-----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, Ehn71EREUzW3rP/xY0QcdwosGpIK4Cn64IFSGhtuk6zVc8XRux9ZmSrRC0tk0tkR tfOrt45gaiC5dEWbwXS1vg== 0000018540-96-000113.txt : 19960816 0000018540-96-000113.hdr.sgml : 19960816 ACCESSION NUMBER: 0000018540-96-000113 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00343 FILM NUMBER: 96614520 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 10-Q 1 PSO 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____TO_____ COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO. 1-1443 CENTRAL AND SOUTH WEST CORPORATION 51-0007707 (A Delaware Corporation) 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 (214) 777-1000 0-346 CENTRAL POWER AND LIGHT COMPANY 74-0550600 (A Texas Corporation) 539 North Carancahua Street Corpus Christi, Texas 78401-2802 (512) 881-5300 0-343 PUBLIC SERVICE COMPANY OF OKLAHOMA 73-0410895 (An Oklahoma Corporation) 212 East 6th Street Tulsa, Oklahoma 74119-1212 (918) 599-2000 1-3146 SOUTHWESTERN ELECTRIC POWER COMPANY 72-0323455 (A Delaware Corporation) 428 Travis Street Shreveport, Louisiana 71156-0001 (318) 222-2141 0-340 WEST TEXAS UTILITIES COMPANY 75-0646790 (A Texas Corporation) 301 Cypress Street Abilene, Texas 79601-5820 (915) 674-7000 INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO Common Stock Outstanding at July 31, 1996 Shares Central and South West Corporation 210,116,819 Central Power and Light Company 6,755,535 Public Service Company of Oklahoma 9,013,000 Southwestern Electric Power Company 7,536,640 West Texas Utilities Company 5,488,560 This combined Form 10-Q is separately filed by Central and South West Corporation, Central Power and Light Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf. Each other Registrant makes no representation as to information relating to the other Registrants. 2 CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES INDEX TO QUARTERLY REPORT ON FORM 10-Q JUNE 30, 1996 Page NUMBER GLOSSARY OF TERMS.........................................................3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements. Central and South West Corporation and Subsidiary Companies......5 Central Power and Light Company..................................15 Public Service Company of Oklahoma...............................24 Southwestern Electric Power Company..............................32 West Texas Utilities Company.....................................40 Notes to Financial Statements....................................46 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................58 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings..........................................63 ITEM 2. Changes in Securities................................Inapplicable ITEM 3. Defaults Upon Senior Securities......................Inapplicable ITEM 4. Submission of Matters to a Vote of Security Holders..............................................Inapplicable ITEM 5. Other Information..........................................65 ITEM 6. Exhibits and Reports on Form 8-K...........................67 SIGNATURES................................................................68 3 GLOSSARY OF TERMS The following abbreviations or acronyms used in this text are defined below: ABBREVIATION OR ACRONYM DEFINITION ALJ..............................Administrative Law Judge Alpek............................Alpek S.A. de C.V. ANI..............................American Nuclear Insurance Burlington Northern..............Burlington Northern Railroad Company Cajun............................Cajun Electric Power Cooperative, Inc. Cajun Trustee....................Cajun's court appointed trustee in bankruptcy Court of Appeals.................Court of Appeals, Third District of Texas, Austin, Texas CPL..............................Central Power and Light Company, Corpus Christi, Texas CPL 1995 Agreement...............Settlement Agreement filed by CPL with the Texas Commission to settle certain CPL regulatory matters CPL 1996 Fuel Agreement..........Fuel settlement agreement entered into by CPL and other parties to CPL's current rate review CSW..............................Central and South West Corporation, Dallas, Texas CSW Common................... ...CSW common stock, $3.50 par value per share CSW Credit Agreement.............$850 million senior credit agreement entered into by CSW with a consortium of banks to partially fund the SEEBOARD acquisition CSW Energy.......................CSW Energy, Inc., Dallas, Texas CSW Investments..................CSW Investments, an unlimited company organized in the United Kingdom which is wholly owned, indirectly though subsidiaries, by CSW International CSW Investments Credit Facility..(pound)1.0 billion pound senior credit facility arranged by CSW Investments with a consortium of banks to partially fund the SEEBOARD acquisition CSW System.......................CSW and its subsidiaries CSW (UK).........................CSW (UK) plc, a public limited company organized in the United Kingdom which is wholly owned by CSW Investments CSW U.K. Group...................Consolidated SEEBOARD, CSW (UK) and CSW Investments converted to U.S. Generally Accepted Accounting Principles CWIP.............................Construction work in progress El Paso..........................El Paso Electric Company Entergy Gulf States..............Gulf States Utilities Company EPS..............................Earnings per share ERCOT............................Electric Reliability Council of Texas FERC.............................Federal Energy Regulatory Commission HVdc.............................High-voltage direct-current IPP..............................Independent Power Producer ITC..............................Investment Tax Credit KWH..............................Kilowatt-hour MD&A.............................Management's Discussion and Analysis of Financial Condition and Results of Operations Members Committee................The members committee of Cajun, which represents 10 of the 12 Louisiana distribution cooperatives that are served by Cajun Merger...........................The proposed merger whereby El Paso would have become a wholly owned subsidiary of CSW Merger Agreement.................Agreement and Plan of Merger between El Paso and CSW, dated as of May 3, 1993, as amended Mirror CWIP......................Mirror construction work in progress Mississippi Power................Mississippi Power Company MMbtu............................Million British thermal units MTN..............................Medium-term note MW...............................Megawatt National Grid....................National Grid Group plc NEIL.............................Nuclear Electric Insurance Limited NRC..............................Nuclear Regulatory Commission NRG..............................NRG Energy, Inc. Oklahoma Commission..............Oklahoma Corporation Commission Oklaunion........................Oklaunion Power Station Unit No. 1 4 GLOSSARY OF TERMS (CONTINUED) The following abbreviations or acronyms used in this text are defined below: ABBREVIATION OR ACRONYM DEFINITION PCB..............................Polychlorinated biphenyl PCRB.............................Pollution Control Revenue Bond PSO..............................Public Service Company of Oklahoma, Tulsa, Oklahoma Red River........................Red River Authority of Texas Registrant(s)....................CSW, CPL, PSO, SWEPCO and WTU Sabine...........................Sabine River Authority of Texas SEEBOARD.........................SEEBOARD plc, Crawley, West Sussex, United Kingdom SEC..............................Securities and Exchange Commission SFAS.............................Statement of Financial Accounting Standard SFAS No. 52......................Foreign Currency Translation STP..............................South Texas Project nuclear electric generating station SWEPCO...........................Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO Plan......................The plan of reorganization for Cajun filed by the Members Committee, SWEPCO and Entergy Gulf States on April 19, 1996 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas............................Tejas Gas Corporation Texas Commission.................Public Utility Commission of Texas Transok..........................Transok, Inc. and subsidiaries, Tulsa, Oklahoma Trustee Plan.....................The plan of reorganization for Cajun filed by the Cajun Trustee on April 22, 1996 with the U.S. Bankruptcy Court for the Middle District of Louisiana U.S. Electric or U.S. Electric Operating Companies...........CPL, PSO, SWEPCO and WTU WTU..............................West Texas Utilities Company, Abilene, Texas WTU Stipulation and Agreement....Stipulation and Agreement to settle certain WTU regulatory matters 5 CSW CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 6 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended Six Months Ended June 30, June 30, ----------------- ----------------- 1996 1995 1996 1995 ------- ------- ------- ------- (millions, except per share amounts) Operating Revenues U.S. Electric $861 $774 $1,527 $1,288 United Kingdom 394 -- 931 -- Other diversified 12 12 24 21 ------- ------- ------- ------- 1,267 786 2,482 1,309 ------- ------- ------- ------- Operating Expenses and Taxes U.S. Electric fuel and purchased power 314 257 578 493 United Kingdom cost of sales 287 -- 687 -- Other operating 173 176 362 272 Maintenance 44 39 76 75 Depreciation and amortization 119 85 234 169 Taxes, other than income 46 44 89 77 Income taxes 70 21 98 (23) ------- ------- ------- ------- 1,053 622 2,124 1,063 ------- ------- ------- ------- Operating Income 214 164 358 246 ------- ------- ------- ------- Other Income and Deductions Mirror CWIP liability amortization -- 10 -- 20 U.S. Electric utility plant development costs, net of tax (84) -- (84) -- Other (5) 11 5 34 ------- ------- ------- ------- (89) 21 (79) 54 ------- ------- ------- ------- Income Before Interest Charges 125 185 279 300 ------- ------- ------- ------- Interest Charges Interest on long-term debt 82 54 160 106 Interest on short-term debt and other 28 27 55 52 ------- ------- ------- ------- 110 81 215 158 ------- ------- ------- ------- Income from Continuing Operations 15 104 64 142 ------- ------- ------- ------- Discontinued Operations Income from discontinued operations, net of tax of $2 and $6 for 1996 and $2 and $4 for 1995 4 4 12 9 Gain on sale of discontinued operations, net of tax of $71 113 -- 113 -- ------- ------- ------- ------- 117 4 125 9 ------- ------- ------- ------- Net Income 132 108 189 151 Preferred stock dividends 4 5 9 10 ======= ======= ======= ======= Net Income for Common Stock $128 $103 $180 $141 ======= ======= ======= ======= Average Common Shares Outstanding 209.5 191.4 204.2 191.1 EPS of Common Stock from Continuing Operations $0.05 $0.52 $0.27 $0.69 EPS of Common Stock from Discontinued Operations 0.56 0.02 0.61 0.05 ------- ------- ------- ------- EPS of Common Stock $0.61 $0.54 $0.88 $0.74 ======= ======= ======= ======= Dividends Paid per Share of Common Stock $0.435 $0.430 $0.870 $0.860 The accompanying notes to consolidated financial statements are an integral part of these statements. 7 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ----------- ----------- (millions) ASSETS Fixed Assets Electric Production $5,814 $5,888 Transmission 1,513 1,484 Distribution 3,968 3,799 General 1,314 1,209 Construction work in progress 192 346 Nuclear fuel 173 165 ------- ------- Total Electric 12,974 12,891 Gas -- 869 Other diversified 30 18 ------- ------- 13,004 13,778 Less - Accumulated depreciation and amortization 4,731 4,761 ------- ------- 8,273 9,017 ------- ------- Current Assets Cash and temporary cash investments 353 401 National Grid assets held for sale -- 100 Accounts receivable 1,173 1,093 Materials and supplies, at average cost 174 188 Electric utility fuel inventory, substantially at average cost 129 129 Gas inventory/products for resale -- 13 Prepayments and other 115 115 ------- ------- 1,944 2,039 ------- ------- Deferred Charges and Other Assets Deferred plant costs 509 514 Mirror CWIP asset 306 312 Other non-utility investments 316 296 Income tax related regulatory assets, net 241 253 Goodwill 1,373 1,074 Other 369 364 ------- ------- 3,114 2,813 ------- ------- $13,331 $13,869 ======= ======= The accompanying notes to consolidated financial statements are an integral part of these statements. 8 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ----------- ----------- (millions) CAPITALIZATION AND LIABILITIES Capitalization Common Stock Equity Common stock: $3.50 par value Authorized: 350.0 million shares Issued and outstanding: 209.9 million shares in 1996 and 192.9 million shares in 1995 $735 $675 Paid-in capital 985 610 Retained earnings 1,897 1,893 Foreign currency translation adjustment (9) -- -------- -------- 3,608 3,178 Preferred Stock Not subject to mandatory redemption 292 292 Subject to mandatory redemption 33 34 Long-term debt 4,293 3,914 -------- -------- 8,226 7,418 -------- -------- Minority Interest -- 202 -------- -------- Current Liabilities Long-term debt and preferred stock due within twelve months 5 30 Short-term debt 503 692 Short-term debt - CSW Credit, Inc. 764 646 Loan notes 96 -- Accounts payable 453 595 Accrued taxes 323 228 Accrued interest 66 77 Provision for SEEBOARD acceptances -- 1,001 Other 176 156 -------- -------- 2,386 3,425 -------- -------- Deferred Credits Accumulated deferred income taxes 2,222 2,306 Investment tax credits 298 306 Other 199 212 -------- -------- 2,719 2,824 -------- -------- $13,331 $13,869 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. 9 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30, --------------------- 1996 1995 ------- ------- OPERATING ACTIVITIES (millions) Net Income $189 $151 Non-cash Items Included in Net Income Depreciation and amortization 269 208 Deferred income taxes and investment tax credits 5 (50) Mirror CWIP liability amortization -- (21) Charges for terminated Merger -- 42 Establishment of regulatory asset 7 (21) Utility plant and other project development costs 141 -- Inventory reserve 7 -- Gain on sale of subsidiary (184) -- Changes in Assets and Liabilities Accounts receivable (148) (164) Unrecovered fuel costs (64) 94 Accounts payable (92) (19) Accrued taxes (20) (14) Refund due customers (27) 52 Other (32) (55) ------- ------- 51 203 ------- ------- INVESTING ACTIVITIES Capital expenditures (224) (212) Acquisition expenditures (1,346) -- CSW Energy projects (15) 32 Sale of National Grid assets 99 -- Cash proceeds from sale of subsidiary 690 -- Other -- (15) ------- ------- (796) (195) ------- ------- FINANCING ACTIVITIES Common stock sold 434 29 Proceeds from issuance of long-term debt 39 40 SEEBOARD acquisition financing 501 -- Retirement of long-term debt (28) (7) Change in short-term debt (71) 31 Payment of dividends (183) (175) ------- ------- 692 (82) ------- ------- Effect of exchange rate changes on cash and cash equivalents 5 -- Net Change in Cash and Cash Equivalents (48) 74 Cash and Cash Equivalents at Beginning of Period 401 108 ======= ======= Cash and Cash Equivalents at End of Period $353 $34 ======= ======= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $179 $166 ======= ======= Income taxes paid $98 $17 ======= ======= The accompanying notes to consolidated financial statements are an integral part of these statements. 10 CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES Set forth below is information concerning the consolidated results of operations for CSW for the three month and six month periods ending June 30, 1996. For information concerning the results of operations for each of the U.S. Electric Operating Companies, see the discussions under the heading RESULTS OF OPERATIONS following the financial statements of each of the U.S. Electric Operating Companies. For supplementary information concerning SEEBOARD's results of operations for these periods, see NOTE 10. SUPPLEMENTAL INFORMATION - SEEBOARD'S RECENT OPERATING RESULTS. RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 Overview. Net income for common stock increased to $128 million or $0.61 per share for the second quarter of 1996 compared to $103 million or $0.54 per share for the second quarter of 1995. Second quarter 1996 earnings increased when compared to the same period a year ago due to an after-tax gain of approximately $113 million from the sale of Transok, the addition of earnings from SEEBOARD and higher U.S. Electric KWH sales resulting from increased customer usage and weather-related demand. Factors that reduced the amount of increase in the second quarter of 1996 were one-time charges of approximately $102 million recorded for certain investments and contingencies, including after tax reserves of $84 million for the U.S. Electric Operating Companies and $14 million for CSW Energy, increased depreciation and amortization and the loss of Mirror CWIP earnings. Second quarter 1995 earnings were decreased by charges related to the termination of the proposed El Paso merger in June of 1995. In the second quarter of 1996, the U.S. Electric Operating Companies, the CSW U.K. Group and Transok contributed the following percentages to CSW's results of operations. Corporate U.S. CSW U.K. Total Items and Electric Group Electric Transok(1) Other Total Operating Revenues 68% 31% 99% --(2) 1% 100% Operating Income 76% 20% 96% --(2) 4% 100% After-tax one-time changes 86% -- 86% -- 14% 100% Net Income for CSW Common 13% 16% 29% 3%(3) 68%(4) 100% (1) On June 6, 1996, CSW sold Transok to Tejas. See NOTE 8. DISCONTINUED OPERATIONS and MD&A - CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING. (2) Transok's Operating Revenues and Operating Income are shown as Income from Discontinued Operations in CSW's Consolidated Statements of Income. (3) Net Income for CSW Common for the second quarter of 1996 includes earnings from Transok for April and May 1996 only. (4) Includes CSW's gain on the sale of Transok. Operating Revenues. Operating revenues increased 61% to $1,267 million in the second quarter of 1996 from $786 million in the second quarter of 1995. This increase reflects the addition of $394 million of SEEBOARD revenues and an $87 million increase in revenues for the U.S. Electric Operating 11 CSW RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 (continued) Companies over the second quarter of 1995. Total retail KWH sales for the U.S. Electric Operating Companies increased 8% in the second quarter of 1996 compared to the second quarter of 1995. Residential, commercial and industrial KWH sales increased 12%, 6% and 7%, respectively. Increased usage, primarily by residential customers, as well as more favorable weather contributed to KWH sales growth. U.S. Electric Fuel and Purchased Power. Fuel and purchased power expense increased 22% to $314 million in the second quarter of 1996 from $257 million in the second quarter of 1995. Fuel expense was higher at the U.S. Electric Operating Companies due primarily to an increase in the average unit cost of fuel to $1.86 per MMbtu in the second quarter of 1996 from $1.65 per MMbtu in the second quarter of 1995, reflecting higher natural gas prices. SEEBOARD Cost of Sales. SEEBOARD cost of sales was $287 million for the second quarter of 1996. CSW did not control SEEBOARD until December 1995. As a result, there is no amount shown for cost of sales in the second quarter of 1995. Other Operating. Other operating expense decreased 2% to $173 million during the second quarter of 1996 from $176 million during the second quarter of 1995. The second quarter 1996 amount reflected the addition of SEEBOARD's operating expenses and increased operating expenses at the U.S. Electric Operating Companies as well as CSW's non-regulated companies. However, the second quarter 1995 amount was unusually high because of a $42 million reserve for deferred merger and acquisition costs recorded in 1995 associated with the termination of the proposed El Paso merger. Maintenance. Maintenance increased $5 million or 13% to $44 million in the second quarter of 1996 from $39 million in the second quarter of 1995 due primarily to the U.S. Electric Operating Companies establishing reserves for the potential write-down of production inventories. Depreciation and Amortization. Depreciation and amortization increased 40% to $119 million in the second quarter of 1996 from $85 million in the second quarter of 1995 due primarily to the addition of SEEBOARD's depreciable fixed assets and the goodwill amortization related to the purchase of SEEBOARD, as well as increases in depreciable fixed assets at the U.S. Electric Operating Companies. Income Taxes. Income taxes increased $49 million to $70 million during the second quarter of 1996 when compared to the second quarter of 1995. For the second quarter 1995, income taxes were reduced by $23 million due to prior period adjustments. For the second quarter of 1996, SEEBOARD had $25 million in income taxes. Other Income and Deductions. Other income and deductions decreased $110 million when compared to the second quarter of 1995 due primarily to one-time charges associated with certain investments for plant sites, engineering studies and lignite reserves for the U.S. Electric Operating Companies and project development costs for CSW Energy. For additional information concerning the one-time charges for the U.S. Electric Operating Companies, see NOTE 9. UTILITY PLANT 12 CSW RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 (continued) DEVELOPMENT COSTS, and for CSW Energy, see NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. Also, the Mirror CWIP liability, which has been fully amortized, contributed $10 million in the second quarter of 1995. Interest on Long-Term Debt. Interest on long-term debt increased $28 million or 52% during the second quarter of 1996 as compared to the second quarter of 1995 due to higher levels of long-term debt outstanding related to the SEEBOARD acquisition. Discontinued Operations. Transok's results are shown separately in Discontinued Operations. Transok's earnings for the second quarter of 1996 were $4 million and were unchanged from the second quarter of 1995. Since Transok was sold on June 6, 1996, CSW's results for the second quarter of 1996 do not reflect a full quarter of earnings from Transok. See NOTE 8. DISCONTINUED OPERATIONS and MD&A - CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING for information, including comparative statements of income, related to the sale of Transok. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Overview. Net income for common stock for the six months ended June 30, 1996 increased to $180 million from $141 million in the first half of 1995 due primarily to the gain from the sale of Transok, the additional earnings from SEEBOARD, the absence of charges in 1996 related to the termination of the proposed El Paso merger in June 1995 and the CPL 1995 Agreement and stronger KWH sales from increased usage and weather related-demand. Factors that reduced the amount of increase in earnings for the six months ended June 30, 1996 were the recording of one-time charges associated with certain investments and contingencies, the absence of tax adjustments made in 1995 and the CPL 1996 Fuel Agreement. Increased depreciation and amortization and the loss of Mirror CWIP earnings also resulted in lower earnings for the six months ended June 30, 1996. In the first half of 1996, the U.S. Electric Operating Companies, the CSW U.K. Group and Transok contributed the following percentages to CSW's results of operations. Corporate U.S. CSW U.K. Total Items and Electric Group Electric Transok(1) Other Total Operating Revenues 61% 38% 99% --(2) 1% 100% Operating Income 73% 24% 97% --(2) 3% 100% After-tax one-time changes 86% -- 86% -- 14% 100% Net Income for CSW Common 28% 23% 51% 7%(3) 42%(4) 100% (1) On June 6, 1996, CSW sold Transok to Tejas. See NOTE 8. DISCONTINUED OPERATIONS and MD&A - CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING. (2) Transok's Operating Revenues and Operating Income are shown as Income from Discontinued Operations in CSW's Consolidated Statement of Income. (3) Net Income for CSW Common for the six months ended June 30, 1996 includes earnings from Transok for January through May 1996 only. (4) Includes CSW's gain on the sale of Transok. 13 CSW RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) Operating Revenues. Operating revenues increased 90% to $2.5 billion in the first six months of 1996 from $1.3 billion in the first six months of 1995. This increase reflects $931 million of SEEBOARD revenues and increased revenues for the U.S. Electric Operating Companies for the first half of 1996. Total retail KWH sales for the U.S. Electric Operating Companies increased 7% in the first half of 1996 compared to the first half of 1995. Residential, commercial and industrial KWH sales increased 12%, 6% and 5%, respectively. Increased usage, primarily by residential customers, as well as more favorable weather contributed to KWH sales growth. Fuel and Purchased Power. Fuel and purchased power expense increased 17% to $578 million in the first six months of 1996 from $493 million in the first six months of 1995. Fuel expense was higher at the U.S. Electric Operating Companies due primarily to an increase in the average unit cost of fuel to $1.82 per MMbtu in the first six months of 1996 from $1.63 per MMbtu in the first six months of 1995, reflecting higher natural gas prices. SEEBOARD Cost of Sales. SEEBOARD cost of sales was $687 million for the first six months of 1996. CSW did not control SEEBOARD until December 1995. As a result, there is no amount shown for cost of sales for the first six months of 1995. Other Operating. Other operating expense increased 33% to $362 million during the first six months of 1996 from $272 million during the first six months of 1995. This increase was due primarily to the addition in 1996 of SEEBOARD's operating expenses as well as the recognition in the first quarter of 1995 of a $23 million regulatory asset established in accordance with the CPL 1995 Agreement and the reversal of $4 million in rate case costs pursuant to the CPL 1995 Agreement. In addition, other operating expenses increased in the first six months of 1996 at the U.S. Electric Operating Companies and at CSW's non-regulated companies. Operating expenses for the first six months of 1995 were unusually high because of a $42 million reserve for deferred merger and acquisition costs recorded in 1995 from the termination of the proposed El Paso merger. Depreciation and Amortization. Depreciation and amortization increased 38% to $234 million in the first six months of 1996 from $169 million in the first six months of 1995 due primarily to the addition of SEEBOARD's depreciable fixed assets and the goodwill amortization related to the purchase of SEEBOARD, as well as increases in depreciable fixed assets at the U.S. Electric Operating Companies. Taxes, Other Than Income. Taxes, other than income increased 16% to $89 million in the first half of 1996 from $77 million in the first half of 1995. The increase was due primarily to lower 1995 ad valorem taxes and revisions of prior year estimates recorded in 1995. Income Taxes. Income taxes increased $121 million to $98 million during the first six months of 1996 when compared to the first six months of 1995. For the first six months of 1995, income taxes were reduced by $58 million due to prior period adjustments. A major portion of the 1995 adjustments was due to a $34 million reduction in deferred taxes as a result of the CPL 1995 Agreement. For the first six months of 1996, SEEBOARD had $32 million in income taxes. 14 CSW RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) Other Income and Deductions. Other income and deductions decreased $133 million in the first six months of 1996 when compared to the first six months of 1995 due primarily to one-time charges associated with certain investments for plant sites, engineering studies and lignite reserves for the U.S. Electric Companies and project development costs for CSW Energy. For additional information concerning the one-time charges for the U.S. Electric Operating Companies, see NOTE 9. UTILITY PLANT DEVELOPMENT COSTS, and for CSW Energy, NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. Also, the Mirror CWIP liability, which has been fully amortized, contributed $20 million in the first six months of 1995. Interest on Long-Term Debt. Interest on long-term debt increased $54 million or 51% during the first half of 1996 as compared to the first half of 1995 due to higher levels of long-term debt outstanding related to the SEEBOARD acquisition. Discontinued Operations. The results of Transok are shown separately in discontinued operations. Transok's earnings for the first five months of 1996 were $12 million compared to $9 million for the six months ended June 30, 1995. Since Transok was sold on June 6, 1996, CSW's results for the six months ended June 30, 1996 do not reflect a full six months of earnings from Transok. See NOTE 8. DISCONTINUED OPERATIONS and MD&A - CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING for information, including comparative statements of income, related to the sale of Transok. 15 CPL CENTRAL POWER AND LIGHT COMPANY PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 16 CENTRAL POWER AND LIGHT COMPANY STATEMENTS OF INCOME (unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- (thousands) (thousands) Electric Operating Revenues $ 362,065 $ 324,525 $ 615,453 $ 451,807 -------- -------- -------- -------- Operating Expenses and Taxes Fuel 90,478 76,000 154,495 136,064 Purchased power 16,865 3,956 29,300 7,027 Other operating 59,242 57,455 109,762 80,989 Maintenance 18,766 14,697 29,110 31,902 Depreciation and amortization 42,542 37,372 82,137 74,372 Taxes, other than income 20,987 20,522 39,341 29,997 Income taxes 33,033 18,005 43,031 (35,618) -------- -------- -------- -------- 281,913 228,007 487,176 324,733 -------- -------- -------- -------- Operating Income 80,152 96,518 128,277 127,074 -------- -------- -------- -------- Other Income and Deductions Mirror CWIP liability amortization -- 10,250 -- 20,500 Utility plant development costs, net of tax (15,481) -- (15,481) -- Other 1,462 2,363 3,210 10,459 -------- -------- -------- -------- (14,019) 12,613 (12,271) 30,959 -------- -------- -------- -------- Income Before Interest Charges 66,133 109,131 116,006 158,033 -------- -------- -------- -------- Interest Charges Interest on long-term debt 27,396 28,534 54,665 57,094 Interest on short-term debt and other 4,467 6,050 11,130 11,349 Allowance for borrowed funds used during construction (537) (1,097) (1,216) (2,416) -------- -------- -------- -------- 31,326 33,487 64,579 66,027 -------- -------- -------- -------- Net Income 34,807 75,644 51,427 92,006 Preferred stock dividends 3,360 3,468 6,797 7,364 -------- -------- -------- -------- Net Income for Common Stock $31,447 $72,176 $44,630 $84,642 ======== ======== ======== ======== The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 17 CENTRAL POWER AND LIGHT COMPANY BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ---------- ---------- ASSETS (thousands) Electric Utility Plant Production $3,103,218 $3,110,744 Transmission 496,504 486,090 Distribution 920,494 879,618 General 261,419 248,629 Construction work in progress 78,160 127,307 Nuclear fuel 173,153 165,087 ---------- ---------- 5,032,948 5,017,475 Less - Accumulated depreciation and amortization 1,629,841 1,547,530 ---------- ---------- 3,403,107 3,469,945 ---------- ---------- Current Assets Cash 2,609 2,883 Accounts receivable 53,222 45,186 Under-recovered fuel costs 4,423 -- Materials and supplies, at average cost 74,721 71,112 Fuel inventory, at average cost 19,456 26,472 Accumulated deferred income taxes 18,604 22,171 Prepayments and other 7,093 2,536 ---------- ---------- 180,128 170,360 ---------- ---------- Deferred Charges and Other Assets Deferred STP costs 485,132 488,047 Mirror CWIP asset 305,469 311,804 Income tax related regulatory assets, net 342,014 346,993 Other 120,371 93,987 ---------- ---------- 1,252,986 1,240,831 ---------- ---------- $4,836,221 $4,881,136 ========== ========== The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 18 CENTRAL POWER AND LIGHT COMPANY BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ---------- ---------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $25 par value Authorized shares: 12,000,000 Issued and outstanding shares: 6,755,535 $168,888 $168,888 Paid-in capital 405,000 405,000 Retained earnings 858,074 863,444 ---------- ---------- 1,431,962 1,437,332 Preferred stock 250,351 250,351 Long-term debt 1,521,481 1,517,347 ---------- ---------- 3,203,794 3,205,030 ---------- ---------- Current Liabilities Long-term debt due within twelve months -- 231 Advances from affiliates 90,007 176,334 Accounts payable 75,449 49,507 Accrued taxes 69,634 61,614 Accrued interest 32,377 32,742 Over-recovered fuel costs -- 12,586 Refund due customers 22,977 -- Other 26,720 24,758 ---------- ---------- 317,164 357,772 ---------- ---------- Deferred Credits Accumulated deferred income taxes 1,150,153 1,151,823 Investment tax credits 149,849 152,744 Mirror CWIP liability and other 15,261 13,767 ---------- ---------- 1,315,263 1,318,334 ---------- ---------- $4,836,221 $4,881,136 ========== ========== The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 19 CENTRAL POWER AND LIGHT COMPANY STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30, ------------------------ 1996 1995 ---------- ---------- OPERATING ACTIVITIES (thousands) Net Income $51,427 $92,006 Non-cash Items Included in Net Income Depreciation and amortization 93,333 86,648 Deferred income taxes and investment tax credits 3,981 (48,553) Mirror CWIP liability amortization -- (20,500) Establishment of regulatory assets 6,682 (20,652) Utility plant development costs 21,374 -- Inventory reserve 487 -- Changes in Assets and Liabilities Accounts receivable (8,036) (18,737) Fuel inventory 7,016 (673) Accounts payable 25,852 (26,091) Accrued taxes 8,020 (9,021) Over- and under-recovered fuel costs (17,009) 87,571 Refund due customers 22,977 52,237 Other (26,597) (21,268) ---------- ---------- 189,507 152,967 ---------- ---------- INVESTING ACTIVITIES Construction expenditures (45,845) (65,087) Allowance for borrowed funds used during construction (1,216) (2,416) Other 872 -- ---------- ---------- (46,189) (67,503) ---------- ---------- FINANCING ACTIVITIES Reacquisition of long-term debt (231) (745) Change in advances from affiliates (86,327) (16,191) Payment of dividends (56,925) (67,147) Other (109) -- ---------- ---------- (143,592) (84,083) ---------- ---------- Net Change in Cash and Cash Equivalents (274) 1,381 Cash and Cash Equivalents at Beginning of Period 2,883 642 ========== ========== Cash and Cash Equivalents at End of Period $2,609 $2,023 ========== ========== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $60,137 $64,250 ========== ========== Income taxes paid $12,753 $1,502 ========== ========== The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 20 CENTRAL POWER AND LIGHT COMPANY RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. Net income for common stock decreased 56% to $31.4 million during the second quarter of 1996 from $72.2 million in the second quarter of 1995. The decrease resulted primarily from the expiration of Mirror CWIP liability amortization and a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves. Also, increases in maintenance, depreciation and amortization and income taxes partially offset by an increase in non-fuel revenues contributed to the lower net income for common stock. Electric Operating Revenues. Total revenues increased 12% to $362.1 million during the second quarter of 1996 from $324.5 million during the second quarter of 1995 due primarily to an increase in fuel revenues of $25.9 million resulting from higher average unit fuel costs and purchased power as discussed below. Also contributing to the higher revenues was an $11.7 million increase in non-fuel revenues due primarily to the implementation of bonded rates and a 7% increase in KWH sales resulting primarily from residential and commercial customer growth, as well as increased customer demand. Fuel. Fuel expense increased 19% to $90.5 million during the second quarter of 1996 from $76.0 million during the second quarter of 1995 due primarily to an increase in the average unit cost of fuel from $1.38 per MMbtu in the second quarter of 1995 to $1.83 per MMbtu in 1996. The cost of fuel reflects an increase in the spot market price of natural gas partially offset by a decrease in the cost of coal. Fuel expense was also affected by a 3% decrease in generation. Purchased Power. Purchased power increased $12.9 million in the second quarter of 1996 when compared to the second quarter of 1995 due primarily to increased economy energy purchases. Other Operating. Other operating expenses increased $1.8 million or 3% during the second quarter of 1996 when compared to the second quarter of 1995. This increase was due primarily to additional regulatory-related and insurance expenses. Maintenance. Maintenance expense increased $4.1 million or 28% during the second quarter of 1996 when compared to the second quarter of 1995 due primarily to increases in nuclear maintenance partially offset by lower distribution maintenance expenses. Nuclear maintenance was higher in 1996 primarily due to a refueling outage at STP Unit 1. Depreciation and Amortization. Depreciation and amortization expense increased $5.2 million or 14% during the second quarter of 1996 when compared to the second quarter of 1995 as a result of an increase in depreciable property and the accelerated amortization of STP deferred costs. Income Taxes. Income taxes increased $15.0 million in the second quarter of 1996 when compared to the second quarter of 1995 due primarily to prior year tax adjustments recorded in 1995 offset by lower 1996 pre-tax income, excluding the effects of a one-time charge, as discussed below. 21 CPL RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 (continued) Other Income and Deductions. Other income and deductions decreased $26.6 million in the second quarter of 1996 when compared to the second quarter of 1995 due primarily to a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $15.5 million, net of tax. Also, Mirror CWIP liability amortization which expired in 1995, contributed $10.3 million to other income and deductions in the second quarter of 1995. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. Interest Charges. Interest charges decreased $2.2 million during the second quarter of 1996 when compared to 1995. Interest on long- term debt decreased as a result of refinancing activities in the second half of 1995. Interest on short-term debt declined primarily due to a lower level of debt outstanding at lower interest rates. Also contributing to this decline was lower interest expense associated with over-recovered fuel revenue, partially offset by a decrease in allowance for borrowed funds used during construction. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. Net income for common stock decreased 47% to $44.6 million during the first six months of 1996 from $84.6 million in the first six months of 1995. Major factors that affected net income for common stock were the effects of the settlement of certain regulatory issues, as shown in the table below. Also, contributing to the decrease was the expiration of Mirror CWIP liability amortization and a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves. Pre-tax After-tax --------- ----------- (millions) CPL 1996 FUEL AGREEMENT Provision for refund $(14.4) $(9.4) Reduction of fuel expense 9.6 6.2 Increased interest expense (1.1) (0.7) Litigation and settlement expense (0.8) (0.5) CPL 1995 AGREEMENT Provision for refund $(112.3) $(73.0) Current flowback of excess deferred federal income tax 34.3 34.3 Capitalization of previously expensed restructuring and rate case costs 26.1 17.0 Recognition of factoring income 12.4 8.1 Electric Operating Revenues. Total revenues increased $163.6 million or 36% during the first six months of 1996 when compared to the first six months of 1995 due primarily to the net effect of the provisions for rate refunds, as reflected in the above tables. Also, fuel revenue increased $47.9 million 22 CPL RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) as a result of higher average unit fuel costs and purchased power as discussed below. Non-fuel revenues increased $17.8 million due primarily to the implementation of bonded rates, increased customer demand and a 9% increase in KWH sales resulting primarily from increased weather-related demand and residential and commercial customer growth. Fuel. Fuel expense increased $18.4 million or 14% during the first six months of 1996 when compared to the first six months of 1995 due primarily to an increase in the average unit cost of fuel from $1.38 per MMbtu in the first half of 1995 to $1.62 per MMbtu for the same period in 1996. The cost of fuel reflects an increase in the spot market price of natural gas partially offset by a decrease in the cost of coal and a one-time $9.6 million reduction in fuel expense as a result of the CPL 1996 Fuel Agreement. Purchased Power. Purchased power increased $22.3 million during the first six months 1996 when compared to the first six months of 1995 primarily as a result of increased economy energy and cogeneration purchases. Other Operating. Other operating expenses increased $28.8 million or 36% during the first six months of 1996 when compared to the first six months of 1995. This increase was due primarily to the 1995 recognition of a $20.7 million regulatory asset for previously recorded restructuring charges and the reversal of $6.5 million in rate case costs pursuant to the CPL 1995 Agreement. Maintenance. Maintenance expense decreased $2.8 million or 9% during the first six months of 1996 when compared to the first six months of 1995 due primarily to lower production and distribution expenses. Production maintenance declined primarily as a result of lower steam maintenance due primarily to fewer scheduled repair projects in the first half of 1996 when compared to 1995. Depreciation and Amortization. Depreciation and amortization expense increased $7.8 million or 10% in the first six months of 1996 primarily as a result of an increase in depreciable property and Mirror CWIP asset amortization as well as the accelerated amortization of deferred STP costs. Taxes, Other Than Income. The $9.3 million increase in other taxes during the first six months of 1996 when compared to the first six months of 1995 was due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates. Income Taxes. Income taxes increased $78.6 million in the first six months of 1996 when compared to the first six months of 1995 due primarily to the accelerated flowback of $34.3 million of unprotected excess deferred income taxes in 1995 in accordance with the CPL 1995 Agreement, prior year tax adjustments, as well as higher 1996 pre-tax income, excluding the effects of a one-time charge, as discussed below. Other Income and Deductions. Other income and deductions decreased $43.2 million in the first six months of 1996 when compared to 1995. Mirror CWIP liability amortization, which expired in 1995, contributed $20.5 million to other income and deductions in the first six months of 1995. Also, a one-time 23 CPL RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $15.5 million, net of tax, contributed to this decline. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. Other income decreased in the first half of 1996 due primarily to the recognition of $12.4 million of factoring income pursuant to the CPL 1995 Agreement. 24 PSO PUBLIC SERVICE COMPANY OF OKLAHOMA PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 25 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- (thousands) (thousands) Electric Operating Revenues $ 181,586 $ 161,644 $ 329,006 $ 310,060 -------- -------- -------- -------- Operating Expenses and Taxes Fuel 68,695 62,989 131,244 133,462 Purchased power 9,776 5,651 18,439 10,394 Other operating 29,442 28,115 57,522 58,006 Maintenance 11,512 8,749 17,710 15,062 Depreciation and amortization 19,400 16,580 38,431 33,065 Taxes, other than income 6,633 6,035 13,409 12,252 Income taxes 9,778 5,155 11,896 6,601 -------- -------- -------- -------- 155,236 133,274 288,651 268,842 -------- -------- -------- -------- Operating Income 26,350 28,370 40,355 41,218 -------- -------- -------- -------- Other Income and Deductions Utility plant development costs, net of tax (35,552) -- (35,552) -- Other (43) 587 199 3,755 -------- -------- -------- -------- (35,595) 587 (35,353) 3,755 -------- -------- -------- -------- Income Before Interest Charges (9,245) 28,957 5,002 44,973 -------- -------- -------- -------- Interest Charges Interest on long-term debt 7,677 7,398 15,116 14,797 Interest on short-term debt and other 1,633 1,770 3,322 3,537 Allowance for borrowed funds used during construction (340) (723) (699) (1,322) -------- -------- -------- -------- 8,970 8,445 17,739 17,012 -------- -------- -------- -------- Net Income (Loss) (18,215) 20,512 (12,737) 27,961 Preferred stock dividends 204 204 408 408 -------- -------- -------- -------- Net Income (Loss) for Common Stock $(18,419) $20,308 $(13,145) $27,553 ======== ======== ======== ======== The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 26 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ---------- ---------- ASSETS (thousands) Electric Utility Plant Production $901,447 $939,106 Transmission 369,793 363,692 Distribution 750,367 712,483 General 187,746 182,705 Construction work in progress 44,869 56,576 ---------- ---------- 2,254,222 2,254,562 Less - Accumulated depreciation and amortization 960,900 924,186 ---------- ---------- 1,293,322 1,330,376 ---------- ---------- Current Assets Cash 1,003 744 Accounts receivable 27,200 17,957 Materials and supplies, at average cost 35,547 41,179 Fuel inventory, at LIFO cost 16,363 15,765 Accumulated deferred income taxes 2,116 10,389 Prepayments and other 3,152 2,450 ---------- ---------- 85,381 88,484 ---------- ---------- Deferred Charges and Other Assets 53,903 61,956 ---------- ---------- $1,432,606 $1,480,816 ========== ========== The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 27 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ---------- ----------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $15 par value Authorized shares 11,000,000; issued 10,482,000 shares and outstanding 9,013,000 shares $157,230 $157,230 Paid-in capital 180,000 180,000 Retained earnings 130,136 150,281 ---------- ---------- 467,366 487,511 Preferred stock 19,826 19,826 Long-term debt 419,998 379,250 ---------- ---------- 907,190 886,587 ---------- ---------- Current Liabilities Long-term debt due within twelve months -- 25,000 Advances from affiliates 67,383 70,510 Payables to affiliates 30,198 40,463 Accounts payable 39,703 23,094 Payables to customers 14,296 32,517 Accrued taxes 13,680 27,014 Accrued interest 9,041 9,025 Other 8,097 8,589 ---------- ---------- 182,398 236,212 ---------- ---------- Deferred Credits Accumulated deferred income taxes 243,987 264,353 Investment tax credits 44,830 46,222 Income tax related regulatory liabilities, net 46,871 41,820 Other 7,330 5,622 ---------- ---------- 343,018 358,017 ---------- ---------- $1,432,606 $1,480,816 ========== ========== The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 28 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30, ------------------------ 1996 1995 ---------- ---------- OPERATING ACTIVITIES (thousands) Net Income $(12,737) $27,961 Non-cash Items Included in Net Income Depreciation and amortization 41,419 35,903 Deferred income taxes and investment tax credits (8,434) (5,972) Allowance for equity funds used during construction 23 (539) Utility plant development costs 50,854 -- Inventory reserve 3,945 -- Changes in Assets and Liabilities Accounts receivable (9,243) (1,149) Accounts payable (10,498) 1,282 Accrued taxes (13,334) 1,104 Other (3,299) 4,294 ---------- ---------- 38,696 62,884 ---------- ---------- INVESTING ACTIVITIES Construction expenditures (39,166) (48,672) Allowance for borrowed funds used during construction (699) (1,322) Other (2,429) (3,281) ---------- ---------- (42,294) (53,275) ---------- ---------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 39,415 -- Retirement of long-term debt (25,000) -- Change in advances from affiliates (3,127) (2,725) Payment of dividends (7,431) (10,407) ---------- ---------- 3,857 (13,132) ---------- ---------- Net Change in Cash and Cash Equivalents 259 (3,523) Cash and Cash Equivalents at Beginning of Period 744 5,453 ========== ========== Cash and Cash Equivalents at End of Period $1,003 $1,930 ========== ========== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $16,493 $19,509 ========== ========== Income taxes paid $16,867 $5,908 ========== ========== The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 29 PUBLIC SERVICE COMPANY OF OKLAHOMA RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. During the second quarter of 1996, net income for common stock decreased from $20.3 million during the second quarter of 1995 to a net loss of $18.4 million. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $35.6 million, net of tax, and increased depreciation and amortization expenses and increased maintenance expenses, offset in part by increased non-fuel revenue resulting from increased weather- related KWH sales and prior year tax adjustments recorded in 1995. Electric Operating Revenues. Electric operating revenues increased 12% to $181.6 million during the second quarter of 1996 from $161.6 million during the second quarter of 1995. The increase was due primarily to increased fuel revenues as discussed below and a 13% increase in retail KWH sales resulting from additional weather-related demand from customers, as well as customer growth. Fuel. Fuel expense was $68.7 million during the second quarter of 1996, a 9% increase from $63.0 million in the second quarter of 1995. The increase was due primarily to an increase in the average unit fuel cost from $1.86 per MMbtu in the second quarter of 1995 to $2.03 per MMbtu in the second quarter of 1996 resulting from an increase in the spot market price of natural gas. Offsetting this increase was an increase in the under-recovery of fuel costs in the second quarter of 1996 when compared to the same period of 1995 as well as decreased KWH generation. Purchased Power. Purchased power expenses increased approximately 73% to $9.8 million for the second quarter of 1996 from $5.7 million in the same period of 1995. The increase was due primarily to increases in purchases of economy energy. Maintenance. Maintenance expenses increased 32% to $11.5 million during the second quarter of 1996 from $8.7 million in the second quarter of 1995. The increase was due primarily to a $3.9 million reserve in 1996 for the potential write down of production inventory offset in part by decreased overhead lines maintenance activities and decreased tree trimming maintenance activities. Depreciation and Amortization. Depreciation and amortization expense increased 17% to $19.4 million in the second quarter of 1996 from $16.6 million in the second quarter of 1995. The increase was due to increases in depreciable property and completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. Income Taxes. Income tax expense for the second quarter of 1996 increased $4.6 million from $5.2 million in 1995 to $9.8 million in 1996 primarily due to higher pre-tax income, excluding the effects of a one-time charge, as discussed below, offset in part by prior year tax adjustments recorded in 1995. 30 PSO RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 (continued) Other Income and Deductions. Other income and deductions for the second quarter of 1996 decreased approximately $36.2 million when compared to the second quarter of 1995 as a result of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $35.6 million, net of tax. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. For the six months ended June 30, 1996, net income for common stock decreased to a net loss of $13.2 million from net income of $27.6 million for the six months ended June 30, 1995. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $35.6 million, net of tax, offset in part by increased non-fuel revenue resulting from increased weather-related demand and prior year tax adjustments recorded in 1995. Electric Operating Revenues. Electric operating revenues increased 6% to $329.0 million for the six months ended June 30, 1996 from $310.1 million for the first six months of 1995. The increase was due primarily to increased fuel revenues, as discussed below, and a 9% increase in retail KWH sales resulting from additional weather-related demand from customers, as well as customer growth. Fuel. Fuel expense was $131.2 million for the first six months of 1996, a 2% decrease from $133.5 million for the same period of 1995. The decrease was due primarily to an under-recovery of fuel costs in the first six months of 1996 compared to an over-recovery of fuel costs in the first six months of 1995, as well as decreased KWH generation. Offsetting these factors in part was an increase in average unit fuel costs from $1.79 per MMbtu in the first six months of 1995 to $2.04 per MMbtu in the first six months of 1996 due to an increase in the spot market price of natural gas. Purchased Power. Purchased power increased approximately 77% to $18.4 million for the first six months of 1996 from $10.4 million during the first six months of 1995. The increase was due primarily to increases in purchases of economy energy. Maintenance. Maintenance expenses increased 18% to $17.7 million for the six months ended June 30, 1996 from $15.1 million for the same period of 1995. The increase was due primarily to a $3.9 million reserve for the potential write-down of production inventory in 1996 offset in part by decreased power plant maintenance activities and decreased distribution maintenance activities. Depreciation and Amortization. Depreciation and amortization expense increased 16% to $38.4 million for the six month period ended June 30, 1996 from $33.1 million in the same period of 1995. The increase was due to increases in depreciable property and completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. 31 PSO RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) Income Taxes. Income tax expense for the first six months of 1996, which increased $5.3 million from $6.6 million in 1995 to $11.9 million in 1996, was affected by higher pre-tax income, excluding the effects of a one-time charge, as discussed below, offset in part by prior year tax adjustments recorded in 1995. Other Income and Deductions. Other income and deductions for the six months ended June 30, 1996 decreased approximately $39 million when compared to the same period of 1995 as a result of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $35.6 million, net of tax. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. Other income and deductions were also affected by the $2.7 million gain on the sale of non-utility fiber optic telecommunication property in the first quarter of 1995. 32 SWEPCO SOUTHWESTERN ELECTRIC POWER COMPANY PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 33 SOUTHWESTERN ELECTRIC POWER COMPANY STATEMENTS OF INCOME (unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- (thousands) (thousands) Electric Operating Revenues $236,563 $212,960 $437,444 $382,200 -------- -------- -------- -------- Operating Expenses and Taxes Fuel 95,606 78,652 184,918 141,844 Purchased power 10,764 4,269 16,098 9,732 Other operating 31,579 29,357 63,473 57,949 Maintenance 11,932 11,471 21,038 20,816 Depreciation and amortization 22,698 20,359 44,939 40,643 Taxes, other than income 11,501 11,410 23,412 21,976 Income taxes 12,462 8,564 17,196 13,775 -------- -------- -------- -------- 196,542 164,082 371,074 306,735 -------- -------- -------- -------- Operating Income 40,021 48,878 66,370 75,465 -------- -------- -------- -------- Other Income and Deductions Utility plant development costs, net of tax (21,743) -- (21,743) -- Allowance for equity funds used during construction 2 656 326 2,105 Other 163 1,042 925 1,452 -------- -------- -------- -------- (21,578) 1,698 (20,492) 3,557 -------- -------- -------- -------- Income Before Interest Charges 18,443 50,576 45,878 79,022 -------- -------- -------- -------- Interest Charges Interest on long-term debt 10,995 11,117 21,995 22,437 Interest on short-term debt and other 2,534 2,835 4,957 5,684 Allowance for borrowed funds used during construction (471) (1,446) (1,226) (2,694) -------- -------- -------- -------- 13,058 12,506 25,726 25,427 -------- -------- -------- -------- Net Income 5,385 38,070 20,152 53,595 Preferred stock dividends 758 840 1,537 1,618 -------- -------- -------- -------- Net Income for Common Stock $4,627 $37,230 $18,615 $51,977 ======== ======== ======== ======== The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 34 SOUTHWESTERN ELECTRIC POWER COMPANY BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ----------- ------------ ASSETS (thousands) Electric Utility Plant Production $1,391,878 $1,410,546 Transmission 445,873 435,362 Distribution 825,916 789,884 General 285,282 231,276 Construction work in progress 51,179 128,963 ---------- ---------- 3,000,128 2,996,031 Less - Accumulated depreciation and amortization 1,161,346 1,116,375 ---------- ---------- 1,838,782 1,879,656 ---------- ---------- Current Assets Cash 1,666 1,702 Accounts receivable 74,245 54,628 Materials and supplies, at average cost 27,333 30,097 Fuel inventory, substantially at average cost 78,657 73,276 Accumulated deferred income taxes -- 4,636 Under-recovered fuel costs 9,473 -- Prepayments and other 15,286 14,109 ---------- ---------- 206,660 178,448 ---------- ---------- Deferred Charges and Other Assets 69,387 58,615 ---------- ---------- $2,114,829 $2,116,719 ========== ========== The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 35 SOUTHWESTERN ELECTRIC POWER COMPANY BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ----------- ------------ CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $18 par value Authorized shares: 7,600,000 Issued and outstanding shares: 7,536,640 $135,660 $135,660 Paid-in capital 245,000 245,000 Retained earnings 310,948 302,334 ---------- ---------- 691,608 682,994 Preferred stock Not subject to mandatory redemption 16,032 16,032 Subject to mandatory redemption 32,428 33,628 Long-term debt 599,164 598,951 ---------- ---------- 1,339,232 1,331,605 ---------- ---------- Current Liabilities Long-term debt and preferred stock due within twelve months 4,639 5,099 Advances from affiliates 86,656 101,228 Accounts payable 49,944 34,717 Payables to affiliates 67,246 52,474 Over-recovered fuel costs -- 8,923 Customer deposits 10,889 11,027 Accrued taxes 27,350 25,268 Accumulated deferred income taxes 1,808 -- Accrued interest 16,842 17,894 Other 19,098 30,525 ---------- ---------- 284,472 287,155 ---------- ---------- Deferred Credits Accumulated deferred income taxes 369,111 377,245 Investment tax credits 73,872 76,237 Income tax related regulatory liabilities, net 38,892 37,363 Other 9,250 7,114 ---------- ---------- 491,125 497,959 ---------- ---------- $2,114,829 $2,116,719 ========== ========== The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 36 SOUTHWESTERN ELECTRIC POWER COMPANY STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30, ------------------------ 1996 1995 ---------- ---------- OPERATING ACTIVITIES (thousands) Net Income $20,152 $53,595 Non-cash Items Included in Net Income Depreciation and amortization 50,074 45,676 Deferred income taxes and investment tax credits (2,526) (4,354) Allowance for equity funds used during construction (326) (2,105) Utility plant development costs 29,590 -- Inventory reserve 1,130 -- Changes in Assets and Liabilities Accounts receivable (19,617) 6,889 Payables to affiliates 14,772 11,775 Fuel inventory (5,381) (11,488) Accounts payable 15,407 4,761 Accrued taxes 2,082 17,955 Accrued interest (1,052) (7,205) Unrecovered fuel/Fuel refund due customers (18,396) (2,449) Other (8,778) (10,830) ---------- ---------- 77,131 102,220 ---------- ---------- INVESTING ACTIVITIES Construction expenditures (44,663) (52,465) Allowance for borrowed funds used during construction (1,226) (2,694) Other (2,833) (3,370) ---------- ---------- (48,722) (58,529) ---------- ---------- FINANCING ACTIVITIES Retirement of long-term debt (1,839) (1,692) Redemption of preferred stock (1,200) (50) Change in advances from affiliates (14,572) (16,454) Payment of dividends (10,834) (24,412) ---------- ---------- (28,445) (42,608) ---------- ---------- Net Change in Cash and Cash Equivalents (36) 1,083 Cash and Cash Equivalents at Beginning of Period 1,702 1,296 ========== ========== Cash and Cash Equivalents at End of Period $1,666 $2,379 ========== ========== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $25,610 $30,964 ========== ========== Income taxes paid $13,950 $2,581 ========== ========== The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 37 SOUTHWESTERN ELECTRIC POWER COMPANY RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. Net income for common stock decreased 88% to $4.6 million during the second quarter of 1996 from $37.2 million during the second quarter of 1995. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $21.7 million, net of tax. Increased other operating expenses, increased depreciation and amortization and prior year tax adjustments recorded in 1995 also contributed to the decrease in net income for common stock. Electric Operating Revenues. Electric operating revenues increased $23.6 million to $236.6 million during the second quarter of 1996 from $213 million during the second quarter of 1995 due primarily to a $16.7 million increase in fuel revenue and a $6.9 million increase in non-fuel revenue. The increase in fuel revenue was due to higher average unit fuel cost as discussed below. The increase in non- fuel revenue is attributable to a 7% increase in retail KWH sales resulting from weather-related demand and higher customer demand. Fuel. Fuel expense increased 22% to $95.6 million during the second quarter of 1996 when compared to the second quarter of 1995 due primarily to a 10% increase in generation and an increase in the average unit fuel cost from $1.71 per MMbtu in 1995 to $1.86 per MMbtu in 1996. The increase in average unit fuel cost was due primarily to an increase in the spot market price of natural gas. Purchased Power. Purchased power expense increased $6.5 million during the second quarter of 1996 when compared to the second quarter of 1995 due primarily to an increase in economy energy purchases. Other Operating. Other operating expenses increased $2.2 million, or 8%, during the second quarter of 1996 when compared to the second quarter of 1995 due primarily to increases in employee-related expenses and insurance expense partially offset by a decrease in miscellaneous administrative and general expenses. Depreciation and Amortization. Depreciation and amortization increased approximately $2.3 million, or 11%, during the second quarter of 1996 as compared to the second quarter of 1995 due primarily to an increase in depreciable plant and the completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. Income Taxes. Income taxes increased $3.9 million, or 46%, to $12.5 million during the second quarter of 1996 as compared to the second quarter of 1995 due primarily to higher pre-tax income, excluding the effects of a one-time charge, as discussed below, and prior year tax adjustments recorded in 1995. 38 SWEPCO RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 Other Income and Deductions. Other income and deductions decreased $23.3 million in the second quarter of 1996 as compared with the second quarter of 1995 due primarily to a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $21.7 million, net of tax. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. Net income for common stock decreased 64% to $18.6 million during the six months ended June 30, 1996 from $52.0 million during the six months ended June 30, 1995. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $21.7 million, net of tax. Increased other operating expenses, increased depreciation and amortization, and prior year tax adjustments recorded in 1995 also contributed to the decrease in net income for common stock. Electric Operating Revenues. Electric operating revenues increased $55.2 million to $437.4 million during the first six months of 1996 from $382.2 million during the first six months of 1995 due primarily to a $39.1 million increase in fuel revenue and a $16.1 million increase in non-fuel revenue. The increase in fuel revenue was due to higher average unit fuel cost as discussed below. The increase in non-fuel revenue is attributable to a 7% increase in retail KWH sales resulting from weather-related demand and increased customer demand. Fuel. Fuel expense increased 30% to $184.9 million during the first six months of 1996 when compared to the first six months of 1995 due primarily to a 17% increase in generation and an increase in the average unit fuel cost from $1.65 per MMbtu in 1995 to $1.85 per MMbtu in 1996. The increase in average unit fuel cost was due primarily to an increase in the spot market price of natural gas. Purchased Power. Purchased power expense increased $6.4 million, or 65%, during the first six months of 1996 when compared to the first six months of 1995 due primarily to an increase in economy energy purchases. Other Operating. Other operating expenses increased $5.5 million, or 10%, during the first six months of 1996 when compared to the first six months of 1995 due primarily to increases in employee- related expenses, outside services and insurance expense partially offset by a decrease in miscellaneous administrative and general expenses. Depreciation and Amortization. Depreciation and amortization increased approximately $4.3 million, or 11%, during the first six months of 1996 as compared to the first six months of 1995 due primarily to an increase in depreciable plant and the completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. 39 SWEPCO RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) Taxes, Other Than Income. Taxes, other than income increased approximately $1.4 million, or 7%, during the first six months of 1996 as compared to the first six months of 1995 due primarily to an increase in ad valorem taxes and state franchise taxes. Income Taxes. Income taxes increased $3.4 million, or 25%, to $17.2 million during the first six months of 1996 as compared to the first six months of 1995 due primarily to higher pre-tax income excluding the effects of a one-time charge, as discussed below, and prior year tax adjustments recorded in 1995. Other Income and Deductions. Other income and deductions decreased $24 million in the first six months of 1996 when compared with the first six months of 1995 due primarily to a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $21.7 million, net of tax. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. 40 WTU WEST TEXAS UTILITIES COMPANY PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 41 WEST TEXAS UTILITIES COMPANY STATEMENTS OF INCOME (unaudited) Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1996 1995 1996 1995 --------- --------- --------- --------- (thousands) (thousands) Electric Operating Revenues $ 101,587 $ 83,049 $ 182,376 $ 157,970 --------- --------- --------- --------- Operating Expenses and Taxes Fuel 35,822 29,763 67,805 60,928 Purchased power 6,608 2,482 12,524 3,825 Other operating 18,227 17,497 34,702 31,561 Maintenance 4,472 4,048 7,691 6,997 Depreciation and amortization 9,832 8,053 19,510 16,117 Taxes, other than income 5,583 5,514 11,181 11,340 Income taxes 4,870 2,506 5,035 4,120 --------- --------- --------- --------- 85,414 69,863 158,448 134,888 --------- --------- --------- --------- Operating Income 16,173 13,186 23,928 23,082 --------- --------- --------- --------- Other Income and Deductions Utility plant development costs, net of tax (10,917) -- (10,917) -- Other 270 836 657 1,044 --------- --------- --------- --------- (10,647) 836 (10,260) 1,044 --------- --------- --------- --------- Income Before Interest Charges 5,526 14,022 13,668 24,126 --------- --------- --------- --------- Interest Charges Interest on long-term debt 5,296 5,298 10,592 10,138 Interest on short-term debt and other 1,367 956 2,745 2,154 Allowance for borrowed funds used during construction (218) (158) (504) (325) --------- --------- --------- --------- 6,445 6,096 12,833 11,967 --------- --------- --------- --------- Net Income (Loss) (919) 7,926 835 12,159 Preferred Stock Dividends 66 66 132 132 --------- --------- --------- --------- Net Income (Loss) for Common Stock $(985) $7,860 $703 $12,027 ========= ========= ========= ========= The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 42 WEST TEXAS UTILITIES COMPANY BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ------------- ------------- ASSETS (thousands) Electric Utility Plant Production $417,395 $427,547 Transmission 200,924 199,055 Distribution 339,536 326,337 General 93,041 84,326 Construction work in progress 17,790 32,686 ---------- ---------- 1,068,686 1,069,951 Less - Accumulated depreciation and amortization 404,774 389,379 ---------- ---------- 663,912 680,572 ---------- ---------- Current Assets Cash 809 717 Accounts receivable 21,415 28,923 Materials and supplies, at average cost 15,385 16,660 Fuel inventory, at average cost 8,184 8,281 Coal inventory, at LIFO cost 6,377 5,545 Accumulated deferred income taxes 2,620 5,328 Under-recovered fuel costs 3,529 -- Prepayments and other 2,170 1,042 ---------- ---------- 60,489 66,496 ---------- ---------- Deferred Charges and Other Assets Deferred Oklaunion costs 24,229 26,092 Restructuring costs 11,798 12,741 Other 32,712 29,713 ---------- ---------- 68,739 68,546 ---------- ---------- $793,140 $815,614 ========== ========== The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 43 WEST TEXAS UTILITIES COMPANY BALANCE SHEETS June 30, December 31, 1996 1995 (unaudited) (audited) ------------- ------------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $25 par value Authorized shares: 7,800,000 Issued and outstanding shares: 5,488,560 $137,214 $137,214 Paid-in capital 2,236 2,236 Retained earnings 116,473 125,770 ---------- ---------- 255,923 265,220 Preferred stock 6,291 6,291 Long-term debt 274,996 273,245 ---------- ---------- 537,210 544,756 ---------- ---------- Current Liabilities Advances from affiliates 12,417 19,820 Payables to affiliates 8,953 8,244 Accounts payable 23,680 20,611 Accrued taxes 10,753 13,182 Accrued interest 6,535 6,081 Over-recovered fuel costs -- 4,060 Refund due customers 481 1,812 Other 2,782 3,121 ---------- ---------- 65,601 76,931 ---------- ---------- Deferred Credits Accumulated deferred income taxes 140,965 145,130 Investment tax credits 29,900 30,561 Income tax related regulatory liabilities, net 15,101 14,464 Other 4,363 3,772 ---------- ---------- 190,329 193,927 ---------- ---------- $793,140 $815,614 ========== ========== The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 44 WEST TEXAS UTILITIES COMPANY STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30, ------------------------ 1996 1995 ---------- ---------- OPERATING ACTIVITIES (thousands) Net Income $835 $12,159 Non-cash Items Included in Net Income Depreciation and amortization 19,414 16,809 Deferred income taxes and investment tax credits (1,481) 1,389 Regulatory assets established for restructuring charges 944 -- Allowance for equity funds used during construction (128) (110) Utility plant development costs 14,905 -- Inventory reserve 1,103 -- Changes in Assets and Liabilities Accounts receivable 7,508 (6,573) Accounts payable 6,179 8,442 Accrued taxes (2,429) (764) Over- and under-recovered fuel costs (7,589) 2,036 Other (4,083) (7,340) ---------- ---------- 35,178 26,048 ---------- ---------- INVESTING ACTIVITIES Construction expenditures (16,722) (20,421) Allowance for borrowed funds used during construction (504) (325) Other (364) (735) ---------- ---------- (17,590) (21,481) ---------- ---------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 39,491 Change in advances from affiliates (7,403) (31,192) Payment of dividends (10,066) (11,198) Other (27) -- ---------- ---------- (17,496) (2,899) ---------- ---------- Net Change in Cash and Cash Equivalents 92 1,668 Cash and Cash Equivalents at Beginning of Period 717 2,501 ========== ========== Cash and Cash Equivalents at End of Period $809 $4,169 ========== ========== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $10,470 $9,588 ========== ========== Income taxes paid $1,220 $8,009 ========== ========== The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 45 WEST TEXAS UTILITIES COMPANY RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. During the second quarter of 1996, net income for common stock decreased from $7.9 million in the second quarter of 1995 to a net loss of $1.0 million. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $10.9 million, net of tax. Also contributing to the decrease were increased maintenance expenses and increased depreciation and amortization. The decrease was partially offset by increased non-fuel electric operating revenues. Electric Operating Revenues. Electric operating revenues increased $18.5 million, or 22%, in the second quarter of 1996 as compared to the second quarter of 1995. This increase was due primarily to increased fuel revenues, as discussed below, and a 12% increase in KWH sales resulting from additional weather-related demand from customers. Fuel. Fuel expense increased $6.1 million, or 20%, for the second quarter of 1996 as compared to the second quarter of 1995 due primarily to an increase in average unit fuel costs from $1.78 per MMbtu in 1995 to $2.04 per MMbtu in 1996, which resulted from higher spot market natural gas prices. Purchased Power. Purchased power increased $4.1 million during the second quarter of 1996 as compared to the second quarter of 1995, primarily as a result of increased economy energy purchases. Maintenance. Maintenance expenses increased $0.4 million, or approximately 10%, in the second quarter of 1996 as compared to the second quarter of 1995 due primarily to a $1.1 million reserve for the potential write down of production inventory, partially offset by decreases in transmission maintenance expenditures. Depreciation and Amortization. Depreciation and amortization expenses increased approximately $1.8 million during the second quarter of 1996 as compared to the second quarter of 1995 due primarily to increases in depreciable property and the accelerated amortization of deferred Oklaunion plant costs and other amortization of regulatory assets established in 1995 in accordance with the WTU Stipulation and Agreement. Income Taxes. Income taxes increased $2.4 million in the second quarter of 1996 as compared to the second quarter of 1995 due primarily to higher pre-tax income in 1996, excluding the effects of a one-time charge, as discussed below, and prior year tax adjustments recorded in 1995. Other Income and Deductions. Other income and deductions decreased $11.5 million during the second quarter of 1996 as compared with the second quarter of 1995 as a result of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $10.9 million, net of tax. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. 46 WTU RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Net Income for Common Stock. For the first six months of 1996, net income for common stock decreased to $0.7 million from $12.0 million in the first six months of 1995. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $10.9 million, net of tax. Also contributing to the decrease were increased operating and maintenance expenses and increased depreciation and amortization. The decrease was partially offset by increased non-fuel electric operating revenues. Electric Operating Revenues. Electric operating revenues increased $24.4 million, or 15%, in the first six months of 1996 as compared to the first six months of 1995. This increase was due primarily to increased fuel revenues, as discussed below, and an 11% increase in KWH sales resulting from additional weather-related demand from customers. Fuel. Fuel expense increased $6.9 million, or 11%, for the first six months of 1996 as compared to the first six months of 1995 due primarily to an increase in average unit fuel costs from $1.90 per MMbtu in 1995 to $2.05 per MMbtu in 1996, which resulted from higher spot market natural gas prices. Purchased Power. Purchased power increased $8.7 million during the first six months of 1996 as compared to the first six months of 1995, primarily as a result of increased economy energy purchases. Other Operating. Other operating expenses increased $3.1 million, or approximately 10%, in the first six months of 1996 as compared to the first six months of 1995 due primarily to increased transmission expenses associated with the completion and placement in service of a new HVdc tie in the third quarter of 1995, increased expenses associated with regulatory activity and increased employee related expenses. Also contributing to the increase was the amortization of a regulatory asset established in the fourth quarter of 1995 in accordance with the WTU Stipulation and Agreement. Maintenance. Maintenance expenses increased $0.7 million, or approximately 10%, in the first six months of 1996 as compared to the first six months of 1995 due primarily to a $1.1 million reserve for the potential write down of production inventory. 47 WTU RESULTS OF OPERATIONS (continued) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (continued) Depreciation and Amortization. Depreciation and amortization expense increased approximately $3.4 million during the first six months of 1996 as compared to the first six months of 1995 due primarily to increases in depreciable property and the accelerated amortization of deferred Oklaunion plant costs and other amortization of regulatory assets established in 1995 in accordance with the WTU Stipulation and Agreement. Income Taxes. Income taxes increased $0.9 million in the first six months of 1996 as compared to the first six months of 1995 due primarily to higher pre-tax income in 1996, excluding the effects of a one-time charge, as discussed below, and prior year tax adjustments recorded in 1995. Other Income and Deductions. Other income and deductions decreased $11.3 million during the first six months of 1996 as compared with the first six months of 1995 as a result of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $10.9 million, net of tax. See NOTE 9. UTILITY PLANT DEVELOPMENT COSTS for additional information. 48 INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS CSW, CPL, PSO, SWEPCO, WTU NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES CSW, CPL, PSO, SWEPCO, WTU NOTE 4. DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU NOTE 5. CSW EARNINGS AND DIVIDENDS PER SHARE SHARE OF CSW COMMON STOCK CSW NOTE 6. LONG TERM FINANCING CSW, PSO, SWEPCO NOTE 7. INCOME TAXES CSW, CPL, PSO, SWEPCO, WTU NOTE 8. DISCONTINUED OPERATIONS CSW NOTE 9. UTILITY VALUATION RESERVES CSW, CPL, PSO, SWEPCO, WTU NOTE 10. SUPPLEMENTAL INFORMATION - SEEBOARD'S RECENT OPERATING RESULTS CSW 49 NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. PRINCIPLES OF PREPARATION The condensed financial statements of the Registrants included herein have been prepared by each Registrant pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each Registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Registrant's Combined Annual Report on Form 10-K for the year ended December 31, 1995 and the Registrant's Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. The unaudited financial information furnished herewith reflects all adjustments which are, in the opinion of management of such Registrant, necessary for a fair statement of the results of operations for the interim periods. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. The financial statements of the CSW U.K. Group, 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 June 30, 1996 and all income statement items are translated at the average exchange rate for the applicable period. At June 30, 1996, the current exchange rate was approximately 1.00 pound=$1.55 and the average exchange rate for the six month period ended June 30, 1996 was approximately 1.00 pound=$1.53. At March 31, 1996, the current exchange rate was approximately 1 pound=$1.52 and the average exchange rate for the three month period ended March 31, 1996 was $1.53. All resulting translation adjustments are recorded directly to Foreign Currency Translation Adjustment on the consolidated balance sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The effect 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. Certain financial statement items for prior years have been reclassified to conform to the 1996 presentation. 2. LITIGATION AND REGULATORY PROCEEDINGS See the Registrants' Combined Annual Report on Form 10-K for the year ended December 31, 1995 and the Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 for additional discussion of litigation and regulatory proceedings. Reference is also made to PART II - ITEM 1. and MD&A - COMPETITION AND INDUSTRY CHALLENGES AND CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING for additional discussion of litigation and regulatory matters. 50 CPL Rate Review Docket No. 14965 As previously reported, on November 6, 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would result in an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL's filing also sought to reconcile $229 million of fuel costs incurred during the period July 1, 1994 through June 30, 1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June 30, 1994 in Docket No. 13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL will commit not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. On April 30, 1996, CPL implemented new fuel factors that will lower fuel costs to its retail customers by $25 million annually. The lower fuel factors result primarily from the projected decline in CPL's fuel costs during the twelve-month period following the implementation of the new factors. On May 9, 1996, CPL placed a $70 million base rate increase into effect under bond. The bonded rates are subject to refund based on the final order of the Texas Commission. When combined with the fuel factor reduction, the net result is an increase in annual retail revenues of $45 million, or 3.8%. On May 10, 1996, CPL and other parties to the fuel reconciliation phase of the current rate review filed the CPL 1996 Fuel Agreement with the Texas Commission that reconciles CPL's fuel costs through June 1995. A final order implementing the settlement was issued on June 28, 1996, approving a one-time fuel refund of $23 million that was refunded to customers in July 1996. As a condition of the settlement, CPL agreed not to seek recovery of $6 million of fuel and fuel-related costs incurred during the reconciliation period. The additional amount of the refund results from an over-recovery of fuel costs during the reconciliation period and did not have a material impact on CPL's results of operations or financial condition. In a preliminary order issued December 21, 1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. CPL made a supplemental filing on April 1, 1996, addressing a recommended model for restructuring the electric industry within ERCOT. In addition, the supplemental filing included: (i) estimates of CPL's potential stranded costs based upon various possible structures of the electric industry and under several energy price scenarios; and (ii) a recommendation that the potential stranded costs not be quantified in rates until any changes in the electricity market and structure of utilities in Texas are known. In this supplemental filing, CPL estimated its potential stranded costs could range from approximately zero to approximately $3.7 billion in a worst-case scenario. The range is dependent upon a number of presently unknown factors, including the extent to which CPL is compensated for its reasonable costs and the extent and timing of any implementation of retail competition. Hearings in this phase of the rate review began July 31, 1996. CPL has filed rebuttal testimony that challenges positions taken by the Texas Commission Staff and other parties intervening in this case. CPL's testimony challenges the Texas Commission Staff's proposals as unreasonable and contrary to current law and regulatory policy. While the Texas Commission Staff reported the use of a "point estimate" of $850 million for potentially stranded costs, their testimony actually describes their range of potential stranded costs as very uncertain and having a range from $200 million to $2 billion. In addition, the Texas Commission Staff recommended (i) a nuclear performance standard that would penalize CPL unless it operates its nuclear units better than 75 percent of the U.S. nuclear industry; and 51 (ii) a fuel-recovery mechanism that is based on prices in an undeveloped energy market; and (iii) a one-sided cap on CPL's earnings that effectively prevents CPL from realizing its authorized level of earnings. For further information related to the preliminary order issued December 21, 1995, by the Texas Commission expanding the scope of the CPL rate review to address certain competitive issues facing the electric utility industry, see the Registrants' Combined Annual Report on Form 10-K for the year ended December 31, 1995 and the Registrants' Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. CPL's management cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's results of operations or financial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL could experience a material adverse effect on its results of operations and financial condition. WTU Stipulation and Agreement As previously reported, in the third quarter of 1995 WTU entered into the WTU Stipulation and Agreement to settle several pending regulatory matters that included: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the Supreme Court of Texas - review of WTU's 1987 Texas rate case in Docket 7510; and (iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding deferred accounting treatment for Oklaunion. In the fourth quarter of 1995, the Texas Commission rendered a final order that implemented the agreement. Part of the final order also set into motion the actions required to seek a remand of the appeal of Docket No. 7510 to the Texas Commission to implement a final order consistent with the WTU Stipulation and Agreement. The Court of Appeals issued a mandate on April 15, 1996, directed to the Travis County District Court, that permitted the case to be remanded back to the Texas Commission. On May 23, 1996, the Texas Commission assigned it a new proceeding for docketing purposes, Docket No. 15988. A prehearing on Docket No. 15988 was held on June 24, 1996 where parties to Docket No. 15988 discussed with the ALJ a joint motion filed with the ALJ by the parties on June 21, 1996 that proposed to adopt a finding to implement the last outstanding element related to the WTU Stipulation and Agreement in Docket No. 13369, WTU's settled rate case. It is expected that the ALJ will utilize the WTU Stipulation and Agreement to prepare an order recognizing the necessity of deferrals in Docket No. 7510 for financial integrity purposes. The Texas Commission is expected to render a final order in Docket No. 15988 during the last quarter of 1996. 3. COMMITMENTS AND CONTINGENT LIABILITIES Termination of El Paso Merger As previously reported, in May 1993, CSW entered into a Merger Agreement pursuant to which El Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. On June 9, 1995, following CSW's notification that it was terminating the Merger Agreement, El Paso filed a suit against CSW seeking a $25 million termination fee from CSW, additional unspecified damages, punitive damages, interest as permitted by law and certain other costs. On June 15, 1995, CSW filed suit against El Paso seeking a $25 million termination fee from El Paso due to El Paso's breach of the Merger Agreement, at least $3.6 million in rate case expenses incurred by CSW on behalf of El Paso related to state regulatory merger proceedings and a declaratory judgment that CSW 52 properly terminated the Merger Agreement. On June 14, 1996, CSW filed an amended complaint seeking a first priority administrative expense claim of $50 million from El Paso based upon El Paso's breach of the Merger Agreement. The United States Bankruptcy Court for the Western District of Texas, Austin Division, consolidated the El Paso suit and the CSW suit into one adversary proceeding. CSW is the named plaintiff in the consolidated adversary proceeding. A trial date of November 19, 1996 has been set for the lawsuit. Although CSW believes that it has substantial defenses to El Paso's claims and intends to defend El Paso's claims and pursue CSW's claims vigorously, CSW cannot presently predict the outcome of the lawsuit. However, if the lawsuit is decided adversely to CSW, it could have a material adverse effect on CSW's consolidated results of operations and financial condition. CSW Energy Projects and Commitments CSW Energy is authorized to develop various independent power and cogeneration facilities and to own and operate such non-utility projects, subject to regulatory approval. The table below summarizes CSW Energy's participation in projects as of June 30, 1996.
Capacity Commercial (in MW) Operation Ownership Thermal Project Location Total Committed Date Interest Host Host Utility Brush II Brush, CO 68 68 January 1994 47% Greenhouse Public Service Company of Colorado Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50% Greenhouse Public Service Company of Colorado Mulberry Polk County, FL 120 110 August 1994 50% Distilled Florida Power Corporation Water/Ethanol Plant Orange Cogen Polk County, FL 103 97 June 1995 50% Orange Juice Florida Power Corporation Processor Tampa Electric Company Phillips Sweeny Sweeny, TX 300 90* Mid 1998 100% Refinery Undetermined* Newgulf Wharton, TX 85 -- Mid 1996 100% IPP IPP * The Phillips Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company.
CSW Energy provided construction services to the Mulberry cogeneration facility through a wholly owned subsidiary, CSW Development-I, Inc. The project achieved commercial operation in August 1994 and added 120 MW of on-line capacity of which CSW Energy owns 50%. CSW Energy's maximum potential liability under the fixed price contract is $29 million which will decrease to zero in August 1996. As of June 30, 1996, CSW has provided additional support to the project totaling approximately $3 million. CSW Energy has entered into a purchase agreement for the Ft. Lupton project to provide $80 million upon the occurrence of certain events. As of June 30, 1996, $43 million has been paid, and CSW has provided a guarantee for the remainder. Additionally, CSW has provided four letters of credit to the project totaling $19 million. The following table summarizes equity investments and loans made by CSW Energy and commitments provided by CSW in the projects at June 30, 1996. 53 Letters of Credit Project Equity and Guarantees Loans (millions) Brush II $15.3 $ -- $ -- Ft. Lupton 43.0 59.2 -- Mulberry 24.0 32.3 -- Orange Cogen 53.2 2.3 -- Phillips Sweeny -- 3.0 9.1 Newgulf 10.5 -- -- Various developmental projects 3.8 9.0 5.4 During the second quarter of 1996, CSW Energy recorded a one-time charge of approximately $14 million after-tax to establish reserves for equity investments, loans made to development projects and deferred charges associated with certain operating projects. CSW International Cogeneration Project In July, 1996, CSW International announced a joint venture with Alpek, through a subsidiary, to build, own and operate a 120 MW, gas-fired cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. CSW International and Alpek each will have 50% ownership in the project, called Enertek, which will cost approximately $75 million. CSW International has entered into a limited guarantee agreement with the project's engineering, procurement and construction contractor that provides the contractor a guarantee of up to $5 million. The Enertek project is expected to commence commercial operations in the first quarter of 1998. CPL Deferred Accounting CPL was granted deferred accounting treatment for certain STP Unit 1 and 2 costs by Texas Commission orders issued in October 1990 and December 1990, respectively. In 1994, the Supreme Court of Texas 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 given its prior determinations. 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. CPL believes that the language of the Supreme Court of Texas opinion suggests that the appropriateness of allowing deferred accounting may be reviewed under a financial integrity standard in the first case in which the deferred STP costs are recovered through rates. If the courts decide that subsequent review under the financial integrity standard is required, that review would be conducted in a remand of the STP Unit 1 and Unit 2 orders. 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, CPL could experience a material adverse effect on its results of operations and financial condition. While CPL's management is unable to predict the ultimate outcome of these matters, management believes CPL will receive approval of its deferred accounting orders or will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CPL's results of operation or financial condition. 54 CPL Nuclear Insurance In connection with the licensing and operation of STP, the owners have purchased the maximum limits of nuclear liability insurance, 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 January 1996. 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 $8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchased, for its own account, a NEIL I Business Interruption and/or Extra Expense policy to 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 21 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same accident, such insurance will reimburse CPL up to 80% of the single unit recovery. The maximum amount recoverable for a single unit outage is $86.02 million for Unit 1 and $85.96 million for Unit 2. CPL is subject to an additional assessment up to $1.6 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceeds the accumulated funds available under the policy. NEIL canceled CPL's current NEIL I policy effective July 31, 1996. For further information relating to litigation associated with CPL nuclear insurance claims, including the cancellation of CPL's NEIL I policy, reference is made to PART II - ITEM 1. PSO PCB Cases For information regarding the commitments and contingent liabilities relating to the PSO's PCB cases, reference is made to PART II - ITEM 1. SWEPCO Biloxi, Mississippi Manufactured Gas Plant Site As previously reported, SWEPCO was notified by Mississippi Power in 1994 that it may be a potentially responsible party at a manufactured gas plant site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as on the subsequent sampling of the site. The sampling results indicated contamination at the property as 55 well as the possibility of contamination of an adjacent property. A risk assessment was submitted to the Mississippi Department of Environmental Quality, whose ensuing comments requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site, of which approximately $200,000 has been incurred to date. SWEPCO Henry W. Pirkey Power Plant In connection with the lignite mining contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining contractor. As of June 30, 1996, the maximum SWEPCO would have to assume is $66.1 million. The maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding as of June 30, 1996 was approximately $57.7 million. 4. DIVIDENDS The U.S. Electric Operating Companies' mortgage indentures, as amended and supplemented, contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not currently limit the ability of CSW to pay dividends to its shareholders. At June 30, 1996, approximately $1.8 billion of the subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. At June 30, 1996, the amount of retained earnings available for payment of cash dividends to CSW by the U.S. Electric Operating Companies was as follows. CPL - $767 million PSO - $130 million SWEPCO - $311 million WTU - $116 million 5. CSW EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK 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. Dividends per common share reflect per share amounts paid during the periods. 6. LONG TERM FINANCING PSO MTNs, Series A In February 1996, PSO filed a shelf registration statement with the SEC for the sale of up to $75 million of Senior Notes. During March and April of 1996, PSO issued $30 million and $10 million of MTNs, respectively, at varying interest rates and maturity dates. The interest rates for the separate issues ranged from 5.89 to 6.43% with maturity dates of 2000-2001. The proceeds of the issues were used to repay a portion of PSO's short-term borrowings and also to reimburse PSO's treasury for the scheduled maturity of $25 million aggregate principal amount of first mortgage bonds. SWEPCO Sabine Series PCRBs In July 1996, $81.7 million of Sabine, 6.10%, Series 1996 PCRBs were issued for the benefit of SWEPCO. The proceeds from this issuance were used to refund the $81.7 million Sabine, 8.20%, Series 1986 PCRBs. 56 CPL, PSO, WTU Red River Series PCRBs In August 1996, $63.3 million of Red River, 6.0%, Series 1996, PCRBs were issued for the benefit of CPL, PSO, and WTU. The proceeds from this issuance will be used to refund the $63.3 million of Red River, 7 7/8%, Series 1984 PCRBs. 7. INCOME TAXES The following tables provide a reconciliation of the differences between the federal statutory tax rate and the effective tax rate for CSW, CPL, PSO, SWEPCO and WTU. Three Months Ended Six Months Ended June 30, 1996 % June 30, 1996 % -------------------- ------------------- CSW ($ in millions) Tax at statutory rate $86 35 $113 35 Differences: Amortization of ITC (4) (2) (7) (2) Non-deductible Goodwill Amortization 3 1 6 2 State Income Taxes from the Sale of Transok 7 3 7 2 Permanent differences related to a one-time charge 9 4 9 3 Prior period adjustments/Other 12 5 8 2 ------ --- ------ --- $113 46 $136 42 ------ --- ------ --- CPL ($ in thousands) Tax at statutory rate $21,435 35 $30,343 35 Differences: Amortization of ITC (1,447) (2) (2,895) (3) Mirror CWIP 882 1 1,754 2 Permanent differences related to a one-time charge 1,390 2 1,390 1 Prior period adjustments 3,198 5 3,198 4 Other 977 2 1,479 2 ------ --- ------ --- $26,435 43 $35,269 41 ------ --- ------ --- PSO ($ in thousands) Tax at statutory rate $(8,402) 35 $(5,935) 35 Differences: Amortization of ITC (696) 3 (1,392) 8 Permanent differences related to a one-time charge 4,382 (18) 4,382 (26) Prior period adjustments 549 (2) 549 (3) Other (1,625) 6 (1,825) 11 ------ --- ------ --- $(5,792) 24 $(4,221) 25 ------ --- ------ --- 57 SWEPCO ($ in thousands) Tax at statutory rate $3,380 35 $9,902 35 Differences: Amortization of ITC (1,182) (12) (2,365) (8) Permanent differences related to a one-time charge 2,330 24 2,330 8 Prior period adjustments 269 3 269 1 Other (506) (5) (1,962) (7) ------ --- ------ --- $4,291 45 $8,174 29 ------ --- ------ --- WTU ($ in thousands) Tax at statutory rate $(39) (35) $566 35 Differences: Amortization of ITC (330) (297) (661) (41) Permanent differences related to a one-time charge 977 879 977 60 Prior period adjustments 143 129 143 9 Other 57 51 (244) (15) ------ --- ------ --- $808 727 $781 48 ------ --- ------ --- The effective tax rate reconciliations are significantly impacted by a one-time charge during the second quarter of 1996. For additional discussion of one-time charges associated with plant sites, engineering studies and lignite reserves, see NOTE 9. UTILITY PLANT DEVELOPMENT COSTS. 8. 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. Transok is an intrastate natural gas gathering, transmission, marketing and processing company that provides natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other non-affiliated gas customers throughout the United States. Transok's natural gas facilities are located in Oklahoma, Louisiana and Texas. After the sale, Transok has continued to supply gas to the U.S. Electric Operating Companies. Operating results of Transok for the three and six month periods ended June 30, 1996 and 1995 are summarized in the following table (intercompany transactions have not been eliminated). Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) (millions) Total revenue $107 $166 $362 $325 Operating income before income taxes 8 10 23 20 Earnings before income taxes 6 6 18 13 Income taxes 2 2 6 4 Net income from discontinued operations $4 $4 $12 $9 58 Since Transok was sold on June 6, 1996, the results of operations for the three and six month periods ended June 30, 1996 do not reflect a full three months and six months of earnings from Transok. CSW's Consolidated Balance Sheet at June 30, 1996 does not contain any assets or liabilities from Transok. See ITEM 2. MD&A - CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING for additional information related to the sale of Transok. 9. UTILITY PLANT DEVELOPMENT COSTS During the second quarter of 1996, the U.S. Electric Operating Companies recorded one-time charges reflected in Other income and Deductions relating to investments made in prior years for plant sites, engineering studies and lignite reserves for which future recovery is not probable. The charges are as follows. Pre-tax effect Income tax Net Income on income benefit effect (thousands) CPL $(21,374) $5,893 $(15,481) PSO (50,854) 15,302 (35,552) SWEPCO (29,590) 7,847 (21,743) WTU (14,905) 3,988 (10,917) -------- ------ ------- $(116,723) $33,030 $(83,693) -------- ------ ------- For a discussion of reserves established by CSW Energy during the second quarter of 1996, see NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. 10. SUPPLEMENTAL INFORMATION - SEEBOARD'S RECENT OPERATING RESULTS SEEBOARD's results of operations discussed below are prepared in accordance with Generally Accepted Accounting Principles in the United Kingdom and exclude currency conversion and CSW consolidation adjustments. CSW's offer to purchase SEEBOARD was declared unconditional on January 10, 1996. Comparative information has been provided for information only. Six Months Ended June 30, 1996 Net income for the six months ended June 30, 1996, was 71.8 million pounds compared to 56.5 million pounds for the six months ended June 30, 1995. Gross profit (revenue less cost of sales) is in line with the comparable period last year despite the impact of a reduction in regulatory allowed revenues following the completion of the regulatory price review of SEEBOARD's distribution business. This primarily reflects an improvement in volume during the current period. Allowed revenue in SEEBOARD's distribution business were reduced by 14% with effect from April 1995 and a further 13% from April 1996. At the net income before interest level, the improvement reflects the continued cost reduction programs of SEEBOARD, the first year contribution from SEEBOARD's 37.5% interest in Medway Power Limited, a company formed to construct, own and operate a 675 MW power station, and the benefit of a release of a 17.5 million pound accrual no longer required in respect of a previous liability for redundancy costs. In addition, during the six months ended June 30, 1995, SEEBOARD received dividends as a result of its 59 shareholding in the National Grid of 9.9 million pounds. SEEBOARD's interest in the National Grid was demerged to shareholders of SEEBOARD in December 1995. Three Months Ended June 30, 1996 Net income for the three months ended June 30, 1996 was 36.8 million pounds compared to 16.6 million pounds for the three months ended June 30, 1995. The improvement in net income primarily reflects the continued cost reduction programs of SEEBOARD, the first year contribution from SEEBOARD's 37.5% interest in Medway Power Limited, and the benefit of a release of a 17.5 million pound accrual no longer required in respect of a previous liability for redundancy costs. 60 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Registrants' Combined Annual Report on Form 10-K for the year ended December 31, 1995 and their Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. Reference is also made to each Registrant's unaudited Financial Statements and related Notes to Financial Statements included herein. The information included therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. RESULTS OF OPERATIONS Reference is made to ITEM 1. Financial Statements for each of the Registrants' Results of Operations. COMPETITION AND INDUSTRY CHALLENGES Industry Restructuring in Texas In compliance with the Texas Commission's Project 15001, "Stranded Costs Report," CPL, SWEPCO and WTU each filed information in response to the Texas Commission's order initiating investigation concerning potential stranded costs. The filings consist of various scenarios used to estimate potential stranded costs. Based on the requirements of the filing, no significant potential stranded costs were identified for SWEPCO or WTU. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the potential impact of potential stranded costs relating to CPL. The Texas Commission's Project 15002, "Scope of Competition Report," is a report that the Texas Commission is required to present to the Texas Legislature in each odd-numbered year detailing the impact of competition in the electric utility industry. In addition, the report will include the Texas Commission's recommendations concerning the public's interest in a partially competitive electric market. In June 1996, CPL, SWEPCO and WTU each filed information for the Texas Commission's report. Independent System Operator Plan In June 1996, CSW (including CPL, SWEPCO and WTU) and more than 20 other parties, including other investor-owned utilities, municipal power companies, electric cooperatives, independent power producers and power marketers, filed plans to create an independent system operator to manage the ERCOT power grid. The filing marks a major step towards implementing the Texas Commission's overall strategy of creating the competitive wholesale electric market that was mandated by the Texas Legislature in 1995. Approval of the independent system operator by the Texas Commission is expected later this year. Such approval would make Texas the first state in the nation to implement a regional independent system operator and a regional competitive wholesale bulk power market. Industry Restructuring in Oklahoma In June 1996, the Oklahoma Commission announced that it has begun soliciting public comment to aid in the potential restructuring of the Oklahoma electric utility industry. The issues the Oklahoma Commission is 61 exploring include the extent and speed of a restructuring, the unbundling of utility services, as well as the legislative and regulatory needs of such a restructuring. The staff of the Oklahoma Commission is scheduling informal public technical conferences over the next several months to discuss these issues. Subsequent to this, the Commissioners of the Oklahoma Commission are scheduled to conduct a conference late in 1996 to review such comments and recommendations in order to prepare themselves for the 1997 session of the Oklahoma Legislature. FERC Order 888 As previously reported, on April 24, 1996, the FERC issued Order 888 which is the final comparable open access transmission rule. The provisions of the final rule are similar to provisions of the FERC's 1995 Notice of Proposed Rule Making in that they provide for comparable service between utilities and their transmission customers by requiring utilities to take service under their open access tariffs for all of their new wholesale sales and purchases and by requiring utilities to rely on the same transmission information network that their transmission customers rely on to make wholesale purchases and sales. In addition, it also reaffirms the FERC's position that utilities are entitled to recover, through a formula, all legitimate, prudent and verifiable stranded costs. The final rule requires holding companies to offer single system rates. However, the rule grants CSW an exemption whereby CSW will be given an opportunity to propose a solution that will provide comparability to all wholesale users whereby the rates, terms and conditions for the CSW ERCOT companies (CPL and WTU) would be permitted to differ from those offered by the CSW Southwest Power Pool companies (PSO and SWEPCO). CSW, along with all FERC jurisdictional utilities, have filed open access tariffs that conform to the provisions of the pro forma tariff included as part of the final rule. CSW has until December 31, 1996, to file a system-wide tariff that will replace the conforming tariffs upon FERC approval. Other In July 1996, two bills were introduced in the U.S. House of Representatives concerning competition in the electric industry. The purpose of both bills is to bring about customer choice through direct retail access, one of which sets a deadline of December 15, 2000 for implementation of such direct retail access. No action on either bill is expected during this session of Congress. There are currently two other bills, one in each house of the United States Congress, that call for the outright repeal of the Public Utility Holding Company Act of 1935, as amended. CSW has long supported legislative actions to reduce the restrictive nature of the current holding company law. CSW cannot predict if or when these current legislative actions will actually be enacted into law. However, if none of these specific bills are enacted, CSW will continue its efforts to repeal or modify the public utility holding company law. CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING Construction Expenditures CSW's construction expenditures totaled $221 million for the six months ended June 30, 1996. Such expenditures for the U.S. Electric Operating Companies totaled $46 million, $39 million, $45 million and $17 million, for CPL, PSO, SWEPCO and WTU, respectively. CSW's construction expenditures, including those for SEEBOARD, were primarily for improvements to existing production, transmission and distribution facilities. The improvements are required to meet the needs of new customers and to satisfy the changing requirements of existing customers. CSW anticipates that the majority of all funds 62 required for construction for the remainder of the year will be provided from internal sources. SEEBOARD Acquisition Financing As previously reported, CSW, indirectly through CSW (UK), has acquired control of 100% of SEEBOARD for an aggregate adjusted purchase price of approximately 1.4 billion pounds (approximately $2.1 billion assuming average exchange rates during the purchase period). As of June 30, 1996, CSW had contributed approximately $829 million of the purchase price for the acquisition of SEEBOARD shares. Such funds, which were initially obtained through borrowings under the $850 million CSW Credit Agreement, have been repaid by using the $398 million net proceeds from CSW's February 1996 common stock offering and $431 million of the proceeds from the sale of Transok. The additional funds necessary for the transaction were made with capital contributions and loans made to CSW (UK) by its sole shareholder, CSW Investments, which arranged the CSW Investments Credit Facility for that purpose. As of June 30, 1996, approximately 814 million pounds (approximately $1.25 billion assuming the prevailing exchange rate on that date) was outstanding under the CSW Investments Credit Facility. CSW Investments anticipates that amounts borrowed under the CSW Investments Credit Facility will be repaid through dividends from SEEBOARD and other proceeds received from refinancing activities. In July 1996, SEEBOARD entered into a receivables securitization program in the amount of 155 million pounds. The proceeds of this securitization program will be used to reduce the CSW Investments Credit Facility. Proceeds from Sale of Transok On June 6, 1996, 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 the CSW Credit Agreement and the remaining proceeds were used to repay commercial paper borrowings. CSW recorded an after tax gain on the sale of Transok of approximately $113 million in the second quarter of 1996. As a result of the gain, CSW incurred a current tax liability of approximately $195 million. Approximately two-thirds of the current tax liability results from taxes previously deferred by Transok. The deferred taxes were generated primarily by the excess of Transok's tax depreciation over its book depreciation. For additional information concerning the disposal of Transok, see ITEM 1. NOTE 8. DISCONTINUED OPERATIONS. Short-Term Financing The CSW System uses short-term debt to meet fluctuations in working capital requirements and other interim capital needs. The Registrants, together with other subsidiaries of CSW have: (i) established a money pool to coordinate short-term borrowings and (ii) made borrowings outside the money pool through CSW's issuance of commercial paper. As of June 30, 1996, CSW had two revolving credit facilities totaling $1.2 billion to back up its commercial paper program. Long-Term Financing The CSW System is committed to maintaining financial flexibility by having a strong capital structure and favorable securities ratings which help to assure future access to capital markets when required. At June 30, 1996, the capitalization ratios of each of the Registrants is presented in the following table. The capitalization ratio of CSW has been impacted by the amount of indebtedness utilized to finance the SEEBOARD acquisition. However, as described above in SEEBOARD 63 Acquisition Financing and in Proceeds from Sale of Transok, $829 million of debt outstanding under the CSW Credit Agreement was repaid in the first six months of 1996. Common Stock Preferred Long Equity Stock Term Debt CSW 44% 4% 52% CPL 45% 8% 47% PSO 52% 2% 46% SWEPCO 51% 4% 45% WTU 48% 1% 51% PSO MTNs, Series A In February 1996, PSO filed a shelf registration statement with the SEC for the sale of up to $75 million of Senior Notes. During March and April of 1996, PSO issued $30 million and $10 million of MTNs, respectively, at varying interest rates and maturity dates. The interest rates for the separate issues ranged from 5.89 to 6.43% with maturity dates of 2000-2001. The proceeds of the issues were used to repay a portion of PSO's short-term borrowings and also to reimburse PSO's treasury for the scheduled maturity of $25 million aggregate principal amount of first mortgage bonds. PSO may offer the remaining $35 million available under its shelf registration statement from time to time subject to market conditions and other factors. The proceeds of any such additional offering may be used to redeem first mortgage bonds, repay short-term debt or provide working capital. SWEPCO Sabine Series PCRBs In July 1996, $81.7 million of Sabine, 6.10%, Series 1996 PCRBs were issued for the benefit of SWEPCO. The proceeds from this issuance were used to refund the $81.7 million Sabine, 8.20%, Series 1986 PCRBs. CPL, PSO, WTU Red River Series PCRBs In August 1996, $63.3 million of Red River, 6.0%, Series 1996, PCRBs were issued for the benefit of CPL, PSO and WTU. The proceeds from this issuance will be used to refund the $63.3 million of Red River, 7 7/8%, Series 1984 PCRBs. SWEPCO Cajun Asset Purchase Proposal As previously reported, in April 1996, SWEPCO and the Members Committee and Entergy Gulf States filed the SWEPCO Plan in the United States Bankruptcy Court for the Middle District of Louisiana pursuant to which, among other things, SWEPCO would directly or indirectly acquire all of the non-nuclear assets of Cajun for approximately $405 million in cash. In addition, under the SWEPCO Plan, the Cajun member cooperatives would make future payments with a net present value ranging from $497 million to $567 million to the Rural Utility Service of the federal government, Cajun's largest creditor, by using a portion of the cooperatives' future income from their retail customers. Subsequent to the filing of the SWEPCO Plan, three other parties filed competing plans of reorganization with higher bid prices for the Cajun assets. The bankruptcy court has scheduled confirmation hearings for December 1996. In light of the other bids, CSW is reevaluating the SWEPCO Plan to determine whether to increase its bid and file an amended plan with the bankruptcy court. No determination has been made to file an amended plan, but if one is filed, it may provide for the proposed purchase of Cajun assets to be made by SWEPCO, a SWEPCO subsidiary, or another subsidiary of CSW. 64 Consummation of the SWEPCO Plan, or, if filed, an amended plan would be conditioned upon confirmation of the reorganization plan by the bankruptcy court, as well as the receipt of all requisite state and federal regulatory approvals. See the Registrants' Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 for additional information related to the SWEPCO Cajun asset proposal. Regulatory Matters On July 19, 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings and rate structure. The application does not specify a time frame for the review and does not include language indicating that the Oklahoma Commission staff believes a rate reduction is needed. Instead, the review is being initiated to investigate the potential impact on PSO's rates from both the sale of Transok and PSO's restructuring efforts as well as PSO's improved financial results. PSO cannot predict the outcome of this review. Reference is made to ITEM 1. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of CPL's and WTU's regulatory proceedings. Litigation Relating to Termination of El Paso Merger For information regarding the commitments and contingent liabilities relating to the termination of the Merger, reference is made to ITEM 1. NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. 65 PART II - OTHER INFORMATION For background and earlier developments relating to PART II information reference is made to the Registrants' Combined Annual Report on Form 10-K for the year ended December 31, 1995 and Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. ITEM 1. LEGAL PROCEEDINGS. CPL Nuclear Insurance Claims As previously reported, in 1994, CPL filed a claim under the NEIL I business interruption and/or extra expense policy relating to the 1993-1994 outage at STP Units 1 and 2. NEIL formally denied CPL's claim on November 21, 1995. On April 9, 1996, CPL filed an action in state district court in Corpus Christi, Texas, against NEIL and Johnson & Higgins of Texas, Inc., the former insurance broker for STP, seeking recovery under the policy and other relief. NEIL responded by filing a suit against CPL on April 16, 1996, in the United States District Court for the Southern District of New York seeking a declaratory judgment to enforce an arbitration provision contained in the policy. On May 24, 1996, the New York court ordered the dispute, including the issue of whether the arbitration provision is enforceable, to arbitration and stayed the Texas proceeding. NEIL canceled CPL's current NEIL I policy effective July 31, 1996. NEIL also filed a claim in arbitration seeking a determination that NEIL properly terminated CPL's coverage and that CPL has caused NEIL damages by opposing NEIL's attempt to compel arbitration and seeking recovery of NEIL's attorneys' fees. On June 21, 1996, CPL filed a notice of appeal of the New York court's order in the United States Court of Appeals for the Second Circuit. CPL intends to assert its rights to recovery under the NEIL I policy and defend against NEIL's claims vigorously, but cannot predict the ultimate outcome of these matters. CPL's management believes that the resolution of these actions will not have a material adverse effect on its results of operations or financial condition. PSO PCB Cases As previously reported, PSO has been named a defendant in complaints filed in federal and state courts in Oklahoma in 1984, 1985, 1986, 1993 and 1996. The complaints allege, among other things, that some of the plaintiffs and the property of other plaintiffs were contaminated with PCBs and other toxic by-products following certain incidents, including transformer malfunctions, in April 1982, December 1983 and May 1984. To date, all complaints, except for claims filed in February 1996 for additional unspecified actual and punitive damages, have been dismissed, certain of which resulted in settlements among the parties. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Moreover, management believes that the remaining complaints are covered under insurance. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on PSO's consolidated results of operations or financial condition. SWEPCO Burlington Northern Transportation Contract As previously reported, a state district court in Bowie County, Texas awarded SWEPCO a judgment of approximately $72 million against Burlington Northern for damages regarding rates charged under two rail transportation contracts for delivery of coal to two of SWEPCO's power plants, post-judgment interest and attorneys' fees and also granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals and, on April 30, 1996, the Texarkana, Texas Court of 66 Appeals reversed the judgment of the state district court. Subsequently, SWEPCO filed two motions for rehearing, but both were overruled. SWEPCO now plans to request the Supreme Court of Texas to grant a writ of error to review the judgment of the court of appeals. Other Legal Claims and Proceedings The CSW System is party to various other legal claims and proceedings arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on the Registrants' results of operations or financial condition. See PART I - NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion CPL's and WTU's regulatory proceedings. 67 ITEM 5. OTHER INFORMATION. Strategic Executive and Organizational Restructuring As previously reported, in April 1996, CSW announced organizational and executive changes as CSW prepares for increased competition and for an unbundling of the electric utility industry into generation, transmission, distribution and services segments. As a result of the organizational and executive changes, each of the U.S. Electric Operating Companies made changes to their respective Board of Directors as well. The Board of Directors for each of the U.S. Electric Operating Companies is presented below. CPL Appointed to the Board of Directors M. Bruce Evans Continuing Directors John F. Brimberry E. R. Brooks Glenn Files Ruben M. Garcia Robert A. McAllen Pete J. Morales, Jr. S. Loyd Neal, Jr. H. Lee Richards Gonzalo Sandoval Gerald E. Vaughn PSO Appointed to the Board of Directors T. D. Churchwell Continuing Directors E. R. Brooks Harry A. Clarke Glenn Files Paul K. Lackey, Jr. Paula Marshall-Chapman Robert B. Taylor, Jr. Wlliam R. McKamey . SWEPCO Appointed to the Board of Directors Michael D. Smith Karen Martin Continuing Directors E. R. Brooks James E. Davison Glenn Files Dr. Frederick E. Joyce William C. Peatross Maxine Sarpy WTU Appointed to the Board of Directors Floyd W. Nickerson Continuing Directors Richard Bacon E. R. Brooks Paul Brower Glenn Files Tommy Morris Dian G. Owen James Parker Ted Steans F. L. Stephens 67 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS: (12) Computation of Ratio of Earnings to Fixed Charges CPL - (Exhibit 12.1) PSO - (Exhibit 12.3) SWEPCO - (Exhibit 12.4) WTU - (Exhibit 12.5) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends CPL - (Exhibit 12.2) (27) Financial Data Schedules CSW - (Exhibit 27.1) CPL - (Exhibit 27.2) PSO - (Exhibit 27.3) SWEPCO - (Exhibit 27.4) WTU - (Exhibit 27.5) (b) REPORTS FILED ON FORM 8-K: CSW, CPL, PSO, SWEPCO and WTU Item 7. Financial Statements and Exhibits, reporting factors expected to affect second quarter earnings, dated June 24, 1996. 68 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned Registrant shall be deemed to relate only to matters having reference to such Registrant or its subsidiaries. CENTRAL AND SOUTH WEST CORPORATION Date: August 14, 1996 /s/ Lawrence B. Connors Lawrence B. Connors Controller and Chief Accounting Officer (Principal Accounting Officer) CENTRAL POWER AND LIGHT COMPANY PUBLIC SERVICE COMPANY OF OKLAHOMA SOUTHWESTERN ELECTRIC POWER COMPANY WEST TEXAS UTILITIES COMPANY Date: August 14, 1996 /s/ R. Russell Davis R. Russell Davis Controller and Chief Accounting Officer (Principal Accounting Officer) EX-12.1 2 CPL EXHIBIT 12.1 CENTRAL POWER AND LIGHT COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $283,388 Adjustments: Income taxes 68,663 Provision for deferred income taxes 22,509 Deferred investment tax credits (5,789) Utility plant development costs, net of tax (15,481) Other income and deductions 7,515 Allowance for borrowed and equity funds used during construction 3,428 Mirror CWIP amortization 20,500 Earnings $384,733 Fixed Charges: Interest on long-term debt $113,776 Interest on short-term debt and other 19,707 Fixed Charges $133,483 Ratio of Earnings to Fixed Charges 2.88 EX-12.2 3 CPL EXHIBIT 12.2 CENTRAL POWER AND LIGHT COMPANY RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $283,388 Adjustments: Income taxes 68,663 Provision for deferred income taxes 22,509 Deferred investment tax credits (5,789) Utility plant development costs, net of tax (15,481) Other income and deductions 7,515 Allowance for borrowed and equity funds used during construction 3,428 Mirror CWIP amortization 20,500 Earnings $384,733 Fixed Charges: Interest on long-term debt $113,776 Interest on short-term debt and other 19,707 Preferred stock dividend requirements 21,057 Fixed Charges and Preferred Requirements $154,540 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.49 EX-12.3 4 PSO EXHIBIT 12.3 PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED) RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $110,906 Adjustments: Income taxes 29,133 Provision for deferred income taxes 238 Deferred investment tax credits (2,786) Utility plant development costs, net of tax (35,552) Other income and deductions (720) Allowance for borrowed and equity funds used during construction 2,549 Earnings $103,768 Fixed Charges: Interest on long-term debt $ 29,913 Amortization of debt issuance cost 1,584 Other interest 4,556 Fixed Charges $ 36,053 Ratio of Earnings to Fixed Charges 2.88 EX-12.4 5 SWEPCO EXHIBIT 12.4 SOUTHWESTERN ELECTRIC POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (Thousands except Ratio) (Unaudited) Operating Income $153,682 Adjustments: Income taxes 27,337 Provision for income taxes 16,290 Deferred investment tax credits (5,114) Utility plant development costs, net of tax (21,743) Other income and deductions (349) Allowance for borrowed and equity funds used during construction 6,086 Interest portion of financing leases 1,688 Earnings $177,877 Fixed Charges: Interest on long-term debt $ 44,026 Amortization of debt issuance cost 3,370 Other interest 6,610 Interest portion of financing leases 1,688 Fixed Charges $ 55,694 Ratio of Earnings to Fixed Charges 3.19 EX-12.5 6 WTU EXHIBIT 12.5 WEST TEXAS UTILITIES COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $60,331 Adjustments: Income taxes 2,362 Provision for deferred income taxes 3,089 Deferred investment tax credits (1,321) Utility plant development costs, net of tax (10,917) Other income and deductions (867) Allowance for borrowed and equity funds used during construction 1,227 Earnings $53,904 Fixed Charges: Interest on long-term debt $21,867 Interest on short-term debt and other 4,701 Fixed Charges $26,568 Ratio of Earnings to Fixed Charges 2.03 EX-27.3 7 EXHIBIT 27.3
UT 0000081027 PUBLIC SERVICE COMPANY OF OKLAHOMA 1,000 6-MOS DEC-31-1996 JUN-30-1996 PER-BOOK 1,293,322 9,400 85,381 2,619 41,884 1,432,606 157,230 180,000 130,136 467,366 0 19,826 379,998 67,383 40,000 0 0 0 0 0 458,033 1,432,606 329,006 11,896 276,755 288,651 40,355 (35,353) 5,002 17,739 (12,737) 408 (13,145) 7,000 15,116 38,696 (0.06) (0.06)
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