-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L4GjlOtxUYK56F4wzHBTycjFD2JVV61FGNgQx4USscL7WBYiTw2KlQbuxyNoYr0/ tx0Fe6SVLPwlgwhRPIkh+g== 0000018540-96-000075.txt : 19960518 0000018540-96-000075.hdr.sgml : 19960518 ACCESSION NUMBER: 0000018540-96-000075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWESTERN ELECTRIC POWER CO CENTRAL INDEX KEY: 0000092487 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 720323455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03146 FILM NUMBER: 96568054 BUSINESS ADDRESS: STREET 1: 428 TRAVIS ST CITY: SHREVEPORT STATE: LA ZIP: 71156 BUSINESS PHONE: 3182222141 10-Q 1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-1443 Central and South West Corporation 51-0007707 (A Delaware Corporation) 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 (214) 777-1000 0-346 Central Power and Light Company 74-0550600 (A Texas Corporation) 539 North Carancahua Street Corpus Christi, Texas 78401-2802 (512) 881-5300 0-343 Public Service Company of Oklahoma 73-0410895 (An Oklahoma Corporation) 212 East 6th Street Tulsa, Oklahoma 74119-1212 (918) 599-2000 1-3146 Southwestern Electric Power Company 72-0323455 (A Delaware Corporation) 428 Travis Street Shreveport, Louisiana 71156-0001 (318) 222-2141 0-340 West Texas Utilities Company 75-0646790 (A Texas Corporation) 301 Cypress Street Abilene, Texas 79601-5820 (915) 674-7000 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Common Stock Outstanding at April 30, 1996 Shares Central and South West Corporation 209,276,145 Central Power and Light Company 6,755,535 Public Service Company of Oklahoma 9,013,000 Southwestern Electric Power Company 7,536,640 West Texas Utilities Company 5,488,560 This combined Form 10-Q is separately filed by Central and South West Corporation, Central Power and Light Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf. Each other Registrant makes no representation as to information relating to the other Registrants. 2 CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES INDEX TO QUARTERLY REPORT ON FORM 10-Q MARCH 31, 1996 Page Number GLOSSARY OF TERMS 3-4 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements. Central and South West Corporation and Subsidiary Companies 5 Consolidated Statements of Income 6 Consolidated Balance Sheets 7-8 Consolidated Statements of Cash Flows 9 Results of Operations 10-11 Central Power and Light Company 12 Statements of Income 13 Balance Sheets 14-15 Statements of Cash Flows 16 Results of Operations 17-18 Public Service Company of Oklahoma 19 Consolidated Statements of Income 20 Consolidated Balance Sheets 21-22 Consolidated Statements of Cash Flows 23 Results of Operations 24 Southwestern Electric Power Company 25 Statements of Income 26 Balance Sheets 27-28 Statements of Cash Flows 29 Results of Operations 30 West Texas Utilities Company 31 Statements of Income 32 Balance Sheets 33-34 Statements of Cash Flows 35 Results of Operations 36 Index to Notes to Financial Statements 37 Notes to Financial Statements 38-45 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 46-49 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. 50-51 ITEM 2. Changes in Securities. Inapplicable ITEM 3. Defaults Upon Senior Securities. Inapplicable ITEM 4. Submission of Matters to a Vote of Security Holders. 52-53 ITEM 5. Other Information. 54-55 ITEM 6. Exhibits and Reports on Form 8-K. 56-57 SIGNATURES 58 3 GLOSSARY OF TERMS The following abbreviations or acronyms used in this text are defined below: Abbreviation or Acronym Definition AFUDC............................. Allowance for funds used during construction ALJ............................... Administrative Law Judge ANI............................... American Nuclear Insurance Big Cajun I....................... A two unit, natural gas-fired power plant owned and operated by Cajun and located in New Roads, Louisiana Big Cajun II...................... A three unit coal-fired power plant owned and operated by Cajun and located near New Roads, Louisiana Burlington Northern............... Burlington Northern Railroad Company Cajun............................. Cajun Electric Power Cooperative, Inc. Cajun Trustee..................... Cajun's court appointed trustee in bankruptcy Court of Appeals.................. Court of Appeals, Third District of Texas, Austin, Texas CPL............................... Central Power and Light Company, Corpus Christi, Texas CPL 1995 Agreement................ Settlement Agreement filed by CPL with the Texas Commission to settle certain CPL regulatory matters CPL 1996 Fuel Agreement........... Fuel settlement agreement entered into by CPL and other parties to CPL's current rate review CSW............................... Central and South West Corporation, Dallas, Texas CSW Common........................ CSW common stock, $3.50 par value per share CSW Credit Agreement.............. $850 million senior credit agreement entered into by CSW with a consortium of banks to partially fund the SEEBOARD acquisition CSW Energy........................ CSW Energy, Inc., Dallas, Texas CSW International................. CSW International, Inc., Dallas, Texas CSW Investments................... CSW Investments, an unlimited company organized in the United Kingdom which is wholly owned, indirectly though subsidiaries, by CSW International CSW Investments Credit Facility... 1.0 billion pound senior credit facility arranged by CSW Investments with a consortium of banks to partially fund the SEEBOARD acquisition CSW System........................ CSW and its subsidiaries CSW (UK).......................... CSW (UK) plc, a public limited company organized in the United Kingdom which is wholly owned by CSW Investments CWIP.............................. Construction work in progress El Paso........................... El Paso Electric Company Energy Policy Act................. National Energy Policy Act of 1992 Entergy Gulf States............... Gulf States Utilities Company EPS............................... Earnings per share ERCOT............................. Electric Reliability Council of Texas FASB.............................. Financial Accounting Standards Board FERC.............................. Federal Energy Regulatory Commission FMB............................... First Mortgage Bond HVdc.............................. High-voltage direct-current IPP............................... Independent Power Producer KWH............................... Kilowatt-hour MD&A.............................. Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ.............................. Mississippi Department of Environmental Quality Members Committee................. The members committee of Cajun, which represents 10 of the 12 Louisiana distribution cooperatives that are served by Cajun Merger............................ The proposed merger whereby El Paso would have become a wholly owned subsidiary of CSW Merger Agreement.................. Agreement and Plan of Merger between El Paso and CSW, dated as of May 3, 1993, as amended MGP............................... Manufactured gas plant or coal gasification plant Mirror CWIP....................... Mirror construction work in progress Mississippi Power................. Mississippi Power Company MMbtu............................. Million Btu MTN............................... Medium-term note 4 GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this text are defined below: MW................................ Megawatt National Grid..................... National Grid Group plc NEIL.............................. Nuclear Electric Insurance Limited NOPR.............................. Notice of Proposed Rule Making NRC............................... Nuclear Regulatory Commission NRG............................... NRG Energy, Inc. Oklaunion......................... Oklaunion Power Station Unit No. 1 PCB............................... Polychlorinated biphenyl PRP............................... Potentially responsible party PSO............................... Public Service Company of Oklahoma, Tulsa, Oklahoma Registrant(s)..................... CSW, CPL, PSO, SWEPCO and WTU RUS............................... Rural Utilities Service of the federal government SEEBOARD.......................... SEEBOARD plc, Crawley, West Sussex, United Kingdom SEEBOARD Group.................... Consolidated SEEBOARD, CSW (UK) and CSW Investments converted to U.S. Generally Accepted Accounting Principles SEC............................... Securities and Exchange Commission SFAS No. 52....................... Foreign Currency Translation SFAS No. 121...................... Accounting for the Impairment of Long-Lived Assets STP............................... South Texas Project nuclear electric generating station Supreme Court..................... Supreme Court of Texas SWEPCO............................ Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO Plan....................... The plan of reorganization for Cajun filed by the Members Committee, SWEPCO and Entergy Gulf States on April 19, 1996 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas............................. Tejas Gas Corporation Tender Offer...................... CSW (UK)'s approximately $2.1 billion tender offer in the United Kingdom for all the outstanding share capital of SEEBOARD Texas Commission.................. Public Utility Commission of Texas Transok........................... Transok, Inc. and subsidiaries, Tulsa, Oklahoma Trustee Plan...................... The plan of reorganization for Cajun filed by the Cajun Trustee on April 22, 1996 with the U.S. Bankruptcy Court for the Middle District of Louisiana U.S. Electric Operating Companies. CPL, PSO, SWEPCO and WTU WTU............................... West Texas Utilities Company, Abilene, Texas WTU Stipulation and Agreement..... Stipulation and Agreement to settle certain WTU regulatory matters Zeigler........................... Zeigler Coal Holding Company 5 CSW CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 6 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited) For Three Months Ended March 31, 1996 1995 (millions, except per share amounts) OPERATING REVENUES $ 1,215 $ 523 OPERATING EXPENSES AND TAXES Fuel and purchased power 624 236 Other operating 229 96 Maintenance 32 36 Depreciation and amortization 115 84 Taxes, other than income 43 33 Income taxes 28 (44) 1,071 441 OPERATING INCOME 144 82 OTHER INCOME AND DEDUCTIONS Mirror CWIP liability amortization - 10 Other 8 24 8 34 INCOME BEFORE INTEREST CHARGES 152 116 INTEREST CHARGES Interest on long-term debt 78 52 Interest on short-term debt and other 27 25 105 77 INCOME FROM CONTINUING OPERATIONS 47 39 DISCONTINUED OPERATIONS Income from discontinued operations, net of income tax expense of $4 for 1996 and $2 for 1995. 8 5 NET INCOME 55 44 Preferred stock dividends 4 5 NET INCOME FOR COMMON STOCK $ 51 $ 39 Average Common Shares Outstanding 199.0 190.8 Earnings per Share of Common Stock from Continuing Operations $0.22 $0.18 Earnings per Share of Common Stock from Discontinued Operations $0.04 $0.02 Earnings per Share of Common Stock $0.26 $0.20 Dividends Paid per Share of Common Stock $0.435 $0.430 The accompanying notes to consolidated financial statements are an integral part of these statements. 7 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) (millions) ASSETS FIXED ASSETS Electric Production $ 5,899 $ 5,888 Transmission 1,494 1,484 Distribution 3,847 3,799 General 1,281 1,209 Construction work in progress 279 346 Nuclear fuel 170 165 Total Electric 12,970 12,891 Gas 878 869 Other diversified 24 18 13,872 13,778 Less - Accumulated depreciation and amortization 4,864 4,761 9,008 9,017 CURRENT ASSETS Cash and temporary cash investments 262 401 National Grid assets held for sale -- 100 Accounts receivable 1,041 1,093 Materials and supplies, at average cost 184 188 Electric utility fuel inventory, substantially at average cost 124 129 Gas inventory/products for resale -- 13 Prepayments and other 171 115 1,782 2,039 DEFERRED CHARGES AND OTHER ASSETS Deferred plant costs 513 514 Mirror CWIP asset 309 312 Other non-utility investments 358 296 Income tax related regulatory assets, net 257 253 Goodwill 1,355 1,074 Other 390 364 3,182 2,813 $ 13,972 $ 13,869 The accompanying notes to consolidated financial statements are an integral part of these statements. 8 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) (millions) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common stock equity Common stock: $3.50 par value Authorized: 350.0 million shares Issued and outstanding: 208.4 million shares in 1996 and 192.9 million shares in 1995 $ 732 $ 675 Paid-in capital 977 610 Retained earnings 1,860 1,893 Foreign currency translation adjustment (24) -- 3,545 3,178 Preferred stock Not subject to mandatory redemption 292 292 Subject to mandatory redemption 34 34 Long-term debt 4,728 3,914 8,599 7,418 Minority interest -- 202 CURRENT LIABLITIES Long-term debt and preferred stock due within twelve months 4 30 Short-term debt 770 692 Short-term debt - CSW Credit, Inc. 588 646 Accounts payable 583 595 Accrued taxes 137 228 Accrued interest 84 77 Provision for SEEBOARD acceptances 122 1,001 Other 196 156 2,484 3,425 DEFERRED CREDITS Income taxes 2,385 2,306 Investment tax credits 302 306 Other 202 212 2,889 2,824 $ 13,972 $ 13,869 The accompanying notes to consolidated financial statements are an integral part of these statements. 9 CENTRAL AND SOUTH WEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For Three Months Ended March 31, 1996 1995 OPERATING ACTIVITIES (millions) Net Income $ 55 $ 44 Non-cash Items Included in Net Income Depreciation and amortization 134 105 Deferred income taxes and investment tax credits 27 (43) Mirror CWIP liability amortization -- (10) Restructuring charges -- (23) Changes in Assets and Liabilities Accounts receivable 47 75 Unrecovered fuel costs (26) 90 Accounts payable (111) (62) Accrued taxes (86) (49) Refund due customers -- 52 Other (40) (34) (--) 145 INVESTING ACTIVITIES Capital expenditures (102) (100) Acquisition expenditures (1,245) -- CSW Energy projects (2) 61 Sale of National Grid assets 100 -- Other (18) (7) (1,267) (46) FINANCING ACTIVITIES Common stock sold 424 15 Proceeds from issuance of long-term debt 30 40 SEEBOARD acquisition financing 773 -- Retirement of long-term debt (27) (1) Change in short-term debt 20 (59) Payment of dividends (88) (87) 1,132 (92) Effect of exchange rate changes on cash and cash equivalents (4) -- NET CHANGE IN CASH AND CASH EQUIVALENTS (139) 7 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 401 27 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 262 $ 34 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 83 $ 89 Income taxes paid $ 91 $ 2 The accompanying notes to consolidated financial statements are an integral part of these statements. 10 CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES Set forth below is information concerning the consolidated results of operations for CSW for the three month period ending March 31, 1996. For information concerning the results of operations for each of the U.S. Electric Operating Companies, see the discussions below under the heading RESULTS OF OPERATIONS following the financial statements of each of the U.S. Electric Operating Companies. RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995 Overview. Net income for common stock increased to $51 million for the first quarter of 1996 compared to $39 million for the first quarter of 1995. Earnings per share increased to $0.26 from $0.20. First quarter 1996 earnings increased due to the addition of earnings from SEEBOARD and higher KWH sales resulting from favorable weather and customer usage offset in part by the loss of Mirror CWIP earnings and the impact of the CPL 1996 Fuel Agreement. First quarter 1995 earnings were impacted by the non-recurring items related to the CPL 1995 Agreement and a prior year tax adjustment. In the first quarter of 1996, the U.S. Electric Operating Companies, the SEEBOARD Group and Transok contributed the following percentages to aggregate operating revenues, operating income and net income for CSW Common. U.S. SEEBOARD Total Electric Group Electric Transok* Other Total Operating Revenues 46% 37% 83% 15% 2% 100% Operating Income 62% 29% 91% 7% 2% 100% Net Income for CSW Common 66% 39% 105% 16% (21)% 100% * On May 9, 1996, CSW entered into an agreement with Tejas pursuant to which CSW will sell Transok to Tejas, subject to the satisfaction of certain conditions. See NOTE 7. DISCONTINUED OPERATIONS and MD&A. RECENT DEVELOPMENTS AND TRENDS. Operating Revenues. Operating revenues increased 132% to $1.2 billion in the first quarter of 1996 from $523 million in the first quarter of 1995. This increase reflects $537 million of SEEBOARD revenues and increased revenues for the U.S. Electric Operating Companies over the first quarter of 1995, which included a $62 million write-off of unrecovered fuel and a $50 million base rate refund resulting from the CPL 1995 Agreement. Total retail KWH sales for the U.S. Electric Operating Companies increased 6.4% in the first quarter of 1996 as compared to the first quarter of 1995. Residential, commercial and industrial sales increased 11.9%, 5.1% and 3.0%, respectively. Increased usage, primarily by residential customers, as well as more favorable weather contributed to KWH sales growth. Fuel and Purchased Power. Fuel and purchased power expense increased 164% to $624 million in the first quarter of 1996 from $236 million in the first quarter of 1995, due primarily to the addition of $360 million of purchased power costs incurred by SEEBOARD and an increase of $28 million at the U.S. Electric Operating Companies. Fuel expense was higher at the U.S. Electric Operating Companies due primarily to an increase in the average unit cost of fuel to $1.77 per MMbtu in the first quarter of 1996 from $1.60 per MMbtu in the first quarter of 1995, reflecting higher natural gas prices. 11 CSW RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995 (continued) Other Operating. Other operating expense increased 139% to $229 million during the first quarter of 1996 from $96 million during the first quarter of 1995. This increase was due primarily to the addition in 1996 of SEEBOARD operating expenses of $96 million as well as recognition in the first quarter of 1995 of a $23 million regulatory asset established in accordance with the CPL 1995 Agreement and the reversal of $4 million in rate case costs pursuant to the CPL 1995 Agreement. Maintenance. Maintenance decreased 11% to $32 million in the first quarter of 1996 from $36 million in the first quarter of 1995 due primarily to decreased steam and nuclear maintenance expenses offset in part by the addition of SEEBOARD's maintenance activities. Depreciation and Amortization. Depreciation and amortization increased 37% from $84 million in the first quarter of 1995 to $115 million in the first quarter of 1996 due primarily to the addition of SEEBOARD's depreciable fixed assets and amortization related to the purchase of SEEBOARD, as well as increases in all classes of depreciable fixed assets at the U.S. Electric Operating Companies. Taxes, Other Than Income. The $10 million increase in other taxes during the first quarter of 1996 as compared to the first quarter of 1995 was due primarily to lower 1995 ad valorem tax expenses resulting from revisions of prior year estimates. Income Taxes. Income taxes were higher in the first quarter of 1996 due to increased earnings attributable to the SEEBOARD acquisition and the effects, in 1995, of the CPL 1995 Agreement. Other Income and Deductions. Other income decreased in the first quarter of 1996 from the first quarter of 1995 due to several factors. The Mirror CWIP liability has been fully amortized. Mirror CWIP liability amortization was $10 million in the first quarter of 1995. Also included in the first quarter of 1995 was recognition of $8 million of previously deferred factoring income pursuant to the CPL 1995 Agreement as well as the sale by PSO of a non-utility fiber optic telecommunications property. Interest on Long-Term Debt. Interest on long-term debt increased $26 million or 50% during the first quarter of 1996 as compared to the first quarter of 1995 due to higher levels of long-term debt outstanding related to the SEEBOARD purchase. Discontinued Operations. Operating results of Transok have been included in discontinued operations. Transok's earnings increased to $8 million in the first quarter of 1996 from $5 million in the first quarter of 1995 due to higher natural gas prices and increased volumes. See NOTE 7. DISCONTINUED OPERATIONS and MD&A. RECENT DEVELOPMENTS AND TRENDS for information related to the sale of Transok. 12 CPL CENTRAL POWER AND LIGHT COMPANY PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 13 CENTRAL POWER AND LIGHT COMPANY STATEMENTS OF INCOME (unaudited) Three Months Ended March 31, 1996 1995 (thousands) ELECTRIC OPERATING REVENUES $ 253,388 $ 127,282 OPERATING EXPENSES AND TAXES Fuel 64,017 60,064 Purchased power 12,435 3,071 Other operating 50,520 23,534 Maintenance 10,344 17,205 Depreciation and amortization 39,595 37,000 Taxes, other than income 18,354 9,475 Income taxes 9,998 (53,623) 205,263 96,726 OPERATING INCOME 48,125 30,556 OTHER INCOME AND DEDUCTIONS Mirror CWIP liability amortization - 10,250 Other 1,748 8,096 1,748 18,346 INCOME BEFORE INTEREST CHARGES 49,873 48,902 INTEREST CHARGES Interest on long-term debt 27,269 28,560 Interest on short-term debt and other 6,663 5,299 Allowance for borrowed funds used during construction (679) (1,319) 33,253 32,540 NET INCOME 16,620 16,362 Preferred stock dividends 3,437 3,896 NET INCOME FOR COMMON STOCK $ 13,183 $ 12,466 The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 14 CENTRAL POWER AND LIGHT COMPANY BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) ASSETS (thousands) ELECTRIC UTILITY PLANT Production $ 3,110,586 $ 3,110,744 Transmission 493,875 486,090 Distribution 896,643 879,618 General 255,721 248,629 Construction work in progress 110,629 127,307 Nuclear fuel 170,281 165,087 5,037,735 5,017,475 Less - Accumulated depreciation and amortization 1,587,809 1,547,530 3,449,926 3,469,945 CURRENT ASSETS Cash 428 2,883 Special deposits 797 797 Accounts receivable 49,108 45,186 Materials and supplies, at average cost 72,087 71,112 Fuel inventory, at average cost 23,108 26,472 Accumulated deferred income taxes 22,997 22,171 Prepayments and other 2,102 1,739 170,627 170,360 DEFERRED CHARGES AND OTHER ASSETS Deferred STP costs 487,780 488,047 Mirror CWIP asset 308,679 311,804 Income tax related regulatory assets, net 347,631 346,993 Other 105,533 93,987 1,249,623 1,240,831 $ 4,870,176 $ 4,881,136 The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 15 CENTRAL POWER AND LIGHT COMPANY BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) CAPITALIZATION AND LIABILITIES (thousands) CAPITALIZATION Common stock: $25 par value Authorized shares: 12,000,000 Issued and outstanding shares: 6,755,535 $ 168,888 $ 168,888 Paid-in capital 405,000 405,000 Retained earnings 851,628 863,444 1,425,516 1,437,332 Preferred stock 250,351 250,351 Long-term debt 1,519,563 1,517,347 3,195,430 3,205,030 CURRENT LIABILITIES Long-term debt due within twelve months -- 231 Advances from affiliates 187,533 176,334 Accounts payable 36,505 49,507 Accrued taxes 33,353 61,614 Accrued interest 38,166 32,742 Over-recovered fuel costs 8,164 12,586 Refund due customers 22,678 -- Other 25,795 24,758 352,194 357,772 DEFERRED CREDITS Accumulated deferred income taxes 1,157,798 1,151,823 Investment tax credits 151,296 152,744 Mirror CWIP liability and other 13,458 13,767 1,322,552 1,318,334 $ 4,870,176 $ 4,881,136 The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 16 CENTRAL POWER AND LIGHT COMPANY STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 1996 1995 OPERATING ACTIVITIES (thousands) Net Income $16,620 $16,362 Non-cash Items Included in Net Income Depreciation and amortization 45,355 43,984 Deferred income taxes and investment tax credits 3,063 (46,663) Mirror CWIP liability amortization -- (10,250) Establishment of regulatory assets 6,313 (23,330) Changes in Assets and Liabilities Accounts receivable (3,922) (14,819) Fuel inventory 3,364 (1,625) Accounts payable (13,022) (28,489) Accrued taxes (28,261) (38,739) Over- and under-recovered fuel costs (4,422) 76,403 Refund due customers 22,678 52,250 Other (10,983) (7,146) 36,783 17,938 INVESTING ACTIVITIES Construction expenditures (21,049) (31,437) Allowance for borrowed funds used during construction (679) (1,319) Other 263 -- (21,465) (32,756) FINANCING ACTIVITIES Reacquisition of long-term debt (231) -- Change in advances from affiliates 11,199 53,342 Payment of dividends (28,656) (37,841) Other (85) -- (17,773) 15,501 NET CHANGE IN CASH AND CASH EQUIVALENTS (2,455) 683 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,883 642 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 428 $ 1,325 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 25,276 $ 29,056 Income taxes paid $ 12,753 $ -- The accompanying notes to financial statements as they relate to CPL are an integral part of these statements. 17 CENTRAL POWER AND LIGHT COMPANY RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995 Net Income for Common Stock. Net income for common stock increased 6% during the first quarter of 1996 to $13.2 million from $12.5 million in the same quarter of 1995. Major factors contributing to this increase were the net effect of the settlements of certain regulatory issues, as shown in the tables below, as well as higher non-fuel revenues. Partially offsetting this increase was the expiration of Mirror CWIP amortization and an increase in ad valorem taxes. Pre-tax After-tax (millions) CPL 1996 Fuel Agreement Provision for refund $(14.4) $(9.4) Reduction of fuel expense 9.2 6.0 Increased interest expense (1.1) (0.7) CPL 1995 Agreement Provision for refund $(112.3) $(73.0) Current flowback of excess deferred federal income taxes 34.3 34.3 Capitalization of previously expensed restructuring and rate case costs 26.3 17.1 Recognition of factoring income 12.4 8.1 Electric Revenues. Total revenues increased $126.1 million in the first quarter of 1996 when compared to the first quarter of 1995 due primarily to the net effect of the provisions for rate refunds, as reflected in the above tables. Also contributing to this increase was a $6.9 million increase in non- fuel revenues due primarily to an 11% increase in KWH sales as a result of cooler weather as well as residential and commercial customer growth. Additionally, fuel revenue increased $21.3 million resulting from higher average unit fuel costs and purchased power as discussed below. Fuel. Fuel expense increased $4.0 million or 7% due primarily to an increase in the average unit cost of fuel from $1.37 per MMbtu in the first quarter of 1995 to $1.57 per MMbtu in 1996. The cost of fuel reflects an increase in the spot market for natural gas partially offset by a decrease in the cost of coal. Partially offsetting the increase in the cost of fuel was a one-time $8.8 million reduction in fuel expense as a result of the CPL 1996 Fuel Agreement. Purchased Power. Purchased power increased $9.4 million in the first quarter of 1996 when compared to the same quarter of 1995 primarily as a result of increased economy and cogeneration purchases. Other Operating. Other operating expenses increased $27.0 million during the first quarter of 1996 when compared to the first quarter of 1995. This increase was due primarily to the 1995 recognition of a $23.3 million regulatory asset for previously recorded restructuring charges and the reversal of $4.3 million in rate case costs pursuant to the CPL 1995 Agreement. 18 CPL RESULTS OF OPERATIONS (continued) COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995 Maintenance. Maintenance expense decreased $6.9 million or 40% in the first quarter of 1996 when compared to 1995 due primarily to decreases in steam and nuclear maintenance expenses. Steam maintenance declined due to fewer scheduled repair projects in the first quarter of 1996 when compared to 1995. Nuclear maintenance was lower mainly as a result of higher 1995 expenses during the refueling outage of STP Unit 1. Depreciation and Amortization. Depreciation and amortization increased $2.6 million in the first quarter of 1996 primarily as a result of an increase in depreciable property. Taxes, Other Than Income. The $8.9 million increase in other taxes during the first quarter of 1996 as compared to the first quarter of 1995 was due primarily to lower 1995 ad valorem tax expenses resulting from revisions of prior year estimates. Income Taxes. Income taxes increased $63.6 million in the first quarter of 1996 when compared to the first quarter of 1995 due primarily to the accelerated flowback of $34.3 million of unprotected excess deferred income taxes in 1995 in accordance with the CPL 1995 Agreement, as well as higher 1996 pre-tax income. Other Income and Deductions. CPL amortized its Mirror CWIP liability in declining amounts over the years 1991 through 1995. As a result, Mirror CWIP liability amortization decreased $10.3 million in the first quarter of 1996 when compared to the first quarter in 1995. The decrease in other income was due primarily to the recognition of $8.1 million of factoring income pursuant to the CPL 1995 Agreement. 19 PSO PUBLIC SERVICE COMPANY OF OKLAHOMA PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 20 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended March 31, 1996 1995 (thousands) ELECTRIC OPERATING REVENUES $ 147,419 $ 148,416 OPERATING EXPENSES AND TAXES Fuel 62,548 70,473 Purchased power 8,664 4,743 Other operating 28,080 29,891 Maintenance 6,198 6,313 Depreciation and amortization 19,031 16,485 Taxes, other than income 6,776 6,217 Income taxes 2,118 1,446 133,415 135,568 OPERATING INCOME 14,004 12,848 OTHER INCOME AND DEDUCTIONS Allowance for equity funds used during construction (1) 480 Other 243 2,688 242 3,168 INCOME BEFORE INTEREST CHARGES 14,246 16,016 INTEREST CHARGES Interest on long-term debt 7,438 7,399 Interest on short-term debt and other 1,689 1,766 Allowance for borrowed funds used during construction (359) (598) 8,768 8,567 NET INCOME 5,478 7,449 Preferred stock dividends 204 204 NET INCOME FOR COMMON STOCK $ 5,274 $ 7,245 The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 21 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) ASSETS (thousands) ELECTRIC UTILITY PLANT Production $ 940,187 $ 939,106 Transmission 366,426 363,692 Distribution 723,140 712,483 General 180,348 182,705 Construction work in progress 61,405 56,576 2,271,506 2,254,562 Less - Accumulated depreciation and amortization 943,876 924,186 1,327,630 1,330,376 CURRENT ASSETS Cash 1,960 744 Accounts receivable 19,180 17,957 Materials and supplies, at average cost 39,920 41,179 Fuel inventory, at LIFO cost 14,748 15,765 Accumulated deferred income taxes 6,664 10,389 Prepayments and other 1,571 2,450 84,043 88,484 DEFERRED CHARGES AND OTHER ASSETS 67,579 61,956 $ 1,479,252 $ 1,480,816 The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 22 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) CAPITALIZATION AND LIABILITIES (thousands) CAPITALIZATION Common stock: $15 par value Authorized shares: 11,000,000 Issued and outstanding shares: 9,013,000 157,230 157,230 Paid-in capital 180,000 180,000 Retained earnings 148,555 150,281 485,785 487,511 Preferred stock 19,826 19,826 Long-term debt 409,625 379,250 915,236 886,587 CURRENT LIABILITIES Long-term debt due within twelve months -- 25,000 Advances from affiliates 76,529 70,510 Payables to affiliates 42,578 40,463 Accounts payable 25,129 23,094 Payables to customers 22,433 32,517 Accrued taxes 18,352 27,014 Accrued interest 10,987 9,025 Other 7,796 8,589 203,804 236,212 DEFERRED CREDITS Accumulated deferred income taxes 265,761 264,353 Investment tax credits 45,526 46,222 Income tax related regulatory liabilities, net 41,228 41,820 Other 7,697 5,622 360,212 358,017 $ 1,479,252 $ 1,480,816 The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 23 PUBLIC SERVICE COMPANY OF OKLAHOMA CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 1996 1995 OPERATING ACTIVITIES (thousands) Net Income $ 5,478 $ 7,449 Non-cash Items Included in Net Income Depreciation and amortization 20,519 17,637 Deferred income taxes and investment tax credits 3,845 (3,537) Allowance for equity funds used during construction 1 (480) Changes in Assets and Liabilities Accounts receivable (1,223) (1,128) Prepayments 879 5,624 Accounts payable (4,469) 3,892 Accrued taxes (8,662) (3,724) Other 41 (1,686) 16,409 24,047 INVESTING ACTIVITES Construction expenditures (18,050) (23,770) Allowance for borrowed funds used during construction (359) (598) Other (374) (871) (18,783) (25,239) FINANCING ACTIVITIES Proceeds from issuance of long-term debt 29,799 -- Retirement of long-term debt (25,000) -- Change in advances from affiliates 6,019 6,510 Payment of dividends (7,228) (204) 3,590 6,306 NET CHANGE IN CASH AND CASH EQUIVALENTS 1,216 5,114 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 744 5,453 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,960 $ 10,567 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 6,458 11,361 Income taxes paid $ 495 $ 2,372 The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements. 24 PUBLIC SERVICE COMPANY OF OKLAHOMA RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995 Net Income for Common Stock. Net income for common stock decreased 27% to $5.3 million during the first quarter of 1996 from $7.2 million during the first quarter of 1995. The decrease resulted primarily from greater depreciation and amortization expenses and the 1995 sale of non-utility fiber optic telecommunications property, partially offset by a decrease in other operating expenses. Electric Operating Revenues. Electric operating revenues decreased less than 1% to $147.4 million during the first quarter of 1996 from $148.4 million during the first quarter of 1995. The decrease was due primarily to decreased fuel revenue as discussed below, offset in part by increased retail customer demand. Fuel. Fuel expense was $62.5 million during the first quarter of 1996, a 11% decrease from $70.5 million in the first quarter of 1995. The decrease was due primarily to an under-recovery of fuel costs in the first quarter of 1996 compared to a over-recovery of fuel costs in the first quarter of 1995, as well as decreased KWH generation. Offsetting these factors in part was an increase in average unit fuel costs from $1.72 per MMbtu in the first quarter of 1995 to $2.10 per MMbtu in the first quarter of 1996 due to an increase in the spot market price of natural gas. Generation was affected by the increase in purchased power expense as discussed below. Purchased Power. Purchased power expenses increased approximately 83% to $8.7 million for the first quarter of 1996 from $4.7 million in the same period of 1995. The increase was due primarily to increases in purchases of economy energy. Other Operating. Other operating expenses decreased 6% to $28.1 million during the first quarter of 1996 from $29.9 million in the first quarter of 1995. The decrease was due primarily to a decrease in customer related expenses, decreased distribution meter expenses and a decrease in steam generation expenses. Depreciation and Amortization. Depreciation and amortization expense increased 15% to $19.0 million in the first quarter of 1996 from $16.5 million in the first quarter of 1995. The increase was due primarily to increases in depreciable property and completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. Other Income and Deductions. Other income and deductions for the first quarter of 1996 decreased approximately $2.9 million when compared to the first quarter of 1995 as the result of the $2.7 million gain on the sale of non-utility fiber optic telecommunication property. 25 SWEPCO SOUTHWESTERN ELECTRIC POWER COMPANY PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 26 SOUTHWESTERN ELECTRIC POWER COMPANY STATEMENTS OF INCOME (unaudited) Three Months Ended March 31 1996 1995 (thousands) ELECTRIC OPERATING REVENUES $ 200,881 $ 169,240 OPERATING EXPENSES AND TAXES Fuel 89,312 63,191 Purchased power 5,334 5,463 Other operating 31,894 28,592 Maintenance 9,106 9,345 Depreciation and amortization 22,241 20,284 Taxes, other than income 11,911 10,567 Income taxes 4,734 5,211 174,532 142,653 OPERATING INCOME 26,349 26,587 OTHER INCOME AND DEDUCTIONS Allowance for equity funds used during construction 324 1,449 Other 762 410 1,086 1,859 INCOME BEFORE INTEREST CHARGES 27,435 28,446 INTEREST CHARGES Interest on long-term 11,000 11,321 Interest on short-term debt and other 2,423 2,848 Allowance for borrowed funds used during construction (755) (1,248) 12,668 12,921 NET INCOME 14,767 15,525 Preferred stock dividends 779 778 NET INCOME FOR COMMON STOCK $ 13,988 $ 14,747 The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 27 SOUTHWESTERN ELECTRIC POWER COMPANY BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) ASSETS (thousands) ELECTRIC UTILITY PLANT Production $ 1,417,593 $ 1,410,546 Transmission 434,124 435,362 Distribution 801,639 789,884 General 277,135 231,276 Construction work in progress 81,433 128,963 3,011,924 2,996,031 Less - Accumulated depreciation and amortization 1,138,469 1,116,375 1,873,455 1,879,656 CURRENT ASSETS Cash 1,330 1,702 Accounts receivable 67,184 54,628 Materials and supplies, at average cost 29,262 30,097 Fuel inventory, substantially at average cost 72,064 73,276 Accumulated deferred income taxes -- 4,636 Under-recovered fuel costs 5,822 -- Prepayments and other 14,438 14,109 190,100 178,448 DEFERRED CHARGES AND OTHER ASSETS 55,302 58,615 $ 2,118,857 $ 2,116,719 The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 28 SOUTHWESTERN ELECTRIC POWER COMPANY BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) CAPITALIZATION AND LIABILITIES (thousands) CAPITALIZATION Common stock: $18 par value Authorized shares: 7,600,000 Issued and outstanding shares: 7,536,640 135,660 135,660 Paid-in capital 245,000 245,000 Retained earnings 306,322 302,334 686,982 682,994 Preferred stock Not subject to mandatory redemption 16,032 16,032 Subject to mandatory redemption 33,628 33,628 Long-term debt 598,697 598,951 1,335,339 1,331,605 CURRENT LIABILITIES Long-term debt and preferred stock due within twelve months 4,445 5,099 Advances from affiliates 124,719 101,228 Accounts payable 25,126 34,717 Payable to affiliates 60,791 52,474 Over-recovered fuel costs -- 8,923 Customer deposits 10,977 11,027 Accrued taxes 30,123 30,339 Accumulated deferred income taxes 481 -- Accrued interest 12,629 17,894 Other 14,336 25,454 283,627 287,155 DEFERRED CREDITS Accumulated deferred income taxes 379,990 377,245 Investment tax credits 75,055 76,237 Income tax related regulatory liabilities, net 35,571 37,363 Other 9,275 7,114 499,891 497,959 $ 2,118,857 $ 2,116,719 The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 29 SOUTHWESTERN ELECTRIC POWER COMPANY STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 1996 1995 OPERATING ACTIVITIES (thousands) Net Income $ 14,767 $ 15,525 Non-cash Items Included in Net Income Depreciation and amortization 24,823 22,851 Deferred income taxes and investment tax credits 4,888 407 Allowance for equity funds used during construction (324) (1,449) Changes in Assets and Liabilities Accounts receivable (12,556) 5,397 Payable to affiliates 8,317 5,263 Fuel inventory 1,212 (12,467) Accounts payable (9,864) (7,641) Accrued taxes (216) 4,550 Accrued interest (5,265) (9,714) Unrecovered fuel/Fuel refund due customers (14,745) 2,093 Other (5,195) (9,024) 5,842 15,791 INVESTING ACTIVITES Construction expenditures (15,926) (19,853) Allowance for borrowed funds used during construction (755) (1,248) Other (1,343) (1,609) (18,024) (22,710) FINANCING ACTIVITIES Retirement of long-term debt (1,645) (1,499) Change in advances from affiliates 23,491 8,498 Payment of dividends (10,036) (819) 11,810 6,180 NET CHANGE IN CASH AND CASH EQUIVALENTS (372) (739) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,702 1,296 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,330 $ 557 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 17,321 $ 20,581 Income taxes paid $ 541 $ -- The accompanying notes to financial statements as they relate to SWEPCO are an integral part of these statements. 30 SOUTHWESTERN ELECTRIC POWER COMPANY RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995 Net Income for Common Stock. Net income for common stock decreased 5% to $14.0 million during the first quarter of 1996 from $14.7 million during the first quarter of 1995, due primarily to an increase in non-fuel revenues and decreased other operating expenses. Electric Operating Revenues. Electric operating revenues increased $31.6 million to $200.9 million during the first quarter of 1996 from $169.2 million during the first quarter of 1995 due primarily to a $22.4 million increase in fuel revenue and a $9.2 million increase in non-fuel revenue. The increase in fuel revenue was due to higher average unit fuel cost as discussed below. The increase in non-fuel revenue is attributable to a 7% increase in retail KWH sales resulting from higher customer demand. Fuel. Fuel expense increased 41% to $89.3 million during the first quarter of 1996 when compared to the first quarter of 1995 due primarily to a 25% increase in generation and an increase in the average unit fuel cost from $1.57 per MMbtu in 1995 to $1.83 per MMbtu in 1996. The increase in average unit fuel cost was due primarily to an increase in the spot market price of natural gas. Other Operating. Other operating expenses increased $3.3 million, or 12%, during the first quarter of 1996 when compared to the first quarter of 1995 due primarily to increases in outside services and insurance expense. Depreciation and amortization. Depreciation and amortization increased $2.0 million, or 10%, during the first quarter of 1996 as compared to the first quarter of 1995 due primarily to an increase in depreciable plant. Taxes, Other Than Income. Taxes, other than income increased approximately $1.3 million, or 13%, during the first quarter of 1996 as compared to the first quarter of 1995 due primarily to an increase in state franchise taxes. Allowance for Equity and Borrowed Funds Used During Construction. AFUDC decreased approximately $1.6 million during the first quarter of 1996 as compared to the first quarter of 1995 due primarily to decreased AFUDC rates and decreased CWIP balances accruing AFUDC. 31 WTU WEST TEXAS UTILITIES COMPANY PART I. FINANCIAL INFORMATION. ITEM 1. Financial Statements. 32 WEST TEXAS UTILITIES COMPANY STATEMENTS OF INCOME (unaudited) Three Months Ended March 31, 1996 1995 (thousands) ELECTRIC OPERATING REVENUES $80,789 $74,921 OPERATING EXPENSES AND TAXES Fuel 31,983 31,165 Purchased power 5,916 1,343 Other operating 16,475 14,064 Maintenance 3,219 2,949 Depreciation and amortization 9,678 8,064 Taxes, other than income 5,598 5,826 Income taxes 165 1,614 73,034 65,025 OPERATING INCOME 7,755 9,896 OTHER INCOME AND DEDUCTIONS Allowance for equity funds used during construction 138 (3) Other 249 211 387 208 INCOME BEFORE INTEREST CHARGES 8,142 10,104 INTEREST CHARGES Interest on long-term debt 5,296 4,840 Interest on short-term debt and other 1,378 1,198 Allowance for borrowed funds used during construction (286) (167) 6,388 5,871 NET INCOME 1,754 4,233 Preferred stock dividends 66 66 NET INCOME FOR COMMON STOCK $ 1,688 $ 4,167 The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 33 WEST TEXAS UTILITIES COMPANY BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) ASSETS (thousands) ELECTRIC UTILITY PLANT Production $ 430,640 $ 427,547 Transmission 200,028 199,055 Distribution 331,545 326,337 General 88,909 84,326 Construction work in progress 25,847 32,686 1,076,969 1,069,951 Less - Accumulated depreciation and amortization 397,420 389,379 679,549 680,572 CURRENT ASSETS Cash 308 717 Accounts receivable 24,806 28,923 Materials and supplies, at average cost 16,456 16,660 Fuel inventory, at average cost 8,204 8,281 Coal inventory, at LIFO cost 5,406 5,545 Accumulated deferred income taxes 4,646 5,328 Prepayments and other 1,452 1,042 61,278 66,496 DEFERRED CHARGES AND OTHER ASSETS Deferred Oklaunion costs 25,160 26,092 Restructuring costs 12,269 12,741 Other 31,060 29,713 68,489 68,546 $ 809,316 $ 815,614 The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 34 WEST TEXAS UTILITIES COMPANY BALANCE SHEETS March 31, December 31, 1996 1995 (unaudited) (audited) CAPITALIZATION AND LIABILITIES (thousands) CAPITALIZATION Common stock: $25 par value Authorized shares: 7,800,000 Issued and outstanding shares: 5,488,560 $ 137,214 $ 137,214 Paid-in capital 2,236 2,236 Retained earnings 122,459 125,770 261,909 265,220 Preferred stock 6,291 6,291 Long-term debt 274,120 273,245 542,320 544,756 CURRENT LIABILITIES Advances from affiliates 33,117 19,820 Payables to affiliates 9,979 8,244 Accounts payable 9,733 20,611 Accrued taxes 5,676 13,182 Accrued interest 7,775 6,081 Over-recovered fuel costs 1,273 4,060 Refund due customers 1,849 1,812 Other 3,396 3,121 72,798 76,931 DEFERRED CREDITS Accumulated deferred income taxes 146,179 145,130 Investment tax credits 30,230 30,561 Income tax related regulatory liabilities, net 13,918 14,464 Other 3,871 3,772 194,198 193,927 $ 809,316 $ 815,614 The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 35 WEST TEXAS UTILITIES COMPANY STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 1996 1995 OPERATING ACTIVITIES (thousands) Net Income $ 1,754 $ 4,233 Non-cash Items Included in Net Income Depreciation and amortization 9,672 8,411 Deferred income taxes and investment tax credits 854 239 Regulatory assets established for restructuring charges 472 -- Allowance for equity funds used during construction (138) 3 Changes in Assets and Liabilities Accounts receivable 4,117 (3,389) Accounts payable (6,730) (1,440) Accrued taxes (7,506) (4,204) Over-recovered fuel costs (2,787) 1,424 Other 1,571 (4,100) 1,279 1,177 INVESTING ACTIVITES Construction expenditures (9,607) (9,311) Allowance for borrowed funds used during construction (286) (167) Other (85) (131) (9,978) (9,609) FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 39,547 Change in advances from affiliates 13,297 (29,723) Payment of dividends (5,000) (66) Other (7) -- 8,290 9,758 NET CHANGE IN CASH AND CASH EQUIVALENTS (409) 1,326 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 717 2,501 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 308 $ 3,827 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 3,733 $ 5,955 Income taxes paid $ 1,220 $ 7,662 The accompanying notes to financial statements as they relate to WTU are an integral part of these statements. 36 WEST TEXAS UTILITIES COMPANY RESULTS OF OPERATIONS COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995. Net Income for Common Stock. Net income for common stock decreased 59% to $1.7 million during the first quarter of 1996 from $4.2 million in the first quarter of 1995. The decrease was due primarily to increased other operating expenses and depreciation and amortization. Electric Operating Revenues. Electric operating revenues increased $5.9 million, or 8%, in the first quarter of 1996 as compared to the first quarter of 1995. This increase was attributable primarily to a $5.9 million increase in fuel revenues due primarily to increased fuel cost and purchased power as discussed below. Fuel. Fuel expense increased $0.8 million, or 3%, for the first quarter of 1996 as compared to the first quarter of 1995 due primarily to an increase in average unit fuel costs from $2.03 per MMbtu in 1995 to $2.06 per MMbtu in 1996, which resulted from higher spot market natural gas prices. Purchased Power. Purchased power increased $4.6 million during the first quarter of 1996 as compared to the first quarter of 1995, primarily as a result of additional economy energy purchases made during the first quarter of 1996. Other Operating. Other operating expenses increased $2.4 million, or approximately 17%, in the first quarter of 1996 as compared to the first quarter of 1995 due primarily to increased transmission expenses associated with the completion and placement in service of a new HVdc tie in the third quarter of 1995 and increased expenses associated with regulatory activity. Also contributing to the increase was the amortization of a regulatory asset established in the fourth quarter of 1995 in accordance with the WTU Stipulation and Agreement. Depreciation and Amortization. Depreciation and amortization expenses increased approximately $1.6 million during the first quarter of 1996 as compared to the first quarter of 1995 due primarily to increases in depreciable property and the accelerated amortization of deferred Oklaunion plant costs and other amortization of regulatory assets established in 1995 in accordance with the WTU Stipulation and Agreement. Income Taxes. Income taxes decreased $1.4 million in the first quarter of 1996 as compared to the first quarter of 1995 due primarily to lower pre-tax income. 37 INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU NOTE 2. LITIGATION AND REGULATORY CSW, CPL, PSO, SWEPCO, WTU PROCEEDINGS NOTE 3. COMMITMENTS AND CONTINGENT CSW, CPL, PSO, SWEPCO, WTU LIABILITIES NOTE 4. DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU NOTE 5. CSW EARNINGS AND DIVIDENDS PER CSW SHARE OF CSW COMMON STOCK NOTE 6. LONG TERM FINANCING CSW, PSO NOTE 7. DISCONTINUED OPERATIONS CSW 38 NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. PRINCIPLES OF PREPARATION The condensed financial statements of the Registrants included herein have been prepared by each Registrant pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each Registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Registrant's combined Annual Report on Form 10-K for the year ended December 31, 1995. The unaudited financial information furnished herewith reflects all adjustments which are, in the opinion of management of such Registrant, necessary for a fair statement of the results of operations for the interim periods. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. The financial statements of SEEBOARD, CSW (UK) and CSW Investments, which are included in CSW's consolidated financial statements, have been translated from British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are translated at the exchange rate at March 31, 1996 and all income statement items are translated at the average exchange rate for the applicable period. At March 31, 1996, the current exchange rate was approximately 1.00 pound=$1.52 and the average exchange rate for the period was approximately 1.00 pound=$1.53. All resulting translation adjustments are recorded directly to Foreign Currency Translation Adjustment on the consolidated balance sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The effect of the changes in exchange rates on cash and cash equivalents, resulting from the translation of items at the different exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in Effect of Exchange Rate Changes on Cash and Cash Equivalents. Certain financial statement items for prior years have been reclassified to conform to the 1996 presentation. 2. LITIGATION AND REGULATORY PROCEEDINGS See the Registrants' combined Annual Report on Form 10-K for the year ended December 31, 1995 for additional discussion of litigation and regulatory proceedings. Reference is also made to PART II - ITEM 1. for additional discussion of litigation matters. CPL Rate Review On November 6, 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would result in an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL's filing also sought to reconcile $229 million of fuel costs incurred during the period July 1, 1994 through June 30, 1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June 30, 1994 in Docket No. 13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate 39 structure are approved, CPL will commit not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. On April 30, 1996, CPL implemented new fuel factors that will lower fuel costs to its retail customers by $25 million annually. The lower fuel factors result primarily from the projected decline in CPL's fuel costs during the twelve-month period following the implementation of the new factors. On May 9, 1996, CPL placed a $70 million base rate increase into effect under bond. The bonded rates are subject to refund based on the final order of the Texas Commission. When combined with the fuel factor reduction, the net result is an increase in annual retail revenues of $45 million, or 3.8%. On May 10, 1996, CPL and other parties to the fuel reconciliation phase of the current rate review filed the CPL 1996 Fuel Agreement with the Texas Commission that, if approved, would reconcile CPL's fuel costs through June 1995. A final order implementing the settlement is expected in June 1996 and if approved, a one-time fuel refund of $23 million will be made to customers in July 1996. As a condition of the settlement, CPL agreed not to seek recovery of $6 million of fuel and fuel related costs incurred during the reconciliation period. The additional amount of the refund results from an over-recovery of fuel costs during the reconciliation period and will not have a material impact on CPL's results of operations or financial condition. In a preliminary order issued December 21, 1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. CPL made a supplemental filing on April 1, 1996, addressing a recommended model, the CPL Industry Restructuring Model, for restructuring the electric industry within ERCOT. The following additional competitive issues were also addressed in the April 1 filing: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. In addition to a discussion of the proposed CPL Industry Restructuring Model, the April 1 supplemental filing included: (i) estimates of CPL's potential stranded cost based upon various possible structures of the electric industry and under several energy price scenarios; and (ii) a recommendation that the potential stranded cost not be quantified in rates until any changes in the electricity market and structure of utilities in Texas are known. The proposed CPL Industry Restructuring Model provides for all non-nuclear electric generation within ERCOT, which encompasses almost the entire state of Texas, to become a part of a competitive wholesale bulk power pool. Development of a competitive wholesale bulk power market for all electricity produced within ERCOT would allow electric providers to obtain the lowest-cost electricity and pass those savings on to all of their customers. The power pool would be run by an independent system operator responsible for ensuring reliability and fairness. All investor-owned utilities, electric cooperatives, municipal utilities, independent power producers and any other generators of electricity would be required to participate in the power pool. Power pools of the kind discussed in CPL's filing are often referred to as Poolcos. Utility companies currently owning all or a portion of a nuclear power plant, including CPL, would continue to include in the cost of delivering electricity all reasonable costs associated with those investments through the rates of their regulated wires. Taking this approach allows electric utilities to continue to recover costs 40 previously determined as prudently incurred while allowing customers to continue receiving the benefit of lower-cost nuclear fuel. The approach also greatly reduces CPL's potential stranded cost risk, which CPL has estimated could range anywhere from approximately zero under the CPL Industry Restructuring Model to approximately $3.7 billion in a worst case scenario where all customers would immediately be allowed to choose their electric suppliers (i.e. retail wheeling) without compensation to CPL for any of its prudently incurred costs. The amount of CPL's potential stranded cost could vary significantly within the range depending upon a number of presently unknown factors, including the extent to which CPL is compensated for its reasonable costs and the time frame over which retail wheeling would be implemented, if at all. The CPL Industry Restructuring Model does not permit the implementation of retail wheeling. CPL's support of its proposed industry structure is contingent upon formation of a significant consensus endorsing the Poolco model. The model is expected to be discussed primarily in the Texas Commission's ongoing industry restructuring project and would, in any event, require action by the Texas Legislature. Even if a Poolco model were adopted by the Texas Legislature in 1997, CPL believes that the earliest that the Poolco would be able to begin operation would be 2001. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposal for decision for consideration by the Texas Commission. Testimony filed by parties to the rate case, including the Staff of the Texas Commission, is not binding on either the ALJs or the Texas Commission. A final decision on the rate request is not anticipated from the Texas Commission prior to January 1997. CPL's management cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's results of operations or financial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL could experience a material adverse effect on its results of operations and financial condition. WTU Stipulation and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No. 1 originally authorized in the Texas Commission's Docket No. 7289. On September 22, 1995, WTU, along with other major parties to the above described matters, filed with the Texas Commission a joint stipulation and agreement to resolve all of these matters. On November 9, 1995, the Texas Commission rendered a final order that implemented the WTU Stipulation and Agreement, ending the rate proceeding and fuel reconciliation in Docket No. 13369 and the remand, designated Docket No. 13949, to the Texas Commission by the Supreme Court for the deferred accounting treatment of Oklaunion Power Station Unit No. 1 originally authorized by the Texas Commission in Docket No. 7289. The final order also set into motion the actions required to seek a remand of the appeal of Docket No. 7510 to the Texas Commission to implement a final order consistent with the WTU Stipulation and Agreement. On December 8, 1995, all parties to the appeals filed a joint motion with the Supreme Court and, on December 22, 1995, the Supreme Court approved the joint motion to withdraw and dismissed the case. 41 On April 15, 1996, the Court of Appeals issued a mandate in the proceeding. This mandate, directed to the Travis County District Court, will permit the proceeding to return to the Texas Commission. The date of final action by the Texas Commission in this matter is not known. 3. COMMITMENTS AND CONTINGENT LIABILITIES Termination of El Paso Merger In May 1993, CSW entered into a Merger Agreement pursuant to which El Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. As previously reported, on June 9, 1995, following CSW's notification that it was terminating the Merger Agreement, El Paso filed a suit against CSW seeking a $25 million termination fee from CSW, additional unspecified damages, punitive damages, interest as permitted by law and certain other costs. On June 15, 1995, CSW filed suit against El Paso seeking a $25 million termination fee from El Paso due to El Paso's breach of the Merger Agreement, at least $3.6 million in rate case expenses incurred by CSW on behalf of El Paso related to state regulatory merger proceedings and a declaratory judgment that CSW properly terminated the Merger Agreement. The United States Bankruptcy Court for the Western District of Texas, Austin Division, consolidated the El Paso suit and the CSW suit into one adversary proceeding. CSW is the named plaintiff in the consolidated adversary proceeding. A trial date of November 19, 1996 has been set for the lawsuit. Although CSW believes that it has substantial defenses to El Paso's claims and intends to defend El Paso's claims and pursue CSW's claims vigorously, CSW cannot presently predict the outcome of the lawsuit. However, if the lawsuit is decided adversely to CSW, it could have a material adverse effect on CSW's consolidated results of operations and financial condition. CSW Energy Projects and Commitments CSW Energy, a wholly owned subsidiary of CSW, is authorized to develop various independent power and cogeneration facilities and to own and operate such non-utility projects, subject to regulatory approval. The table below summarizes CSW Energy's participation in projects:
Capacity Commercial (in Mw) Operation Ownership Thermal Project Location Total Sold Date Interest Host Host Utility Brush II Brush, CO 68 68 January 1994 47% Greenhouse Public Service Company of Colorado Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50% Greenhouse Public Service Company of Colorado Mulberry Polk County, FL 120 110 August 1994 50% Distilled Florida Power Corporation Water/Ethanol Plant Orange Cogen Polk County, FL 103 97 June 1995 50% Orange Juice Florida Power Corporation Processor Tampa Electric Company Phillips Sweeny Sweeny, TX 300 90* Mid 1998 50% Refinery Undetermined* Newgulf Wharton, TX 85 -- Mid 1996 100% IPP Undetermined * The Phillips Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company.
CSW Energy provided construction services to the Mulberry cogeneration facility through a wholly owned subsidiary, CSW Development-I, Inc. The project achieved commercial operation in 42 August 1994 and added 120 MW of on-line capacity of which CSW Energy owns 50%. CSW Energy's maximum potential liability under the fixed price contract is $29 million which will decrease to zero in August 1996. As of March 31, 1996, CSW has provided additional support to the project totaling approximately $3 million. CSW Energy has entered into a purchase agreement on the Ft. Lupton project to provide $85 million upon the occurrence of certain events. As of March 31, 1996, $45 million has been paid and CSW has provided a guarantee for $40 million. Additionally, CSW Energy has provided four letters of credit to the project totaling $19 million. The following table summarizes the investments and commitments in the projects at March 31, 1996. Letters of Credit Project Equity and Guarantees Loans (millions) Brush II $15.3 $ -- $ -- Ft. Lupton 45.2 58.9 -- Mulberry 24.0 32.3 -- Orange Cogen 53.2 2.3 -- Phillips Sweeny -- 3.0 5.8 Newgulf 10.5 -- -- Various developmental projects 8.3 7.0 9.7 CPL Deferred Accounting CPL was granted deferred accounting treatment for certain STP Unit 1 and 2 costs by Texas Commission orders issued in October 1990 and December 1990, respectively. In 1994, the Supreme Court sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals given its prior determinations. On August 16, 1995, the Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects. CPL believes that the language of the Supreme Court's opinion suggests that the appropriateness of allowing deferred accounting may be reviewed under a financial integrity standard in the first case in which the deferred STP costs are recovered through rates. If the courts decide that subsequent review under the financial integrity standard is required, that review would be conducted in a remand of the STP Unit 1 and 2 orders. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. If CPL's deferred accounting matters are not favorably resolved, CPL could experience a material adverse effect on its results of operations and financial condition. While CPL's management is unable to predict the ultimate outcome of these matters, management believes CPL will receive approval of its deferred accounting orders or will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CPL's results of operation or financial condition. 43 CPL Nuclear Insurance In connection with the licensing and operation of STP, the owners have purchased the maximum limits of nuclear liability insurance, as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1, 2002. The limit of liability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of January 1995. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling $8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchases, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 21 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same accident, insurance will reimburse CPL up to 80% of the single unit recovery. The maximum amount recoverable for a single unit outage is $86.02 million for Unit 1 and $85.96 million for Unit 2. CPL is subject to an additional assessment up to $1.6 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceeds the accumulated funds available under the policy. For further information relating to litigation associated with CPL nuclear insurance claims, reference is made to PART II - ITEM 1. PSO PCB Cases For information regarding the commitments and contingent liabilities relating to the PSO's PCB cases, reference is made to PART II - ITEM 1. SWEPCO Suspected Biloxi, Mississippi MGP Site As previously reported, SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO has worked with Mississippi Power since then to investigate the extent of contamination at this site. The MDEQ approved a site investigation work plan and, in 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of the property and 44 adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results confirmed the contamination on the property and indicated the possibility of contamination of an adjacent property. A risk assessment was submitted to the MDEQ for review and comment. The MDEQ's ensuing comments requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. This phase is scheduled for the second quarter of 1996. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site. SWEPCO's Henry W. Pirkey Power Plant In connection with the lignite mining contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining contractor. As of March 31, 1996, the maximum SWEPCO would have to assume is $66.5 million. The maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding as of March 31, 1996 was approximately $59.5 million. 4. DIVIDENDS The U.S. Electric Operating Companies' mortgage indentures, as amended and supplemented, contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not limit the ability of CSW to pay dividends to its shareholders. At March 31, 1996, approximately $1.8 billion of the subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. At March 31, 1996, the amount of retained earnings available for payment of cash dividends to CSW by the U.S. Electric Operating Companies was as follows: CPL - $748 million PSO - $149 million SWEPCO - $306 million WTU - $122 million 5. CSW EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK Earnings per share of common stock are computed by dividing net income for common stock by the average number of common shares outstanding for the respective periods. Dividends per common share reflect per share amounts paid during the periods. 6. LONG TERM FINANCING In February 1996, PSO filed a shelf registration statement with the SEC for the sale of up to $75 million of Senior Notes. During March and April of 1996, PSO issued $30 million and $10 million of MTNs, respectively, at varying interest rates and maturity dates. The interest rates for the separate issues ranged from 5.89 to 6.43% with maturity dates of 2000-2001. The proceeds of the issues were used to repay a portion of PSO's short -term borrowings and to also reimburse PSO's treasury for the scheduled maturity of $25 million aggregate principal amount of FMBs. 45 7. DISCONTINUED OPERATIONS In January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok, including a possible sale. On May 9, 1996, CSW entered into an agreement with Tejas pursuant to which Transok will be sold to Tejas, subject to the satisfaction of certain conditions, for an aggregate purchase price of approximately $890 million, including approximately $690 million in cash and approximately $200 million in existing long term debt that will remain with Transok after the sale. The sale is expected to be completed in the second quarter of 1996. Accordingly, the results of operations for Transok have been reported as discontinued operations and prior periods have been restated for consistency. For additional information related to this sale, reference is made to MD&A. RECENT DEVELOPMENTS AND TRENDS. Operating results of Transok for the three months ended March 31, 1996 and 1995 are summarized in the following table. For the Three Months Ended March 31, 1996 1995 (millions) Total revenue $255 $160 Operating income before income taxes $15 $8 Earnings before income taxes $12 $7 Income taxes 4 2 Net income from discontinued operations $8 $5 The net assets of Transok included in CSW's Consolidated Balance Sheets at March 31, 1996 and December 31, 1995, are summarized in the following table. March 31, December 31, 1996 1995 (millions) Net gas fixed assets $633 $632 Current assets 100 81 Deferred charges and other assets 53 52 Current liabilities (131) (123) Long term debt (200) (200) Deferred credits and other liabilities (121) (116) Net assets $334 $326 46 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Registrants' combined Annual Report on Form 10-K for the year ended December 31, 1995. Reference is also made to each Registrant's unaudited Financial Statements and related Notes to Financial Statements included herein. The information included therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. RESULTS OF OPERATIONS Reference is made to ITEM 1. Financial Statements for each of the Registrants' Results of Operations. RECENT DEVELOPMENTS AND TRENDS Sale of Transok In January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok, including a possible sale. On May 9, 1996, CSW entered into an agreement with Tejas pursuant to which CSW will sell Transok to Tejas, subject to the satisfaction of certain conditions. In consideration of the sale, CSW will receive approximately $890 million (consisting of approximately $690 million in cash and approximately $200 million in existing long term debt that is to remain with Transok after the sale), subject to adjustment under certain circumstances. The transaction will be effected through a merger of a newly-formed wholly owned subsidiary of Tejas into Transok, with Tejas holding all of the outstanding capital stock of Transok after the merger. Assuming all conditions to the consummation of the sale are satisfied, it is anticipated that the sale of Transok will be consummated by June 30, 1996. CSW expects to record a material gain in the period the Transok sale is completed and to use the proceeds from the sale to repay outstanding borrowings under the CSW Credit Agreement and, to the extent any proceeds remain, for general corporate purposes. Transok is an intrastate natural gas gathering, transmission, marketing and processing company that provides natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to non- affiliated gas customers throughout the United States. Subsequent to the sale of Transok to Tejas, Transok will continue to supply gas to PSO under the existing supply agreement between PSO and Transok. It is also anticipated that Transok will continue to supply gas to the other U.S. Electric Operating Companies after the sale. Transok's natural gas facilities are located in Oklahoma, Louisiana and Texas. For additional information, reference is made to NOTE 7. DISCONTINUED OPERATIONS. Competition and Industry Challenges As previously reported, on March 29, 1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR a requirement that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which such utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded 47 investment costs expected to be brought about by the proposed changes. On August 7, 1995, CSW filed comments on the proposed approach in the NOPR with the FERC. On April 24, 1996, the FERC issued Order 888 which is the final comparable open access transmission rule. The provisions of the final rule are similar to the provisions of the NOPR in that they provide for comparable service between utilities and their transmission customers by requiring utilities to take service under their open access tariffs for all of their new wholesale sales and purchases and by requiring utilities to rely on the same transmission information network that their transmission customers rely on to make wholesale purchases and sales. The final rule also reaffirms the FERC's position that utilities are entitled to recover all legitimate, prudent and verifiable stranded costs determined by a formula based upon the revenues lost method through direct assignments charges to departing customers. The final rule requires holding companies to offer single system rates. However, the rule grants CSW an exemption whereby CSW will be given an opportunity to propose a solution that will provide comparability to all wholesale users whereby the rates, terms and conditions for the CSW ERCOT companies (CPL and WTU) would be permitted to differ from those offered by the CSW Southwest Power Pool companies (PSO and SWEPCO). CSW, along with all FERC jurisdictional utilities, will have to file open access tariffs that conform to the provisions of the pro forma tariff included as part of the final rule by July 9, 1996. CSW will then have until December 31, 1996, to file a system-wide tariff that will replace the conforming tariffs upon FERC approval. CAPITAL REQUIREMENTS, LIQUIDITY AND FINANCING Construction Expenditures CSW's construction expenditures totaled $102 million for the three months ended March 31, 1996. Such expenditures for the U.S. Electric Operating Companies totaled $21 million, $18 million, $16 million and $10 million, for CPL, PSO, SWEPCO and WTU, respectively. Construction expenditures were primarily for improvements to existing production, transmission and distribution facilities. The improvements are required to meet the needs of new customers and to satisfy the changing requirements of existing customers. CSW anticipates that the majority of all funds required for construction for the remainder of the year will be provided from internal sources. SEEBOARD Acquisition Financing On November 6, 1995, CSW, indirectly through CSW (UK), commenced a cash tender offer in the United Kingdom for all of the outstanding shares of capital stock of SEEBOARD. At March 31, 1996, CSW had acquired or received valid acceptances in respect of, approximately 96% of SEEBOARD's outstanding share capital and at April 25, 1996, CSW had control of 100% of the company. The aggregate adjusted purchase price paid for SEEBOARD was approximately 1.4 billion pounds (approximately $2.1 billion assuming average exchange rates during the purchase period). As of March 31, 1996, CSW had contributed approximately $829 million of the purchase price to complete the acquisition of SEEBOARD shares in connection with the Tender Offer. CSW initially obtained such funds through borrowings under the $850 million CSW Credit Agreement. Borrowings under the CSW Credit Agreement are unsecured and mature on November 6, 2000, subject to prepayment by CSW at any time. On February 28, 1996, CSW used the $398 million net proceeds from its February 1996 common stock offering to repay a portion of these borrowings. CSW anticipates that the remaining amounts owed under the CSW Credit Agreement will be repaid through a combination of internally generated funds, additional sales of CSW Common (including sales through CSW's 48 Thrift Plan and PowerShare Dividend Reinvestment and Stock Purchase Plan) and the proceeds from the sale of Transok. CSW (UK) obtained the additional funds necessary for the Tender Offer from capital contributions and loans made to CSW (UK) by its sole shareholder, CSW Investments, which arranged the CSW Investments Credit Facility for that purpose. As of April 30, 1996, CSW Investments had outstanding approximately 794 million pounds (approximately $1.2 billion assuming the prevailing exchange rate on that date) under the CSW Investments Credit Facility. CSW Investments anticipates that amounts borrowed under the CSW Investments Credit Facility will be repaid through dividends and other amounts received, indirectly through CSW (UK), from SEEBOARD. Neither CSW nor CSW International, the indirect parent of CSW Investments and CSW (UK), has guaranteed or is otherwise subject to recourse for amounts borrowed under the CSW Investments Credit Facility. In addition to the foregoing, CSW (UK) issued notes of approximately 62 million pounds (approximately $94 million assuming the prevailing exchange rate on that date) to acquire shares of SEEBOARD. Short-Term Financing The CSW System uses short-term debt to meet fluctuations in working capital requirements and other interim capital needs. The Registrants, together with other subsidiaries of CSW, have established a money pool to coordinate short-term borrowings and to make borrowings outside the money pool through CSW's issuance of commercial paper. As of March 31, 1996, CSW had two revolving credit facilities totaling $1.2 billion to back up its commercial paper program. Long-Term Financing The CSW System is committed to maintaining financial flexibility by maintaining a strong capital structure and favorable securities ratings which help to assure future access to capital markets when required. At March 31, 1996, the capitalization ratios of each of the Registrants is presented in the following table. The capitalization ratio of CSW has been significantly impacted by the amount of indebtedness utilized to finance the SEEBOARD acquisition. Common Long Stock Preferred Term Equity Stock Debt CSW 41% 4% 55% CPL 45% 8% 47% PSO 53% 2% 45% SWEPCO 51% 4% 45% WTU 48% 1% 51% PSO Financings PSO issued MTNs, Series A under a $75 million shelf registration statement aggregating $30 million in March 1996 and an additional $10 million in April 1996. The proceeds were used to repay a portion of PSO's short-term borrowings and to reimburse PSO's treasury for the scheduled maturity of $25 million aggregate principal amount of FMBs on March 1, 1996. PSO may offer the remaining $35 million available under its shelf registration statement from time to time subject to market conditions and other factors. The proceeds of any such additional offering may be used to redeem FMBs, repay short-term debt or provide working capital. SWEPCO Cajun Asset Purchase Proposal On April 19,1996, SWEPCO, the Members Committee and Entergy Gulf States filed the SWEPCO Plan in the United States Bankruptcy Court for the Middle District of Louisiana pursuant to which, among other 49 things, SWEPCO would directly or indirectly acquire all of the non- nuclear assets of Cajun for approximately $405 million in cash. On April 22, 1996, the Cajun Trustee filed a competing plan of reorganization under which NRG and Zeigler would acquire the non- nuclear assets of Cajun. If the conditions to the consummation of the SWEPCO Plan are met and the plan is approved by the bankruptcy court, CSW and SWEPCO expect to raise the $405 million required to consummate the acquisition of Cajun's non-nuclear assets through a combination of internally generated funds and external borrowings. See PART II - ITEM 5. for additional information relating to the Cajun Asset Purchase Proposal. Regulatory Matters Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of CPL's regulatory matters. New Accounting Standards As previously reported, in March 1995, the FASB issued SFAS No. 121 to be effective for financial statements for fiscal years beginning after December 15, 1995. The statement establishes a two- fold test for identification and quantification of an impaired asset. The Registrants adopted SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121 did not have a significant impact on their results of operations or financial condition. Under the current regulatory environment, the Registrants do not expect SFAS No. 121 to have a significant impact on their results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, the Registrants are monitoring the changing conditions facing the electric utility industry. Litigation Relating to Termination of El Paso Merger For information regarding the commitments and contingent liabilities relating to the termination of the Merger, reference is made to NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. 50 PART II - OTHER INFORMATION For background and earlier developments relating to PART II information reference is made to each Registrants' combined Annual Report on Form 10-K for the year ended December 31, 1995. ITEM 1. LEGAL PROCEEDINGS. CPL Nuclear Insurance Claims In a letter dated August 24, 1994, CPL filed a claim under the NEIL I policy relating to the 1993-1994 outage at STP Units 1 and 2. NEIL formally denied CPL's claim on November 21, 1995. On April 9, 1996, CPL filed an action in state district court in Corpus Christi, Texas, against NEIL and Johnson & Higgins of Texas, Inc., the former insurance broker at STP, seeking recovery under the policy and other relief. NEIL responded by filing a suit against CPL on April 16, 1996, in federal district court in New York seeking a declaratory judgment to enforce an arbitration provision contained in the policy. CPL intends to vigorously assert its rights to recovery under the NEIL I policy, but cannot predict the ultimate outcome of these matters. CPL's management believes that the resolution of these actions will not have a material adverse effect on its results of operations or financial condition. PSO PCB Cases As previously reported, PSO has been named a defendant in complaints filed in federal and state courts in Oklahoma in 1984, 1985, 1986, 1993 and 1996. The complaints allege, among other things, that some of the plaintiffs and the property of other plaintiffs were contaminated with PCBs and other toxic by-products following certain incidents, including transformer malfunctions, in April 1982, December 1983 and May 1984. To date, all complaints, except for claims filed in February 1996 for additional unspecified actual and punitive damages, have been dismissed, certain of which resulted in settlements among the parties. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Moreover, management believes that the remaining complaints are covered under insurance. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on PSO's consolidated results of operations or financial condition. PSO Burlington Northern Transportation Contract In June 1992, PSO filed suit in the United States District Court for the Northern District of Oklahoma against Burlington Northern seeking declaratory relief under a long-term contract for the transportation of coal. In July 1992, Burlington Northern asserted counterclaims for unspecified damages against PSO alleging that PSO breached the contract. In December 1993, PSO amended its suit against Burlington Northern seeking damages and declaratory relief under federal and state antitrust laws. In December 1995, PSO and Burlington Northern reached a compromise settlement of all outstanding claims and counterclaims, and the action was dismissed with prejudice. The settlement did not have a material adverse effect on PSO's consolidated results of operations or financial condition. PSO Burlington Northern Arbitration In May 1994, in an arbitration related to the Burlington Northern coal transportation contract described above, an arbitration panel made an award in favor of PSO concerning basic transportation rates under the coal transportation contract and concerning the contract mechanism for adjustment for future transportation rates. This arbitration award was then the subject of litigation in the United States District Courts for the Northern Districts of Oklahoma and Texas and the United States Court of Appeals for the Tenth Circuit. In December 1994, the United States District Court for the Northern District of Oklahoma entered judgment for PSO confirming the arbitration award and granting PSO a $16.4 million money judgment. In 51 December 1995, this litigation was settled as part of the compromise settlement of the related transportation contract litigation described above. Under the settlement, that portion of the District Court's judgment granting PSO a $16.4 million money judgment was released and satisfied of record, and that portion of the judgment confirming the arbitration award as to basic transportation rates for the balance of the contract term and the mechanism for adjustment of future transportation rates became final and is in full force and effect. SWEPCO Burlington Northern Transportation Contract On January 20, 1995, a state district court in Bowie County, Texas entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO approximately $72 million covering damages for the period from April 27, 1989 through September 26, 1994, post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals. On April 30, 1996, the Texarkana, Texas court of appeals reversed the judgment of the state district court. SWEPCO is reviewing the court of appeals decision and is considering its options for further action in this case. WTU Burlington Northern Transportation Contract Prior to the expiration of a coal transportation contract in October 1995, all coal used at Oklaunion was transported approximately 1,100 miles to the plant by Burlington Northern. Subsequently, coal has been transported in Burlington Northern supplied rail cars pursuant to a tariff filed with the Interstate Commerce Commission, whose authority in the matter was transferred to the Surface Transportation Board of the U.S. Department of Transportation, effective January 1, 1996. In a case before such board, WTU challenged the rate filed by Burlington Northern and requested prescription of a reasonable rate by the Surface Transportation Board. On May 3, 1996, the Surface Transportation Board issued a final order saying that the rate charged by Burlington Northern since October 1995 is unreasonably high and ordered Burlington Northern to reduce the rate and pay reparations for the period of time the rate was in dispute. As a result of the order, WTU anticipates that its cost of coal transportation through Burlington Northern will be reduced by approximately $6 per ton. Although the exact savings have not yet been calculated, the savings in fuel costs will be passed along to WTU's customers. The amount of reparation Burlington Northern must pay WTU has not yet been determined. Based on the order, however, WTU has been overcharged approximately $8.5 million to date. The assessment for reparations will continue until Burlington Northern establishes, within 60 days of the order, a new rate within the order guidelines. Other Legal Claims and Proceedings The CSW System is party to various other legal claims and proceedings arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on the Registrants' results of operations or financial condition. See PART I - NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion CPL's and WTU's regulatory matters. 52 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CSW (a) The annual meeting of stockholders of CSW was held on April 18, 1996. (b) The stockholders elected five directors at the annual meeting. The name of each nominee and the number of shares voted for or against were as follows: Nominee Votes for Votes against T. J. Ellis 182,420,217 2,889,182 Thomas H. 182,402,168 2,907,231 Cruikshank Joe H. Foy 182,460,095 2,849,304 J. C. Templeton 182,383,027 2,926,372 Lloyd D. Ward 174,335,992 10,973,407 In addition, stockholders voted to approve the appointment of Arthur Andersen LLP, independent public accountants, as CSW's auditors for 1996, with 184,164,660 votes cast for approval, 588,656 votes cast against approval and 556,083 votes abstaining. (c) Other matters voted upon at the annual meeting of stockholders. No other matters (other than procedural matters) were voted upon at the annual meeting. CPL (a) The annual meeting of stockholders of CPL was held on April 11, 1996. (b) Directors elected at the annual meeting were: John F. Brimberry Pete Morales, Jr. E. R. Brooks S. Loyd Neal, Jr. Robert R. Carey H. Lee Richards Glenn Files Melanie J. Richardson Ruben M. Garcia J. Gonzalo Sandoval David L. Hooper Gerald E. Vaughn Robert A. McAllen (c) Other matters voted upon at the annual meeting of stockholders. No other matters (other than procedural matters) were voted upon at the annual meeting. 53 PSO (a) The annual meeting of stockholders of PSO was held on April 16, 1996. (b) Directors elected at the annual meeting were: E. R. Brooks William R. McKamey Harry A. Clarke Mary M. Polfer Glenn Files Dr. Robert B. Taylor, Jr. Paul K. Lackey, Jr. Robert L. Zemanek Paula Marshall-Chapman Waldo J. Zerger, Jr. (c) Other matters voted upon at the annual meeting of stockholders. No other matters (other than procedural matters) were voted upon at the annual meeting. SWEPCO (a) The annual meeting of stockholders of SWEPCO was held on April 10, 1996. (b) Directors elected at the annual meeting were: Richard H. Bremer Dr. Frederick E. Joyce E. R. Brooks Michael H. Madison James E. Davison Marvin R. McGregor Glenn Files William C. Peatross W. J. Googe, Jr. Maxine P. Sarpy (c) Other matters voted upon at the annual meeting of stockholders. No other matters (other than procedural matters) were voted upon at the annual meeting. WTU (a) The annual meeting of stockholders of WTU was held on March 26, 1996. (b) Directors elected at the annual meeting were: Richard F. Bacon Dian G. Owen E. R. Brooks James M. Parker Paul J. Brower Dennis M. Sharkey T.D. Churchwell Ted Steans Glenn Files F. L. Stephens Tommy Morris (c) Other matters voted upon at the annual meeting of stockholders. No other matters (other than procedural matters) were voted upon at the annual meeting. 54 ITEM 5. OTHER INFORMATION. CSW Strategic Executive and Organizational Restructuring In April 1996, CSW announced organizational and executive changes as CSW prepares for increased competition and for an unbundling of the electric utility industry into generation, transmission, distribution and services segments. Unbundling is expected to provide a more competitive organizational structure for CSW. CSW moved its utility and non-utility generation under one organization. On April 12, 1996, Mr. Glenn Files was named to succeed Mr. Harry D. Mattison, who retired on April 30, 1996, as Executive Vice President of CSW and President and Chief Executive Officer of CSW Electric. Also on April 12, 1996, Mr. Thomas M. Hagan was named Senior Vice President, External Affairs and Ms. Venita McCellon-Allen was named Senior Vice President, Corporate Development. Effective May 1, 1996, four executives assumed new duties as presidents of the U.S. Electric Operating Companies as shown below: Mr. M. Bruce Evans President, CPL Mr. Michael D. Smith President, SWEPCO Mr. T.D. Churchwell President, PSO Mr. Floyd Nickerson President, WTU Also effective May 1, 1996, Mr. Richard H. Bremer was named president of a new organization that is to provide marketing services as well as new products and services to customers and Mr. Robert L. Zemanek was named president of a new organization that will be responsible for building and maintaining the CSW System's electric transmission and distribution facilities, as well as various administrative services. SWEPCO Cajun Asset Purchase Proposal On April 19, 1996, the Members Committee, SWEPCO and Entergy Gulf States filed the SWEPCO Plan in the U.S. Bankruptcy Court for the Middle District of Louisiana. Under the SWEPCO Plan, SWEPCO would directly or indirectly acquire all of Cajun's non-nuclear assets, including Big Cajun I and Big Cajun II, and would serve the member cooperatives through new wholesale power supply agreements. Cajun's creditors would receive a total value in excess of $1.2 billion, including $405 million in cash from SWEPCO or a SWEPCO subsidiary for the purchase of Big Cajun I, Big Cajun II and other related non- nuclear assets. Under the SWEPCO Plan, the Cajun member cooperatives would make future payments with a net present value ranging from $497 million to $567 million to the RUS, Cajun's largest creditor, by using a portion of the cooperatives' future income from their retail customers. The remaining value to the creditors would come from existing liquid assets and a ratepayer trust fund that was established as part of the bankruptcy procedure. Under the SWEPCO Plan, wholesale rates to the member distribution cooperatives that buy power from Cajun would be reduced from 4.88 cents per KWH to 3.74 cents per KWH which would, in turn, allow the cooperatives to reduce retail rates to residential customers by 20 to 25 percent from current rates. Consummation of the SWEPCO Plan is conditioned upon confirmation of the reorganization plan by the bankruptcy court, as well as the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals. If the conditions to the consummation of the SWEPCO Plan are met and the plan is approved by the bankruptcy court, CSW and SWEPCO expect to raise the $405 million required to consummate 55 the acquisition of Cajun's non-nuclear assets through a combination of internally generated funds and external borrowings. On April 22, 1996 the Cajun Trustee filed the Trustee Plan, pursuant to which NRG and Zeigler would indirectly acquire Big Cajun I, Big Cajun II and certain related non-nuclear assets of Cajun for an aggregate purchase price of approximately $1.11 billion in cash, subject to adjustment under certain circumstances. Under the Trustee Plan, Cajun would continue as an electric cooperative and would purchase its energy requirements from an entity to be formed by NRG and Zeigler under a new wholesale power purchase contract to be entered into between such entity and Cajun. The contract rates under the new power purchase contract would generally be fixed at an effective average price of 4.49 cents per KWH, subject to adjustment after five years to reflect changes in operating and maintenance costs. Consummation of the Cajun Plan is conditioned upon, among other things, approval of a definitive asset purchase agreement by the respective boards of directors of NRG and Zeigler, confirmation of the Trustee Plan by the bankruptcy court, and the receipt of all requisite state and federal regulatory approvals. In the event the acquisition contemplated by the Trustee Plan is not consummated following execution of a definitive asset purchase agreement, Cajun would be required under certain circumstances to pay to NRG and Zeigler a termination fee of $25 million in the aggregate and reimburse to NRG and Zeigler up to $15 million in respect of expenses incurred by them in connection with the Trustee Plan. A hearing has been scheduled for May 13, 1996 at which the bankruptcy court will address whether or not the termination fee and expense reimbursement provisions of the Trustee Plan would apply in the event the SWEPCO Plan is ultimately confirmed by the bankruptcy court. It is currently anticipated that disclosure statements setting forth the details of the SWEPCO Plan and the Trustee Plan will by submitted to Cajun's creditors following bankruptcy court hearings anticipated to be held in August 1996. SWEPCO would not acquire Cajun's interest in the River Bend nuclear power generating plant which is owned 70% by Entergy Gulf States and 30% by Cajun, under the SWEPCO Plan. Cajun's interest in River Bend, as well as certain legal and business disputes between Cajun and Entergy Gulf States that have arisen out of such ownership interest, are the subject of a settlement agreement entered into on April 29, 1996 among Cajun, the RUS, and Entergy Gulf States. Under this River Bend settlement, the RUS would be provided with several options for disposing of Cajun's 30% interest in River Bend, and Cajun would be released from all liabilities associated with its interest in River Bend, including potential liabilities arising from pending claims among the parties relating to River Bend, which would be released. Finally, under the River Bend settlement, Cajun would be required to fund its full share of the estimated decommissioning obligation for River Bend by setting aside $125 million in a decommissioning trust fund. The River Bend settlement, which will be advanced independently of the SWEPCO Plan and the Trustee Plan, is subject to approvals by federal and other regulatory and governmental bodies, the board of directors of Entergy Corporation, and the United States District Court before which River Bend-related litigation is pending. Entergy Gulf States has indicated that it will continue to be a proponent of the SWEPCO Plan. Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. 56 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS: (10) Material Contracts Agreement of Merger Between Central and South West Corporation and Tejas Gas Corporation Relating to Transok, Inc. (12) Computation of Ratio of Earnings to Fixed Charges CPL - (Exhibit 12.1) PSO - (Exhibit 12.3) SWEPCO - (Exhibit 12.4) WTU - (Exhibit 12.5) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends CPL - (Exhibit 12.2) (27) Financial Data Schedules SWEPCO - (Exhibit 27.4) 57 (b) REPORTS FILED ON FORM 8-K: CSW Item 2. Acquisition or Disposition of Assets and Item 7. Financial Statements and Exhibits, reporting CSW's acquisition of SEEBOARD and financial information related to the acquisition, dated January 10, 1996. Item 5. Other Events, updating recent developments in connection with CSW's common stock offering, dated January 30, 1996. Item 5. Other Events, reporting information related to CPL's rate review, dated February 13, 1996. Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, reporting information related to CSW's common stock offering, dated February 22, 1996. Item 5. Other Events, and Item 7. Financial Statements and Exhibits, reporting SWEPCO's proposal for the purchase of Cajun assets, dated April 19, 1996. CPL Item 5. Other Events, reporting information related to CPL's rate review, dated February 13, 1996. PSO Item 5. Other Events, providing unaudited financial information for the year ended December 31, 1995 in connection with a debt offering by PSO, dated February 23, 1996. Item 5. Other Events, and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, reporting information related to a PSO debt offering, dated March 4, 1996. SWEPCO Item 5. Other Events, and Item 7. Financial Statements and Exhibits, reporting SWEPCO's proposal for the purchase of Cajun assets, dated April 19, 1996. WTU No reports were filed for WTU. 58 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned Registrant shall be deemed to relate only to matters having reference to such Registrant or its subsidiaries. CENTRAL AND SOUTH WEST CORPORATION Date: May 14, 1996 /s/ Wendy G. Hargus Wendy G. Hargus Controller and Chief Accounting Officer (Principal Accounting Officer) CENTRAL POWER AND LIGHT COMPANY PUBLIC SERVICE COMPANY OF OKLAHOMA SOUTHWESTERN ELECTRIC POWER COMPANY WEST TEXAS UTILITIES COMPANY Date: May 14, 1996 /s/ R. Russell Davis R. Russell Davis Controller and Chief Accounting Officer (Principal Accounting Officer) EX-10 2 AGREEMENT OF MERGER Dated May 9, 1996 Between CENTRAL AND SOUTH WEST CORPORATION and TEJAS GAS CORPORATION Relating to TRANSOK, INC. i AGREEMENT OF MERGER TABLE OF CONTENTS Page ARTICLE I. DEFINITIONS Section 1.01. Definitions 1 Section 1.02. Rules of Construction 1 ARTICLE II. TERMS OF MERGER Section 2.01. Statutory Merger 1 Section 2.02. Purchase Price 2 Section 2.03. Closing 2 Section 2.04. Actions at the Closing 2 Section 2.05. Effect of the Merger 2 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE SELLER AS TO THE SELLER Section 3.01. Organization 4 Section 3.02. Authorization of Agreement 4 Section 3.03. Approvals 4 Section 3.04. No Violation 4 Section 3.05. Litigation 5 Section 3.06. Brokerage Agreements 5 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SELLER AS TO THE COMPANY Section 4.01. Organization and Qualification 5 Section 4.02. Capitalization 6 Section 4.03. No Violation 7 Section 4.04. Financial Statements 8 Section 4.05. No Material Adverse Effect; Conduct 8 ii Section 4.06. Title to Properties 8 Section 4.07. Certain Obligations 9 Section 4.08. Regulation; Permits and Licenses. 10 Section 4.09. Litigation; Compliance with Laws 11 Section 4.10. Taxes 12 Section 4.11. Employee Benefit Plans 12 Section 4.12. Environmental Matters 14 Section 4.13. Patents, Trademarks 14 Section 4.14. Insurance 15 Section 4.15. Public Utility 15 Section 4.16. Minute Books 15 Section 4.17. Powers of Attorney 15 Section 4.18. Intercompany Transactions 15 Section 4.19. Accounts Receivable 15 Section 4.20. Gas Balancing 16 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Section 5.01. Organization and Good Standing 16 Section 5.02. Financing 16 Section 5.03. Authorization of Agreement 16 Section 5.04. Approvals 16 Section 5.05. No Violation 17 Section 5.06. Litigation 17 Section 5.07. Brokerage Agreements 17 Section 5.08. Accounts Receivable 17 ARTICLE VI. AGREEMENTS Section 6.01. Affirmative Covenants of the Seller 17 Section 6.02. Negative Covenants of the Seller 18 Section 6.03. Access 20 Section 6.04. Appropriate Action; Consents; Filings 21 Section 6.05. Pending and Upcoming Rate Proceedings. 22 Section 6.06. Preparation and Filing of Tax Returns; Payment of Taxes. 22 Section 6.07. Access to Information. 24 Section 6.08. Employees and Employee Benefit Plans 25 Section 6.09. Working Capital Contribution 28 Section 6.10. Intercompany Accounts; Post-Closing Relationships; Closing Covenants 29 iii Section 6.11. Estimated Purchase Price 30 Section 6.12. Determination of Final Purchase Price 30 Section 6.13. Public Announcements 31 Section 6.14. Confidentiality 31 Section 6.15. Acquisition Proposals 31 ARTICLE VII. CONDITIONS TO THE CLOSING Section 7.01. Conditions to Obligations of Each Party 32 Section 7.02. Conditions to Obligation of the Purchaser 32 Section 7.03. Conditions to Obligation of the Seller 33 ARTICLE VIII. INDEMNIFICATION Section 8.01. Survival of Representations, Warranties, Covenants and Agreements 34 Section 8.02. General Indemnification 34 Section 8.03. Tax Indemnification and Audits 38 Section 8.04. Section 338(h)(10) Elections 40 ARTICLE IX. TERMINATION Section 9.01. Termination 41 Section 9.02. Effect of Termination; Nonconsummation 42 Section 9.03. Fees and Expenses 42 ARTICLE X. MISCELLANEOUS Section 10.01. Notices 43 Section 10.02. Headings; Cross References 43 Section 10.03. Prior Agreements 43 Section 10.04. Amendment 43 Section 10.05. Waiver 43 Section 10.06. Further Actions 44 Section 10.07. Assignment 44 Section 10.08. Governing Law 44 Section 10.09. Counterparts 44 Section 10.10. Tranpache Partnership 44 iv ANNEXES Annex A _ Definitions Annex B _ Transition Services 1 AGREEMENT OF MERGER THIS AGREEMENT OF MERGER (this "Agreement") is made and entered into on May 9, 1996, by and between TEJAS GAS CORPORATION, a Delaware corporation (the "Purchaser"), and CENTRAL AND SOUTH WEST CORPORATION, a Delaware corporation (the "Seller"). RECITALS This Agreement contemplates a transaction in which the Purchaser will acquire all of the outstanding capital stock of Transok, Inc., an Oklahoma corporation and wholly-owned subsidiary of the Seller (the "Company"), for cash through a reverse subsidiary merger of a newly formed wholly-owned subsidiary of the Purchaser (the "Merger Subsidiary") with and into the Company. For federal and state income tax purposes, the parties will treat the reverse subsidiary merger as a sale of stock by the Seller to the Purchaser, and the Seller and the Purchaser will make a timely joint Code section 338(h)(10) election. NOW, THEREFORE, in consideration of the premises hereof, the mutual promises herein made, and the representations, warranties and covenants herein contained, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.01. Definitions. Certain capitalized and other terms used in this Agreement are defined in Annex A hereto and are used herein with the meanings ascribed to them therein. Section 1.02. Rules of Construction. Unless the context otherwise requires, as used in this Agreement: a term has the meaning ascribed to it; an accounting term not otherwise defined has the meaning ascribed to it in accordance with generally accepted accounting principles as in effect from time to time: "or" is not exclusive; "including" means "including, without limitation;" and words in the singular include the plural and words in the plural include the singular. ARTICLE II. TERMS OF MERGER Section 2.01. Statutory Merger. Subject to the terms and conditions and in reliance upon the representations, warranties, covenants and agreements contained herein, the Merger Subsidiary shall merge with and into the Company (the "Merger"), at the Effective Time. The terms and conditions of the Merger and the mode of carrying the same into effect shall be as set forth in this Agreement. The Company shall be the corporation surviving the Merger. Hereafter "Surviving Corporation" shall mean the Company and "Constituent Corporations" shall mean the Company and the Merger Subsidiary. 2 Section 2.02. Purchase Price. (a) The purchase price (the "Purchase Price") payable to the Seller pursuant to the Merger shall be an amount equal to $690,000,000; plus the amount by which the Working Capital of the Company as of the Closing exceeds zero or minus the amount by which the Working Capital of the Company as of the Closing is less than zero, as the case may be. As required by Section 6.09, Working Capital of the Company as of the Closing shall be zero. (b) The Estimated Purchase Price, determined as provided in Section 6.11, shall be paid by the Purchaser to the Seller by wire transfer of immediately available funds at the Closing and the Final Purchase Price shall be determined and paid as provided in Section 6.12. Section 2.03. Closing. The Closing shall take place at the offices of Vinson & Elkins L.L.P., 2001 Ross Avenue, Dallas, Texas 75201 at 10:00 a.m. on May 31, 1996 or at such other place, time and date as the parties hereto may agree. The date on which the Closing occurs is referred to herein as the "Closing Date". Section 2.04. Actions at the Closing. At the Closing, upon fulfillment or waiver of the conditions precedent to the Closing set forth in Article VII, the Seller and the Purchaser shall cause the Constituent Corporations to file with the Secretary of State of the State of Oklahoma a certificate of merger (the "Certificate of Merger") containing the information required by Section 1081(C) of the Oklahoma General Corporation Act (the "OGCA") and executed and delivered in accordance with this Agreement and in accordance with the provisions of Section 1007 of the OGCA, at which time the Merger will become effective (the "Effective Time"), and two newly formed wholly-owned subsidiaries of the Merger Subsidiary to merge with and into Transok Gas Company and Transok Gas Processing Company (each a Delaware corporation and wholly-owned subsidiary of the Company), respectively, pursuant to Section 251 of the Delaware General Corporation Law. Section 2.05. Effect of the Merger. (a) From and after the Effective Time, (i) for all purposes the separate corporate existence of the Merger Subsidiary shall cease and the Company, as the Surviving Corporation, shall possess all the rights, privileges, powers and franchises of a public nature as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations to the Merger; (ii) all and singular of the rights, privileges, powers and franchises of each of the Constituent Corporations and all property, real, personal and mixed, and all debts due to any of the Constituent Corporations and all property, real, personal and mixed, and all debts due to any of the Constituent Corporations shall be vested in the Surviving Corporation; (iii) all property, rights, privileges, powers and franchises, and all and every other interest shall be as effectually the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate, vested by deed or otherwise, in any of the Constituent Corporations shall not revert or in any way be impaired by reason of the provisions of the OGCA, but all rights of creditors and all liens upon any property of any Constituent Corporation shall be preserved unimpaired; and (iv) all debts, liabilities and 3 duties of each Constituent Corporation shall attach to the Surviving Corporation and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by the Surviving Corporation. The Merger shall have the effect set forth in the OGCA. (b) The Surviving Corporation may, at any time after the Effective Time, take any action (including executing and delivering any document) in the name and on behalf of either of the Constituent Corporations in order to carry out and effectuate the transactions contemplated by this Agreement. (c) The certificate of incorporation of the Surviving Corporation shall be amended and restated in the Merger at and as of the Effective Time to read as did the certificate of incorporation of the Merger Subsidiary immediately prior to the Effective Time (except that Article First of such certificate of incorporation shall read in full as follows: "The name of the corporation is Transok, Inc."). (d) The bylaws of the Surviving Corporation shall be amended and restated at and as of the Effective Time to read as did the bylaws of the Merger Subsidiary immediately prior to the Effective Time (except that the name of the Surviving Corporation will remain unchanged). (e) The directors and officers of the Merger Subsidiary immediately prior to the Effective Time shall become the directors and officers of the Surviving Corporation at and as of the Effective Time (retaining their respective positions and terms of office). (f) The manner of converting the shares of each of the Constituent Corporations into shares or securities of the Surviving Corporation or the cash, property or other rights which the holders of shares of such Constituent Corporations are to receive in exchange for or upon conversion of such shares is as follows: (i) At and as of the Effective Time, the outstanding shares of Common Stock of the Company shall be converted into the right to receive the Purchase Price. (ii) At and as of the Effective Time, each share of common stock, par value $100.00 per share, of the Merger Subsidiary shall be converted into one share of common stock, par value $100.00 per share, of the Surviving Corporation. 4 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE SELLER AS TO THE SELLER Subject to the provisions of Sections 8.01 and 8.02, the Seller hereby represents and warrants as to itself to the Purchaser as follows: Section 3.01. Organization. The Seller is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware, with all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now conducted. Section 3.02. Authorization of Agreement. The Seller has all requisite corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it at the Closing, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby. The execution and delivery by the Seller of this Agreement and each instrument required hereby to be executed and delivered by it at the Closing and the performance of its obligations hereunder and thereunder have been duly and validly authorized by all requisite corporate action on the part of the Seller. This Agreement has been duly executed and delivered by the Seller and (assuming due authorization, execution and delivery hereof by the other party hereto) constitutes a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. Section 3.03. Approvals. Except for the requirements of the HSR Act and those Laws, Regulations and Orders noncompliance with which could not reasonably be expected to have a material adverse effect on the ability of the Seller to perform its obligations under this Agreement or to have a Material Adverse Effect on the Company, no filing or registration with, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law, Regulation or Order applicable to the Seller or the Company or any of its subsidiaries to permit the Seller to execute, deliver or perform this Agreement or any instrument required hereby to be executed and delivered by it at the Closing. Section 3.04. No Violation. Assuming effectuation of all filings and registrations with, termination or expiration of any applicable waiting periods imposed by and receipt of all Permits and Orders of, Governmental Authorities indicated as required in Section 3.03, neither the execution and delivery by the Seller of this Agreement or any instrument required hereby to be executed and delivered by it at the Closing nor the performance by the Seller of its obligations hereunder or thereunder will violate or breach the terms of or cause a default under any Law, Regulation or Order applicable to the Seller, the certificate of incorporation or bylaws of the Seller or any contract or agreement to which the Seller or any of its subsidiaries (other than the Company and its subsidiaries) is a party or by which it or any of its properties or assets is bound, or with the passage of time, the giving of notice or the taking of any action by a third party, have any of the effects set forth in clause (a) of this Section, except in any such case for any matters described in this Section that could not reasonably be expected to have a material adverse effect upon the ability of the Seller to perform its obligations under this Agreement. 5 Section 3.05. Litigation. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending, or, to the Knowledge of the Seller, threatened, against the Seller or any of its assets, at law or in equity, in any Court or before or by any Governmental Authority that could reasonably be expected to have a material adverse effect on the validity or enforceability of this Agreement or the ability of the Seller to perform its obligations under this Agreement. Section 3.06. Brokerage Agreements. Neither the Seller, the Company nor any of the Company's subsidiaries has, directly or indirectly, entered into any agreement with any Person that would obligate the Company, any of its subsidiaries or the Purchaser to pay any commission, brokerage fee or "finder's fee" in connection with the transactions contemplated herein. The fees and expenses of Morgan Stanley & Co. Incorporated incurred in connection with the transactions contemplated hereby will be for the account of the Seller. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SELLER AS TO THE COMPANY The Purchaser acknowledges that, prior to the execution of this Agreement, it has been afforded the opportunity to inspect the business and properties of the Company and to examine the records of the Company at its offices, and has been afforded access to all information in the Company's possession requested by the Purchaser. THE PURCHASER FURTHER ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY PROVIDED IN ARTICLE III OR THIS ARTICLE IV, THE SELLER, ITS OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES AND AGENTS HAVE MADE NO, AND THE SELLER HEREBY EXPRESSLY DISCLAIMS ANY, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION, AS TO TITLE OF THE COMPANY OR ANY OF ITS SUBSIDIARIES TO ANY ASSETS, OR AS TO ANY OTHER INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED TO THE PURCHASER OR ITS REPRESENTATIVES OR AGENTS BY OR ON BEHALF OF THE SELLER. Subject to the foregoing and to the provisions of Sections 8.01 and 8.02, the Seller represents and warrants as to the Company to the Purchaser as follows: Section 4.01. Organization and Qualification. The Company and each of its subsidiaries is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization (which in the case of the Company is the State of Oklahoma), has all requisite corporate or partnership, as the case may be, power and authority to own, lease and operate its properties and to carry on its business as it is now conducted, and is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the character of its properties or the nature of its business makes such qualification necessary, except where the failure to be so qualified or in good 6 standing could not reasonably be expected to have a Material Adverse Effect on the Company. The names and jurisdictions of organization of each of the Company's subsidiaries are listed in Section 4.01 of the Seller's Disclosure Letter. Complete copies of the certificate of incorporation and bylaws or other organizational documents of the Company and each of its subsidiaries, as amended to the date hereof, have been made available to the Purchaser. Section 4.02. Capitalization. (a) The authorized capital stock of the Company consists solely of 95,000 shares of common stock, par value $100.00 per share ("Common Stock"), of which 92,186 shares (the "Stock") are issued and outstanding and owned beneficially and of record by the Seller, free and clear of all Liens. No other shares of capital stock of the Company are issued or outstanding. Each share of Stock has been validly issued and is fully paid and nonassessable. No shares of Stock have been issued in violation of any preemptive or similar rights of any past or present stockholder of the Company. None of the shares of capital stock of the Company or any other class of securities of the Company has been or is registered under the Securities Act or the Exchange Act. (b) No shares of Common Stock are reserved for issuance, and, except for this Agreement, there are no contracts, agreements, commitments or arrangements obligating the Seller or the Company to offer, sell, issue or grant any shares of, or any options, warrants or rights of any kind to acquire any shares of, or any securities that are convertible into or exchangeable for any shares of, capital stock of the Company, to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding shares of, or any outstanding options, warrants or rights of any kind to acquire any shares of, or any outstanding securities that are convertible into or exchangeable for any shares of, capital stock of the Company or to grant any Lien on any shares of capital stock of the Company. (c) The authorized, issued and outstanding capital stock of, or other equity interests in, each of the Company's subsidiaries and the names and addresses of the holders of record of the capital stock or other equity interests of each such subsidiary are set forth in Section 4.02(c) of the Seller's Disclosure Letter. The issued and outstanding shares of capital stock of, or other equity interests in, each of the subsidiaries of the Company that are owned by the Company or any of its subsidiaries have been duly authorized and are validly issued, and, with respect to capital stock, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights of any past or present equity holder of such subsidiary. All such issued and outstanding shares, or other equity interests, that are indicated as owned by the Company or one of its subsidiaries in Section 4.02(c) of the Seller's Disclosure Letter are owned beneficially as set forth therein and free and clear of all Liens. No shares of capital stock of, or other equity interests in, any subsidiary of the Company are reserved for issuance, and there are no contracts, agreements, commitments or arrangements obligating the Company or any of its subsidiaries (i) to offer, sell, issue, grant, pledge, dispose of or encumber any shares of capital stock of, or other equity interests in, or any options, warrants or rights of any kind to acquire any shares of capital stock of, or other equity interests in, or any securities that are convertible into or exchangeable for any shares of capital stock of, or other equity interests in, any of the subsidiaries of the Company or (ii) to redeem, 7 purchase or acquire, or offer to purchase or acquire, any outstanding shares of capital stock of, or other equity interests in, or any outstanding options, warrants or rights of any kind to acquire any shares of capital stock of or other equity interest in, or any outstanding securities that are convertible into or exchangeable for, any shares of capital stock of, or other equity interests in, any of the subsidiaries of the Company or (iii) to grant any Lien on any outstanding shares of capital stock of, or other equity interest in, any of the subsidiaries of the Company; provided, however, that certain terms and provisions of, and applicable law relating to, the partnership or joint venture agreements or arrangements listed in Section 4.02(c) of the Seller's Disclosure Letter may require the partnerships or joint ventures to which such agreements or arrangements relate or the partners or venturers therein to take certain actions not Material to the Company with respect to the equity interests in such partnerships and joint ventures contrary to clauses (i), (ii) or (iii) above. (d) Neither the Company nor any of its subsidiaries directly or indirectly owns, has agreed to purchase or otherwise acquire or holds any interest convertible into or exchangeable or exercisable for the capital stock or other equity interests of any Person (other than the subsidiaries of the Company identified in Section 4.01 of the Seller's Disclosure Letter). Except for any contracts, agreements, commitments or arrangements between the Company and its subsidiaries or between such subsidiaries or between the Company and its subsidiaries, on the one hand, and the Seller and its Affiliates (other than the Company and its Subsidiaries), on the other, that will be terminated at or prior to the Closing, there are no contracts, agreements, commitments or arrangements of any character (contingent or otherwise) pursuant to which any Person is or may be entitled to receive any payment from the Company or any of its subsidiaries based on, or calculated in accordance with, the revenues or earnings of the Company or any of its subsidiaries, except for payments not Material to the Company from the partnerships or joint ventures listed in Section 4.02(c) of the Seller's Disclosure Letter. Section 4.03. No Violation. Assuming effectuation of all filings and registrations with, the termination or expiration of any applicable waiting periods imposed by and receipt of all Permits and Orders of, Governmental Authorities indicated as required in Section 3.03, neither the execution and delivery by the Seller of this Agreement or any instrument required hereby to be executed and delivered by it at the Closing nor the performance by the Seller of its obligations hereunder or thereunder will violate or breach the terms of or cause a default under any Law, Regulation or Order applicable to the Company or any of its subsidiaries, the certificate of incorporation or bylaws or other organizational documents of the Company or any of its subsidiaries or any contract or agreement to which the Company or any of its subsidiaries is a party or by which they or any of their properties or assets are bound, result in the creation or imposition of any Lien, other than any Permitted Encumbrance, on any of the properties or assets of the Company or any of its subsidiaries, result in the cancellation, forfeiture, revocation, suspension or adverse modification of any Permit owned or held by the Company or any of its subsidiaries or , with the passage of time, the giving of notice or the taking of any action by a third party, have any of the effects set forth in clause (a), (b) or (c) of this Section, except in any such case for any matters described in this Section that could not reasonably be expected to have a Material Adverse Effect on the Company. 8 Section 4.04. Financial Statements. There is included in Section 4.04 of the Seller's Disclosure Letter a copy of the Consolidated Financial Statements, and such Consolidated Financial Statements fairly present the consolidated financial position of the Company as of the respective dates of the balance sheets included therein and the consolidated results of the operations of the Company for the fiscal years ended on such dates, all in conformity with GAAP throughout the periods involved. Except as set forth in the Seller's Disclosure Letter, there exist no liabilities or obligations of the Company that are Material to the Company, whether accrued, absolute, contingent or threatened, which would be required to be reflected, reserved for or disclosed under GAAP in the consolidated financial statements of the Company as of and for the period ended on the date of this representation and warranty, other than liabilities or obligations which are adequately reflected, reserved for or disclosed in the Consolidated Financial Statements, and liabilities or obligations incurred in the ordinary course of business of the Company since December 31, 1995. Section 4.05. No Material Adverse Effect; Conduct. (a) Since December 31, 1995, no event (other than any event that is of general application to all or a substantial portion of the Company's industry and other than any event that is expressly subject to any other representation or warranty contained in Articles III or IV) has, to the Knowledge of the Seller, occurred that, individually or together with other similar events, could reasonably be expected to constitute or cause a Material Adverse Effect on the Company. (b) Except as disclosed in the Seller's Disclosure Letter, during the period from December 31, 1995 to the execution of this Agreement by the Seller, neither the Company nor any of its subsidiaries has engaged in any conduct that is proscribed during the period from the execution of this Agreement by the Seller to the Closing by subsections (a) through (j) of Section 6.02 or agreed in writing or otherwise during such period prior to the execution of this Agreement by the Seller to engage in any such conduct. Section 4.06. Title to Properties. (a) The Company or its subsidiaries, individually or together, have indefeasible title to all of the properties reflected in the Consolidated Balance Sheet, (other than the Pipeline Assets, as to which they have such title or interest as is sufficient to enable the Company and its subsidiaries to conduct their business as currently conducted without material interference, and other than any properties reflected in the Consolidated Balance Sheet that have been sold or otherwise disposed of since the date of the Consolidated Balance Sheet without breaching either Section 4.05(b) or Section 6.02(f) or are not, individually or in the aggregate, Material to the Company) free and clear of Liens, other than (x) Liens the existence of which is reflected in the Consolidated Financial Statements, (y) Permitted Encumbrances and (z) Liens that, individually or in the aggregate, are not Material to the Company. The Company or its subsidiaries, individually or together, hold under valid lease agreements all real and personal properties reflected in the Consolidated Balance Sheet as being held under capitalized leases, and all real and personal property that is subject to the operating leases to which reference is made in the notes to the Consolidated Financial Statements, and enjoy peaceful and undisturbed possession of such properties under such leases, other than (i) any properties as to which such 9 leases have terminated in the ordinary course of business since the date of the Consolidated Balance Sheet and (ii) any properties that, individually or in the aggregate, are not Material to the Company. Neither the Company nor any of its subsidiaries has received any written notice of any adverse claim to the title to any properties owned by them or with respect to any lease under which any properties are held by them, other than any claims that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. (b) Easements. Neither the Company nor any of its subsidiaries is in violation of the terms of any Easement except any such violations that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. All Easements that are Material to the Company are valid and enforceable and grant the rights purported to be granted thereby and all rights necessary thereunder for the current operation of the business of the Company and its subsidiaries. There are no spatial gaps in the Easements that could reasonably be expected to have a Material Adverse Effect on the Company, and all parts of the Pipeline Assets that are Material to the Company are located either on property owned in fee by the Company or a subsidiary of the Company or on property subject to an Easement in favor of the Company or a subsidiary of the Company. Section 4.07. Certain Obligations. (a) Except as set forth in Section 4.07(a) of the Seller's Disclosure Letter, neither the Company nor any of its subsidiaries is a party to or bound by any Material Contract. Except as set forth in Section 4.07(a) of the Seller's Disclosure Letter, all Material Contracts are in full force and effect, the Company or the subsidiary of the Company that is a party to or bound by such Material Contract has performed its obligations thereunder to date and, to the Knowledge of the Seller, each other party thereto has performed its obligations thereunder to date, other than any failure of a Material Contract to be in full force and effect or any nonperformance thereof that could not reasonably be expected to have a Material Adverse Effect on the Company. Each of the Medium-Term Notes issued by the Company pursuant to the Medium-Term Note Program identified in Section 4.07(a) of the Seller's Disclosure Letter conform in all material respects to the sample Medium-Term Note included in Section 4.07(a-l) of the Seller's Disclosure Letter. (b) Subject to Section 4.08(a), except for matters that could not reasonably be expected to have a Material Adverse Effect on the Company, no provision of any Law, Regulation or Order applicable to the Company or any of its subsidiaries would preclude the Company or any of its subsidiaries from charging and collecting, without the necessity for approvals of any Governmental Authority and without refund obligation, market based rates for storing, processing, purchasing, gathering or selling Hydrocarbons; would preclude the Company or any of its subsidiaries from constructing additions to, modifications of or interconnections with third parties with respect to, its transportation, storage, processing or gathering facilities; or could reasonably be expected to require the Company or any of its subsidiaries to make refunds of amounts collected for sales or services. 10 (c) Except as set forth in Section 4.07(c) of the Seller's Disclosure Letter and for matters that could not reasonably be expected to have a Material Adverse Effect on the Company, none of the Company and its subsidiaries engages in any natural gas or other futures or options trading or is a party to any price swaps, hedges, futures or similar instruments, except for transactions and agreements entered into primarily to hedge contracts for the purchase or sale of Hydrocarbons to which the Company or one of its subsidiaries is a party. Section 4.07(c) of the Seller's Disclosure Letter sets forth a true and correct statement of the position, as of the date hereof, of the Company and its subsidiaries with respect to obligations under Fixed Price Contracts (including, with respect to each Fixed Price Contract, location of delivery and variations in the obligation to take or deliver) and related Hydrocarbon price swaps, hedges, futures or similar instruments to which the Company or any of its subsidiaries is a party and that are Material to the Company. Section 4.08. Regulation; Permits and Licenses. (a) The Company and its subsidiaries operate intrastate pipelines with Pipeline Assets located in the States of Texas, Oklahoma, and Louisiana. As such, the natural gas storage, transportation, and exchange services performed in interstate commerce by the Company and certain of its subsidiaries are subject to the provisions of either a limited jurisdiction certificate issued under the NGA or Section 311 of the NGPA ("Section 311") and the applicable Regulations of the FERC promulgated thereunder (including applicable facilities construction, rate authorization, reporting and refund requirements), as the provisions of such certificate, Section 311 and such Regulations may be interpreted, amended or modified from time to time pursuant to Orders of the FERC or of any Court. Under such Laws and Regulations, the Company and certain of its subsidiaries are authorized to charge market based rates for Section 311 storage services and are authorized to charge various maximum rates for Section 311 transportation and exchange services. Except as set forth in Section 4.08(a) of the Seller's Disclosure Letter, the rates for services collected pursuant to such rate authorizations are not being collected subject to refund. In addition, sales for resale of natural gas in interstate commerce made by the Company or its subsidiaries of natural gas that is produced from reserves owned by a party other than such seller are made pursuant to Section 311 and the applicable Regulations thereunder or the terms and conditions of a blanket sales certificate authorization issued by the FERC under the NGA, as such authorization may be amended, modified or interpreted from time to time pursuant to Orders of the FERC or of any Court. Intrastate transportation, exchange, storage, gathering, and pipeline sales services performed by the Company and its subsidiaries may be subject to certain facilities construction, rate, reporting and prior authorization requirements applicable under the Laws of the States of Texas, Oklahoma, and Louisiana, and Regulations promulgated thereunder by the TRC, the OCC and the LCC, respectively, as such Regulations may be amended, modified and interpreted by the respective Governmental Authorities or the Courts. (b) To the Knowledge of the Seller, the Company and its subsidiaries have obtained all Permits, including all certificates of public convenience and necessity and rate authorizations required by the LCC and by the FERC, as are necessary to carry on their businesses as currently conducted, except for any such Permits that the failure to possess which, 11 individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. Such Permits are in full force and effect, have not been violated in any respect that could reasonably be expected to have a Material Adverse Effect on the Company and, to the Knowledge of the Seller, no suspension, revocation or cancellation thereof has been threatened. (c) Neither the Company nor any subsidiary of the Company is subject to the jurisdiction of the FERC under the NGA, except pursuant to Sections 284.121 through 284.126 of the FERC's regulations, 18 C.F.R. 284.121 through 284.126 (1995), Section 284.142 of the FERC's regulations, 18 C.F.R., 284.142 (1995), and pursuant to a limited jurisdiction blanket certificate issued under Section 284.227 of the FERC's regulations, 18 C.F.R. 284.227 (1994). The Company and its subsidiaries have engaged in no activities which would subject them, their activities, or their facilities to the NGA jurisdiction of the FERC. All of the Company's and its subsidiaries' facilities used to transport natural gas are non-jurisdictional intrastate transmission or "gathering" facilities within the meaning of the NGA and/or NGPA, and, except as set forth in the first sentence of this Section 4.08(c), neither the Company nor any of its subsidiaries has or is engaged in the interstate transmission of gas through any of its facilities. The Company's and each of its subsidiaries' representations concerning the jurisdictional status of its facilities and operations made to natural gas purchasers and interstate or intrastate pipelines in order to effect sales or to facilitate transportation transactions (whether for the Company, its subsidiaries or any third parties) have been and, through the Closing, are true and correct in all Material respects, and the Company and its subsidiaries have complied in all Material respects with the terms and conditions of such sales, transportation or interconnect or similar arrangements (including "on behalf of" certificates). Neither the Company nor any of its subsidiaries has violated, and neither has received notification from any Governmental Authority that it has violated, the NGA, the NGPA, or any other Law concerning the transmission and sale of natural gas or the conduct of gathering, treating, processing, and compression activities associated with natural gas, except for any violations that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. Section 4.09. Litigation; Compliance with Laws. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending or, to the Knowledge of the Seller, threatened against the Company or any of its subsidiaries, at law or in equity, in any Court or before or by any Governmental Authority (excluding any rulemaking or similar proceedings of general applicability and any appeal or petition for review related thereto), except actions, suits or proceedings that are set forth in Section 4.09 or Section 4.12 of the Seller's Disclosure Letter or , individually or, with respect to multiple actions, suits or proceedings that allege similar theories of recovery based on similar facts, in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. Except as set forth in Section 4.09 of the Seller's Disclosure Letter, the Company and its subsidiaries are in substantial compliance with all applicable Laws and Regulations and are not in default with respect to any Order applicable to the Company or any of its subsidiaries, except such events of noncompliance or defaults that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. 12 Section 4.10. Taxes. (a) Except for such matters as could not reasonably be expected to have a Material Adverse Effect on the Company, all returns and reports of or with respect to any Tax which are required to be filed by or with respect to the Company or any of its subsidiaries ("Tax Returns") on or before the Closing Date have been or will be timely filed, all Taxes which are shown to be due on such Tax Returns on or before the Closing Date have been or will be timely paid in full, all withholding Tax requirements imposed on or with respect to the Company or any of its subsidiaries have been or will be satisfied in full in all respects and no penalty, interest or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any such Tax. (b) Except as set forth in Section 4.10(b) of the Seller's Disclosure Letter, all Tax Returns have been audited by the applicable Governmental Authority or the applicable statute of limitations has expired for the period covered by such Tax Returns. (c) Except as set forth in Section 4.10(c) of the Seller's Disclosure Letter, there is not in force any extension of time with respect to the due date for the filing of any Tax Return or any waiver or agreement for any extension of time for the assessment or payment of any Tax due with respect to the period covered by any Tax Return. (d) There is no claim against the Company or any of its subsidiaries for any Taxes, and no assessment, deficiency or adjustment has been asserted or proposed with respect to any Tax Return that could reasonably be expected to have a Material Adverse Effect on the Company. (e) Except as set forth in Section 4.10(e) of the Seller's Disclosure Letter, none of the Company and its subsidiaries, during the last ten years, has been a member of an affiliated group filing a consolidated federal income Tax Return (other than the Seller's Group). Section 4.11. Employee Benefit Plans. (a) Each Benefit Plan is listed in Section 4.11(a) of the Seller's Disclosure Letter. True and correct copies of each of the following have been made available to the Purchaser: the most recent annual report (Form 5500) relating to each Benefit Plan filed with the IRS, each such Benefit Plan, the trust agreement, if any, relating to each such Benefit Plan, the most recent summary plan description for each such Benefit Plan for which a summary plan description is required by ERISA, the most recent actuarial report or valuation relating to each such Benefit Plan subject to Title IV of ERISA and the most recent determination letter, if any, issued by the IRS with respect to any such Benefit Plan qualified under Section 401 of the Code. (b) With respect to the Benefit Plans, no event has occurred and, to the Knowledge of the Seller, there exists no condition or set of circumstances in connection with which the Company or any of its subsidiaries could be subject to any liability under the terms of such Benefit Plans, ERISA, the Code 13 or any other applicable Law, other than any condition or set of circumstances that could not reasonably be expected to have a Material Adverse Effect on the Company. (c) As to any Benefit Plan intended to be qualified under Section 401 of the Code, such Benefit Plan satisfies in form the requirements of such Section and there has been no termination or partial termination of such Benefit Plan within the meaning of Section 411(d)(3) of the Code. (d) There are no actions, suits or claims pending (other than routine claims for benefits) or, to the Knowledge of the Seller, threatened against, or with respect to, any of the Benefit Plans or their assets. (e) All contributions required to be made to the Benefit Plans pursuant to their terms and provisions have been made timely. (f) As to any Benefit Plan subject to Title IV of ERISA, there has been no event or condition which presents the material risk of plan termination, no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, no notice of intent to terminate the Benefit Plan has been given under Section 4041 of ERISA, no proceeding has been instituted under Section 4042 of ERISA to terminate the Benefit Plan, and no liability to the Pension Benefit Guaranty Corporation has been incurred (other than with respect to required premium payments). (g) In connection with the consummation of the transactions contemplated by this Agreement, no payments have or will be made under the Benefit Plans or any of the programs, agreements, policies or other arrangements described in Section 4.11(i) of the Seller's Disclosure Letter which, in the aggregate, would be nondeductible under Section 280G of the Code. (h) No collective bargaining agreement is being negotiated by the Company or any of its subsidiaries. There is no pending or, to the Knowledge of the Seller, threatened labor dispute, strike or work stoppage against the Company or any of its subsidiaries which could reasonably be expected to interfere with the business activities of the Company or any of its subsidiaries. To the Knowledge of the Seller, none of the Company, any of its subsidiaries or any of their respective representatives or employees has committed any unfair labor practices in connection with the operation of the respective businesses of the Company or its subsidiaries, and there is no pending or, to the Knowledge of the Seller, threatened charge or complaint against the Company or any of its subsidiaries by the National Labor Relations Board or any comparable state agency. (i) Except as set forth in Section 4.11(i) of the Seller's Disclosure Letter, neither the Company nor any of its subsidiaries is a party to or is bound by any severance agreements, programs or policies. True and correct copies of all employment agreements with officers of the Company and its subsidiaries, and all vacation, overtime and other compensation 14 policies of the Company and its subsidiaries relating to their employees have been made available to the Purchaser. Except as set forth in Section 4.11(i) of the Seller's Disclosure Letter, there are no (x) agreements with consultants of the Company and its subsidiaries obligating the Company or any of its subsidiaries to make cash payments in an amount exceeding $150,000 or (y) noncompetition agreements with the Company or any of its subsidiaries executed by officers of the Company. (j) Except as set forth in Section 4.11(j) of the Seller's Disclosure Letter, no Benefit Plan provides retiree medical or retiree life insurance benefits to any Person and neither the Company nor any of its subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any Person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of Sections 601 through 608 of ERISA and Section 4980B of the Code. (k) Neither the Company nor any of its subsidiaries contributes to or has an obligation to contribute to, and has not within six years prior to the date of this Agreement contributed to or had an obligation to contribute to, a multiemployer plan within the meaning of Section 3(37) of ERISA. (l) The Company's vacation policy does not provide for carryover vacation from one calendar year to the next. Section 4.12. Environmental Matters. Except for matters disclosed in Section 4.12 of the Seller's Disclosure Letter and except for matters that, individually or in the aggregate, would not have a Material Adverse Effect on the Company, the properties, operations and activities of the Company and its subsidiaries are in compliance with all applicable Environmental Laws; the Company and its subsidiaries and the properties and operations of the Company and its subsidiaries are not subject to any existing, pending or, to the Knowledge of the Seller, threatened action, suit, investigation, inquiry or proceeding by or before any Court or Governmental Authority under any Environmental Law; all Permits, if any, required to be obtained or filed by the Company or any of its subsidiaries under any Environmental Law in connection with the business of the Company and its subsidiaries have been obtained or filed and are valid and currently in full force and effect; there has been no release of any hazardous substance, pollutant or contaminant into the environment by the Company or its subsidiaries or in connection with their properties or operations; and the Company and its subsidiaries have made available to the Purchaser all internal and external environmental audits and studies and all correspondence on substantial environmental matters in each case relevant to the Company or any of its subsidiaries and known by the Seller, or which the Seller should have known, to be in the possession of the Company or its subsidiaries. Section 4.13. Patents, Trademarks. Section 4.13 of the Seller's Disclosure Letter sets forth all patents, trademarks, service marks, trade names and copyrights and registrations and applications for any thereof, domestic or foreign, owned by or registered in the name of the Company or one of its subsidiaries or in which the Company or its subsidiaries has any rights and which are Material to the Company. The Company or its subsidiaries own or hold licenses under such patents, trademarks, service marks, trade names and copyrights as are necessary for the conduct of its business as currently conducted except for licenses which the failure to own or hold could not reasonably be 15 expected to have a Material Adverse Effect on the Company. Neither the Company nor any of its subsidiaries is currently in receipt of any notice of infringement or notice of conflict with the asserted rights of others in any patents, trademarks, service marks, trade names and copyrights owned or held by other Persons, except, in each case, for matters that could not reasonably be expected to have a Material Adverse Effect on the Company. Section 4.14. Insurance. Section 4.14 of the Seller's Disclosure Letter sets forth all insurance policies held by the Company and its subsidiaries that are Material to the Company. To the Knowledge of the Seller, all such policies are in full force and effect and all premiums due thereon have been paid. Section 4.15. Public Utility. The Company is not a "holding company," or a "public utility company," as such terms are defined in the Holding Company Act and the rules and regulations thereunder; it is, however, a "subsidiary company" of a "holding company," and an "affiliate" of a "holding company," as such terms are defined in the Holding Company Act and the rules and regulations thereunder. The Seller has taken no action that, and no relationship between the Seller and its Affiliates existing prior to the Closing, will cause the Company to continue to be a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" after the Closing within the meaning of the Holding Company Act and the rules and regulations thereunder. Section 4.16. Minute Books. The minute books of the Company and its subsidiaries which have been made available to the Purchaser for review constitute all of the Company's and its subsidiaries' minute books and contain a complete and accurate record of all resolutions and formal actions of the Company's and its subsidiaries' stockholders and directors (and any committees thereof), in each case, in their respective capacities as such. Section 4.17. Powers of Attorney. No Persons hold powers of attorney for the Company or its subsidiaries except for revocable limited powers of attorney granted in connection with ad valorem, franchise and other state and local taxes or other routine business matters. Section 4.18. Intercompany Transactions. Except as may otherwise be required by Sections 6.09 and 6.10, since December 31, 1995, all Material intercompany transactions between the Company and its subsidiaries, on the one hand, and the Seller and its Affiliates (other than the Company and its subsidiaries), on the other, including charges for factoring accounts receivable, interest, administrative and overhead services, transporting Hydrocarbons and sales of Hydrocarbons, have been made on terms consistent in all material respects with, and accounted for by the Company and its subsidiaries consistent with, transactions of a similar nature occurring during the periods reflected in the Consolidated Financial Statements. The Company and its subsidiaries have not guaranteed, or provided collateral, surety, or credit support for, any obligations of the Seller and its Affiliates (other than the Company and its subsidiaries) to third parties, except such that will be released at the Closing. Section 4.19. Accounts Receivable. The accounts receivable included in current accounts of the Company comprising part of the Working Capital of the Company arise from, in all material respects, sales made or services rendered in the ordinary course of business, are not subject to any material Lien (except Liens to be released at or prior to the Closing), are not subject to 16 any material conditions that would preclude the sale thereof by the Company (except any such condition to be satisfied or released at or prior to Closing) and are collectible in the ordinary course of business, except as reflected in the reserve for doubtful accounts included in the Working Capital of the Company as of the Closing. Section 4.20. Gas Balancing. Except as set forth in Section 4.09 of the Seller's Disclosure Letter, to the Knowledge of the Seller, since December 31, 1995 no claim has been asserted against the Company or any of its subsidiaries relating to any Material gas balancing liabilities. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Subject to the provisions of Sections 8.01 and 8.02, the Purchaser represents and warrants to the Seller as follows: Section 5.01. Organization and Good Standing. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware with all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as currently conducted. Section 5.02. Financing. The Purchaser has available to it internal funds that are otherwise uncommitted and funds that it can acquire through borrowings from nationally recognized financial institutions, which borrowings are the subject of firm commitments from such institutions obtained for the purposes of this Agreement, and such funds are, in the aggregate, sufficient to enable the Purchaser to pay the Estimated Purchase Price of the Stock in full, together with all costs and expenses related thereto, and otherwise to perform its obligations under this Agreement. Section 5.03. Authorization of Agreement. The Purchaser has all requisite corporate power and authority to enter into this Agreement and each instrument required hereby to be executed and delivered by it at the Closing, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby. The execution and delivery by the Purchaser of this Agreement and each instrument required hereby to be executed and delivered by it at the Closing, and the performance of its obligations hereunder and thereunder, have been duly and validly authorized by all requisite corporate action on the part of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser and (assuming due authorization, execution and delivery hereof by the other party hereto) constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. Section 5.04. Approvals. Except for the requirements of the HSR Act and those Laws, Regulations and Orders noncompliance with which could not reasonably be expected to have a material adverse effect on the Purchaser's ability to perform this Agreement, no filing or registration with, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law, Regulation or Order applicable to the Purchaser to permit the Purchaser to execute, deliver or perform 17 this Agreement or any instrument required hereby to be executed and delivered by it at the Closing. Section 5.05. No Violation. Assuming effectuation of all filings and registrations with, termination or expiration of all waiting periods imposed by and receipt of all Permits and Orders of, Governmental Authorities indicated as required in Section 5.04, neither the execution and delivery by the Purchaser of this Agreement or any instrument required hereby to be executed and delivered by it at the Closing nor the performance by the Purchaser of its obligations hereunder or thereunder will violate or breach the terms of or cause a default under any Law, Regulation or Order applicable to the Purchaser, the charter or bylaws of the Purchaser or any contract or agreement to which the Purchaser is a party or by which it or any of its properties or assets is bound, or , with the passage of time or the giving of notice or the taking of any action by a third party, have any of the effects set forth in clause (a) of this Section, except in any such case for any matters described in this Section that could not reasonably be expected to have a material adverse effect upon the ability of the Purchaser to perform its obligations under this Agreement. Section 5.06. Litigation. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending, or, to the Knowledge of the Purchaser, threatened, against the Purchaser or any of its assets, at law or in equity, in any Court or before or by any Governmental Authority that could reasonably be expected to have a material adverse effect on the validity or enforceability of this Agreement or the ability of the Purchaser to perform its obligations under this Agreement. Section 5.07. Brokerage Agreements. Neither the Purchaser nor any of its subsidiaries has, directly or indirectly, entered into any agreement with any Person that would obligate the Seller, the Company or any of the Company's subsidiaries to pay any commission, brokerage fee or "finder's fee" in connection with the transactions contemplated herein. Section 5.08. Accounts Receivable. The reserve for doubtful accounts included in the Working Capital of the Company as of the Closing does not exceed the amount of receivables of the Company comprising part of the Working Capital of the Company as of the Closing that is not collectible (it being understood and agreed that this representation is intended solely to provide a mechanism pursuant to which the Purchaser will rebate to the Seller, pursuant to Section 8.02, the excess of receivables actually collected over the amount credited to the Seller for such receivables pursuant to Section 6.09(c) in computing the Final Purchase Price). ARTICLE VI. AGREEMENTS Section 6.01. Affirmative Covenants of the Seller. Except as expressly contemplated by this Agreement or consented to in writing by the Purchaser (which consent shall not be unreasonably withheld), the Seller will, during the period from the execution of this Agreement by the Seller to the Closing, cause the Company and its subsidiaries: 18 (a) to operate their businesses in all material respects in the usual and ordinary course consistent with past practices; (b) to use all reasonable efforts to preserve substantially intact their business organizations, maintain the rights and franchises that are Material to the Company, retain the services of their officers and maintain the relationships with the customers and suppliers that are Material to the Company; (c) to maintain and keep the properties and assets that are Material to the Company in as good repair and condition as on the date of this Agreement, ordinary wear and tear excepted, and maintain supplies and inventories in quantities consistent with their customary business practices; (d) to use all commercially reasonable efforts to keep in full force and effect insurance comparable in amount and scope of coverage to that set forth in Section 4.14 of the Seller's Disclosure Letter; and (e) to comply in all material respects with all applicable Laws, Regulations and Orders. Section 6.02. Negative Covenants of the Seller. Except as (i) expressly contemplated by this Agreement, (ii) required by the partnership or joint venture agreements or arrangements listed in Section 4.02(c) of the Seller's Disclosure Letter with respect to the business, condition (financial or otherwise), operations, performance or properties of the partnerships and joint ventures created thereby, or (iii) as otherwise consented to in writing by the Purchaser (which consent shall not be unreasonably withheld), the Seller will not, from the execution of this Agreement by the Seller until the Closing, permit the Company or any of its subsidiaries: (a) (i) to increase in any material respect the compensation payable to or to become payable to any director or executive officer, except for increases in salary or wages payable or to become payable in the ordinary course of business and consistent with past practice; to grant in any material respect any severance or termination pay (other than pursuant to the normal severance policy of the Company and its subsidiaries as in effect on the date of this Agreement) to, or to enter into or to amend any employment or severance agreement with, any director, officer or employee; or to establish, adopt or enter into any Benefit Plan; (b) to declare or to pay any dividend on, or to make any other distribution in respect of, outstanding shares of capital stock or other equity interests, except for dividends or any other distributions by a wholly-owned subsidiary of the Company to the Company or another wholly-owned subsidiary of the Company or as disclosed in Section 6.02(b) of the Seller's Disclosure Letter; (c) (i) to redeem, purchase or acquire, or to offer to purchase or acquire, any outstanding shares of capital stock of, or other equity interests in, or any securities that are convertible into or exchangeable for any shares of capital stock of, or other equity interests in (other than any such acquisition 19 by the Company or any of its wholly-owned subsidiaries directly from any wholly-owned subsidiary of the Company in exchange for capital contributions or loans to such subsidiary), or any outstanding options, warrants or rights of any kind to acquire any shares of capital stock of, or other equity interests in, the Company or any of its subsidiaries; to effect any reorganization or recapitalization; or to split, combine or reclassify any of the capital stock of, or other equity interests in, the Company or any of its subsidiaries or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of such capital stock or such equity interests; (d) (i) to offer, sell, issue or grant, or authorize the offering, sale, issuance or grant, of any shares of capital stock of, or other equity interests in, any securities convertible into or exchangeable for any shares of capital stock of, or other equity interests in, or any options, warrants or rights of any kind to acquire any shares of capital stock of, or other equity interests in, the Company or any of its subsidiaries; or to grant any Lien with respect to any shares of capital stock of, or other equity interests in, any subsidiary of the Company; (e) to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or in any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise to acquire any assets of any other Person (other than the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice), the aggregate purchase prices for which exceeds $3,000,000; (f) to sell, lease, exchange or otherwise dispose of, or to grant any Lien (other than a Permitted Encumbrance) with respect to, any of the assets of the Company or any of its subsidiaries that are Material to the Company, except for dispositions of assets (up to an aggregate fair market value of $3,000,000) and inventories in the ordinary course of business and consistent with past practice; (g) to adopt any amendments to its charter or bylaws or other organizational documents that would alter the terms of its capital stock or other equity interests or would have a material adverse effect on the ability of the Seller to perform its obligations under this Agreement; (h) (i) to change any of its policies or practices related to business transactions between the Company and its subsidiaries, on the one hand, and the Seller and its Affiliates (other than the Company and its subsidiaries), on the other hand, to change any of its methods of accounting in effect at December 31, 1995, except as may be required to comply with GAAP, to make or rescind any election relating to Taxes, to settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes (except where the cost to the Company and its subsidiaries of such settlements or compromises, individually or in the aggregate, does not exceed $500,000), or to change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns for the taxable year ending December 31, 1994, except, in each case, as may be required by Law and except, in the cases of 20 clauses (i), (ii) (iii) and (v), for matters that could not reasonably be expected to have a Material Adverse Effect on the Company; (i) to incur any obligations for borrowed money or purchase money indebtedness that are Material to the Company, whether or not evidenced by a note, bond, debenture or similar instrument, except obligations to the Seller and its Affiliates which, in the case of obligations to the Seller and its Affiliates other than the Company and its subsidiaries, will be forgiven or otherwise satisfied at the Closing in accordance with Sections 6.09 and 6.10; (j) to enter into any arrangement, agreement or contract with any third party (other than customers in the ordinary course of business) which is Material to the Company and that is substantially more restrictive on the Company and its subsidiaries or substantially less advantageous to the Company and its subsidiaries than arrangements, agreements or contracts existing on the date hereof; (k) to enter into any (i) new Hydrocarbons purchase contract or Hydrocarbons sale contract or amend or modify any such contract now in existence, which contract, amendment or modification is Material to the Company or (ii) Fixed Price Contract; (l) to enter into any new Hydrocarbons transportation, gathering, compression or dehydration contract or amend or modify any such contract now in existence, which contract, amendment or modification is Material to the Company; (m) to enter into any new Hydrocarbons storage contract or Hydrocarbons processing contract or amend or modify any such contract now in existence, which contract amendment or modification is Material to the Company; (n) to initiate any proceeding before the OCC, the LCC, the TRC, the FERC or any other federal or state regulatory agency, which proceeding could reasonably be expected to have a Material Adverse Effect on the Company; or (o) to agree in writing or otherwise to do any of the foregoing. Section 6.03. Access. (a) From the execution of this Agreement by the Seller until the Closing, the Seller shall cause the Company and its subsidiaries to afford the Purchaser and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives, including environmental engineers (collectively, the "Purchaser's Representatives"), reasonable access at reasonable times, upon reasonable prior notice, to the officers, employees, agents, properties, offices and other facilities of the Company and its subsidiaries and to the books and records thereof and to furnish promptly to the Purchaser and the Purchaser's Representatives such information concerning the business, properties, contracts, records and personnel of the Company and its subsidiaries (including financial, operating and other data and information) as may be reasonably requested, from time to time, by the Purchaser. 21 (b) Notwithstanding the foregoing provisions of this Section, the Seller shall not be required to cause the Company or any of its subsidiaries to grant access or furnish information to the Purchaser or any of the Purchaser's Representatives to the extent that such information is subject to an attorney/client or attorney work product privilege or that such access or the furnishing of such information is prohibited by Law or by a valid and binding confidentiality agreement with a third party; provided, however, that, in the latter instance, if so requested by the Purchaser, the Seller will use all commercially reasonable efforts to obtain from such third party a waiver of such prohibition. (c) The information received pursuant to this Section shall be deemed to be "Evaluation Material" for purposes of the Confidentiality Agreement. Section 6.04. Appropriate Action; Consents; Filings. (a) The Seller and the Purchaser shall each use, and shall cause each of their respective subsidiaries to use, all commercially reasonable efforts to take, or to cause to be taken, all appropriate action, and to do, or to cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, to obtain from any Governmental Authorities any Licenses, Permits or Orders required to be obtained by the Purchaser or the Seller or any of their subsidiaries in connection with the authorization, execution and delivery of this Agreement and the performance of their obligations hereunder, to make all necessary filings, and thereafter to make promptly any other required submissions, with respect to this Agreement required under the HSR Act or any other applicable Law, Regulation or Order; provided, however, that the Purchaser and the Seller shall cooperate with each other in connection with the making of all such filings and in supplying any information requested supplementally or by second request from any Governmental Authority. The Purchaser and the Seller shall request early termination of the waiting period under the HSR Act with respect to the transactions contemplated hereby. (b) The Purchaser and the Seller agree to cooperate and to cause their respective subsidiaries to cooperate with respect to, and agree to use all commercially reasonable efforts vigorously to contest and resist and to have vacated, lifted, reversed or overturned, any action, including legislative, administrative or judicial action, including any Order (whether temporary, preliminary or permanent) of any Governmental Authority, that is in effect and that restricts, prevents or prohibits the consummation of the transactions contemplated by this Agreement. Each of the Purchaser and the Seller also agree to take any and all commercially reasonable actions that may be required by any Governmental Authority as a condition to the granting of any Permit or Order required in order to permit the consummation of the transactions contemplated hereby or as may be required to vacate, lift, reverse or overturn any administrative or judicial action that would otherwise cause any condition to the Closing not to be satisfied; provided, however, that in no event shall the Seller take any action that could reasonably be expected to have a Material Adverse Effect on the Company and in no event shall either party be required to take any action that could reasonably be expected to have a Material Adverse Effect on such party or to result in a breach of this Agreement. 22 (c) Each of the Seller and the Purchaser shall use, and shall cause its subsidiaries to use, all commercially reasonable efforts to obtain from all Persons (other than Governmental Authorities) all consents that are necessary, proper or advisable or otherwise required under any contracts, licenses, leases, Easements, or other agreements to which the Seller or the Purchaser or any of its subsidiaries is a party or by which it is bound, in order to permit the Seller or the Purchaser, as the case may be, to perform its obligations hereunder. (d) If any party shall fail to obtain any third party consent described in subsection (c) of this Section, such party shall use all commercially reasonable efforts, and shall take any such actions reasonably requested by the other party, to limit the adverse effect upon the Seller and the Purchaser, their respective subsidiaries, and their respective businesses resulting, or which could reasonably be expected to result after the Closing, from the failure to obtain such consent. (e) Each of the Purchaser and the Seller shall promptly notify the other of any complaints, investigations or hearings (or communications indicating that the same may be contemplated) from or by any Governmental Authorities with respect to the transactions contemplated hereby or the institution or the threat of litigation involving this Agreement or the transactions contemplated hereby. Section 6.05. Pending and Upcoming Rate Proceedings. The Company and its subsidiaries currently have pending rate proceedings in FERC Docket Nos. PR96-2 (Traditional System), PR96-7 (Anadarko System) and TRC Docket No. 8457 with respect to transportation service under Section 311. From the execution of this Agreement by the Seller until the Closing, the Seller shall cause the Company and its subsidiaries to use all commercially reasonable efforts to obtain approval for the maximum rates requested in such proceedings and to prevail in such litigation. Notwithstanding the foregoing, the Seller reserves the right to permit the Company and its subsidiaries to agree with the appropriate Governmental Authorities or other parties, at any time prior to the Closing, to settle all or any part of the issues in such proceedings or litigation, including any issues regarding the appropriate maximum rate, fuel component, rate of return or other cost of service or rate design aspect, when in the sole judgment of the Company or such subsidiary, such action is in the best interests of the Company or such subsidiary and could not reasonably be expected to have a Material Adverse Effect on the Company. Section 6.06 Preparation and Filing of Tax Returns; Payment of Taxes. (a) With respect to each Tax Return covering a taxable period ending on or before the Closing Date that is required to be filed after the Closing Date for, by or with respect to the Company or any subsidiary of the Company (other than the Tax Returns described in subsection (c) of this Section), the Seller shall cause such Tax Return to be prepared, shall cause to be included in such Tax Return all items of income, gain, loss, deduction and credit or other items (collectively "Tax Items") required to be included therein, and shall deliver the original of such Tax Return to the Purchaser at least thirty (30) days prior to the due date (including extensions) of such Tax Return. If the amount of the Tax shown to be due on such Tax Return exceeds the amount of the Closing Date Tax Accrual for such Tax, the Seller shall pay to the Purchaser the amount of such excess 23 not less than five (5) days prior to the due date of such Tax Return. If the amount of the Tax shown to be due on such Tax Return is less than the amount of the Closing Date Tax Accrual for such Tax, the Purchaser shall pay to the Seller the amount of such difference not less than five (5) days prior to the due date of such Tax Return. The Purchaser shall cause the Company or the respective subsidiary to file timely such Tax Return with the appropriate taxing authority and to pay the amount of Taxes shown to be due on such Tax Return. (b) With respect to each Tax Return covering a taxable period beginning on or before the Closing Date and ending after the Closing Date that is required to be filed after the Closing Date for, by or with respect to the Company or any subsidiary of the Company (other than the Tax Returns described in subsection (c) of this Section), the Purchaser shall cause such Tax Return to be prepared and shall cause to be included in such Tax Return all Tax Items required to be included therein. The Purchaser shall determine, subject to verification by the Seller, the portion, if any, of the Tax due with respect to the period covered by such Tax Return which is attributable to the Company or the respective subsidiary for a Pre-Closing Taxable Period. The determination of the portion of such Tax that is attributable to the Pre-Closing Period shall be based, in the case of real and personal property Taxes, on a per diem basis and, in the case of other Taxes, on the actual activities, taxable income or taxable loss of the Company and its subsidiaries during the Pre-Closing Period and Post-Closing Period. At least thirty (30) days prior to the due date (including extensions) of such Tax Return, the Purchaser shall deliver to the Seller a copy of such Tax Return. If the amount of Tax attributable to the Pre-Closing Taxable Period exceeds the amount of the Closing Date Tax Accrual for such Tax, the Seller shall pay to the Purchaser the amount of such excess Tax not less than five (5) days prior to the due date of such Tax Return. If the amount of Tax attributable to the Pre- Closing Taxable Period is less than the amount of the Closing Date Tax Accrual for such Tax, the Purchaser shall pay to the Seller the amount of such difference not less than five (5) days prior to the due date of such Tax Return. The Purchaser shall cause the Company or the respective subsidiary to file timely such Tax Return with the appropriate taxing authority and to pay timely the amount of Taxes shown to be due on such Tax Return. For purposes of this subsection, (i) any Texas franchise Tax imposed on the Taxable Earned Surplus of the Company or any of its subsidiaries which is determined with reference to the federal taxable income of the Company or any of its subsidiaries for the period up to and including the Closing Date shall be treated as attributable to a Pre-Closing Taxable Period, and (ii) any state income or franchise Tax (other than Texas franchise Tax) which is imposed on the Company or any of its subsidiaries in a Post-Closing Taxable Period and is determined by reference to federal taxable income of a Pre-Closing Taxable Period of the Company or any of its subsidiaries shall be treated as attributable to a Pre-Closing Taxable Period. (c) The Seller shall cause to be included in the consolidated federal income Tax Returns (and the state income Tax Returns of any state in which the Seller files consolidated, combined or unitary income Tax Returns) of the Seller's Group for all periods ending on or before or which include the Closing Date, all Tax Items of the Company and its subsidiaries which are required to be included therein, shall file timely all such Tax Returns with the appropriate taxing authorities and shall pay timely all Taxes due with respect to the periods covered by such Tax Returns. 24 (d) The Seller shall be responsible for the payment of all state and local transfer, sales, use or other similar taxes resulting from the transactions contemplated by this Agreement. (e) From time to time prior to the Closing Date, the Seller shall have the right to cause the Company or any of its subsidiaries to pay to the IRS or the applicable state taxing authority (or to the Seller or another member of the Seller's Group as agent for the payment of such Tax) such amounts on account of the Company's and the subsidiaries' shares of consolidated federal income Tax liability and any consolidated, combined or unitary state income Tax liability of the Seller's Group for the 1996 taxable year as are consistent with any tax sharing agreements, arrangements, policies or guidelines ("Tax Sharing Agreements") that may exist between the Company or any subsidiary of the Company, on the one hand, and the Seller or any other Affiliate of the Seller, on the other. All such Tax Sharing Agreements will be terminated and any obligations to make payments under them shall be canceled as of the Closing Date. Any and all payments then remaining due under those Tax Sharing Agreements shall be made prior to their termination. Section 6.07. Access to Information. From and after the Closing: (a) The Seller and each member of the Seller's Group shall grant to the Purchaser (or its designees) access at all reasonable times to all of the information, books and records relating to the Company and its subsidiaries within the possession of the Seller or any member of the Seller's Group (including work papers and correspondence with taxing authorities), and shall afford to the Purchaser (or its designees) the right (at the Purchaser's expense) to take extracts therefrom and to make copies thereof, to the extent reasonably necessary to permit the Purchaser or any of its Affiliates (or its designees) to prepare Tax Returns, to conduct negotiations with Tax authorities, to fulfill an obligation to any Governmental Authority imposed by Law, Regulation or Order and to implement the provisions of, or to investigate or defend any claims between the parties arising under, this Agreement. (b) The Purchaser shall grant or cause the Company and its subsidiaries to grant to the Seller or any of its Affiliates (or its designees) access at all reasonable times to all of the information, books and records relating to the Company and its subsidiaries within the possession of the Purchaser, the Company or its subsidiaries (including work papers and correspondence with taxing authorities), and shall afford to the Seller (or its designees) the right (at the Seller's expense) to take extracts therefrom and to make copies thereof, to the extent reasonably necessary to permit the Seller (or its designees) to prepare Tax Returns, to conduct negotiations with Tax authorities, to fulfill an obligation to any Governmental Authority imposed by Law, Regulation or Order and to implement the provisions of, or to investigate or defend any claims between the parties arising under, this Agreement or otherwise. (c) Each of the parties hereto will preserve and retain all schedules, work papers and other documents relating to any Tax Returns of or with respect to the Company or any of its subsidiaries or to any claims, audits or other proceedings affecting the Company or any of its subsidiaries until the expiration of the statute of limitations (including extensions) 25 applicable to the taxable period to which such documents relate or until the final determination of any controversy with respect to such taxable period, and until the final determination of any payments that may be required with respect to such taxable period under this Agreement. (d) Notwithstanding the foregoing provisions of this Section, neither party hereto shall be required to grant or cause to be granted to the other access to information, books and records or to furnish extracts or copies thereof if such information, books and records also include information regarding such party or any of its Affiliates. In such circumstances, such party shall either provide appropriately detailed summaries of the information contained therein or , in providing extracts or copies thereof, redact the information relating to such party or its Affiliates. Section 6.08. Employees and Employee Benefit Plans. (a) Effective as of the Closing, the Seller shall cause the Company to withdraw as a participating employer from all Benefit Plans other than any Benefit Plans as to which the Company is the sole sponsoring entity. (b) Effective as of the Closing, the Seller shall cause each employee of the Company on the Closing Date (the "Continuing Employees") who is a participant in the Central and South West System Pension Plan (the "CSW Pension Plan") on the Closing Date to become 100% vested in his accrued benefit under the CSW Pension Plan as of the Closing and shall cause the accrued benefits of the Continuing Employees under the CSW Pension Plan to be distributed to such Continuing Employees pursuant to the terms and provisions of the CSW Pension Plan as if the Continuing Employees had terminated employment for purposes of the CSW Pension Plan as of the Closing. Effective as of the Closing, the Purchaser shall take all action necessary and appropriate to extend coverage under a new or existing defined benefit pension plan (the "Purchaser's Pension Plan") qualified under section 401(a) of the Code to the Continuing Employees who were participants in the CSW Pension Plan at the Closing. The Continuing Employees shall be credited with service under the Purchaser's Pension Plan, for eligibility, vesting, and accrual of benefit purposes, with the service credited to them for such purposes under the CSW Pension Plan as of the Closing. The Continuing Employees' benefits under the Purchaser's Pension Plan shall be reduced by the actuarial equivalent of the pension benefit paid or payable to such Continuing Employees from the CSW Pension Plan. In making such reduction, the pension paid or payable under each plan shall be determined under the provisions of each plan as if payable at normal retirement date in the normal form; provided, however, that the pension benefit paid or payable under the CSW Pension Plan in the normal form at the normal retirement date shall be converted to the normal form under the Purchaser's Pension Plan using the actuarial assumptions under the Purchaser's Pension Plan. The net pension payable under the Purchaser's Pension Plan shall then be actuarially adjusted in accordance with the provisions of the Purchaser's Pension Plan for the actual time and form of payment. (c) Effective as of the Closing, the Purchaser shall take all action necessary and appropriate to extend coverage under a new or existing defined contribution plan (the "Purchaser's Savings Plan") qualified under section 401(a) of the Code to the 26 Continuing Employees who have account balances under the Central and South West System Thrift Plus Plan (the "CSW Thrift Plan") at the Closing. The Continuing Employees shall be credited with service under the Purchaser's Savings Plan, for eligibility and vesting purposes, with the service credited to them under the terms of the CSW Thrift Plan as of the Closing. As soon as practicable following the Closing, the Seller shall cause to be transferred from the trustee of the CSW Thrift Plan to the trustee of the Purchaser's Savings Plan an amount in cash or in kind (with any in kind transfers to be agreed upon by the Seller and the Purchaser, except that it is hereby agreed that participant loans shall be transferred in kind; provided, however, that any loan repayments shall be applied to investments available under the Purchaser's Savings Plan) equal to the aggregate account balances (both vested and unvested) of the Continuing Employees under the CSW Thrift Plan determined as of the transfer date (which shall be a valuation date) in accordance with the methods of valuation set forth in the CSW Thrift Plan. From and after the date of such transfer, the Purchaser shall cause the Purchaser's Savings Plan to assume the obligations of the CSW Thrift Plan with respect to the benefits accrued by the Continuing Employees under the CSW Thrift Plan, and the CSW Thrift Plan shall cease to be responsible therefor. (d) Except as provided in subsections (e), (f), and (j) of this Section, claims for benefits under welfare plans, as such term is defined in Section 3(1) of ERISA, in which Continuing Employees participate arising out of occurrences prior to the Closing shall be covered by the applicable welfare plan of the Seller in accordance with the terms of such plan. All such claims for benefits by Continuing Employees arising out of occurrences subsequent to the Closing shall be covered by the applicable welfare plan of the Purchaser in accordance with the terms of such plan. Neither the Purchaser nor any of its subsidiaries shall be liable for payment of any disability benefit due to disabled employees of the Company or its subsidiaries or Continuing Employees who, prior to the Closing, are in the waiting or qualifying period for disability benefits. After the Closing, the Seller shall be responsible for disability benefits payable to such persons under the Seller's disability plan. (e) Claims for medical, dental, prescription drug, vision, and employee assistance plan benefits by Continuing Employees with respect to purchases or services or treatment rendered prior to the Closing shall be covered by the applicable welfare plan of the Seller in accordance with the terms of such plan. Claims for such benefits by Continuing Employees with respect to purchases or services or treatment rendered on or subsequent to the Closing shall be covered by the applicable welfare plan of the Purchaser in accordance with the terms of such plan. The Purchaser shall cause the Continuing Employees to be granted credit under the welfare plan of the Purchaser providing medical, dental, prescription drug, vision, and employee assistance plan coverage, for the year during which the Closing occurs, for any deductibles already incurred by such Continuing Employees for such year under the welfare plan of the Seller providing such coverage, and the Purchaser shall cause to be waived any eligibility waiting periods and pre-existing condition restrictions under the welfare plans of the Purchaser to the extent necessary to provide immediate coverage under such welfare plans as of the Closing (but only to the extent that coverage was provided under the applicable welfare plan of the Seller). The Purchaser shall provide the Continuing Employees (and their respective beneficiaries) with medical benefits sufficient to satisfy the obligations of the Seller under Section 4980B(f) of the Code with respect to such Continuing Employees so that the Seller will not incur any tax under Section 4980B of the Code. 27 (f) Effective as of the Closing, the Purchaser shall, or shall cause the Company to, take all action necessary and appropriate to extend coverage under a new or existing health care spending account plan (the "Purchaser's Health Care Plan") to the Continuing Employees. A Continuing Employee shall be considered to have an account balance under the Purchaser's Health Care Plan following the Closing that is the same as such Continuing Employee's account balance under the Central and South West System Health Care Reimbursement Plan (the "CSW Health Care Plan") immediately prior to the Closing, and the elections in effect for the year in which the Closing Date occurs under the CSW Health Care Plan shall remain in effect under the Purchaser's Health Care Plan for the remainder of such year unless changed as a result of a change in family status. As of the Closing, the positive and negative balances of the Continuing Employees under the CSW Health Care Plan shall be netted. To the extent that there is a net positive balance, claims under the Purchaser's Health Care Plan following the Closing shall be paid from the Central and Southwest System Voluntary Employees' Beneficiary Association (the "CSW VEBA") until such balance is eliminated. Thereafter, all such claims shall be paid by the Company. To the extent that there is a net negative balance as of the Closing, the Company shall make a contribution to the CSW VEBA as of or before the Closing equal to the net negative balance. For purposes of this paragraph, a Continuing Employee shall be considered to have a positive balance in such employee's account as of the Closing if the amounts that have been withheld from such Continuing Employee's compensation during the year in which the Closing occurs, pursuant to the CSW Health Care Plan, prior to the Closing, exceeded disbursements on such Continuing Employee's behalf from the CSW Health Care Plan prior to the Closing for such year's claims. A Continuing Employee shall be considered to have a negative balance in such Continuing Employee's account as of the Closing if the disbursements on such Continuing Employee's behalf from the CSW Health Care Plan prior to the Closing for the year in which the Closing occurs exceeds the amounts that have been withheld from such Continuing Employee's compensation during such year, pursuant to the CSW Health Care Plan, prior to the Closing. (g) Effective as of the Closing, the Purchaser shall, or shall cause the Company to, take all action necessary and appropriate to extend coverage under a new or existing dependent care spending account plan (the "Purchaser's Dependent Care Plan") to the Continuing Employees. A Continuing Employee shall be considered to have an account balance under the Purchaser's Dependent Care Plan following the Closing that is the same as such Continuing Employee's account balance under the Central and South West System Dependent Care Assistance Plan (the "CSW Dependent Care Plan") immediately prior to the Closing, and the elections in effect for the year in which the Closing Date occurs under the CSW Dependent Care Plan shall remain in effect under the Purchaser's Dependent Care Plan for the remainder of such year unless changed as a result of a change in family status. To the extent that there are amounts held in the CSW VEBA as of the Closing attributable to a Continuing Employee's participation in the CSW Dependent Care Plan, claims under the Purchaser's Dependent Care Plan following the Closing shall be paid from the CSW VEBA until such amounts are depleted. Thereafter, all such claims shall be paid by the Company. (h) For a period of one year following the Closing Date, the Purchaser shall, or shall cause the Company to, establish and manage a severance benefit plan to cover the Continuing Employees with such severance benefit being a severance benefit plan 28 substantially similar to the Central and South West System Severance Benefit Plan, effective July 1, 1995 (the "CSW Severance Benefit Plan"). For purposes of such plan, any restructuring, reorganization, or other position elimination involving a Continuing Employee shall be considered approved within the meaning of Section 2.1 of the CSW Severance Benefit Plan and service with the Seller or any of its subsidiaries, including the Company, shall be taken into account. (i) Vacation entitlement accrued by Continuing Employees for the year in which the Closing Date occurs under the Company's vacation policy as in effect as of the Closing shall be recognized by the Purchaser and the Company following the Closing. Service with the Seller or any of its subsidiaries, including the Company, shall be taken into account for purposes of the Purchaser's vacation policy following the Closing. (j) With respect to all employees who retired from employment with the Company prior to the Closing and who have been, or are eligible to be, provided with post-retirement medical, dental, or life insurance coverage as of the Closing under plans sponsored by the Seller or the Company, the Seller shall assume or retain any and all liability with respect to the provision of such coverages to such retired employees and their eligible dependents on and after the Closing. With respect to all Continuing Employees who retire from employment with the Company after the Closing and who have been, or are eligible to be, provided with post-retirement medical, dental or life insurance as of the Closing under plans sponsored by the Company or the Seller, the Purchaser shall assume any and all liability with respect to the provision of such coverages to such retired Continuing Employees and their eligible dependents on and after the Closing (up to a present benefit obligation of $3.2 million, computed using the actuarial assumptions of the CSW Pension Plan). (k) Claims for workers compensation benefits for Continuing Employees arising out of occurrences prior to the Closing shall be the responsibility of the Seller. Claims for workers compensation benefits for Continuing Employees arising out of occurrences subsequent to the Closing shall be the responsibility of the Purchaser. (l) Nothing herein shall be deemed or construed to give rise to any rights, claims, benefits, or causes of action to any Continuing Employee or any other Person, except the Seller or to prevent, restrict, or limit the Purchaser or the Company and its subsidiaries following the Closing from modifying or terminating its pension or other benefit plans, programs, or policies from time to time as it may deem appropriate, subject only to compliance with the express provisions of subsections (a) through (k) of this Section for the benefit of the Seller. Section 6.09. Working Capital Contribution. Effective as of the Closing, the Seller shall cause the purchase agreement dated January 2, 1991, between the Company and CSW Credit, Inc. pursuant to which the Company factors its trade accounts receivable to CSW Credit, Inc. to be amended to terminate the factoring of accounts receivable of the Company arising after the Closing, the Company's intercompany payable or receivable balance, as the case may be, in the CSW Money Pool to be forgiven in full resulting in a capital contribution (or resulting in a distribution), and (c) to be assigned (without recourse) to the 29 Company, as a capital contribution, the right, title and interest in and to the amount of current accounts receivable balances existing as of the Closing that are required to bring the Working Capital of the Company as of the Closing to zero (after giving effect to clause (b) of this Section and Section 6.10(a)) and that have been factored by the Company to CSW Credit, Inc. pursuant to such purchase agreement. Section 6.10. Intercompany Accounts; Post-Closing Relationships; Closing Covenants. (a) Except for the Company's intercompany payable or receivable balance, as the case may be, in the CSW Money Pool (which is specifically addressed in Section 6.09), and except for those accounts set forth in Section 6.10(a) of the Seller's Disclosure Letter, the Seller, effective as of the Closing, will cause all intercompany accounts (including those pertaining to all income taxes) between the Company and its subsidiaries, on the one hand, and the Seller and its Affiliates (other than the Company and its subsidiaries), on the other, to be paid or otherwise satisfied. (b) Effective as of the Closing, the only obligations of the Company and its subsidiaries to the Seller and its Affiliates (other than the Company and its subsidiaries) and of the Seller and its Affiliates (other than the Company and its subsidiaries) to the Company and its subsidiaries shall be those obligations expressly set forth in the contracts listed in Section 6.10(b) of the Seller's Disclosure Letter, irrespective of any prior relationships, arrangements, business practices or courses of dealing and any forecasts, estimates or projections related to the subject matter of such contracts. (c) The Seller agrees to assign to the Company, at or prior to the Closing, the confidentiality agreements with all other prospective purchasers of the Company. (d) At the Purchaser's request, the Seller agrees to provide the transition services described in Annex B to this Agreement to the Company until April 15, 1997 at a level sufficient to effect a smooth transfer of the ownership and operation of the Company by the Seller to the Purchaser, and the Purchaser agrees to pay the Seller the cost of such services (consistent with the payment for similar services made in the past under that certain agreement among Central and South West Services, Inc., the Company and certain Affiliates of the Company dated August 18, 1988). (e) As of the Closing, the Seller shall cause the Company and its subsidiaries to have no outstanding long term indebtedness for borrowed money which would be required to be reflected under GAAP in the consolidated financial statements of the Company as of the Closing, other than any such indebtedness reflected in the Consolidated Financial Statements and the debt secured by the real estate mortgages disclosed in Section 4.07(a) of the Seller's Disclosure Letter. (f) The Seller agrees to use commercially reasonable efforts to cooperate with the Company and its subsidiaries after the Closing in making and prosecuting claims under insurance policies and programs of the Seller and its Affiliates that cover the Company and its subsidiaries. The insurance trust of which the Seller is a member under the Trust Agreement dated November 1, 1990 (the "Trust"), will continue to process, respond to, defend, and pay claims received prior to the Closing. The 30 Company and its subsidiaries will process, respond to, defend, and pay claims made after the Closing; provided, however, that the Company and its subsidiaries after the Closing will continue to be entitled to make claims against insurance policies purchased by the Trust prior to the Closing in which the Company and its subsidiaries are named as insureds in accordance with the terms of such policies so long as such insurance policies remain in effect, but the Company and its subsidiaries will not make claims against the Trust or Trust assets for claims made after the Closing. The Seller shall cause no premiums or assessments to be due and payable from the Company and its subsidiaries to the Trust (and no distributions or refunds to be due and payable from the Trust to the Company and its subsidiaries) after the Closing. (g) Prior to or at the Closing the Seller shall enter into, or cause Public Service Company of Oklahoma to enter into, an agreement providing for the indemnity to the Company and its subsidiaries described in the seventh paragraph of Note 10 to the Consolidated Financial Statements as such indemnity relates to the claims against the Company or such subsidiaries described in such paragraph or similar claims against the Company or such subsidiaries made subsequent to December 31, 1995 that relate to events occurring or circumstances existing prior to the Closing. Such agreement shall contain terms similar to those set forth in Sections 8.02(e) and (f) regarding the defense and settlement of claims, but in any event shall be in form and substance reasonably acceptable to the Purchaser. Section 6.11. Estimated Purchase Price. At least three (3) days prior to the Closing, the Seller in good faith shall prepare in reasonable detail and deliver to the Purchaser a statement setting forth the Seller's calculations with respect to its best estimation of the Purchase Price, including its best estimation of the amount of Working Capital of the Company as of the Closing (the "Estimated Purchase Price"). Section 6.12. Determination of Final Purchase Price. As soon as reasonably practicable and in any event within sixty (60) days following the Closing Date, the Purchaser shall cause the Company to prepare and deliver to the Seller a statement setting forth the Purchaser's calculation (the "Final Purchase Price Calculation") of the final purchase price (the "Final Purchase Price"), including the actual amount of Working Capital of the Company as of the Closing and, if the Final Purchase Price differs from the Estimated Purchase Price, the reasons therefor in reasonable detail. The Final Purchase Price Calculation shall contain sufficient detail to enable the Seller to relate the calculations contained therein to the books and records of the Company and its subsidiaries. The Purchaser shall cause the Company to make available to the Seller all information in the possession of the Company and its subsidiaries reasonably required for the Seller to verify whether the Final Purchase Price Calculation is correct. Within forty-five (45) days following the delivery of the Final Purchase Price Calculation, the Seller shall notify the Purchaser whether it agrees with the Final Purchase Price Calculation; provided, however, that, if the Seller shall fail so to notify the Purchaser within such forty- five (45) day period, it shall be deemed to have agreed with the Final Purchase Price Calculation. If the Seller shall disagree with the Final Purchase Price Calculation, the Seller and the Purchaser shall endeavor in good faith to agree on the Final Purchase Price but, if they shall not agree within thirty (30) days following the Seller's notice to the Purchaser, either the Purchaser or the Seller may cause the issues in dispute to be referred for resolution to Price Waterhouse L.L.P. (or such other firm of independent public accountants as the Purchaser and the Seller may mutually designate), and the Seller and the Purchaser 30 shall cooperate, and the Purchaser shall cause the Company and its subsidiaries to cooperate, with such firm of independent public accountants by making available to that firm such information, books and records and such personnel as such firm may reasonably request. The costs of such firm of independent public accountants shall be borne equally by the Purchaser and the Seller. The Purchaser and the Seller shall use all commercially reasonable efforts to cause such firm of independent public accountants to examine the books and records of the Company and its subsidiaries, as well as any other information that such firm may reasonably conclude is necessary to make such determination, and to make a determination with respect to such issues within sixty (60) days following the date such issues are referred to them. Any such determination shall be final and binding on the Purchaser and the Seller and may be enforced by appropriate judicial or other proceedings. The Final Purchase Price shall then be calculated by the Seller and the Purchaser based on those matters as to which they are in agreement and the determination by the independent public accountants as to those matters, if any, as to which they did not agree. If the Final Purchase Price as so determined (whether by agreement of the parties or determination by accountants) shall exceed the Estimated Purchase Price, the Purchaser shall pay the Seller the amount of such excess plus interest thereon from the Closing Date until paid at a rate equal to the base or reference rate quoted from time to time by the Bank, but, if the Final Purchase Price as so determined shall be less than the Estimated Purchase Price, the Seller shall pay the Purchaser the amount of such shortfall plus interest thereon from the Closing Date until paid at a rate equal to the base or reference rate quoted from time to time by the Bank, such payment in either case to be made within five (5) days following the final determination of the Final Purchase Price. Section 6.13. Public Announcements. Except as otherwise required by Law or the New York Stock Exchange, the Seller and the Purchaser shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement and the transactions contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation. The press release announcing the execution and delivery of this Agreement shall be a joint press release of the Seller and the Purchaser. Section 6.14. Confidentiality. After the Closing, the Seller will not, and will not permit its Affiliates which it controls (excluding the Company and its subsidiaries) to, disclose or provide to any other Person any material non-public information of a confidential nature concerning the business or operations of the Company or its subsidiaries, except as required by Law, Regulation or Order. Section 6.15. Acquisition Proposals. From the execution of this Agreement by the Seller until the Closing or the termination of this Agreement in accordance with its terms, the Seller will not, and will cause its officers, directors, employees or agents not to, directly or indirectly, take any action to solicit, initiate or encourage any proposal regarding the acquisition of the Company or its assets by merger or otherwise or , except as required by Law, Regulation or Order, engage in negotiations with, or disclose any non-public information relating to the Company, or afford access to its properties, books or records to any Person that has made or, to the Knowledge of the Seller, may be considering making an acquisition proposal. 32 ARTICLE VII. CONDITIONS TO THE CLOSING Section 7.01. Conditions to Obligations of Each Party. The obligations of each party to this Agreement to effect the transactions contemplated hereby to occur at the Closing shall be subject to the satisfaction or, to the extent permitted by Law, waiver of each of the following conditions: (a) All requirements of any applicable Law, Regulation or Order necessary for the valid consummation of the transactions contemplated herein to occur at the Closing shall have been fulfilled (including the termination or expiration of the applicable waiting period under the HSR Act), and all filings required to be made with any Governmental Authority under any applicable Law, Regulation or Order (including the filing of the Certificate of Merger) and all Permits and Orders required to be obtained from any Governmental Authority or Court under any applicable Law, Regulation or Order, in each case, in order to permit the Seller or the Purchaser to consummate the transactions contemplated hereby to occur at the Closing shall have been made or obtained (other than any requirement the nonfulfillment of which and any Permit or Order the nonreceipt of which could not reasonably be expected to have a Material Adverse Effect on the Seller, the Purchaser or the Company); and (b) No temporary restraining order, preliminary or permanent injunction or other Order issued by any Court of competent jurisdiction preventing the consummation of the transactions contemplated hereby to occur at the Closing shall be in effect. Section 7.02. Conditions to Obligation of the Purchaser. The obligation of the Purchaser to effect the transactions contemplated hereby to occur at the Closing shall be subject to the satisfaction or, to the extent permitted by Law, waiver of each of the following conditions: (a) The representations and warranties of the Seller set forth in this Agreement shall be true and correct in all material respects as of the execution of this Agreement by the Seller and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing as though made at and as of the Closing and the Purchaser shall have received a certificate signed on behalf of the Seller by the president or any vice president and by the chief financial officer of the Seller to such effect (except the representations and warranties set forth in Sections 4.07, 4.08 and 4.09 insofar as they relate to the Palo Duro Pipeline); (b) The Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Purchaser shall have received a certificate signed on behalf of the Seller by the president or any vice president and by the chief financial officer of the Seller to such effect; (c) The Seller shall have furnished the Purchaser at the Closing with certified copies of resolutions duly adopted by the Board of Directors of the Seller authorizing the execution, delivery and performance of this Agreement and each instrument required hereby to be executed and delivered by the Seller at the Closing; 33 (d) There shall not be any action or proceeding pending or threatened (including any investigation) by any Governmental Authority to restrain, enjoin or invalidate the transactions contemplated herein or to compel the Purchaser to divest any material assets, which would, in the judgment of the Board of Directors of the Purchaser, made in good faith and based upon the advice of counsel, involve expense or lapse of time or result in a reconfiguration of the Purchaser's business which expense, lapse of time or result would be materially adverse to the interests of the Purchaser; (e) The Purchaser shall have received from counsel to the Seller an opinion dated as of the Closing Date in form and substance reasonably satisfactory to the Purchaser; and (f) The Purchaser shall have received at the Closing resignations of all directors of the Company and its subsidiaries. Section 7.03. Conditions to Obligation of the Seller. The obligation of the Seller to effect the transactions contemplated hereby to occur at the Closing shall be subject to the satisfaction or, to the extent permitted by Law, waiver of each of the following conditions: (a) The representations and warranties of the Purchaser set forth in this Agreement shall be true and correct in all material respects as of the execution of this Agreement by the Purchaser and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing as though made at and as of the Closing and the Seller shall have received a certificate signed on behalf of the Purchaser by the president or any vice president and by the chief financial officer of the Purchaser to such effect; (b) The Purchaser shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Seller shall have received a certificate signed on behalf of the Purchaser by the president or any vice president and by the chief financial officer of the Purchaser to such effect; (c) The Purchaser shall have furnished the Seller at the Closing with certified copies of resolutions duly adopted by the Board of Directors of the Purchaser authorizing the execution, delivery and performance of this Agreement and each instrument required hereby to be executed and delivered by the Purchaser at the Closing; (d) There shall not be any action or proceeding pending or threatened (including any investigation) by any Governmental Authority to restrain, enjoin or invalidate the transactions contemplated herein or to compel the Seller to divest any material assets, which would, in the judgment of the Board of Directors of the Seller, made in good faith and based upon the advice of counsel, involve expense or lapse of time or result in a reconfiguration of the Seller's business which expense, lapse of time or result would be materially adverse to the interests of the Seller or pay over any material amount of the proceeds from the Merger; (e) The Seller shall have received from counsel to the Purchaser an opinion dated as of the Closing Date in form and substance reasonably satisfactory to the Seller; and 34 (f) The Purchaser shall have delivered to the Seller at the Closing immediately available funds in an amount equal to the Estimated Purchase Price. ARTICLE VIII. INDEMNIFICATION Section 8.01. Survival of Representations, Warranties, Covenants and Agreements. The representations, warranties, covenants and agreements of the parties contained in Articles II, III, IV, V and VI (other than the representations and warranties contained in Sections 3.02, 3.06, 4.02(a), 4.08(c) (to the extent the representations and warranties set forth in such Section relate to the Palo Duro Pipeline), 4.09, 4.10, 4.11, 4.12, 4.16, 4.17 and 4.18 and the covenants and agreements contained in Sections 6.06, 6.07, 6.08, 6.10 and 6.14) shall survive both the Closing and any investigation by the parties with respect thereto but shall terminate and be of no further force or effect on the first anniversary of the Closing. The representations and warranties contained in Sections 4.09 and 4.11 shall survive both the Closing and any investigation by the parties with respect thereto but shall terminate and be of no further force and effect on the second anniversary of the Closing. The representations and warranties contained in Section 4.12 shall survive the Closing and any investigation by the parties with respect thereto until the tenth anniversary of the Closing. The representations and warranties contained in Sections 3.02, 3.06, 4.02(a), 4.08(c) (except to the extent the representations and warranties set forth in such Section relate to the Palo Duro Pipeline), 4.16, 4.17 and 4.18 and the covenants and agreements contained in Sections 6.06, 6.07, 6.08, 6.10(a)-(f) and 6.14 shall survive both the Closing and any investigation by the parties with respect thereto until the expiration of the statute of limitations (including any and all periods of extension or tolling thereof) applicable to actions on written contracts. The representations and warranties contained in Sections 4.08(c) (to the extent the representations and warranties set forth in such Section relate to the Palo Duro Pipeline), and 4.10 and the covenants contained in Section 6.10(g) shall survive both the Closing and any investigation by the parties with respect thereto until the expiration of the statute of limitations (including any and all periods of extension or tolling thereof) applicable to the subject matter of such sections. Notwithstanding the foregoing, any such representation, warranty, covenant or agreement as to which a bona fide claim relating thereto is asserted in writing in accordance with Section 8.02 during such survival period shall, with respect only to such claim, survive such survival period. The covenants and agreements in this Article VIII shall survive the Closing and shall remain in full force and effect for such period as is necessary to resolve any bona fide claim made with respect to any representation, warranty, covenant or agreement contained in this Agreement during the survival period thereof. The remaining covenants and agreements of the parties hereto contained in this Agreement shall survive the Closing without any contractual limitation on the period of survival. Section 8.02. General Indemnification. (a) Subject to the limitations on survival contained in Section 8.01, if the transactions contemplated hereby to occur at the Closing are effected, each party hereto (the "Indemnifying Party") hereby agrees, from and after the Closing, to indemnify and hold harmless the other party hereto (the "Indemnified Party") against any losses, claims, damages or liabilities 35 ("Losses") which such Indemnified Party shall actually incur, to the extent that such Losses (or actions, suits or proceedings in respect thereof and any appeals therefrom ("Proceedings")) (other than any Losses subject to Section 8.03 herein): (i) arise out of or are based upon any allegation that any representation or warranty made herein in Article III, IV or V for the benefit of the Indemnified Party by the Indemnifying Party is untrue or has been breached in any respect; or (ii) arise out of or are based upon any allegation that any covenant or agreement made herein for the benefit of the Indemnified Party by the Indemnifying Party has not been performed in accordance with its terms; and will reimburse the Indemnified Party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against any such Losses or Proceedings. Notwithstanding the foregoing, except for Losses resulting from breaches of Sections 3.02, 3.06, 4.02, 4.08(c) (to the extent the representations and warranties set forth in such Section relate to the Palo Duro Pipeline), 4.10, 4.18, 4.19, 5.08, 6.06, 6.09, 6.10 and 6.12, the Indemnifying Party shall (x) not be liable to the Indemnified Party under this Section for any Loss incurred by the Indemnified Party which does not exceed $500,000, and (y) be liable to the Indemnified Party under this Section only for the amount of Losses incurred by the Indemnified Party which exceed $10,000,000 in the aggregate; provided, however, that the amount of such Losses that are subject to indemnification hereunder shall not exceed the Final Purchase Price; and provided, further, that the Losses incurred by an Indemnified Party shall, for purposes of determining the threshold level thereof in accordance with this sentence and otherwise, be offset by (i) the amount of any such Losses incurred by the Indemnifying Party jointly and severally with the Indemnified Party to the extent of payments made by the Indemnifying Party; and (ii) the proceeds of any insurance received by the Indemnified Party with respect thereto. (b) Promptly after receipt by the Indemnified Party under subsection (a) of this Section of notice of a Loss or the commencement of any Proceeding against which it believes it is indemnified under this Section, the Indemnified Party shall, if a claim in respect thereto is to be made against the Indemnifying Party under this Section, notify the Indemnifying Party in writing of the commencement thereof; provided, however, that the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to the Indemnified Party to the extent that the Indemnifying Party is not prejudiced by such omission. (c) For purposes of determining whether an event, fact or occurrence constitutes a misrepresentation or a breach of any representation, warranty, covenant or agreement contained in this Agreement for which indemnification can be or is sought under this Section, as used in any such representation, warranty, covenant or agreement, the terms "Material" and "Material Adverse Effect" shall have the following meanings: "Material" shall mean material to the condition (financial and other), results of operations or business of a specified Person and its subsidiaries, if any, 36 taken as whole; provided that, without limiting the foregoing definition, the parties acknowledge and agree that any amount exceeding $500,000 is material; and "Material Adverse Effect" shall mean any change or effect that would be materially adverse to the consolidated business, condition (financial or otherwise), operations, performance or properties of a specified Person and its subsidiaries, if any, taken as a whole; provided that, without limiting the foregoing definition, the parties acknowledge and agree that any amount exceeding $5,000,000 is material in respect of Section 4.05 and that any amount exceeding $500,000 is material in all other cases; provided that the special purpose use of the terms "Material" and "Material Adverse Effect" in this subsection (c) shall be disregarded and given no effect in determining what is "material" for purposes of the definitions of such terms contained in Annex A to this Agreement and how they are used elsewhere in this Agreement. (d) The Indemnifying Party shall, within thirty (30) days after receipt of a notice of Loss or Proceeding given pursuant to subsection (b) of this Section, either acknowledge liability, as between the Indemnifying Party and the Indemnified Party, for such Loss or the amount in controversy in such Proceeding and pay the Indemnified Party the amount of such Loss or the amount in controversy in such Proceeding in cash or other immediately available funds (or establish by agreement with the Indemnified Party an alternative payment schedule), acknowledge liability, as between the Indemnifying Party and the Indemnified Party, for such Loss or the amount in controversy in such Proceeding, disavow the validity of the Loss or Proceeding or the amount thereof and, to the extent that it shall so desire in accordance with subsection (d) of this Section, assume the legal defense thereof, or object (or reserve the right to object until additional information is obtained) to the claim for indemnification or the amount thereof, setting forth the grounds therefor in reasonable detail; provided that, if the Indemnifying Party objects (or reserves its right to object) within such 30- day period as provided in this clause (iii), then the Indemnified Party may bring suit (in the same Proceeding or otherwise) to resolve the dispute and, pending final resolution of such dispute, the Indemnified Party may proceed as though the Indemnifying Party had responded in accordance with clause (i) above. If the Indemnifying Party does not respond to the Indemnified Party as provided in this subsection within such 30- day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such indemnification claim in accordance with clause (i) of this subsection and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. (e) If any such Proceeding shall be brought against an Indemnified Party and it shall notify the Indemnifying Party thereof in accordance with subsection (c) of this Section, the Indemnifying Party shall, if it shall have responded to such notice in accordance with clause (ii) of subsection (c) of this Section, be entitled to assume the legal defense thereof with counsel reasonably satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or such action, 37 the Indemnifying Party shall not be liable to the Indemnified Party under this Section for any attorney's fees or other expenses (except reasonable costs of investigation) subsequently incurred by the Indemnified Party in connection with the defense thereof. If the Indemnifying Party does not assume the defense of a Proceeding as to which it has acknowledged liability, as between itself and the Indemnified Party, pursuant to clause (ii) of subsection (c) of this Section, the Indemnified Party may require the Indemnifying Party to reimburse it on a current basis for its reasonable expenses of investigation, reasonable attorney's fees and expenses and reasonable out-of-pocket expenses incurred in the defense thereof and, subject to the provisions of subsection (e) of this Section, the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party. (f) An Indemnifying Party will not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened Proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Party is an actual or potential party to such Proceeding) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Party from all liability arising out of such Proceeding. If the Indemnifying Party has responded to the Indemnified Party pursuant to clause (i) of subsection (c) of this Section, the Indemnified Party may settle or compromise or consent to the entry of any judgment with respect to the Proceeding that was the subject of notice to the Indemnifying Party pursuant to subsection (c) of this Section without the consent of the Indemnifying Party. An Indemnified Party will not otherwise, without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened Proceeding, but, if such Proceeding is settled or compromised or if there is entered any judgment with respect to any such Proceeding, in either case with the consent of the Indemnifying Party, or if there be a final judgment of the plaintiff in any such Proceeding, the Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party from and against any loss or liability by reason of such settlement, compromise or judgment. (g) From and after the Closing, except as provided in Section 8.03, the provisions of this Section shall be the sole and exclusive remedy of each party hereto for any breach of the other party's representations, warranties, covenants or agreements contained in this Agreement; provided, however, that each party may seek specific performance by the other party of the agreements and obligations set forth in Sections 6.07, 6.13 and 6.14. Notwithstanding anything in this Agreement to the contrary, in no event shall any losses, claims, damages or liabilities indemnified hereunder include any consequential or punitive damages, except to the extent that such are awarded to a third party in a proceeding against an indemnified party. 38 Section 8.03. Tax Indemnification and Audits. (a) From and after the Closing, the Seller hereby agrees to protect, defend, indemnify and hold harmless the Purchaser and the Company and its subsidiaries from and against, and agrees to pay, all: (i) Taxes of the Company or any subsidiary of the Company attributable to any Pre-Closing Taxable Period (except for Taxes arising out of any transaction of the Company or its subsidiaries not in the ordinary course of business occurring on the Closing Date but subsequent to the Closing), but only to the extent the amount of such Taxes exceeds the amount taken into account as a liability for such Taxes in determining the Purchase Price; (ii) Taxes of any corporation (other than the Company and its subsidiaries) that is or was a member of the Seller's Group; and (iii) Taxes of the Company or any subsidiary of the Company attributable to the Section 338(h)(10) Elections made pursuant to Section 8.04. (b) From and after the Closing, the Purchaser agrees to protect, defend, indemnify and hold harmless the Seller from and against, and agrees to pay, all: (i) Taxes of the Company or any subsidiary of the Company attributable to any Post-Closing Taxable Period; and (ii) Taxes arising out of any transaction of the Company or its subsidiaries not in the ordinary course of business occurring on the Closing Date and after the Closing. (c) If a claim shall be made by any taxing authority that, if successful, would result in the indemnification of a party (the "Tax Indemnified Party") under this Section, the Tax Indemnified Party shall promptly notify the party (the "Tax Indemnifying Party") obligated under this Section to indemnify the Tax Indemnified Party in writing of such fact; provided, however, that the omission to so notify the Indemnifying Party shall not relieve it from any liability which it may have to the Indemnified Party to the extent that the Indemnifying Party is not prejudiced by such omission. (i) The Tax Indemnified Party shall take such action in connection with contesting such claim as the Tax Indemnifying Party shall request in writing from time to time, including the selection of counsel and experts and the execution of powers of attorney; provided that (a) within thirty (30) days after the notice required by this subsection has been delivered (or such earlier date that any payment of Taxes is due by the Tax Indemnified Party but in no event sooner than five (5) days after the Tax Indemnifying Party's receipt of such notice), the Tax Indemnifying Party requests that such claim be contested, and (b) the Tax Indemnifying Party shall have agreed to pay to the Tax 39 Indemnified Party all costs and expenses that the Tax Indemnified Party incurs in connection with contesting such claim, including reasonable attorneys' and accountants' fees and disbursements. The Tax Indemnified Party shall not make any payment of such claim for at least thirty (30) days (or such shorter period as may be required by applicable law) after the giving of the notice required by this subsection, shall give to the Tax Indemnifying Party any information requested relating to such claim, and otherwise shall cooperate with the Tax Indemnifying Party in order to contest effectively any such claim. The Tax Indemnifying Party shall determine the method of any contest of such claim and shall control the conduct thereof. (ii) Subject to the provisions of paragraph (i) of this subsection, the Tax Indemnified Party shall enter into a settlement of such contest with the applicable taxing authority or prosecute such contest to a determination in a Court, all as the Tax Indemnifying Party may request. (iii) Promptly after the extent of the liability of the Tax Indemnified Party with respect to a claim shall be established by the final judgment or decree of a Court or a final and binding settlement with a Governmental Authority having jurisdiction thereof, the Tax Indemnifying Party shall pay to the Tax Indemnified Party the amount of any Taxes to which the Tax Indemnified Party may become entitled by reason of the provisions of this Section. (d) Notwithstanding anything to the contrary in this Section, any interest, penalties, fines, assessments or additions to Tax resulting from or attributable to the failure of the Tax Indemnified Party to act in a timely manner, including in filing Tax Returns, responding to Tax audit or other inquiries or making payments shall not be indemnifiable hereunder and shall be the sole responsibility of the Tax Indemnified Party. (e) In addition to the provisions of this subsection (c) of this Section, if any proposed audit adjustments of a Pre-Closing Taxable Period Tax Return could result in a tax adjustment for a Post-Closing Taxable Period, the Seller shall promptly inform the Purchaser. If the Seller elects not to contest the adjustment, the Purchaser shall have the option, at the Purchaser's own expense, to contest the proposed adjustment in accordance with the provisions of subsection (c) of this Section. (f) In addition to the provisions of subsection (c) of this Section, if any proposed audit adjustments of a Post-Closing Taxable Period Tax Return could result in an audit adjustment for a Pre-Closing Taxable Period, the Purchaser shall promptly inform the Seller. If the Purchaser elects not to contest the adjustment, the Seller shall have the option, at the Seller's own expense, to contest the proposed adjustment in accordance with the provisions of subsection (c) of this Section. (g) Except for the indemnification provided in Section 8.02 for breach of any representation or warranty contained in Section 4.10 or any covenant or agreement contained in Section 6.06, the indemnification provided in this Section shall be the sole remedy for any claim in respect of Taxes. In the event of a conflict between the provisions of this Section and any other provisions of this Agreement, the provisions of this Section shall control. 40 The limitations of Section 8.02 shall not apply to any amounts for which a party is liable under this Section. Any claim for indemnity under this Section must be made prior to the expiration of the applicable Tax statute of limitations with respect to the relevant taxable period (including all periods of tolling or extension). (h) To the extent any determination of Taxes, whether as the result of an audit or examination, a claim for refund, the filing of an amended return or otherwise results in a refund of Taxes paid (a "Refund"), the Seller shall be entitled to any part of such Refund attributable to a Pre-Closing Taxable Period, the Purchaser shall be entitled to any part of such Refund attributable to a Post-Closing Taxable Period, and the Purchaser and the Seller shall each be entitled to a Refund attributable to a taxable period described in Section 6.06(b) in the portions that the Purchaser and the Seller originally bore any Taxes payable with respect to such taxable period. Whichever party receives such Refund shall, within ten (10) days after receipt thereof, pay such Refund, or any part thereof, and the interest received thereon to the party entitled thereto under this subsection. (i) Any payment from the Purchaser to the Seller pursuant to Section 6.06 or this Section shall be treated for Tax purposes as an increase in the Purchase Price, and any payment from the Seller to the Purchaser pursuant to Section 6.06 or this Section shall be treated for Tax purposes as a reduction in the Purchase Price. Section 8.04. Section 338(h)(10) Elections. (a) The Seller, as the common parent of the Seller's Group, and the Purchaser shall make a joint election under section 338(h)(10) of the Code and a similar election under any applicable state income tax law for the Company and for each of the corporate subsidiaries (collectively, the "Section 338(h)(10) Elections"). At the Closing, the Seller shall deliver to the Purchaser an Internal Revenue Service Form 8023-A and any similar form under applicable state income tax law (the "Forms") with respect to the Section 338(h)(10) Elections, which shall have been duly executed by an authorized person for the Seller. The Purchaser shall cause the Forms to be duly executed by an authorized person for the Purchaser, shall complete any schedules required to be attached thereto, shall provide a copy of the executed Forms and schedules to the Seller, and the Seller and the Purchaser shall duly and timely file the Forms as prescribed by Treasury Regulation 1.338(h)(10)-1 or the corresponding provisions of applicable state income tax law. (b) The Purchaser shall select a firm of qualified appraisers to conduct an appraisal of the Company's assets (the "Appraisal"), which selection must be approved by the Seller, such approval not to be unreasonably withheld. The Seller and the Purchaser agree that the results of the Appraisal shall be used to allocate the Purchase Price and liabilities of the Company and its subsidiaries (plus other relevant items) to the assets of the Company and its subsidiaries for all purposes (including United States or any state, county or local government Tax purposes) in accordance with the Code and applicable Treasury Regulations. Such allocation of the Purchase Price shall be prepared by the Purchaser and submitted in writing to the Seller within ninety (90) calendar days after the date on which the Final Purchase Price is determined. The Seller shall consent to such Purchase 41 Price allocation unless such Purchase Price allocation is unreasonable. If the Seller does not object in writing to such proposed allocation within thirty (30) calendar days after receipt of the Purchaser's written proposal, the Purchaser's proposed allocation shall become final and binding on the Seller and the Purchaser. If the Seller makes timely objection to the Purchaser's proposal, the Purchaser and Seller shall have thirty (30) calendar days to reach agreement or the allocation shall be submitted to Price Waterhouse L.L.P. The determination of Price Waterhouse L.L.P. shall be final and binding on the Purchaser and the Seller and the fees and expenses of Price Waterhouse L.L.P. shall be borne equally by the Purchaser and the Seller. Price Waterhouse L.L.P. shall adjust the Purchase Price allocation provided by the Purchaser to the extent necessary to make such allocation reasonable. The Purchaser and the Seller shall duly prepare and timely file such reports and information returns as may be required under the Code and applicable Treasury Regulations and any corresponding or comparable provisions of applicable state and local Tax laws to report the allocation of the Purchase Price. ARTICLE IX. TERMINATION Section 9.01. Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual consent of the Seller and the Purchaser; (b) by the Purchaser, upon a breach in any material respect of any representation, warranty, covenant or agreement on the part of the Seller set forth in this Agreement, or if any representation or warranty of the Seller shall have become untrue in any material respect, in either case such that the conditions set forth in Section 7.02(a) or Section 7.02(b), as the case may be, would be incapable of being satisfied by June 30, 1996 (or as otherwise extended as described in Section 9.01(e)); provided, however, that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this subsection; (c) by the Seller, upon a breach in any material respect of any representation, warranty, covenant or agreement on the part of the Purchaser set forth in this Agreement, or if any representation or warranty of the Purchaser shall have become untrue in any material respect, in either case such that the conditions set forth in Section 7.03(a) or Section 7.03(b), as the case may be, would be incapable of being satisfied by June 30, 1996 (or as otherwise extended as described in Section 9.01(e)); provided, however, that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this subsection (c); (d) by either the Seller or the Purchaser, if there shall be any Order which is final and nonappealable preventing the consummation of the transactions contemplated hereby, unless the party relying on such Order to terminate this Agreement has not complied with its obligations under Section 6.04(b); and 42 (e) by either the Seller or the Purchaser, if the Closing shall not have occurred prior to June 30, 1996; provided, however, that this Agreement may be extended by written notice from either party hereto to the other to a date not later than July 31, 1996, if the Closing shall not have occurred as a direct result of the nonfulfillment of the condition contained in subsection (a) of Section 7.01 by June 30, 1996. The right of any party hereto to terminate this Agreement pursuant to this Section shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective officers, directors, employees or representatives, whether prior to or after the execution of this Agreement; provided, however, that each party shall provide written notice to the other party of any breach by such other party of a representation, warranty, covenant or agreement set forth in this Agreement as soon as practicable upon learning of such breach, and the non-breaching party may only terminate this Agreement pursuant to subsections (b) or (c) of this Section, as the case may be, if such breach is not cured within ten (10) days of such notice being given. If such ten (10) day cure period extends beyond the date set forth in such subsections, then such date shall be extended to be the first business day immediately following the expiration of such ten (10) day cure period. Section 9.02. Effect of Termination; Nonconsummation. Except as provided in this Section and Section 9.03, in the event of the termination of this Agreement pursuant to Section 9.01, this Agreement shall forthwith become void and of no further force and effect. If the transactions contemplated hereby are not consummated by reason of the termination of this Agreement or otherwise, there shall be no liability on the part of either party hereto to the other and all rights and obligations of each party hereto shall cease, except that nothing herein (other than the immediately following sentence) shall relieve any party of any liability for any breach of such party's covenants or agreements contained in this Agreement or any breach of such party's representations or warranties contained in this Agreement. Notwithstanding anything in this Agreement to the contrary, in no event shall any losses, claims, damages or liabilities claimed with respect to the exception to the immediately preceding sentence include any consequential or punitive damages, except to the extent that such are awarded to a third party in a Proceeding against an Indemnified Party. Section 9.03. Fees and Expenses. All Expenses incurred by the parties hereto shall be borne solely and entirely by the party which has incurred such Expenses; provided, however, that the Seller (and not the Company or its subsidiaries) shall be responsible for the fees and expenses of all third parties retained by or on behalf of the Seller and its Affiliates in connection with the transactions contemplated by this Agreement. 43 ARTICLE X. MISCELLANEOUS Section 10.01. Notices. All notices and other communications hereunder to a party hereto shall be in writing and shall be deemed to be properly given if delivered personally, telecopied (subject to confirmation) or mailed to it by registered or certified mail (return receipt requested), in the case of the Seller, to: Central and South West Corporation 1616 Woodall Rodgers Freeway P.O. Box 660164 Dallas, Texas 77256-0164 Telecopy Number: (214) 777-1528 Attention: Senior Vice President and General Counsel and in the case of the Purchaser, to: Tejas Gas Corporation 1301 McKinney Street, Suite 700 Houston, Texas 77010 Telecopy Number: (713) 658-9600 Attention: James W. Whalen, Chief Financial Officer or at such other address as shall be specified by like notice. Section 10.02. Headings; Cross References. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of the Agreement. Unless the context otherwise requires, all references herein to Articles or Sections shall refer to Articles or Sections of this Agreement. Section 10.03. Prior Agreements. This Agreement shall supersede all prior agreements, documents or other instruments with respect to the matters covered hereby, save and except the Confidentiality Agreement which shall remain in full force and effect in accordance with its terms until the Closing, but shall expire at the Closing. Section 10.04. Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Closing. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. Section 10.05. Waiver. At any time prior to the Closing, either party hereto may extend the time for the performance of any of the obligations or other acts of the other party hereto, waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto and waive compliance by the other party with any 44 of the covenants or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. Section 10.06. Further Actions. Each party shall execute and deliver such other certificates, agreements and other documents and take such other actions as may reasonably be requested by the other party in order to consummate or implement the transactions contemplated by this Agreement. Section 10.07. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, by operation of law or otherwise, by any party hereto without the prior written consent of the other party; provided, however, that the Purchaser may assign its rights under this Agreement to any corporation, all of the outstanding voting stock of which is owned directly or indirectly by the Purchaser; and provided, further, that no such assignment shall relieve the Purchaser of any of its obligations under this Agreement. Nothing in this Agreement, express or implied, is intended to confer upon any person other than the parties hereto and their respective successors and permitted assigns, any rights, remedies or obligations under or by reason of this Agreement. Section 10.08. Governing Law. The terms of this Agreement shall be governed by, and interpreted in accordance with the provisions of, the laws of the State of Texas. Section 10.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. Section 10.10. Tranpache Partnership. To the extent that any representation, warranty or covenant contained in this Agreement relates to the business, condition (financial or otherwise), operations, performance or properties of Tranpache Partnership, (i) any such representation or warranty shall be limited to only those matters of which the Seller has Knowledge and (ii) any such covenants shall be limited to only those matters over which the Seller has control. 45 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed in its corporate name by its duly authorized officer, all on the date first above written. CENTRAL AND SOUTH WEST CORPORATION By: E. R. Brooks Chairman, President and Chief Executive Officer TEJAS GAS CORPORATION By: Charles R. Crisp President A-1 ANNEX A SCHEDULE OF DEFINED TERMS The following terms when used in the Agreement shall have the meanings set forth below unless the context shall otherwise require: "Affiliate" shall, with respect to any Person, mean any other Person that controls, is controlled by or is under common control with the former. The term "control" and correlative terms shall have the meanings ascribed to them in Rule 405 under the Securities Act. "Agreement" shall mean the Agreement of Merger made and entered into as of May 9, 1996 between the Seller and the Purchaser, including any amendments thereto and each Annex (including this Annex A) and Schedule thereto (including the Seller's Disclosure Letter and the Purchaser's Disclosure Letter). "Appraisal" shall have the meaning ascribed to such term in Section 8.04(b). "Bank" shall mean Citibank N.A. "Benefit Plans" shall mean any employee pension benefit plan (whether or not insured), as defined in Section 3(2) of ERISA, any employee welfare benefit plan (whether or not insured) as defined in Section 3(1) of ERISA, any stock bonus, stock ownership, stock option, stock purchase, stock appreciation rights, phantom stock or other stock plan (whether qualified or nonqualified), and any bonus or incentive compensation plan under which the Company or any of its subsidiaries may become obligated in any manner (including obligations to make contributions or other payments) to any of the present or former directors, officers, employees, agents, consultants or other similar representatives providing services to or for the Company or any of its subsidiaries in connection with such services; provided, however, that such term shall not include (a) routine employment policies and procedures developed and applied in the ordinary course of business and consistent with past practice, including wage, vacation, holiday and sick or other leave policies, (b) workers compensation insurance and (c) directors and officers liability insurance. "Certificate of Merger" shall have the meaning ascribed to such term in Section 2.04 of the Agreement. "Closing" shall mean a meeting of all Persons interested in the transactions contemplated by the Agreement at which all documents deemed necessary by the parties to the Agreement to evidence the fulfillment or waiver of all conditions precedent to the consummation of the transactions contemplated by the Agreement are executed and delivered. "Closing Date" shall have the meaning ascribed thereto in Section 2.03 of the Agreement. A-2 "Closing Date Tax Accrual" for a Tax shall be the amount reflected as a liability for that Tax in the Consolidated Balance Sheet plus or minus, as the case may be, any adjustments to that liability arising during the Computation Period and reflected in the Purchase Price pursuant to Section 2.02(a) of the Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Common Stock" shall have the meaning ascribed to such term in Section 4.02(a) of the Agreement. "Company" shall have the meaning ascribed to such term in the Recitals to the Agreement. "Confidentiality Agreement" shall mean that certain confidentiality agreement between the Seller and the Purchaser dated February 9, 1996. "Consolidated Balance Sheet" shall mean the consolidated balance sheet of the Company and its subsidiaries, as of December 31, 1995, included in the Consolidated Financial Statements together with the notes thereto. "Consolidated Financial Statements" shall mean the consolidated balance sheets of the Company and its subsidiaries as of December 31, 1994 and December 31, 1995 and the related consolidated statements of income, cash flows and changes in stockholder's equity for the fiscal years ended December 31, 1993, 1994 and 1995, together with the notes thereto, all as audited by Arthur Andersen LLP, independent accountants, under their report with respect thereto dated February 9, 1996. "Constituent Corporations" shall have the meaning ascribed to such term in Section 2.01 of the Agreement. "Continuing Employees" shall have the meaning ascribed to such term in Section 6.08(b) of the Agreement. "Court" shall mean any court, federal, state or local, or arbitration tribunal. "CSW Health Care Plan" shall have the meaning ascribed to such term in Section 6.08(f) of the Agreement. "CSW Dependent Care Plan" shall have the meaning ascribed to such term in Section 6.08(g) of the Agreement. "CSW Money Pool" shall mean the arrangement among the Seller and its Affiliates pursuant to which surplus cash is consolidated and short term borrowings are facilitated as reflected in the A-3 accounting records of the Company by the captions titled "Advances to Affiliates" and "Advances from Affiliates" included in the Consolidated Balance Sheet. "CSW Pension Plan" shall have the meaning ascribed to such term in Section 6.08(b) of the Agreement. "CSW Severance Benefit Plan" shall have the meaning ascribed to such term in Section 6.08(h) of the Agreement. "CSW Thrift Plan" shall the meaning ascribed to such term in Section 6.08(c) of the Agreement. "CSW VEBA" shall the meaning ascribed to such term in Section 6.08(f) of the Agreement. "Easements" shall mean any easements, rights of way, permits, servitudes, licenses, leasehold estates and similar rights held by the Company or any of its subsidiaries relating to real property used in their business but owned by other Persons. "Effective Time" shall have the meaning ascribed to such term in Section 2.04 of the Agreement. "Environmental Law or Laws" shall mean any and all laws, statutes, ordinances, rules, regulations, or orders of any Governmental Authority pertaining to health or the environment currently in effect and applicable to the Company and its subsidiaries, including the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, the Oil Pollution Act of 1990 ("OPA"), any state laws implementing the foregoing federal laws, and any state laws pertaining to the handling of oil and gas exploration and production wastes or the use, maintenance, and closure of pits and impoundments, and all other environmental conservation or protection laws. For purposes of the Agreement, the terms "hazardous substance" and "release" have the meanings specified in CERCLA; provided, however, that to the extent the laws of the state in which the property is located establish a meaning for "hazardous substance" or "release" that is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply, and the term "hazardous substance" shall include all dehydration and treating wastes, waste (or spilled) oil, and waste (or spilled) petroleum products, and (to the extent in excess of background levels) radioactive material, even if such are specifically exempt from classification as hazardous substances pursuant to CERCLA or RCRA or the analogous statutes of any jurisdiction applicable to the Company or its subsidiaries or any of their respective properties or assets. A-4 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Estimated Purchase Price" shall have the meaning ascribed to such term in Section 6.11 of the Agreement. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Expenses" shall mean all out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of the Agreement, and all other matters related to the consummation of the transactions contemplated thereby. "FERC" shall mean the Federal Energy Regulatory Commission including its predecessor, the Federal Power Commission, and any successors thereto. "Final Purchase Price" shall have the meaning ascribed to such term in Section 6.12 of the Agreement. "Final Purchase Price Calculation" shall have the meaning ascribed to such term in Section 6.12. "Fixed Price Contracts" shall mean any contracts, commitments or agreements for the purchase or sale of Hydrocarbons (i) having a remaining term of more than sixty (60) days, wherein the purchase or sale price thereunder throughout part of the remaining life of such contract, commitment or agreement is a fixed amount or an amount that is otherwise reasonably determinable as of the date hereof pursuant to the terms of such contract, commitment or agreement, or (ii) which the Company or any subsidiary thereof has hedged with futures contracts or otherwise; provided, however, that the term Fixed Price Contracts will not include any contract, commitment or agreement under which the purchase or sales price throughout the remaining life of the contract, commitment or agreement is based on a market responsive reference price for a Hydrocarbon. "Forms" shall have the meaning ascribed to such term in Section 8.04(a) of the Agreement. "GAAP" shall mean generally accepted accounting principles consistently applied; provided, however, that the Statements of Financial Accounting Standards (SFAS) Nos. 121 will be applied in determining Working Capital of the Company prior to the Closing. "Governmental Authority" shall mean any federal, state or local governmental agency or authority (other than a Court). A-5 "Holding Company Act" shall mean the Public Utility Holding Company Act of 1935, as amended, and the rules and regulations promulgated thereunder. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Hydrocarbons" shall mean crude oil, natural gas, natural gas liquids and other hydrocarbons produced from crude oil or natural gas. "Indemnified Party" shall have the meaning ascribed to such term in Section 8.02(a) of the Agreement. "Indemnifying Party" shall have the meaning ascribed to such term in of Section 8.02(a) of the Agreement. "IRS" shall mean the Internal Revenue Service. "Knowledge" shall mean (i) with respect to the Seller, the actual knowledge of the officers of the Seller and the Company, and the in-house attorneys employed in the general counsel's office of the Company and (ii) with respect to the Purchaser, the actual knowledge of the officers of the Purchaser. For the purposes of this definition, and without limiting other matters of which they have knowledge, in-house attorneys of the Company shall be deemed also to have knowledge of the contents of letters directed to the Company's independent auditors from outside counsel of the Company in connection with its fiscal 1995, 1994 and 1993 annual audits. "Law" shall mean all laws, statutes, ordinances, rules and regulations of the United States, any foreign country, or any domestic or foreign state, and any political subdivision or agency thereof, including all decisions of Courts having the effect of law in each such jurisdiction. "LCC" shall mean the Commissioner of Conservation, Department of Natural Resources of the State of Louisiana, and any predecessors or successors thereto. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof or the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Losses" shall have the meaning ascribed to such term in Section 8.02(a) of the Agreement. "Material" shall mean material to the condition (financial and other), results of operations or business of a specified Person and its subsidiaries, if any, taken as a whole; provided that the special purpose use of the term "Material" in Section 8.02(c) of the Agreement shall be disregarded and given no effect A-6 in any determination of what is material for purposes of this definition of the term "Material" as used elsewhere in this Agreement. "Material Adverse Effect" shall mean any change or effect that would be materially adverse to the consolidated business, condition (financial or otherwise), operations, performance or properties of a specified Person and its subsidiaries, if any, taken as a whole; provided that the special purpose use of the term "Material Adverse Effect" in Section 8.02(c) shall be disregarded and given no effect in any determination of what is material for purposes of this definition of the term "Material Adverse Effect" as used elsewhere in this Agreement. "Material Contract" shall mean, as between the Company or any of its subsidiaries, on the one hand, and any Person other than any other member of the group consisting of the Company and its subsidiaries, on the other: (1) Any collective bargaining agreement or other agreement with any labor union; (2) Any employment or consulting agreement, contract or commitment between the Company or any of its subsidiaries and any employee, officer or director thereof (i) having more than one year to run from the date hereof, (ii) providing for an obligation to pay or accrue compensation of $250,000 or more per annum or (iii) providing for the payment or accrual of any additional compensation upon a change in control of the Company or any of its subsidiaries or upon any termination of such employment or consulting relationship following a change in control of the Company or any of its subsidiaries; (3) Any agency or representation agreement with any Person which is not terminable by the Company or one of its subsidiaries without penalty upon not more than ninety (90) days' notice; (4) Any agreement, contract or commitment with any Person containing any covenant limiting the freedom of the Company or any of its subsidiaries to engage in any line of business or to compete with any Person; (5) Any partnership, joint venture or profit sharing agreement with any Person; (6) Any agreement, contract, commitment, indenture or other instrument relating to the borrowing of money in a principal amount of $500,000 or more or any direct or indirect guarantee of any obligation of any other Person or Governmental Authority for, or agreement to service the repayment of, borrowed money in a principal amount of $500,000 or more, including any agreement or arrangement (i) relating to the maintenance of compensating balances, (ii) with respect to lines of credit or letters of credit, (iii) relating to the purchase or repurchase obligations of any other Person or Governmental Authority, (iv) to advance or supply funds to or to invest in any other Person or Governmental Authority, (v) to pay for property, products or services of any other Person or Governmental Authority even if such property, products or services are not conveyed, delivered or rendered and (vi) to guarantee any lease or other similar periodic payments to be made by any other Person or Governmental Authority; A-7 (7) Any lease (A) with annual rental payments aggregating $500,000 or more that is not terminable without premium or penalty on ninety (90) days or less notice or (B) of assets exceeding $10,000,000 fair market value; (8) Any agreement, contract or commitment relating to the disposition or acquisition of any investment in any Person if such investment has a book value of, or the disposition or acquisition price of such investment or interest is, $500,000 or more; (9) Any agreement, contract or commitment to which the Company or any of its subsidiaries is a party or by which any of them is bound (i) which relates to the receiving, storing, compressing, dehydrating, processing, purchasing, transporting, gathering, exchanging or sale of Hydrocarbons (either for the account of the Company or a subsidiary thereof or on behalf of third parties) (A) involving a commitment of the Company for a term in excess of one month (or that may not be terminated by the Company upon notice of one month or less) and involving consideration in excess of $500,000 within any twelve-month period commencing after the date of the Agreement, or which is otherwise Material to the Company, and (B) regardless of whether the agreement, contract or commitment is "firm" or "interruptible" or (ii) which is a swap, exchange or futures contract. As used in clause (i) in reference to any sales, purchase, transportation, storage or exchange agreement, contract or commitment, the term "interruptible" means that neither the Company nor any of its subsidiaries will be liable for any reason for any damages (including consequential damages) if it elects to not purchase, sell, transport or exchange hydrocarbons in connection with such agreement, contract or commitment, and the term "firm" means that such agreement, contract or commitment does not meet the foregoing definition of "interruptible"; or (10) Any other agreement, contract or commitment which involves payment or potential payment, pursuant to the terms of such agreement, contract or commitment, by or to the Company or any of its subsidiaries of $500,000 or more within any twelve month period commencing after the date of the Agreement; "Merger" shall have the meaning ascribed to such term in Section 2.01 of the Agreement. "Merger Subsidiary" shall have the meaning ascribed to such term in the Recitals to the Agreement. "NGA" shall mean the Natural Gas Act of 1938, as amended. "NGPA" shall mean the Natural Gas Policy Act of 1978, as amended. A-8 "OCC" shall mean the Oklahoma Corporation Commission and any predecessors or successors thereto. "OGCA" shall have the meaning ascribed to such term in Section 2.04 of the Agreement. "Order" shall mean any judgment, order or decree of any court, arbitration tribunal or Governmental Authority, federal, state or local. "Palo Duro Lease" means that certain Lease and License Agreement dated July 1, 1993, between Palo Duro Pipeline Company, Inc. and the Company. "Palo Duro Pipeline" means the pipeline facility and related interests and assets leased or licensed to the Company pursuant to the Palo Duro Lease. "Permit" shall mean any and all permits, licenses, authorizations, orders, certificates, registrations or other approvals granted by any federal, state, local or foreign Governmental Authority. "Permitted Encumbrances" shall mean the following: (1) liens for taxes, assessments and other governmental charges not delinquent or which are currently being contested in good faith by appropriate proceedings; provided that, in the latter case, the Company or one of its subsidiaries shall have set aside on its books adequate reserves with respect thereto; (2) mechanics' and materialmen's liens not filed of record and similar charges not delinquent or which are filed of record but are being contested in good faith by appropriate proceedings; provided that, in the latter case, the Company or one of its subsidiaries shall have set aside on its books adequate reserves with respect thereto; (3) liens in respect of judgments or awards with respect to which the Company or one of its subsidiaries shall in good faith currently be prosecuting an appeal or other proceeding for review and with respect to which the Company or such subsidiary shall have secured a stay of execution pending such appeal or such proceeding for review; provided that the Company or such subsidiary shall have set aside on its books adequate reserves with respect thereto; (4) easements, leases, reservations or other rights of others in, or minor defects and irregularities in title to, property or assets of the Company or any of its subsidiaries; provided that such easements, leases, reservations, rights, defects or irregularities do not materially impair the use of such property or assets for the purposes for which they are held; and A-9 (5) any lien or privilege vested in any lessor, licensor or permittor for rent or other obligations of the Company or any of its subsidiaries thereunder so long as the payment of such rent or the performance of such obligations is not delinquent. "Person" shall mean an individual, partnership, limited liability company, corporation, joint stock company, trust, estate, joint venture, association or unincorporated organization, or any other form of business or professional entity. "Pipeline Assets" shall mean the pipelines, equipment, other tangible personal property, Easements and other similar assets and rights used by the Company or its subsidiaries in connection with their natural gas pipeline, gathering, processing and storage operations that are reflected in the Consolidated Balance Sheet other than any such properties, assets and rights that (i) have been sold or otherwise disposed of since the date of the Consolidated Balance Sheet without breaching either Section 4.05(b) or Section 6.02(f) of the Agreement or (ii) are not, individually or in the aggregate, Material to the Company. "Post-Closing Taxable Period" means (i) any taxable period beginning after the Closing Date and (ii) with respect to any taxable period beginning on or before the Closing Date and ending after the Closing Date, the portion of such taxable period that is after the Closing Date. "Pre-Closing Taxable Period" means (i) any taxable period ending on or before the Closing Date or (ii) with respect to any taxable period beginning on or before the Closing Date and ending after the Closing Date, the portion of such taxable period that is on or before the Closing Date. "Proceedings" shall have the meaning ascribed to such term in Section 8.02(a) of the Agreement. "Purchase Price" shall have the meaning ascribed to such term in Section 2.02 of the Agreement. "Purchaser" shall have the meaning ascribed to such term in the introductory paragraph of the Agreement. "Purchaser's Dependent Care Plan" shall have the meaning ascribed to such term in Section 6.08(g) of the Agreement. "Purchaser's Disclosure Letter" shall mean that certain disclosure letter of even date with the Agreement from the Purchaser to the Seller delivered concurrently with the execution and delivery of the Agreement. "Purchaser's Health Care Plan" shall have the meaning ascribed to such term in Section 6.08(f) of the Agreement. A-10 "Purchaser's Pension Plan" shall have the meaning ascribed to such term in Section 6.08(b) of the Agreement. "Purchaser's Representatives" shall have the meaning ascribed to such term in Section 6.03(a) of the Agreement. "Purchaser's Savings Plan" shall have the meaning ascribed to such term in Section 6.08(c) of the Agreement. "Refund" shall have the meaning ascribed to such term in Section 8.03(h) of the Agreement. "Regulation" shall mean any rule or regulation of any Governmental Authority having the effect of law. "Section 338(h)(10) Elections" shall have the meaning ascribed to such term in Section 8.04(a) of the Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Seller" shall have the meaning ascribed to such term in the first paragraph of the Agreement. "Seller's Disclosure Letter" shall mean that certain disclosure letter of even date with the Agreement from the Seller to the Purchaser delivered concurrently with the execution and delivery of the Agreement. "Seller's Group" means the "affiliated group" of corporations (as defined in Section 1504 of the Code) of which Seller has been and will be the "common parent" (as that term is used in Section 1504(a) of the Code). "Stock" shall have the meaning ascribed to such term in Section 4.02(a) of the Agreement. A "subsidiary" of a specified Person shall be any corporation, partnership, limited liability company, joint venture or other legal entity of which the specified Person (either alone or through or together with any other subsidiary) owns, directly or indirectly, 50% or more of the stock or other equity or partnership interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. "Surviving Corporation" shall have the meaning ascribed to such term in Section 2.01 of the Agreement. "Taxable Earned Surplus" shall have the meaning ascribed to the term "Net Taxable Earned Surplus" in 171.110 of the Texas Tax Code (Vernon 1992 and Supp. 1996). A-11 "Tax Indemnified Party" shall have the meaning ascribed to such term in Section 8.03(c) of the Agreement. "Tax Indemnifying Party" shall have the meaning ascribed to such term in Section 8.03(c) of the Agreement. "Tax Items" shall have the meaning ascribed to such term in Section 6.06(a) of the Agreement. "Tax Returns" shall have the meaning ascribed to such term in Section 4.10(a) of the Agreement. "Tax Sharing Agreements" shall have the meaning ascribed to such term in Section 6.06(e) of the Agreement. "Taxes" shall mean all taxes, charges, imposts, tariffs, fees, levies or other similar assessments or liabilities, including income taxes, ad valorem taxes, excise taxes, withholding taxes or other taxes of or with respect to gross receipts, premiums, real property, personal property, windfall profits, sales, use, transfers, licensing, employment, payroll and franchises imposed by or under any Law; and such terms shall include any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any such tax or any contest or dispute thereof. "TRC" shall mean the Texas Railroad Commission and any predecessors and successors thereto. "Trust" shall have the meaning ascribed to such term in Section 6.10(f). "Working Capital of the Company" shall mean the current assets of the Company and its subsidiaries minus the current liabilities of the Company and its subsidiaries, each as determined in accordance with GAAP. B-1 ANNEX "B" TRANSITION SERVICES (a) Consultation, analysis and advice in connection with matters relating to operations, management, financing and financial planning, engineering, system planning, law, governmental and general business problems or questions. (b) Consultation, analysis and advice in connection with personnel relations and employee benefit plans. (c) Tax services relating to the preparation and filing of returns for federal, state and local taxes, and the consolidation of such returns. (d) Assistance in connection with audits or returns by, and participation in discussions of such returns with, the Internal Revenue Service and other taxing bodies or authorities. (e) Consultation, analysis and advice in connection with accounting matters and in preparation of accounts and the consolidation of such accounts. (f) Electronic data processing services, including establishing and operating a data processing center, processing of customer billing, revenues and statistics, payrolls, property accounting, general accounting, cash forecasts, load flow studies, and various other business and engineering applications. (g) special services, in addition to those specified above, as may be required and which the Seller concludes it is equipped to perform. In supplying the above services, the Seller may arrange, where it deems appropriate, for the services of such experts, consultants, advisers and other persons with necessary qualifications as are required for or pertinent to the rendition of such services. EX-12.1 3 EXHIBIT 12.1 CENTRAL POWER AND LIGHT COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED MARCH 31, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $299,754 Adjustments: Federal income taxes 61,005 Provision for deferred Federal income taxes 19,700 Deferred investment tax credits (5,789) Other income and deductions 8,529 Allowance for borrowed and equity funds used during construction 3,875 Mirror CWIP amortization 30,750 Earnings $417,824 Fixed Charges: Interest on long-term debt $114,914 Interest on short-term debt and other 21,290 Fixed Charges $136,204 Ratio of Earnings to Fixed Charges 3.07 EX-12.2 4 EXHIBIT 12.2 CENTRAL POWER AND LIGHT COMPANY RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR THE TWELVE MONTHS ENDED MARCH 31, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $299,754 Adjustments: Federal income taxes 61,005 Provision for deferred Federal income taxes 19,700 Deferred investment tax credits (5,789) Other income and deductions 8,529 Allowance for borrowed and equity funds used during construction 3,875 Mirror CWIP amortization 30,750 Earnings $417,824 Fixed Charges: Interest on long-term debt $114,914 Interest on short-term debt and other 21,290 Preferred stock dividend requirements 19,087 Fixed Charges and Preferred Requirements $155,291 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.69 EX-12.3 5 EXHIBIT 12.3 PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED) RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED MARCH 31, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $112,925 Adjustments: Federal and state income taxes 29,292 Provision for deferred Federal and state income taxes 10,084 Deferred investment tax credits (2,788) Other income and deductions (171) Allowance for borrowed and equity funds used during construction 3,014 Earnings $152,356 Fixed Charges: Interest on long-term debt $ 29,633 Amortization of debt issuance cost 1,571 Other interest 4,707 Fixed Charges $ 35,911 Ratio of Earnings to Fixed Charges 4.24 EX-12.4 6 EXHIBIT 12.4 SOUTHWESTERN ELECTRIC POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED MARCH 31, 1996 (Thousands except Ratio) (Unaudited) Operating Income $162,538 Adjustments: Federal and state income taxes 35,848 Provision for deferred Federal and state income taxes 10,932 Deferred investment tax credits (4,950) Other income and deductions 530 Allowance for borrowed and equity funds used during construction 7,716 Interest portion of financing leases 1,772 Earnings $214,386 Fixed Charges: Interest on long-term debt $ 44,147 Amortization of debt issuance cost 3,427 Other interest 6,855 Interest portion of financing leases 1,772 Fixed Charges $ 56,201 Ratio of Earnings to Fixed Charges 3.81 EX-12.5 7 EXHIBIT 12.5 WEST TEXAS UTILITIES COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED MARCH 31, 1996 (Thousands Except Ratio) (Unaudited) Operating Income $57,345 Adjustments: Federal income taxes 4,523 Provision for deferred Federal income taxes 2,587 Deferred investment tax credits (1,321) Other income and deductions (425) Allowance for borrowed and equity funds used during construction 1,290 Earnings $63,999 Fixed Charges: Interest on long-term debt $ 21,868 Interest on short-term debt and other 4,290 Fixed Charges $26,158 Ratio of Earnings to Fixed Charges 2.45 EX-27.1 8
UT 0000092487 SOUTHWESTERN ELECTRIC POWER COMPANY 1,000 3-MOS DEC-31-1996 MAR-31-1996 PER-BOOK 1,873,455 3,552 190,100 30,424 21,326 2,118,857 135,660 245,000 306,322 686,982 33,628 16,032 539,445 124,719 50,000 0 145 1,200 9,252 3,100 654,354 2,118,857 200,881 4,734 169,798 174,532 26,349 1,086 27,435 12,668 14,767 779 13,988 10,000 11,000 5,842 0.00 0.00
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