make deferral elections with respect to specified Plan Years, the Committee shall also maintain, within each Participant's account under this Section 5.6, subaccounts as necessary to identify specific Annual Deferral Amounts as provided under Section 5.8. A Participant's elected deferral contributions and Employer matching contributions shall be credited to the Participant's account (and applicable Annual Deferral Amount subaccount) as of the date on which the amount which is being deferred would have become payable to the Participant in the absence of the applicable deferral election. Earnings on the balances in a Participant's account shall be credited as provided in Section 5.5. Charges to a Participant's account to reflect benefit payments under the Plan shall be made as of the date of any such payment and shall be charged to the applicable subaccount within such account. As of any relevant date, the balance standing to the credit of a Participant's account under this Section 5.6 shall be the balance in such account as of the close of business on such date, and after all applicable credits and charges have been posted through such date. 5.7 Vesting A Participant shall have a fully vested and nonforfeitable beneficial interest in the balance standing to the credit of his account under Section 5.6 as of any relevant date, subject to the conditions and limitations on the payment of amounts from such account as provided in the Plan. 5.8 Annual Deferral Amounts In each case where a Participant has filed an Incentive deferral election under Section 5.2 and/or a salary deferral election under Section 5.3, any contributions which are the subject of such election(s), any matching contributions under Section 5.4 made on the Participant's behalf as a result of such election(s) and any credited earnings attributable thereto shall be known as his Annual Deferral Amount. Article VI. Payment of Benefits 6.1 Designation of Time and Form of Payment As provided in Sections 5.2 and 5.3, each time a Participant makes a deferral election provided for in Article V, such Participant shall designate on his deferral election form the time of payment as described in Section 6.2 and the form of payment as described in Section 6.3. Such designation as to the time and form of payment shall be irrevocable and shall remain in effect for the entire period of deferral, except where a change in such designation is permitted by Section 6.8. 6.2 Time of Payment On each deferral election form filed by a Participant, such Participant shall specify the Deferral Payment Date on which benefit payments under the Plan are to be made or commence with respect to the subject Annual Deferral Amount. In making such designation, the Participant may designate a deferral period of 5, 10, or 15 years or such other deferral periods as may be allowed from time to time by the Committee in its sole discretion. Where a Participant has made a designation to receive an Annual Deferral Amount in annual installments, as provided for in Section 6.3, his Deferral Payment Date shall be the date on which the first installment payment is to be paid, with subsequent installment payments to be made as of the same date in the subsequent years. If for any reason the Participant fails to make an effective Deferral Payment Date designation under this Section 6.2, his Deferral Payment Date for the Annual Deferral Amount shall be the earliest permissible Deferral Payment Date. Except as otherwise provided in Sections 6.4, 6.5, 6.6, 6.7 and 6.8, all benefit payments under the Plan with respect to a Participant shall be made to the Participant on the Deferral Payment Dates as specified in his applicable deferral election forms. 6.3 Forms of Payment On each deferral election form filed by a Participant, such Participant shall specify the form of payment for the Annual Deferral Amount. In making such designation, the Participant may designate payment in the form of a single lump sum payment or payment in the form of annual installment payments. Annual installment payments will be paid on or before January 31 beginning in the year specified in the applicable deferral election form, as provided in Section 6.2. If for any reason the Participant fails to make an effective designation under this Section 6.3, payment of the Annual Deferral Amount shall be made in the form of a single lump sum payment on the date as specified in Section 6.2. Except as otherwise provided in Sections 6.4, 6.5, 6.6, 6.7 and 6.8, all benefit payments under the Plan with respect to a Participant shall be made to the Participant in the payment forms as specified in his applicable deferral election forms. 6.4 Applicable Provisions Upon Termination of Employment Upon a Participant's termination of employment with the Company and any Affiliate, the balance credited to his account established under Section 5.6 at such time shall be paid to such Participant in the following manner: (a) Annual Deferral Amounts in Pay Status - With respect to each Annual Deferral Amount which is in pay status on the date of his termination of employment (in other words, the Deferral Payment Date preceded the date of termination of employment and the Annual Deferral Amount is being paid in annual installments), the payment of such Annual Deferral Amount shall continue to be paid at the same time and in the same manner. (b) Annual Deferral Amounts Not in Pay Status - With respect to each Annual Deferral Amount with a designated Deferral Payment Date after the Participant's termination of employment, the payment of such Annual Deferral Amount shall (1) be made within 90 days of termination of employment if the elected form of distribution is a single sum payment; or (2) commence on or before the January 31 coincident with or next following the date on which the Participant terminated employment if the elected form of distribution is annual installment payments. 6.5 Death Benefit If a Participant dies with a balance credited to his account established under Section 4.3 and/or his account established under Section 5.6, the balance(s) of such Account(s) shall be paid to his designated Beneficiary or Beneficiaries in the form of a single lump sum payment within 90 days after proof of death is provided to the Committee. 6.6 Disability Benefit If a Participant becomes totally and permanently disabled, as determined by the Committee in its absolute discretion, with a balance credited to his account established under Section 4.3 or his account established under Section 5.6, the balance(s) of such Account(s) shall be paid to the Participant in the form of a single lump sum payment within 90 days after the Committee determines that the Participant has become disabled. 6.7 Severe Financial Hardship If a Participant suffers a severe financial hardship, as determined by the Committee in its absolute discretion, with a balance credited to his account established under Section 4.3 or his account established under Section 5.6, the portion of such balance(s) which is necessary to meet the severe financial hardship shall be paid to the Participant within 30 days after the Committee determines that the Participant has incurred a severe financial hardship. For purposes of this Section 6.7, a severe financial hardship includes a sudden and unexpected illness or accident of the Participant or a dependent (as defined under Section 152(a) of the Internal Revenue Code of 1986, as amended), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the Participant's control, to the extent not reimbursed by insurance, and to the extent the Participant does not have other funds available to alleviate the hardship. Amounts withdrawn pursuant to this Section 6.7 from a Participant's account established under Section 5.6 shall be allocated pro-rata among each Annual Deferral Amount subaccount. 6.8 Election Changes From time to time, the Committee may, in its sole discretion, allow Participants to change the Deferral Payment Date and/or the form of payment elected on the Participant's deferral election form(s) with respect to one or more Annual Deferral Amounts which are not in pay status. Any such change to a Participant's Deferral Payment Date or his form of payment shall be made on forms provided by the Committee for this purpose. Any such election by a Participant to change the time or form of payment with respect to one or more Annual Deferral Amount(s) shall specify the Annual Deferral Amount(s) to which such election relates and the new Deferral Payment Date and/or form of payment elected by the Participant. No such election pursuant to this Section 6.8 shall be effective to change the time or form of payment elected by the Participant unless such election is made at least 12 months prior to payment or commencement of payment of the applicable Annual Deferral Amount. Article VII. Administration of the Plan 7.1 Administration The Plan shall be administered by the Committee. A majority of the members of the Committee shall constitute a quorum and the acts of a majority of the members present, or acts approved in writing by a majority of the members without a meeting, shall be the acts of the Committee. The Committee shall have that authority which is expressly stated in the Plan as vested in the Committee, and authority to make rules to administer and interpret the Plan, to decide questions arising under the Plan, and to take such other action as may be appropriate to carry out the purposes of the Plan. In addition, the Committee may designate one or more persons to be responsible for certain administrative functions vested in the Committee under the terms of the Plan, including, but not limited to: notifying Eligible Employees of the opportunity to make deferral elections, and preparing, distributing and collecting deferral election forms. Such person or persons shall be entitled to act on behalf of the Committee in performing the administrative functions delegated by the Committee. 7.2 Rules; Claims Review Procedures (a) General. The Committee shall adopt and establish such rules and regulations with respect to the administration of the Plan as it deems necessary and appropriate. The Committee shall also prescribe such deferral election forms, election change forms, and other administrative forms as it deems necessary to carry out the provisions of the Plan. All determinations with respect to a Participant's right to any benefit under the Plan shall be made by the Committee. (b) Denial of Claim. If a claim for benefits is wholly or partially denied, the claimant shall be given notice in writing of the denial within a reasonable time after the receipt of the claim, but not later than 90 days after the receipt of the claim. However, if special circumstances require an extension, written notice of the extension shall be furnished to the claimant before the termination of the 90-day period. In no event shall the extension exceed a period of 90 days after the expiration of the initial 90-day period. The notice of the denial shall contain the following information: (1) the specific reasons for the denial, (2) specific reference to pertinent Plan provisions on which the denial is based, (3) a description of any additional material or information necessary for the claimant to perfect his claim and an explanation of why such material or information is necessary, (4) an explanation that a full and fair review by the Committee of the denial may be requested by the claimant or his authorized representative by filing a written request for a review with the Committee within 60 days after the notice of the denial is received, and (5) if a request for a review is filed, the claimant or his authorized representative may review pertinent documents and submit issues and comments in writing within the 60-day period described in paragraph (4) above. (c) Decision After Review. The decision of the Committee with respect to the review of the denial shall be made promptly, but not later than 60 days after the Committee receives the request for the review. However, if special circumstances require an extension of time, a decision shall be rendered not later than 120 days after the receipt of the request for review. A written notice of the extension shall be furnished to the claimant prior to the expiration of the initial 60-day period. The claimant shall be given a copy of the decision, which shall state, in a manner calculated to be understood by the claimant, the specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 7.3 Finality of Determinations All determinations of the Committee as to any matter arising under the Plan, including questions of construction and interpretation shall be final, binding and conclusive upon all interested parties. 7.4 Indemnification To the extent permitted by law and the Employer's by-laws, the members of the Committee, its agents, and the officers, directors and employees of the Employer shall not be liable for any act or failure to act hereunder, except for gross negligence or fraud. 7.5 Withholding of Taxes The Employer shall have the right to deduct from all payments made under the Plan any Federal, state or local taxes required by law to be withheld with respect to such payments. Article VIII. Funding 8.1 Funding (a) General. Any obligation of the Employer to pay benefits hereunder shall be an unsecured promise, and any right to enforce such obligation shall be solely as a general creditor of the Employer. For the convenience and benefit of the Employer and to the extent not inconsistent with the foregoing sentence, the Employer may establish one or more irrevocable trusts to hold assets to meet its obligations under the Plan to Participants. (b) Trust Assets. The property comprising the assets of a Trust established under subsection (a) shall, at all times, remain the property of the Trust. The Trustee shall distribute the assets comprising the Trust in accordance with the provisions of the Plan and Trust as instructed by the Committee, but in no event shall the Trustee distribute the assets of the Trust to or for the benefit of the Employer, except as provided in the Trust in the case of insolvency or bankruptcy of the Employer or after satisfaction of all the Employer's obligations under the Plan to the Participants. Article IX. Amendment; Termination; Merger 9.1 Amendment and Termination The board of directors of the Company, or the Committee acting on behalf of such board, may modify or amend any or all of the provisions of this Plan, or suspend or terminate it entirely; provided, that no such modification, amendment, suspension, or termination may, without the consent of a Participant (or his Beneficiary in the case of the death of a Participant), reduce the right of a Participant (or his Beneficiary as the case may be) to a distribution to which he is otherwise entitled in accordance with the provisions of the Plan prior to such change. In the event of a termination of the Plan, no further deferral elections may be made under the Plan, and amounts which become payable under the terms of the Plan, shall be paid as scheduled in accordance with the provisions of the Plan. 9.2 Merger, Consolidation, or Sale of Assets In the event that an Employer should be liquidated, dissolved, or become a party to a merger or consolidation where the Employer is not the surviving corporation, the Plan with respect to such Employer shall terminate at the time of such event, unless the successor or acquiring corporation shall elect to continue and carry on the Plan. In the event such Plan termination occurs, the provisions of Section 9.1 relating to Plan terminations shall become applicable. Article X. General Provisions 10.1 Nonalienation No amount payable under the Plan shall be subject to assignment, transfer, sale, pledge or encumbrance by a Participant or Beneficiary, and any attempt to assign, transfer, sell, pledge or encumber a benefit under the Plan shall be void. In addition, no amount payable under the Plan shall be subject to legal or equitable process in satisfaction of any debt, liability or obligation prior to receipt by the Participant or Beneficiary, except as may be required by law. 10.2 Beneficiary Designation A Participant shall designate a Beneficiary or Beneficiaries who, upon his death, are to receive payments that otherwise would have been paid to him under the Plan. All Beneficiary designations shall be in writing and on a form prescribed by the Committee for such purpose, and any such designation shall only be effective if and when delivered to the Committee during the lifetime of the Participant. A Participant may from time to time during his lifetime change a designated Beneficiary or Beneficiaries by filing a new Beneficiary designation form with the Committee. If a designated Beneficiary dies after the Participant, but before all death benefit payments relating to such Beneficiary have been paid, the remainder of such death benefit payments shall be continued to such Beneficiary's estate. In the event a Participant shall fail to designate a Beneficiary or Beneficiaries with respect to any death benefit payments, or if no designated Beneficiary survives the Participant, or if for any reason such designation shall be ineffective, in whole or in part, any payment that otherwise would have been paid to such Participant shall be paid to his estate, and in such event, his estate shall be his Beneficiary with respect to such payments. 10.3 Nontransferability No right or interest of any Participant in this Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge, and bankruptcy. 10.4 No Guaranty The Plan is not an employment contract. It does not give to any person the right to be continued in employment, and all Employees remain subject to change of salary, transfer, change of job, discipline, layoff, discharge or any other change of employment status. No provision of this Plan shall entitle an Eligible Employee to participate in or receive an Incentive under the Central and South West Corporation Annual Incentive Plan, or any other program which awards Incentives. 10.5 Binding on Employer, Participant, and Their Successors This Plan shall be binding upon and inure to the benefit of the Employer, its successors and assigns, and the Participant, his heirs, executors, administrators, and legal representatives. The provisions of this Plan shall be applicable with respect to each Employer separately, and amounts payable hereunder shall be paid by the Employer of the particular Eligible Employee. 10.6 Incompetency If any person entitled to receive any benefits hereunder is, in the judgment of the Committee, legally, physically or mentally incapable of personally receiving and receipting for any distribution, the Committee may make distribution to such other person or persons or institution or institutions as, in the judgment of the Committee, shall then be maintaining or have custody over such distributee. 10.7 Severability In the event any provision of the Plan shall be held invalid or illegal for any reason, any illegality or invalidity shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced as if the illegal or invalid provision had never been inserted, and the Company shall have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in the Plan. 10.8 Applicable Law The Plan shall be governed and construed in accordance with the laws of the State of Delaware, except to the extent such laws are preempted by any applicable Federal law. In Witness Whereof, the authorized officers of the Company have signed this document and have affixed the corporate seal on June 30 1997, but effective as of January 1, 1997. CENTRAL AND SOUTH WEST CORPORATION Attest. By /s/ E.R. Brooks E.R. Brooks Its Chairman, President & Chief Executive Officer By /s/ Kenneth C. Raney, Jr. Kenneth C. Raney, Jr. Its Vice President, Associate (Corporate Seal) General Counsel & Corporate Secretary PARTICIPATING EMPLOYERS UNDER CENTRAL AND SOUTH WEST CORPORATION EXECUTIVE DEFERRED SAVINGS PLAN The following employers are participating Employers under the Central and South West Corporation Executive Deferred Savings Plan as of January 1, 1997, unless a later participation date is designated: Central and South West Corporation Central and South West Services, Inc. Central Power and Light Company CSW Energy, Inc. Public Service Company of Oklahoma Southwestern Electric Power Company West Texas Utilities Company EX-99.13 14 EXHIBIT 13 CSW LOGO ================================================================================ Central and South West Corporation --------------------------- 1998 FINANCIAL REPORT --------------------------- March 5, 1999 TABLE OF CONTENTS Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................1 Consolidated Statements of Income.............................................35 Consolidated Statements of Stockholders'Equity................................36 Consolidated Balance Sheets...................................................37 Consolidated Statements of Cash Flows.........................................39 Notes to Consolidated Financial Statements....................................40 Report of Independent Public Accountants......................................86 Report of Management..........................................................89 Glossary of Terms.............................................................90 FORWARD-LOOKING INFORMATION This report made by CSW and certain of its subsidiaries contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Although CSW and each of its subsidiaries believe that their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: - the impact of general economic changes in the United States and in countries in which CSW either currently has made or in the future may make investments, - the impact of deregulation on the United States electric utility business, - increased competition and electric utility industry restructuring in the United States, - the impact of the proposed AEP Merger including any regulatory conditions imposed on the merger, the inability to consummate the AEP Merger, or other merger and acquisition activity including the SWEPCO Plan, - 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, - costs associated with any year 2000 computer related failure(s) either within the CSW System or supplier failures that adversely affect the CSW System, - uncertainties in foreign operations and foreign laws affecting CSW's investments in those countries, - the effects of retail competition in the natural gas and electricity distribution and supply businesses in the United Kingdom, and - the timing and success of efforts to develop domestic and international power projects. In the non-utility area, the previously mentioned factors apply and also include, but are not limited to: - the ability to compete effectively in new areas, including telecommunications, power marketing and brokering, and other energy related services, and - evolving federal and state regulatory legislation and policies that may adversely affect those industries generally or the CSW System's business in areas in which it operates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. The RESULTS OF OPERATIONS of CSW precede its financial statements. OVERVIEW The electric utility industry is changing rapidly as it is becoming more competitive. In anticipation of increasing competition and fundamental changes in the industry, CSW's management is implementing a strategic plan designed to help position CSW to be competitive in this rapidly changing environment and is developing a global energy business. CSW has undertaken key initiatives in the implementation of this overall strategy and is determining new directions for the corporation's future. One of these key initiatives is the proposed merger between AEP and CSW that was announced in December 1997. CSW would become a subsidiary of AEP in the proposed merger. The proposed merger would join two companies which are low cost providers of electricity and would achieve greater economies of scale than either company could achieve on its own. In addition, CSW International continues to make investments in South America. CSW continues to pursue the acquisition of the non-nuclear generating assets of Cajun, a Louisiana member electric cooperative. In 1998, C3 Communications sold its interest in ChoiceCom and retained the long haul, high-capacity fiber optic network from that partnership. These initiatives are discussed in more detail below and elsewhere in this report. CSW believes that compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). The CSW System benefits from economies of scale by virtue of its size and is a reliable and relatively low-cost provider of electric power. Specifically, CSW seeks competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additional information. LIQUIDITY AND CAPITAL RESOURCES Overview of Operating, Investing and Financing Activities Net cash inflows from operating activities increased $216 million to $942 million during 1998 compared to 1997. The increase in net cash inflows is due primarily to the absence in 1998 of $190 million of federal and state income tax payments made in the first half of 1997 for the gain on CSW's 1996 sale of Transok. However, these payments were offset in part by the utilization of Alternative Minimum Tax credits that CSW had previously generated. Also contributing to the increase were better fuel recovery positions and a higher accounts payable balance. The increase in net cash inflows was offset in part by an increase in the accounts receivable balance. The second installment of the 1 United Kingdom windfall profits tax was paid in December 1998 in the amount of (pound)55 million, or $91 million; however, this cash outflow did not reduce the increase in cash flows from operations when compared to the prior year because a comparable amount was paid in December 1997. Net cash outflows from investing activities decreased $269 million to an outflow of $635 million during 1998 compared to an outflow of $904 million for 1997. CSW Energy obtained permanent external financing during the first half of 1997 for the Orange cogeneration project and subsequently reduced its equity investment in the project. In addition, CSW Energy made its final payment on the Ft. Lupton cogeneration project in the first half of 1997. CSW Energy also experienced a decrease in construction expenditures for the Phillips Sweeny project that began operating in the first quarter of 1998. Further reducing the cash outflows from investing activities was a cash inflow resulting from CSW International's Enertek partner, Alpek, assuming its 50% obligation of that power plant project. Reduced spending at the U.S. Electric Operating Companies for facilities also contributed to the lower net cash outflows from investing activities. Net cash flows from financing activities decreased $229 million to an outflow of $225 million during 1998 compared to an inflow of $4 million for the same period last year. In the second quarter of 1997, CSW received proceeds from the issuance of Trust Preferred Securities. The proceeds were used primarily to reacquire preferred stock and pay down short-term debt in the second quarter of 1997. In April 1997, CSW made changes to its common stock plans and stopped issuing original shares. The decrease in net cash from financing activities was due in part to funding these common stock plans through open market purchases. The decrease in cash flows from financing activities was offset in part by higher amounts of reacquisitions and maturities of long-term debt in 1997 compared to 1998. Also partially offsetting the decrease in cash flows from financing activities was a cash inflow in 1998 from financing CSW Energy's Sweeny project. The non-cash impacts of exchange rate differences on the translation of foreign currency denominated assets and liabilities were recorded on a separate line on the cash flow statement in accordance with accounting guidelines. Internally Generated Funds Internally generated funds, which consist of cash flows from operating activities less common and preferred stock dividends, should meet most of the capital requirements of the CSW System. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non-utility businesses through acquisitions or otherwise, may require additional capital from external sources. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. Productive investment of net funds from operations in excess of capital expenditures and dividend payments is necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of internally generated funds, which totaled $564 million, $343 million and $499 million for 1998, 1997 and 1996, respectively. Capital Expenditures The CSW System's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers. The historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. However, current projected capital expenditures are expected to be primarily for existing transmission and distribution systems and for various non-utility investments. The U.S. Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the U.S. Electric Operating Companies for the next three years are primarily to improve and expand 2 transmission and distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. CSW regularly evaluates its capital spending policies and generally seeks to fund only those projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with this strategy, the CSW System is likely to continue to make additional investments in energy-related and non-utility businesses and will continue to search for other electric utility properties to acquire. Primary sources of capital for these expenditures are long-term debt, trust preferred securities and preferred stock issued by the U.S. Electric Operating Companies, long-term and short-term debt issued by CSW, as well as internally generated funds. Historically, the issuance of common stock by CSW has also been a source of capital. CSW Energy and CSW International typically use various forms of non-recourse project financing to provide a portion of the capital required for their respective projects as well as utilizing long-term debt for other investments. Although CSW and each of the U.S. Electric Operating Companies expect to fund the majority of their respective capital expenditures for their existing utility systems through internally generated funds, for any significant investment or acquisition, additional funds from the capital markets may be required. For a description of certain restrictions on CSW's ability to make investments and raise capital from external sources, including through the issuance of common stock, see PROPOSED AEP MERGER. The historical and estimated capital expenditures for the CSW System, including the U.S. Electric Operating Companies, SEEBOARD and other operations are shown in the CAPITAL EXPENDITURES table. The amounts include construction expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and CSW's other operations, construction expenditures and net equity investments. The 1996 CSW amount does not include SEEBOARD acquisition expenditures. The majority of the capital expenditures for the U.S. Electric Operating Companies for 1996 through 1998 were spent on transmission and distribution facilities. It is anticipated that the majority of the estimated capital expenditures for 1999 through 2001 will be for transmission and distribution facilities as well. For a description of certain restrictions on CSW's ability to make capital expenditures, including through the issuance of common stock, see PROPOSED AEP MERGER (The table and statements below contain forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). CAPITAL EXPENDITURES Estimated Expenditures 1996 1997 1998 1999 2000 2001 ------------------------------ -------------------------------- (millions including AFUDC) CSW $644 $760 $584 $855 $814 $664 Estimated capital expenditures for 1999 - 2001 do not include expenditures for acquisition-type investments. Although CSW does not believe that the U.S. Electric Operating Companies will require substantial additions of generating capacity over the next several years, the U.S. Electric system's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases. See Integrated Resource Plan below for additional information regarding the U.S. Electric System's capacity needs. Inflation Annual inflation rates, as measured by the U.S. Consumer Price Index, have averaged approximately 2.3% during the three years ended December 31, 1998. CSW believes that inflation, at this level, does not materially affect CSW's results of operations or financial position. However, under existing regulatory 3 practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. Financial Structure, Shelf Registrations and Credit Ratings As of December 31, 1998, the capitalization ratios of CSW were 46% common stock equity, 2% preferred stock, 4% Trust Preferred Securities and 48% long-term debt. CSW is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing activities. The estimated embedded cost of long-term debt for CSW is 7.3%. CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, to fund its LTIP, stock option plan, PowerShare plan and Retirement Savings Plan. CSW began funding these plans through open market purchases on April 1, 1997. CPL has shelf registration statements on file for the issuance of up to $60 million of FMBs, up to $75 million of preferred stock, and up to $350 million of Senior Notes. PSO has a shelf registration statement on file for the issuance of up to $35 million of Senior Notes. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. 4 The current securities ratings for each of the Registrants is presented in the following table, including the securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I. Duff Standard & Moody's & Phelps Poor's --------------------------------------- CPL First mortgage bonds A3 A A Senior unsecured Baa1 A- A- Preferred stock Baa1 BBB+ BBB+ Trust preferred (CPL Capital I) Baa1 BBB+ BBB+ Junior subordinated deferrable Interest debentures Baa2 -- -- PSO First mortgage bonds A1 AA- AA- Senior unsecured A2 A+ A Preferred stock a3 A+ A- Trust preferred (PSO Capital I) a2 A+ A- Junior subordinated deferrable Interest debentures A3 -- -- SWEPCO First mortgage bonds Aa3 AA AA- Senior unsecured A1 AA- A Preferred stock a1 AA- A- Trust preferred (SWEPCO Capital I) aa3 AA- A- Junior subordinated deferrable Interest debentures A2 -- -- WTU First mortgage bonds A2 A+ A Senior unsecured A3 -- A- Preferred stock a3 A BBB+ CSW Commercial paper P-2 D-2 A-2 These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating. Long-Term Financing CSW Services used short-term debt to repay a $60 million variable rate bank loan due December 1, 2001 in two $30 million installments on January 28, 1998 and April 27, 1998. On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt to fund the $28 million redemption cost. On September 1, 1998, CPL reacquired in its entirety $36 million principal amount outstanding of its 7% Series L FMBs, due February 1, 2001 at a call price of 100.53. On September 1, 1998, PSO reacquired in their entirety $25 million principal amount outstanding of its 7 1/4% Series K FMBs, due January 1, 1999 and $30 million principal amount outstanding of its 7 3/8% Series L FMBs, due March 1, 2002, at call prices of 100 and 100.77, respectively. CPL and PSO used short-term borrowings and internally generated cash to fund the reacquisitions. The final installment of (pound)55 million, or $91 million, related to the windfall profits tax, enacted by the United Kingdom government, was paid by SEEBOARD on December 1, 1998. 5 Short-Term Financing and Accounts Receivable Factoring The CSW System uses short-term debt, primarily commercial paper, 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 December 31, 1998, CSW had revolving credit facilities totaling $1.0 billion to back up its commercial paper program. At December 31, 1998, CSW had $811 million outstanding in short-term borrowings. The maximum amount of short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $1.1 billion during June 1998. CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated electric utility companies. The sale of accounts receivable provides the U.S. Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. In addition, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, so CSW's cost of capital is lowered. CSW Credit issues commercial paper to meet its financing needs. At December 31, 1998, CSW Credit had a $1.0 billion revolving credit agreement, secured by the assignment of its receivables, to back up its commercial paper program, which had $749 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield of 5.6%, was $1.0 billion during September 1998. CSW Energy and CSW International CSW Energy has authority from the SEC to expend up to $250 million for general development activities related to qualifying facilities and independent power facilities. CSW Energy may seek specific authority to spend additional amounts on certain projects subject to limitations contained in the AEP merger agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy projects at December 31, 1998. In January 1997, CSW received authority from the SEC under the Holding Company Act to spend an amount up to 100% of consolidated retained earnings on EWG or FUCO investments, subject to certain restrictions. This represents a twofold increase in authority previously granted under the Holding Company Act. However, the amount of any such expenditures is subject to the terms of the AEP merger agreement. As of December 31, 1998, CSW had invested an amount equal to 49% of consolidated retained earnings, as defined by Rule 53 of the Holding Company Act, on EWG and FUCO investments. For a description of certain restrictions on the ability of CSW and its subsidiaries to make capital expenditures in respect of qualifying facilities and independent power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER. RECENT DEVELOPMENTS AND TRENDS AEP Merger In December 1997, AEP and CSW announced that their boards of directors approved a definitive merger agreement. If the merger is completed, the combined company will be a diversified electric utility serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. In 1998, CSW undertook a corporate realignment to more effectively position itself for competition and to better align itself with AEP related to the proposed merger of the two companies. The merger must receive regulatory approval from federal and state authorities and must satisfy a number of other conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated, and if it is, the timing of such consummation or the effect of any regulatory conditions that may be imposed on such consummation. See PROPOSED AEP MERGER. 6 Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail levels in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be less expensive than electricity. In the United Kingdom, the franchised electricity supply business opened to full competition on a phased-in basis beginning October 1998. As a result, SEEBOARD will be able to seek customers while risking the loss of existing customers to other competitors. CSW believes that, overall, its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the energy marketplace (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several current issues affecting the CSW System. Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to: (i) who will bear the costs of prudent utility investments or past commitments incurred under traditional cost-of-service regulation that will be uneconomic in a competitive environment, sometimes referred to as stranded costs; (ii) whether all customers have access to the benefits of competition; (iii) how, and by whom, the rules of competition will be established; (iv) what the impact of deregulation will be on conservation, environmental protection and other regulator-imposed programs; and (v) how transmission system reliability will be ensured. The degree of risk to CSW and the U.S. Electric Operating Companies associated with various federal and state restructuring proposals aimed at resolving any or all of these issues will vary depending on many factors, including the proposals' competitive position and treatment of stranded utility investment, primarily at CPL, resulting from such requirements. Although the U.S. Electric Operating Companies believe they are in a position to compete effectively in a deregulated, more competitive marketplace, if stranded costs are not recovered from customers then the U.S. Electric Operating Companies may be required by existing accounting standards to recognize potentially significant losses from unrecovered stranded costs, especially with respect to STP (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See Regulatory Accounting for additional information. A majority of the states, including the four states in which the U.S. Electric Operating Companies operate, have considered industry restructuring including retail competition. Several states have enacted legislation mandating retail competition, including Oklahoma in which PSO operates. CSW cannot predict when and if it will be subject to legislative or regulatory initiatives enacting industry restructuring and retail competition, nor can they predict the scope or effect of such initiatives on their results of operations or financial condition in Texas, Louisiana, Oklahoma and Arkansas. For additional information related to such state initiatives, see Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas. Wholesale Electric Competition in the United States The Energy Policy Act, which was enacted in 1992, significantly altered the way in which electric utilities compete. The Energy Policy Act created exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to own 7 EWGs. EWGs are a relatively new category of non-utility wholesale power producers that are free from most federal and state regulation, including restrictions under the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been increasingly competitive since enactment of the Energy Policy Act. The U.S. Electric Operating Companies must compete in the wholesale energy markets with other public utilities, cogenerators, qualifying facilities, EWGs and others for sales of electric power. While CSW believes the Energy Policy Act will continue to make the wholesale markets more competitive, CSW is unable to predict how the Energy Policy Act will ultimately impact the U.S. Electric Operating Companies. FERC Orders 888 and 889 The FERC issued Order No. 888 in 1996, which is the final comparable open access transmission service rule. 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 wholesale sales and purchases and by requiring utilities to rely on the same transmission 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. In May 1998, the Texas Commission issued an order in Docket No. 17285, Complaint of CPL and WTU against Texas Utilities Electric Company, granting CPL and WTU the relief they sought, which is to net the annual payment paid to Texas Utilities Electric Company under a prior FERC settlement for transmission service in ERCOT against the amounts CPL and WTU would otherwise owe Texas Utilities Electric Company under the Texas Commission's transmission rule. Texas Utilities Electric Company has appealed the order. FERC Order No. 888 requires holding companies to offer single system transmission rates. The transmission rates of the U. S. Electric Operating Companies are under the exclusive jurisdiction of the FERC while the transmission rates of most of the transmitting utilities in ERCOT are under the exclusive jurisdiction of the Texas Commission. Because 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 became effective on January 1, 1997, subject to refund and to the issuance of further orders. On December 10, 1997 the FERC issued an order regarding the U. S. Electric Operating Companies' proposed system-wide tariff filed on November 1, 1996. The FERC's order accepted the proposed tariff subject to several modifications, including revisions to provide for system-wide transmission service under a 8 single system rate. The U.S. Electric Operating Companies filed the required compliance tariff on February 17, 1998. On November 13, 1998, the FERC issued an order that accepted the U.S. Electric Operating Companies' compliance tariff providing for system-wide transmission service under a single system rate, subject to further modifications. In 1996, the FERC issued Order No. 889 requiring transmitting utilities to establish and operate an OASIS for the dissemination of information regarding available transfer capability for their respective transmission systems. The OASIS is an on-line information system that provides the same information about the utility's transmission system to all transmission customers. The U.S. Electric Operating Companies utilize, and participate in the OASIS systems for ERCOT and SPP. Order No. 889 also created standards of conduct requiring utilities to conduct any wholesale power sales business separately from their transmission operations. The standards of conduct are designed to ensure that utilities and their affiliates, as sellers of power, do not have preferential access to information about wholesale transmission prices and availability. The FERC has accepted, subject to minor modifications, the U.S. Electric Operating Companies' standards of conduct. Retail Electric Competition in the United States Most states have considered the adoption of various legislative and regulatory initiatives to restructure the electric utility industry and enact retail competition, and several states have already passed legislation that requires the implementation of retail access for customers. CSW believes that initiatives adopting industry restructuring and retail competition will be in the best interest of CSW and the U.S. Electric Operating Companies only if such initiatives fairly treat customers, utilities and their shareholders. More specifically CSW believes industry restructuring will not be in the best interests of CSW's and the U.S. Electric Operating Companies' security holders, unless CSW and the U.S. Electric Operating Companies receive fair recovery of the full amounts previously invested to serve customers, including amounts invested to finance generation facilities. These investments, which were reasonably incurred, were made by the U.S. Electric Operating Companies to meet their obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CSW intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CSW undertook to serve the public's demand for electricity. For additional information related to retail wheeling in the United States, see Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas and Holding Company Act and Legislative Update. Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas Several initiatives to restructure the electric utility industry and enact retail competition have been undertaken in the four states in which the U. S. Electric Operating Companies operate. Legislation was enacted in Oklahoma in 1997 and 1998, while legislative activity in Texas, Louisiana and Arkansas stopped short of any such definitive action. In April 1997, the Oklahoma Legislature passed restructuring legislation providing for retail access by July 1, 2002. The legislation called for a number of studies to be completed on a variety of restructuring issues, including independent system operator issues, technical issues, financial issues, transition issues, and consumer issues. The study on independent system operator issues was completed in January 1998. In 1998, the Oklahoma Legislature passed Senate Bill 888, which accelerated the schedule for completion of the remaining studies to October 1999. These studies are to be conducted under the direction of the Joint Electric Utility Task Force. The Task Force has organized the study effort into several working groups, which have been directed to evaluate assigned issues. The Task Force will develop its report to the Legislature based on the work performed by these working groups. The Task Force's final report will be provided to the Legislature by October 1, 1999. Management is unable to predict the outcome of these studies or their ultimate impact on the results of operations and financial condition of CSW. 9 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 began in October 1997, and the committees held hearings throughout 1998. Also, the Arkansas Commission initiated a series of generic restructuring dockets in 1998, and held hearings on restructuring in May 1998. In October 1998, the Arkansas Commission released a report to the Arkansas Legislature, recommending the establishment of retail competition in Arkansas by January 2002. Bills have been filed in the 1999 session of the Arkansas legislature concerning the restructuring of the electric utility industry in Arkansas. In 1998, a special legislative committee created by the Louisiana Senate studied the impact of retail competition on the state of Louisiana. Further, the Louisiana Commission opened a proceeding to study restructuring and retail competition. Comments were submitted and hearings were held throughout 1998 on a number of specific restructuring topics. In addition, utilities filed rate unbundling information with the Louisiana Commission staff. The Louisiana Commission staff recently released its report on industry restructuring in Louisiana, including its recommendations to the Louisiana Commission regarding retail competition in Louisiana. In its report, the Louisiana Commission staff found that electric industry restructuring in Louisiana is not in the public interest at this time, although the staff did approve an electric industry restructuring plan in case the commissioners decide to move forward with electric industry restructuring and retail competition. In 1997, the Texas legislature considered but did not pass legislation enacting industry restructuring, including retail competition. Following the 1997 Texas legislative session, the Texas Lieutenant Governor appointed a Senate interim committee to study retail competition and restructuring. The committee held a series of hearings in late 1997 and throughout 1998, and issued its report to the legislature in late 1998. The 1999 session of the Texas legislature has already produced three comprehensive electric industry restructuring bills as electric industry restructuring has become one of the primary topics the legislature will address. Management cannot predict the ultimate outcome of the initiatives concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma and Texas, or their ultimate impact on the results of operations, financial condition, or competitive position of CSW. Texas Independent System Operator An ISO is managing the ERCOT power grid in a competitive wholesale electric market in Texas. Integrated Resource Plan In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a joint integrated resource plan outlining the companies' future electric needs over a 10-year forecast horizon and the manner in which the companies propose to meet those needs. In July 1997, the Texas Commission issued an Interim Order on the Preliminary Plan which adopted a settlement agreement that had been reached with all the parties in the case. The Interim Order approved the load forecast and individual resource needs for each of the companies, as well as the request for proposal documents to be used to procure future resource needs. The Interim Order also approved the targeted purchase goal amounts for renewable and energy efficiency programs, which will result in renewable and energy efficiency programs being included in the companies' resource mix. In June 1997, CSW Services, on behalf of CPL, SWEPCO and WTU, issued a request for proposal for up to 75 MW of renewable resources. In November 1998, the Texas Commission approved the winning contract from that solicitation, a 75 MW wind farm to be constructed near McCamey, Texas. Additionally, CPL, SWEPCO and WTU have each issued solicitations for additional resources to be available in 2001. The contracts awarded as a result of these solicitations will be presented to the Texas Commission for certification during 1999. In May 1997, a separate phase of the 10 Integrated Resource Plan was created to address the value of interruptible resources at CPL. As a result of that proceeding, in January 1999, the Texas Commission approved a new interruptible tariff for CPL. The tariff will go into effect in 2000 prior to the expiration of CPL's current tariffs. Holding Company Act and Federal Legislative Update In 1995, the SEC issued a report to the U.S. Congress advocating repeal of the Holding Company Act, which restricts certain activities of CSW and other registered holding companies, finding the Holding Company Act anachronistic and duplicative of other federal and state regulatory regimes. In the last Congress, and again in February 1999, Holding Company Act repeal legislation was reported out of the U.S. Senate Banking Committee. Management cannot predict the outcome of this, or similar, legislation. Also in the last Congress, several bills which provided for the restructuring and/or deregulating of the electric utility industry were considered but did not pass. Several similar bills have been introduced as of February 1999. Management cannot predict the ultimate outcome of any legislative initiatives. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition of regulatory assets, the U.S. Electric Operating Companies have recognized significant regulatory assets and liabilities. Management believes that the U.S. Electric Operating Companies currently meet the criteria for following SFAS No. 71. However, in the event the U.S. Electric Operating Companies or some portion of their business no longer meets the criteria for following SFAS No. 71 due to deregulation or for other reasons, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PSO Union Negotiations PSO and its Local Union 1002 of the IBEW 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 then 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. In October 1998, PSO received an adverse ruling from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ upheld PSO's right to cease collecting union dues through payroll deductions. The ALJ ruled that PSO did negotiate in good faith, but also PSO's position on some issues was too harsh, and therefore the December 1996 implementation should be rolled back and employees made whole. Additionally, the ALJ ruled that PSO had improperly solicited employees to withdraw from the union. In December 1998, PSO appealed the ALJ's ruling to the NLRB. The union is an intervenor in the AEP merger proceedings. PSO continues to negotiate with the union. At this time, management cannot predict the outcome of this matter. However, management believes that even in the event of a strike, its operations would continue without a significant disruption and that a strike would not have a material adverse effect on its results of operations or financial condition. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such 11 projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Impact of Competition and Industry Restructuring Initiatives CSW believes that compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity. CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry in the United States, and in the United Kingdom or on the CSW System. As the electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. CSW cannot predict the form or effect of any federal or state electric utility restructuring initiatives at this time. Federal and/or state electric utility restructuring may cause impairment of significant recorded assets, material reductions of profit margins, and/or increased costs of capital. No assurance can be made that such events would not have a material adverse effect on CSW's results of operations, financial condition or competitive position. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). CPL - Wholesale Customers Certain CPL wholesale customers have given notice of their intent to terminate their contract when they expire in 2001 through 2004. During 1998, these customers represented 3% of CPL's total electric operating revenues. SEEBOARD - Third Party Pension Litigation In the U.K., National Grid Group and National Power have been involved in continuing litigation in respect of their use of actuarial surpluses declared in the electricity industry's occupational pension scheme, the Electricity Supply Pension Scheme. A high court decision in favor of the National Grid Group and National Power was appealed and on February 10, 1999 the court of appeal ruled that the particular arrangements made by these corporations to dispose of the surplus, partly by canceling liabilities relating to additional pension payments resulting from early retirement, were invalid due to procedural defects. SEEBOARD employees are members of the Electricity Supply Pension Scheme, and SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of the payments cancelled was approximately $33 million. The court of appeal did not order the National Grid Group and National Power to make payment to the Electricity Supply Pension Scheme but will hold a further hearing to decide what action to take. It is likely that the case will then be referred to the U.K. House of Lords. The final outcome of the hearing, or any referral to the U.K. House of Lords, cannot be determined and therefore it is not possible to quantify the impact, if any, on the results of operations and financial condition of CSW. RATES AND REGULATORY MATTERS U.S. ELECTRIC CPL Rate Review - Docket No 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million. On October 16, 1997 the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included 12 a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be reduced an additional $13 million on May 1, 1999. CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property; (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999; and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL sought a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology. The court denied the temporary injunction and the "Glide Path" rate reduction was implemented in May 1998. Hearings on the appeal were held during the third quarter of 1998, and a judgment was issued in February 1999 affirming the Texas Commission order, except for a consolidated tax issue in the amount of $6 million, which will be remanded to the Texas Commission. While CPL intends to appeal this most recent order to the Court of Appeals, management is unable to predict how the final resolution of these issues will ultimately affect CSW's results of operations and financial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has recorded approximately $1.2 billion of regulatory-related assets at December 31, 1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, CPL, or some portion of its business, no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. CPL would also be required to evaluate whether there was any impairment of any deregulated plant assets. In addition, 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. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information on the CPL 1997 Final Order. SWEPCO Louisiana Rate Review In December 1997, the Louisiana Commission announced it would review SWEPCO's rates and service. SWEPCO's last rate activity was an $8.2 million rate decrease, initiated by SWEPCO and approved for its small and large industrial customers in January 1988. Prior to that SWEPCO's last rate increase was in 1985. The Louisiana Commission has selected consultants and legal counsel to perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of service. The Louisiana Commission's legal counsel will issue a report in May 1999, and hearings will begin in September 1999. Management cannot predict the outcome of this review. SWEPCO Arkansas Rate Review In June 1998, the Arkansas Commission indicated that it would conduct a review of SWEPCO's earnings. The review began in July 1998. Management cannot predict the outcome of this review. Other Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding fuel proceedings at CPL, SWEPCO and WTU. 13 U.K. ELECTRIC SEEBOARD Recent Regulatory Actions Following the commencement of the phased-in opening of the United Kingdom domestic and small business electricity market to competition, since September 1998, many customers are now able to choose their electricity supplier. SEEBOARD competes for customers in its own area as well as throughout the rest of the United Kingdom. The DGES has allowed a significant portion of the system development costs associated with the introduction of competition to be recovered by the regional electricity companies through a charge to all customers over the next five years. The DGES has also announced price restraints which set a maximum amount that existing electricity supply companies can charge their domestic and small business customers, taking into account its view of future electricity purchase costs. For SEEBOARD, these price restraints reduce prices in real terms by 6% for the regulatory year ending March 31, 1999 and a further 3% for the following regulatory year ending March 31, 2000. PROPOSED AEP MERGER Background Information On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28 billion at that time. At December 31, 1998, the total market capitalization of the combined company would have been $28 billion ($15 billion in equity; $13 billion in debt) and the combined company would have served more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. At December 22, 1997, AEP would have issued approximately $6.6 billion in stock to CSW stockholders to complete the transaction. At December 31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as 1998, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries. The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two work forces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Transition teams of employees from both companies will make organizational and staffing recommendations. 14 The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from: (i) issuing shares of common stock other than pursuant to employee benefit plans; (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Merger Regulatory Approvals The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. General Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas and at the FERC outlined the expected company-wide benefits of the merger to AEP and CSW customers and shareholders. These benefits would include $2 billion in non-fuel savings over 10 years and $98 million in net fuel savings over 10 years. FERC On April 30, 1998, AEP and CSW jointly filed a request with the FERC for approval of their proposed merger. On July 15, the FERC approved a draft order accepting the proposed transmission service agreements between the Ameren System and PSO. The draft order confirms that PSO's 250 MW firm contract path is available for AEP and CSW to meet the Holding Company Act's requirement that the two systems operate on an integrated and coordinated basis. In November 1998, the FERC issued an order setting issues for hearing. Hearings are scheduled to begin on June 1, 1999. The FERC order indicated that the review of the proposed merger would address the issues of competition, market power and customer protection and instructed AEP and CSW to refile an updated market power study. The updated market power study was filed in January 1999. CSW has filed a proposed settlement with the FERC to sell 250 MWs of capacity in the Frontera power plant project, two years after the AEP merger closes to respond to market-power issues. A final order is expected in the fourth quarter of 1999. Arkansas On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas Commission for approval of their proposed merger. The Arkansas Commission issued an order approving the merger, subject to approval of the associated regulatory plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a final order granting conditional approval of a stipulated agreement related to a proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to reduce rates through a net savings merger rider for its Arkansas retail customers by $6 million over the five-year period following completion of the merger. The Arkansas Commission order notes the possibility of decisions in 15 other jurisdictions adversely affecting provisions of the stipulated agreement. Consequently, the Arkansas Commission final orders are conditioned on its consideration of approval of the merger in other state and federal jurisdictions. Louisiana On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana Commission for approval of their proposed merger and for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Louisiana that provides for: - Approximately $2.6 million in fuel cost savings to Louisiana customers of CSW's SWEPCO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for SWEPCO customers in Louisiana and a plan to share with those customers approximately one-half of the savings allocated to Louisiana related to the merger during the first 10 years following the merger. Under this plan, approximately $26 million of these non-fuel merger-related savings will be used to reduce future costs to SWEPCO's Louisiana customers. Hearings in Louisiana are expected to begin in the first quarter of 1999, and a final order is expected in the second quarter of 1999. Oklahoma On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma Commission for approval of their proposed merger. AEP and CSW have proposed a regulatory plan in Oklahoma that provides for - Approximately $11.8 million in fuel cost savings to Oklahoma customers of CSW's PSO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for PSO retail customers and to share approximately one-half of the savings from synergies created by the merger during the first 10 years following the merger. Under this plan, approximately $78.6 million of these non-fuel merger-related savings will be used to reduce future costs to PSO's retail customers. On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling recommending to the Oklahoma Commission that the merger filing be dismissed without prejudice for lack of information regarding the potential impact of the merger on the retail electric market in Oklahoma. The ruling was in response to comments received from intervenors to the merger. A dismissal without prejudice would allow AEP and CSW to submit an amended application with the added information. Subsequent meetings with the parties to the merger proceeding resulted in an agreement on criteria for the additional studies. On October 21, 1998, the ALJ approved these criteria, as well as plans by AEP and CSW to file an amended application along with the additional studies. An amended application was filed with the Oklahoma Commission on February 25, 1999. Submission of the amended application reset Oklahoma's 90-day statutory time period for Oklahoma Commission action on the merger. All other material in the written record in the merger case will be preserved since the docket is not being dismissed. AEP and CSW anticipate that the Oklahoma Commission will establish a procedural schedule that will result in a final order in Oklahoma in the second quarter of 1999. 16 Texas On April 30, 1998, AEP and CSW jointly filed a request with the Texas Commission for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Texas that provides for: - Approximately $29 million in fuel cost savings to Texas customers during the 10-year period following completion of the merger; and - A commitment to not raise base rates prior to January 1, 2002 for Texas customers and a plan to share with those customers approximately one-half of the savings allocated to Texas related to the merger during the first 10 years following the merger. In Texas, approximately $183 million of the savings from synergies will be used to reduce future costs to customers. On July 2, 1998, the Texas Commission issued a preliminary order setting forth the issues the Texas Commission will consider in the merger application. In its preliminary order, the Texas Commission also determined that: (i) the merger application was not a rate proceeding; (ii) restructuring issues should not be addressed; and (iii) matters in the jurisdiction of other regulatory bodies should not be addressed. AEP and CSW have reached a settlement in principle with the Texas Office of Public Utility Counsel and several cities in Texas. The proposed settlement provides for combined rate reductions totaling approximately $180 million over a six-year period for CSW's electric operating company customers through two separate rate riders. Both rate reduction riders become effective upon approval of the settlement and completion of the merger. The first rate reduction rider provides for $84.4 million in estimated net merger savings to be credited to Texas customer bills. The reduction would come from a net merger savings rate reduction rider over the six years following completion of the merger with the aggregate rate reductions for customers of the CSW Texas companies as follows: - $52.7 million for CPL; - $16.1 million for SWEPCO; and - $15.6 million for WTU. The second rate reduction rider will be implemented to resolve issues associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings in Texas. The $95.6 million rate reductions over the six years following completion of the merger include: - $61.3 million for CPL; - $19.9 million for SWEPCO; and - $14.4 million for WTU. CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction of $13.0 million implemented in May 1998, as well as the second glide-path rate reduction of $13.0 million scheduled to take effect May 1999, if the settlement is approved and the merger between AEP and CSW merger is completed. In addition, as a part of the settlement proposal, CPL, SWEPCO and WTU agree not to seek an increase in base rates prior to January 1, 2003. The Texas Office of Public Utility Counsel and members of the Texas cities will not initiate rate reviews prior to January 1, 2001. 17 The settlement proposal also provides for a sharing of off-system sales margins on the wholesale electricity market after the effective date of the merger. The proposed settlement also includes affiliate transaction standards and provides for the maintenance of service quality for Texas customers. Hearings in Texas are expected to begin in the second quarter of 1999, and a final order is expected by the end of the third quarter of 1999. NRC On June 19, 1998, CPL filed a license transfer application with the NRC requesting the NRC's consent to the indirect transfer of control of CPL's interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue to own its 25.2% interest in STP, and CPL's name would remain on the NRC operating license. On November 5, 1998, the NRC approved the license transfer application on the condition that the merger is completed by December 31, 1999. Other Federal On October 13, 1998, AEP and CSW jointly filed an application with the SEC for approval of the proposed merger. The SEC merger filing is similar to requests currently before other jurisdictions and outlines the expected combined company benefits of the merger to AEP and CSW customers and shareholders. On November 9, 1998, AEP and CSW filed an amendment to the application. AEP and CSW plan to make other required federal merger filings with the Federal Communications Commission and the Department of Justice in the near future. United Kingdom CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in Yorkshire. The proposed merger of CSW into AEP would result in common ownership of the United Kingdom entities. Although the merger of CSW into AEP is not subject to approval of United Kingdom regulatory authorities, the common ownership of the United Kingdom entities could be referred by the United Kingdom Secretary of State for Trade and Industry for an investigation by the United Kingdom Monopolies and Mergers Commission. CSW is unable to predict the outcome of any such regulatory proceeding. AEP AEP has received a request from the staff of the Kentucky Public Service Commission to file an application seeking Kentucky Public Service Commission approval for the indirect change in control of Kentucky Power Company that will occur as a result of the proposed merger. CSW understands that although AEP does not believe that the Kentucky Public Service Commission has the jurisdictional authority to approve the merger, AEP will prepare a merger application filing to be made with the Kentucky Public Service Commission, which is expected to be filed by April 15, 1999. Under the governing statute the Kentucky Public Service Commission must act on the application within 60 days. Therefore this matter is not expected to impact the timing of the merger. Completion of the Merger The proposed AEP merger has a targeted completion date in the fourth quarter of 1999. The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. The transaction must satisfy many conditions, including the condition that it must be a pooling of interests. The parties may not waive some of these conditions. AEP and CSW have initiated the process of seeking regulatory approvals, but there can be no assurances as to when, on what terms or whether the required approvals will be received or whether there will be any regulatory proceedings in the United Kingdom. The merger agreement will terminate on December 31, 1999 unless, in certain circumstances, extended by either party as provided in the merger agreement. There can be no assurance that the AEP merger will be consummated. 18 Merger Costs As of December 31, 1998, CSW had deferred $26 million in costs related to the merger on its consolidated balance sheet, which will be charged to expense if AEP and CSW are not successful in completing their proposed merger. See NOTE 16. PROPOSED AEP MERGER. OTHER MERGER AND ACQUISITION ACTIVITIES SWEPCO Cajun Asset Purchase Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million in cash, subject to adjustment pursuant to the terms of the asset purchase agreement proposed as part of the SWEPCO Plan. Two competing plans of reorganization for the non-nuclear assets of Cajun were filed with the bankruptcy court. On September 25, 1998, Enron Capital and Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid. The trustee for Cajun supports the sole remaining competing bid of $1.19 billion by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy, Inc., Northern States Power Company and Zeigler Coal Holding Company. Confirmation hearings in Cajun's bankruptcy case were completed in May 1998. On February 11, 1999, the bankruptcy court issued a ruling that denied confirmation of both the Louisiana Generating LLC reorganization plan and the SWEPCO Plan. Although both plans were rejected, the bankruptcy court said its ruling should provide guidance for the bidders to modify their existing plans. SWEPCO expects to modify the SWEPCO Plan consistent with the bankruptcy court's direction and to continue to pursue the acquisition of the non-nuclear assets of Cajun. The bankruptcy court has scheduled a status conference for March 15, 1999 to determine the next step in the process. Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their respective board of directors approvals. If a SWEPCO reorganization plan for Cajun is ultimately confirmed by the bankruptcy court, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external non-recourse borrowings and internally generated funds. There can be no assurance that the bankruptcy court will confirm a SWEPCO reorganization plan for Cajun, or, if it is confirmed, that federal and state regulators will approve it. As of December 31, 1998, SWEPCO had deferred $11.9 million in costs related to the Cajun acquisition on its consolidated balance sheet, which would be expensed if a SWEPCO reorganization plan for Cajun was not ultimately successful. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. 19 OTHER INITIATIVES As described in OVERVIEW, a vital part of CSW's future strategy involves initiatives that are outside of the traditional United States electric utility industry due to increasing competition and fundamental changes in this industry. In addition, lower anticipated growth rates in CSW's core United States electric utility business combined with the previously mentioned industry factors have resulted in CSW pursuing other initiatives. These initiatives have taken a variety of forms; however, they are all consistent with the overall plan for CSW to develop a global energy business. CSW has restrictions on the amounts it may spend under the AEP merger agreement. While CSW believes that such initiatives are necessary to maintain its competitiveness and to supplement its growth in the future, the Holding Company Act may impede or delay its ability to successfully pursue such initiatives. (The foregoing statement constitutes a forward-looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See OVERVIEW and RECENT DEVELOPMENTS AND TRENDS. DIVERSIFIED ELECTRIC CSW Energy CSW Energy presently owns interests in six operating power projects totaling 978 MW which are located in Colorado, Florida and Texas. CSW Energy began construction in August 1998 of a 500 MW merchant power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural gas-fired facility should begin simple cycle operation in the summer of 1999 and combined cycle operation by the end of 1999. In addition to these projects, CSW Energy has other projects in various stages of development. CSW International CSW International was organized to pursue investment opportunities in EWGs and FUCOs and currently holds investments in the United Kingdom, Mexico and South America. In the first quarter of 1998, CSW International and its joint venture partner, Alpek, commenced commercial operations of a 109 MW, gas fired cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. In late 1998, CSW International and Scottish Power commenced construction of a 400 MW combined cycle gas turbine power station in southeast England. Commercial operation is expected to begin in the year 2000. CSW International has a 50% interest in the project. Also during 1998, CSW International invested an additional $100 million in convertible securities of Vale. At December 31, 1998, CSW International had approximately $290 million invested in South America. Through December 31, 1998, CSW International has invested $80 million in Vale to obtain a 36% equity interest. CSW International also issued $100 million of debt to Vale, convertible to equity by the end of 1999. CSW International accounts for its $80 million investment in Vale on the equity method of accounting, and the $100 million as a loan. In mid-January 1999, amid market instability, the Brazilian government abandoned its policy of pegging the currency in a broad range against the 20 dollar. This resulted in a 40% devaluation of the Brazilian currency, the real, by the end of January. Vale will be unfavorably impacted by the devaluation primarily due to the revaluation of foreign denominated debt. CSW International has a put option which requires that Vale purchase CSW International's shares, upon CSW International exercising the put, at a minimum of the purchase price paid for the shares ($80 million). As a result of the put option arrangement, management has reached a preliminary conclusion that CSW International's investment carrying amount will not be reduced below the put option value unless there is deemed to be a permanent impairment. CSW International views its investment in Vale as a long-term investment strategy and believes that the investment in Vale continues to have significant long-term value and is recoverable. Management will continue to closely evaluate the changes in the Brazilian economy, and its impact on CSW International's investment in Vale. As of December 31, 1998, CSW International had invested $110 million in stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the year-end market value of the shares and foreign exchange rates, the value of the investment at December 31, 1998 is $66 million. The reduction in the carrying value of this investment has been reflected in Other Comprehensive Income in CSW's Consolidated Statements of Stockholder's Equity. Management views its investment in Chile as a long-term investment strategy. Management will continue to closely evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company. In addition to these projects, CSW International has other projects in various stages of development. ENERGY SERVICES C3 Communications C3 Communications, an exempt telecommunications company, is comprised of two divisions. C3 Communications' Utility Automation Division provides automatic meter reading, interval meter data and related products and services to commercial and industrial customers, electric, gas and water utilities and other energy service providers. C3 Communications' Networks Division was formed from the dissolution of ChoiceCom. C3 Communications' Networks Division offers high capacity inter-city fiber optic network services to telecommunications carriers and wholesale customers in Texas and Louisiana with plans to expand into Arkansas and Oklahoma. C3 Communications' Utility Automation Division entered the direct access market in 1998 and received approval from all three utility distribution companies in California to manage meter data for the state's deregulated electric utility industry. The Utility Automation Division continues to seek other domestic opportunities. In 1998, ChoiceCom expanded its switch-based local dial tone markets from three cities to five by installing state-of-the art Lucent 5ESS(R) switches in Dallas and Houston, Texas. ChoiceCom also expanded its long haul network with the installation and operation of a high capacity fiber optic system linking the Texas cities of Dallas, Houston, Austin and San Antonio in July of 1998. By mutual agreement, the ChoiceCom partnership was terminated December 31, 1998. ICG Communications, Inc. purchased ChoiceCom's local dial tone business while C3 Communications retained the long haul, high-capacity fiber optic network. With the fiber assets, C3 Communications established the Networks Division and plans to focus on CSW's original strategies to build new routes in the states of Texas, Oklahoma, Louisiana and Arkansas. 21 EnerShop EnerShop's two product lines are performance contracting and EnerACT advisory services. Through performance contracting, EnerShop provides energy services to customers in Texas and Louisiana that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis, project management, engineering design, equipment procurement and construction and performance monitoring. EnerACT is an innovative system that communicates with all brands and models of energy management systems and utility meters. EnerACT aggregates load profiles of multiple facilities into a single purchasing entity, optimizes real-time control of buildings simultaneously with real-time energy prices, and predicts energy consumption for operations through building simulation models. Customers in California, Illinois, Louisiana, New York, Texas, and Wisconsin currently subscribe to EnerACT advisory services. Other Ventures The CSW Services Business Ventures group pursues energy-related projects. Projects for these groups include staffing services for electric utility nuclear power plants, energy management systems, and electric substation automation software. In August 1998, the SEC approved the marketing and distribution of electric bikes, and associated accessories under the TotalEV name. In late 1997, CSW Energy Services was launched to explore the electric utility industry's emerging retail supply markets as they were deregulated on a state-by-state basis. CSW Energy Services began selling retail electric supply to commercial customers in California and Pennsylvania. In March 1998, CSW Energy Services signed its first major supply contract in California. In January 1999, CSW Energy Services announced that it was ceasing its business as a retail electric supplier and that it would assign or terminate its existing electricity supply contracts to other suppliers. In June 1997, the FERC approved the request of CSW Power Marketing to sell power and energy at market-based rates in the wholesale market. AEP is currently pursuing this initiative, as a result, CSW has temporarily suspended this initiative. SOUTH TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. HL&P owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit 2 was placed in service in June 1989. In November 1997, STPNOC assumed the duties of STP operator. Each of the four STP co-owners are represented on the STPNOC board of directors. STP unit 2 was removed from service during 1998 for a scheduled refueling outage. For the year 1998, Unit 1 and Unit 2 operated at net capacity factors of 99.1% and 91.1%, respectively. For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. 22 ENVIRONMENTAL MATTERS The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. The U.S. Electric Operating Companies are subject to various pending claims alleging that they are PRPs under federal or state remedial laws for investigating and cleaning up contaminated property. CSW believes that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CSW's or any U.S. Electric Operating Company's results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by the U.S. Electric Operating Company, the estimated amount of costs allocated to the U.S. Electric Operating Company and the participation of other parties (The foregoing statements constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission constraints or reductions for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities within the CSW System. The impact, if any, on CSW cannot yet be determined, but the impact could be significant. At the Kyoto Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating Companies could be affected if this treaty is approved by the United States Congress in its present form. The impact, if any, on CSW cannot be determined because most of the greenhouse gas emission reduction would come from coal generation that would have to be switched to natural gas or retired. At December 31, 1998, 34% of the U.S. Electric Operating Companies' installed generating capacity was coal and lignite. For the year ended December 31, 1998, 47% of the U.S. Electric Operating Companies' MWH generation was coal and lignite. RISK MANAGEMENT In 1997, CSW's board of directors adopted a risk management resolution authorizing CSW to engage in currency, interest rate and energy spot and forward transactions and related derivative transactions on behalf of CSW with foreign and domestic parties as deemed appropriate by executive officers of CSW. The risk management program is necessary to meet the growing demands of CSW's 23 customers for competitive prices and price stability, to enable CSW to compete in a deregulated power industry, to manage the risks associated with domestic and foreign investments and to take advantage of strategic investment opportunities. The U.S. Electric Operating Companies experience commodity price exposures related to the purchase of fuel supplies for the generation of electricity and for the purchase of power and energy from other generation sources. Contracts that provide for the future delivery of these commodities can be considered forward contracts which contain pricing and/or volume terms designed to stabilize the cost of the commodity. Consequently, the U.S. Electric Operating Companies manage their price exposure for the benefit of customers by balancing their commodity purchases through a combination of long-term and short-term (spot market) agreements. In response to the development of a more competitive electric energy market, CSW has received regulatory approval, which authorizes the four U.S. Electric Operating Companies to conduct a pilot program which offers power sales agreements at tariffed rates with a fixed fuel cost. To offset the commodity price risk associated with these contracts, CSW has purchased natural gas swaps. These swaps cover natural gas deliveries beginning in January and continuing for the remainder of 1999. Natural gas volumes purchased to serve these contracts for which CSW has secured swap agreements represents approximately 1% of annual natural gas purchases. The table below provides information about the Company's natural gas swaps and electricity forward contracts that are sensitive to changes in commodity prices. The swaps hedge commodity price exposure for the year 1999. Cash outflows on the swap agreements should be offset by increased margins on electricity sales to customers under tariffed rates with fixed fuel costs. The electricity forward contracts hedge a portion of CSW's energy requirements through September 1999. The average contract price for forward purchases is $58 per MWH and the average contract price for forward sales is $80 per MWH. Contractual commitments at December 31, 1998 are as follows: Net Notional Fair Value of Products Amount Fair Value of Assets Liabilities ---------------------------------------------------------------------------- (millions) Swaps 6,510,000 MMbtu $-- $1 Forwards: purchases 440,000 MWH 3 -- sales 292,800 MWH 1 -- SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. At December 31, 1998, the gross value of such contracts for differences was approximately 92% of the expected power purchases for 1999. CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound. CSW has utilized certain risk management tools to manage adverse changes in exchange rates and to facilitate financing transactions resulting 24 from CSW's acquisition of SEEBOARD. At the end of 1998, CSW had positions in two cross currency swap contracts. The following table presents information relating to these contracts. The market value represents the foreign exchange/interest rate terms inherent in the cross currency swaps at current market pricing. CSW expects to hold these contracts to maturity. At current exchange rates, this liability is included in long-term debt on the balance sheet at a carrying value of approximately $429 million. Expected Expected Cash Cash Inflows Outflows Contract Maturity Date (Maturity Value) (Market Value) - -------------------------------------------------------------------------------- Cross currency swaps August 1, 2001 $200 million $220.4 million Cross currency swaps August 1, 2006 $200 million $236.2 million For information related to currency risk in South America see OTHER INITIATIVES, DIVERSIFIED ELECTRIC, CSW International. For information on commodity contracts see NOTE 7. FINANCIAL INSTRUMENTS. OTHER MATTERS Year 2000 On a system-wide basis, CSW initiated a year 2000 project to prepare internal computer systems and applications for the year 2000. These systems and applications include management information systems that support business operations such as customer billing, payroll, inventory and maintenance. Other systems with computer-based controls such as telecommunications, elevators, building environmental management, metering, plant, transmission, distribution and substations are included in this project as well. Year 2000 readiness is a top priority for CSW. The formal project was initiated in late 1996 at which time an executive sponsor and project manager were named and a centralized project management office was formed. More than 30 Readiness Teams have been initiated and are in various phases of the project. Currently, those teams represent the equivalent of about 90 full-time employee positions working on year 2000 readiness. The teams are using a formal approach that includes inventory, assessment, remediation, testing of systems and development of contingency plans. Formal progress checkpoints are conducted biweekly by the project management team. An executive oversight council comprising the functional vice presidents convenes monthly to review progress and address issues. The project executive sponsor updates top management on a weekly basis and at every Board of Directors Audit Committee meeting. CSW has completed a review of its year 2000 project. External consultants assisted in the review. The purpose of the review was to assess the project plans and processes to ensure that the significant risks to CSW associated with the year 2000 are prudently managed. Several changes have been incorporated into the year 2000 project as a result of the review findings. State of Readiness Key milestones for the CSW system-wide year 2000 program excluding SEEBOARD and Vale are listed below: - A detailed inventory and assessment of critical systems was completed in the third quarter of 1998. This includes switchboards, elevators, environmental controls, vehicles, metering systems, and embedded logic or real time control systems in support of generation and delivery of electricity. The findings indicate that less than 15% of installed controls have microprocessors, very few have date logic and over 90% of those with 25 date logic already process new millennium dates correctly. The need for additional functionality in the early 1990's resulted in the modernization of several electric operation systems that has reduced the conversion requirements. Corrective and certification measures are well underway for these systems and completion is targeted for all systems by the second quarter of 1999. - Inventory and assessment of business applications and vendor-supplied software was completed in the first quarter of 1997. Only 25% of the business application programs were determined to require remediation by December 1999. - Plans for modification and certification testing of business application software were completed in the third quarter of 1997. - Remediation plans and schedules for business applications were established in the fourth quarter of 1997, and conversion and certification activities were initiated. As of the end of 1998, 75% of business critical applications were converted and certified. The remaining 25% of applications are targeted for completion by mid-year 1999. SEEBOARD completed an inventory of date dependent assets including, but not limited to, embedded chip technology, software, hardware, applications, telecommunications, access and security systems in the third quarter of 1998. SEEBOARD is on schedule to complete an assessment of all critical systems by the first quarter of 1999 and remediation of those systems in the second quarter of 1999. Final verification of those systems is scheduled for completion by the third quarter of 1999. To date, 70% of the work to be performed in electric operations has been completed. Vale completed an inventory of date dependent assets and critical systems in the fourth quarter of 1998. Vale is on schedule for remediation of these assets and systems by the third quarter of 1999. Most business system remediation has been completed. Cost to Address Year 2000 Issues Work related to the year 2000 project is being performed using a mix of internal and external resources. The funds for year 2000 project expenditures are included in CSW's budget. The majority of costs related to the project are expensed as incurred. The historical cost incurred to date for the year 2000 project is approximately $10 million, $9 million of which was incurred in 1998. Remaining testing and conversion is expected to cost an additional $23 million to $28 million over the next 15 months. Approximately 33% of the projected cost is to be covered through the redeployment of existing resources. Approximately 42% of the projected cost is for contract labor. The remaining 25% of the projected cost is for computer hardware and software purchases. Development and upgrade costs totaling approximately $12 million relating to certain SEEBOARD systems have been removed from the projected cost. The primary purpose for implementing those particular systems is related to the competitive electricity markets in the U.K., not an acceleration of expenditure for year 2000 purposes. At present no planned CSW computer information system projects have been affected by the year 2000 project, but that may change as the year 2000 approaches. Accordingly, no estimate has been made for the financial impact of any future projects foregone due to resources allocated to the year 2000 project. Risk of Year 2000 Issues The greatest financial risk to CSW would be a total inability to generate and deliver electricity. Many primary systems and backup systems would have to fail in order for that total inability to occur. The probability of a total inability to generate and deliver electricity by CSW is very low. 26 To date at CSW System power plants, no year 2000 issues have been found that would have caused power plants to fail. Risk of power plant failure is limited because 50% of power plant controls do not operate with date sensitive logic. Additionally, the year 2000 issues, which have been identified in the plants, are generally minor issues typically affecting reporting systems. The vast majority of the transmission and distribution system consists of wires, poles, transformers, switches and fuses where year 2000 is not an issue. Fewer than 15% of control systems that operate transmission and distribution equipment are microprocessor based, and of those, 95% have been found to process year 2000 dates correctly. The standard residential meter is not affected; however, about 10% of industrial and large commercial meters have microprocessors. So far most of those microprocessors process dates correctly. The areas requiring the greatest amount of work are the computers that operate business systems such as customer billing and accounting. CSW is on schedule to have year 2000 issues in these systems resolved by the summer of 1999. Currently, no cost estimate exists related to CSW's year 2000 risk. Contingency Plans Contingency plans have been in place for years to address problems resulting from weather. These plans are being updated to include year 2000 issues. Contingency planning is engineered into the transmission and distribution systems as it is designed with the capability to by-pass failed equipment. A margin of power generation reserve above what is needed is normally maintained. This reserve is a customary operating contingency plan that allows CSW to operate normally even when a power plant unexpectedly quits operating. Backup supplies of fuels are normally maintained at CSW power plants. Natural gas plants have fuel oil as a backup and multiple pipelines provide redundant supplies. At coal plants about 40-45 days of extra coal is kept on hand. The North American Electric Reliability Council is coordinating with all national power regions to assess the risks and to develop contingency plans within the national electric delivery system. During the fourth quarter of 1998, CSW developed first drafts of the contingency plans to address year 2000 issues. These contingency plans are currently being further developed and will be completed in the second quarter of 1999. CSW will participate in an industry-wide drill focused on sustaining reliable operations with a simulated partial loss of voice and data communications on April 9, 1999. Additionally, CSW will participate in an industry-wide drill to test its operational preparedness in the third quarter of 1999. Final verification of external interfaces will be performed in the last half of 1999. Contingency plans will continue to be revised as needed as a result of the drills. CSW has contacted over 6,000 suppliers to determine their readiness with 70% responding. Of those responding, 55% say they are prepared for the year 2000. CSW is developing plans for the possible failure of some critical suppliers. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION. 27 NEW ACCOUNTING STANDARDS SFAS No. 130 SFAS No. 130 is effective for fiscal year 1998 and was the basis of preparation for the Consolidated Statements of Stockholders' Equity in this report. The statement adds the requirement to present comprehensive income and all of its components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period except those resulting from investments by owners and distributions to owners. SFAS No. 131 CSW adopted SFAS No. 131 for fiscal year 1998. The statement requires disclosure of selected information about its reportable operating segments. Operating segments are components of an enterprise that engage in business activities that may earn revenues and incur expenses, for which discrete financial information is available and is evaluated regularly by the chief operating decision-maker within a company for making operating decisions and assessing performance. Segments may be based on products and services, geography, legal structure or management structure. SFAS No. 132 SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5. BENEFIT PLANS. This statement standardizes the disclosure requirements for pensions and OPEBs, requires additional information for changes in the benefit obligations and fair value of plan assets and eliminates certain disclosure requirements. SOP No. 98-5 SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The statement requires entities to expense the costs of start-up activities as incurred. SOP No. 98-5 broadly defines start-up activities to include: (i) costs that are incurred before operations have begun; (ii) costs incurred after operations have began but before full productive capacity has been reached; (iii) learning costs and non-recurring operating losses incurred before a project is fully operational; and (iv) one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory or with a new class of customer, and initiating a new process in an existing operation. CSW adopted SOP No. 98-5 in 1998 and, as a result, CSW Energy and CSW International expensed $4.5 million and $1.5 million, after tax, respectively, of start-up costs, which had previously been capitalized. SFAS No. 133 SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 (January 1, 2000 for calendar year entities). This statement replaces existing pronouncements and practices with a single integrated accounting framework for derivatives and hedging activities and eliminates previous inconsistencies in generally accepted accounting principles. The statement expands the accounting definition of derivatives, which had focused on freestanding contracts (futures, forwards, options and swaps) to include embedded derivatives and many commodity contracts. All derivatives will be reported on the balance sheet either as an asset or liability measured at fair value. Changes in a derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing or the method of adopting SFAS No. 133. 28 EITF Issue 98-10 In December 1998, the EITF reached consensus on Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. In reaching its consensus, the EITF distinguished between energy contracts entered to generate a profit and energy contracts entered to provide for the physical delivery of a commodity. Generally, CSW's energy contracts are entered into for the physical delivery of energy. These contracts, therefore, do not meet the definition of "trading activities" addressed by EITF Issue 98-10. Therefore, adoption of EITF Issue 98-10 will not have a material impact on CSW's results of operations or financial condition. 29 CENTRAL AND SOUTH WEST CORPORATION RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis. CSW's results fluctuate, in part, with the weather. CSW's 1998 results reflect an outstanding weather-related year, and that type of weather may not occur in 1999. Also, other than certain one-time items, as discussed throughout the results of operations, CSW's income statement line items as a percentage of total revenues remain fairly consistent, due primarily to the regulatory environment in which CSW operates. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 CSW's earnings increased to $440 million in 1998 from $153 million in 1997. CSW's return on average common stock equity was 12.4% in 1998 compared to 4.2% in 1997. The primary reason for the higher earnings and return on average common stock equity was the absence in 1998 of the accrual of $176 million for the one-time United Kingdom windfall profits tax. Hotter than normal summer weather and increased customer growth and usage at the U.S. Electric Operating Companies were also factors in the increase in earnings over 1997. Additionally, the sale of a telecommunications partnership interest in 1998 and a decrease in the United Kingdom corporate tax rate contributed to the earnings increase. The absence of the impact of CSW's final settlement of litigation with El Paso in 1997 contributed to the increase in earnings in 1998 as well. Also contributing to the increase in earnings was the absence in 1998 of the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the windfall profits tax. Partially offsetting the higher earnings was a charge for accelerated capital recovery of STP and asset write-offs at several of CSW's business segments. Operating revenues increased $214 million in 1998 compared to 1997. The revenue variances are shown in the following table. 1998 REVENUE VARIANCES Increase (decrease) from prior year, millions U.S. Electric KWH Sales, Weather-Related $72 KWH Sales, Growth and Usage 53 Fuel Revenue 31 Sales for Resale 6 Other Electric 5 ------------ 167 United Kingdom (101) Other Diversified 148 ------------ $214 ------------ U.S. Electric revenues increased $167 million, or 5%, in 1998 compared to 1997. Retail MWH sales increased 6% with increases in all customer classes. U.S. Electric revenues increased due primarily to higher MWH sales resulting from hotter than normal summer weather and increased customer usage and growth. An 30 increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. United Kingdom revenues decreased $101 million, or 5%, in 1998 compared to 1997 due to the loss of revenues associated with the sale of its retail stores in the second quarter of 1998 and the effect of price control on the supply business. Other diversified revenues increased $148 million in 1998 compared to 1997 due primarily to increased revenues from CSW Energy, CSW Credit and EnerShop. During 1998 and 1997 the U.S. Electric Operating Companies generated 92% and 93% of their electric energy requirements, respectively. U.S. Electric fuel expense increased $13 million in 1998 compared to 1997 due primarily to increased generation offset in part by a decrease in fuel prices to $1.67 per MMbtu in 1998 from $1.83 per MMbtu in 1997. United Kingdom cost of sales decreased $87 million in 1998 compared to 1997 due primarily to lower cost of sales associated with the sale of SEEBOARD's retail stores and a decrease in the cost of purchased power reflecting lower business volumes. Other operating expense increased $48 million in 1998 compared to 1997 due in part to a CSW Energy power plant that went into service in February 1998. The increase in other operating expense was offset in part by the absence in 1998 of the settlement of litigation with El Paso which increased other operating expense $35 million in 1997. Further offsetting the increase in other operating expense in 1998 was the absence of the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan. Depreciation and amortization expense increased $24 million, or 5%, in 1998 due primarily to accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order, a charge for accelerated capital recovery of STP, as well as increases in depreciable property. Income tax expense increased $52 million due primarily to higher pre-tax income. Other income and deductions increased to $42 million in 1998 from $32 million in 1997 due primarily to the sale of a telecommunications partnership interest. Long-term interest expense decreased $22 million in 1998 due primarily to the prepayment of a $60 million variable rate bank loan due December 1, 2001; the maturity of $200 million of CPL FMBs on October 1, 1997 and $28 million of CPL FMBs on January 1, 1998; and the redemption of $91 million of FMBs of certain of the U.S. Electric Operating Companies on September 1, 1998. See NOTE 8. LONG-TERM DEBT for additional information on the redemption of these securities. Short-term debt was used to prepay the variable rate bank loan in two $30 million installments on January 28, 1998 and April 27, 1998. Short-term borrowings and internal cash generation were used to fund the maturities and redemption of the previously mentioned FMBs. Short-term and other interest expense increased $35 million in 1998 when compared to 1997 due primarily to higher levels of short-term borrowings. Distributions on Trust Preferred Securities increased interest and other charges by $10 million in 1998. The Trust Preferred Securities were outstanding for all of 1998, while they were outstanding for only part of 1997. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on these securities. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 CSW's earnings decreased to $153 million in 1997 from $429 million in 1996. CSW's return on average common stock equity was 4.2% in 1997 compared to 12.1% in 1996. The primary reason for the lower earnings and return on average common stock equity was the accrual of the one-time United Kingdom windfall profits tax. The impact of CSW's final settlement of litigation with El Paso 31 contributed to the decline in earnings as well. Also contributing to the decrease in earnings was the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the windfall profits tax. Further reducing earnings for 1997 were certain asset write-offs predominately at the U.S. Electric Operating Companies. Partially offsetting the lower earnings was the gain on the reacquisition of a portion of the U.S. Electric Operating Companies' preferred stock and an adjustment to deferred tax balances of $15 million resulting from a 2% reduction in the United Kingdom corporation tax rate. Further offsetting the decline in earnings was an increase in non-fuel electric revenues. Significant items occurring in 1997 that affected earnings are listed below (in millions). Earnings Impact United Kingdom Windfall Profits Tax $(176) CPL 1997 Final Order (48) Asset Write-offs and Reserves (48) PSO 1997 Rate Settlement Agreement (27) Settlement of Litigation with El Paso (23) Gain on the Reacquisition of Preferred Stock 10 United Kingdom Tax Adjustment 15 In addition, several items that occurred in 1996 were not present in 1997. Prior to the sale of Transok in 1996, CSW realized $12 million of earnings from Transok's operations. As a result of the sale, CSW also recorded an after-tax gain of approximately $120 million in 1996. However, the U.S. Electric Operating Companies and CSW Energy recorded charges totaling $102 million, after-tax, for certain investments in the second quarter of 1996 which decreased earnings. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information concerning the effects of the sale of Transok. Operating revenues increased $113 million in 1997 compared to 1996. The revenue variances are shown in the following table. 1997 REVENUE VARIANCES Increase (decrease) from prior year, millions U.S. Electric CPL and WTU Transmission Revenues $56 KWH Sales, Growth and Usage 41 Fuel Revenue 23 CPL 1996 Fuel Agreement 18 Sales for Resale 12 CPL 1997 Final Order (45) KWH Sales, Weather-Related (37) PSO 1997 Rate Settlement Agreement (32) Other Electric 37 ------ 73 ------ United Kingdom 22 Other Diversified 18 ------ $113 ------ U.S. Electric revenues increased $73 million, or 2%, in 1997 compared to 1996. Retail MWH sales increased 2.5%, with increases in all customer classes. U.S. Electric revenues increased due primarily to higher MWH sales resulting from increased customer usage and new transmission access revenues at CPL and WTU, in accordance with FERC Order No. 888 and the Texas Commission's rule 32 regarding transmission access and pricing. The new transmission revenues had no material effect on earnings because they were almost completely offset by a corresponding amount of transmission expense. Revenues increased due in part to the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel Agreement. An increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. Partially offsetting the revenue increase was a decrease in weather-related demand due to milder weather in the first nine months of 1997. Further offsetting the increase in U.S. Electric revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million, or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate movement between the British pound and the U.S. dollar, partially offset by a reduction in the fossil fuel levy collected on behalf of the United Kingdom government. Other diversified revenues increased $18 million, or 31%, in 1997 compared to 1996 due primarily to increased revenues from CSW International, C3 Communications, CSW Credit and EnerShop. During 1997 and 1996 the U.S. Electric Operating Companies generated 93% of their electric energy requirements. U.S. Electric fuel expense increased $26 million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also contributing to the increase was the absence in 1997 of a one-time reduction to fuel expense of approximately $9 million recorded in the first quarter of 1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these increases in fuel expense was the effect of lower-cost coal. United Kingdom cost of sales decreased approximately $40 million to $1.3 billion in 1997 compared to 1996 due primarily to a reduction in the fossil fuel levy collected on behalf of the United Kingdom government, which was partially offset by the effect of the exchange rate movement between the British pound and the U.S. dollar. Other operating expense increased $196 million to $981 million in 1997 compared to 1996 due in part to the absence in 1997 of a $27 million pension adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased pension expense. The effect of the exchange rate movement between the British pound and U.S. dollar also contributed to the increase in other operating expense of SEEBOARD U.S.A. In addition, approximately $56 million in new transmission access expense was recorded at CPL and WTU in 1997 related to FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also increasing other operating expense were asset write-offs of approximately $57 million including certain regulatory assets, capitalized demand side management assets and obsolete inventories. In addition, the settlement of litigation with El Paso increased other operating expense $35 million. Further contributing to the increase in other operating expense was the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Partially offsetting these increases were the absence in 1997 of expenses recorded in 1996 related to inventory write-offs of $10 million and CPL rate case adjustments of $15 million. Further offsetting the increases were charges in 1996 associated with restructuring costs. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan. Depreciation and amortization expense increased $33 million, or 7%, in 1997 due primarily to the implementation of depreciation and amortization in accordance with the CPL 1997 Final Order. As a result of that order, the increase in depreciation due to the accelerated recovery of ECOM property was offset in part by the implementation of lower depreciation rates. Taxes other than income increased $17 million, or 10%, in 1997 compared to 1996 due primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas franchise tax refund and true-up in 1996. Income tax expense decreased $73 33 million to $151 million in 1997 due primarily to lower pre-tax income and a $15 million adjustment to deferred income tax balances resulting from a 2% reduction in the United Kingdom corporation tax rate. Other income and deductions increased to a gain of $32 million in 1997 from a loss of $61 million in 1996 due primarily to the absence in 1997 of charges for certain investments 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 increased $8 million, or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter 1996 debt issuance by CSW Energy. Short-term and other interest expense decreased $8 million to $86 million in 1997 when compared to 1996 due primarily to lower levels of short-term borrowings. Distributions on newly-issued Trust Preferred Securities increased interest and other charges by $17 million in 1997, which was partially offset by lower dividend requirements resulting from the related preferred stock reacquisitions at the U.S. Electric Operating Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on the new securities. 34 CSW Consolidated Statements of Income Central and South West Corporation - ------------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------ 1998 1997 1996 ------------------------------ ($ in millions, except share amounts) Operating Revenues U.S. Electric $ 3,488 $ 3,321 $ 3,248 United Kingdom 1,769 1,870 1,848 Other diversified 225 77 59 ------------------------------ 5,482 5,268 5,155 ------------------------------ Operating Expenses and Taxes U.S. Electric fuel 1,190 1,177 1,151 U.S. Electric purchased power 111 89 77 United Kingdom cost of sales 1,204 1,291 1,331 Other operating 1,029 981 785 Maintenance 169 152 150 Depreciation and amortization 521 497 464 Taxes, other than income 189 195 178 Income taxes 203 151 224 ----------------------------- 4,616 4,533 4,360 ----------------------------- Operating Income 866 735 795 ----------------------------- Other Income and Deductions U.S. Electric charges for investments and plant development costs -- (3) (117) Other 60 29 16 Non-operating income taxes (18) 6 40 ----------------------------- 42 32 (61) ----------------------------- Income Before Interest and Other Charges 908 767 734 ----------------------------- Interest and Other Charges Interest on long-term debt 311 333 325 Distributions of Trust Preferred Securities 27 17 -- Interest on short-term debt and other 121 86 94 Preferred dividend requirements of subsidiaries 8 12 18 Gain on reacquired preferred stock 1 (10) -- ----------------------------- 468 438 437 ----------------------------- Income from Continuing Operations 440 329 297 ----------------------------- Discontinued Operations Income from discontinued operations, net of tax of $6 -- -- 12 Gain on the sale of discontinued operations, -- -- 120 net of tax of $72 ------------------------------ -- -- 132 ------------------------------ Income Before Extraordinary Item 440 329 429 Extraordinary Item - United Kingdom windfall profits tax -- (176) -- ------------------------------ Net Income for Common Stock $440 $ 153 $ 429 ============================== Average Common Shares Outstanding 212.4 212.1 207.5 Basic and Diluted EPS from Continuing Operations $2.07 1.55 $1.43 Basic and Diluted EPS from Discontinued Operations -- -- 0.64 ------------------------------ Basic and Diluted EPS before Extraordinary Item 2.07 1.55 2.07 Basic and Diluted EPS from Extraordinary Item -- (0.83) -- ------------------------------ Basic and Diluted EPS $2.07 $0.72 $2.07 ============================== Dividends Paid per Share of Common Stock $1.74 $1.74 $1.74 ============================== The accompanying notes to consolidated financial statements are an integral part of these statements. 35 CSW Consolidated Statements of Stockholders' Equity Central and South West Corporation (millions)
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income (Loss) Total Beginning Balance -- January 1, 1996 $675 $610 $1,893 ($4) $3,174 Sale of common stock 65 412 -- -- 477 Common stock dividends -- -- (358) -- (358) Other -- -- 3 -- 3 ------- 3,296 Comprehensive Income: Foreign currency translation adjustment (net of tax of $35) -- -- -- 75 75 Unrealized gain on securities (net of tax of $1) -- -- -- 2 2 Net Income -- -- 429 -- 429 ------- Total comprehensive income 506 ------ ------ ------ ------ ------- Ending Balance -- December 31, 1996 $740 $1,022 $1,967 $73 $3,802 ============================================= ======= Beginning Balance -- January 1, 1997 $740 $1,022 $1,967 $73 $3,802 Sale of common stock 3 17 -- -- 20 Common stock dividends -- -- (369) -- (369) ------- 3,453 Comprehensive Income: Foreign currency translation adjustment (net of tax of $23) -- -- -- (48) (48) Unrealized loss on securities (net of tax of $0.3) -- -- -- (1) (1) Minimum pension liability (net of tax of $0.3) -- -- -- (1) (1) Net Income -- -- 153 -- 153 ------- Total comprehensive income 103 ------ ------ ------ ------ ------- Ending Balance -- December 31, 1997 $743 $1,039 $1,751 $23 $3,556 ============================================= ======= Beginning Balance -- January 1, 1998 $743 $1,039 $1,751 $23 $3,556 Sale of common stock 1 10 -- -- 11 Common stock dividends -- -- (370) -- (370) Other -- -- 2 -- 2 ------- 3,199 Comprehensive Income: Foreign currency translation adjustment (net of tax of $2) -- -- -- 7 7 Unrealized loss on securities (net of tax of $8) -- -- -- (14) (14) Adjustment for gain included in net income (net of tax of $4) -- -- -- (7) (7) Minimum pension liability (net of tax of $0.6) -- -- -- (1) (1) Net Income -- -- 440 -- 440 ------- Total comprehensive income 425 ------ ------ ------ ------ ------- Ending Balance -- December 31, 1998 $744 $1,049 $1,823 $8 $3,624 ============================================= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 36 Consolidated Balance Sheets Central and South West Corporation - ------------------------------------------------------------------------- As of December 31, ------------------------------- 1998 1997 -------------- ------------ (millions) ASSETS Fixed Assets Electric Production $5,887 $ 5,824 Transmission 1,594 1,558 Distribution 4,681 4,453 General 1,380 1,381 Construction work in progress 166 184 Nuclear fuel 207 196 -------------- ------------ 13,915 13,596 Other diversified 333 250 -------------- ------------ 14,248 13,846 Less - Accumulated depreciation and amortization 5,652 5,264 -------------- ------------ 8,596 8,582 -------------- ------------ Current Assets Cash and temporary cash investments 157 75 Accounts receivable 1,110 916 Materials and supplies, at average cost 191 172 Electric utility fuel inventory 90 65 Under-recovered fuel costs 4 84 Notes receivable 109 -- Prepayments and other 90 78 -------------- ------------ 1,751 1,390 -------------- ------------ Deferred Charges and Other Assets Deferred plant costs 497 503 Mirror CWIP asset 257 285 Other non-utility investments 432 448 Securities available for sale 66 103 Income tax related regulatory assets, net 308 329 Goodwill 1,402 1,428 Other 435 383 -------------- ------------ 3,397 3,479 -------------- ------------ $ 13,744 $ 13,451 ============== ============ The accompanying notes to consolidated financial statements are an integral part of these statements. 37 CSW Consolidated Balance Sheets Central and South West Corporation - -------------------------------------------------------------------------------- As of December 31, --------------------------- 1998 1997 -------- ------- CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 212.6 million shares in 1998 and 212.2 million shares in 1997 $ 744 $ 743 Paid-in capital 1,049 1,039 Retained earnings 1,823 1,751 Accumulated other comprehensive income 8 23 -------- ------- 3,624 46% 3,556 45% -------- ------ ------- ----- Preferred Stock Not subject to mandatory redemption 176 176 Subject to mandatory redemption -- 26 -------- ------- 176 2% 202 2% Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 335 4% 335 4% Long-term debt 3,785 48% 3,898 49% ------- ------ ------ ----- Total Capitalization 7,920 100% 7,991 100% -------- ------ ------- ----- Current Liabilities Long-term debt and preferred stock due within twelve months 169 32 Short-term debt 811 721 Short-term debt - CSW Credit, Inc. 749 636 Loan notes 32 56 Accounts payable 624 573 Accrued taxes 190 171 Accrued interest 84 87 Other 218 238 -------- ------- 2,877 2,514 -------- ------- Deferred Credits Accumulated deferred income taxes 2,410 2,431 Investment tax credits 267 278 Other 270 237 ------- ------- 2,947 2,946 ------- ------- $13,744 $13,451 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. 38 CSW Consolidated Statements of Cash Flows Central and South West Corporation
For the Years Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (millions) OPERATING ACTIVITIES Net income for common stock $ 440 $ 153 $ 429 Non-cash Items and Adjustments Depreciation and amortization 552 529 521 Deferred income taxes and investment tax credits (56) 110 62 Preferred stock dividends 8 12 18 Gain on reacquired preferred stock 1 (10) -- Charges for investments and assets 39 53 147 Gain on sale of investments (13) -- (192) Changes in Assets and Liabilities Accounts receivable (187) (140) (86) Accounts payable 69 45 23 Accrued taxes 20 (153) (14) Fuel recovery 109 (37) (89) Other (40) 164 56 -------- -------- -------- 942 726 875 -------- -------- -------- INVESTING ACTIVITIES Construction expenditures (492) (507) (521) Acquisitions expenditures -- -- (1,394) Disposition of plant (5) -- -- CSW Energy/CSW International projects (184) (382) (124) Sale of National Grid assets -- -- 99 Cash proceeds from sale of investments 56 -- 690 Other (10) (15) (36) -------- -------- -------- (635) (904) (1,286) -------- -------- -------- FINANCING ACTIVITIES Common stock sold 11 20 477 Proceeds from issuance of long-term debt 154 -- 437 SEEBOARD acquisition financing -- -- 350 Reacquisition/Maturity of long-term debt (182) (253) (239) Redemption of preferred stock (28) (114) (1) Trust Preferred Securites sold -- 323 -- Other financing activities (4) (3) 67 Change in short-term debt 202 414 (395) Payment of dividends (378) (383) (376) -------- -------- -------- (225) 4 320 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents -- (5) (56) -------- -------- -------- Net Change in Cash and Cash Equivalents 82 (179) (147) Cash and Cash Equivalents at Beginning of Year 75 254 401 ======== ======== ======== Cash and Cash Equivalents at End of Year $ 157 $ 75 $ 254 ======== ======== ======== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 446 $ 396 $ 356 ======== ======== ======== Income taxes paid $ 357 $ 301 $ 196 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 39 CENTRAL AND SOUTH WEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations CSW is a registered holding company under the Holding Company Act subject to regulation by the SEC. The U.S. Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of the U.S. Electric Operating Companies is the generation, transmission, and distribution of electric power and energy. These companies are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission, and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Texas Commission. The principal business of SEEBOARD is the distribution and supply of electricity in Southeast England. SEEBOARD is subject to rate regulation by the DGES. In addition to electric utility operations, CSW has subsidiaries involved in a variety of business activities. CSW Energy and CSW International pursue cogeneration and other energy-related ventures. CSW Credit factors the accounts receivable of affiliated and non-affiliated companies. C3 Communications pursues telecommunications projects. CSW Leasing has investments in leveraged leases. EnerShop offers energy-management services. CSW Energy Services pursued retail energy markets outside of CSW's traditional service territory, until these activities were discontinued in early 1999. The more significant accounting policies of the CSW System are summarized below. Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. The consolidated financial statements for CPL, PSO and SWEPCO include their respective capital trusts. All significant inter-company transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities along with disclosure of contingent liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fixed Assets and Depreciation U.S. Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used 40 during construction. SEEBOARD's fixed assets are stated at their original fair market value which existed on the date of acquisition plus the original cost of property acquired or constructed since the acquisition, less disposals. Provisions for depreciation of plant are computed using the straight-line method, generally at individual rates applied to the various classes of depreciable property. The annual average consolidated composite rates of the Registrants are presented in the following table. CSW CPL PSO SWEPCO WTU ================================================== 1998 3.4% 3.0% 3.1% 3.3% 3.2% 1997 3.4% 3.0% 3.3% 3.2% 3.3% 1996 3.4% 2.9% 3.6% 3.2% 3.2% CPL Nuclear Decommissioning of STP At the end of STP's service life, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its pre-plant condition. CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalation for expected inflation to the expected time of decommissioning, and is net of expected earnings on the trust fund. CPL's portion of the costs of decommissioning STP was estimated to be $258 million in 1995 dollars based on a site specific study completed in 1995. CPL is accruing and recovering these decommissioning costs through rates based on the service life of STP at a rate of $8.2 million per year. The funds are deposited with a trustee under the terms of an irrevocable trust and are reflected in CPL's consolidated balance sheets as Nuclear Decommissioning Trust with a corresponding amount accrued in Accumulated Depreciation. On CSW's consolidated balance sheets, the irrevocable trust is included in Deferred Charges and Other Assets, Other, with a corresponding amount accrued in Accumulated Depreciation. In CSW's and CPL's consolidated statements of income, the income related to the irrevocable trust is recorded in Other Income and Deductions, Other. In CPL's consolidated statements of income, the interest expense related to the irrevocable trust is recorded in Interest Charges, Interest on Short-term Debt and Other. In CSW's consolidated statements of income the interest expense related to the irrevocable trust is recorded in Interest and Other Charges, Interest on Short-term Debt and Other. At December 31, 1998, the nuclear trust balance was $66.0 million. Electric Revenues and Fuel The U.S. Electric Operating Companies record revenues based upon cycle-billings. Electric service provided subsequent to billing dates through the end of each calendar month are accrued for by estimating unbilled revenues in accordance with industry standards. CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of base rates whereby over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers after Texas Commission approval. The cost of fuel is charged to expense as incurred, with resulting fuel over-recoveries and under-recoveries recorded as regulatory assets and liabilities. PSO recovers fuel costs in Oklahoma through service level fuel cost adjustment factors, and SWEPCO recovers fuel costs in Arkansas and Louisiana 41 through automatic fuel recovery mechanisms. The application of these mechanisms varies by jurisdiction. See ITEM 1. BUSINESS, FUEL RECOVERY - U.S. Electric and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information about fuel recovery. CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale customers through formula rates. CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In addition to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including spent fuel disposal fees assessed on the basis of net MWHs sold from STP and DOE special assessment fees for decontamination and decommissioning of the enrichment facilities on the basis of prior usage of enrichment services. Accounts Receivable CSW Credit purchases, without recourse, the billed and unbilled accounts receivable of the U.S. Electric Operating Companies, certain non-affiliated public utility companies and, prior to its sale by CSW in June 1996, Transok. Regulatory Assets and Liabilities For their regulated activities, the U.S. Electric Operating Companies follow SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent probable future revenue to the company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory assets are currently being recovered in rates or are probable of being recovered in rates. The unamortized asset balances are included in the table below. 1998 1997 -------- ------- (millions) As of December 31, Regulatory Assets Deferred plant costs (3) $497 $503 Mirror CWIP asset 257 285 Income tax related regulatory assets, net 308 329 Deferred restructuring and rate case costs (1) 26 36 OPEBs 2 3 Under-recovered fuel costs (2) 4 84 Loss on reacquired debt 153 166 Fuel settlement (4) 14 16 Other 10 19 ======== ======= $1,271 $1,441 ======== ======= Regulatory Liabilities Refunds due customers(5) $ 21 $ 64 Income tax related regulatory liabilities, net -- -- Other 1 ======== ======= $ 21 $ 65 ======== ======= (1) $16 million and $24 million earning no return in 1998 and 1997, amortized by the end of 2000; $10 million and $12 million earning no return in 1998 and 1997 through 2002. (2) $15 million earning no return in 1997, amortized over twelve month period, recalculated twice each year. (3) $15 million and $19 million earning no return in 1998 and 1997, amortized through 2002. (4) $14 million and $16 million earning no return in 1998 and 1997, amortized by the end of 2006. (5) $15 million in 1998 earning no return, amortized over twelve month period, recalculated twice each year. 42 In accordance with orders of the Texas Commission, CPL and WTU deferred carrying costs, as well as operating costs, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began commercial operation until the date the plants were included in rate base. CPL is amortizing and recovering these deferred costs through rates over the life of the plant. WTU began amortizing and recovering such costs over a seven year period beginning January 1, 1996, prior to this date it was amortized over the life of the plant. In accordance with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which is being amortized over the life of STP. For further information regarding the deferred plant costs at CPL and WTU, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. For additional information regarding regulatory accounting, reference is made to NOTE 18. NEW ACCOUNTING STANDARDS and MD&A, RECENT DEVELOPMENTS AND TRENDS, Regulatory Accounting. Goodwill Resulting from SEEBOARD Acquisition The acquisition of SEEBOARD was accounted for as a purchase combination. An allocation of the purchase price has been performed and is reflected in the consolidated financial statements. The goodwill is being amortized on a straightline basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31, 1998 was $1.4 billion. CSW continually evaluates whether circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision. Foreign Currency Translation The financial statements of SEEBOARD U.S.A., which are included in CSW's consolidated financial statements, have been translated from British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are translated at the exchange rate at the end of the period and all income statement items are translated at the average exchange rate for the applicable period. At December 31, 1998 the current exchange rate was approximately (pound)1.00=$1.66, and the average exchange rate for the twelve month period ended December 31, 1998 was approximately (pound)1.00=$1.66. At December 31, 1997 the current exchange rate was approximately (pound)l.00=$1.65, and the average exchange rate for the twelve month period ended December 31, 1997 was approximately (pound)l.00=$1.58. At December 31, 1996 the current exchange rate was approximately (pound)l.00=$1.71, and the average exchange rate for the twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56. All the resulting translation adjustments are recorded directly to Accumulated Other Comprehensive Income on CSW's Consolidated Balance Sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The non-cash impact of the changes in exchange rates on cash and cash equivalents, resulting from the translation of items at the different exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in Effect of Exchange Rate Changes on Cash and Cash Equivalents. See NOTE 20. SUBSEQUENT EVENT for information regarding CSW's investments in Brazil. Cash Equivalents Cash equivalents are considered to be highly liquid instruments with a maturity of three months or less. Accordingly, temporary cash investments and advances to affiliates are considered cash equivalents. Risk Management CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound. CSW has utilized certain risk management tools, including cross currency swaps, foreign currency futures and foreign currency options, to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. 43 SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. CSW accounts for these transactions as hedge transactions and any gains or losses associated with the risk management tools are recognized in the financial statements at the time the hedge transactions are settled. CSW believes its credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT; NOTE 7. FINANCIAL INSTRUMENTS; NOTE 18. NEW ACCOUNTING STANDARDS and NOTE 20. SUBSEQUENT EVENT for additional information. Securities Available for Sale CSW accounts for its investments in equity securities in accordance with SFAS No. 115. The investments have been designated as available for sale, and as a result are stated at fair value. Unrealized holding gains and losses, net of related taxes, are included in Accumulated Other Comprehensive Income on CSW's Consolidated Balance Sheets. Information related to these securities available for sale as of December 31, 1998 is presented in the following table. Original Unrealized Holding Fair Cost Gains / (Losses) Value ---------------------------------------- Securities available for sale $110 $(44) $66 As of December 31, 1998, CSW International has invested $110 million in stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the year-end market value of the shares and foreign exchange rates, the value of the investment at December 31, 1998 is $66 million. The reduction in the carrying value of this investment has been reflected in Accumulated Other Comprehensive Income in CSW's Consolidated Balance Sheets. Management views its investment in Chile as a long-term investment strategy. Management will continue to closely evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company. Inventory CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil fuel inventories. SWEPCO continues to utilize the weighted average cost method pending approval of the Arkansas Commission to utilize the LIFO method. At December 31, 1998, none of the U.S. Electric Operating Companies had LIFO reserves. LIFO reserves are the excess of the inventory replacement cost over the carrying amount on the balance sheet. Comprehensive Income Consistent with the requirements of SFAS No. 130, CSW discloses comprehensive income. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. See NOTE 18. NEW ACCOUNTING STANDARDS. 44 Components of Other Comprehensive Income The following table provides the components that comprise the balance sheet amount in Accumulated Other Comprehensive Income. Components 1998 1997 1996 ---------------------------------------------------------------- (millions) Foreign Currency Translation Adjustment $34 $27 $34 Unrealized Losses on Securities (20) 1 (20) Minimum Pension Liability (6) (5) (6) --------------------------- $8 $23 $8 --------------------------- Segment Reporting CSW has adopted SFAS No. 131, which requires disclosure of select financial information by business segment as viewed by the chief operating decision-maker. See NOTE 18. NEW ACCOUNTING STANDARDS. Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1998 presentation. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information related to the classification of Transok activities. 2. LITIGATION AND REGULATORY PROCEEDINGS Litigation Related to the Rights Plan and AEP Merger Two lawsuits have been filed in Delaware state court seeking to enjoin the AEP Merger. CSW and each of its directors have been named as defendants in both cases. The first suit alleges that the Rights Plan, approved by the CSW Board of Directors on September 27, 1997 and which became effective after SEC approval under the Holding Company Act on December 19, 1997, constitutes a "poison pill" precluding acquisition offers and resulting in a heightened fiduciary duty on the part of the CSW Board of Directors to pursue an auction-type sales process to obtain the best value for CSW stockholders. The second suit alleges that the AEP Merger is unfair to CSW stockholders in that it does not recognize the underlying intrinsic value of CSW's assets and its future profitability. The second suit also seeks an auction-type sale process. CSW believes that both suits are without merit and intends to defend them vigorously. CPL Rate Review - Docket No. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million. On October 16, 1997, the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be reduced an additional $13 million on May 1, 1999. CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property; (ii) the Texas Commission's use of the "Glide Path" rate 45 reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999; and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL sought a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology. The court denied the temporary injunction and the "Glide Path" rate reduction was implemented in May 1998. Hearings on the appeal were held during the third quarter of 1998, and a judgment was issued in February 1999 affirming the Texas Commission order, except for a consolidated tax issue in the amount of $6 million, which will be remanded to the Texas Commission. While CPL intends to appeal this most recent order to the Court of Appeals, management is unable to predict how the final resolution of these issues will ultimately affect CSW's results of operations and financial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has recorded approximately $1.2 billion of regulatory-related assets at December 31, 1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, CPL, that all or some portion of its business, no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. CPL would also be required to evaluate whether there was any impairment of any deregulated plant assets. In addition, 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. See MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No. 14965 for a discussion of the CPL 1997 Final Order. 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 Supreme Court of Texas' opinion in 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 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, 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, management 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 could experience a material adverse effect on their respective results of operations 46 and financial condition. While management is unable to predict the ultimate outcome of these matters, management believes either that CPL will receive approval of its deferred accounting amounts or that CPL will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CSW's results of operation or financial condition. CPL Fuel Proceeding On December 31, 1998, CPL filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. CPL did not seek a surcharge of the reconciled balance in the filing. During the reconciliation period of July 1, 1995 through June 30, 1998, CPL incurred $828.5 million in eligible fuel and fuel-related expenses. The Texas jurisdictional allocation of such fuel and fuel-related expenses is $783.4 million. In addition to requesting reconciliation of its fuel and fuel-related expenses for the reconciliation period, CPL requested the Texas Commission to authorize CPL to recover the reward that was earned during the reconciliation period under the performance standard adopted in Docket No. 14965 for CPL's share of STP. In Docket No. 14965, the Texas Commission adopted a three-year average capacity factor of 83% performance standard for STP. During the reconciliation period, STP operated at a net capacity factor of 93.1%, saving customers $28.4 million in fuel and purchased power costs, as compared to operation at an 83% capacity factor. CPL proposed an equal sharing with its customers of the benefit, or reward, resulting from STP operation during the reconciliation period above the 83% capacity factor target, net of any reduction of eligible fuel expense as a result of this case. CPL requested that it be authorized to recover the Texas retail amount, or $13.4 million, of its 50% share of the performance standard reward, by including 1/36, or $373,003 in retail eligible fuel expense each month for the three-year period following the Texas Commission's order in this case. These amounts will be included in calculating the monthly over-recovery or under-recovery balances. CPL further requested that it be authorized to apply the amounts of the reward recovered through Texas retail eligible fuel expense as additional amortization of its STP deferred accounting regulatory asset. CPL also made an alternative proposal if consistent and uniform equal sharing of potential penalties and rewards is not intended by the Texas Commission. CPL proposed that it be authorized to recover the Texas portion of 50% of the reward by including 1/36, or $373,003 in Texas retail eligible fuel expense each month for three years following the Texas Commission order in this case and that the remaining 50% of the reward be "banked" to be used against potential future penalties or other disallowance of fuel costs. CPL Municipal Franchise Fee Litigation In May 1996, the City of San Juan, Texas filed a purported class action in Hidalgo County, Texas District Court on behalf of all cities served by CPL based upon CPL's alleged underpayment of municipal franchise fees. The plaintiffs' petition asserts various contract and tort claims against CPL as well as certain audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed a counterclaim for any overpayment of franchise fees it may have made as well as its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement asserting that the Texas Commission has primary jurisdiction over the claims. In May 1996 and December 1996, respectively, the Cities of Pharr, Texas and San Benito, Texas filed individual suits making claims virtually identical to those claimed by the 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 47 Court, which affirmed the Texas Commission ruling on February 19, 1999. After the Texas Commission's order, the Hidalgo County District Court overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County District Court entered an order certifying the case as a class action. CPL appealed this order to the Corpus Christi Court of Appeals. In February 1998, the Corpus Christi Court of Appeals affirmed the trial court's order certifying the class. CPL appealed the Corpus Christi Court of Appeals ruling to the Texas Supreme Court, which declined to hear the case. In August 1998, the Hidalgo County District Court ordered the case to mediation and suspended all proceedings pending the completion of the mediation. The mediation was completed in December, 1998, but the case was not resolved. On January 5, 1999, a class notice was mailed to each of the CPL cities; the cities have until April 5, 1999, to decide whether or not to participate in the lawsuit as a class member. 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, management cannot predict the outcome of the municipal franchise fee litigation. CPL Anglo Iron Litigation In April 1998, CPL was sued by Anglo Iron in the United States District Court for the Southern District of Texas, Brownsville Division, for claims arising from the clean up of a site owned and operated by Anglo Iron in Harlingen, Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common law contribution and indemnity for alleged response and clean up costs of $328,139 and damages of $150,000 for "loss of fair market value" of the site. In January 1999, the parties settled the case, and the case was dismissed with prejudice by the court in February 1999. The settlement did not have a material adverse impact on CSW's consolidated results of operations or financial condition. CPL Sinton Landfill Litigation CPL, along with over 30 others, is named as a defendant in the district court in San Patricio County, Texas. The plaintiffs, approximately 500 current and former landowners in the vicinity of a landfill site near Sinton, Texas, each of whom alleges $10 million property damage and personal injury as a result of alleged contamination from the site. Plaintiffs made a collective settlement demand upon CPL for $1.1 million. In January, 1999, in exchange for a non-material sum, CPL reached an agreement with Browning Ferris Industries, Inc., the operator of the site, for Browning Ferris Industries, Inc. to indemnify CPL for any judgment or settlement amount that CPL may owe to the plaintiffs in this case. CPL Valero Litigation In April 1998, Valero filed suit against CPL in Nueces County, Texas District Court, alleging claims for breach of contract and negligence. Valero's suit seeks in excess of $11 million as damages for property loss and lost profits allegedly incurred after an interruption of electricity to its facility in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of this litigation. However, management believes that CPL has valid defenses to Valero's claims and intends to defend the matter vigorously. Management also believes that the ultimate resolution of this matter will not have a material adverse impact on CSW's consolidated results of operations or financial condition. CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285) A joint complaint filed by CPL and WTU with the Texas Commission asserted that since January 1, 1997, Texas Utilities Electric Company had been effectively double charging for transmission service within ERCOT. A proposal for decision received in February 1998 recommended approval of a CPL and WTU 48 proposed reduction of $15.5 million annually of payments to Texas Utilities Electric Company under FERC-approved transmission service agreements against amounts that CPL and WTU would otherwise owe Texas Utilities Electric Company pursuant to Texas Commission rules for transmission service in ERCOT. The Texas Commission approved the proposal in September 1998. Even though Texas Utilities Electric Company has appealed the Texas Commission final order, they refunded $26.6 million to CPL and WTU in November 1998. Prior to the Texas Commission's September 1998 decision, the $15.5 million annual payment to Texas Utilities Electric Company was allocated to the U.S. Electric Operating Companies. As a result of this order the payment is recorded on CPL's and WTU's books as a reduction to ERCOT transmission expense. Transmission Coordination Agreement The Transmission Coordination Agreement provides the means by which the U.S. Electric Operating Companies will operate, plan and maintain the four separate transmission systems as a single system. The agreement also establishes a process for the U.S. Electric Operating Companies to allocate revenues received under open access transmission tariffs. On August 7, 1998, the FERC accepted the Transmission Coordination Agreement for filing, suspended it for a nominal period, and made it effective retroactive to January 1, 1997, subject to refund and investigation. PSO Rate Review In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings and in July 1997 recommended a rate reduction of $76.8 million for PSO. On October 23, 1997, the Oklahoma Commission issued a final order approving a stipulated agreement with parties to settle the rate inquiry. The PSO 1997 Rate Settlement Agreement called for PSO to lower its retail base rates beginning with the December 1997 billing cycle by approximately $35.9 million annually, or a 5.3 percent decrease below the then current level of retail rates. Part of the rate reduction included a reduction in annual depreciation expense of approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement resulted in PSO making a one-time $29 million refund to customers in December 1997. The PSO 1997 Rate Settlement Agreement also called for PSO to eliminate or amortize before its next rate filing approximately $41 million in certain deferred assets, approximately $26 million of which had been expensed in 1996. The remaining $15 million of deferred assets, which included approximately $9 million of costs incurred for customer energy management incentive programs, were written off in 1997. The financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations were lower revenues of $31.5 million and lower expenses of $4.1 million which included the write-off of the previously mentioned deferred assets. The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing impact because of the rate decrease. However, it reduced significant risks for PSO related to this regulatory proceeding and should allow PSO's rates to remain competitive for the foreseeable future. PSO PCB Cases PSO has been named a defendant in petitions filed in state court in Oklahoma in February and August 1996. The petitions allege that the plaintiffs suffered personal injury and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April 1982 at the Page Belcher Federal Building in Tulsa, Oklahoma. Each of the plaintiffs seeks actual and punitive damages in excess of $10,000. Other claims arising from this incident have been settled and the suits dismissed. The first case to go to trial is anticipated to begin in May 1999. Management believes that PSO has 49 defenses to the remaining complaints and intends to defend the suits vigorously. Management believes that the remaining claims are covered by insurance. Management also believes that the ultimate resolution of the remaining lawsuits will not have a material adverse effect on CSW's results of operations or financial condition. PSO Sand Springs/Grandfield, Oklahoma Sites In 1989, PSO found PCB contamination in a Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to comply with provisions of the Toxic Substances Control Act. The EPA alleged improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual cleanup at the site. The complaint also alleged failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims in the suit by March 1998. The settlement did not have a material adverse effect on CSW's results of operations or financial condition. SWEPCO Fuel Proceeding In May 1997, SWEPCO filed with the Texas Commission an application to reconcile fuel costs and implement a 12 month surcharge of fuel cost under-recoveries. Because of the uncertainty as to when a surcharge may be implemented, SWEPCO did not establish in its filing a proposed surcharge period or a total surcharge amount, which would reflect interest through the entire surcharge period. However, SWEPCO indicated that it had 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. On December 8, 1997, SWEPCO and the other parties to the above consolidated proceedings before the Texas Commission filed a settlement on all issues except whether transmission equalization payments should be included in fuel or base revenues. Of the $16.8 million in under-recovered fuel costs as of December 31, 1996, the settlement resulted in a decrease of the under-recovered fuel costs, and the resulting surcharge recovery, by $6.0 million. The settlement also provides that SWEPCO's fuel and fuel-related expenses during the reconciliation period were reasonable and necessary and would allow them to be reconciled as eligible fuel expense. Also, the settlement provides that SWEPCO's actions in litigating and renegotiating certain fuel contracts, together with the prices, terms and conditions of the renegotiated contracts were prudent. The $6.0 million reduction was not associated with any particular activity or issue within the fuel proceedings. On April 8, 1998, the ALJ assigned to this proceeding, issued a proposal for decision regarding the one outstanding issue, whether transmission equalization payments should be included in eligible fuel expense. The proposal for decision recommended that SWEPCO be allowed to include transmission equalization expense in eligible fuel expense. On May 19, 1998, the Texas Commission reversed the ALJ and did not allow SWEPCO to recover its transmission equalization payments as a component of eligible fuel expense. This ruling resulted in an earnings reduction of approximately $1.8 million, which was recorded in the second quarter of 1998. On June 8, 1998, SWEPCO filed a motion for rehearing on the transmission equalization issue, which was denied through operation of law. After the Texas Commission's order on May 19, 1998, SWEPCO had still under-recovered its fuel and fuel related expenses. On July 1, 1998, the Texas Commission issued an order allowing SWEPCO to surcharge its Texas retail customers $6.9 million of under-recovered fuel and fuel related expenses and associated interest. The surcharge began in July 1998 and will end in June 1999. SWEPCO has filed an appeal regarding this matter in the State District Court of Travis County, Texas. Management is unable to predict the ultimate outcome of this litigation. However, SWEPCO will drop the appeal if the AEP merger settlement is approved and the merger is consummated. 50 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 have benefited 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 was held before the Supreme Court of Texas in October 1997. On March 13, 1998, the Supreme Court of Texas affirmed the judgment of the court of appeals. On April 7, 1998, SWEPCO filed a motion for rehearing of the Supreme Court of Texas' decision. On June 5, 1998, the motion for rehearing was denied and the court reaffirmed the judgment of the court of appeals. SWEPCO does not plan additional litigation for this lawsuit. No financial impact resulted from these proceedings other than the legal expenses, which were expensed as incurred. SWEPCO Lignite Mining Agreement Litigation SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1 and jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement with the DHMV, a partnership for the mining and delivery of lignite from a portion of these reserves. On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its partners in the United States District Court for the Western District of Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining agreement, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed an answer denying the allegations in the suit and filed a counterclaim asserting various contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have denied the allegations in the counterclaims on the grounds the counterclaims have no merit. On January 8, 1999, SWEPCO and CLECO amended the claims against DHVM in the lawsuit to include a request that, if the court agrees that DHMV has breached the lignite mining agreement that the lignite mining agreement be terminated. This federal court suit is set for trial beginning in November 1999. SWEPCO intends to vigorously prosecute the claims against DHMV and defend against the counterclaims which DHMV has asserted. Although management cannot predict the ultimate outcome of this matter, management believes that the resolution of this matter will not have a material adverse effect on CSW's results of operations or financial condition. WTU Fuel Proceedings Fuel Reconciliation On December 31, 1997, WTU filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. WTU did not seek a surcharge of the reconciled balance in the December 31, 1997 filing. During the reconciliation period of July 1, 1994 through June 30, 1997, WTU incurred approximately $422 million in eligible fuel and fuel-related expenses to generate and purchase electricity. The Texas jurisdictional allocation of such fuel and fuel-related expenses is approximately $295 million. 51 On June 11, 1998, WTU amended its application to reconcile fuel costs to remove a credit from the calculation of eligible fuel in the amount of $3 million related to transmission equalization payments. This amendment was a result of the Texas Commission's ruling concerning transmission equalization payments in the SWEPCO fuel reconciliation described above. On October 14, 1998, the general counsel of the Texas Commission and WTU agreed to a non-unanimous stipulation regarding WTU's eligible fuel and fuel-related expenses. One party does not accept the stipulation's proposed treatment of transmission equalization payment, discussed above. Parties filed briefs in November 1998, and a proposal for decision from the ALJ was received January 29, 1999. In the proposal for decision, the ALJ recommends recovery of all eligible fuel and fuel-related expenses requested by WTU except for $100,000, or 0.03% of the amount requested. A Texas Commission decision is expected by the end of the first quarter of 1999. Management is unable to predict the outcome of the fuel proceeding. Fuel Factor Filing In March 1998, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $6.8 million, including accumulated interest over a six month period to collect its under-recovered fuel costs. WTU implemented the revised fuel factors with its June 1998 billing. Other The Registrants are party to various other legal claims, actions and complaints 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. 3. COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that CSW, including the U.S. Electric Operating Companies, SEEBOARD and other operations, will spend approximately $855 million in capital expenditures (but excluding capital that may be required for acquisitions) during 1999. Substantial commitments have been made in connection with these programs. CPL - $224 million PSO - $91 million SWEPCO - $108 million WTU - $51 million Fuel and Related Commitments To supply a portion of their fuel requirements, the U.S. Electric Operating Companies have entered into various commitments for the procurement of fuel. 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 December 31, 1998, the maximum amount SWEPCO believes it could potentially assume is $93 million. However, the maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding at December 31, 1998 was $71 million. 52 SWEPCO South Hallsville Lignite Mine As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining at the South Hallsville lignite mine and expansion into the Marshall South Lignite Project area, SWEPCO has agreed to 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. Other Commitments and Contingencies 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 NRC 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 1997. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self insurance totaling $8.92 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, for anyone nuclear incident payable at $10 million per year per reactor. An additional surcharge of five percent of the maximum may be payable if the total amount of public claims and legal costs exceeds the limit. 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. CPL owns 25.2% of each reactor. The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by NEIL. Policies of insurance issued by 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 owners' respective ownership interest in STP. CPL purchases, 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 the result of a covered accident that shuts down production at one or both of the STP Units for more than 23 consecutive weeks. In the event of an outage which is the result of the same accident, insurance will reimburse CPL up to 80 percent of the recovery. The maximum amount recoverable for a single unit outage is $133.8 million for both Units 1 and 2. CPL is subject to an additional assessment of up to $1.54 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceed the accumulated funds available under the policy. CPL renewed its current NEIL I Business Interruption and/or Extra Expense policy on October 1, 1998. SWEPCO Cajun Asset Purchase Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. 53 On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million in cash, subject to adjustment pursuant to the terms of the asset purchase agreement proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for SWEPCO and the Cajun member cooperatives to enter into long-term power supply agreements which will provide the Cajun member cooperatives with rate plan options and market access provisions designed to ensure the long-term competitiveness of the cooperatives. Eight cooperatives and Central Louisiana Electric Company, Inc., successor to Teche Electric Cooperative, agreed to purchase power from SWEPCO, if the bankruptcy court confirms SWEPCO's plan. Two competing plans of reorganization for the non-nuclear assets of Cajun were filed with the bankruptcy court. On September 25, 1998, Enron Capital and Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid. The trustee for Cajun supports the sole remaining competing bid of $1.19 billion by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy, Inc., Northern States Power Company and Zeigler Coal Holding Company. Confirmation hearings in Cajun's bankruptcy case were completed in May 1998. On August 11, 1998, the U.S. Fifth Circuit Court of Appeals overturned a U.S. District Court for the Middle District of Louisiana ruling that disqualified the SWEPCO Plan from being considered in the Cajun bankruptcy reorganization process. The U.S. Fifth Circuit Court of Appeals said the U.S. District Court for the Middle District of Louisiana erred in reversing the bankruptcy court, which had originally had determined that $1 million in assistance payments from SWEPCO to the Cajun Members Committee did not constitute vote-buying and were legal. On October 30, 1998, the U.S. Fifth Circuit Court of Appeals rejected requests for rehearing by the Cajun Trustee, the RUS and others of its decision to overturn a U.S. District Court for the Middle District of Louisiana ruling that disqualified the SWEPCO Plan from competing in the Cajun bankruptcy reorganization process. On February 3, 1999, the Cajun Trustee asked the United States Supreme Court to review the U.S. Fifth Circuit Court of Appeals decision that reinstated the SWEPCO Plan in the bankruptcy court. On October 13, 1998, the trustee for Cajun sought an injunction preventing the Louisiana Commission from acting on a rate case involving Cajun, contending that the Louisiana Commission's involvement in the rate case was a violation of the bankruptcy court's jurisdiction over Cajun's assets and thus by extension, its rates. The bankruptcy court enjoined individual commissioners of the Louisiana Commission from acting on issues related to possible changes in wholesale electric rates of Cajun. The bankruptcy court dismissed the Louisiana Commission as a defendant in the case, but permitted the action to continue against the commissioners of the Louisiana Commission and the executive secretary of the Louisiana Commission. On February 11, 1999, the bankruptcy court issued a ruling that denied confirmation of both the Louisiana Generating LLC reorganization plan and the SWEPCO Plan. Although both plans were rejected, the bankruptcy court said its ruling should provide guidance for the bidders to modify their existing plans and a status conference has been scheduled for March 1999. No timetable for modifications was set. Louisiana Generating LLC reorganization plan was denied confirmation due to issues related to power supply agreements with Cajun. SWEPCO and the Cajun Members Committee are co-plaintiffs in litigation regarding a central issue in 54 the bankruptcy case, whether a competing plan supported by the Cajun trustee can force the cooperatives to buy power for 25 years under the non-consensual arrangements contained in that plan. The bankruptcy court ruled that the cooperatives' existing supply agreements with Cajun cannot be assumed in the manner proposed in the Louisiana Generating LLC reorganization plan. The SWEPCO Plan was denied confirmation due to several technical issues upon which the bankruptcy court ruled that the SWEPCO Plan did not meet the requirements of the bankruptcy code. SWEPCO expects to modify the SWEPCO Plan consistent with the bankruptcy court's direction and to continue to pursue the acquisition of the non-nuclear assets Cajun. The bankruptcy court has scheduled a status conference for March 15, 1999 to determine the next step in the process. Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their respective boards of directors approvals. If a SWEPCO reorganization plan for Cajun is ultimately confirmed by the bankruptcy court, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external non-recourse borrowings and internally generated funds. There can be no assurance that the bankruptcy court will confirm a SWEPCO reorganization plan for Cajun or, if it is confirmed, that federal and state regulators will approve it. As of December 31, 1998, SWEPCO had deferred $11.9 million in costs related to the Cajun acquisition on its consolidated balance sheet, which would be expensed if a SWEPCO reorganization plan for Cajun was not ultimately successful. SWEPCO Rental and Lease Commitments SWEPCO has entered into various financing arrangements primarily with respect to coal transportation and related equipment which are treated as operating leases for rate-making purposes. At December 31, 1998, leased assets of $45.7 million, less accumulated amortization of $41.4 million, were included in Electric Utility Plant on the Consolidated Balance Sheets and at December 31, 1997, leased assets were $45.7 million, less accumulated amortization of $39.0 million. SWEPCO Biloxi, Mississippi MGP Site SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as the subsequent sampling of the site. The sampling results indicated contamination at the property as well as the possibility of contamination of an adjacent property. A risk assessment was submitted to the MDEQ, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to a residential scenario is appropriate since this site has been industrial/commercial for more than 100 years, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. Resolution of this issue is still pending. Currently, a feasibility study is being conducted to more definitely evaluate remedial strategies for the property. The feasibility study process will require public input prior to a final decision and will result in a remediation strategy along with associated costs. SWEPCO has incurred approximately $200,000 to date for its portion of the cleanup of this site, and based on its preliminary estimates, anticipates that an additional $2 million may be incurred. Accordingly, SWEPCO has accrued an additional $2 million for the cleanup of the site. 55 The State of Mississippi has passed Brownfield legislation, which provides for levels of cleanup standards. Although regulations implementing this legislation are not expected to be finalized until the summer of 1999, the MDEQ has indicated that it will work with SWEPCO in the interim within the legislation's intent to allow the project to move forward. SWEPCO / CPL Voda Petroleum Superfund Site SWEPCO and CPL received correspondence from the EPA notifying SWEPCO and CPL that they are PRPs to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO and CPL conducted a records review to compile documentation relating to SWEPCO's and CPL's past use of the Voda Petroleum site. The matter was settled through a payment of $1,400 each by SWEPCO and CPL. SWEPCO Wilkes Power Plant Copper Limit Compliance The EPA has issued Wilkes power plant, which is owned by SWEPCO, an administrative order for wastewater permit violations related to copper limits. The administrative order is for a show cause meeting only. Past and future compliance activities, including activities that have been conducted to determine the source of copper were presented by SWEPCO during this meeting, which was held on August 13, 1998, which resulted in continued negotiations. The EPA has not issued an administrative penalty order nor a referral to the United States Department of Justice for judicial action with monetary fines. On December 29, 1998, the TNRCC fined SWEPCO $8,250 for the same issue on the state permit, which was paid in February 1999. SEEBOARD London Underground Commitment SEEBOARD has committed (pound)83 million, or $137 million, for costs associated with its contract related to the London Underground transportation system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a $1.6 billion, 30 year contract as a joint venture partner to operate, maintain, finance and renew the high-voltage power distribution network of the London Underground. SEEBOARD - Third Party Pension Litigation In the U.K., National Grid Group and National Power have been involved in continuing litigation in respect of their use of actuarial surpluses declared in the electricity industry's occupational pension scheme, the Electricity Supply Pension Scheme. A high court decision in favor of the National Grid Group and National Power was appealed and on February 10, 1999 the court of appeal ruled that the particular arrangements made by these corporations to dispose of the surplus, partly by canceling liabilities relating to additional pension payments resulting from early retirement, were invalid due to procedural defects. SEEBOARD employees are members of the Electricity Supply Pension Scheme and SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of the payments cancelled was approximately $33 million. The court of appeal did not order the National Grid Group and National Power to make payment to the Electricity Supply Pension Scheme but will hold a further hearing to decide what action to take. It is likely that the case will then be referred to the U.K. House of Lords. The final outcome of the hearing, or any referral to the U.K. House of Lords, cannot be determined and therefore it is not possible to quantify the impact, if any, on the results of operations and financial condition of CSW. Diversified Electric Loans and Commitments In June 1998, the 330 MW Phillips Sweeny cogeneration facility, an entity 50% owned by CSW Energy, obtained permanent project financing. The $149 million of debt, with an effective interest rate of 7.4%, is unconditionally guaranteed by the project and is non-recourse to CSW Energy and CSW. Concurrently, the project repaid its outstanding note to CSW Energy for construction financing. 56 CSW Energy obtained the funds for this project from CSW's short-term borrowings program, which were also repaid. CSW Energy began construction in August 1998 of a 500 MW power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. At December 31, 1998, CSW Energy had spent approximately $81 million, including development construction and financing of the projected $210 million project costs. The natural gas-fired facility should begin simple cycle operation in the summer of 1999 and combined cycle operation by the end of 1999. The Frontera project is being built as a merchant power plant. Frontera is expected to supply power to the rapidly growing Rio Grande Valley and to supply customers throughout Texas. CSW International and its 50% joint venture partner, Scottish Power, commenced construction of the South Coast Power project, a 400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. Commercial operation is expected to begin in the year 2000. The partners will provide interim construction financing with third party financing expected in the first quarter of 1999. At December 31, 1998, CSW International had spent approximately $12 million, including development, construction and financing of their 50% share of the total $320 million of estimated project costs. CSW, CSW Energy and CSW International have provided letters of credit and guarantees on behalf of independent power projects of approximately $254 million, $13 million, and $201 million, respectively, as of December 31, 1998. 57 4. INCOME TAXES CSW files a consolidated United States federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes United States federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the amounts computed by applying the United States federal statutory income tax rate to income before taxes for a number of reasons which are presented in the INCOME TAX RATE RECONCILIATION table below. Information concerning income taxes, including total income tax expense, the reconciliation between the United States federal statutory tax rate and the effective tax rate and significant components of deferred income taxes follow. INCOME TAX EXPENSE 1998 1997 1996 -------------------------- (millions) Included in Operating Expenses and Taxes Current (1) $253 $47 $118 Deferred (1) (38) 117 120 Deferred ITC (2) (12) (13) (14) -------------------------- 203 151 224 Included in Other Income and Deductions Current 18 -- (1) Deferred -- (6) (39) -------------------------- 18 (6) (40) Income Taxes for Discountinued Operations (includes $72 resulting from the gain on the sale) -- -- 78 -------------------------- $221 $145 $262 -------------------------- (1)Approximately $14 million, $30 million and $49 million of CSW's Current Income Tax Expense was attributable to SEEBOARD U.S.A. operations and was recognized as United Kingdom corporation tax expense for 1998, 1997 and 1996, respectively. In addition, approximately $9 million, $7 million and $19 million of CSW's Deferred Income Tax Expense in 1998, 1997 and 1996, respectively, was attributed to SEEBOARD U.S.A. (2)ITC deferred in prior years are included in income over the lives of the related properties. INCOME TAX RATE RECONCILIATION 1998 1997 1996 --------------------------- (millions) Income before taxes attributable to: Domestic operations $558 $327 $562 Foreign operations 112 147 146 --------------------------- Income before taxes $670 $474 $708 Tax at U.S. statutory rate $235 $166 $248 Differences Amortization of ITC (13) (13) (14) Mirror CWIP 10 5 5 Non-deductible goodwill amortization 12 12 13 Foreign tax benefits (41) (19) (18) Adjustments 15 (4) 10 Other 3 (2) 18 --------------------------- $221 $145 $262 --------------------------- Effective rate 33% 31% 37% 58 1998 1997 ------------------ DEFERRED INCOME TAXES (1) (millions) 1998 Deferred Income Tax Liabilities Depreciable utility plant $1,936 $1,912 Deferred plant costs 174 176 Mirror CWIP asset 90 100 Income tax related regulatory assets 224 211 Other 257 375 ------------------ 2,681 2,774 Deferred Income Tax Assets Income tax related regulatory liability (117) (123) Unamortized ITC (96) (100) Alternative minimum tax carryforward (11) (27) Other (75) (72) ------------------ (299) (322) ------------------ Net Accumulated Deferred Income Taxes $2,382 $2,452 ------------------ Net Accumulated Deferred Income Taxes Noncurrent $2,410 $2,432 Current (28) 20 ------------------ $2,382 $2,452 ------------------ (1)In 1997, the valuation reserve was reduced to $17 million due to lower levels of excess foreign tax credits. In 1998, the valuation reserve was increased to $145 million due to higher levels of excess foreign tax credits. Other than excess foreign tax credits, CSW did not have other valuation allowances recorded against other deferred tax assets at December 31, 1998 and 1997 due to a favorable earnings history. CSW has not provided for U.S. federal income and foreign withholding taxes on $75 million of non-U.S. subsidiaries' undistributed earnings as of December 31, 1998, because such earnings are intended to be reinvested indefinitely. If these earnings were distributed, foreighn tax credits should become available under current law to reduce or eliminate the resulting U.S. income tax liability. 5. BENEFIT PLANS Pension Plans Prior to June 30, 1997, CSW maintained a tax qualified, non-contributory defined benefit pension plan covering substantially all CSW employees in the United States. Benefits were based on employees' years of credited service, age at retirement, and final average annual earnings with an offset for the participant's primary Social Security benefit. The CSW board of directors approved an amendment effective July 1, 1997, which converted the present value of accrued benefits under the existing pension plan into a cash balance pension plan. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. The applicable percentage is determined by age and years of vested service the participant has with CSW as of December 31 of each year. The fair value of plan assets are measured as of September 30 of each year. 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. 59 In addition, CSW has a non-qualified excess benefit plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code through the qualified plan. 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. SFAS No. 132 was published in February 1998. SFAS No. 132 amended the disclosure requirements of SFAS No. 87 and SFAS No.88. The new disclosure requirements under Statement 132 are effective for CSW in 1998 and are currently being implemented. Pension plan assets consist primarily of common stocks and short-term and intermediate-term fixed income investments. The majority of SEEBOARD's employees joined a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee-administered fund that is actuarially valued every three years. SEEBOARD and its participating employees both contribute to the plan. Subsequent to July 1, 1995, new employees were no longer able to participate in that plan. Instead, two new pension plans were made available to new employees, both of which are also separate trustee-administered plans. Information about the separate pension plans (the U.S. plans and the non-U.S. plan), including: (i) change in benefit obligation; (ii) change in plan assets; (iii) reconciliation of funded status; (iv) amount recognized on balance sheets; (v) additional information for pension plans with unfunded benefit obligaitons; (vi) additional information for pension plans with unfunded accumulated benefit obligations; (vii) components of net periodic benefit costs; and (viii) assumptions used in accounting for the pension plan follow. 60 1998 ------------------------------------------- Pension/Cash Balance U.S. Plan Retirement Plan ---------------------- Non- Non- CSW Qualified Qualified U.S. Plan ------- --------- --------- --------- (millions) Change in benefit obligation Benefit obligation at beginning of year $1,978 $931 $24 $1,023 Service cost 36 21 1 14 Interest Cost 137 68 1 68 Plan participants' contributions 3 -- -- 3 Amendments 58 -- -- 58 Foreign currency translation adjustment 9 -- -- 9 Acquisition 7 -- -- 7 Actuarial gain 11 8 3 -- Benefits paid (128) (65) (1) (62) ------------------------------------------- Benefit obligation at end of year $2,111 $963 $28 $1,120 ------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $2,290 $1,109 $-- $1,181 Actual return on plan assets 143 (30) -- 173 Employer contributions 7 -- 1 6 Plan participants' contributions 3 -- -- 3 Foreign currency translation adjustment 11 -- -- 11 Benefits paid (128) (65) (1) (62) ------------------------------------------- Fair value of plan assets at end of year $2,326 $1,014 -- $1,312 ------------------------------------------- Reconciliation of Funded Status $214 $50 $(27) $191 Unrecognized net actuarial loss/(gain) 26 149 11 (134) Unrecognized prior service cost (77) (82) 1 4 Unrecognized transition obligation 10 9 1 -- ------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $173 $126 $(14) $61 ------------------------------------------- Amounts Recognized in Balance Sheet Prepaid benefit costs $188 $126 $ -- $62 Accrued benefit (liability)-smaller of (accrued) benefit cost and minimum (liability) (25) -- (25) -- Intangible asset 2 -- 2 -- Accumulated other comprehensive income 8 -- 8 -- ------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $173 $126 $(15) $62 ------------------------------------------- Other comprehensive expense attributable to change in additional minimum pension liability recognition $ 1 -- $1 -- Weighted-average assumptions as of December 31 Discount rate 6.75% 6.75% 5.50% Expected return on plan assets 9.00% 9.00% 6.25% Rate of compensation increase 4.96% 4.96% 3.50% 61 1997 ------------------------------------------- Pension/Cash Balance U.S. Plan Retirement Plan ---------------------- Non- Non- CSW Qualified Qualified U.S. Plan ------ ---------- --------- --------- (millions) Change in benefit obligation Benefit obligation at beginning of year $1,969 $922 $21 $1,026 Service cost 35 20 -- 15 Interest cost 141 65 2 74 Plan participants' contributions 3 -- -- 3 Amendments and other (85) (85) -- -- Foreign currency translation adjustment (41) -- -- (41) Acquisition 62 56 1 5 Actuarial gain 1 -- 1 -- Benefits paid (107) (47) (1) (59) ---------------------------------------------- Benefit obligation at end of year $1,978 $931 $24 $1,023 ---------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $2,071 $985 $-- $1,086 Actual return on plan assets 351 164 -- 187 Employer contributions 14 7 1 6 Plan participants' contributions 3 -- -- 3 Foreign currency translation adjustment (42) -- -- (42) Benefits paid (107) (47) (1) (59) ---------------------------------------------- Fair value of plan assets at end of year $2,290 $1,109 $ -- $1,181 ---------------------------------------------- Reconciliation of Funded Status $313 $178 $(23) $158 Unrecognized net actuarial loss/(gain) (77) 12 9 (98) Unrecognized prior service cost (92) (88) 1 (5) Unrecognized transition obligation 16 11 1 4 ---------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $160 $113 $(12) $59 ---------------------------------------------- Amounts Recognized in Balance Sheet Prepaid benefit costs $172 $113 $-- $59 Accrued benefit(liability)-smaller of (accrued) benefit cost and minimum (liability) (22) -- (22) -- Intangible asset 3 -- 3 -- Accumulated other comprehensive income 7 -- 7 -- ---------------------------------------------- Prepaid (accrued) benefit cost before balance sheet adjustments $160 $113 $(12) $59 ---------------------------------------------- Other comprehensive expense attributable to change in additional minimum pension liability recognition $ 1 -- $ 1 -- Weighted-average assumptions as of December 31 Discount rate 7.50% 7.50% 6.75% Expected return on plan assets 9.00% 9.00% 7.25% Rate of compensation increase 5.46% 5.46% 4.75% 62 Pension/Cash Balance Retirement Plan Components of net periodic benefit costs U.S. Plan --------------------- Non- Non- U.S. 1998 CSW Qualified Qualified Plan --- --------- --------- ---- (millions) Service cost $36 $21 $1 $14 Interest cost 137 67 2 68 Expected return on plan assets: (175) (97) -- (77) Amortizations of prior service costs (5) (6) -- -- Amortization of unrecognized transition obligation 2 2 -- -- Recognized net actuarial loss -- -- -- -- ------------------------------------------ Net periodic benefit cost $(5) $(13) $3 $5 U.S. Plan --------------------- Non- Non- U.S. 1997 CSW Qualified Qualified Plan --- --------- --------- ---- (millions) Service cost $34 $20 $-- $14 Interest cost 139 64 2 73 Expected return on plan assets: (173) (92) -- (81) Amortizations of prior service costs (6) (6) -- -- Amortization of unrecognized transition obligation 2 2 -- -- Recognized net actuarial loss 1 -- 1 -- ------------------------------------------ Net periodic benefit cost $(3) $(12) $3 $6 U.S. Plan --------------------- Non- Non- U.S. 1996 CSW Qualified Qualified Plan --- --------- --------- ---- (millions) Service cost $37 $22 $1 $14 Interest cost 137 69 1 67 Expected return on plan assets: (158) (84) -- (74) Amortizations of prior service costs -- -- -- -- Amortization of unrecognized transition obligation 2 2 -- -- Recognized net actuarial loss 1 -- 1 -- ------------------------------------------ Net periodic benefit cost $19 $9 $3 $7 As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. 63 Additional Information for Plans Non-Qualified Plan with Unfunded Benefit Obligations (thousands) 1998 1997 ---------------- ---------------- Benefit obligation $27,379 $23,621 Plan assets at fair value -- -- Additional Information for Plans Non-Qualified Plan with Unfunded Accumulated Benefit (thousands) Obligations 1998 1997 ---------------- ---------------- Projected benefit obligation $27,379 $23,621 Accumulated benefit obligation 25,137 22,193 Plan assets at fair value -- -- Post-retirement Benefits Other Than Pensions (U.S. Companies Only) CSW, including each of the U.S. Electric Operating Companies, adopted SFAS No. 106 effective January 1, 1993. The transition obligation established at adoption is being amortized over twenty years, with fourteen years remaining. Prior to 1993, these benefits were accounted for on a pay-as-you-go basis. Pursuant to an order by the Oklahoma Commission, PSO established a regulatory asset of approximately $5 million in 1993 for the difference between the pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is recovering the amortization of this regulatory asset over a ten year period. SFAS No. 132 was published in February 1998. Statement No. 132 amended the disclosure requirements of SFAS No. 106. The revised rules did not affect either the measurement or recognition of benefit costs. The new disclosure requirements under Standard 132 are effective for fiscal years beginning after December 15, 1997. Information about the non-pension post-retirement benefit plan, including: (i) change in benefit obligation; (ii) change in plan assets; (iii) reconciliation of funded status; (iv) amount recognized on balance sheets; (v) additional information for post-retirement plans with unfunded benefit obligations; (vi) components of net periodic benefit costs; and (vii) assumptions used in accounting for the post-retirement plan follow. 64 Post-retirement Benefits Other Than Pensions U.S. Companies Only 1998 1997 ------------------------------ (millions) Benefit Obligations and Plan Assets Benefit obligation: Retirees $170 $158 Other fully eligible participants 30 24 Other active participants 75 59 ------------------------------ $275 $241 Plan Assets at Fair Value $164 $159 Change in Accumulated Post- Retirement Benefit Obligation Benefit obligation at beginning of year $241 $236 Service Cost 8 8 Interest Cost 17 18 Amendments (5) -- Benefit payments (15) (10) Plan participants' contributions 1 -- Actuarial gain 28 (11) ------------------------------ Benefit Obligation at end of year $275 $241 Change in fair value of plan assets Fair value of plan assets at beginning of year $158 $151 Actual return of plan assets 3 3 Employer contributions 17 18 Plan participants' contributions 1 1 Benefits Paid (15) (15) ------------------------------ Fair value of plan assets at end of year $164 $158 Reconciliation of Funded Status Funded status end of year $(111) $(82) Unrecognized: Transition Obligation 126 135 Prior Service Cost -- -- (Gain) (15) (53) ------------------------------ Prepaid (accrued) benefit cost before balance sheet adjustments $ -- $ -- Amounts Recognized in Balance Sheet Prepaid Benefit Cost $2 $1 Accrued Benefit cost (2) (1) ------------------------------ Prepaid (accrued) benefit cost $ -- $ -- As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. 65 Post-retirement Benefits Other Than Pensions U.S. Companies Only Components of Net Periodic Benefit Costs 1998 1997 1996 ----------------------------------- (millions) Service Cost $8 $8 $8 Interest cost 17 18 19 Expected Return on Plan Assets: (12) (10) (9) Amortization of Unrecognized: Transition Obligation 9 9 9 Prior Service Cost -- -- -- (Gain) (2) (1) -- ----------------------------------- Total Net Period Benefit cost $20 $24 $27 Effect of 1% Change in Assumed Health Care Cost Trend Rate 1998 --------------- (millions) 1% Increase Service Cost Plus Interest Cost $4 APBO 30 1% Decrease Service Cost Plus Interest Cost $(3) APBO (26) Tax Rate ASSUMPTIONS USED IN THE Discount Return on for Taxable ACCOUNTING FOR SFAS NO. 106 Rate Plan Assets Trusts --------------------------------------------------------------------- 1998 6.75% 9.00% 39.6% 1997 7.50% 9.00% 39.6% 1996 8.00% 9.50% 39.6% Health care cost trend rates 1998 Average Rate of 6.5% grading down 0.50% per year to an ultimate average rate of 5.00% in 2001. 1997 Average Rate of 7.0% grading down 0.50% per year to an ultimate average rate of 5.00% in 2001. 1996 Average Rate of 9.0% grading down 0.75% per year to an ultimate average rate of 5.25% in 2001. Additional Information for Plans Post-retirement Benefits Other with Unfunded Benefit Obligations Than Pensions (millions) 1998 1997 ---------------- ----------------- Benefit obligation $275 $241 Plan assets at fair value 164 159 66 Health and Welfare Plans CSW provides medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment insurance plans for substantially all active CSW System employees in the United States. The total contributions, recorded on a pay-as-you-go basis, for the years 1996 - 1998 are listed in the following table. CSW --------- (millions) 1998 $35.6 1997 35.6 1996 28.4 Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority of its employees. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT The U.S. Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for the joint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December 31, 1998, the U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table. SWEPCO SWEPCO SWEPCO CPL Flint Dolet CSW(1) STP Creek Pirkey Hills Oklaunion Nuclear Coal Lignite Lignite Coal Plant Plant Plant Plant Plant --------------------------------------------------- ($ millions) Plant in service $2,336 $81 $439 $230 $400 Accumulated depreciation $657 $49 $190 $91 $132 Plant capacity-MW 2,501 528 675 650 690 Participation 25.2% 50.0% 85.9% 40.2% 78.1% Share of capacity-MW 630 264 580 262 539 (1)CPL, PSO and WTU have joint ownership agreements with each other and other non-affiliated entities. Such agreements provide for the joint ownership and operation of Oklaunion Power Station. Each participant provided financing for its share of the project, which was placed in service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7% ownership interest represents CSW's 78.1% participation in the plant. The statements of income reflect CPL's, PSO's and WTU's respective portions of the operating costs of Oklaunion Power Station. The total investments, including AFUDC, in Oklaunion Power Station for CPL, PSO and WTU were $37 million, $81 million and $282 million, respectively, at December 31, 1998. Accumulated depreciation was $12 million, $34 million and $86 million for CPL, PSO and WTU, respectively, at December 31,1998. 7. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the following fair values of each class of financial instruments for which it is practicable to estimate fair value. The fair value does not affect any of the liabilities unless the issues are redeemed prior to their maturity dates. 67 Cash, temporary cash investments, accounts receivable, other financial instruments and short-term debt The fair value equals the carrying amount as stated on the balance sheets due to the short maturity of those instruments. Securities available for sale The fair values, which are based on quoted market prices, equal the carrying amounts as stated on the balance sheet as prescribed by SFAS No. 115. See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Long-term debt The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities. Trust Preferred Securities The fair value of the Trust Preferred Securities are based on quoted market prices on the New York Stock Exchange. Preferred stock subject to mandatory redemption The fair value of preferred stock subject to mandatory redemption is estimated based on quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock with the same or similar remaining redemption provisions. Long-term debt and preferred stock due within 12 months The fair value of current maturities of long-term debt and preferred stock due within 12 months are estimated based on quoted market prices for the same or similar issues or on the current rates offered for long-term debt or preferred stock with the same or similar remaining redemption provisions. CARRYING VALUE AND ESTIMATED FAIR VALUE 1998 1997 -------------------- (millions) Long-term debt carrying amount $3,785 $3,898 fair value 4,025 4,052 Trust Preferred Securities carrying amount 335 335 fair value 345 344 Preferred stock subject to mandatory redemption carrying amount -- 26 fair value -- 27 Long-term debt and preferred stock due within 12 months carrying amount 169 32 fair value 169 32 Commodity Contracts CSW utilizes commodity forward contracts which contain pricing and/or volume terms designed to stabilize market risk associated with fluctuations in the price of natural gas used in generation and electric energy sold under firm commitments with certain of our customers. 68 In 1998, CSW did not utilize any contracts for commodities that would be classified as a financial instrument under generally accepted accounting principles, since physical delivery of natural gas and electricity may, and most frequently does, occur pursuant to these contracts. These contracts are, however, the major part of CSW's risk management program. The table below provides information about the Company's natural gas swaps and electricity forward contracts that are sensitive to changes in commodity prices. The swaps hedge commodity price exposure for the year 1999. Cash outflows on the swap agreements should be offset by increased margins on electricity sales to customers under tariffed rates with fixed fuel costs. The electricity forward contracts hedge a portion of CSW's energy requirements through September 1999. The average contract price for forward purchases is $58 per MWH and the average contract price for forward sales is $80 per MWH. Contractual commitments at December 31, 1998 are as follows: Net Notional Fair Value of Products Amount Fair Value of Assets Liabilities ---------------------------------------------------------------------------- (millions) Swaps 6,510,000 MMbtu $-- $1 Forwards: purchases 440,000 MWH 3 -- sales 292,800 MWH 1 -- Cross-currency swaps and SEEBOARD's electricity contracts for differences The fair value of cross currency swaps reflect third-party valuations calculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $57 million at December 31, 1998. This unrealized loss is offset by unrealized gains related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. The fair value of SEEBOARD's contracts for differences is not determinable due to the absence of a trading market. DERIVATIVE CONTRACTS NOTIONAL AMOUNTS Notional Fair AND ESTIMATED FAIR VALUES Amount Value ------------------------- (millions) Cross currency swaps Maturities: 2001 and 2006 $400 $457 69 8. LONG-TERM DEBT The CSW System's long-term debt outstanding as of the end of the last two years is presented in the following table. Maturities Interest Rates December 31, From To From To 1998 1997 ----------------------------------------------------------------------------- (millions) Secured bonds 1999 2025 5.25% 7.75% $1,824 $2,080 Unsecured bonds 2001 2030 3.33% (1) 8.88% 1,359 1,353 Notes and Lease Obligations 1999 2021 5.89% 9.75% 765 641 Unamortized discount (10) (10) Unamortized cost of Reacquired debt (153) (166) ------------------------- $3,785 $3,898 ------------------------- (1) Variable rate The mortgage indentures, as amended and supplemented, securing FMBs issued by the U.S. Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plant. The U.S. Electric Operating Companies may offer additional FMBs, medium-term notes and other securities subject to market conditions and other factors. CSW's year end weighted average cost of long-term debt was 7.3% for 1998 and 7.2% for both 1997 and 1996. Annual Requirements Certain series of outstanding FMBs have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have been, satisfied by the application of net expenditures for bondable property in an amount equal to 166-2/3% of the annual requirements. Certain series of pollution control revenue bonds also have sinking fund requirements. At December 31, 1998, the annual sinking fund requirements and annual maturities (including sinking fund requirements) for all long-term debt for the next five years are presented in the following table. Sinking Fund Annual Requirements Maturities ------------------------- (millions) 1999 $1 $169 2000 1 208 2001 1 421 2002 1 151 2003 1 206 70 Dividends At December 31, 1998, approximately $1.3 billion of CSW's subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. Reacquired Long-term Debt In September 1998, PSO reacquired $25 million principal amount outstanding of Series K and $30 million principal amount outstanding of Series L FMBs, in their entirety, at call prices of 100 and 100.77, respectively. In September 1998, CPL reacquired $36 million principal amount outstanding of Series L FMBs, in its entirety, at a call price of 100.53. No long-term debt was reacquired prior to maturity during 1997. Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further information related to long-term debt, including new issues and reacquisitions of long-term debt during 1998. 9. PREFERRED STOCK The outstanding preferred stock of the U.S. Electric Operating Companies as of the end of the last two years is presented in the following table. Dividend Current Rate December 31, Redemption Price From To 1998 1997 From - To --------------------------------------------- (millions) Not subject to mandatory redemption 182,931 shares 4.00% -5.00% $19 $19 $102.75-109.00 1,600,000 shares Auction 160 160 $100.00 Issuance expenses/premiums (3) (3) ------------- $176 $176 ------------- Subject to mandatory redemption (none outstanding at December 31, 1998) 6.95% $-- $27 $-- To be redeemed within one year -- (1) ------------- $-- $26 ------------- Total authorized shares 6,405,000 All of the outstanding preferred stock is redeemable at the option of the U.S. Electric Operating Companies upon 30 days notice at the current redemption price per share. During 1998 and 1997, SWEPCO redeemed $1.2 million pursuant to its annual sinking fund requirement. During 1997, each of the U.S. Electrics reacquired a significant portion of its outstanding preferred stock. As a result of differences between the dividend 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 Consolidated Statements of Income. CPL The dividends on CPL's $160 million auction and money market preferred stocks are adjusted every 49 days, based on current market rates. The dividend rates averaged 4.4%, 4.3% and 4.1% during 1998, 1997 and 1996, respectively. 71 SWEPCO On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt to fund the redemption. For additional information about the U.S. Electric Operating Companies' preferred stock, see their Statements of Capitalization in the Financial Statements. 10. TRUST PREFERRED SECURITIES The following Trust Preferred Securities issued by the wholly-owned statutory business trusts of CPL, PSO and SWEPCO were outstanding at December 31, 1998. They are classified on the balance sheets as CPL, PSO or SWEPCO Obligated, Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures of CPL, PSO or SWEPCO, respectively.
Amount Description of Underlying Business Trust Security Units (millions) Debentures of Registrant - ------------------------------------------------------------------------------------------------- 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 ---------------------
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. 11. SHORT-TERM FINANCING The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinate short-term borrowings for certain subsidiaries and also incurs borrowings outside the money pool for other subsidiaries. As of December 31, 1998, CSW had revolving credit facilities totaling $1.0 billion to backup its commercial paper program. At December 31, 1998, CSW had $811 million outstanding in short-term borrowings. The maximum amount of such short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $1.1 billion during June 1998. CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-alone basis. At December 31, 1998, CSW Credit had a $1.0 billion revolving credit agreement that is secured by the assignment of its receivables to back up its commercial paper program which had $749 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield for the year of 5.6%, was $1.0 billion during September 1998. 72 12. COMMON STOCK CSW's basic earnings per share of common stock are computed by dividing net income for common stock by the average number of common shares outstanding for the respective periods. Diluted earnings per share reflect the potential dilution that could occur if all options outstanding under CSW's stock incentive plan were converted to common stock and then shared in the income for common stock. CSW's basic and diluted earnings per share were the same for the years 1996 - 1998. CSW's dividends per common share reflect per share amounts paid for each of the periods. CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, through the LTIP, a stock option plan, PowerShare and Retirement Savings Plan. CSW began funding these plans through open market purchases, effective April 1, 1997. Information concerning common stock activity issued through the LTIP, the stock option plan, PowerShare and the Retirement Savings Plan is presented in the following table. 1998 1997 1996 ------------------------------------------------ Number of new shares issued (millions) 0.4 0.8 2.9 Range of stock price for new shares $25 5/8-$30 1/16 $21 1/4-$25 5/8 $24 3/8-$28 7/8 New common stock equity (millions) $10 $20 $79 During February 1996, CSW sold 15,525,000 shares of CSW Common in a primary stock offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of indebtedness incurred during the acquisition of SEEBOARD. 13. STOCK-BASED COMPENSATION PLANS CSW has a key employee incentive plan. This plan is accounted for under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined consistent with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric Operating Companies' net income for common stock and earnings per share as required by SFAS No. 123 would not have changed significantly from amounts reported. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. CSW may grant options for up to 4.0 million shares of CSW common stock under the stock option plan. Under the stock option plan, the option exercise price equals the stock's market price on the date of grant. The grant vests over three years, one-third on each of the three anniversary dates of the grant and 73 expires 10 years after the original grant date. CSW has granted 2.8 million shares through December 31, 1998. A summary of the status of CSW's stock option plan at December 31, 1998, 1997 and 1996 and the changes during the years then ended is presented in the following table.
1998 1997 1996 ------------------------------------------------------------------------------------------ Weighted Weighted Weighted Shares Average Shares Average Shares Average (thousands) Exercise Price (thousands) Exercise Price (thousands) Exercise Price Outstanding at beginning of year 1,902 $24 1,412 $26 1,564 $26 Granted -- -- 694 21 70 27 Exercised (337) 24 -- 22 (147) 24 Canceled (119) 24 (204) 28 (75) 27 ---------- ---------- --------- Outstanding at end of year 1,446 24 1,902 24 1,412 26 Exercisable at end of year 1,010 n/a 1,162 n/a 1,004 n/a
74 14. BUSINESS SEGMENTS Effective December 31, 1998, CSW adopted SFAS No. 131. CSW's business segments at December 31, 1998 included U.S. Electric (CPL, PSO, SWEPCO and WTU) and U.K. Electric (SEEBOARD U.S.A.). Eight additional non-utility companies are included with CSW in Other and Reconciling Items (CSW Energy, CSW International, C3 Communications, EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and CSW Services). Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business segment information is presented in the following tables. U.S. U.K. Other and CSW Electric Electric Reconciling Consolidated ---------------------------------------------- 1998 Operating revenues $3,488 $1,769 $225 $5,482 Depreciation and amortization 399 95 27 521 Interest income 6 6 18 30 Interest expense 197 116 103 416 Operating income tax expense 235 1 (33) 203 Net income from equity method subsidiaries (1) -- -- (1) Income from continuing operations 374 117 (51) 440 Total assets 8,998 3,032 1,714 13,744 Investments in equity method subsidiaries 15 -- -- 15 Capital expenditures 313 106 107 526 1997 Operating revenues $3,321 $1,870 $77 $5,268 Depreciation and amortization 389 92 16 497 Interest income 8 12 -- 20 Interest expense 212 120 82 414 Operating income tax expense 144 31 (24) 151 Windfall profits tax -- (176) -- (176) Net income from equity method subsidiaries (1) -- -- (1) Income from continuing operations 289 117 (77) 329 Total assets 9,172 2,931 1,348 13,451 Investments in equity method subsidiaries 15 -- -- 15 Capital expenditures 346 126 276 748 1996 Operating revenues $3,248 $1,848 $59 $5,155 Depreciation and amortization 362 88 14 464 Interest income 3 18 -- 21 Interest expense 224 116 65 405 Operating income tax expense 191 46 (13) 224 Windfall profits tax -- -- 132 132 Net income from equity method subsidiaries -- -- -- -- Income from continuing operations 262 103 (68) 297 Total assets 9,142 3,061 1,129 13,332 Investments in equity method subsidiaries 10 -- -- 10 Capital expenditures 356 1,543 109 2,008 Products and Services The U.S. Electric Operating Companies' products and services primarily consist of the generation, transmission and distribution of electricity. The U.K. Electric segment's primary lines of business are the supply and distribution of electricity. CSW is currently developing computer systems to provide information by product and services rather than by legal entity. 75 Geographic Areas Revenues ------------------------------------------------- United United Other CSW States Kingdom Foreign Consoldiated ------------------------------------------------- (millions) 1998 $3,705 $1,769 $8 $5,482 1997 3,390 1,870 8 5,268 1996 3,616 1,848 1 5,465 Long-Lived Assets ------------------------------------------------ United United Other CSW States Kingdom Foreign Consoldiated ------------------------------------------------- (millions) 1998 $7,831 $2,530 $201 $10,562 1997 7,801 2,551 254 10,606 1996 7,682 2,623 72 10,377 15. TRANSOK DISCONTINUED OPERATIONS On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of operations for Transok have been reported as discontinued operations and prior periods have been restated for consistency. As a wholly owned subsidiary of CSW, Transok operated as an intrastate natural gas gathering, transmission, marketing and processing company that provided natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other gas customers throughout the United States. CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and $200 million in existing long-term debt that remained with Transok after the sale. A portion of the cash proceeds was used to repay borrowings incurred related to the SEEBOARD acquisition and the remaining proceeds were used to repay commercial paper borrowings. CSW recorded an after tax gain on the sale of Transok of approximately $120 million in 1996. Transok's operating results for 1996 are summarized in the following table (transactions with CSW have not been eliminated). 1996 --------- (millions) Total revenue $362 Operating income before income taxes 23 Earnings before income taxes 18 Income taxes (6) --------- Net income from discontinued operations $12 --------- 76 16. PROPOSED AEP MERGER On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28 billion at that time. At December 31, 1998, the total market capitalization of the combined company would have been $28 billion ($15 billion in equity; $13 billion in debt) and the combined company would have served more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. At December 22, 1997, AEP would have issued approximately $6.6 billion in stock to CSW stockholders to complete the transaction. At December 31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as 1998, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries. The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two work forces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Transition teams of employees from both companies will make organizational and staffing recommendations. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from: (i) issuing shares of common stock other than pursuant to employee benefit plans; (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. (The foregoing statements constitute forward-looking statements within 77 the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). Merger Regulatory Approvals The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. General Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas and at the FERC outlined the expected company-wide benefits of the merger to AEP and CSW customers and shareholders. These benefits would include $2 billion in non-fuel savings over 10 years and $98 million in net fuel savings over 10 years. FERC On April 30, 1998, AEP and CSW jointly filed a request with the FERC for approval of their proposed merger. On July 15, the FERC approved a draft order accepting the proposed transmission service agreements between the Ameren System and PSO. The draft order confirms that PSO's 250 MW firm contract path is available for AEP and CSW to meet the Holding Company Act's requirement that the two systems operate on an integrated and coordinated basis. In November 1998, the FERC issued an order setting issues for hearing. Hearings are scheduled to begin on June 1, 1999. The FERC order indicated that the review of the proposed merger would address the issues of competition, market power and customer protection and instructed AEP and CSW to refile an updated market power study. The updated market power study was filed in January 1999. CSW has filed a proposed settlement with the FERC to sell 250 MWs of capacity in the Frontera power plant project, two years after the AEP merger closes to respond to market-power issues. A final order is expected in the fourth quarter of 1999. Arkansas On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas Commission for approval of their proposed merger. The Arkansas Commission issued an order approving the merger subject to approval of the associated regulatory plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a final order granting conditional approval of a stipulated agreement related to a proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to reduce rates through a net savings merger rider for its Arkansas retail customers by $6 million over the five-year period following completion of the merger. The Arkansas Commission order notes the possibility of decisions in other jurisdictions adversely affecting provisions of the stipulated agreement. Consequently, the Arkansas Commission final orders are conditioned on its consideration of approval of the merger in other state and federal jurisdictions. Louisiana On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana Commission for approval of their proposed merger and for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Louisiana that provides for: - Approximately $2.6 million in fuel cost savings to Louisiana customers of CSW's SWEPCO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for SWEPCO customers in Louisiana and a plan to share with those customers approximately one-half of the savings allocated to Louisiana related to the merger during the first 10 years following the merger. Under this plan, approximately $26 million of these non-fuel merger-related savings will be used to reduce future costs to SWEPCO's Louisiana customers. 78 Hearings in Louisiana are expected to begin in the first quarter of 1999, and a final order is expected in the second quarter of 1999. Oklahoma On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma Commission for approval of their proposed merger. AEP and CSW have proposed a regulatory plan in Oklahoma that provides for - Approximately $11.8 million in fuel cost savings to Oklahoma customers of CSW's PSO subsidiary during the 10 years following completion of the merger; and - A commitment not to raise base rates above current levels prior to January 1, 2002, for PSO retail customers and to share approximately one-half of the savings from synergies created by the merger during the first 10 years following the merger. Under this plan, approximately $78.6 million of these non-fuel merger-related savings will be used to reduce future costs to PSO's retail customers. On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling recommending to the Oklahoma Commission that the merger filing be dismissed without prejudice for lack of information regarding the potential impact of the merger on the retail electric market in Oklahoma. The ruling was in response to comments received from intervenors to the merger. A dismissal without prejudice would allow AEP and CSW to submit an amended application with the added information. Subsequent meetings with the parties to the merger proceeding resulted in an agreement on criteria for the additional studies. On October 21, 1998, the ALJ approved these criteria, as well as plans by AEP and CSW to file an amended application along with the additional studies. An amended application was filed with the Oklahoma Commission on February 25, 1999. Submission of the amended application reset Oklahoma's 90-day statutory time period for Oklahoma Commission action on the merger. All other material in the written record in the merger case will be preserved since the docket is not being dismissed. AEP and CSW anticipate that the Oklahoma Commission will establish a procedural schedule that will result in a final order in Oklahoma in the second quarter of 1999. Texas On April 30, 1998, AEP and CSW jointly filed a request with the Texas Commission for a finding that the merger is in the public interest. AEP and CSW have proposed a regulatory plan in Texas that provides for: - Approximately $29 million in fuel cost savings to Texas customers during the 10-year period following completion of the merger; and - A commitment to not raise base rates prior to January 1, 2002 for Texas customers and a plan to share with those customers approximately one-half of the savings allocated to Texas related to the merger during the first 10 years following the merger. In Texas, approximately $183 million of the savings from synergies will be used to reduce future costs to customers. On July 2, 1998, the Texas Commission issued a preliminary order setting forth the issues the Texas Commission will consider in the merger application. 79 In its preliminary order, the Texas Commission also determined that: (i) the merger application was not a rate proceeding; (ii) restructuring issues should not be addressed; and (iii) matters in the jurisdiction of other regulatory bodies should not be addressed. AEP and CSW have reached a settlement in principle with the Texas Office of Public Utility Counsel and several cities in Texas. The proposed settlement provides for combined rate reductions totaling approximately $180 million over a six-year period for CSW's electric operating company customers through two separate rate riders. Both rate reduction riders become effective upon approval of the settlement and completion of the merger. The first rate reduction rider provides for $84.4 million in estimated net merger savings to be credited to Texas customer bills. The reduction would come from a net merger savings rate reduction rider over the six years following completion of the merger with the aggregate rate reductions for customers of the CSW Texas companies as follows: - $52.7 million for CPL; - $16.1 million for SWEPCO; and - $15.6 million for WTU. The second rate reduction rider will be implemented to resolve issues associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings in Texas. The $95.6 million rate reductions over the six years following completion of the merger include: - $61.3 million for CPL; - $19.9 million for SWEPCO; and - $14.4 million for WTU. CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction of $13.0 million implemented in May 1998, as well as the second glide-path rate reduction of $13.0 million scheduled to take effect May 1999, if the settlement is approved and the merger between AEP and CSW merger is completed. In addition, as a part of the settlement proposal, CPL, SWEPCO and WTU agree not to seek an increase in base rates prior to January 1, 2003. The Texas Office of Public Utility Counsel and members of the Texas cities will not initiate rate reviews prior to January 1, 2001. The settlement proposal also provides for a sharing of off-system sales margins on the wholesale electricity market after the effective date of the merger. The proposed settlement also includes affiliate transaction standards and provides for the maintenance of service quality for Texas customers. Hearings in Texas are expected to begin in the second quarter of 1999, and a final order is expected by the end of the third quarter of 1999. NRC On June 19, 1998, CPL filed a license transfer application with the NRC requesting the NRC's consent to the indirect transfer of control of CPL's interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue to own its 25.2% interest in STP, and CPL's name would remain on the NRC operating license. On November 5, 1998, the NRC approved the license transfer application on the condition that the merger is completed by December 31, 1999. 80 Other Federal On October 13, 1998, AEP and CSW jointly filed an application with the SEC for approval of the proposed merger. The SEC merger filing is similar to requests currently before other jurisdictions and outlines the expected combined company benefits of the merger to AEP and CSW customers and shareholders. On November 9, 1998, AEP and CSW filed an amendment to the application. AEP and CSW plan to make other required federal merger filings with the Federal Communications Commission and the Department of Justice in the near future. United Kingdom CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in Yorkshire. The proposed merger of CSW into AEP would result in common ownership of the United Kingdom entities. Although the merger of CSW into AEP is not subject to approval of United Kingdom regulatory authorities, the common ownership of the United Kingdom entities could be referred by the United Kingdom Secretary of State for Trade and Industry for an investigation by the United Kingdom Monopolies and Mergers Commission. CSW is unable to predict the outcome of any such regulatory proceeding. AEP AEP has received a request from the staff of the Kentucky Public Service Commission to file an application seeking Kentucky Public Service Commission approval for the indirect change in control of Kentucky Power Company that will occur as a result of the proposed merger. CSW understands that although AEP does not believe that the Kentucky Public Service Commission has the jurisdictional authority to approve the merger, AEP will prepare a merger application filing to be made with the Kentucky Public Service Commission, which is expected to be filed by April 15, 1999. Under the governing statute the Kentucky Public Service Commission must act on the application within 60 days. Therefore this matter is not expected to impact the timing of the merger. Completion of the Merger The proposed AEP merger has a targeted completion date in the fourth quarter of 1999. The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. The transaction must satisfy many conditions, including the condition that it must be a pooling of interests. The parties may not waive some of these conditions. AEP and CSW have initiated the process of seeking regulatory approvals, but there can be no assurances as to when, on what terms or whether the required approvals will be received or whether there will be any regulatory proceedings in the United Kingdom. The merger agreement will terminate on December 31, 1999 unless, in certain circumstances, extended by either party as provided in the merger agreement. There can be no assurance that the AEP merger will be consummated. Merger Costs As of December 31, 1998, CSW had deferred $26 million in costs related to the merger on its consolidated balance sheet, which will be charged to expense if AEP and CSW are not successful in completing their proposed merger. 17. EXTRAORDINARY ITEM In the general election held in the United Kingdom on May 1, 1997, the United Kingdom's 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 81 introduced in the Labour Party's Budget and the legislation enacting the tax subsequently was passed during the third quarter of 1997. Accordingly, during the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item, (pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a one-time, windfall profits tax enacted by the United Kingdom government. The windfall profits tax was payable in two equal installments, due December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on the difference between nine times the average profits after tax for the four years following flotation in 1990, and SEEBOARD's market capitalization calculated as the number of shares issued at flotation multiplied by the flotation price per share. 18. NEW ACCOUNTING STANDARDS SFAS No. 130 SFAS No. 130 is effective for fiscal year 1998 and was the basis of preparation for the Consolidated Statements of Stockholders' Equity in this report. The statement adds the requirement to present comprehensive income and all of its components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period except those resulting from investments by owners and distributions to owners. SFAS No. 131 CSW adopted SFAS No. 131 for fiscal year 1998. The statement requires disclosure of selected information about its reportable operating segments. Operating segments are components of an enterprise that engage in business activities that may earn revenues and incur expenses, for which discrete financial information is available and is evaluated regularly by the chief operating decision-maker within a company for making operating decisions and assessing performance. Segments may be based on products and services, geography, legal structure or management structure. SFAS No. 132 SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5. BENEFIT PLANS. This statement standardizes the disclosure requirements for pensions and OPEBs, requires additional information for changes in the benefit obligations and fair value of plan assets and eliminates certain disclosure requirements. Adoption of this statement did not have a material effect on the CSW's results of operations or financial condition. SOP No. 98-5 SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998. The statement requires entities to expense the costs of start-up activities as incurred. SOP No. 98-5 broadly defines start-up activities to include: (i) costs that are incurred before operations have begun; (ii) costs incurred after operations have begun but before full productive capacity has been reached; (iii) learning costs and non-recurring operating losses incurred before a project is fully operational; and (iv) one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory or with a new class of customer, and initiating a new process in an existing operation. CSW adopted SOP No. 98-5 in 1998. CSW Energy and CSW International expensed $4.5 million and $1.5 million, after tax, respectively, of start-up costs which had previously been capitalized. 82 SFAS No. 133 SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 (January 1, 2000 for calendar year entities). This statement replaces existing pronouncements and practices with a single integrated accounting framework for derivatives and hedging activities and eliminates previous inconsistencies in generally accepted accounting principles. The statement expands the accounting definition of derivatives, which had focused on freestanding contracts (futures, forwards, options and swaps) to include embedded derivatives and many commodity contracts. All derivatives will be reported on the balance sheet either as an asset or liability measured at fair value. Changes in a derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing or method of adopting SFAS No. 133. EITF Issue 98-10 In December 1998, the EITF reached consensus on Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. In reaching its consensus, the EITF distinguished between energy contracts entered to generate a profit and energy contracts entered to provide for the physical delivery of a commodity. Generally, CSW's energy contracts are entered into for the physical delivery of energy. These contracts, therefore, do not meet the definition of "trading activities" addressed by EITF Issue 98-10. Therefore, adoption of EITF Issue 98-10 will not have a material impact on CSW's results of operations or financial condition. 83 19. QUARTERLY INFORMATION (UNAUDITED) The following unaudited quarterly information includes, in the opinion of management all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. QUARTER ENDED 1998 1997 ----------------------------------------------------------------- March 31 Operating Revenues $1,257 $1,278 Operating Income 163 127 Income from Continuing Operations 60 25 Net Income for Common Stock 60 25 Basic and Diluted EPS from Continuing $0.28 $0.12 Operations Basic and Diluted EPS $0.28 $0.12 June 30 Operating Revenues $1,344 $1,184 Operating Income 214 169 Income from Continuing Operations 107 83 Net Income for Common Stock 107 83 Basic and Diluted EPS from Continuing $0.50 $0.39 Operations Basic and Diluted EPS $0.50 $0.39 September 30 Operating Revenues $1,581 $1,477 Operating Income 344 303 Income from Continuing Operations 233 196 Extraordinary Item -- (176) Net Income for Common Stock 233 20 Basic and Diluted EPS from Continuing $1.10 $0.93 Operations Basic and Diluted EPS from $-- $(0.83) Extraordinary Item Basic and Diluted EPS $1.10 $0.10 December 31 Operating Revenues $1,300 $1,329 Operating Income 145 136 Income from Continuing Operations 40 25 Net Income for Common Stock 40 25 Basic and Diluted EPS from Continuing $0.19 $0.11 Operations Basic and Diluted EPS $0.19 $0.11 Total Operating Revenues $5,482 $5,268 Operating Income 866 735 Income from Continuing Operations 440 329 Extraordinary Item -- (176) Net Income for Common Stock 440 153 Basic and Diluted EPS from Continuing $2.07 $1.55 Operations Basic and Diluted EPS from $-- $(0.83) Extraordinary Item Basic and Diluted EPS $2.07 $0.72 84 20. SUBSEQUENT EVENT Through December 31, 1998, CSW International has invested $80 million in Vale, a Brazilian electric distribution company, to obtain a 36% equity interest. CSW International also issued $100 million of debt to Vale, convertible to equity by the end of 1999. CSW International accounts for its $80 million investment in Vale on the equity method of accounting, and the $100 million as a loan. In mid-January 1999, amid market instability, the Brazilian government abandoned its policy of pegging the currency in a broad range against the dollar. This resulted in a 40% devaluation of the Brazilian Real by the end of January. Vale will be unfavorably impacted by the devaluation due primarily to the revaluation of foreign denominated debt. CSW International has a put option which requires that Vale purchase CSW International's shares, upon CSW International exercising the put, at a minimum of the purchase price paid for the shares ($80 million). As a result of the put option arrangement, management has reached a preliminary conclusion that CSW International's investment carrying amount will not be reduced below the put option value unless there is deemed to be a permanent impairment. CSW International views its investment in Vale as a long-term investment strategy and believes that the investment in Vale continues to have significant long-term value and is recoverable. Management will continue to closely evaluate the changes in the Brazilian economy, and its impact on CSW International's investment in Vale. 85 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Central and South West Corporation: We have audited the accompanying consolidated balance sheets of Central and South West Corporation (a Delaware corporation) and subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows, for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of CSW UK Finance Company (1998 and 1997 - which includes CSW Investments) and CSW Investments (1996), which statements reflect total assets and total revenues of 22 percent and 32 percent in 1998, 22 percent and 35 percent in 1997 and 36 percent of total revenues in 1996, respectively, of the consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Central and South West Corporation and subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas February 12, 1999 86 AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY We have audited the consolidated balance sheets of CSW UK Finance Company and subsidiaries as of 31 December 1998 and 1997 and the related consolidated statement of earnings and statements of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW UK Finance Company and subsidiaries at 31 December 1998 and 1997 and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the years ended 31 December 1998 and 1997 to the extent summarised in Note 23 to the consolidated financial statements. /s/ KPMG Plc KPMG Audit Plc Chartered Accountants London, England Registered Auditor 18 January 1999 87 AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS We have audited the consolidated balance sheets of CSW Investments and subsidiaries as of 31 December 1996 and the related consolidated statement of earnings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW Investments and subsidiaries at 31 December 1996 and the results of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 1996 to the extent summarised in the notes to the consolidated financial statements. /s/ KPMG Audit Plc KPMG Audit Plc Chartered Accountants London, England Registered Auditor 22 January 1997 88 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central and South West Corporation and subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports of independent public accountants are presented elsewhere in this report. CSW, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CSW and its subsidiaries believe that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1998. /s/ E.R. Brooks /s/ Glenn D. Rosilier /s/ Lawrence B. Connors E. R. Brooks Glenn D. Rosilier Lawrence B. Connors Chairman and Executive Vice President and Controller Chief Executive Officer Chief Financial Officer 89 GLOSSARY OF TERMS The following abbreviations or acronyms used in this financial report are defined below: Abbreviation or Acronym......Definition AEP ....................American Electric Power Company, Inc. AEP Merger .............Proposed Merger between AEP and CSW where CSW would become a wholly owned subsidiary of AEP AFUDC ..................Allowance for funds used during construction ALJ ....................Administrative Law Judge Alpek ..................Alpek S.A. de C.V. Anglo Iron..............Anglo Iron and Metal, Inc. APBO ...................Accumulated Post-retirement Benefit Obligation Arkansas Commission ....Arkansas Public Service Commission Btu ....................British thermal unit Burlington Northern ....Burlington Northern Railroad Company C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW Communications, Inc.) Cajun ..................Cajun Electric Power Cooperative, Inc. CERCLA .................Comprehensive Environmental Response, Compensation and Liability Act of 1980 ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture between C3 Communications and ICG Communications, Inc. CLECO ..................Central Louisiana Electric Company, Inc. Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas CPL ....................Central Power and Light Company, Corpus Christi, Texas CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's rate case Docket No, 14965, including both the order received on September 10, 1997 and the revised order received on October 16, 1997 CPL 1996 Fuel Agreement.Fuel settlement agreement entered into by CPL and other parties CSW ....................Central and South West Corporation, Dallas, Texas CSW Credit .............CSW Credit, Inc., Dallas, Texas CSW Energy .............CSW Energy, Inc., Dallas, Texas CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas CSW International ......CSW International, Inc., Dallas, Texas CSW Investments ........CSW Investments, an unlimited company organized in the United Kingdom through which CSW International owns SEEBOARD CSW Leasing ............CSW Leasing, Inc., Dallas, Texas CSW Power Marketing ....CSW Power Marketing, Inc., Dallas, Texas CSW Services ...........Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW System .............CSW and its subsidiaries CSW UK Finance Company .An unlimited company organized in the United Kingdom through which CSW International owns CSW Investments CWIP ...................Construction work in progress DGES ...................Director General of Electricity Supply DHMV ...................Dolet Hills Mining Venture Diversified Electric ...CSW Energy and CSW International DOE ....................United States Department of Energy ECOM ...................Excess cost over market EITF....................Emerging Issues Task Force EITF Issue 98-10........Accounting for Contracts Involved in Energy Trading and Risk Management Activities El Paso ................El Paso Electric Company EnerACT.................Energy Aggregation and Control Technology Energy Policy Act ......National Energy Policy Act of 1992 EnerShop ...............EnerShopsm Inc., Dallas, Texas EPA ....................United States Environmental Protection Agency EPS ....................Earnings per share of common stock ERCOT ..................Electric Reliability Council of Texas Exchange Act ...........Securities Exchange Act of 1934, as amended EWG ....................Exempt Wholesale Generator FERC ...................Federal Energy Regulatory Commission FMB ....................First mortgage bond FUCO ...................Foreign utility company as defined by the Holding Company Act HL&P ...................Houston Lighting & Power Company Holding Company Act ....Public Utility Holding Company Act of 1935, as amended IBEW ...................International Brotherhood of Electrical Workers ISO ....................Independent system operator ITC ....................Investment tax credit 90 GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this financial report are defined below: Abbreviation or Acronym.......Definition KWH ....................Kilowatt-hour LIFO ...................Last-in first-out (inventory accounting method) Louisiana Commission ...Louisiana Public Service Commission LTIP ...................Long-Tern Incentive Plan MD&A ...................Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ ...................Mississippi Department of Environmental Quality MGP ....................Manufactured gas plant or coal gasification plant Mirror CWIP ............Mirror construction work in progress Mississippi Power ......Mississippi Power Company MMbtu ..................Million Btu MW .....................Megawatt MWH ....................Megawatt-hour National Grid ..........National Grid Group plc NEIL ...................Nuclear Electric Insurance Limited NLRB ...................National Labor Relations Board NRC ....................Nuclear Regulatory Commission OASIS ..................Open access same time information system Oklahoma Commission ....Corporation Commission of the State of Oklahoma Oklaunion ..............Oklaunion Power Station Unit No. I OPEB ...................Other post-retirement benefits (other than pension) PCB ....................Polychlorinated biphenyl PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock Purchase Plan PRP ....................Potentially responsible party PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma PSO 1997 Rate Settlement Agreement..............Joint stipulation agreement reached by PSO and other parties to settle PSO's rate inquiry PURPA ..................Public Utility Regulatory Policies Act of 1978 Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan Retirement Savings Plan.CSW's employee retirement savings plan Rights Plan ............Stockholders Rights Agreement between CSW and CSW Services, as Rights Agent RUS ....................Rural Utilities Service of the federal government SEC ....................United States Securities and Exchange Commission SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted to U.S.Generally Accepted Accounting Principles SFAS ...................Statement of Financial Accounting Standards SFAS No. 52 ............Foreign Currency Translation SFAS No. 71 ............Accounting for the Effects of Certain Types of Regulation SFAS No. 87 ............Employers' Accounting for Pensions SFAS No. 106 ...........Employers' Accounting for Post-retirement Benefits Other than Pensions SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity Securities SFAS No. 123 ...........Accounting for Stock-Based Compensation SFAS No. 130 ...........Reporting Comprehensive Income SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related Information SFAS No. 132 ...........Employers' Disclosures about Pensions and Other Post-retirement Benefits SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging Activities SOP 98-5 ...............Statement of Position 98-5, Reporting on the Costs of Start-up Activities SPP ....................Southwest Power Pool STP ....................South Texas Project nuclear electric generating station STPNOC .................STP Nuclear Operating Company, a non-profit Texas corporation, jointly owned by CPL, HL&P, City of Austin, and City of San Antonio SWEPCO .................Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO Plan ............The amended plan of reorganization for Cajun filed by the Members Committee and SWEPCO on March 18, 1998 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas ..................Tejas Gas Corporation Texas Commission .......Public Utility Commission of Texas TNRCC ..................Texas Natural Resource Conservation Commission Transok.................Transok, Inc. and subsidiaries Trust Preferred Securities.............Collective term for securities issued by business trusts of CPL, PSO and SWEPCO classified on the balance sheet as "Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)" 91 GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this financial report are defined below: Abbreviation or Acronym.......Definition U.K. Electric...........SEEBOARD U.S.A. U.S. Electric Operating Companies or U.S. Electrics..............CPL, PSO, SWEPCO and WTU Vale ...................Empresa De Electricidade Vale Paranapanema S/A, a Brazilian Electric Distribution Company Valero..................Valero Refining Company-Texas, Valero Refining Company and Valero Energy Company WTU ....................West Texas Utilities Company, Abilene, Texas Yorkshire ..............Yorkshire plc, a regional electricity company in the United Kingdom 92 EX-99.24.1 15 EXHIBIT 24.1 EXHIBIT (24) 1 POWER OF ATTORNEY The undersigned, as Chairman and Chief Executive Officer of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints Glenn D. Rosilier and Lawrence B. Connors and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ E.R. Brooks E. R. Brooks Chairman, Chief Executive Officer and Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EX-99.24.2 16 EXHIBIT 24.2 EXHIBIT (24) 2 POWER OF ATTORNEY The undersigned, as Executive Vice President and Chief Financial Officer of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ Glenn D. Rosilier Glenn D. Rosilier Executive Vice President and Chief Financial Officer Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EX-99.24.3 17 EXHIBIT 24.3 EXHIBIT (24) 3 POWER OF ATTORNEY The undersigned, as Controller of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks and Glenn D. Rosilier, and each of them severally, his true and lawful attorney-in-fact and agents, each with full power and authority (acting alone and without the other) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ L.B. Connors Lawrence B. Connors Controller Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EX-99.24.4 18 EXHIBIT 24.4 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ Molly Shi Boren Molly Shi Boren Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ Donald M. Carlton Dr. Donald M. Carlton Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ T.J. Ellis T.J. Ellis Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ Joe H. Foy Joe H. Foy Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ William R. Howell William R. Howell Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ Robert W. Lawless Dr. Robert W. Lawless Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ James L. Powell James L. Powell Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ Richard L. Sandor Dr. Richard L. Sandor Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 20th day of January, 1999. /s/ T.V. Shockley III Thomas V. Shockley III President, Chief Operating Officer and Director Subscribed and sworn to before me this 20th day of January, 1999. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EX-99.24.5 19 EXHIBIT 24.5 Exhibit (24) 5 CERTIFICATE I, Kenneth C. Raney, Jr., Secretary of Central and South West Corporation, a Delaware corporation (the "Corporation"), hereby certify that set forth below is a complete and accurate copy of a certain resolution adopted by the Board of Directors of the Corporation on this 20th day of January, 1999, and that such resolution is in full force and effect as of the date of this certificate. Central and South West Corporation Board of Directors Resolution January 20, 1999 RESOLVED, that each officer of Central and South West Corporation listed at the end of this sentence is hereby authorized to make, constitute and appoint, in his respective capacity, a power of attorney in favor of the person(s) listed directly after his name at the end of this sentence, as his true and lawful attorney(s)-in-fact and agent(s), with full power and authority (and in the case of more than one attorney-in-fact, each attorney-in-fact acting alone and without the other) to execute in the name and on behalf of the officer, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, and grant to such attorney(s)-in-fact, and agent(s) (and in the case of more than one attorney-in-fact, each of them), full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and all intents and purposes as the officer might or could do in person. 1. E.R. Brooks is authorized to make, constitute and appoint Glenn D. Rosilier and Lawrence B. Connors to be his attorney[s]-in-fact. 2. Glenn D. Rosilier is authorized to make, constitute and appoint E.R. Brooks and Lawrence B. Connors to be his attorney[s]-in-fact. 3. Lawrence B. Connors is authorized to make, constitute and appoint E.R. Brooks and Glenn D. Rosilier to be his attorney[s]-in-fact. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Central and South West Corporation this day, the 20th of January, 1999. /s/ Kenneth C. Raney, Jr. Kenneth C. Raney, Jr. CORPORATE SEAL EX-99.24.6 20 EXHIBIT 24.6 EXHIBIT (24) 6 POWER OF ATTORNEY The undersigned, as President of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ J. Gonzalo Sandoval J. Gonzalo Sandoval General Manager/President and Director Subscribed and sworn to before me this 24th day of February, 1999 by J. Gonzalo Sandoval. /s/ Alice G. Crisp Notary Public My Commission Expires: 8-3-2002 EX-99.24.7 21 EXHIBIT 24.7 EXHIBIT (24) 7 POWER OF ATTORNEY The undersigned, as Controller of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ R. Russell Davis R. Russell Davis Controller Subscribed and sworn to before me this 24th day of February, 1999, by R. Russell Davis. /s/ Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-99.24-8 22 EXHIBIT 24.8 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ John F. Brimberry John F. Brimberry Director Subscribed and sworn to before me this 26th day of February, 1999 by John F. Brimberry. /s/ Lynell Scherer Notary Public My Commission Expires:3-11-2002 EXHIBIT (24) 8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ E. R. Brooks E. R. Brooks Director Subscribed and sworn to before me this 24th day of February, 1999 by E. R. Brooks. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT (24) 8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ Glenn Files Glenn Files Director Subscribed and sworn to before me this 24th day of February, 1999 by Glenn Files. /s/ Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ Ruben M. Garcia Ruben M. Garcia Director Subscribed and sworn to before me this 1st day of March, 1999 by Ruben M. Garcia. /s/ Phyllis A. Pego Notary Public My Commission Expires: 12-29-2001 EXHIBIT (24) 8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ Alphonso R. Jackson Alphonso R. Jackson Director Subscribed and sworn to before me this 24th day of February, 1999 by Alphonso R. Jackson. /s/ L. Charlene Camp Notary Public My Commission Expires: 4-3-1999 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ Robert A. McAllen Robert A. McAllen Director Subscribed and sworn to before me this 26th day of February, 1999 by Robert A. McAllen. /s/ Oneida M. Lorenzana Notary Public My Commission Expires: 3-6-2000 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ Pete J. Morales, Jr. Pete J. Morales, Jr. Director Subscribed and sworn to before me this 4th day of March, 1999 by Pete J. Morales, Jr. /s/ Alice G. Crisp Notary Public My Commission Expires:8-3-2002 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ H. Lee Richards H. Lee Richards Director Subscribed and sworn to before me this 26th day of February, 1999 by H. Lee Richards. /s/ C. J. Winter Notary Public My Commission Expires: 12-22-99 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney as of the 24th day of February, 1999. /s/ Gerald E. Vaughn Gerald E. Vaughn Director Subscribed and sworn to before me this 25th day of February, 1999 by Gerald E. Vaughn. /s/ Imelda V. Perez Notary Public My Commission Expires: 2-2-2001 EX-99.24.9 23 EXHIBIT 24.9 EXHIBIT (24) 9 CERTIFICATE I, Brenda L. Snider, Secretary of Central Power and Light Company, a Texas corporation (the "Corporation"), hereby certify that set forth below is a complete and accurate copy of a certain resolution adopted by the Board of Directors of the Corporation as of February 24, 1999, and that such resolution is in full force and effect as of the date of this certificate. Central Power and Light Company Written Consent in Lieu of Meeting The undersigned, being all directors of Central Power and Light Company, a Texas Corporation, hereby consent, pursuant to the Texas Business Corporation Act, Article 9.10(B), to the adoption of the following resolution: Power of Attorney RESOLVED, that each officer of Central Power and Light Company listed at the end of this sentence is hereby authorized to make, constitute and appoint, in his respective capacity, a power of attorney in favor of the person(s) listed directly after his name at the end of this sentence, as his true and lawful attorney(s)-in-fact and agent(s), with full power and authority (and in the case of more than one attorney-in-fact, each attorney-in-fact acting alone and without the other) to execute in the name and on behalf of the officer, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, and grant to such attorney(s)-in-fact, and agent(s) (and in the case of more than one attorney-in-fact, each of them), full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and all intents and purposes as the officer might or could do in person. 1. J. Gonzalo Sandoval is authorized to make, constitute and appoint R. Russell Davis to be his attorney[s]-in-fact. 2. R. Russell Davis] is authorized to make, constitute and appoint J. Gonzalo Sandoval to be his attorney[s]-in-fact. Dated as of February 24, 1999 /s/ John F. Brimberry /s/ E.R. Brooks John F. Brimberry E.R. Brooks /s/ Glenn Files /s/ Ruben M. Garcia Glenn Files Ruben M. Garcia /s/ Alphonso R. Jackson /s/ Robert A. McAllen Alphonso R. Jackson Robert A. McAllen /s/ Pete Morales, Jr. /s/ H. Lee Richards Pete Morales, Jr. H. Lee Richards /s/ Gerald E. Vaughn Gerald E. Vaughn IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Central Power and Light Company this day, March 5, 1999. Brenda L. Snider /s/ Brenda L. Snider Corporate Secretary COMPANY SEAL EX-99.24.10 24 EXHIBIT 24.10 EXHIBIT (24) 10 POWER OF ATTORNEY The undersigned, as President of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agents, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agents, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ T.D. Churchwell T.D. Churchwell President and Director Subscribed and sworn to before me this 19th day of January, 1999 by T.D. Churchwell. /s/ Lina P. Holm Notary Public My Commission Expires: 01-28-2003 EX-99.24.11 25 EXHIBIT 24.11 EXHIBIT (24) 11 POWER OF ATTORNEY The undersigned, as Controller of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same,with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ R. Russell Davis R. Russell Davis Controller Subscribed and sworn to before me this 19th day of January, 1999 by R. Russell Davis. /s/ Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-99.24.12 26 EXHIBIT 24.12 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done byvirtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ E. R. Brooks E. R. Brooks Director Subscribed and sworn to before me this 19th day of January, 1999 by E. R. Brooks. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ Harry A. Clarke Harry A. Clarke Director Subscribed and sworn to before me this 19th day of January, 1999 by Harry A. Clarke. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ Glenn Files Glenn Files Director Subscribed and sworn to before me this 19th day of January, 1999 by Glenn Files. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ Paul K. Lackey Paul K. Lackey, Jr. Director Subscribed and sworn to before me this 19th day of January, 1999 by Paul K. Lackey, Jr. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ Paula Marshall-Chapman Paula Marshall-Chapman Director Subscribed and sworn to before me this 19th day of January, 1999 by Paula Marshall-Chapman. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ William R. McKamey William R. McKamey General Manager and Director Subscribed and sworn to before me this 19th day of January, 1999 by William R. McKamey. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EXHIBIT (24) 12 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1999. /s/ Robert B. Taylor, Jr. Robert B. Taylor, Jr. Director Subscribed and sworn to before me this 19th day of January, 1999 by Robert B. Taylor, Jr. /s/ Lina P. Holm Notary Public My Commission Expires: 1-28-2003 EX-99.24.13 27 EXHIBIT 24.13 EXHIBIT (24)13 CERTIFICATE I, Lina P. Holm, Secretary of Public Service Company of Oklahoma, an Oklahoma corporation (the "Corporation"), hereby certify that set forth below is a complete and accurate copy of a certain resolution adopted by the Board of Directors of the Corporation on this 19th day of January, 1999, and that such resolution is in full force and effect as of the date of this certificate. Public Service Company of Oklahoma Board of Directors Resolution January 19, 1999 RESOLVED, that each officer of Public Service Company of Oklahoma listed at the end of this sentence is hereby authorized to make, constitute and appoint, in his respective capacity, a power of attorney in favor of the person(s) listed directly after his name at the end of this sentence, as his true and lawful attorney(s)-in-fact and agent(s), with full power and authority (and in the case of more than one attorney-in-fact, each attorney-in-fact acting alone and without the other) to execute in the name and on behalf of the officer, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, and grant to such attorney(s)-in-fact, and agent(s) (and in the case of more than one attorney-in-fact, each of them), full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and all intents and purposes as the officer might or could do in person. 1. T.D. Churchwell is authorized to make, constitute and appoint R. Russell Davis to be his attorney[s]-in-fact. 2. R. Russell Davis is authorized to make, constitute and appoint T.D. Churchwell to be his attorney[s]-in-fact. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Public Service Company of Oklahoma this day, the 19th of January, 1999. /s/ Lina P. Holm Lina P. Holm Corporate Secretary COMPANY SEAL EX-99.24.14 28 EXHIBIT 24.14 EXHIBIT (24) 14 POWER OF ATTORNEY The undersigned, as President of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Michael H. Madison Michael H. Madison President and Director Subscribed and sworn to before me this 26th day of January, 1999 by Michael H. Madison. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EX-99.24.15 29 EXHIBIT 24.15 EXHIBIT (24) 15 POWER OF ATTORNEY The undersigned, as Controller of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ R. Russell Davis R. Russell Davis Controller Subscribed and sworn to before me this 26th day of January, 1999 by R. Russell Davis. /s/ Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-99.24.16 30 EXHIBIT 24.16 EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ E. R. Brooks E. R. Brooks Director Subscribed and sworn to before me this 26th day of January, 1999 by E.R. Brooks. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ James E. Davison James E. Davison Director Subscribed and sworn to before me this 26th day of January, 1999 by James E. Davison. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that suchattorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Glenn Files Glenn Files Director Subscribed and sworn to before me this 26th day of January, 1999 by Glenn Files. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ F.E. Joyce, M.D. F.E. Joyce, M.D. Director Subscribed and sworn to before me this 26th day of January, 1999 by Dr. Frederick E. Joyce. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ John M. Lewis John M. Lewis Director Subscribed and sworn to before me this 26th day of January, 1999 by James M. Lewis. /s/ Linda Carmack Catron Notary Public My Commission Expires: 5-1-2001 EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Karen Adams Karen Adams General Manager and Director Subscribed and sworn to before me this 26th day of January, 1999 by Karen Adams. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ William C. Peatross William C. Peatross Director Subscribed and sworn to before me this 26th day of January, 1999 by William C. Peatross. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EXHIBIT (24) 16 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael H. Madison and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Maxine P. Sarpy Maxine P. Sarpy Director Subscribed and sworn to before me this 26th day of January, 1999 by Maxine P. Sarpy. /s/ Judith W. Culver Notary Public My Commission Expires: My Commission is for Life EX-99.24.17 31 EXHIBIT 24.17 EXHIBIT (24)17 CERTIFICATE I, Marilyn S. Kirkland, Secretary of Southwestern Electric Power Company, a Delaware corporation (the "Corporation"), hereby certify that set forth below is a complete and accurate copy of a certain resolution adopted by the Board of Directors of the Corporation on this 26th day of January, 1999, and that such resolution is in full force and effect as of the date of this certificate. Southwestern Electric Power Company Board of Directors Resolution January 26, 1999 RESOLVED, that each officer of Southwestern Electric Power Company listed at the end of this sentence is hereby authorized to make, constitute and appoint, in his respective capacity, a power of attorney in favor of the person(s) listed directly after his name at the end of this sentence, as his true and lawful attorney(s)-in-fact and agent(s), with full power and authority (and in the case of more than one attorney-in-fact, each attorney-in-fact acting alone and without the other) to execute in the name and on behalf of the officer, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, and grant to such attorney(s)-in-fact, and agent(s) (and in the case of more than one attorney-in-fact, each of them), full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and all intents and purposes as the officer might or could do in person. 1. Michael H. Madison is authorized to make, constitute and appoint R. Russell Davis to be his attorney[s]-in-fact. 2. R. Russell Davis is authorized to make, constitute and appoint Michael H. Madison to be his attorney[s]-in-fact. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Southwestern Electric Power Company this day, the 26th of January, 1999. /s/ Marilyn S. Kirkland Marilyn S. Kirkland Corporate Secretary COMPANY SEAL EX-99.24.17 32 EXHIBIT 24.17 EXHIBIT (24)17 CERTIFICATE I, Marilyn S. Kirkland, Secretary of Southwestern Electric Power Company, a Delaware corporation (the "Corporation"), hereby certify that set forth below is a complete and accurate copy of a certain resolution adopted by the Board of Directors of the Corporation on this 26th day of January, 1999, and that such resolution is in full force and effect as of the date of this certificate. Southwestern Electric Power Company Board of Directors Resolution January 26, 1999 RESOLVED, that each officer of Southwestern Electric Power Company listed at the end of this sentence is hereby authorized to make, constitute and appoint, in his respective capacity, a power of attorney in favor of the person(s) listed directly after his name at the end of this sentence, as his true and lawful attorney(s)-in-fact and agent(s), with full power and authority (and in the case of more than one attorney-in-fact, each attorney-in-fact acting alone and without the other) to execute in the name and on behalf of the officer, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, and grant to such attorney(s)-in-fact, and agent(s) (and in the case of more than one attorney-in-fact, each of them), full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and all intents and purposes as the officer might or could do in person. 1. Michael H. Madison is authorized to make, constitute and appoint R. Russell Davis to be his attorney[s]-in-fact. 2. R. Russell Davis is authorized to make, constitute and appoint Michael H. Madison to be his attorney[s]-in-fact. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Southwestern Electric Power Company this day, the 26th of January, 1999. /s/ Marilyn S. Kirkland Marilyn S. Kirkland Corporate Secretary COMPANY SEAL EX-99.24.18 33 EXHIBIT 24.18 EXHIBIT (24) 18 POWER OF ATTORNEY The undersigned, as President of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Paul J. Brower Paul J. Brower General Manager/President and Director Subscribed and sworn to before me this 26th day of January, 1999 by Paul J. Brower. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EX-99.24.19 34 EXHIBIT 24.19 EXHIBIT (24) 19 POWER OF ATTORNEY The undersigned, as Controller of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ R. Russell Davis R. Russell Davis Controller Subscribed and sworn to before me this 26th day of January, 1999 by R. Russell Davis. /s/ Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-99.24.20 35 EXHIBIT 24.20 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ E.R. Brooks E.R. Brooks Director Subscribed and sworn to before me this 26th day of January, 1999 by E.R. Brooks. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Glenn Files Glenn Files Director Subscribed and sworn to before me this 26th day of January, 1999 by Glenn Files. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Alphonso Jackson Alphonso Jackson Director Subscribed and sworn to before me this 26th day of January, 1999 by Alphonso Jackson. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Tommy Morris Tommy Morris Director Subscribed and sworn to before me this 26th day of January, 1999 by Tommy Morris. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ Dian G. Owen Dian G. Owen Director Subscribed and sworn to before me this 26th day of January, 1999 by Dian G. Owen. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ James Parker James Parker Director Subscribed and sworn to before me this 26th day of January, 1999 by James Parker. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EXHIBIT (24) 20 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1999. /s/ F.L. Stephens F.L. Stephens Director Subscribed and sworn to before me this 26th day of January, 1999 by F. L. Stephens. /s/ Martha Murray Notary Public My Commission Expires: 11-19-2000 EX-99.24.21 36 EXHIBIT 24.21 EXHIBIT (24) 21 CERTIFICATE I, Martha Murray, Secretary of West Texas Utilities Company, a Texas corporation (the "Corporation"), hereby certify that set forth below is a complete and accurate copy of a certain resolution adopted by the Board of Directors of the Corporation on this 26th day of January, 1999, and that such resolution is in full force and effect as of the date of this certificate. West Texas Utilities Company Board of Directors Resolution January 26, 1999 RESOLVED, that each officer of West Texas Utilities Company listed at the end of this sentence is hereby authorized to make, constitute and appoint, in his respective capacity, a power of attorney in favor of the person(s) listed directly after his name at the end of this sentence, as his true and lawful attorney(s)-in-fact and agent(s), with full power and authority (and in the case of more than one attorney-in-fact, each attorney-in-fact acting alone and without the other) to execute in the name and on behalf of the officer, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1998 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, and grant to such attorney(s)-in-fact, and agent(s) (and in the case of more than one attorney-in-fact, each of them), full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and all intents and purposes as the officer might or could do in person. 1. Paul J. Brower is authorized to make, constitute and appoint R. Russell Davis to be his attorney[s]-in-fact. 2. R. Russell Davis is authorized to make, constitute and appoint Paul J. Brower to be his attorney[s]-in-fact. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of West Texas Utilities Company this day, the 26th of January, 1999. /s/ Martha Murray Martha Murray Corporate Secretary COMPANY SEAL EX-27.1 37
UT 0000018540 CENTRAL AND SOUTH WEST CORPORTION 001 CENTRAL AND SOUTH WEST CORPORATION 1,000,000 12-MOS Dec-31-1998 Dec-31-1998 PER-BOOK 8,263 333 1,751 497 2,900 13,744 744 1,049 1,831 3,624 0 176 4,078 0 40 1,560 166 0 2 3 4,095 13,744 5,482 203 4,413 4,616 866 42 908 468 440 8 440 369 208 942 2.07 2.07
EX-27.2 38
UT 0000018734 CENTRAL POWER AND LIGHT COMPANY 003 CENTRAL POWER AND LIGHT COMPANY 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 3,263,505 9,616 140,070 4,424 1,239,630 4,657,245 168,888 405,000 739,031 1,312,919 0 163,204 1,296,762 0 0 0 125,000 0 0 0 1,759,360 4,657,245 1,406,117 116,831 1,006,360 1,123,191 282,926 760 283,686 122,036 161,650 6,901 154,749 249,000 93,301 438,881 0.00 0.00
EX-27.3 39
UT 0000081027 PUBLIC SERVICE COMPANY OF OKLAHOMA 004 PUBLIC SERVICE COMPANY OF OKLAHOMA 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 1,309,641 19,664 101,703 1,983 33,794 1,466,785 157,230 180,000 144,626 481,856 0 5,287 403,121 15,892 40,000 0 0 0 0 0 520,629 1,466,785 780,159 49,099 616,052 665,151 115,008 (91) 114,917 38,074 76,843 213 76,630 69,000 26,706 193,093 0.00 0.00
EX-27.4 40
UT 0000092487 SOUTHWESTERN ELECTRIC POWER COMPANY 003 SOUTHWESTERN ELECTRIC POWER COMPANY 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 1,840,854 5,954 131,767 17,373 53,572 2,049,520 135,660 245,000 300,592 681,252 0 4,707 614,727 40,705 0 0 40,595 0 2,212 3,337 661,985 2,049,520 952,952 47,982 754,183 802,165 150,787 2,451 153,238 55,135 98,103 705 96,542 120,000 39,233 226,463 0.00 0.00
EX-27.5 41
UT 0000105860 WEST TEXAS UTILITIES COMPANY 009 WEST TEXAS UTILITIES COMPANY 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 673,079 1,033 71,493 9,844 43,055 798,504 137,214 2,236 117,189 256,639 0 2,482 282,211 0 0 0 0 0 0 0 257,172 798,504 424,953 20,643 344,944 365,587 59,366 2,712 62,078 24,263 37,814 104 37,710 40,000 20,352 59,660 0 0
-----END PRIVACY-ENHANCED MESSAGE-----