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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
(361) 881-5300
0-343 Public Service Company of Oklahoma 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 Southwestern Electric Power Company 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 673-3000
0-340 West Texas Utilities Company 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
Securities Registered Pursuant To Section 12(B) Of The Act:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
Central and South West Corporation Common Stock, $3.50 Par Value New York Stock Exchange, Inc.
Chicago Stock Exchange, Inc.
CPL Capital I 8.00% Cumulative Quarterly Income Preferred New York Stock Exchange, Inc.
Securities, Series A, Liquidation Preference
$25 per Preferred Security
PSO Capital I 8.00% Trust Originated Preferred Securities New York Stock Exchange, Inc.
Series A, Liquidation Preference $25 per
Preferred Security
SWEPCO Capital I 7.875% Trust Preferred Securities, Series A, New York Stock Exchange, Inc.
Liquidation amount $25 per Preferred
Security
Securities Registered Pursuant To Section 12(G) Of The Act:
Registrant Title of Each Class
Central Power and Light Company Cumulative Preferred Stock, $100 Par Value
Public Service Company of Oklahoma Cumulative Preferred Stock, $100 Par Value
Southwestern Electric Power Company Cumulative Preferred Stock, $100 Par Value
West Texas Utilities Company Cumulative Preferred Stock, $100 Par Value
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) have been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K:
Central and South West Corporation [X], Central Power and Light Company [X],
Public Service Company of Oklahoma [X], Southwestern Electric Power Company,[X]
and West Texas Utilities Company [X]
Aggregate market value of the Common Stock of Central and South West
Corporation at March 13, 2000 held by non-affiliates was approximately $3.3
billion. Number of shares of Common Stock outstanding at March 13, 2000:
212,652,493. Central and South West Corporation is the sole holder of the common
stock of Central Power and Light Company, Public Service Company of Oklahoma,
Southwestern Electric Power Company and West Texas Utilities Company.
This combined Form 10-K is separately filed by Central and South West
Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
1
TABLE OF CONTENTS
GLOSSARY OF TERMS................................................i
FORWARD-LOOKING INFORMATION......................................v
PART I
ITEM 1. BUSINESS ...............................................1
ITEM 2. PROPERTIES .............................................26
ITEM 3. LEGAL PROCEEDINGS ......................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....28
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ..........................................2-1
ITEM 6. SELECTED FINANCIAL DATA ................................2-2
Registrants
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..........................2-2
Registrants
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................................2-2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............2-2
Registrants
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ..........................2-155
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS ..3-1
ITEM 11. EXECUTIVE COMPENSATION ...............................3-10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ...................................................3-26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......3-29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ..................................................4-1
i
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
AEP.....................American Electric Power Company, Inc.
AEP Merger .............Proposed Merger between AEP and CSW where CSW would
become a wholly owned subsidiary of AEP
AFUDC ..................Allowance for funds used during construction
AIP.....................Annual Incentive Plan
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Altamira................CSW International cogeneration project in Altamira,
Tamaulipas, Mexico
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO....................Accumulated Postretirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Bankruptcy Code.........Title 11 Of The United States Bankruptcy Code, as
amended
BP Amoco................BP Amoco plc
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
CAAA ...................Clean Air Act/Clean Air Act Amendments
Cajun ..................Cajun Electric Power Cooperative, Inc.
Cash Balance Plan ......CSW's tax-qualified Cash Balance Retirement Plan
CEO ....................Chief Executive Officer
CERCLA .................Comprehensive Environmental Response, Compensation and
Liability Act of 1980
ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture
between C3 Communications and ICG Communications, Inc.
CLECO ..................Central Louisiana Electric Company, Inc.
CPL ....................Central Power and Light Company, Corpus Christi, Texas
CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's
rate case Docket No. 14965, including both the order
received on September 10, 1997 and the revised order
received on October 16, 1997
CSW ....................Central and South West Corporation, Dallas, Texas
CSW Credit .............CSW Credit, Inc., Dallas, Texas
CSW Energy .............CSW Energy, Inc., Dallas, Texas
CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas
CSW International ......CSW International, Inc., Dallas, Texas
CSW Investments ........CSW Investments, an unlimited company organized in the
United Kingdom through which CSW International owns
SEEBOARD
CSW Leasing ............CSW Leasing, Inc., Dallas, Texas
CSW Services ...........Central and South West Services, Inc., Dallas, Texas and
Tulsa, Oklahoma
CSW System .............CSW and its subsidiaries
CSW UK Finance Company..An unlimited company organized in the United Kingdom
through which CSW International owns CSW Investments
CSW UK Holdings.........An unlimited company organized in the United Kingdom
through which CSW International owns CSW UK Finance
Company
CSW U.S. Electric
System...............CSW and the U.S. Electric Operating Companies
DeSoto..................Parish of DeSoto, State of Louisiana pollution control
revenue bond issuing authority
DGEGS ..................Director General of Electricity and Gas Supply
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
DOE ....................United States Department of Energy
ECOM ...................Excess cost over market
EDC.....................Energy Delivery Company
EITF....................Emerging Issues Task Force
EITF 97-4...............Deregulation of the Pricing of Electricity - Issues
Related to the Application of SFAS Nos. 71 and 101
El Paso ................El Paso Electric Company
EMF ....................Electric and magnetic fields
EnerACT.................EnerACT(TM), Energy Aggregation and Control Technology
Energy Policy Act ......National Energy Policy Act of 1992
EnerShop ...............EnerShopsm Inc., Dallas, Texas
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
ERISA ..................Employee Retirement Income Security Act of 1974, as
amended
ESPS....................Electric Supply Pension Scheme
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FCC.....................Federal Communications Commission
FERC ...................Federal Energy Regulatory Commission
FMB ....................First mortgage bond
ii
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
FUCO ...................Foreign utility company as defined by the Holding
Company Act
Guadalupe...............Guadalupe-Blanco River Authority pollution control
revenue bond issuing authority
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
HVdc ...................High-voltage direct-current
IPP ....................Independent power producer
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
Joint Proxy Statement...The Notice of Annual Meeting and Joint Proxy Statement
of American Electric Power Company, Inc. and Central and
South West Corporation
July 1999 SWEPCO Plan...The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on July 28, 1999 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
KW .....................Kilowatt
KWH ....................Kilowatt-hour
LIBOR...................London Inter-Bank Overnight Rate
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Amended and Restated 1992 Long-Term Incentive Plan
Matagorda ..............Matagorda County Navigation District Number One (Texas)
pollution control revenue bond issuing authority
Mcfs ...................Thousand cubic feet of gas
MD&A ...................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
Named Executive
Officers..............The CEO and the four most highly compensated Executive
Officers, as defined by regulation
National Grid ..........National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
OASIS ..................Open access same time information system
OEFA....................Oklahoma Environmental Finance Authority pollution
control revenue bond issuing authority
OFGEM...................Office of Gas and Electricity Markets
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. 1
OPEB ...................Other postretirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
PCRB....................Pollution control revenue bond
PGC.....................Power Generation Company
Phillips................Phillips Petroleum Company
PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock
Purchase Plan
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement.............Joint stipulation agreement reached by PSO and other
parties to settle PSO's rate inquiry
PURPA...................Public Utility Regulatory Policies Act of 1978
QF......................Qualifying Facility as defined in PURPA
RCRA....................Federal Resource Conservation and Recovery Act of 1976
Red River...............Red River Authority of Texas pollution control revenue
bond issuing authority
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
RESCTA .................Retail Electric Supplier Certified Territory Act
REP.....................Retail Electric Provider
Retirement Savings Plan.CSW's employee retirement savings plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RTO.....................Region Transmission Organization
Sabine..................Sabine River Authority of Texas pollution control
revenue bond issuing authority
SAR ....................Stock Appreciation Right
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted
to U.S. Generally Accepted Accounting Principles
iii
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
SERP....................Special Executive Retirement Plan
SFAS....................Statement of Financial Accounting Standards
SFAS No. 34.............Capitalization of Interest Cost
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
Regulation
SFAS No. 87.............Employers' Accounting for Pensions
SFAS No. 88.............Employers' Accounting for Settlements and Curtailments
of Defined Pension Plans and for Termination Benefits
SFAS No. 101............Regulated Enterprises - Accounting for the
Discontinuation of Application of SFAS No. 71
SFAS No. 106 ...........Employers' Accounting for Postretirement Benefits Other
than Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 121............Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of
SFAS No. 123 ...........Accounting for Stock-Based Compensation
SFAS No. 130 ...........Reporting Comprehensive Income
SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related
Information
SFAS No. 132 ...........Employers' Disclosures about Pensions and Other
Postretirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 137............Deferral of the Effective Date of Statement No. 133
SPP ....................Southwest Power Pool
Siloam Springs..........City of Siloam Springs, Arkansas pollution control
revenue bond issuing authority
STP ....................South Texas Project nuclear electric generating station
STPNOC .................STP Nuclear Operating Company, a non-profit Texas
corporation, jointly owned by CPL, HL&P, City of Austin,
and City of San Antonio
SWEPCO .................Southwestern Electric Power Company, Shreveport,
Louisiana
Texas Commission .......Public Utility Commission of Texas
Texas Electric Operating
Companies............CPL, SWEPCO and WTU
Texas Legislation.......Texas Senate Bill 7 relating to deregulation of electric
utility industry
Titus County............Titus County Fresh Water Supply District No. 1 pollution
control revenue bond issuing authority
TNRCC...................Texas Natural Resource Conservation Commission
Transok.................Transok, Inc. and subsidiaries
Trust Preferred
Securities............Collective term for securities issued by business trusts
of CPL, PSO and SWEPCO classified on the balance sheet
as "Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated,
mandatorily redeemable preferred securities of
subsidiary trusts holding solely Junior Subordinated
Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)"
U.K. Electric...........SEEBOARD U.S.A.
Union Pacific ..........Union Pacific Railroad Company
U.S. Electric Operating Companies or
U.S. Electric .....CPL, PSO, SWEPCO and WTU
UWUA....................Utility Workers Union of America
Vale ...................Empresa De Electricidade Vale Paranapanema SA, a
Brazilian Electric Distribution Company
Valero..................Valero Refining Company-Texas, Valero Refining Company
and Valero Energy Company
WTU ....................West Texas Utilities Company, Abilene, Texas
Yorkshire ..............Yorkshire plc, a regional electricity company in the
United Kingdom
iv
FORWARD-LOOKING INFORMATION
This report made by CSW and its U.S. Electric Operating Companies contains
forward-looking statements within the meaning of Section 21E of the Exchange
Act. Although CSW and each of its subsidiaries believe that their expectations
are based on reasonable assumptions, any such statements may be influenced by
factors that could cause actual outcomes and results to be materially different
from those projected. Important factors that could cause actual results to
differ materially from those in the forward-looking statements include, but are
not limited to:
- - increased competition and electric utility industry restructuring in the
United States,
- - the impact of the proposed AEP Merger, including any regulatory
conditions imposed on the merger or the inability to consummate the AEP
Merger, or other merger and acquisition activity,
- - federal and state regulatory developments and changes in law which may have
a substantial adverse impact on the value of CSW System assets,
- - the impact of general economic changes in the United States and in
countries in which CSW either currently has made or in the future may make
investments,
- - timing and adequacy of rate relief,
- - adverse changes in electric load and customer growth,
- - climatic changes or unexpected changes in weather patterns,
- - changing fuel prices, generating plant and distribution facility
performance,
- - decommissioning costs associated with nuclear generating facilities,
- - costs associated with any year 2000 computer-related failure(s) either
within the CSW System or supplier failures that adversely affect the CSW
System,
- - uncertainties in foreign operations and foreign laws affecting CSW's
investments in those countries,
- - the effects of retail competition in the natural gas and electricity
distribution and supply businesses in the United Kingdom, and
- - the timing and success of efforts to develop domestic and international
power projects.
In the non-utility area, the previously mentioned factors apply and also
include, but are not limited to:
- - the ability to compete effectively in new areas, including
telecommunications and other energy-related services, and
- - evolving federal and state regulatory legislation and policies that may
adversely affect those industries generally or the CSW System's
business in areas in which it operates.
v
PART I
ITEM 1. BUSINESS.
CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based
public utility holding company registered under the Holding Company Act. CSW
owns all of the outstanding shares of common stock of the U.S. Electric
Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3
Communications, EnerShop, and CSW Energy Services, and indirectly owns all of
the outstanding share capital of SEEBOARD. In addition, CSW owns 80% of the
outstanding shares of common stock of CSW Leasing. In 1999, CSW's operating
segments, including its four registrants that form the U.S. Electric segment,
contributed the following percentages to aggregate operating revenues, operating
income and net income.
U.S. U.K.
CPL PSO SWEPCO WTU Electric Electric Other Total
----------------------------------------------------------
Operating 26% 13% 17% 8% 64% 31% 5% 100%
Revenues
Operating 35% 15% 14% 8% 72% 23% 5% 100%
Income
Net Income (1) 37% 15% 18% 7% 77% 24% (1)% 100%
(1) Net Income before Extraordinary Items
The relative contributions of the U.S. Electric, U.K. Electric and
Diversified Electric segments and other non-utility subsidiaries to the
aggregate operating revenues, operating income and net income differ from year
to year due to variations in weather, fuel costs, timing and amount of rate
changes and other factors, including but not limited to changes in business
conditions and the results of non-utility businesses. Sales of electricity by
the U.S. Electric Operating Companies tend to increase during warmer summer
months and, to a lesser extent, cooler winter months, because of higher demand
for power. The sale of electricity by the U.K. Electric segment tends to
increase during colder winter months because of a higher demand for power. For
additional detail related to CSW's reportable business segments, see ITEM 8. -
NOTE 14. BUSINESS SEGMENTS. For financial results showing CSW's seasonality, see
ITEM 8. - NOTE 19. QUARTERLY INFORMATION.
The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance, acquisition and sale of securities,
the acquisition and sale of utility assets, the acquisition of or any interest
in any other business and accounting practices, including certain affiliate
transactions, and other matters. See RATES AND REGULATION below, and ITEM 7.
MD&A for additional information regarding the Holding Company Act.
PROPOSED AEP MERGER
Background Information
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28 billion at that time. At December 31, 1999, the total market
capitalization of the combined company would have been $19 billion ($9 billion
in equity; $10 billion in debt). The combined company will serve more than 4.7
million customers in 11 states and approximately 4 million customers outside the
United States. On May 27, 1998, AEP shareholders approved the issuance of the
additional shares of stock required to complete the merger. On May 28, 1998, CSW
stockholders approved the merger. On December 16, 1999, the AEP merger agreement
was amended to extend the date of the agreement to June 30, 2000, after which
either party may terminate the agreement.
1
Under the merger agreement, each common share of CSW will be converted
into 0.6 share of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price, and AEP would have issued approximately $6.6 billion in stock to
CSW stockholders to complete the transaction. At December 31, 1999, AEP would
have issued approximately $4.1 billion in stock to CSW stockholders to complete
the transaction. CSW plans to continue to pay dividends on its common stock
until the closing of the AEP Merger at approximately the same times and rates
per share as in 1999, subject to the continuing evaluation of CSW's earnings,
financial condition and other factors by the CSW board of directors.
Under the merger agreement, there will be no changes required with respect
to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.
AEP and CSW anticipate net savings related to the merger of approximately
$2 billion over a 10-year period from the elimination of duplication in
corporate and administrative programs, greater efficiencies in operations and
business processes, increased purchasing efficiencies, and the combination of
the two work forces. AEP and CSW continue to seek opportunities for additional
savings and anticipate significant additional savings will be achieved after the
merger.
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict the
manner in which the parties may operate their respective businesses until the
time of closing of the merger. In particular, without the prior written consent
of AEP, CSW may not engage in a number of activities that could affect its
sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from: (i) issuing shares of
common stock other than pursuant to employee benefit plans; (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures; and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted. (The foregoing statements constitute forward-looking statements within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).
Merger Regulatory Approval
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies. In order to be closed, the merger
must satisfy many conditions, including the condition that it must be accounted
for as a pooling of interests. The parties may not waive some of these
conditions. AEP and CSW have initiated the process of seeking regulatory
approvals, but there can be no assurance as to when, on what terms or whether
the required approvals will be received. The proposed AEP Merger has a targeted
completion date in the second quarter of 2000. However, there can be no
assurance that the AEP Merger will be consummated.
See ITEM 7. MD&A and ITEM 8. - NOTE 15. PROPOSED AEP MERGER.
2
U.S. ELECTRIC
The U.S. Electric Operating Companies generate, purchase, transmit,
distribute and sell electricity. The U.S. Electric Operating Companies serve
approximately 1.8 million customers in one of the largest combined service
territories in the United States covering approximately 152,000 square miles in
portions of Texas, Oklahoma, Louisiana and Arkansas. The customer base includes
a mix of residential, commercial and diversified industrial customers. CPL and
WTU operate in portions of south and central west Texas, respectively. PSO
operates in portions of eastern and southwestern Oklahoma, and SWEPCO operates
in portions of northeastern Texas, northwestern Louisiana and western Arkansas.
Information concerning each of the U.S. Electric Operating Companies for 1999 is
presented in the following table.
Estimated
Estimated Service Average Rural Electric
State and Year Population Territory Number of Municipal Cooperatives
Registrant Incorporation Served (sq. miles) Customers Customers Served
----------------------------------------------------------------------------------------
CPL Texas - 1945 1,830,000 44,000 661,100 1 4
PSO Oklahoma - 1913 1,113,000 30,000 490,900 2 2
SWEPCO Delaware - 1912 942,000 25,000 421,900 3 9
WTU Texas - 1927 387,000 53,000 189,100 4 13
The largest cities in CPL's service territory are Corpus Christi, Laredo
and McAllen. The economic base of CPL's service territory includes
manufacturing, mining, agricultural, transportation and public utilities
sectors. Major activities in these sectors include oil and gas extraction, food
processing, apparel, metal refining, chemical and petroleum refining, plastics
and machinery equipment. Contracts with substantially all large industrial
customers provide for both demand and energy charges. Demand charges continue
under such contracts even during periods of reduced industrial activity, thus
mitigating the effect of reduced activity on operating income.
The largest cities in PSO's service territory are Tulsa, Lawton, Broken
Arrow and Bartlesville. The economic base of PSO's service territory includes
petroleum products, manufacturing and agriculture. The principal industries in
the territory include natural gas and oil production, oil refining, steel
processing, aircraft maintenance, paper manufacturing and timber products,
glass, chemicals, cement, plastics, aerospace manufacturing, telecommunications
and rubber goods.
The largest cities in SWEPCO's service territory are Shreveport/Bossier
City, Longview and Texarkana. The economic base of SWEPCO's service territory
includes mining, manufacturing, chemical products, petroleum products,
agriculture and tourism. The principal industries in the territory include
natural gas and oil production, petroleum refining, manufacturing of pulp and
paper, chemicals, food processing and metal refining. The territory also has
several military installations, colleges and universities.
The largest cities in WTU's service territory are Abilene and San Angelo.
The economic base of WTU's service territory includes agricultural businesses,
such as the production of cattle, sheep, goats, cotton, wool, mohair and feed
crops. Significant gains have been made in economic diversification through
value added processing of these products. The natural resources of the territory
include oil, natural gas, sulfur, gypsum and ceramic clays. Important
manufacturing and processing plants served by WTU produce cottonseed products,
oil products, electronic equipment, precision and consumer metal products, meat
products, gypsum products and carbon fiber products. The territory also has
several military installations and state correctional institutions.
The U.S. Electric Operating Companies operate on an interstate basis to
facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW
North HVdc transmission interconnection located at Vernon, Texas. SWEPCO and CPL
are interconnected through the 600 MW East HVdc transmission interconnection
located at Pittsburg, Texas.
3
CPL and WTU are members of the ERCOT power grid that operates in Texas.
Other ERCOT members include Texas Utilities Electric Company, HL&P, Texas
Municipal Power Agency, Lower Colorado River Authority, the municipal systems of
San Antonio, Austin and Brownsville, the South Texas and Medina Electric
Cooperatives, and several other interconnected systems and cooperatives. PSO and
SWEPCO are members of the SPP power grid that includes 12 investor-owned
utilities, 7 municipalities, 7 cooperatives, 3 state agencies and 1 federal
agency as well as IPPs and power marketers operating in the states of Arkansas,
Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and
Texas. ERCOT members interchange power and energy with one another on a firm,
economy and emergency basis, as do the members of the SPP.
CSW Services performs, at cost, various accounting, engineering, tax,
legal, financial, electronic data processing, centralized economic dispatching
of electric power and other services for the CSW System, primarily for the U.S.
Electric Operating Companies. The U.S. Electric Operating Companies are
functionally organized into power generation, energy delivery and energy
services business units, which are centrally managed by CSW Services. Currently,
CSW is developing management information systems to report segment information
along these business lines. See RECENT DEVELOPMENTS AND TRENDS - Texas Business
Separation Plan for an explanation of CSW's future plans to unbundle its
vertically integrated electric services.
U.K. ELECTRIC
SEEBOARD is one of the 12 regional electricity companies formed as a
result of the restructuring and subsequent privatization of the United Kingdom
electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April
1996. SEEBOARD's principal businesses are the distribution and supply of
electricity. In addition, SEEBOARD is engaged in other businesses, including gas
supply, electricity generation, and electrical contracting.
SEEBOARD's service area covers approximately 3,000 square miles in
Southeast England. The service area extends from the outlying areas of London to
the English Channel, and includes large towns such as Kingston-upon-Thames,
Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural
areas. The area has a population of approximately 4.7 million people with
significant portions of the area, such as south London, having a high population
density. Over the past 25 years, the services sector of the area's economy has
grown in importance, while the industrial sector has declined. Considerable
commercial development has occurred in a number of towns in the area over the
last ten years, in particular in the areas around Gatwick Airport and the
English Channel ports.
In 1998, the electricity market in the U.K. began a phased opening of
competition, allowing domestic and small business customers in selected areas to
choose their electric suppliers. During 1999, competition was extended to the
entire country. SEEBOARD became one of the first regional electricity companies
to compete in the open marketplace, with part of its service area being opened
to competition in October 1998. SEEBOARD is actively competing to retain its
existing customers and win new customers in other regions.
In a joint venture, SEEBOARD Powerlink won a 30-year contract for $1.6
billion to operate, maintain, finance and renew the high-voltage power
distribution network of the London Underground, the largest metropolitan rail
system in the world. SEEBOARD Powerlink will be responsible for distributing
high voltage electricity supply to all 270 London Underground stations and to
some 250 miles of the rail system's track. SEEBOARD's partners in the Powerlink
consortium are an international electrical engineering group and an
international cable and construction group.
On June 30, 1999, SEEBOARD purchased the 50% interest in Beacon Gas held
by BP Amoco. Beacon Gas was a joint venture between SEEBOARD and BP Amoco set up
for the supply of gas.
4
See RATES AND REGULATION - U.K. ELECTRIC and ITEM 8. NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS - Regulatory Price Proposal for SEEBOARD for
additional information related to scheduled changes in SEEBOARD's prices and
expected effects thereof.
OTHER CSW BUSINESS OPERATIONS
CSW continually seeks opportunities to expand its non-utility business in
areas related to energy and energy services. This expansion frequently occurs
through strategic domestic and international acquisitions, through marketing
initiatives inside and outside of the service territories of the U.S. Electric
Operating Companies and through new business investments. Acquisitions of any
new assets, or development of any new business opportunities, must meet defined
criteria, including the potential to lower CSW System costs, increase long-term
efficiency and competitiveness, and provide an acceptable return on investment
to CSW. See ITEM 7. MD&A, PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP
MERGER for information related to covenants and restrictions on certain business
activities.
Diversified Electric
CSW Energy
CSW Energy presently owns interests in seven operating power projects
totaling 1,308 MW which are located in Colorado, Florida and Texas. In addition
to these projects, CSW Energy has other projects in various stages of
development.
CSW Energy began construction in August 1998 of a 500 MW power plant,
known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas.
The natural gas-fired facility began simple cycle operation of 330 MW in July
1999 and is scheduled to commence combined cycle operation in early 2000.
Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the
state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of Frontera
upon completion of the merger, subject to certain conditions. See ITEM 7. MD&A,
PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP MERGER for additional
information.
CSW Energy also has entered into an agreement with Eastman Chemical
Company to construct and operate a 440 MW cogeneration facility in Longview,
Texas. This facility will be known as the Eastex Cogeneration Project.
Construction of the facility began in the fourth quarter of 1999, with expected
operation in early 2001. CSW Energy will sell excess electricity generated by
the plant in the wholesale electricity market.
In October 1999, GE Capital Structured Finance Group purchased 50% of the
equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's
after-tax earnings from the proceeds of the transaction were approximately $33
million. The agreement between CSW Energy and GE Capital Structured Finance
Group provides for additional payments to CSW Energy subject to completion of a
planned expansion of the Sweeny cogeneration facility, which may be operational
in the fourth quarter of 2000.
CSW International
CSW International pursues investment opportunities in EWGs and FUCOs and
currently holds investments in the United Kingdom, Mexico and South America.
CSW International and its 50% partner, Scottish Power plc have entered
into a joint venture to construct and operate the South Coast power project, a
400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
International has guaranteed approximately (pound)19 million of the (pound)190
5
million construction financing. Both the guarantee and the construction
financing are denominated in pounds sterling. The U.S. dollar equivalent at
December 31, 1999 would be $31 million and $308 million respectively, using a
conversion rate of (pound)1.00 equals $1.62. The permanent financing is
unconditionally guaranteed by the project. Construction of the project began in
March 1999, and commercial operation is expected to begin in late 2000.
Through November 1999, CSW International had purchased a 36% equity
interest in Vale for $80 million. In 1998, CSW International also extended $100
million of debt convertible into equity in Vale. In December of 1999, CSW
International converted $69 million of that $100 million of debt into equity,
thereby raising its equity interest in Vale to 44%. CSW International
anticipates converting the remaining debt to equity over the next two years. See
ITEM 7. MD&A - DIVERSIFIED ELECTRIC - CSW International for additional
information about these investments.
As of December 31, 1999, CSW International had invested $110 million in
common stock of a Chilean electric company.
Energy Services
C3 Communications
C3 Communications has two active business units, C3 Networks and C3
Utility Automation. C3 Networks offers wholesale, high capacity, long-haul
regional and metropolitan fiber and collocation services to telecommunications
carriers and Internet service providers in Texas and Louisiana.
C3 Networks has approximately 1,500 miles of fiber network in Texas and
Louisiana and offers collocation services to carriers and Internet service
providers through sites in Dallas, Houston, Austin, San Antonio, Abilene, San
Angelo, Corpus Christi, Harlingen, Laredo, and McAllen, Texas and Tulsa,
Oklahoma.
C3 Communications plans to expand existing Texas and Louisiana routes and
to expand its fiber network to include Oklahoma and Arkansas. The network
expansion is expected to include additional sites in Victoria, Longview and
Bryan, Texas; Shreveport and Monroe, Louisiana; Lawton and Oklahoma City,
Oklahoma and Fayetteville and Fort Smith, Arkansas. C3 Communications also plans
to add two additional products to its offerings: cost-effective, reliable
wholesale Internet access and wholesale managed modem services.
C3 Utility Automation services include meter reading, validation and
settlement services; automated meter reading equipment sales and leasing; energy
information services and equipment sales and services. In 1999, C3
Communications launched a new energy information service, PurView(TM). In
addition, EnerACT(TM) advisory services, was transferred from EnerShop to better
align products and marketing. PurView(TM) is a service for collecting meter data
and interactively viewing and analyzing consumption information over the
Internet. EnerACT(TM), transferred from EnerShop, is an energy information and
advisory service for multi-site building owners and managers who want to
increase property value, control operating expenses and prepare for utility
deregulation. Additionally, C3 Utility Automation shifted away from efforts to
sell large-scale capital intensive mass-market automated meter reading
deployments in favor of more distributed methods for collecting meter data and
providing energy information services. While currently providing service for
over 90,000 direct access customers in California, C3 Communications plans to
leverage its experience providing meter data services by expanding into eight
other states where electric restructuring allows competition for metering
services.
C3 Communications believes that electric industry restructuring will
continue to fuel interest in its energy information services. Evaluation of
partnerships and acquisitions will also be a key element of growth for C3
Communications in 2000. The foregoing statement constitutes a forward-looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
6
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD-LOOKING INFORMATION.
EnerShop
EnerShop's two product lines in 1999 were performance contracting and
EnerACT(TM) advisory services until August 1999, when EnerACT(TM) was
transferred to C3 Communications to better align products and marketing.
EnerShop continues to provide energy services to customers in Texas and
Louisiana that are designed to help reduce customers' operating costs through
increasing energy efficiency and improving equipment operations. EnerShop
utilizes the skills of local trade allies in offering services that include
energy and facility analysis, project management, engineering design, equipment
procurement and construction and performance monitoring.
Business Ventures
The CSW Services' Business Ventures is comprised of companies that pursue
energy-related businesses. Projects include providing energy management systems,
electric substation automation software and the marketing and distribution of
electric bikes and associated accessories under the TotalEV(TM) name.
In late 1997, CSW Energy Services was launched to explore the electric
utility industry's emerging retail supply markets as they were deregulated on a
state-by-state basis. In January 1999, CSW Energy Services announced that it was
ceasing its business as a retail electric supplier and that it would assign its
existing electricity supply contracts to other suppliers or terminating them. In
the fourth quarter of 1999, the CSW Business Ventures group's investment in an
energy-related company that provides staffing services for nuclear power plants
was transferred from PSO to CSW Energy Services.
Other Diversified
CSW Credit was originally formed to purchase, without recourse, accounts
receivable from the U.S. Electric Operating Companies to reduce working capital
requirements. In addition, because CSW Credit's capital structure is more highly
leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost
of capital is lower. Subsequent to its formation, CSW Credit's business has
expanded to include the purchase, without recourse, of accounts receivable from
certain non-affiliated utilities, subject to limitations imposed by the SEC
under the Holding Company Act.
CSW Leasing, Inc. is a subsidiary which is 80% owned by CSW, and makes
investments in leveraged leases of transportation equipment.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are affecting
the CSW System and electric utilities generally. Current legislative and
regulatory initiatives are aimed at creating greater competition in both the
wholesale and retail markets in the future. See ITEM 8. NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for further
information. As competition in the industry increases, the U.S. Electric
Operating Companies will have the opportunity to seek new customers and at the
same time will be at risk of losing customers to other competitors.
Additionally, the U.S. Electric Operating Companies will continue to compete
with suppliers of alternative forms of energy, such as natural gas, fuel oil and
coal, some of which may be cheaper than electricity. As a whole, the U.S.
Electric Operating Companies believe that their prices for electricity and the
quality and reliability of their service currently place them in a position to
compete effectively in the marketplace. In light of these anticipated changes,
CSW continues to seek opportunities to expand its business operations that are
not regulated by state utility commissions (The foregoing statement constitutes
a forward-looking statement within the meaning of Section 21E of the Exchange
7
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).
To address the anticipated changes in the electric utility industry and to
properly align its business operations with its non-regulated activities, CSW
manages its business operations in five distinct lines of business. These
business lines fall into both the regulated and non-regulated categories. In
addition, given the expected restructuring of the utility industry, certain
aspects of the business lines will eventually cease to be regulated.
Consequently, CSW's operating structure is designed to accommodate both the
current business environment as well as the anticipated future environment. The
five business lines are: (i) power generation; (ii) energy delivery; (iii)
energy services; (iv) international energy operations; and (v)
telecommunications. Currently, CSW is developing management information systems
to report segment information along these business lines.
Code of Conduct Under Customer Choice
Legislation was enacted in Arkansas and Texas in 1999 to restructure the
electric utility industry in those states. These two new laws require that the
CSW System begin to operate its utilities as separate power generation entities,
retail electric providers and transmission and distribution entities. Power
generation entities and retail electric providers will be non-regulated;
transmission and distribution entities will continue to be regulated. On or
before September 1, 2000, the Texas operations of each of the U.S. Electric
Operating Companies will separate their regulated and non-regulated utility
activities.
The purpose of these laws and the separation they impose is to create
financial and informational firewalls between regulated and non-regulated
activities of the CSW System so that competitive sensitive information cannot be
shared by regulated and non-regulated entities.
In order to comply with the new Texas and Arkansas laws, the Registrants
will follow a "code of conduct," which requires the non-regulated business
activities to be separate from the regulated activities. Transactions between
the regulated and non-regulated activities will be subject to an
information-sharing "firewall" and the requirement to act on an arm's-length
basis.
For additional information regarding competition and industry challenges,
including legislative initiatives at both the state and federal level, see ITEM
7. MD&A - RECENT DEVELOPMENTS AND TRENDS - Competition and Industry Challenges -
Code of Conduct Under Customer Choice and ITEM 8. NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS.
RATES AND REGULATION
The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance of securities, certain acquisition and
divestiture activities, certain affiliate transactions and other matters. The
Holding Company Act generally limits the operations of a registered holding
company to that of a single integrated public utility system, plus such
additional businesses as are functionally related to such system. The U.S.
Electric Operating Companies have been classified as public utilities under the
Federal Power Act. Accordingly, the FERC has jurisdiction, in certain respects,
over their electric utility facilities and operations wholesale rates, and
certain other matters. The U.S. Electric Operating Companies are subject to the
jurisdiction of various state commissions as to retail rates, accounting
matters, standards of service and, in some cases, issuances of securities,
certification of facilities and extensions or divisions of service territories.
For a discussion of regulation by the various environmental agencies that
applies to the CSW System, see ENVIRONMENTAL MATTERS below.
8
U.S. Electric
Franchises
The U.S. Electric Operating Companies hold franchises to provide electric
service in various municipalities within their service areas. These franchises
have varying provisions and expiration dates, including, in some cases,
termination and buy-out provisions. CSW considers the franchises of the U.S.
Electric Operating Companies to be adequate for the conduct of their business.
However, due to electric utility restructuring legislation, which is phasing in
competition to retail markets in Arkansas and Texas, the U.S. Electric Operating
Companies expect additional competition in their franchise areas. See ITEM 7.
MD&A - Securitization of Generation-related Regulatory Assets and Stranded Costs
and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility
Restructuring Legislation for additional information on electric utility
restructuring.
Texas Rates - CPL, SWEPCO and WTU
The Texas Commission has original jurisdiction over retail rates in the
unincorporated areas of Texas. The governing bodies of incorporated
municipalities have original jurisdiction over rates within their incorporated
limits. Municipalities may elect, and some have elected, to surrender this
original jurisdiction to the Texas Commission. The Texas Commission has
appellate jurisdiction over rates set by incorporated municipalities.
In Texas, electric service areas are approved by the Texas Commission. A
given tract in a utility's overall service area may be certificated to one
utility, to one of several competing electric cooperatives or investor owned
utilities, to one of the competing municipal electric systems, or it may be
certificated to two or more of these entities. The Texas Commission has changed
these certificated areas only slightly since 1976.
Effective with the passage of the Texas Legislation, in areas in which
each certificated retail electric utility is providing customer choice, the
Texas Commission, if requested by a retail electric utility, shall examine all
areas within the service area of the retail electric utility that are also
certificated to one or more other retail electric utilities and amend the
certificates so that only one retail electric utility is certificated to provide
distribution services in any such area.
Three parties have filed applications at the Texas Commission requesting
authority to provide retail electric service in CPL's currently certificated
areas. Two of the parties requested that the Texas Commission order CPL to
permit them to use CPL's distribution facilities, which management believes to
be unlawful. Hearings on the matter were held in December 1999, and a final
order is anticipated in the second quarter of 2000. A third party sought to
operate as a distribution utility serving an economic development project, part
of which was in CPL's certificated territory. CPL and the third party entered
into a settlement agreement ending the dispute. The settlement provided that the
other party could serve the area, but would reimburse CPL on a per KW basis for
any stranded costs to the new system.
In a separate docket, the Texas Commission has determined that three large
naval bases, which are currently served as industrial customers by CPL, may
qualify as wholesale customers. A second phase of the proceeding has been
docketed to analyze all issues pertinent to the bases being able to take
electric service from other wholesale providers. Among the issues to be
addressed is the extent to which the U.S. Navy would have to compensate CPL for
costs that may be stranded if the naval facilities were to obtain electric
service from another wholesale provider. The procedural schedule has been
suspended to allow the parties time to finalize a settlement agreement.
9
Oklahoma Rates - PSO
PSO currently is subject to the jurisdiction of the Oklahoma Commission
with respect to retail prices. Pursuant to authority granted under RESCTA, the
Oklahoma Commission established service territorial boundary maps in all
unincorporated areas for all regulated retail electric suppliers serving
Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend
retail electric service into the certified territory of another supplier, except
to serve its own facilities or to serve a new customer with an initial full load
of 1,000 KW or more. RESCTA provides that when any territory certified to a
retail electric supplier or suppliers is annexed and becomes part of an
incorporated city or town, the certification becomes null and void. However,
once established in the annexed territory, a supplier may generally continue to
serve within the annexed area. See ITEM 7. MD&A, RECENT DEVELOPMENTS AND TRENDS.
Arkansas and Louisiana Rates - SWEPCO
SWEPCO is subject to the jurisdiction of the Arkansas Commission and
Louisiana Commission with respect to retail rates, as well as the Texas
Commission as described above. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS - Electric Utility Restructuring Legislation for information on
electric utility restructuring.
Nuclear Regulation - CPL
Ownership of an interest in a nuclear generating unit exposes CPL and,
indirectly, CSW to regulation not common to a fossil fuel generating unit. Under
the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974,
operation of nuclear plants is intensively regulated by the NRC, which has broad
power to impose licensing and safety-related requirements. Along with other
federal and state agencies, the NRC also has extensive regulations pertaining to
the environmental aspects of nuclear reactors. The NRC has the authority to
impose fines and/or shut down a unit until compliance is achieved, depending
upon its assessment of a particular situation. For additional information
regarding STP, see ITEM 7. MD&A.
U.K. Electric
SEEBOARD Rates and Franchise Area
The distribution and supply businesses of SEEBOARD are principally
regulated by the Electricity Act of 1989 and by the conditions contained in
SEEBOARD's public electricity supply license. The public electricity supply
license generally continues until at least 2025, although it may be revoked upon
25 years' prior notice after 2000. In addition, the public electricity supply
license may be revoked by the United Kingdom's Secretary of State in certain
specified circumstances. Prior to October 1998, SEEBOARD had the sole right to
supply substantially all of the consumers in its authorized area, except where
demand exceeded 100 KW. However, since October 1998, on a phased-in basis,
SEEBOARD no longer has monopoly supply rights in its franchise area. At December
31, 1999, 15% of SEEBOARD's domestic customers had elected to switch to an
alternative supplier.
Most of the income of the distribution business is regulated by a formula
set by the DGEGS based upon, among other factors, the United Kingdom Retail
Price Index. The formula generally sets a cap on the average price per unit of
electricity distributed, with allowed annual increases based upon changes in the
United Kingdom Retail Price Index minus a percentage factor set from time to
time by the DGEGS. The prices charged by SEEBOARD in its franchise supply
business are also determined from a formula set from time to time by the DGEGS.
However, as competition increases, the regulatory cap is likely to be removed.
The formula provides for a price cap derived from the forecast electricity
purchase costs, transmission charges, distribution costs and overheads, together
with an allowed margin as determined by the DGEGS. All holders of a second-tier
license, including SEEBOARD, who supply electricity to non-franchise customers
must pay charges to the host regional electricity company for the use of its
distribution network.
10
In 1999, OFGEM completed its review of price controls for both the
distribution and supply businesses. Despite SEEBOARD being identified as one of
the three most efficient electricity suppliers, OFGEM's final proposals will
result in substantial reductions in revenue for the distribution business,
effective from April 1, 2000, for five years. In addition, supply prices to
retail customers will be capped from April 1, 2000, for two years. Overall,
these changes to the supply business are viewed as broadly neutral to earnings.
A year-end study of projected SEEBOARD cash flows demonstrated that the recorded
value of goodwill was not impaired by these regulatory developments. See ITEM 8.
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related
to the review of SEEBOARD's prices.
FUEL RECOVERY - U.S. ELECTRIC
The recovery of fuel costs from retail customers by the U.S. Electric
Operating Companies is subject to regulation by the state utility commissions in
the states in which they operate. All of the contracts of the U.S. Electric
Operating Companies with their wholesale customers contain FERC approved
fuel-adjustment provisions for recovery of fuel costs.
Texas Fuel Recovery - CPL, SWEPCO and WTU
Electric utilities in Texas, including CPL, SWEPCO and WTU, are not
allowed to make automatic adjustments to recover changes in fuel costs from
retail customers. A utility is allowed to recover its known or reasonably
predictable fuel costs through a fixed fuel factor. The Texas Commission
established procedures whereby each utility under its jurisdiction may petition
to revise its fuel factor every six months according to a specified schedule.
Fuel factors may also be revised in the case of emergencies or in a general rate
proceeding. Fuel factors are in the nature of temporary rates and the utility's
collection of revenues by such factors is subject to adjustment at the time of a
fuel reconciliation. Under these procedures, at its semi-annual adjustment date,
a utility is required to petition the Texas Commission for a surcharge or to
make a refund when it has materially under- or over-collected its fuel costs and
projects that it will continue to materially under- or over-collect. Material
under- or over-collections including interest are defined as variances of four
percent or more of the most recent Texas Commission adopted annual estimated
fuel cost for the utility. A utility does not have to revise its fuel factor
when requesting a surcharge or refund. An interim emergency fuel factor order
must be issued by the Texas Commission within 30 days after such petition is
filed by the utility. Final reconciliation of fuel costs is made through a
reconciliation proceeding, which may contain a maximum of three years and a
minimum of one year of reconcilable data, and must be filed with the Texas
Commission no later than six months after the end of the period to be
reconciled. In addition, a utility must include a reconciliation of fuel costs
in any general rate proceeding regardless of the time since its last fuel
reconciliation proceeding. Any fuel costs that are determined to be unreasonable
in a reconciliation proceeding are not recoverable from retail customers.
Beginning January 1, 2002, fuel costs will not be subject to Texas
Commission fuel reconciliation proceedings. Pursuant to the Texas Legislation,
after January 1, 2002, the date that retail customer choice commences, each
electric utility will file a final fuel reconciliation for the period ending
December 31, 2001. These final fuel balances will be included in each company's
true-up proceeding in 2004. See ITEM 7. MD&A - Securitization of
Generation-related Regulatory Assets and Stranded Costs and ITEM 8. NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring
Legislation.
Oklahoma Fuel Recovery - PSO
In general, MWH sales to PSO's retail customers are made at rates which
include a service level fuel cost adjustment factor reflecting the difference
between projected fuel and purchased power costs and the fuel rate embedded in
PSO's base rates. The factors are determined twice each year and are based upon
projected fuel, natural gas transportation, and purchased power costs. Any
difference between projected and actual costs is included in the fuel recovery
calculation for future periods. Oklahoma law requires that an examination of
11
PSO's retail fuel cost adjustment factor is performed annually by the Oklahoma
Commission, which approves the utility's embedded fuel rate per KWH.
Arkansas and Louisiana Fuel Recovery - SWEPCO
SWEPCO's fuel recovery mechanisms are subject to the jurisdiction of the
Arkansas Commission and the Louisiana Commission. SWEPCO's retail rates
currently in effect in Louisiana are adjusted based on SWEPCO's cost of fuel in
accordance with a fuel cost adjustment which is applied to each billing month
based on the second previous month's average cost of fuel. Provision for any
over- or under-recovery of fuel costs is allowed under an automatic fuel clause.
A new SWEPCO fuel adjustment rider, as approved by the Arkansas
Commission, was implemented in December 1999. Under this fuel adjustment rider,
an annual fuel cost factor is developed each year based on the previous year's
actual fuel cost. This factor is then applied to each billing month's sales,
which allows SWEPCO to recover fuel costs from its customers. Any difference
between actual fuel cost for the month and the revenues collected from
customers, including interest, will be included in the determination of the
annual factor for the following year.
Recoverability of Fuel Costs
Under current regulation, the U.S. Electric Operating Companies recover
all their material fuel costs from their customers. The inability of any of the
U.S. Electric Operating Companies to recover its fuel costs under the procedures
described above could have a material adverse effect on such company's results
of operations and financial condition.
See ITEM 7. MD&A and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for further information with respect to regulatory, rate and fuel proceedings.
FUEL SUPPLY AND PURCHASED POWER - U.S. ELECTRIC
The U.S. Electric Operating Companies' net dependable summer rating, power
generation capabilities and the type of fuel used are set forth in ITEM 2.
PROPERTIES. Information concerning energy sources and cost data for the years
1997 through 1999 is presented in the following tables. In addition, detailed
fuel cost and consumption information for 1999 is also presented.
CSW
Source of Energy (based on MW) 1999 1998 1997
-------------------------------
Natural Gas 39% 38% 36%
Coal 38 39 41
Lignite 7 8 9
Nuclear 7 7 7
-------------------------------
Total Generated 91 92 93
Purchased Power 9 8 7
-------------------------------
Total 100% 100% 100%
-------------------------------
Fuel Cost data
Average Btu per net KWH 10,470 10,514 10,405
Cost per MMbtu $1.78 $1.67 $1.83
Cost per KWH generated 1.86(cent)1.75(cent)1.90(cent)
Cost, including purchased power, as a percentage
of revenue 37.8% 37.3% 38.1%
12
CPL
Source of Energy (based on MW) 1999 1998 1997
-------------------------------
Natural Gas 49% 51% 50%
Coal 20 20 18
Nuclear 20 21 22
-------------------------------
Total Generated 89 92 90
Purchased Power 11 8 10
-------------------------------
Total 100% 100% 100%
-------------------------------
Fuel cost data
Average Btu per net KWH 10,637 10,563 10,386
Cost per MMbtu $1.72 $1.59 $1.83
Cost per KWH generated 1.82(cent)1.68(cent)1.90(cent)
Cost, including purchased power, as a percentage
of revenue 31.8% 30.3% 32.9%
PSO
Source of Energy (based on MW)
Natural Gas 45% 43% 39%
Coal 37 43 48
-------------------------------
Total Generated 82 86 87
Purchased Power 18 14 13
-------------------------------
Total 100% 100% 100%
-------------------------------
Fuel cost data
Average Btu per net KWH 10,298 10,272 10,264
Cost per MMbtu $1.96 $1.77 $1.98
Cost per KWH generated 2.02(cent)1.82(cent)2.03(cent)
Cost, including purchased power, as a percentage
of revenue 45.9% 47.1% 46.4%
SWEPCO
Source of Energy (based on MW)
Natural Gas 17% 15% 12%
Coal 52 51 52
Lignite 21 23 26
-------------------------------
Total Generated 90 89 90
Purchased Power 10 11 10
-------------------------------
Total 100% 100% 100%
-------------------------------
Fuel cost data
Average Btu per net KWH 10,380 10,544 10,554
Cost per MMbtu $1.66 $1.63 $1.69
Cost per KWH generated 1.72(cent)1.72(cent)1.79(cent)
Cost, including purchased power, as a percentage
of revenue 43.2% 42.7% 43.4%
WTU
Source of Energy (based on MW)
Natural Gas 41% 42% 37%
Coal 31 33 36
---------------------------
Total Generated 72 75 73
Purchased Power 28 25 27
----------------------------
Total 100% 100% 100%
----------------------------
Fuel cost data
Average Btu per net KWH 10,599 10,828 10,275
Cost per MMbtu $1.98 $1.83 $1.98
Cost per KWH generated 2.10(cent)1.98(cent)2.03(cent)
Cost, including purchased power, as a percentage
of revenue 42.0% 40.2% 42.6%
13
1999 Cost 1999 Consumption
Fuel Type per MMbtu (millions)
- --------------------------------------------------------------------------------
MMbtus Mcfs Tons
CSW
Natural gas $2.43 296 289
Coal 1.39 272 16
Lignite 1.21 57 4
Nuclear .42 51
Composite 1.78
CPL
Natural gas $2.34 132 129
Coal 1.36 52 3
Nuclear .42 51
Composite 1.72
PSO
Natural gas $2.57 81 80
Coal 1.20 67 4
Composite 1.96
SWEPCO
Natural gas $2.46 46 44
Coal 1.53 127 8
Lignite 1.21 57 4
Composite 1.66
WTU
Natural gas $2.44 37 36
Coal 1.29 26 1
Composite 1.98
Natural Gas
CSW Services purchased approximately 289 billion cubic feet of natural gas
during 1999 for the U.S. Electric Operating Companies, which ranks them as the
third largest consumer of natural gas in the United States. A majority of the
gas fired electric generation plants are connected to at least two natural gas
pipelines, which provides greater access to competitive supplies and improves
reliability. Natural gas requirements for each plant are supplied by a portfolio
of long-term and short-term gas purchase and transportation agreements which are
acquired on a competitive basis and are based on market prices.
Coal and Lignite
The U.S. Electric Operating Companies purchase coal from a number of
suppliers. In 1999, the U.S. Electric Operating Companies purchased
approximately 73% of their total coal purchases under long-term contracts with
the balance procured on the spot market. The coal for the plants comes primarily
from Wyoming and Colorado mines, which are located between 1,000 and 1,700 rail
miles from the generating plants.
Oklaunion - CPL, PSO and WTU
The jointly-owned Oklaunion plant purchases coal under a coal supply
contract with Caballo Coal Company which accounts for approximately 64% of the
total 1999 Oklaunion coal requirements for CPL, PSO and WTU with the balance
procured on the spot market. As of December 31, 1999, CPL's share of the
year-end 1999 coal inventory at Oklaunion was approximately 35,000 tons,
representing a 46-day supply. PSO's share was approximately 75,000 tons,
14
representing a 50-day supply. WTU's share was approximately 270,000 tons,
representing a 52-day supply.
Coleto Creek - CPL
CPL has a coal supply agreement with Colowyo Coal Company covering
approximately 50% of the coal requirements of its Coleto Creek plant. The
balance of the plant's coal deliveries came from spot market purchases of Powder
River Basin and Colorado coal that was delivered under one spot market rail
transportation agreement. Additionally, approximately 80,000 tons of spot coal
were purchased and transported via truck to the plant. At December 31, 1999, CPL
had approximately 556,000 tons of coal in inventory at Coleto Creek,
representing a 74-day supply.
During 2000, CPL intends to purchase Powder River Basin coal on the spot
market for approximately 50% of the Coleto Creek plant requirements and will
transport such coal pursuant to a rail transportation agreement with Union
Pacific. The remainder of CPL's coal will be purchased from multiple Colorado
suppliers. This coal will also be transported by Union Pacific. Union Pacific is
currently the only rail carrier with access to the Coleto Creek plant. In 1994,
CPL instituted a proceeding at the Interstate Commerce Commission requesting a
reasonable rate for the 16 miles from Victoria, Texas to Coleto Creek. Southern
Pacific Transportation Company moved to dismiss the complaint and, in a decision
issued December 31, 1996, the Surface Transportation Board of the U.S.
Department of Transportation, successor to the Interstate Commerce Commission,
granted the motion. CPL appealed this decision to the U.S. Court of Appeals for
the Eighth Circuit. On February 10, 1999, the U.S. Court of Appeals for the
Eighth Circuit issued a ruling upholding the Surface Transportation Board's
decision in the case. Subsequently, the Western Coal Traffic League, of which
CPL is a member, appealed the eighth circuit court's decision to the U.S.
Supreme Court. On October 18, 1999, the U.S. Supreme Court denied Western Coal
Traffic League's appeal, bringing the legal proceeding to a close.
Northeastern Station - PSO
PSO has a long-term contract with Kennecott Energy Corporation, which
substantially covers the coal supply for PSO's Northeastern Station coal units.
Coal delivery is by unit trains from mines located in the Gillette, Wyoming
vicinity, a distance of about 1,100 rail miles from the Northeastern Station.
PSO owns sufficient railcars for operation of six unit trains. Coal is
transported to the Northeastern Station pursuant to a long-term contract with
Burlington Northern. The plant at Northeastern station is also equipped to
accept deliveries from Union Pacific. At December 31, 1999, PSO had
approximately 851,000 tons of coal in inventory at Northeastern Station,
representing a 71-day supply.
Welsh and Flint Creek - SWEPCO
The long-term coal supply for SWEPCO's Welsh plant and its 50% owned Flint
Creek plant is provided under a contract with Cyprus Amax Minerals Company. Coal
under this contract is mined near Gillette, Wyoming, a distance of about 1,500
and 1,100 miles, respectively, from the Welsh and Flint Creek plants. Coal is
delivered to the plants under rail transportation contracts with Burlington
Northern and the Kansas City Southern Railroad Company, which expire on dates
ranging between 2001 and 2006. SWEPCO owns or leases, under long-term leases,
sufficient railcars and spares for the operation of 15 unit trains. SWEPCO has
supplemented its railcar fleet from time to time with short-term leases. At
December 31, 1999, SWEPCO had coal inventories of approximately 1,479,000 tons
at Welsh, representing a 74-day supply, and approximately 556,000 tons at Flint
Creek, representing a 74-day supply. See ITEM 8. NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional information.
Pirkey and Dolet Hills - SWEPCO
SWEPCO has acquired lignite leases covering approximately 27,000 acres
near the Henry W. Pirkey power plant. Sabine Mining Company is the contract
miner of these reserves. At December 31, 1999, approximately 280,000 tons of
lignite were in SWEPCO's inventory at the Pirkey plant representing a 22-day
supply. Another 25,000 acres are jointly leased in equal portions by SWEPCO and
CLECO in the Dolet Hills area of Louisiana near the Dolet Hills Power Plant. The
15
DHMV is the contract miner for these reserves. At December 31, 1999, SWEPCO had
160,000 tons of lignite in inventory at the Dolet Hills plant, representing a
28-day supply. SWEPCO believes the acreage under lease in these areas contains
sufficient reserves to cover the anticipated lignite requirements for the
estimated useful lives of the lignite-fired units. For a discussion related to
SWEPCO Dolet Hills litigation see ITEM 8. NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS - SWEPCO Lignite Mining Agreement Litigation.
Nuclear Fuel - CPL
The supply of fuel for STP involves a complex process. This process
includes the acquisition of uranium concentrate, the conversion of uranium
concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride into
the isotope U235, the fabrication of the enriched uranium into fuel rods and
incorporation of fuel rods into fuel assemblies. The fuel assemblies are the
final product loaded into the reactor core. This process requires that fuel
decisions be made years in advance of the actual need to refuel the reactor.
Fuel requirements for STP are being handled by the STPNOC.
Outages are necessary approximately every 18 months for refueling. Because
STP's fuel costs are significantly lower than any other CPL units, CPL's average
fuel costs are expected to be higher whenever a STP unit is out of service for
refueling or maintenance.
CPL and the other STP participants have entered into contracts with
suppliers for 100% of the uranium concentrate required for the operation of both
STP units through December 2002, with additional contracts to provide 54% of the
uranium concentrate needed for STP through 2004. In addition, CPL and the other
STP participants have entered into contracts with suppliers for 100% of the
nuclear fuel conversion service required for the operation of both STP units
through October 2001, with additional contracts to provide at least 40% of the
conversion service needed for STP through 2005. Enrichment contracts were
secured for a 30-year period from the initial operation of each unit. The STP
participants have canceled the enrichment contract for requirements after
October 2000. The participants believe that other, lower cost options will be
available in the future. CPL and the other STP participants have entered into
contracts to provide for 100% of enrichment services from October 2000 to
December 2004, with additional contracts to provide at least 40% of enrichment
services through 2006. Also, fuel fabrication services have been contracted for
operation through 2005 for Unit 1 and 2006 for Unit 2. Although CPL and the
other STP owners cannot predict the availability of uranium and related
services, CPL and the other STP owners do not currently expect to have
difficulty obtaining uranium and related services required for the remaining
years of STP operation.
The Energy Policy Act has provisions for the recovery of a portion of the
costs associated with the decommissioning and decontamination of the gaseous
diffusion plants used in the enrichment process. These costs are being recovered
on the basis of enrichment services purchased by utilities from the DOE prior to
October 1992. The total annual assessment for all domestic utilities is limited
to $150 million per federal fiscal year through October 2007. The STP assessment
will be approximately $2.0 million each year with CPL's share being 25.2% of the
annual STP assessment.
The Nuclear Waste Policy Act of 1982, as amended, required the DOE to
develop a permanent high level waste disposal facility for the storage of spent
nuclear fuel by 1998. The DOE last estimated that the permanent facility will
not be available until 2010. The DOE will take possession of all spent fuel
generated at STP as a result of a contract CPL and other STP participants have
entered into with the DOE. STP has on-site storage facilities with the
capability to store all the spent nuclear fuel generated by the STP units over
their lives. Therefore, the DOE delay in providing the disposal facility will
not affect the operation of the STP units. Under provisions of the Nuclear Waste
Policy Act of 1992, a one-mill per KWH assessment on electricity generated and
sold from nuclear reactors funds the DOE waste disposal program.
Risks of substantial liability could arise from the operation of STP and
from the use, handling, disposal and possible radioactive emissions associated
with nuclear fuel. While CPL carries insurance, the availability, amount and
16
coverage is limited and may become more limited in the future. The available
insurance may not cover all types or amounts of loss or expense which may be
experienced in connection with the ownership of STP. See ITEM 8. NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES for information relating to nuclear
insurance.
Governmental Regulation
The price and availability of each of the foregoing fuel types are
significantly affected by governmental regulation. Any inability in the future
to obtain adequate fuel supplies or adoption of additional regulatory measures
restricting the use of such fuels for the generation of electricity might affect
the U.S. Electric Operating Companies' ability to economically meet the needs of
their customers. Such regulatory measures could require the U.S. Electric
Operating Companies to supplement or replace, prior to normal retirement,
existing generating capability with units using other fuels. This would be
difficult to accomplish quickly, would require substantial additional
expenditures for construction and could have a significant adverse effect on the
financial condition and results of operations of CSW and/or any of the U.S.
Electric Operating Companies.
The Registrants are unable to predict the future cost of fuel. (The
foregoing statements constitute forward-looking statements within the meaning of
Section 21E of the Exchange Act. Actual results may differ materially from such
projected information due to changes in the underlying assumptions. See
FORWARD-LOOKING INFORMATION). See ITEM 7. MD&A and ITEM 8. NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS for additional information concerning fuel costs.
Power Purchases and Sales
The U.S. Electric Operating Companies serve various municipalities,
electric cooperatives and public power authorities. The U.S. Electric Operating
Companies exchange power with various neighboring electric systems and engage in
electric interchanges with each other. In addition, they contract with certain
suppliers, including power marketers and independent power producers for the
purchase or sale of capacity, firm energy, responsive reserves and other
wholesale services.
CPL - Wholesale Customers
Certain CPL wholesale customers have given notice of their intent to
terminate their contracts when they expire in 2001 through 2004. During 1999,
these customers represented 3% of CPL's total electric operating revenues.
ENVIRONMENTAL MATTERS
The CSW System is subject to regulation with respect to air and water
quality, solid waste standards and other environmental matters. These
authorities have continuing jurisdiction in most cases to require modifications
in facilities and operations. Any such changes in environmental statutes or
regulations could require substantial additional expenditures to modify the CSW
System's facilities and operations and could have a material adverse effect on
the results of operations and financial condition of CSW and/or any of the U.S.
Electric Operating Companies. Violations of environmental statutes or
regulations can result in fines and other costs. See FORWARD-LOOKING
INFORMATION.
EMFs
Research is ongoing whether exposure to EMFs may result in adverse health
effects. Although earlier studies suggested some correlation between EMFs and
adverse health effects, the research to date has not established a
cause-and-effect relationship between EMFs and adverse health effects from
electric lines. Recently, more comprehensive studies have failed to show any
correlation. CSW cannot predict the impact on CSW or the electric utility
industry if further investigations or proceedings were to establish that the
present electricity delivery system is contributing to increased risk or
incidence of health problems.
17
Other Environmental Matters
From time to time the Registrants become aware of various other
environmental issues or are named as parties to various other legal claims,
actions, complaints or other proceedings related to environmental matters.
Management does not expect disposition of any such pending environmental
proceedings to have a material adverse effect on the results of operations or
financial condition of CSW and/or any of the U.S. Electric Operating Companies.
See ITEM 7. MD&A, ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional information
relating to environmental matters.
U.S. ELECTRIC ENVIRONMENTAL MATTERS
Air Quality
Air quality standards and emission limitations are subject to the
jurisdiction of state regulatory authorities in each state in which the CSW
System operates, with oversight by the EPA. In accordance with regulations of
these state authorities, permits are required for all generating units on which
construction is commenced or which are substantially modified after the
effective date of the applicable regulations.
In 1990, the U.S. Congress amended the Clean Air Act. CAAA places
restrictions on the emission of sulfur dioxide from gas-, coal- and
lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric
Operating Companies will be required to hold allowances in order to emit sulfur
dioxide. The EPA issues allowances to owners of existing generating units based
on historical operating conditions. Based on the CSW U.S. Electric System
facilities plan, CSW believes that the allowances of the U.S. Electric Operating
Companies are adequate to meet their needs through 2008. Public and private
markets are developing for trading of excess allowances.
The CAAA also directed the EPA to issue regulations governing nitrogen
oxide emissions and requiring government studies to determine what controls, if
any, should be imposed on utilities to control toxic air emissions. The acid
rain rules have not been released. Accordingly, the impact of any such rules on
CSW and the U.S. Electric Operating Companies cannot be determined at this time.
Under the CAAA rules for nitrogen oxide control for coal units, the U.S.
Electric Operating Companies have elected alternate standards for their units
under an optional provision regarding emission limits. This will eliminate any
capital expenses through 2007, if the alternate standards are met.
Texas passed legislation in 1999 to have older units, which were
grandfathered under the CAAA, operate under permits and reduce emissions by 50%
based on 1997 emission levels. The U.S. Electric Operating Companies' compliance
cost for Texas grandfathered units are estimated to be from $3 million to $10
million. Approximately $1.6 million has been spent on compliance through
December 31, 1999. The deadline for compliance with the legislation on the
grandfathered units is May 2003.
The EPA recently promulgated revised, more stringent ambient air quality
standards for ozone and particulates. While these standards do not mandate
emission constraints or reductions for facilities such as electricity generating
power plants, they may result in more areas being designated as non-attainment
for these two pollutants. States will be required to develop strategies to
achieve compliance in these areas, strategies that may include lower emission
levels for electricity generating power plants, possibly including facilities
within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be to significantly
raise operations and maintenance costs of the U.S. Electric Operating Companies.
18
At the Kyoto, Japan Conference on Global Warming held in December 1997,
U.S. representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
Companies could be affected if this treaty, in its present form, is approved by
the United States Congress. The impact, if any, on CSW or the U.S. Electric
Operating Companies cannot be determined because most of the greenhouse gas
emission reduction would come from coal generation that would have to be
switched to natural gas or retired. During 1999, 50% of the U.S. Electric
Operating Companies' MWH generation and 33% of its installed generating capacity
at December 31, 1999 was coal and lignite.
Water Quality
Water quality is subject to the jurisdiction of each of the state
regulatory authorities in which the U.S. Electric Operating Companies operate as
well as the EPA. These authorities have jurisdiction over all wastewater
discharges into state waters, establish water quality standards and issue waste
control permits covering discharges which might affect the quality of state
waters. The EPA has jurisdiction over point source discharges through the
National Pollutant Discharge Elimination System provisions of the Clean Water
Act.
RCRA and CERCLA
The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules
provide for comprehensive control of all solid wastes from generation to final
disposal. The appropriate state regulatory authorities in the states in which
the U.S. Electric Operating Companies operate have received authorization from
the EPA to administer the RCRA solid waste control program for their respective
states.
The operations of the U.S. Electric Operating Companies, like those of
other utility systems, generally involve the use and disposal of substances
subject to environmental laws. CERCLA, the federal "Superfund" law, addresses
the cleanup of sites contaminated by hazardous substances. Superfund requires
that PRPs fund remedial actions regardless of fault or the legality of past
disposal activities. PRPs include owners and operators of contaminated sites and
transporters and/or generators of hazardous substances. Many states have similar
laws. Theoretically, any one PRP can be held responsible for the entire cost of
a cleanup. Typically, however, cleanup costs are allocated among PRPs.
CSW's subsidiaries incur significant costs for the handling,
transportation, storage and disposal of hazardous and non-hazardous waste
materials. Unit costs for waste classified as hazardous exceed by a substantial
margin unit costs for waste classified as non-hazardous.
The U.S. Electric Operating Companies, like other electric utilities,
produce combustion and other generation by-products, such as ash, sludge, slag,
low-level radioactive waste and spent nuclear fuel. The U.S. Electric Operating
Companies own distribution poles treated with creosote or other substances. The
EPA currently exempts coal combustion by-products from regulation as hazardous
wastes. Distribution poles treated with creosote or other substances are not
expected to exhibit characteristics that would cause them to be hazardous waste.
In connection with their operations, the U.S. Electric Operating Companies also
have used asbestos, PCBs and materials classified as hazardous waste. If
additional by-products or other materials generated or used by companies in the
CSW U.S. Electric System were reclassified as hazardous wastes, or other new
laws or regulations concerning hazardous wastes were put into effect, CSW System
disposal and remedial costs could increase materially.
EPA Toxic Release Inventory Initiative
Beginning July 1, 1999, the EPA requires electric utilities to report the
amount of certain chemicals released by coal-fired power plants under its Toxic
Release Inventory Initiative. The regulations currently require nearly 30,000
facilities nationwide to report their annual emissions of certain chemicals. The
Toxic Release Inventory Initiative allows the public to access information on
the types and quantities of listed chemicals that are released. The Toxic
Release Inventory regulations require reports on the amounts of materials
disposed of, transferred offsite, recovered and recycled.
19
U.K. ELECTRIC ENVIRONMENTAL MATTERS
SEEBOARD's operations are subject to regulation with respect to water
quality standards and other environmental matters by various authorities within
the United Kingdom. Under certain circumstances, these authorities may require
modifications to SEEBOARD's facilities and operations and/or impose fines and
other costs for violations of applicable statutes and regulations. From time to
time SEEBOARD is made aware of various environmental issues or is named as a
party to various legal claims, actions, complaints or other proceedings related
to environmental matters. Management does not expect disposition of any such
pending environmental proceedings to have a material adverse effect on CSW's
consolidated results of operations or financial condition.
OPERATING INFORMATION - CSW SYSTEM
CSW
(excludes SEEBOARD)
1999 1998 1997
---------------------------
Kilowatt-hour sales (millions)
Residential 18,997 19,757 17,995
Commercial 15,641 15,554 14,546
Industrial 21,232 21,481 21,087
Other retail 1,936 1,906 1,705
---------------------------
Sales to retail customers 57,806 58,698 55,333
Sales for resale 8,996 8,296 7,824
---------------------------
Total 66,802 66,994 63,157
---------------------------
Average number of electric customers (thousands)
Residential 1,500 1,480 1,462
Commercial 227 218 214
Industrial 21 22 23
Other retail 15 15 13
---------------------------
Total 1,763 1,735 1,712
---------------------------
Revenue per KWH
Residential 6.64(cent)6.60(cent)6.96(cent)
Commercial 5.74 5.71 6.13
Industrial 3.76 3.62 3.85
Sales for Resale 3.43 3.16 3.11
Peak Load and Capability
Net system capability (MW) (1) 15,525 14,839 14,290
Maximum coincident system demand (MW) 14,066 13,718 13,105
Percentage increase in peak demand over prior
period 2.5% 4.7% 3.9%
Generation at time of peak (MW) 13,220 13,012 12,817
Percent of peak demand generated 94.0% 94.9% 97.8%
Net purchases at time of peak (MW) 846 706 288
Percent of net purchases at time of peak 6.0% 5.2% 2.2%
Date of maximum coincident system demand August12 July 27 July 28
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Excludes 85 MW of system capability in storage in 1998 and 310 MW of
system capability in storage and 156 MW of system capability under repair
in 1997.
20
CPL
1999 1998 1997
---------------------------
Kilowatt-hour sales (millions)
Residential 7,248 7,167 6,771
Commercial 5,256 5,122 4,846
Industrial 8,219 8,350 7,999
Other retail 580 553 486
---------------------------
Sales to retail customers 21,303 21,192 20,102
Sales for resale 1,813 1,867 1,737
---------------------------
Total 23,116 23,059 21,839
---------------------------
Average number of electric customers
Residential 563,200 550,000 538,700
Commercial 88,200 82,000 79,700
Industrial 5,300 5,500 5,600
Other 4,400 4,500 3,900
---------------------------
Total 661,100 642,000 627,900
---------------------------
Revenue per KWH
Residential 7.46(cent)7.35(cent)7.99(cent)
Commercial 7.49 7.37 8.26
Industrial 4.02 3.71 4.13
Sales for resale 4.18 3.57 4.06
Peak Load and Capability
Net system capability (MW) (1) 4,773 4,542 4,319
Maximum coincident system demand (MW) 4,454 4,537 4,232
Percentage increase/(decrease) in peak demand (1.8)% 7.2% 4.6%
over prior period
Generation at time of peak (MW) 4,200 3,688 4,227
Percent of peak demand generated 94.3% 81.3% 99.9%
Net purchases at time of peak (MW) 254 849 5
Percent of net purchases at time of peak 5.7% 18.7% 0.1%
Date of maximum coincident system demand August 5 August 13 August 20
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Excludes 60 MW of system capability in storage in 1997.
21
PSO
1999 1998 1997
-----------------------------
Kilowatt-hour sales (millions)
Residential 5,336 5,772 5,054
Commercial 5,057 5,091 4,698
Industrial 4,972 4,873 4,714
Other retail 251 265 192
-----------------------------
Sales to retail customers 15,616 16,001 14,658
Sales for resale 1,005 861 958
-----------------------------
Total 16,621 16,862 15,616
-----------------------------
Average number of electric customers
Residential 427,600 423,300 419,600
Commercial 56,800 56,100 55,300
Industrial 4,900 5,000 5,100
Other 1,600 1,600 1,400
-----------------------------
Total 490,900 486,000 481,400
-----------------------------
Revenue per KWH
Residential 5.52(cent)5.70(cent)5.88(cent)
Commercial 4.48 4.64 4.82
Industrial 3.24 3.34 3.44
Sales for Resale 3.90 3.18 3.23
Peak Load and Capability
Net system capability (MW) (1) 4,022 4,042 3,882
Maximum coincident system demand (MW) 3,800 3,683 3,474
Percentage increase in peak demand over 3.2% 6.0% 3.4%
prior period
Generation at time of peak (MW) 3,732 3,048 3,376
Percent of peak demand generated 98.2% 82.8% 97.2%
Net purchases at time of peak (MW) 68 635 98
Percent of net purchases at time of peak 1.8% 17.2% 2.8%
Date of maximum coincident system demand August 11 September 4 July 28
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Excludes 85 MW of system capability in storage in 1998 and 250 MW of system
capability in storage in 1997.
22
SWEPCO
1999 1998 1997
---------------------------
Kilowatt-hour sales (millions)
Residential 4,735 5,052 4,549
Commercial 4,033 4,039 3,780
Industrial 6,807 6,929 6,968
Other retail 474 467 445
---------------------------
Sales to retail customers 16,049 16,487 15,742
Sales for resale 7,522 6,449 6,791
---------------------------
Total 23,571 22,936 22,533
---------------------------
Average number of electric customers
Residential 360,600 358,600 356,600
Commercial 52,800 51,800 50,800
Industrial 5,600 5,800 5,800
Other 2,900 2,800 2,700
---------------------------
Total 421,900 419,000 415,900
---------------------------
Revenue per KWH
Residential 6.22(cent)6.23(cent)6.37(cent)
Commercial 4.91 4.90 5.08
Industrial 3.75 3.66 3.78
Sales for Resale 2.29 2.17 2.16
Peak Load and Capability
Net system capability (MW) 5,028 4,559 4,636
Maximum coincident system demand (MW) 4,463 4,372 4,157
Percentage increase in peak demand over prior 2.1% 5.2% 3.5%
period
Generation at time of peak (MW) 3,970 4,414 3,839
Percent of peak demand generated 89.0% 101.0% 92.4%
Net purchases (sales) at time of peak (MW) 493 (42) 318
Percent of net purchases (sales) at time of 11.0% (1.0)% 7.6%
peak
Date of maximum coincident system demand August 11 July 29 July 28
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
23
WTU
1999 1998 1997
--------------------------------
Kilowatt-hour sales (millions)
Residential 1,679 1,766 1,622
Commercial 1,295 1,302 1,223
Industrial 1,234 1,329 1,406
Other retail 630 621 580
--------------------------------
Sales to retail customers 4,838 5,018 4,831
Sales for resale 2,784 2,622 2,504
--------------------------------
Total 7,622 7,640 7,335
--------------------------------
Average number of electric customers
Residential 148,300 147,600 146,900
Commercial 28,900 28,400 27,800
Industrial 5,500 5,800 6,000
Other 6,400 6,200 6,000
--------------------------------
Total 189,100 188,000 186,700
--------------------------------
Revenue per KWH
Residential 7.89(cent) 7.60(cent)7.68(cent)
Commercial 6.08 5.85 5.99
Industrial 4.23 3.89 4.05
Sales for Resale 3.71 3.72 3.55
Peak Load and Capability
Net system capability (MW) (1) 1,702 1,696 1,453
Maximum coincident system demand (MW) 1,508 1,591 1,481
Percentage increase/(decrease) in peak (5.2)% 7.4% 3.3%
demand over prior period
Generation at time of peak (MW) 1,350 1,357 865
Percent of peak demand generated 89.5% 85.3% 58.4%
Net purchases at time of peak (MW) 158 234 616
Percent of net purchases at time of peak 10.5% 14.7% 41.6%
Date of maximum coincident system demand August 19 August 3 September 17