-----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, K+O9jR55Qqpm8zcA+YrhR9vJKx2C5dROiYhidaC7NXDkreiZYxXh+o43/RXv3mO2 ZTyB360sGpDwqnjJAParNg== 0000018540-98-000031.txt : 19980327 0000018540-98-000031.hdr.sgml : 19980327 ACCESSION NUMBER: 0000018540-98-000031 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 46 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 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-K405 SEC ACT: SEC FILE NUMBER: 001-03146 FILM NUMBER: 98573513 BUSINESS ADDRESS: STREET 1: 428 TRAVIS ST CITY: SHREVEPORT STATE: LA ZIP: 71156 BUSINESS PHONE: 3182222141 MAIL ADDRESS: STREET 1: C/O SOUTHWESTERN ELECTRIC POWER CO STREET 2: 428 TRAVIS STREET CITY: SHREVEPORT STATE: LA ZIP: 71156-0001 10-K405 1 SWEPCO UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-1443 Central and South West Corporation 51-0007707 (A Delaware Corporation) 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 (214) 777-1000 0-346 Central Power and Light Company 74-0550600 (A Texas Corporation) 539 North Carancahua Street Corpus Christi, Texas 78401-2802 (512) 881-5300 0-343 Public Service Company of Oklahoma 73-0410895 (An Oklahoma Corporation) 212 East 6th Street Tulsa, Oklahoma 74119-1212 (918) 599-2000 1-3146 Southwestern Electric Power Company 72-0323455 (A Delaware Corporation) 428 Travis Street Shreveport, Louisiana 71156-0001 (318) 222-2141 0-340 West Texas Utilities Company 75-0646790 (A Texas Corporation) 301 Cypress Street Abilene, Texas 79601-5820 (915) 674-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of Each Exchange Registrant Title of Each Class on Which Registered Central and South West Common Stock, New York Stock Exchange, Inc. Corporation $3.50 Par Value Chicago Stock Exchange, Inc. CPL Capital I 8.00% Cumulative Quarterly New York Stock Exchange, Income Preferred Inc. Securities, Series A, Liquidation Preference $25 per Preferred Security PSO Capital I 8.00% Trust Originated New York Stock Exchange, Preferred Securities Series Inc. A, Liquidation Preference $25 per Preferred Security SWEPCO Capital I 7.875% Trust Preferred New York Stock Exchange, Securities, Series A, Inc. Liquidation amount $25 per Preferred Security SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Registrant Title of Each Class Central Power and Light Cumulative Preferred Stock, $100 Par Value Company Public Service Company of Cumulative Preferred Stock, $100 Par Value Oklahoma Southwestern Electric Cumulative Preferred Stock, $100 Par Value Power Company West Texas Utilities Cumulative Preferred Stock, $100 Par Value Company $100 Par Value Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) have been subject to such filing requirements for the past 90 days. Yes _x_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: Central and South West Corporation [ ] Central Power and Light Company [ x ] Public Service Company of Oklahoma [ x ] Southwestern Electric Power Company [ x ] West Texas Utilities Company [ x ] Aggregate market value of the Common Stock of Central and South West Corporation at March 6, 1998 held by non-affiliates was approximately $5.7 billion. Number of shares of Common Stock outstanding at March 6, 1998:212,271,060. Central and South West Corporation is the sole holder of the common stock of Central Power and Light Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Notice of Annual Meeting and Joint Proxy Statement of Central and South West Corporation and American Electric Power Company, Inc. are hereby incorporated by reference into Part III hereof. This Combined Form 10-K is separately filed by Central and South West Corporation, Central Power and Light Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf. Each Registrant makes no representation as to information relating to the other Registrants. TABLE OF CONTENTS GLOSSARY OF TERMS................................................ii FORWARD LOOKING INFORMATION......................................v PART I ITEM 1.BUSINESS................................................1 ITEM 2.PROPERTIES..............................................27 ITEM 3.LEGAL PROCEEDINGS.......................................28 ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....29 PART II ITEM 5.MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................2-1 ITEM 6.SELECTED FINANCIAL DATA.................................2-2 Central and South West Corporation Central Power and Light Company Public Service Company of Oklahoma Southwestern Electric Power Company West Texas Utilities Company ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................2-2 Central and South West Corporation Central Power and Light Company Public Service Company of Oklahoma Southwestern Electric Power Company West Texas Utilities Company ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............2-2 Central and South West Corporation Central Power and Light Company Public Service Company of Oklahoma Southwestern Electric Power Company West Texas Utilities Company ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................2-133 PART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS....3-1 ITEM 11.EXECUTIVE COMPENSATION.................................3-7 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................3-13 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........3-15 PART IV ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................................4-1 i GLOSSARY OF TERMS The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition ACSI.......................American Customer Satisfaction Index(TM) (Survey conducted by the University of Michigan Business School and the American Society of Quality Control) AEP........................American Electric Power Company, Inc. AEP Merger.................Proposed Merger between AEP and CSW where CSW would become a wholly owned subsidiary of AEP APBO.......................Accumulated Postretirement Benefit Obligation AFUDC......................Allowance for funds used during construction Alpek......................Alpek S.A. de C.V. ANI........................American Nuclear Insurance Arkansas Commission........Arkansas Public Service Commission Btu........................British thermal unit Burlington Northern........Burlington Northern Railroad Company C3 Communications..........C3 Communications, Inc., Austin, Texas (formerly CSW Communications, Inc.) CAAA.......................Clean Air Act/Clean Air Act Amendments Cajun......................Cajun Electric Power Cooperative, Inc. CEO........................Chief Executive Officer CERCLA.....................Comprehensive Environmental Response, Compensation and Liability Act of 1980 ChoiceCom..................CSW/ICG ChoiceCom, L.P., a joint venture between C3 Communications and ICG Communications, Inc. CLECO......................Central Louisiana Electric Company, Inc. Court of Appeals...........Court of Appeals, Third District of Texas, Austin, Texas CPL........................Central Power and Light Company, Corpus Christi, Texas CPL 1997 Final Order.......Final orders received from the Texas Commission in CPL's rate case Docket No. 14965, including both the order received on September 10, 1997 and the revised order received on October 16, 1997 CPL 1997 Original Rate Order....................Final order issued on March 31, 1997 by the Texas Commission in CPL's rate case Docket No. 14965 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 CSW........................Central and South West Corporation, Dallas, Texas CSW Common.................CSW common stock, $3.50 par value per share CSW Credit.................CSW Credit, Inc., Dallas, Texas CSW Energy.................CSW Energy, Inc., Dallas, Texas CSW Energy Services........CSW Energy Services, Inc., Dallas, Texas CSW International..........CSW International, Inc., Dallas, Texas CSW Investments............CSW Investments, an unlimited company organized in the United Kingdom through which CSW International owns SEEBOARD CSW Leasing................CSW Leasing, Inc., Dallas, Texas CSW Power Marketing........CSW Power Marketing, Inc., Dallas, Texas CSW Services...............Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW System.................CSW and its subsidiaries CSW UK Finance Company.....CSW Finco, an unlimited company organized in the United Kingdom through which CSW International owns CSW Investments CSW U.S. Electric System...CSW and the U.S. Electric Operating Companies CWIP.......................Construction work in progress DeSoto.....................Parish of DeSoto, State of Louisiana pollution control revenue bond issuing authority DGES.......................Director General Electricity Supply DHMV.......................Dolet Hills Mining Venture DOE........................United States Department of Energy ECOM.......................Excess cost over market El Paso....................El Paso Electric Company El Paso Merger Agreement...Agreement and Plan of Merger between El Paso and CSW, dated as of May 3, 1993, as amended EMF........................Electric and magnetic fields Energy Policy Act..........National Energy Policy Act of 1992 EnerShop...................EnerShopSM Inc., Dallas, Texas Entergy Texas..............Entergy Texas Utilities Company EPA........................United States Environmental Protection Agency ii GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition EPS........................Earnings per share of common stock ERCOT......................Electric Reliability Council of Texas ERISA......................Employee Retirement Income Security Act of 1974, as amended Exchange Act...............Securities Exchange Act of 1934, as amended EWG........................Exempt Wholesale Generator FASB.......................Financial Accounting Standards Board FCC........................Federal Communications Commission FERC.......................Federal Energy Regulatory Commission FMB........................First mortgage bond FUCO.......................Foreign utility company as defined by the Holding Company Act Guadalupe..................Guadalupe-Blanco River Authority pollution control revenue bond issuing authority HL&P.......................Houston Lighting & Power Company Holding Company Act........Public Utility Holding Company Act of 1935, a amended HVdc.......................High-voltage direct-current IPP........................Independent power producer IBEW.......................International Brotherhood of Electrical Workers ISO........................Independent system operator ITC........................Investment tax credit Joint Proxy Statement......The Notice of Annual Meeting and Joint Proxy Statement of American Electric Power Company, Inc. and Central and South West Corporation KW.........................Kilowatt KWH........................Kilowatt-hour LIFO.......................Last-in first-out (inventory accounting method) Louisiana Commission.......Louisiana Public Service Commission LTIP.......................Long-Term Incentive Plan Matagorda..................Matagorda County Navigation District Number One (Texas) pollution control revenue bond issuing authority Mcfs.......................Thousand cubic feet of gas MD&A.......................Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ.......................Mississippi Department of Environmental Quality MGP........................Manufactured gas plant or coal gasification plant Mirror CWIP................Mirror construction work in progress Mississippi Power..........Mississippi Power Company MMbtu......................Million Btu MW.........................Megawatt MWH........................Megawatt-hour National Grid..............National Grid Group plc NEIL.......................Nuclear Electric Insurance Limited NRC........................Nuclear Regulatory Commission OASIS......................Open access same time information system OEFA.......................Oklahoma Environmental Finance Authority pollution control revenue bond issuing authority Oklahoma Commission........Corporation Commission of the State of Oklahoma Oklaunion..................Oklaunion Power Station Unit No. 1 OPEB.......................Other postretirement benefits (other than pension) PCB........................Polychlorinated biphenyl PCRB.......................Pollution Control Revenue Bond PowerShare.................CSW's PowerShareSM Dividend Reinvestment and Stock Purchase Plan PRP........................Potentially responsible party PSO........................Public Service Company of Oklahoma, Tulsa, Oklahoma PSO 1997 Rate Settlement Agreement................Joint stipulation agreement reached by PSO and other parties to settle PSO's rate inquiry PURA.......................Public Utility Regulatory Act of Texas, as amended PURPA......................Public Utility Regulatory Policies Act of 1978 QF.........................Qualifying Facility as defined in PURPA RCRA.......................Federal Resource Conservation and Recovery Act of 1976 Red River..................Red River Authority of Texas pollution control revenue bond issuing authority Registrant(s)..............CSW, CPL, PSO, SWEPCO and WTU RESCTA.....................Rural Electric Supplier Certified Territory Act iii GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition Retirement Plan............CSW's tax-qualified Cash Balance Retirement Plan Rights Plan................Stockholders Rights Agreement between CSW and CSW Services, as Rights Agent RUS........................Rural Utilities Service of the federal government Sabine.....................Sabine River Authority of Texas pollution control revenue bond issuing authority Siloam Springs.............City of Siloam Springs, Arkansas pollution control revenue bond issuing authority SAR........................Stock Appreciation Right SEC........................United States Securities and Exchange Commission SEEBOARD...................SEEBOARD plc., Crawley, West Sussex, United Kingdom SEEBOARD U.S.A.............CSW's investment in SEEBOARD consolidated and converted to U.S. Generally Accepted Accounting Principles SERP.......................Special Executive Retirement Plan SFAS.......................Statement of Financial Accounting Standards SFAS No. 52................Foreign Currency Translation SFAS No. 71................Accounting for the Effects of Certain Types of Regulation SFAS No. 87................Employers' Accounting for Pensions SFAS No. 106...............Employers' Accounting for Postemployment Benefits SFAS No. 115...............Accounting for Certain Investments in Debt and Equity Securities SFAS No. 123...............Accounting for Stock-Based Compensation SFAS No. 125...............Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities SFAS No. 128...............Earnings Per Share SFAS No. 130...............Reporting Comprehensive Income SFAS No. 131...............Disclosure about Segments of an Enterprise and Related Information SPP........................Southwest Power Pool STB........................Surface Transportation Board of the United States Department of Transportation STP........................South Texas Project nuclear electric generating station STPNOC.....................STP Nuclear Operating Company, a non-profit Texas corporation, jointly owned by CPL, HL&P, City of Austin, and City of San Antonio SWEPCO.....................Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO Plan................The amended plan of reorganization for Cajun filed by the Members Committee and SWEPCO on January 15, 1998 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas......................Tejas Gas Corporation Texas Commission...........Public Utility Commission of Texas ThriftPlus.................CSW's employee thrift plan Titus County...............Titus County Fresh Water Supply District No. 1 pollution control revenue bond issuing authority Transok....................Transok, Inc. and subsidiaries, Tulsa, Oklahoma Trust Preferred Securities...............Collective term for securities issued by business trusts of CPL, PSO and SWEPCO classified on the balance sheet as "Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)" Union Pacific..............Union Pacific Railroad Company U.S. Electric or U.S. Electric Operating Companies................CPL, PSO, SWEPCO and WTU Vale.......................Empresa De Electricidade Vale Paranapanema S/A WTU........................West Texas Utilities Company, Abilene, Texas WTU 1995 Stipulation and Agreement................Stipulation and Agreement to settle certain WTU regulatory matters iv FORWARD LOOKING INFORMATION This report made by CSW and its subsidiaries contains forward looking statements within the meaning of Section 21E of the Exchange Act. Although CSW and each of its subsidiaries believe that, in making any such statements, their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to: the impact of general economic changes in the U.S. and in countries in which CSW either currently has made or in the future may make investments; the impact of deregulation on the U.S. electric utility business; increased competition and electric utility industry restructuring in the U.S.; the impact of the AEP Merger or other merger and acquisition activity; federal and state regulatory developments and changes in law which may have a substantial adverse impact on the value of CSW System assets; timing and adequacy of rate relief; adverse changes in electric load and customer growth; climatic changes or unexpected changes in weather patterns; changing fuel prices, generating plant and distribution facility performance; decommissioning costs associated with nuclear generating facilities; uncertainties in foreign operations and foreign laws affecting CSW's investments in those countries; the effects of retail competition in the natural gas and electricity distribution and supply businesses in the United Kingdom; and the timing and success of efforts to develop domestic and international power projects. In the non-utility area, the aforementioned factors would also apply, and, in addition, would include, but are not limited to: the ability to compete effectively in new areas, including telecommunications, power marketing and brokering, and other energy related services, as well as evolving federal and state regulatory legislation and policies that may adversely affect those industries generally or the CSW System's business in areas in which it operates. v PART I ITEM 1. BUSINESS. CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based public utility holding company registered under the Holding Company Act. CSW owns all of the outstanding shares of common stock of the U.S. Electric Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3 Communications, EnerShop and CSW Energy Services and indirectly owns all of the outstanding share capital of SEEBOARD. In addition, CSW owns 80% of the outstanding shares of common stock of CSW Leasing. In 1997, the U.S. Electric Operating Companies, SEEBOARD U.S.A. and CSW's other subsidiaries contributed the following percentages to aggregate operating revenues, operating income and income before extraordinary item. SEEBOARD Total CPL PSO SWEPCO WTU U.S.A. Electric Other Total ---------------------------------------------------------- Operating Revenues 26 13 17 8 35 99 1 100% Operating Income 35 11 13 12 30 101 (1) 100% Income before Extraordinary Item 37 15 28 7 36 123 (23) 100% The relative contributions of the U.S. Electric Operating Companies and SEEBOARD U.S.A. to the aggregate operating revenues, operating income and net income before extraordinary item differ from year to year due to variations in weather, fuel costs reflected in charges to customers, timing and amount of rate changes and other factors, including changes in business conditions and the results of non-utility businesses. Sales of electricity by the U.S. Electric Operating Companies tend to increase during warmer summer months and, to a lesser extent, cooler winter months, because of higher demand for power. The sale of electricity by SEEBOARD tends to increase during colder winter months because of a higher demand for power. For additional detail related to CSW's reportable business segments, see ITEM 8-NOTE 14. BUSINESS SEGMENTS and for financial results showing CSW's seasonality, see ITEM 8-NOTE 19. QUARTERLY INFORMATION. The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance, acquisition and sale of securities, the acquisition and sale of utility assets or any interest in any business and accounting practices, including certain affiliate transactions, and other matters. See RATES AND REGULATION below, and ITEM 7. MD&A for additional information regarding the Holding Company Act. PROPOSED AEP MERGER On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28.1 billion ($16.5 billion in equity; $11.6 billion in debt and preferred stock). CSW expects the combination to be accounted for as a pooling of interests. The transaction must satisfy many conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated. 1 This combination is expected to create one of the nation's preeminent diversified electric utilities serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. Both companies have low-cost generation and offer their customers in every state prices below the national average. Over the last two years, both CSW and AEP have ranked among the top five electric utilities in customer satisfaction in the ACSI. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. AEP will issue approximately $6.6 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. Both companies anticipate continuing their current dividend policies until the close of the transaction. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW or its subsidiaries. The companies anticipate savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two workforces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Organizational and staffing recommendations will be made by transition teams of employees from both companies. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger CSW and its subsidiaries are restricted from (i) issuing shares of common stock other than pursuant to employee benefit plans, (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or funds permitted capital expenditures and (iii) incurring indebtedness other than pursuant to existing facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. The merger is conditioned, among other things, upon the approval of CSW stockholders and several state and federal regulatory agencies. AEP shareholders must authorize additional common stock and approve a new common stock issuance to be used in the exchange for CSW common stock. The companies anticipate that regulatory approvals can be obtained in 12 to 18 months from the date of announcement. However, there can be no assurance that the AEP Merger will be consummated, and if it is, the timing of such consummation or the effect of any regulatory condition that may be imposed on such consummation. See ITEM 7. MD&A and ITEM 8-NOTE 16. PROPOSED AEP MERGER. 2 U.S. ELECTRIC OPERATING COMPANIES The U.S. Electric Operating Companies are public utility companies engaged in generating, purchasing, transmitting, distributing and selling electricity. The U.S. Electric Operating Companies serve approximately 1.7 million customers in one of the largest combined service territories in the United States covering approximately 152,000 square miles in portions of Texas, Oklahoma, Louisiana and Arkansas. The customer base includes a mix of residential, commercial and diversified industrial customers. CPL and WTU operate in portions of south and central west Texas, respectively. PSO operates in portions of eastern and southwestern Oklahoma, and SWEPCO operates in portions of northeastern Texas, northwestern Louisiana and western Arkansas. Information concerning each of the U.S. Electric Operating Companies for 1997 is presented in the following table. Estimated Service Average Rural State and Estimated Territory Number of Electric Registrant Year of Population (sq. Retail Municipal Cooperatives Incorporation Served miles) Customers Customers Served - -------------------------------------------------------------------------------- CPL Texas - 1945 1,778,000 44,000 627,900 1 4 PSO Oklahoma - 1913 1,100,000 30,000 481,400 2 2 SWEPCO Delaware - 1912 943,000 25,000 415,900 3 8 WTU Texas - 1927 393,000 53,000 186,700 3 13 The largest cities in CPL's service territory are Corpus Christi, Laredo and McAllen. The economic base of CPL's service territory includes manufacturing, mining, agricultural, transportation and public utilities sectors. Major activities in these sectors include oil and gas extraction, food processing, apparel, metal refining, chemical and petroleum refining, plastics and machinery equipment. Contracts with substantially all large industrial customers provide for both demand and energy charges. Demand charges continue under such contracts even during periods of reduced industrial activity, thus mitigating the effect of reduced activity on operating income. The largest cities in PSO's service territory are Tulsa, Lawton and Bartlesville. The economic base of PSO's service territory includes petroleum products, manufacturing and agriculture. The principal industries in the territory include natural gas and oil production, oil refining, steel processing, aircraft maintenance, paper manufacturing and timber products, glass, chemicals, cement, plastics, aerospace, telecommunications and rubber goods. The largest cities in SWEPCO's service territory are Shreveport/Bossier City, Longview and Texarkana. The economic base of SWEPCO's service territory includes mining, manufacturing, chemical products, petroleum products, agriculture and tourism. The principal industries in the territory include natural gas and oil production, petroleum refining, manufacturing of pulp and paper, chemicals, food processing and metal refining. The territory also has several military installations, colleges and universities. The largest cities in WTU's service territory are Abilene and San Angelo. The economic base of WTU's service territory includes agricultural businesses, such as the production of cattle, sheep, goats, cotton, wool, mohair and feed crops. Significant gains have been made in economic diversification through value added processing of these products. The natural resources of the territory include oil, natural gas, sulfur, gypsum and ceramic clays. Important manufacturing and processing plants served by WTU produce cotton seed products, oil products, electronic equipment, precision and consumer metal products, meat products, gypsum products and carbon fiber products. The territory also has several military installations and state correctional institutions. 3 The CSW U.S. Electric System operates on an interstate basis to facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW North HVdc transmission interconnection located at Vernon, Texas. SWEPCO and CPL are interconnected through the 600 MW East HVdc transmission interconnection located at Pittsburg, Texas. CPL and WTU are members of ERCOT which operate in Texas. Other ERCOT members include Texas Utilities Electric Company, HL&P, Texas Municipal Power Agency, Texas Municipal Power Pool, Lower Colorado River Authority, the municipal systems of San Antonio, Austin and Brownsville, the South Texas and Medina Electric Cooperatives, and several other interconnected systems and cooperatives. PSO and SWEPCO are members of the SPP, which includes 18 investor-owned utilities, 11 municipalities, 11 cooperatives, 3 state and 1 federal agency as well as IPPs and power marketers operating in the states of Arkansas, Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and Texas. ERCOT members interchange power and energy with one another on a firm, economy and emergency basis, as do the members of the SPP. CSW Services performs, at cost, various accounting, engineering, tax, legal, financial, electronic data processing, centralized economic dispatching of electric power and other services for the CSW System, primarily for the U.S. Electric Operating Companies. During 1996, CSW functionally reorganized its domestic utility operations into three organizational units including power generation, energy delivery and energy services, which are centrally managed by CSW Services. The functional unbundling of CSW's vertically integrated structure was undertaken to provide a more competitive organizational structure for CSW. Certain employees moved from the U.S. Electric Operating Companies to CSW Services in connection with this functional reorganization. SEEBOARD SEEBOARD is one of the 12 regional electricity companies formed as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April 1996. SEEBOARD's principal regulated businesses are the distribution and supply of electricity. In addition SEEBOARD is engaged in other businesses, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD's service area covers approximately 3,000 square miles in Southeast England. The service area extends from the outlying areas of London to the English Channel, and includes large towns such as Kingston-upon-Thames, Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas. The area has a population of approximately 4.6 million people with significant portions of the area, such as south London, having a high population density. Over the past 25 years, the services sector of the area's economy has grown in importance, while the industrial sector has declined. Considerable commercial development has occurred in a number of towns in the area over the last ten years, in particular in the areas around Gatwick Airport and the English Channel ports. OTHER CSW BUSINESS OPERATIONS CSW continually seeks opportunities to expand its non-utility business in areas related to energy and energy services. This expansion frequently occurs through strategic domestic and international acquisitions, through marketing 4 initiatives inside and outside of the service territories of the U.S. Electric Operating Companies and through new business investments. Acquisitions of any new assets, or development of any new business opportunities, must meet defined criteria, including the potential to lower CSW System costs, increase long-term efficiency and competitiveness, and provide an acceptable return on investment to CSW. CSW Energy develops, owns and operates independent power and cogeneration facilities within the United States. Currently, CSW Energy has ownership interests in six electricity generating projects and other projects in various stages of development. CSW International engages in international activities, including developing, acquiring, financing and owning EWGs and FUCOs, either alone or with partners. C3 Communications was the first Holding Company Act registrant affiliate communications company to be granted exempt telecommunications company status. C3 Communications has two main lines of business. C3 Communications' Utility Automation Division specializes in providing automated meter reading and related services to investor owned, municipal, and cooperative electric utilities. C3 Communications offers systems to aggregate meter data from a variety of technologies and vendor products which span multiple communication mode infrastructures including broadband, wireless network, power line carrier and telephony-based systems. In January 1997, ChoiceCom was formed to offer local telephone service, long distance, and data communications services to customers in the four-state region where CSW operates, with an emphasis on the business customer market. During its first year, ChoiceCom established operations in Texas and plans to expand to the other three states under a five year business plan. EnerShop provides energy services to commercial, industrial, institutional and governmental customers in Texas. These services help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include facility analysis; project management; engineering design, equipment procurement and construction; and performance monitoring. CSW Energy Services will spearhead CSW's competitive efforts in the retail electricity markets of states outside of CSW's historical service territories. CSW Energy Services will not only attempt to secure electricity supply business in states which soon will permit retail competition, but will also extend CSW's business reach and name recognition beyond CSW's traditional customer base. In March 1998 CSW Energy Services signed its first major supply contract in California. CSW Credit was originally formed to purchase, without recourse, accounts receivable from the U.S. Electric Operating Companies to reduce working capital requirements. In addition, because CSW Credit's capital structure is more leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost of capital is lower. Subsequent to its formation, CSW Credit's business has expanded to include the purchase, without recourse, of accounts receivable from certain non-affiliated parties subject to limitations imposed by the SEC under the Holding Company Act. CSW Leasing has investments in leveraged leases. COMPETITION AND INDUSTRY CHALLENGES Competitive forces at work in the electric utility industry are affecting the CSW System and electric utilities generally. Current legislative and regulatory initiatives are likely to result in even greater competition in both the wholesale and retail markets in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to 5 seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. As a whole, the U.S. Electric Operating Companies believe that their prices for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the marketplace. In light of these changes, CSW continues to seek opportunities to expand its business operations that are not regulated by state utility commissions (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). To address the anticipated changes in the electric utility industry and to properly align its business operations with its non-regulated activities, CSW has functionally reorganized its business operations into six distinct lines of business. These business lines fall into both the regulated and non-regulated categories. In addition, given the expected deregulation of the utility industry, certain aspects of the business lines will eventually cease to be regulated. Consequently, CSW's operating structure is designed to accommodate both the current business environment as well as the future. The six business lines are: (i) electricity generation; (ii) energy delivery; (iii) energy services; (iv) international energy operations; (v) energy trading; and (vi) telecommunications. For additional information regarding competition and industry challenges, including legislative initiatives at both the state and federal level, see ITEM 7. MD&A. RATES AND REGULATION The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance of securities, certain acquisition and divestiture activities, certain affiliate transactions and other matters. The Holding Company Act generally limits the operations of a registered holding company to that of a single integrated public utility system, plus such additional businesses as are functionally related to such system. The U.S. Electric Operating Companies have been classified as public utilities under the Federal Power Act. Accordingly, the FERC has jurisdiction, in certain respects, over their electric utility facilities and operations, wholesale rates, and certain other matters. The U.S. Electric Operating Companies are subject to the jurisdiction of various state commissions as to retail rates, accounting matters, standards of service and, in some cases, issuances of securities, certification of facilities and extensions or divisions of service territories. Franchises The U.S. Electric Operating Companies hold franchises to provide electric service in various municipalities within their service areas. These franchises have varying provisions and expiration dates including, in some cases, termination and buy-out provisions. CSW considers the U.S. Electric Operating Companies' franchises to be adequate for the conduct of their business. Texas Rates - CPL, SWEPCO and WTU The Texas Commission has original jurisdiction over retail rates in the unincorporated areas of Texas. The governing bodies of incorporated municipalities have original jurisdiction over rates within their incorporated limits. Municipalities may elect, and some have elected, to surrender this original jurisdiction to the Texas Commission. The Texas Commission has appellate jurisdiction over rates set by incorporated municipalities. 6 In Texas, electric service areas are approved by the Texas Commission. A given tract in a utility's overall service area may be certificated to one utility, to one of several competing electric cooperatives or investor owned utilities, to one of the competing municipal electric systems, or it may be certificated to two or more of these entities. The Texas Commission has changed these certificated areas only slightly since 1976. Oklahoma Rates - PSO PSO is subject to the jurisdiction of the Oklahoma Commission with respect to retail prices. Pursuant to authority granted under RESCTA, the Oklahoma Commission established service territorial boundary maps in all unincorporated areas for all regulated retail electric suppliers serving Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend retail electric service into the certified territory of another supplier, except to serve its own facilities or to serve a new customer with an initial full load of 1,000 KW or more. RESCTA provides that when any territory certified to a retail electric supplier or suppliers is annexed and becomes part of an incorporated city or town, the certification becomes null and void. However, once established in the annexed territory, a supplier may generally continue to serve within the annexed area. Arkansas and Louisiana Rates - SWEPCO SWEPCO is subject to the jurisdiction of the Arkansas Commission and Louisiana Commission with respect to retail rates, as well as the Texas Commission as described above. SEEBOARD Rates/Franchise The distribution and supply businesses of SEEBOARD are principally regulated by the Electricity Act of 1989 and by the conditions contained in SEEBOARD's public electricity supply license. The public electricity supply license generally continues until at least 2025, although it may be revoked upon 25 years prior notice after 2000. In addition, the public electricity supply license may be revoked by the United Kingdom's Secretary of State in certain specified circumstances. At the end of 1997, SEEBOARD had the sole right to supply substantially all of the consumers in its authorized area, except where demand exceeds 100 KW. However, beginning September 1, 1998, on a phased-in basis, the regional electricity companies' supply businesses, including SEEBOARD's, will no longer be protected by a franchise. The original April 1, 1998 start up date to full competition was delayed due to information technology issues. Most of the income of the distribution business is regulated by a formula set by the DGES based upon, among other factors, the United Kingdom Retail Price Index. The formula generally sets a cap on the average price per unit of electricity distributed, with allowed annual increases based upon changes in the United Kingdom Retail Price Index plus a percentage factor set from time to time by the DGES. The DGES is not scheduled to review the allowed distribution charges for the regional electricity companies, including SEEBOARD, until 2000, although the DGES may reopen the review before such time under certain circumstances. The prices charged by SEEBOARD in its franchise supply business are also determined from a formula set from time to time by the DGES. The formula generally provides for the pass through to customers of certain costs incurred by SEEBOARD in supplying the electricity, which includes electricity purchase costs, transmission charges, and distribution costs, together with an allowed margin as determined by the DGES. All holders of a second-tier license, including SEEBOARD, who supply electricity to non-franchise customers (i.e., demand of 100 KW or above) must pay charges to the host regional electricity company for the use of its distribution network. 7 Nuclear Regulation - CPL Ownership of an interest in a nuclear generating unit exposes CPL and, indirectly, CSW to regulation not common to a fossil fuel generating unit. Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, operation of nuclear plants is intensively regulated by the NRC, which has broad power to impose licensing and safety-related requirements. Along with other federal and state agencies, the NRC also has extensive regulations pertaining to the environmental aspects of nuclear reactors. The NRC has the authority to impose fines and/or shut down a unit until compliance is achieved, depending upon its assessment of the severity of the situation. For additional information regarding STP, see ITEM 7. MD&A. Environmental Regulation For a discussion of regulation by the various environmental agencies that applies to the CSW System, see ENVIRONMENTAL MATTERS below. FUEL RECOVERY The recovery of fuel costs from retail customers by the U.S. Electric Operating Companies is subject to regulation by the state utility commissions in the states in which they operate. All of the U.S. Electric Operating Companies' contracts with their wholesale customers contain FERC approved fuel-adjustment provisions for recovery of fuel costs. Texas Fuel Recovery - CPL, SWEPCO and WTU Electric utilities in Texas, including CPL, SWEPCO and WTU, are not allowed to make automatic adjustments to recover changes in fuel costs from retail customers. A utility is allowed to recover its known or reasonably predictable fuel costs through a fixed fuel factor. The Texas Commission established procedures whereby each utility under its jurisdiction may petition to revise its fuel factor every six months according to a specified schedule. Fuel factors may also be revised in the case of emergencies or in a general rate proceeding. Fuel factors are in the nature of temporary rates and the utility's collection of revenues by such factors is subject to adjustment at the time of a fuel reconciliation. Under these procedures, at its semi-annual adjustment date, a utility is required to petition the Texas Commission for a surcharge or to make a refund when it has materially under- or over-collected its fuel costs and projects that it will continue to materially under- or over-collect. Material under- or over-collections including interest are defined as variances of four percent or more of the most recent Texas Commission adopted annual estimated fuel cost for the utility. A utility does not have to revise its fuel factor when requesting a surcharge or refund. An interim emergency fuel factor order must be issued by the Texas Commission within 30 days after such petition is filed by the utility. Final reconciliation of fuel costs is made through a reconciliation proceeding, which may contain a maximum of three years and a minimum of one year of reconcilable data, and must be filed with the Texas Commission no later than six months after the end of the period to be reconciled. In addition, a utility must include a reconciliation of fuel costs in any general rate proceeding regardless of the time since its last fuel reconciliation proceeding. Any fuel costs that are determined to be unreasonable in a reconciliation proceeding are not recoverable from retail customers. Oklahoma Fuel Recovery - PSO In general, MWH sales to PSO's retail customers are made at rates which include a service level fuel cost adjustment factor reflecting the difference between projected fuel and purchased power costs and the fuel rate embedded in PSO's base rates. The factors are determined semi-annually and are based upon projected fuel, natural gas transportation, and purchased power costs. Any difference between projected and actual costs is included in the fuel recovery calculation for future periods. Oklahoma law requires that an examination of 8 PSO's retail fuel cost adjustment factor be performed annually by the Oklahoma Commission which approves the utility's embedded fuel rate per KWH. Arkansas and Louisiana Fuel Recovery - SWEPCO SWEPCO's retail rates currently in effect in Louisiana are adjusted based on SWEPCO's cost of fuel in accordance with a fuel cost adjustment which is applied to each billing month based on the second previous month's average cost of fuel. Provision for any over- or under-recovery of fuel costs is allowed under an automatic fuel clause. Under SWEPCO's fuel adjustment rider currently in effect in Arkansas, the fuel cost adjustment is applied to each billing month on a basis which permits SWEPCO to recover the level of fuel cost experienced two months earlier. SWEPCO's fuel recovery mechanisms are subject to the jurisdiction of the Arkansas Commission and the Louisiana Commission. Recoverability of Fuel Costs Under current regulation, the U.S. Electric Operating Companies recover all their material fuel costs from their customers. The inability of any U.S. Electric Operating Company to recover its fuel costs under the procedures described above could have a material adverse effect on such company's results of operations and financial condition. See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for further information with respect to regulatory, rate and fuel proceedings. FUEL SUPPLY AND PURCHASED POWER The U.S. Electric Operating Companies' present net dependable summer rating power generation capabilities and the type of fuel used are set forth in ITEM 2. PROPERTIES. Information concerning energy sources and cost data for the years 1995 through 1997 is presented in the following tables. In addition, detailed fuel cost and consumption information for 1997 is also presented. 1997 1996 1995 -------------------- CSW Source of Energy (based on MW) Natural Gas 36% 36% 43% Coal 41 39 33 Lignite 9 9 9 Nuclear 7 8 7 Other -- 1 -- -------------------- Total Generated 93 93 92 Purchased Power 7 7 8 -------------------- Total 100% 100% 100% -------------------- Fuel cost data Average Btu per net KWH 10,405 10,440 10,299 Cost per MMBtu $1.83 $1.81 $1.58 Cost per KWH generated 1.90 1.89 1.63 cents cents cents Cost, including purchased power, as a percentage of revenue 38.1% 37.4% 35.0% 9 1997 1996 1995 -------------------- CPL Source of Energy (based on MW) Natural Gas 50% 42% 51% Coal 18 22 20 Nuclear 22 22 23 -------------------- Total Generated 90 86 94 Purchased Power 10 14 6 -------------------- Total 100% 100% 100% -------------------- Fuel cost data Average Btu per net KWH 10,386 10,391 10,175 Cost per MMBtu $1.83 $1.62 $1.37 Cost per KWH generated 1.90 1.68 1.39 cents cents cents Cost, including purchased power, as a percentage of revenue 32.9% 30.8% 28.7% PSO Source of Energy (based on MW) Natural Gas 39% 43% 56% Coal 48 46 37 -------------------- Total Generated 87 89 93 Purchased Power 13 11 7 -------------------- Total 100% 100% 100% -------------------- Fuel cost data Average Btu per net KWH 10,264 10,225 10,151 Cost per MMBtu $1.98 $2.04 $1.73 Cost per KWH generated 2.03 2.09 1.75 cents cents cents Cost, including purchased power, as a percentage of revenue 46.4% 45.1% 43.0% SWEPCO Source of Energy (based on MW) Natural Gas 12% 15% 18% Coal 52 45 45 Lignite 26 26 27 Other -- 4 -- -------------------- Total Generated 90 90 90 Purchased Power 10 10 10 -------------------- Total 100% 100% 100% -------------------- Fuel cost data Average Btu per net KWH 10,554 10,606 10,531 Cost per MMBtu $1.69 $1.76 $1.61 Cost per KWH generated 1.79 1.87 1.70 cents cents cents Cost, including purchased power, as a percentage of revenue 43.4% 45.1% 40.3% 10 1997 1996 1995 -------------------- WTU Source of Energy (based on MW) Natural Gas 37% 46% 58% Coal 36 35 32 -------------------- Total Generated 73 81 90 Purchased Power 27 19 10 -------------------- Total 100% 100% 100% -------------------- Fuel cost data Average Btu per net KWH 10,275 10,568 10,370 Cost per MMBtu $1.98 $2.01 $1.83 Cost per KWH generated 2.03 2.12 1.90 cents cents cents Cost, including purchased power, as a percentage of revenue 42.6% 43.5% 42.1% 1997 Fuel Type Cost 1997 Consumption per MMbtu (millions) - ------------------------------------------------ MMbtus Mcfs Tons CSW Natural gas $2.67 254 249 Coal 1.45 280 16 Lignite 1.19 65 5 Nuclear 0.51 52 Composite 1.83 CPL Natural gas $2.53 124 121 Coal 1.38 41 2 Nuclear 0.51 52 Composite 1.83 PSO Natural gas $2.89 67 65 Coal 1.22 81 4 Composite 1.98 SWEPCO Natural gas $2.65 32 32 Coal 1.69 129 8 Lignite 1.19 65 5 Composite 1.69 WTU Natural gas $2.81 31 31 Coal 1.09 29 2 Composite 1.98 Natural Gas The U.S. Electric Operating Companies purchase their natural gas from a number of suppliers operating in and around their service territories. In 1997, approximately 36% of the U.S. Electric Operating Companies' total natural gas purchases were made under long-term contracts and approximately 64% came from short-term contracts and spot market purchases. 11 CPL CPL's eight gas-fired electric generating plants are supplied by a portfolio of long-term and short-term natural gas purchase agreements through multiple natural gas pipeline systems. Approximately 48% of CPL's total natural gas requirements in 1997 were purchased under long-term arrangements representing both purchase obligations and discretionary purchases. The balance of CPL's natural gas requirements was acquired under short-term arrangements from the spot market. PSO PSO's six gas-fired electric generating plants are supplied by a portfolio of long-term and short-term natural gas purchase agreements. In 1997, approximately 37% of PSO's natural gas requirements were provided under firm contracts with the remaining requirements acquired from the spot market. In order to comply with an Oklahoma Commission order issued in 1991, PSO has contracted with two pipeline suppliers to connect to four of the natural gas-fired generating units. Duke Energy Field Services, Inc. is now connected to Riverside Power Station, and ONEOK Gas Marketing Company is connected to Riverside Power Station, Northeastern Power Station, Southwestern Power Station and Tulsa Power Station. Transok, a former affiliate, is still connected to all six plants. These additional connections will give PSO greater access to competitive supplies. SWEPCO SWEPCO purchased approximately 97% of its natural gas requirements in 1997 pursuant to spot purchase contracts. Since SWEPCO's five gas-fired electric generating plants are used primarily for peaking requirements, a majority of SWEPCO's natural gas requirements will continue to be purchased on the spot market and will be subject to market conditions. WTU WTU purchases its natural gas requirements from numerous suppliers. The long-term purchase contract with Lone Star Gas Company was renegotiated into a long-term transportation agreement with Lone Star Pipeline Company during the latter part of 1997. This new agreement will allow WTU to buy natural gas from alternative suppliers. In 1997, WTU purchased approximately 22% of its natural gas requirements under firm contracts with Lone Star Gas Company, and the remaining 78% was purchased from a number of suppliers on the spot market. Coal and Lignite The U.S. Electric Operating Companies purchase coal from a number of suppliers. In 1997, the U.S. Electric Operating Companies purchased approximately 86% of their total coal purchases under long-term contracts with the balance procured on the spot market. The coal for the CSW U.S. Electric System plants comes primarily from Wyoming and Colorado mines which are located between 1,000 and 1,700 rail miles from the generating plants. Oklaunion - CPL, PSO and WTU The jointly-owned Oklaunion plant purchases coal under a coal supply contract with Caballo Coal Company which accounts for approximately 68% of the total 1997 Oklaunion coal requirements for WTU, 68% for CPL and 69% for PSO with the balance procured on the spot market. As of December 31, 1997, CPL's share of the year-end 1997 coal inventory at Oklaunion was approximately 22,000 tons, representing a 29-day supply. PSO's share was approximately 41,000 tons, representing a 27-day supply. WTU's share was approximately 178,000 tons, representing a 33-day supply. 12 Burlington Northern supplies railcars to Oklaunion for the transportation of coal pursuant to a tariff filed with the Interstate Commerce Commission, whose authority in the matter was transferred to the STB effective January 1, 1996. In a decision issued May 3, 1996, the STB declared the rate set forth in Burlington Northern's tariff of $19.36 per ton to be unreasonably high and imposed a maximum rate of $13.68 per ton. On July 2, 1996, Burlington Northern established the new rate for the transportation of coal to Oklaunion. Burlington Northern appealed the May 3, 1996 decision and a related June 25, 1996 decision to the U.S. Court of Appeals for the District of Columbia Circuit. On May 23, 1997, the STB decisions were upheld. Subsequently, on October 24, 1997, the STB ordered Burlington Northern to pay reparations, including interest, to WTU on or before November 24, 1997. On November 24, 1997, Burlington Northern paid WTU approximately $12.4 million. WTU's share of this amount was $7 million; PSO's share was $1.9 million; CPL's share was approximately $1 million, and the outside participants' share was $2.5 million. WTU, CPL and PSO each credited its respective fuel expense in November 1997 for the refund amounts. Coleto Creek - CPL CPL has a long-term coal supply agreement with Colowyo Coal Company covering approximately 25% of the coal requirements of its Coleto Creek plant. During 1997, this agreement was suspended and replaced with an agreement pursuant to which both coal and coal transportation, using CPL-owned railcars, were provided by Colowyo Coal Company, which, in turn, entered into transportation agreements with Southern Pacific Transportation Company. Approximately 83% of Coleto Creek's deliveries were furnished under this agreement. The balance of the plant's coal deliveries resulted from spot purchases of Powder River Basin coal that was delivered under spot rail transportation agreements. Additionally, approximately 26,000 tons of coal were purchased from a supplier in Columbia and transported via ship to the Port of Corpus Christi where it was then transferred by train to the plant. At December 31, 1997, CPL had approximately 144,000 tons of coal in inventory at Coleto Creek, representing a 21-day supply. During 1998, CPL intends to purchase Powder River Basin coal on the spot market for approximately 50% of the Coleto Creek plant requirements and will transport such coal pursuant to a rail transportation agreement with Union Pacific. The remainder of CPL's coal will be purchased from the Colowyo Coal Company. This coal will also be transported by Union Pacific. As a result of the recent merger between Union Pacific and the Southern Pacific Transportation Company, Union Pacific is currently the only rail carrier with access to the Coleto Creek Plant. In 1994, CPL instituted a proceeding at the Interstate Commerce Commission requesting a reasonable rate for the 16 miles transported from Victoria, Texas to Coleto Creek. Southern Pacific Transportation Company moved to dismiss the complaint and, in a decision issued December 31, 1996, the STB granted the motion. CPL has appealed this decision to the U.S. Court of Appeals for the Eighth Circuit. Northeastern Station - PSO PSO has a contract with Kerr-McGee Coal Corporation, which substantially covers the coal supply for PSO's Northeastern Station coal units through at least 2004. Coal delivery is by unit trains from mines located in the Gillette, Wyoming vicinity, a distance of about 1,100 rail miles from Northeastern Station. PSO owns sufficient railcars for operation of six unit trains. Coal is transported to Northeastern Station pursuant to a long-term contract with Burlington Northern. The plant is also equipped to accept deliveries from Union Pacific. At December 31, 1997, PSO had approximately 269,000 tons of coal in inventory at Northeastern Station representing a 22-day supply. Welsh and Flint Creek - SWEPCO The long-term coal supply for SWEPCO's Welsh plant and its 50% owned Flint Creek plant is provided under a contract with Cyprus/Amax. Coal under this contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100 13 miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to the plants under rail transportation contracts with Burlington Northern and the Kansas City Southern Railroad Company having expiration dates ranging between 1997 and 2007. SWEPCO owns or leases under long-term leases sufficient railcars and spares for operation of fifteen unit trains. SWEPCO has supplemented its railcar fleet from time to time with short-term leases. At December 31, 1997, SWEPCO had coal inventories of approximately 502,000 tons at Welsh representing a 25-day supply and approximately 179,000 tons at Flint Creek representing a 24-day supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional information. Pirkey and Dolet Hills - SWEPCO SWEPCO has acquired lignite leases covering an aggregate of about 27,000 acres near the Henry W. Pirkey power plant. Sabine Mining Company is the contract miner of these reserves. At December 31, 1997, approximately 231,000 tons of lignite were in SWEPCO's inventory at the Pirkey plant representing a 19-day supply. Another 25,000 acres are jointly leased in equal portions by SWEPCO and CLECO in the Dolet Hills area of Louisiana near Dolet Hills Power Plant. The DHMV is the contract miner for these reserves. At December 31, 1997, SWEPCO had 161,000 tons of lignite in inventory at the Dolet Hills plant representing a 28-day supply. In the opinion of the management of SWEPCO, the acreage under lease in these areas contains sufficient reserves to cover the anticipated lignite requirements for the estimated useful lives of the lignite-fired plants. Nuclear Fuel - CPL The supply of fuel for STP involves a complex process. This process includes the acquisition of uranium concentrate, the conversion of uranium concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride into the isotope U235, the fabrication of the enriched uranium into fuel rods and incorporation of fuel rods into fuel assemblies. The fuel assemblies are the final product loaded into the reactor core. The time associated with this process requires that fuel decisions be made years in advance of the actual need to refuel the reactor. Fuel requirements for STP are being handled by the STPNOC. Outages are necessary approximately every 18 months for refueling. Because STP's fuel costs are significantly lower than any of the other CPL units, CPL's average fuel costs are expected to be higher whenever an STP unit is down for refueling or maintenance. CPL and the other STP participants have entered into contracts with suppliers for 100% of the uranium concentrate sufficient for the operation of both STP units through April 2001, with additional flexible contracts to provide 69% of the uranium concentrate needed for STP through 2002. In addition, CPL and the other STP participants have entered into contracts with suppliers for 100% of the nuclear fuel conversion service sufficient for the operation of both STP units through November 1998, with additional flexible contracts to provide at least 50% of the conversion service needed for STP through 2002. Enrichment contracts were secured for a 30-year period from the initial operation of each unit. The STP participants have canceled the enrichment requirements for the period from October 2000 to September 2007 under a ten-year no-cost termination provision of the enrichment contracts. The STP participants believe that other, lower cost options will be available in the future. CPL and the other STP participants have entered into additional flexible contracts to provide enrichment service from October 2000 to December 2004. Also, nuclear fuel fabrication services have been contracted for operation through 2005 for Unit 1 and 2006 for Unit 2. Although CPL and the other STP owners cannot predict the availability of uranium and related services, CPL and the other STP owners do not currently expect to have difficulty obtaining uranium and related services required for the remaining years of STP operation. 14 The Energy Policy Act has provisions for the recovery of a portion of the costs associated with the decommissioning and decontamination of the gaseous diffusion plants used in the enrichment process. These costs are being recovered on the basis of enrichment services purchased by utilities from the DOE prior to October of 1992. The total annual assessment for all domestic utilities is limited to $150 million per federal fiscal year and assessable until October 2007. The STP assessment will be approximately $2.0 million each year with CPL's share being 25.2% of the annual STP assessment. The Nuclear Waste Policy Act of 1982, as amended, requires the DOE to develop a permanent high level waste disposal facility for the storage of spent nuclear fuel by 1998. The DOE last estimated that the permanent facility will be available in 2010. The DOE will take possession of all spent fuel generated at STP as a result of a contract CPL and other STP participants have entered into with the DOE. STP has on-site storage facilities with the capability to store all the spent nuclear fuel generated by the STP units over their lives. Therefore, the DOE delay in providing the disposal facility will not impact the operation of the STP units. Under provisions of the Nuclear Waste Policy Act of 1992, a one-mill per KWH assessment on electricity generated and sold from nuclear reactors funds the DOE waste disposal program. Risks of substantial liability could arise from the operation of STP and from the use, handling, disposal and possible radioactive emissions associated with nuclear fuel. While CPL carries insurance, the availability, amount and coverage thereof is limited and may become more limited in the future. The available insurance may not cover all types or amounts of loss or expense which may be experienced in connection with the ownership of STP. See ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for information relating to nuclear insurance. Governmental Regulation The price and availability of each of the foregoing fuel types are significantly affected by governmental regulation. Any inability in the future to obtain adequate fuel supplies or adoption of additional regulatory measures restricting the use of such fuels for the generation of electricity might affect the CSW U.S. Electric System's ability to economically meet the needs of its customers and could require the U.S. Electric Operating Companies to supplement or replace, prior to normal retirement, existing generating capability with units using other fuels. This would be impossible to accomplish quickly, would require substantial additional expenditures for construction and could have a significant adverse effect on CSW's and/or the U.S. Electric Operating Companies' financial condition and results of operations. The Registrants are unable to predict the future cost of fuel (The foregoing statements constitute forward looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information concerning fuel costs. Power Purchases and Sales The U.S. Electric Operating Companies serve various municipalities, electric cooperatives and public power authorities. The U.S. Electric Operating Companies exchange power with various neighboring electric systems and engage in electric interchanges with each other. In addition, they contract with certain suppliers including power marketers and independent power producers for the purchase or sale of capacity, firm energy, responsive reserves and other wholesale services. 15 CPL - Magic Valley Electric Cooperative CPL's largest wholesale customer, Magic Valley Electric Cooperative, is currently served under an agreement that requires a five year notice of termination. During 1996, the cooperative exercised such notice of termination. Magic Valley Electric Cooperative's contract will expire July 23, 2001. During 1997, Magic Valley Electric Cooperative purchased 755 million KWHs from CPL which represents 43% of CPL's sales for resale but only 3% of CPL's total sales. WTU - Weatherford and Hearne WTU began wholesale service to a new customer, the City of Weatherford, Texas, in January 1997. Service to the City of Weatherford for its load of approximately 55 MW will continue through the year 2001. WTU will begin wholesale service to a new customer, the City of Hearne, Texas, in April 1998. Service to the City of Hearne for its load of approximately 12 MW will continue through March 2003. ENVIRONMENTAL MATTERS The CSW System is subject to regulation with respect to air and water quality, solid waste standards and other environmental matters by various governmental authorities. These authorities have continuing jurisdiction in most cases to require modifications in facilities and operations. Any such changes in environmental statutes or regulations could require substantial additional expenditures to modify the CSW System's facilities and operations and could have a material adverse effect on CSW and each of the U.S. Electric Operating Companies' results of operations and financial condition. Violations of environmental statutes or regulations can result in fines and other costs. Air Quality Air quality standards and emission limitations are subject to the jurisdiction of state regulatory authorities in each state in which the CSW System operates, with oversight by the EPA. In accordance with regulations of these state authorities, permits are required for all generating units on which construction is commenced or which are substantially modified after the effective date of the applicable regulations. In 1990, the U.S. Congress amended the Clean Air Act. CAAA places restrictions on the emission of sulfur dioxide from gas-, coal- and lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric Operating Companies will be required to hold allowances in order to emit sulfur dioxide. The EPA issues allowances to owners of existing generating units based on historical operating conditions. Based on the CSW U.S. Electric System facilities plan, CSW believes that the U.S. Electric Operating Companies' allowances are adequate to meet their needs at least through 2008. Public and private markets are developing for trading of excess allowances. As a result of requirements imposed by the CAAA, CSW spent approximately $16 million over the three year period from 1995 to 1997 for annual testing of, software modifications to, and maintenance of continuous emission monitoring equipment. Approximately $0.6 million of this amount was spent in 1997. Similarly, the expenditures for each of the U.S. Electric Operating Companies are presented in the following table. 16 CPL PSO SWEPCO WTU ------------------------------- (thousands) Total expenditures (1995-1997) $530 $310 $469 $295 Expenditures in 1997 194 100 166 102 The CAAA also directed the EPA to issue regulations governing nitrogen oxide emissions and requiring government studies to determine what controls, if any, should be imposed on utilities to control toxic air emissions. The acid rain rules have not been released. Accordingly, the impact on CSW and the U.S. Electric Operating Companies cannot be determined at this time. Under the Acid Rain Title IV rules of the CAAA for nitrogen oxide control for coal units, the U.S. Electric Operating Companies have elected alternate standards for their units under an optional provision regarding emission limits. This will eliminate any capital expenses through 2007, if the alternate standards are met. Approximately $150,000 was expended in 1997 towards optimizing nitrogen oxide emissions at the coal units to safeguard against exceeding those limits. There is a legislative initiative in Texas to have older units, which were grandfathered under the CAAA, operate under permits and reduce emissions. Based upon reduction levels being discussed, the U.S. Electric Operating Companies' cost could be approximately $131 million. The time frame has not been established for these controls. The issue will be considered in the 1999 Texas legislative session. The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission levels for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. At the Kyoto Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating companies could be affected if this treaty is approved by Congress in its present form. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. Water Quality Water quality is subject to the jurisdiction of each of the state regulatory authorities in which the U.S. Electric Operating Companies operate as well as the EPA. These authorities have jurisdiction over all wastewater discharges into state waters, establish water quality standards and issue waste control permits covering discharges which might affect the quality of state waters. The EPA has jurisdiction over point source discharges through the National Pollutant Discharge Elimination System provisions of the Clean Water Act. RCRA and CERCLA The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules provide for comprehensive control of all solid wastes from generation to final disposal. The appropriate state regulatory authorities in the states in which the U.S. Electric Operating Companies operate have received authorization from the EPA to administer the RCRA solid waste control program for their respective states. 17 The operations of the U.S. Electric Operating Companies, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Theoretically, any one PRP can be held responsible for the entire cost of a cleanup. Typically, however, cleanup costs are allocated among PRPs. CSW's subsidiaries incur significant costs for the handling, transportation, storage and disposal of hazardous and non-hazardous waste materials. Unit costs for waste classified as hazardous exceed by a substantial margin unit costs for waste classified as non-hazardous. The U.S. Electric Operating Companies, like other electric utilities, produce combustion and other generation by-products, such as ash, sludge, slag, low-level radioactive waste and spent nuclear fuel. The U.S. Electric Operating Companies own distribution poles treated with creosote or other substances. The EPA currently exempts coal combustion by-products from regulation as hazardous wastes. Distribution poles treated with creosote or other substances are not expected to exhibit characteristics that would cause them to be hazardous waste. In connection with their operations, the U.S. Electric Operating Companies also have used asbestos, PCBs and materials classified as hazardous waste. If additional by-products or other materials generated or used by companies in the CSW U.S. Electric System were reclassified as hazardous wastes, or other new laws or regulations concerning hazardous wastes were put into effect, CSW System disposal and remedial costs could increase materially. The EPA is expected to issue new regulations stating whether certain other materials will be classified as hazardous. SEEBOARD SEEBOARD's operations are subject to regulation with respect to water quality standards and other environmental matters by various authorities within the United Kingdom. Under certain circumstances, these authorities may require modifications to SEEBOARD's facilities and operations or impose fines and other costs for violations of applicable statutes and regulations. From time to time SEEBOARD is made aware of various environmental issues or is named as a party to various legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on CSW's consolidated results of operations or financial condition. PSO Sand Springs/Grandfield, Oklahoma Sites In 1989, PSO found some PCB contamination in a Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to comply with provisions of the Toxic Substances Control Act. The complaint has three counts, two of which pertain to the Sand Springs facility and the third of which deals with a substation in Grandfield, Oklahoma. The EPA alleges improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual cleanup at the site. The complaint at the Grandfield site alleges failure to date PCB articles at the site. The total proposed penalty for the three counts, which was accrued by PSO in 1996, was $479,000. PSO settled all claims in the suit in March, 1998. The settlement did not have a material adverse effect on CSW's or PSO's results of operations or financial condition. PSO Compass Industries Superfund Site PSO has received notice from the EPA that it is a PRP under CERCLA and may be required to share in the reimbursement of cleanup costs for the Compass Industries Superfund site which has been remediated. PSO has been named 18 defendant in a lawsuit filed in Federal District Court in Tulsa, Oklahoma on August 29, 1994, for reimbursement of the cleanup costs. PSO's degree of responsibility, if any, is believed to be insignificant, and management expects that PSO will have an opportunity to pay its share of costs and remove itself from the case. Accordingly, in 1995, PSO accrued $100,000 for this matter. On March 19, 1996, a district judge ruled in favor of the defendants and determined that the plaintiffs do not have a cause of action under CERCLA. The plaintiffs may have a claim to funds expended after August 29, 1991. This greatly reduces PSO's exposure since most of the remediation was completed prior to this date. In October, 1996, the plaintiffs appealed this ruling, and PSO is awaiting the outcome of this matter. SWEPCO Biloxi, Mississippi MGP Site SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as on the subsequent sampling of the site. The sampling results indicated contamination at the property as well as the possibility of contamination of an adjacent property. A risk assessment was submitted to the MDEQ, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to a residential scenario is appropriate since this site has been industrial/commercial for more than 100 years, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. The MDEQ has not agreed to a non-residential future land use scenario and has requested further testing. Following the additional testing and resolution of whether cleanup must meet a residential usage scenario or a commercial/industrial scenario, a feasibility study will be conducted to more definitively evaluate remedial strategies for the property. The feasibility study process will require public input prior to a final decision being made. At the present time, SWEPCO has not had any further substantive discussions with MDEQ regarding the ultimate resolution of this issue. Therefore, a final range of cleanup costs is not yet determinable. SWEPCO has incurred approximately $200,000 to date for its portion of the cleanup of this site, and based on its preliminary estimates, anticipates that an additional $2 million may be incurred. Accordingly, SWEPCO has accrued $2 million for the cleanup of the site. SWEPCO Voda Petroleum Superfund Site In April 1996, SWEPCO received correspondence from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records review to compile documentation relating to SWEPCO's past use of the Voda Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost approximately $2 million and to take approximately twelve months to complete. An option for over 30 PRPs to conduct the cleanup in lieu of the EPA conducting the cleanup is under consideration. Any SWEPCO liability associated with this project is not expected to have a material adverse effect on its results of operations or financial condition. EMFs Research is ongoing whether exposure to EMFs may result in adverse health effects. Although earlier studies suggested a correlation between EMFs and some types of effects, the research to date has not established a cause-and-effect 19 relationship between EMFs and adverse health effects from electric lines. Recently, more comprehensive studies have failed to show any correlation. CSW cannot predict the impact on CSW or the electric utility industry if further investigations or proceedings were to establish that the present electricity delivery system is contributing to increased risk or incidence of health problems. Other Environmental Matters From time to time the Registrants are made aware of various other environmental issues or are named as parties to various other legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on CSW's or any of the U.S. Electric Operating Companies' results of operations or financial condition. See ITEM 7. MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional information relating to environmental matters. 20 OPERATING INFORMATION - U.S. ELECTRIC OPERATING COMPANIES CSW (excludes SEEBOARD) 1997 1996 1995 ------------------------ Kilowatt-hour sales (millions) Residential 17,995 17,883 16,872 Commercial 14,546 14,256 13,755 Industrial 21,087 20,266 19,321 Other retail 1,705 1,592 1,518 ------------------------ Sales to retail customers 55,333 53,997 51,466 Sales for resale 7,824 8,428 8,468 ------------------------ Total 63,157 62,425 59,934 ------------------------ Average number of electric customers (thousands) Residential 1,462 1,443 1,425 Commercial 214 210 206 Industrial 23 24 24 Other 13 13 13 ----------------------- Total 1,712 1,690 1,668 ----------------------- Revenue per KWH (cents) Residential 6.96 6.95 6.75 Commercial 6.13 6.12 5.89 Industrial 3.85 3.85 3.63 Sales for Resale 3.11 3.03 2.65 Peak Load and Capability Net system capability (MW) (1) 14,290 14,377 14,168 Maximum coincident system demand (MW) 13,105 12,613 12,314 Percentage increase in peak demand over prior period 3.9% 2.4% 7.7% Generation at time of peak (MW) 12,817 11,625 12,053 Percent of peak demand generated 97.8% 92.2% 97.9% Net purchases at time of peak (MW) 288 988 261 Percent of net purchases at time of peak 2.2% 7.8% 2.1% Date of maximum coincidentsystem demand July 28 July 22 July 28 The preceding table sets forth (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand, (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1)Does not include 310 MW of system capability in storage and 156 MW of system capability in 1997 as described in ITEM 2. PROPERTIES, 358 MW of system capability in storage in 1996, 392 MW of system capability in storage in 1995 and 54 MW of SWEPCO capability in 1995 that was not available at the peak due to fuel procurement issues. 21 CPL 1997 1996 1995 ------------------------ Kilowatt-hour sales (millions) Residential 6,771 6,680 6,223 Commercial 4,846 4,773 4,656 Industrial 7,999 7,610 7,250 Other retail 486 499 465 ------------------------ Sales to retail customers 20,102 19,562 18,594 Sales for resale 1,737 2,029 1,680 ------------------------ Total 21,839 21,591 20,274 ------------------------ Average number of electric customers Residential 538,700 536,500 526,900 Commercial 79,700 78,900 77,700 Industrial 5,600 5,700 5,700 Other 3,900 3,900 3,600 ------------------------ Total 627,900 625,000 613,900 ------------------------ Revenue per KWH (cents) Residential 7.99 7.92 7.48 Commercial 8.26 8.13 7.63 Industrial 4.13 4.05 3.53 Sales for resale 4.06 3.56 3.10 Peak Load and Capability Net system capability (MW) (1) 4,319 4,380 4,200 Maximum coincident system demand (MW) 4,232 4,046 3,862 Percentage increase in peak demand over prior period 4.6% 4.8% 3.5% Generation at time of peak (MW) 4,227 3,484 3,846 Percent of peak demand generated 99.9% 86.1% 99.6% Net purchases at time of peak (MW) 5 562 16 Percent of net purchases at time of peak 0.1% 13.9% 0.4% Date of maximum coincident system demand August 20 August 13 July 26 The preceding table sets forth (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand, (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1)Does not include 60 MW of system capability in storage in 1997 as described in ITEM 2. PROPERTIES, 108 MW of system capability in storage in 1996 and 142 MW of system capability in storage in 1995. 22 PSO 1997 1996 1995 ------------------------ Kilowatt-hour sales (millions) Residential 5,054 5,098 4,753 Commercial 4,698 4,621 4,427 Industrial 4,714 4,581 4,307 Other retail 192 81 80 ------------------------ Sales to retail customers 14,658 14,381 13,567 Sales for resale 958 1,487 1,617 ------------------------ Total 15,616 15,868 15,184 ------------------------ Average number of electric customers Residential 419,600 414,800 411,000 Commercial 55,300 54,400 53,800 Industrial 5,100 5,200 5,200 Other 1,400 1,400 1,400 ------------------------ Total 481,400 475,800 471,400 ------------------------ Revenue per KWH (cents) Residential 5.88 5.89 5.89 Commercial 4.82 4.80 4.76 Industrial 3.44 3.45 3.43 Sales for Resale 3.23 2.64 2.12 Peak Load and Capability Net system capability (MW) (1) 3,882 3,848 3,759 Maximum coincident system demand (MW) 3,474 3,360 3,292 Percentage increase in peak demand over prior period 3.4% 2.1% 3.9% Generation at time of peak (MW) 3,376 3,009 3,025 Percent of peak demand generated 97.2% 89.6% 91.9% Net purchases at time of peak (MW) 98 351 267 Percent of net purchases at time of peak 2.8% 10.4% 8.1% Date of maximum coincident system demand July 28 August 7 August 28 The preceding table sets forth (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand, (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1)Does not include 250 MW of system capability in storage in 1997 as described in ITEM 2. PROPERTIES, and 250 MW of system capability in storage in 1996 and 1995. 23 SWEPCO 1997 1996 1995 ------------------------ Kilowatt-hour sales (millions) Residential 4,549 4,487 4,406 Commercial 3,780 3,658 3,521 Industrial 6,968 6,833 6,531 Other retail 445 432 424 ------------------------ Sales to retail customers 15,742 15,410 14,882 Sales for resale 6,791 6,395 5,002 ------------------------ Total 22,533 21,805 19,884 ------------------------ Average number of electric customers Residential 356,600 353,200 349,000 Commercial 50,800 49,600 48,600 Industrial 5,800 5,900 5,800 Other 2,700 2,600 2,600 ------------------------ Total 415,900 411,300 406,000 ------------------------ Revenue per KWH (cents) Residential 6.37 6.46 6.32 Commercial 5.08 5.19 5.03 Industrial 3.78 3.85 3.77 Sales for Resale 2.16 2.11 1.89 Peak Load and Capability Net system capability (MW) (1) 4,636 4,554 4,783 Maximum coincident system demand (MW) 4,157 4,018 3,932 Percentage increase in peak demand over prior period 3.5% 2.2% 11.5% Generation at time of peak (MW) 3,839 3,608 4,022 Percent of peak demand generated 92.4% 89.8% 102.3% Net purchases at time of peak (MW) 318 410 (90) Percent of net purchases at time of peak 7.6% 10.2% (2.3)% Date of maximum coincident system demand July 28 July 22 July 28 The preceding table sets forth (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand, (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1)Does not include 54 MW of system capability in storage in 1995 that was not available at the peak due to fuel procurement issues. 24 WTU 1997 1996 1995 ------------------------ Kilowatt-hour sales (millions) Residential 1,622 1,620 1,490 Commercial 1,223 1,203 1,152 Industrial 1,406 1,241 1,233 Other retail 580 581 549 ------------------------ Sales to retail customers 4,831 4,645 4,424 Sales for resale 2,504 2,411 2,268 ------------------------ Total 7,335 7,056 6,692 ------------------------ Average number of electric customers Residential 146,900 146,500 145,700 Commercial 27,800 27,600 27,000 Industrial 6,000 6,300 7,400 Other 6,000 5,700 5,600 ------------------------ Total 186,700 186,100 185,700 ------------------------ Revenue per KWH (cents) Residential 7.68 7.67 7.67 Commercial 5.99 6.02 5.76 Industrial 4.05 4.22 4.17 Sales for Resale 3.55 3.69 3.26 Peak Load and Capability Net system capability (MW) (1) 1,453 1,595 1,426 Maximum coincident system demand (MW) 1,481 1,433 1,435 Percentage increase (decrease) in peak demand over prior period 3.3% (0.1)% 13.7% Generation at time of peak (MW) 865 1,048 1,167 Percent of peak demand generated 58.4% 73.1% 81.3% Net purchases at time of peak (MW) 616 385 268 Percent of net purchases at time of peak 41.6% 26.9% 18.7% Date of maximum coincident system demand September 17 July 8 July 28 The preceding table sets forth (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand, (ii) the maximum coincident system demand on a one-hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective amounts and percentages of peak demand generated and net purchases and sales. (1) Does not include 156 MW of system capability for 1997 as described in ITEM 2. PROPERTIES. 25 EMPLOYEES AND EXECUTIVE OFFICERS The number of employees in the CSW System at December 31, 1997 is presented in the table below. Of the employees listed below, 565 of the positions at PSO and 805 of the positions at SWEPCO are covered under collective bargaining agreements with the IBEW. In addition, 2,456 employees at SEEBOARD are covered by collective agreements with several different unions. These unions include the Amalgamated Electrical and Engineering Union, GMB, EMA, Unison and the Transport and General Workers Union. For information related to ongoing union negotiations at PSO, reference is made to ITEM 7. MD&A. CSW SYSTEM EMPLOYEES CPL 1,668 PSO 1,273 SWEPCO 1,529 WTU 907 SEEBOARD 4,161 CSW Services 1,553 Other Non-Regulated Businesses 324 ------ 11,415 ------ EXECUTIVE OFFICERS Age at March 1, Present Position 1998 - ------------------------------------------------------------------------------- E. R. Brooks 60 Chairman, CEO and Director T. V. Shockley, III 52 President, Chief Operating Officer and Director Glenn Files 50 Senior Vice President, Electric Operations Ferd. C. Meyer, Jr. 57 Executive Vice President and General Counsel Glenn D. Rosilier 50 Executive Vice President and Chief Financial Officer Thomas M. Hagan 53 Senior Vice President, External Affairs Venita McCellon-Allen 38 Senior Vice President, Customer Relations and Corporate Development and Assistant Corporate Secretary Kenneth C. Raney 46 Vice President, Associate General Counsel and Corporate Secretary Wendy G. Hargus 40 Treasurer Lawrence B. Connors 46 Controller The information in the foregoing table is included in Part I pursuant to Regulation S-K, Item 401(b), Instruction 3. Each of the executive officers of CSW is elected to hold office until the first meeting of CSW's Board of Directors after the next annual meeting of stockholders. CSW's next annual meeting of stockholders is scheduled to be held May 28, 1998. Each of the executive officers listed in the table above has been employed by CSW or an affiliate of CSW in an executive or managerial capacity for at least the last five years. 26 ITEM 2. PROPERTIES. U.S. ELECTRIC OPERATING COMPANIES The total capabilities (MW, net dependable summer rating) of the U.S. Electric Operating Companies, which owned the following electric generating units or portions thereof in the case of jointly owned facilities, as of December 31, 1997 are shown in the following table. These properties are all located in either Arkansas, Louisiana, Oklahoma or Texas. Natural Lignite Nuclear Other Total Company Stations Gas MW Coal MW MW MW MW (a) MW (b) - --------------------------------------------------------------------- CPL 12 3,056 685 630 6 4,377(c) PSO 8 2,629 1,006 25 3,660(c) SWEPCO 9 1,784 1,848 842 4,474 WTU 11 847 370 11 1,228(c) -------------------------------------------------------- CSW 40 8,316 3,909 842 630 42 13,739 -------------------------------------------------------- (a) Some plants have the capability of burning oil in combination with gas. Use of oil in facilities primarily designed to burn gas results in increased maintenance expense and a slight reduction in capability. PSO and WTU have 25 MW and 11 MW, respectively, of facilities primarily designed to burn oil. (b) Data reflects only the U.S. Electric Operating Companies' portion of plants which are jointly owned with non-affiliates. For additional information concerning jointly owned facilities see ITEM 8-NOTE 6. JOINTLY OWNED ELECTRIC UTILITY PLANT. (c) Excludes 310 MW from units in storage, consisting of 60 MW at Victoria for CPL and 250 MW at Tulsa for PSO of which 125 MW will be available in March 1998. Excludes 117 MW at Paint Creek and 39 MW at Rio Pecos for WTU which will be available in June 1998. All of the generating facilities described above are located on land owned by the U.S. Electric Operating Companies or, in the case of jointly owned facilities, jointly with other participants. The U.S. Electric Operating Companies' electric transmission and distribution facilities are mostly located over or under highways, streets and other public places or property owned by others, for which permits, grants, easements or licenses (which the U.S. Electric Operating Companies believe to be satisfactory, but without examination of underlying land titles) have been obtained. The principal plants and properties of the U.S. Electric Operating Companies are subject to the liens of the first mortgage indentures under which the U.S. Electric Operating Companies' FMBs are issued. OTHER PROPERTIES In addition to the generating facilities described above, CSW has ownership interests in other electrical generating facilities, both foreign and domestic. Information concerning these facilities is listed below. 27 Capacity Capacity Ownership Company Location Total Committed Interest Status ------------------------------------------------------- Operating Facilities - United States Brush II CSW Energy Colorado 68 68 47% QF Ft. Lupton CSW Energy Colorado 272 272 50% QF Mulberry CSW Energy Florida 120 110 50% QF Orange Cogen CSW Energy Florida 103 97 50% QF Newgulf CSW Energy Texas 85 n/a 100% IPP Sweeny CSW Energy Texas 330 90 50% QF ------------ 978 637 ------------ Operating Facilities - International Medway CSW International United Kingdom 675 675 37.5% n/a Enertek CSW International Mexico 109 109 50% FUCO ------------ 784 784 ------------ CAPITAL EXPENDITURES The CSW System, including the U.S. Electric Operating Companies, maintains a continuing construction program, the nature and extent of which is based upon current and estimated demands upon the system. In addition, the CSW System requires capital to invest in new enterprises, either through equity investments or loans to projects, when deemed appropriate. See ITEM 7. MD&A for detailed information related to historical and projected capital expenditures. ITEM 3. LEGAL PROCEEDINGS. The Registrants are parties to various legal claims, actions and complaints arising in the normal course of business which are not described herein. Management does not expect disposition of these matters to have a material adverse effect on any of the Registrants' results of operations or financial condition. See ITEM 1. BUSINESS, ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal, environmental and regulatory proceedings. 28 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CSW None. CPL None. PSO None. SWEPCO None. WTU None. 29 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. CSW COMMON STOCK INFORMATION 1997 1996 Market Price Dividends Market Price Dividends High Low Paid High Low Paid ------- ------ ---------- ------- ------- ---------- First Quarter $25 3/4 $21 1/4 43.5(cent) $28 1/2 $26 3/8 43.5(cent) Second Quarter 22 1/8 18 1/4 43.5 28 7/8 26 1/2 43.5 Third Quarter 22 7/16 19 3/4 43.5 28 1/2 25 3/4 43.5 Fourth Quarter 27 5/16 20 5/8 43.5 28 25 1/2 43.5 CSW's common stock is traded under the ticker symbol CSR and listed on the New York Stock Exchange, Inc. and Chicago Stock Exchange, Inc. Market prices were obtained from the composite listing of all closing prices on CSW Common trades as reported on Bloomberg Financial Commodities News. In January 1998, CSW's board of directors elected to maintain the quarterly dividend, payable on February 27, 1998, to stockholders of record on February 9, 1998, unchanged at $0.435 per share, or an indicated rate of $1.74 per year. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and at rates per share as was paid during 1997, subject to continuing evaluation of CSW's financial condition and earnings by the CSW board of directors. Traditionally, the CSW board of directors has declared dividends to be payable on the last business day of February, May, August, and November. There were approximately 65,000 record holders of CSW's common stock as of March 6, 1998. See NOTE 12. COMMON STOCK for information on CSW Common. CPL, PSO, SWEPCO AND WTU COMMON STOCK INFORMATION All of the outstanding shares of common stock of the U.S. Electric Operating Companies are owned by CSW. Consequently, there is no market for their common stock. Cash dividends declared and paid to CSW on their common stock for 1997 and 1996 are presented in the following table. CPL PSO SWEPCO WTU -------- ------- -------- ------- (thousands) 1997 $157,000 $59,000 $90,000 $26,000 1996 $128,000 $35,000 $44,000 $19,000 During 1997, the common stock dividends paid to CSW by the U.S. Electric Operating Companies were higher than 1996 because of increased earnings available for common in 1997 at the U.S. Electric Operating Companies. This resulted primarily from charges associated with certain investments for plant sites, engineering studies and lignite reserves of the U.S. Electric Operating Companies during 1996. For information related to restrictions on the ability of the U.S. Electric Operating Companies to pay dividends to CSW, see NOTE 8. LONG-TERM DEBT. CSW 2-1 Reference is made to the page numbers noted in the table below for the locations of the following items: ITEM 6. SELECTED FINANCIAL DATA. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page Number CSW CPL PSO SWEPCO WTU ----- ----- ----- ------ ----- SELECTED FINANCIAL DATA 2-4 2-81 2-95 2-108 2-121 MD&A (1) 2-5 2-5 2-5 2-5 2-5 RESULTS OF OPERATIONS 2-29 2-82 2-96 2-109 2-122 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 2-35 2-85 2-98 2-111 2-124 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2-76 2-92 2-105 2-118 2-131 REPORT OF MANAGEMENT 2-79 2-93 2-106 2-119 2-132 (1) In 1997 CSW combined the MD&A sections of the Registrants except for the Results of Operations which are located at the page numbers indicated in the table above. CSW 2-2 CENTRAL AND SOUTH WEST CORPORATION CSW 2-3 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CSW. CSW recorded the United Kingdom windfall profits tax in the third quarter of 1997 as an extraordinary item. CSW sold Transok in 1996. Accounting rules require the classification of both the sale and the actual operating results prior to such sale as discontinued operations. In addition to the Transok reclassifications, certain other financial statement items for prior years have been reclassified to conform to the 1997 presentation. 1997(1) 1996(2) 1995 1994 1993(3) -------- ------- ------ ------- ------- (millions, except per share and ratio data) INCOME STATEMENT DATA Revenues $5,268 $5,155 $3,143 $3,105 $3,084 Income from continuing operations 329 297 377 369 247 Income before extraordinary item and cumulative effect of changes in accounting principles 329 429 402 394 260 Net income for common stock 153 429 402 394 308 EPS of common stock from continuing operations $1.55 $1.43 $1.97 $1.95 $1.32 EPS of common stock $0.72 $2.07 $2.10 $2.08 $1.63 Dividends paid per share of common stock $1.74 $1.74 $1.72 $1.70 $1.62 Average common shares outstanding 212.1 207.5 191.7 189.3 188.4 BALANCE SHEET DATA Assets $13,451 $13,332 $13,869 $11,066 $10,604 Long-term obligations (4) 4,259 4,057 3,948 2,975 2,807 Capitalization ratios Common stock equity 45% 47% 43% 48% 49% Preferred stock 2 4 4 5 6 Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 4 -- -- -- -- Long-term debt 49 49 53 47 45 (1) Earnings in 1997 decreased significantly due primarily to the accrual of the United Kingdom Windfall Profits Tax. Also contributing to the decline in earnings was the effect of both the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Further reducing earnings in 1997 was the settlement of litigation with El Paso and the write-offs associated with other assets including certain regulatory assets, capitalized demand side management energy efficiency assets and obsolete inventory. (2) Revenues in 1996 increased significantly due to the acquisition of SEEBOARD. Earnings in 1996 were significantly impacted by the charges associated with certain investments for plant sites, engineering studies and lignite reserves at the U.S. Electric Operating Companies, the write-off of certain investments at CSW Energy and the gain realized on the sale of Transok. (3) Earnings in 1993 were significantly impacted by restructuring charges, the $46 million cumulative effect of changes in accounting principles, the establishment of reserves for fuel and other properties and prior year tax adjustments. (4) Long-term obligations includes long-term debt, Trust Preferred Securities and preferred stock subject to mandatory redemption. CSW 2-4 REGISTRANTS' COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. The RESULTS OF OPERATIONS of CSW and the U.S. Electric Operating Companies precede their financial statements. OVERVIEW The electric utility industry is changing rapidly as it is becoming more competitive. In anticipation of increasing competition and fundamental changes in the industry, CSW's management is implementing a strategic plan designed to help position CSW to be competitive in this rapidly changing environment and is developing an emerging global energy business. CSW has undertaken key initiatives in the implementation of this overall strategy and is determining new directions for the corporation's future. One of these new directions is the proposed merger between AEP and CSW that was announced in December 1997. CSW would become a subsidiary of AEP in the proposed merger. The proposed merger would join two companies which are low cost providers of electricity and would achieve greater economies of scale than either company could achieve on its own. In 1997, CSW International doubled its investment in a Brazilian electric distribution utility and made other investments in Latin America. CSW continues to pursue the acquisition of the non-nuclear generating assets of Cajun, a Louisiana member electric cooperative. C3 Communications' joint venture limited partnership, ChoiceCom, has entered the local telephone markets in the Texas cities of Austin, Corpus Christi and San Antonio and plans to enter the markets of Dallas and Houston offering a variety of telecommunications services. These events are discussed below and elsewhere in this report. CSW believes that, compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). The CSW System benefits from economies of scale by virtue of its size and is a reliable and relatively low-cost provider of electric power. Specifically, CSW seeks competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additional information. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW OF OPERATING, INVESTING AND FINANCING ACTIVITIES Net cash provided by operating activities decreased $149 million during 1997 compared to 1996. The decrease was primarily attributable to the December 1997 payment of $88 million on the first installment of the windfall profits tax imposed on SEEBOARD in the United Kingdom. In addition, increased factored accounts receivable purchases at CSW Credit, federal and state income tax payments for the gain on CSW's 1996 sale of Transok which totaled approximately $122 million (after being offset in part by the utilization of Alternative Minimum Tax credits that CSW had previously generated), and a $35 million CSW 2-5 payment related to the settlement of litigation between CSW and El Paso all contributed to the decrease. Offsetting part of the decrease, the U.S. Electric Operating Companies realized greater fuel recovery during 1997 compared to 1996. Net cash used in investing activities was $904 million in 1997 compared to $1.3 billion in 1996. There were no acquisition expenditures during 1997 while $1.4 billion in SEEBOARD acquisition expenditures were made during 1996. However, during 1996, CSW received $690 million in cash on the sale of Transok and $99 million on the sale of the National Grid shares. During 1997, while CSW's total construction expenditures decreased $14 million compared to 1996, a combined total of approximately $294 million was invested by CSW Energy and CSW International in 1997 on several projects compared to $124 million in 1996. In addition, during 1997, CSW Energy made its final payment on the Ft. Lupton cogeneration project which was more than offset by the reduction of CSW Energy's equity investment in the Orange cogeneration project when permanent external financing was obtained on the project. Net cash flows from financing activities decreased substantially during 1997 compared to 1996. During 1996, CSW incurred substantial debt to finance the acquisition of SEEBOARD. In addition, CSW sold approximately 15.5 million shares of common stock and received net proceeds of approximately $398 million in a primary public offering in 1996, the proceeds of which were subsequently used to repay a portion of the debt incurred in connection with the SEEBOARD acquisition. CSW Energy also issued $200 million in Senior Notes during 1996. During 1997, CSW made changes in its common stock plans and stopped issuing original shares through these plans. Consequently, $20 million in new common stock was issued pursuant to these plans in 1997 compared to $79 million in 1996. CPL's $200 million Series BB, 6% FMBs also matured in 1997. However, offsetting a portion of the decrease, the business trusts of CPL, PSO and SWEPCO received cash proceeds of approximately $323 million from the issuance of Trust Preferred Securities during 1997. These proceeds were used primarily to redeem preferred stock and repay short-term debt of the companies. The non-cash impacts of exchange rate differences on the translation of foreign currency denominated assets and liabilities were recorded on a separate line on the cash flow statement in accordance with accounting guidelines. INTERNALLY GENERATED FUNDS Internally generated funds, which consist of cash flows from operating activities less common and preferred stock dividends, should meet most of the capital requirements of the CSW System. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non-utility businesses through acquisitions or otherwise, may require additional capital from external sources. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. Productive investment of net funds from operations in excess of capital expenditures and dividend payments is necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of these funds. CSW's internally generated funds totaled $343 million, $499 million and $451 million for 1997, 1996 and 1995, respectively. Internally generated funds for the U.S. Electric Operating Companies are detailed in the following table. CSW 2-6 1997 1996 1995 ------------------------ CPL ($ - millions) Internally Generated Funds $172 $268 $100 Construction Expenditures Provided by Internally Generated Funds 136% 196% 66% PSO Internally Generated Funds $62 $107 $88 Construction Expenditures Provided by Internally Generated Funds 78% 128% 89% SWEPCO Internally Generated Funds $108 $153 $100 Construction Expenditures Provided by Internally Generated Funds 100% 165% 96% WTU Internally Generated Funds $69 $52 $12 Construction Expenditures Provided by Internally Generated Funds 217% 121% 27% CAPITAL EXPENDITURES The CSW System's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers, and the historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. However, current projected capital expenditures are expected to be primarily for existing distribution systems and for various non-utility investments. The U.S. Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the U.S. Electric Operating Companies for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. CSW regularly evaluates its capital spending policies and generally seeks to fund only those projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with this strategy, the CSW System is likely to continue to make additional investments in energy-related and non-utility businesses and will continue to search for electric utility companies or other electric utility properties to acquire. Primary sources of capital for these expenditures are long-term debt, trust preferred securities and preferred stock issued by the U.S. Electric Operating Companies, long-term and short-term debt issued by CSW, as well as internally generated funds. Historically, the issuance of common stock by CSW has also been a source of capital. CSW Energy and CSW International typically use various forms of non-recourse project financing to provide a portion of the capital required for their respective projects as well as utilizing long-term debt for other investments. Although CSW and each of the U.S. Electric Operating Companies expect to fund the majority of their respective capital expenditures for their existing utility systems through internally generated funds, for any significant investment or acquisition, additional funds from the capital markets may be required. For a description of certain restrictions on CSW's ability to raise capital from external sources, including through the issuance of common stock, see PROPOSED AEP MERGER. The historical and estimated capital expenditures for the CSW System, including the U.S. Electric Operating Companies, SEEBOARD and other diversified operations are shown in the CAPITAL EXPENDITURES table. The amounts include construction expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and CSW's other diversified operations, construction expenditures and net equity investments. It does not include the $2.1 billion used to acquire SEEBOARD during 1995 and 1996. The majority of the capital expenditures for the U.S. Electric Operating Companies for 1995 through 1997 were spent on distribution facilities. It is anticipated that the majority of the estimated capital expenditures for 1998 through 2000 will be for distribution facilities as well. For a description of certain restrictions on CSW's ability to make capital expenditures, including through the issuance of common stock, see PROPOSED AEP MERGER (The table and statements below contain forward looking information within the meaning of Section 21E of the Exchange Act. Actual CSW 2-7 results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). CAPITAL EXPENDITURES Estimated expenditures 1995 1996 1997 1998 1999 2000 -------------------- -------------------- (millions including AFUDC) CSW $495 $644 $760 $569 $586 $595 CPL 155 139 130 129 157 136 PSO 102 85 82 71 75 89 SWEPCO 115 95 110 95 116 122 WTU 45 44 33 36 42 47 Estimated capital expenditures for 1998 - 2000 do not include expenditures for acquisition-type investments Although CSW does not believe that the U.S. Electric Operating Companies will require substantial additions of generating capacity over the next several years, the U.S. Electric system's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases. Refer to INTEGRATED RESOURCE PLAN for additional information regarding the U.S. Electric System's capacity needs. INFLATION Annual inflation rates, as measured by the U.S. Consumer Price Index, have averaged approximately 2.4% during the three years ended December 31, 1997. CSW believes that inflation, at this level, does not materially affect CSW's results of operations or financial position. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. FINANCIAL STRUCTURE, SHELF REGISTRATIONS AND CREDIT RATINGS As of December 31, 1997, the capitalization ratios of CSW were 45% common stock equity, 2% preferred stock, 4% Trust Preferred Securities and 49% long-term debt. CSW is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing activities. The estimated embedded cost of long-term debt for CSW and the U.S. Electric Operating Companies is shown below. CSW 7.2% CPL 6.8 PSO 6.9 SWEPCO 6.8 WTU 6.7 CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, to fund its LTIP, stock option plan, PowerShare plan and ThriftPlus plan. Following the issuance of the CPL 1997 Original Rate Order and the decline in the market price of CSW Common, which CSW believes was attributable in part to the CPL 1997 Original Rate Order, the determination was made that it was appropriate for CSW to begin funding these plans through open market purchases, effective April 1, 1997. Prior to that time, CSW had issued $20 million in new common stock in 1997. CPL has shelf registration statements on file for the issuance of up to $60 million of FMBs and up to $75 million of preferred stock, and PSO has a shelf registration statement on file for the issuance of up to $35 million of Senior Notes. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. CSW 2-8 The current securities ratings for each of the Registrants is presented in the following table, including the securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I. Duff & Standard Moody's Phelps & Poor's ---------------------------------- CPL First mortgage bonds A3 A A Senior unsecured Baa1 A- A- Preferred stock baa1 BBB+ A- Trust preferred (CPL Capital I) baa1 BBB+ A- Junior subordinated deferrable interest debentures Baa2 -- -- PSO First mortgage bonds A1 AA- AA- Senior unsecured A2 A+ A Preferred stock a3 A+ A Trust preferred (PSO Capital I) a2 A+ A Junior subordinated deferrable interest debentures A3 -- -- SWEPCO First mortgage bonds Aa3 AA AA- Senior unsecured A1 AA- A Preferred stock a1 AA- A Trust preferred (SWEPCO Capital I) aa3 AA- A Junior subordinated deferrable interest debentures A2 -- -- WTU First mortgage bonds A2 A+ A Senior unsecured A3 -- A- Preferred stock a3 A A- CSW Commercial paper P-2 D-2 A-2 These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating. LONG-TERM FINANCING On April 24, 1997, PSO's business trust, PSO Capital I, sold to underwriters in a negotiated offering $75 million, 8.00% Series A, Trust Originated Preferred Securities due April 30, 2037. The proceeds from the sale of these securities were used by PSO to repay short-term debt, to reimburse PSO's treasury for the cost of reacquiring approximately $14.5 million of 4.00% Series and 4.24% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 2, 1997. PSO Capital I is treated as a subsidiary of PSO whose only assets are the approximately $77.3 million principal subordinated debentures issued by PSO. In addition to PSO's obligation under the subordinated debentures, PSO has also agreed to a security obligation which represents a full and unconditional guarantee of PSO Capital I's trust obligations. On April 30, 1997, SWEPCO's business trust, SWEPCO Capital I, sold to underwriters in a negotiated offering $110 million, 7.875% Series A, Trust Preferred Securities due April 30, 2037. The proceeds from the sale of these securities were used by SWEPCO to repay short-term debt, to reimburse SWEPCO's treasury for the cost of reacquiring approximately $15.5 million of 4.28% Series, 4.65% Series, 5.00% Series and 6.95% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 8, 1997. SWEPCO Capital I is treated as a subsidiary of SWEPCO whose only assets are the approximately $113.4 million principal subordinated debentures issued by SWEPCO. In addition to SWEPCO's obligation CSW 2-9 under the subordinated debentures, SWEPCO has also agreed to a security obligation which represents a full and unconditional guarantee of SWEPCO Capital I's trust obligations. On May 8, 1997, CPL's business trust, CPL Capital I, sold to underwriters in a negotiated offering $150 million, 8.00% Series A, Cumulative Quarterly Income Preferred Securities due April 30, 2037. The proceeds from the sale of these securities were used by CPL to repay short-term debt, to reimburse CPL's treasury for the cost of reacquiring approximately $87.5 million of 4.00% Series, 4.20% Series, 7.12% Series and 8.72% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 14, 1997. CPL Capital I is treated as a subsidiary of CPL whose only assets are the approximately $154.6 million principal subordinated debentures issued by CPL. In addition to CPL's obligation under the subordinated debentures, CPL has also agreed to a security obligation which represents a full and unconditional guarantee of CPL Capital I's trust obligations. In March 1997, an affiliate of Orange Cogeneration Limited Partnership, an entity that is 50% indirectly owned by CSW Energy and accounted for by the equity method of accounting, issued $110 million, 8.175% Senior Secured Bonds, due 2022. The bonds are unconditionally guaranteed by Orange Cogeneration Limited Partnership. Concurrently, $53.2 million was distributed to CSW Energy representing its equity investment in the Orange Cogeneration project. SHORT-TERM FINANCING AND ACCOUNTS RECEIVABLE FACTORING The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a system money pool to coordinate short-term borrowings for certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW also incurs borrowings for other subsidiaries that are not included in the money pool. As of December 31, 1997, CSW had a revolving credit facility totaling $1.4 billion to back up its commercial paper program. At December 31, 1997 CSW had $721 million outstanding in short-term borrowings. The maximum amount of short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $725 million during December 1997. Information concerning short-term borrowings for each of the U.S. Electric Operating Companies is presented in the following table. Maximum Borrowing Amount Date of Maximum Limit Borrowed Borrowed -------------- -------------- ----------------- ($ - millions) CPL $300 $149 December 30, 1997 PSO 125 89 February 4, 1997 SWEPCO 150 83 April 23, 1997 WTU 65 44 April 11, 1997 CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated electric companies. The sale of accounts receivable provides the U.S. Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. In addition, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, so CSW's cost of capital is lowered. CSW Credit issues commercial paper to meet its financing needs. At December 31, 1997, CSW Credit had a $900 million revolving credit agreement, secured by the assignment of its receivables, to back up its commercial paper program, which had $637 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield of 5.6%, was $890 million during September 1997. The average and year end amounts of accounts receivable sold during 1997 by the U.S. Electric Operating Companies to CSW Credit are shown in the following table. CSW 2-10 1997 1997 Average End of Year ------------ ------------ (millions) CPL $115 $65 PSO 82 62 SWEPCO 109 77 WTU 38 59 CSW has recently made several finance-related filings with the SEC under the Holding Company Act which, if approved, would increase CSW's financial flexibility. In the first filing, CSW requested authority to repurchase up to ten percent of its outstanding common stock as of June 30, 1997, from its stock and employee benefit plans (pursuant to the terms and conditions of such plans) from time to time through December 31, 2002, and to utilize its short-term borrowing program, including funds borrowed through its commercial paper program, to finance its repurchase in the open market of up to twenty percent of its outstanding common stock as of June 30, 1997. No decision regarding this application has been made by the SEC. Such authority would increase CSW's flexibility to adjust its capital structure. The second filing requests authority through December 31, 2002 for CSW, the U.S. Electric Operating Companies and CSW Services to finance ongoing business, repay short-term debt and finance the potential repurchase of outstanding securities. CSW has requested authority to issue common stock, while the U.S. Electric Operating Companies and CSW Services have requested authority to issue common stock, preferred stock and debt. Such authority would give CSW the flexibility to take advantage of favorable market conditions for routine financings. The SEC issued an order on December 30, 1997 granting the requested authority. The third filing requests an increase in the authorized short-term borrowing capacity for CSW and certain of its subsidiaries. The SEC has not issued an order with respect to this application. For a description of certain restrictions on CSW's ability to repurchase common stock and to raise capital from external sources, see PROPOSED AEP MERGER. CSW ENERGY AND CSW INTERNATIONAL In October 1996, CSW Energy issued $200 million, 6.875% Senior Notes due 2001. The proceeds from the notes were for the acquisition, development and construction of electric generation assets in the United States and to make affiliate loans to CSW International. CSW Energy has authority from the SEC to expend up to $250 million for general development activities related to qualifying facilities and independent power facilities. CSW Energy may seek specific authority to spend additional amounts on certain projects subject to limitations contained in the AEP merger agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy projects at December 31, 1997. In January 1997, CSW received authority from the SEC under the Holding Company Act to spend an amount up to 100% of consolidated retained earnings on EWG or FUCO investments. This represents an increase in authority previously granted under the Holding Company Act. However, the amount of any such expenditures is subject to the terms of the AEP merger agreement. As of December 31, 1997, CSW had invested an amount equal to 49% of consolidated retained earnings, as defined by rule 53 of the Holding Company Act, on EWG and FUCO investments. For a description of certain restrictions on the ability of CSW and its subsidiaries to make capital expenditures in respect of qualifying facilities and independent power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER. CSW 2-11 RECENT DEVELOPMENTS AND TRENDS CSW STRATEGIC RESPONSES CSW and the U.S. Electric Operating Companies have, from time to time considered, and expect to consider in the future, various strategies designed to enhance CSW's competitive position and to increase its ability to anticipate and adapt to changes in the electric utility industry. These strategies may include business combinations with other companies, internal restructurings involving the complete or partial separation of CSW's generation, transmission and distribution businesses, acquisitions or dispositions of assets or lines of business, and additions to or reductions of franchised service territories. CSW and the U.S. Electric Operating Companies may from time to time engage in discussions, either internally or with third parties, regarding one or more of these potential strategies. Those discussions may be subject to confidentiality agreements and CSW's policy is generally not to comment on such activities. No assurances can be given that any potential transaction of the type described above may actually occur, or, if one does occur, the ultimate effect thereof on CSW's or any U.S. Electric Operating Company's results or operations, financial condition or competitive position (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). AEP MERGER In December 1997, AEP and CSW announced that their boards of directors approved a definitive merger agreement. If the merger is completed, the combined company will be a diversified electric utility serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On January 19, 1998, CSW announced a corporate realignment to more effectively position itself for competition and to better align itself with AEP related to the proposed merger of the two companies. The transaction must receive regulatory approval from federal and state authorities and must satisfy a number of other conditions, some of which, such as CSW and AEP shareholder approval, may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated, and if it is, the timing of such consummation or the effect of any regulatory conditions that may be imposed on such consummation. See PROPOSED AEP MERGER. COMPETITION AND INDUSTRY CHALLENGES Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail levels in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. In the United Kingdom, the franchised electricity supply business is scheduled to open to full competition on a phased-in basis on September 1, 1998. As a result, SEEBOARD will be able to seek customers while risking the loss of existing customers to other competitors. As a whole, the CSW U.S. Electric System believes that, overall, its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the energy marketplace (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several current issues impacting the CSW System. Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to: (i) who will bear the costs of prudent utility investments or past commitments incurred under traditional cost-of-service regulation that will be uneconomic in a competitive environment, sometimes referred to as stranded costs; (ii) whether all customers have access CSW 2-12 to the benefits of competition; (iii) how, and by whom, the rules of competition will be established; (iv) what the impact of deregulation will be on conservation, environmental protection and other regulator-imposed programs; and (v) how transmission system reliability will be ensured. The degree of risk to CSW and the U.S. Electric Operating Companies associated with various federal and state restructuring proposals aimed at resolving any or all of these issues will vary depending on many factors, including the proposals' competitive position and treatment of stranded utility investment resulting from such requirements. Although the U.S. Electric Operating Companies believe they are in a position to compete effectively in a deregulated, more competitive marketplace, if stranded costs are not recovered from customers, then the U.S. Electric Operating Companies may be required by existing accounting standards to recognize potentially significant losses from unrecovered stranded costs, especially with respect to STP (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See REGULATORY ACCOUNTING for additional information. At the federal level, several bills were introduced in Congress during the 1997 legislative session which provided for restructuring and/or deregulating the electric utility industry. However, no such bills were enacted into law. In 1998, the United States Senate has progressed further in its consideration of comprehensive energy restructuring legislation than the United States House of Representatives. However, in the United States Senate, differences must be resolved between those who favor legislation to repeal the Holding Company Act and those who support repeal only in the context of comprehensive legislation. Prospects for repeal of the Holding Company Act in 1998 are unclear. While a majority of the states, including the four states in which the U.S. Electric Operating Companies operate, have considered deregulation that requires some form of retail competition, several states have enacted actual legislation mandating retail competition including Oklahoma in which PSO operates. CSW and the U.S. Electric Operating Companies cannot predict when and if they will be subject to one or more of these legislative initiatives, nor can they predict the scope or effect of such legislation on their results of operations or financial condition. For additional information related to such state initiatives, see INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS, LOUISIANA, OKLAHOMA AND ARKANSAS. WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES The Energy Policy Act, which was enacted in 1992, significantly altered the way in which electric utilities compete. The Energy Policy Act created exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to own EWGs. EWGs are a relatively new category of non-utility wholesale power producers that are free from most federal and state regulation, including restrictions under the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been increasingly competitive since enactment of the Energy Policy Act. The U.S. Electric Operating Companies must compete in the wholesale energy markets with other public utilities, cogenerators, qualifying facilities, EWGs and others for sales of electric power. While CSW believes that the Energy Policy Act will continue to make the wholesale markets more competitive, CSW is unable to predict whether the Energy Policy Act will adversely impact the U.S. Electric Operating Companies. FERC ORDERS 888 AND 889 The FERC issued Order No. 888 in 1996, which is the final comparable open access transmission service rule. The provisions of FERC Order No. 888 provide for comparable transmission service between utilities and their transmission customers by requiring utilities to take transmission service under CSW 2-13 their open access tariffs for wholesale sales and purchases and by requiring utilities to rely on the same transmission information that their transmission customers rely on to make wholesale purchases and sales. In addition, the Texas Commission adopted a rule governing transmission access and pricing for ERCOT in 1996. The pricing method adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a distance-sensitive component which recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began recording transmission revenues and expenses in accordance with the Texas Commission's rule on January 1, 1997. FERC Order No. 888 requires holding companies to offer single system transmission rates. The transmission rates of the U. S. Electric Operating Companies are under the exclusive jurisdiction of the FERC while the transmission rates of most of the transmitting utilities in ERCOT are under the exclusive jurisdiction of the Texas Commission. Because the two commissions have different approaches to defining and implementing comparable open access transmission service, Order No. 888 granted the U. S. Electric Operating Companies an exemption permitting them an opportunity to propose a solution that provides comparability to all wholesale users. On November 1, 1996, the U. S. Electric Operating Companies filed a system-wide tariff to comply with Order No. 888 and, on December 31, 1996, the FERC accepted for filing the system-wide tariff which became effective on January 1, 1997, subject to refund and to the issuance of further orders. On December 10, 1997 the FERC issued an order regarding the U. S. Electric Operating Companies' proposed system-wide tariff filed on November 1, 1996. The FERC's order accepted the proposed tariff subject to several modifications, including revisions to provide for system-wide transmission service under a single system rate. The U. S. Electric Operating Companies filed the required compliance tariff on February 9, 1998 and are waiting for FERC's acceptance of the revised tariff. In 1996, the FERC issued Order No. 889 requiring transmitting utilities to establish and operate an OASIS for the dissemination of information regarding available transfer capability for their respective transmission systems. The OASIS is an on-line information system that provides the same information about the utility's transmission system to all transmission customers. The U.S. Electric Operating Companies utilize, and participate in the OASIS systems for ERCOT and SPP. Order No. 889 also created standards of conduct requiring utilities to conduct any wholesale power sales business separately from their transmission operations. The standards of conduct are designed to ensure that utilities and their affiliates, as sellers of power, do not have preferential access to information about wholesale transmission prices and availability. RETAIL ELECTRIC COMPETITION IN THE UNITED STATES Increased competition in the utility industry has resulted in increased pressure to stabilize or reduce rates. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. Incentive rate and performance-based plans encourage efficiencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major legislative initiative which would require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Most states either have introduced legislation or are investigating the issue, and several states have already passed legislation which mandates retail choice by a certain date. CSW believes that retail competition would not be in the best interests of CSW's and the U.S. Electric Operating Companies' security holders unless CSW and the U.S. Electric Operating Companies receive fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by the U.S. Electric Operating Companies to meet their obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CSW intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CSW undertook to serve the public's demand for electricity. For additional CSW 2-14 information related to retail wheeling in the United States, see HOLDING COMPANY ACT AND LEGISLATIVE UPDATE and INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS, LOUISIANA, OKLAHOMA AND ARKANSAS. INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS, LOUISIANA, OKLAHOMA AND ARKANSAS Several initiatives regarding restructuring the electric utility industry have recently been undertaken in the four states in which the U.S. Electric Operating Companies operate. Legislation was enacted in Oklahoma while legislative activity in Texas, Louisiana and Arkansas stopped short of any such definitive action. In April 1997, the Oklahoma Legislature enacted legislation dealing with industry restructuring in Oklahoma, which provides for retail competition by July 1, 2002. The legislation directs the Oklahoma Commission to study all relevant issues relating to restructuring and develop a framework for a restructured industry. The legislation divides the study of restructuring issues by the Oklahoma Commission into four parts: (i) independent system operator issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues. At the end of each of these studies, the Oklahoma Commission must provide reports along with legislative recommendations. The legislation directs the Oklahoma Tax Commission to study the impact of electric utility restructuring on state tax revenues and the existing tax structure, consider the establishment of a uniform consumption tax, and report to the Oklahoma Legislature by December 31, 1998. The legislation prohibits the establishment of retail competition until a uniform tax policy is established. The legislation also creates a Joint Electric Utility Task Force, a 14-member panel composed of an equal number of representatives from the Oklahoma House of Representatives and the Oklahoma Senate. The duties of this task force include the oversight and direction of the studies by the Oklahoma Commission and the Oklahoma Tax Commission. Management is unable to predict the outcome of these studies or their ultimate impact on the results of operations and financial condition of CSW and PSO. In March 1997, the Arkansas Legislature passed a resolution directing interim legislative committees to study competition in the electric power industry in Arkansas. The study began in October 1997, and the committees will continue to hold hearings throughout 1998. Also, the Arkansas Commission has initiated a series of generic restructuring dockets. The Arkansas Commission will provide a report to the Arkansas Legislature by October 1998. In Louisiana, a special legislative committee created by the Louisiana Senate is studying the impact of retail competition on the state of Louisiana. The committee is scheduled to issue a report before the next regular session of the Louisiana Legislature. The Louisiana Commission has also opened a proceeding to study restructuring and retail competition. In Texas, the Texas Lieutenant Governor appointed a Senate interim committee to study retail competition and restructuring. The committee is holding a series of hearings and is scheduled to issue a report by September 1998. Management cannot predict the outcome of the studies in Arkansas, Louisiana and Texas or their ultimate impact on the results of operations and financial condition of CSW, CPL, SWEPCO and WTU. INDUSTRY RESTRUCTURING IN TEXAS Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1, 1995. Among other things, the amendments deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven integrated resource planning process and mandate comparable open access transmission service. PURA also required that the Texas Commission adopt a rule on comparable open transmission access by March 1, 1996. In conjunction with this rulemaking proceeding (Project No. 14045), the chairman of the Texas Commission issued a proposal on September 6, 1995, for the purpose of maximizing competition in the ERCOT wholesale bulk power market. The proposal calls for the functional unbundling of integrated utilities where distribution entities could purchase their power requirements from any generator or set of generators in ERCOT. Those generators which are currently regulated would be deregulated after provisions are in place to recover stranded costs. The proposal was assigned a separate proceeding (Project No. 15000), and after a series of workshops and technical conferences conducted during 1996, the Texas Commission submitted a final Scope CSW 2-15 of Competition report to the Texas Legislature in January 1997. The final report contains numerous recommendations to the Texas Legislature including requests for additional regulatory authority or clarification of existing authority including to certificate electric service resellers, the authority to adopt consumer protection and universal service standards, the authority to determine and allocate stranded costs to all customers, the authority to promote unbundling, the authority to allow alternative forms of regulation, increased authority to address mergers, authority to correct market power abuses, authority over the ERCOT ISO and authority to permit alternative methods for fuel cost recovery. In addition, the final report offers the Texas Legislature four restructuring options. Option 1 maintains the regulatory status quo; Option 2 would permit utilities to voluntarily offer retail access; Option 3 would provide for full wholesale competition; and Option 4 would provide for full retail competition. The report's final recommendation is for the Texas Legislature to direct the Texas Commission to prepare for full retail competition using a careful and deliberate approach on a timetable to be established by the Texas Legislature, but with no retail access before the year 2000. The Texas legislature considered but did not pass any of these proposals in the 1997 legislative session. On February 7, 1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No. 14045). The pricing method adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a distance-sensitive component referred to as a vector-absolute megawatt mile which recovers the remaining 30% of ERCOT transmission costs. The open access tariffs filed with the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However, on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC Order 888 that conform to the Texas Commission's rule. See FERC ORDERS 888 AND 889 for additional information regarding the transmission pricing rules prescribed by FERC. By statute the Texas Commission was required to submit a report to the 1997 Texas Legislature on "methods or procedures for quantifying the magnitude of stranded investment, procedures for allocating costs, and the acceptable methods of recovering stranded costs." The Texas Commission initiated Project No. 15001 to collect information to prepare the required report. In response to the Texas Commission's order in Project 15001, CPL, SWEPCO, and WTU each filed information on estimates of potential stranded costs. While the filings for CPL included estimates of significant potential stranded costs, no significant potential stranded costs were identified in the filings for SWEPCO or WTU. In January 1998, the Texas Commission requested updated information on CPL's stranded costs for a report that the Texas Commission is preparing for the Senate interim committee on restructuring. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the potential impact of potential stranded costs relating to CPL. The Texas Commission's Project 15002, "Scope of Competition Report," is a report that the Texas Commission is required to present to the Texas Legislature in each odd-numbered year detailing the scope of competition in the electric markets and the impact of competition and industry restructuring on customers. In addition, the report is required to include the Texas Commission's recommendations to the Texas Legislature for further legislation. In June 1996, CPL, SWEPCO and WTU each filed information for the Texas Commission's report. TEXAS INDEPENDENT SYSTEM OPERATOR PLAN In June 1996, CSW, including CPL and WTU, and more than 20 other parties, including other investor-owned utilities, municipal power companies, electric cooperatives, independent power producers and power marketers, filed plans to create an ISO to manage the ERCOT power grid. The filing marks a major step towards implementing the Texas Commission's overall strategy to create the competitive wholesale electric market that was mandated by the Texas Legislature in 1995. The Texas Commission approved the ISO in August 1996. Such approval made Texas the first state in the nation to adopt a plan for a regional ISO and a regional competitive wholesale bulk power market. CSW 2-16 INTEGRATED RESOURCE PLAN In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a joint integrated resource plan outlining the companies' future electric needs over a 10-year forecast horizon and the manner in which the companies propose to meet those needs. In July 1997 the Texas Commission issued an Interim Order on the Preliminary Plan which adopted a settlement agreement that had been reached with all the parties in the case. The Interim Order approved the load forecast and individual resource needs for each of the companies, as well as the request for proposal documents to be used to procure future resource needs. The Interim Order also approved the targeted purchase goal amounts for renewable and energy efficiency programs, which will result in renewable and energy efficiency programs being included in the companies' resource mix. The targeted purchase goals were developed in response to customer input obtained through the deliberative polling process conducted at each operating company in the summer of 1996. A separate phase of the Integrated Resource Plan was created to address the value of interruptible resources at CPL. That phase is expected to be completed in March 1998. The Interim Order also required that a green pricing tariff be filed which would allow customers who are interested in acquiring a greater portion of their personal consumption from environmentally beneficial generation to exercise that choice. A green pricing tariff was approved for use in San Angelo, Texas in October 1996. A system-wide filing is expected in mid-1998. HOLDING COMPANY ACT AND LEGISLATIVE UPDATE The Holding Company Act generally has been construed to limit the operations of a registered holding company to a single integrated public utility system, plus such additional businesses as are functionally related to such system. Among other things, the Holding Company Act requires CSW and its subsidiaries to seek prior SEC approval before effecting mergers and acquisitions or pursuing other types of non-utility initiatives. Such pervasive regulation may impede or delay CSW's efforts to achieve its strategic and operating objectives. Consequently, CSW continues to support efforts to repeal or modify this legislation. In 1995, the SEC issued a report to the United States Congress advocating repeal of the Holding Company Act, either on a conditional and transitional basis or immediate and outright repeal. The basis for the SEC's recommendation for repeal is that the Holding Company Act is anachronistic and duplicative of other federal and state regulatory regimes that have developed over the past sixty years. Following the SEC's report, there were several bills introduced in both the United States Senate and House of Representatives in 1996 which would have repealed the Holding Company Act on a conditional and transitional basis and transferred its oversight functions to the FERC and the states. Another bill was introduced into the United States House of Representatives that, in addition to repealing the Holding Company Act, would have repealed PURPA, which among other things, requires investor owned utilities to purchase power at their avoided cost from qualifying facilities. Although none of these bills were enacted into law, they may suggest the form of future legislation. In January 1997, a bill was introduced in the United States Senate providing for comprehensive electric utility industry restructuring and for retail choice by December 2003, repeal of the Holding Company Act one year after the bill is enacted, as well as repeal of the requirement that electric utilities purchase power at their avoided cost from qualifying facilities under PURPA. Under this bill, many of the oversight functions performed by the SEC under the Holding Company Act would be shifted to the FERC and the states. In addition, a bill was reintroduced in the United States House of Representatives providing for choice of electricity suppliers at the retail level by the year 2000. Under this bill, which is substantially similar to the United States Senate bill, the application of the Holding Company Act to a particular holding company system would be eliminated after each state served by the electric utility companies in that system made a determination that retail competition existed in that state. No legislation was enacted in 1997. In February 1997, the SEC adopted Rule 58 allowing a holding company registered under the Holding Company Act or any of its subsidiaries, to acquire, without prior SEC approval, the securities of any energy-related company subject to certain limits. Under the new rule, investment in energy-related company securities without prior SEC approval is limited to the greater of (i) $50 million and (ii) 15% of the consolidated capitalization of the registered CSW 2-17 holding company as reported on its most recent Form 10-Q or Form 10-K as filed with the SEC. Rule 58 does not exempt the acquisition by a registered holding company of the securities of an electric utility company or a gas utility company, which remains subject to the SEC's prior approval as does the issuance of securities for the purpose of making such exempt investments. In 1998, the United States Senate has progressed further in its consideration of comprehensive energy restructuring legislation than the United States House of Representatives. However, in the United States Senate, differences must be resolved between those who favor legislation to repeal the Holding Company Act and those who support repeal only in the context of comprehensive legislation. Prospects for repeal of the Holding Company Act in 1998 are unclear. REGULATORY ACCOUNTING Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, the U.S. Electric Operating Companies have recognized significant regulatory assets and liabilities. Management believes that the U.S. Electric Operating Companies currently meet the criteria for following SFAS No. 71. However, in the event the U.S. Electric Operating Companies or some portion of their business no longer meets the criteria for following SFAS No. 71 due to deregulation or for other reasons, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PSO UNION NEGOTIATIONS As previously reported, PSO and its Local Union 1002 of the IBEW have been engaged in contract renewal negotiations. The underlying agreement expired in September 1996 and, to date, the parties have been unable to reach an agreement. In December 1996, PSO implemented portions of its final proposal after declaring an impasse. The principal issue of disagreement involves PSO's need for flexibility in a deregulated environment. In April 1997, Oklahoma's governor signed into law an electric industry restructuring bill. The new law mandates the implementation of retail competition to begin on July 1, 2002. PSO believes that the new law also broke the impasse in the contract negotiations and has resumed negotiations with the union. At this time, PSO cannot predict the outcome of this matter. However, PSO believes that, even in the event of a strike, its operations would continue without a significant disruption and that a strike would not have a material adverse effect on its results of operations or financial condition (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). IMPACT OF COMPETITION AND INDUSTRY RESTRUCTURING INITIATIVES CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry in the United States, and in the United Kingdom or on the CSW System. As the electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent reliability, availability of capacity, and customer service. CSW and the U.S. Electric Operating Companies cannot predict the form or effect of any federal or state electric utility restructuring initiatives at this time. Federal and/or state electric utility restructuring may cause impairment of significant recorded assets, material reductions of profit margins, and/or increased costs of capital. No assurance can be made that such events would not have a material adverse effect on CSW's or any U.S. Electric Operating Company's results of operations, financial condition or competitive position. (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). CSW 2-18 RATES AND REGULATORY MATTERS CPL RATE REVIEW - DOCKET NO. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million, and in May 1996, CPL placed a $70 million base rate increase into effect under bond, subject to refund based on the receipt of the CPL 1997 Original Rate Order of the Texas Commission. On March 31, 1997, the Texas Commission issued a rate order in CPL's rate review, Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested the reconsideration of numerous provisions of the order. Motions for rehearing were also filed by other parties to the rate proceeding. In response to the motions for rehearing, in June 1997, the Texas Commission made several modifications to the CPL 1997 Original Rate Order and also agreed to rehear on remand several other issues. CPL restored its rates in July 1997, with two exceptions, to levels existing prior to the May 1996 implementation of bonded rates. On August 21, 1997, after reconsidering the issues on remand, the Texas Commission voted to issue a revised final order and on September 10, 1997, CPL received a revised final order. CPL filed its second motion for rehearing on September 30, 1997. The second motion for rehearing again requested reconsideration of numerous issues in the rate case. On October 16, 1997, the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowers the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates will be reduced by an additional $13 million in mid-1998 and another $13 million in mid-1999. There are numerous contributing factors to the difference between the $71 million retail base rate increase originally requested by CPL and the $19 million retail base rate reduction included in the CPL 1997 Final Order. The CPL 1997 Final Order decreased CPL's requested return on equity of 12.25% on its retail rate base to a 10.9% return on equity for all non-ECOM invested capital, which results in a $30 million decrease in CPL's rate request. The CPL 1997 Final Order provides for the disallowance of approximately $18 million of affiliate transactions. In addition, the CPL 1997 Final Order denied CPL's request to use straight line amortization for CPL's deferred accounting costs. Instead, the CPL 1997 Final Order requires CPL to continue to use the mortgage amortization method to amortize its deferred accounting costs, resulting in a reduction of $14 million from CPL's rate request. The CPL 1997 Final Order also decreased depreciation by $17.4 million from CPL's rate request. Another major provision of the CPL 1997 Final Order was the Texas Commission's categorization of $800 million of CPL's investment in STP as ECOM. The term ECOM has been used to refer to the amount of costs that potentially would become "stranded" if retail competition were mandated and prices were set in the market, rather than the price being determined by current regulatory standards of reasonable and necessary cost of providing service. The CPL 1997 Final Order reduced CPL's equity return on the ECOM portion of CPL's investment in STP to 7.96%, compared to the 10.9% return on common equity approved for all other invested capital, resulting in a $15.9 million decrease in CPL's rate request. At the same time, the CPL 1997 Final Order accelerated the recovery of the $800 million designated as ECOM to 20 years from the remaining 32-year life of STP. CSW 2-19 The following table contains details of the estimate of the financial impact of the CPL 1997 Final Order. 1997 1998 1999 ----------------------------- (millions) Decrease in revenue $(24.2) $(28.7) $(41.9) Items included in decrease in revenue with an offsetting effect on expense: Recovery of STP (ECOM) 20.0 20.0 20.0 Change in depreciation (11.3) (11.3) (11.3) Decommissioning 4.3 4.3 4.3 Other 6.8 2.1 2.1 ------ ------ ------ 19.8 15.1 15.1 ------ ------ ------ Change in current year income before tax (44.0) (43.8) (57.0) Federal income taxes 14.8 14.8 19.3 ------ ------ ------ Current year impact on net income (29.2) (29.0) (37.7) ------ ------ ------ 1996 effect (18.9) -- -- ------ ------ ------ Estimated impact on net income $(48.1) $(29.0) $(37.7) ------ ------ ------ CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of disallowed affiliate transactions from CSW Services. As part of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology, currently scheduled to begin in May 1998. A hearing has been set for the temporary injunction on April 3, 1998. Management is unable to predict how the final resolution of these issues will ultimately affect CSW's and CPL's results of operations and financial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had recorded approximately $1.3 billion of regulatory-related assets at December 31, 1997. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, including the CPL 1997 Final Order, CPL no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets would be required. In addition, CPL and CSW could experience, depending on the timing and amount of any write-off, a material adverse effect on their results of operations and financial condition. The foregoing discussion of CPL RATE REVIEW - DOCKET NO. 14965 constitutes forward looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order. PSO 1997 RATE SETTLEMENT AGREEMENT In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings. In accordance with the established schedule, PSO subsequently filed financial data, cost of service and rate design testimony supporting both its current rates and an increase in annual depreciation expense of $26 million. In July 1997, the Oklahoma Commission staff and other intervenors to the proceeding filed their revenue requirements testimony. In its filing, the Oklahoma Commission staff recommended a rate reduction of $76.8 million for PSO. On October 15, 1997, PSO reached a stipulated agreement with parties to settle the rate inquiry that was pending before the Oklahoma Commission. On October 23, 1997, the Oklahoma Commission issued a final order approving the agreement. The following table represents the financial impact of the PSO 1997 CSW 2-20 Rate Settlement Agreement on PSO's 1997 results of operations and also an estimate of its ongoing annual impact on net income in successive years. Ongoing 1997 Annual Impact Impact ------------------- (millions) Decrease in revenue Refund to customers $(29.0) $-- Change in rates (2.5) (35.9) ----- ----- (31.5) (35.9) ----- ----- Changes in expenses (offsetting impact included in revenues) Depreciation (6.3) (10.9) Rate case deferred costs 2.2 -- Income tax (10.2) (8.8) ----- ----- (14.3) (19.7) ----- ----- (17.2) (16.2) Write-off of deferred assets, net of tax (10.2) -- ----- ----- $(27.4) $(16.2) ----- ----- The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing material adverse effect on its results of operations because of the rate decrease. However, it also reduced significant risks for PSO related to this regulatory proceeding and will enable PSO's rates to remain competitive for the foreseeable future. The foregoing discussion of PSO 1997 RATE SETTLEMENT AGREEMENT constitutes forward looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the PSO 1997 Rate Settlement Agreement. SWEPCO LOUISIANA RATE REVIEW In December 1997, the Louisiana Commission announced it would review SWEPCO's rates and service. In 1993, the Louisiana Commission issued an order initiating a review of the rates of all investor-owned utilities in the state. Since that time, each of the other investor-owned utilities in Louisiana have been reviewed. SWEPCO's last rate activity was an $8.2 million rate decrease, initiated by SWEPCO and approved for its small and large industrial customers in January 1988. Prior to that, SWEPCO's last rate increase was in 1985. The Louisiana Commission has requested bids from consultants to perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of service. The Louisiana Commission plans to select consultants during the second quarter of 1998 and a timeline for the review will be determined shortly thereafter. Management cannot predict the outcome of this review. SEEBOARD RECENT REGULATORY ACTIONS Following the phased-in opening of the United Kingdom domestic and small business electricity market to competition in September 1998, customers will be able to choose their electricity supplier. SEEBOARD will compete for customers in its own area as well as throughout the rest of the United Kingdom. The DGES has allowed some of the system development costs associated with the introduction of competition to be recovered by the regional electricity companies through a charge to all customers over the next five years. The DGES has also announced price restraints which set a maximum amount that existing electricity supply companies can charge their domestic and small business customers over the first two years following the introduction of competition, taking into account its view of future electricity purchase costs. For SEEBOARD, this proposal reduces prices in real terms by 6% for the regulatory year ending March 31, 1999 and a further 3% for the following regulatory year ending March 31, 2000. CSW 2-21 OTHER Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding fuel proceedings at CPL, SWEPCO and WTU. PROPOSED AEP MERGER On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28.1 billion ($16.5 billion in equity; $11.6 billion in debt and preferred stock). CSW expects the combination to be accounted for as a pooling of interests. The transaction must satisfy many conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated. This combination is expected to create one of the nation's preeminent diversified electric utilities serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. Both companies have low-cost generation and offer their customers in every state prices below the national average. Over the last two years, both CSW and AEP have ranked among the top five electric utilities in customer satisfaction in the ACSI. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. AEP will issue approximately $6.6 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. Both companies anticipate continuing their current dividend policies until the close of the transaction. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW or its subsidiaries. The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two workforces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Organizational and staffing recommendations will be made by transition teams of employees from both companies. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger CSW and its subsidiaries are restricted from (i) issuing shares of common CSW 2-22 stock other than pursuant to employee benefit plans, (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. The merger is conditioned, among other things, upon the approval of CSW stockholders and several state and federal regulatory agencies. AEP shareholders must authorize additional common stock and approve a new common stock issuance to be used in the exchange for CSW common stock. The companies anticipate that regulatory approvals can be obtained in 12 to 18 months from the date of announcement. See NOTE 16. PROPOSED AEP MERGER. OTHER MERGER AND ACQUISITION ACTIVITIES SETTLEMENT OF LITIGATION RELATED TO TERMINATION OF EL PASO MERGER In July 1997, CSW and El Paso reached a settlement agreement that resolved all of the pending litigation resulting from the termination of the proposed merger. Under the terms of the settlement agreement, CSW and El Paso agreed to dismiss all pending claims in the litigation and give a mutual release from any potential claims related to the El Paso Merger Agreement or the pending litigation, and CSW paid $35 million to El Paso, various of its creditor groups under its plan of reorganization, and its attorneys. CSW recorded a charge of $25 million in the first quarter of 1997 following the court's interim order and recorded an additional charge of $10 million in the second quarter of 1997 to fully recognize the $35 million settlement amount. The bankruptcy court vacated the interim order and approved the settlement agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. SWEPCO CAJUN ASSET PURCHASE PROPOSAL On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets, for $940.5 million in cash, subject to adjustment pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, the Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. The SWEPCO Plan filed March 18, 1998 replaces plans filed previously by SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April 19, 1996. Two competing plans of reorganization for the non-nuclear assets of Cajun have been filed with the bankruptcy court, each with different purchase prices, rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy case are now scheduled through April 1998. Consummation of the SWEPCO Plan is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their board approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external borrowings and internally generated funds with approximately 70% of the external borrowings funded with non-recourse debt. There can be no assurance that the SWEPCO Plan will be confirmed by the bankruptcy court or, if it is confirmed, that it will be approved by federal and state regulators. For additional information regarding the SWEPCO Cajun asset purchase proposal see NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. CSW 2-23 OTHER INITIATIVES As described in OVERVIEW, a vital part of CSW's future strategy involves initiatives that are outside of the traditional United States electric utility industry due to increasing competition and fundamental changes in this industry. In addition, lower anticipated growth rates in CSW's core United States electric utility business combined with the aforementioned industry factors have resulted in CSW pursuing other initiatives. These initiatives have taken a variety of forms; however, they are all consistent with the overall plan for CSW to develop a global energy business. CSW has restrictions on the amounts it may spend under the AEP merger agreement. While CSW believes that such initiatives are necessary to maintain its competitiveness and to supplement its growth in the future, the Holding Company Act may impede or delay its ability to successfully pursue such initiatives (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See RECENT DEVELOPMENTS AND TRENDS. CSW ENERGY AND CSW INTERNATIONAL CSW Energy presently owns interests in six operating power projects totaling 978 MW which are located in Colorado, Florida and Texas. In addition to these projects, CSW Energy has other projects in various stages of development. In August 1997, an affiliate of CSW Energy sold 50% of its 100% interest in the Sweeny Cogeneration project. CSW Energy provided the $56.5 million non-recourse financing for the sale which is expected to be repaid from project distributions or proceeds from sale, as defined in the sales agreements. Construction of the 330 MW electricity generating facility was completed in early 1998 with a commercial operation date of February 1, 1998. CSW Energy did not recognize a gain or loss on this transaction. CSW International was organized to pursue investment opportunities in EWGs and FUCOs. CSW International currently holds investments in the United Kingdom, Mexico and Latin America. CSW International acquired a minority interest in Vale, a Brazilian electric utility company, for an initial investment of approximately $40 million in December 1996. In 1997, CSW International made additional equity investments of approximately $150 million in Latin America. The $190 million used to make the equity investments was funded through loans to CSW International by CSW Energy. CSW Energy obtained the funds from its $200 million Senior Note issuance in October 1996. CSW International continues to seek to expand into other countries in Latin America, Europe, and Asia that meet its investment criteria and the investment criteria contained in the AEP merger agreement. C3 COMMUNICATIONS C3 Communications has two active business units; its Utility Automation Division and a telecommunications partnership, ChoiceCom. C3 Communications' Utility Automation Division performs consulting, implementation and integration of utility meter automation products and services for traditional utility companies and, as competition markets open, in states like California, for energy service providers. C3 Communications offers clients innovative meter-based competitive data services including automated meter reading; hourly, daily and monthly delivery of consumption data; advanced load profiling data; aggregation reports for customers with multiple accounts and operational services like outage and tamper detection and real-time-pricing and time-of use data. ChoiceCom offers telecommunications services including local telephone service, long distance and long-haul data transmission services. ChoiceCom began offering local telephone service in August, 1997, in Austin, Corpus Christi and San Antonio, Texas with an emphasis on the business customer. ChoiceCom also installed state-of-the-art Lucent 5ESS(R) switches in those three cities. In January 1998, ChoiceCom began offering telephone service in Dallas and Houston with plans to install Lucent 5ESS(R) switches in both cities by the end of the year. With the addition of Dallas and Houston, ChoiceCom's expected 5-year CSW 2-24 capital budget has increased to $210 million from $104 million. The partnership has grown to about 150 employees during its first year of operation. In November 1997, the parties amended the ChoiceCom Limited Partnership Agreement to provide that CSW hold 100% of the economic interest in ChoiceCom and 60% of the voting interest. ICG Communications, Inc. holds the remaining 40% voting interest in ChoiceCom, and has an option to acquire a 50% economic interest in ChoiceCom. In the event that its option terminates without being exercised, ICG Communications, Inc. will be bound by a non-compete agreement in CSW's service territory. ENERSHOP EnerShop currently provides energy services to customers in Texas which help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis; project management; engineering design, equipment procurement and construction; and performance monitoring. OTHER VENTURES CSW Energy Services will spearhead CSW's competitive efforts in the retail electricity markets of states outside of CSW's historical service territories. CSW Energy Services will seek to secure electricity supply business in the markets which soon will have retail competition, and will enable CSW to extend its business reach and name recognition beyond CSW's traditional customer base. In March 1998, CSW Energy Services signed its first major supply contract in California. The CSW Services Business Ventures group pursues energy projects related to the business activities of the U.S. Electric Operating Companies. Projects for these groups include staffing services for electric utility nuclear power plants, energy management systems, electric substation automation software and electric vehicles. In June 1997, the FERC approved the request of CSW Power Marketing to sell power and energy at market-based rates in the wholesale market. CSW has temporarily suspended this initiative in light of the AEP Merger since AEP is already pursuing this initiative. SOUTH TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. HL&P owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit 2 was placed in service in June 1989. STP Unit 1 and Unit 2 were removed from service during 1997 for scheduled refueling outages which lasted 24 days and 18 days, respectively. For the year 1997, Unit 1 and Unit 2 operated at net capacity factors of 90.1% and 91.0%, respectively. In September 1997, STPNOC was formed to replace HL&P as the STP Project Manager. Each of the four STP co-owners are represented on the STPNOC board of directors. The CPL representative has been elected as the initial chairman of the board of directors. On October 1, 1997, all HL&P employees assigned to STP were transferred from HL&P to STPNOC. On November 17, 1997, HL&P was removed as STP Project Manager, and STPNOC became the operator of the plant. CPL believes the formation of STPNOC is in the best interest of CPL. The establishment of STPNOC provides the following advantages: (i) allows the management and work force to focus exclusively on the safe, reliable and efficient operation of the STP units; (ii) removes most of the possibility of disputes between the four owners over the operation of the facility; (iii) removes dissension concerning the potential liability of HL&P who was acting as the project manager; and (iv) allows the management of the facility to tailor a total compensation package for the STP work force which best suits that work force and its needs. In addition, the formation and operation of STPNOC is CSW 2-25 expected to result in a decrease in costs allocable to CPL related to its investment in STP (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. ENVIRONMENTAL MATTERS The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. The U.S. Electric Operating Companies are subject to various pending claims alleging that they are PRPs under federal or state remedial laws for investigating and cleaning up contaminated property. CSW believes that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CSW's or any U.S. Electric Operating Company's results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by the U.S. Electric Operating Company, the estimated amount of costs allocated to the U.S. Electric Operating Company and the participation of other parties (The foregoing statements constitute forward looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission levels for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. At the Kyoto Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating companies could be affected if this treaty is approved by the United States Congress in its present form. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. CSW 2-26 RISK MANAGEMENT In October 1997, CSW's board of directors adopted a risk management resolution authorizing CSW to engage in currency, interest rate and energy spot and forward transactions and related derivative transactions on behalf of CSW with foreign and domestic parties as deemed appropriate by executive officers of CSW. The risk management program is necessary to meet the growing demands of CSW's customers for competitive prices and price stability, to enable CSW to compete in a deregulated power industry, to manage the risks associated with domestic and foreign investments and to take advantage of strategic investment opportunities. The U.S. Electric Operating Companies experience commodity price exposures related to the purchase of fuel supplies for the generation of electricity and for the purchase of power and energy from other generation sources. Contracts that provide for the future delivery of these commodities can be considered forward contracts which contain pricing and/or volume terms designed to stabilize the cost of the commodity. Consequently, the U.S. Electric Operating Companies manage their price exposure for the benefit of customers by balancing their commodity purchases through a combination of long-term and short-term (spot-market) agreements. In addition, SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. At December 31, 1997, the gross value of such contracts for differences amounted to not more than 80% of any year's expected power purchases. CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound since its purchase of SEEBOARD in 1995. CSW has utilized certain risk management tools to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. At the end of 1997, CSW had positions in two cross currency swap contracts. The following table presents information relating to these contracts. The market value represents the foreign exchange/interest rate terms inherent in the cross currency swaps at current market pricing. CSW expects to hold these contracts to maturity. At current exchange rates, this liability is included in long-term debt on the balance sheet at a carrying value of approximately $425 million. Expected Expected Cash Cash Inflows Outflows Contract Maturity (Maturity Value) (Market Value) Date - ------------------------------------------------------------------------ Cross currency swap August 1, 2001 $200 million $216.5 million Cross currency swap August 1, 2006 $200 million $226.8 million OTHER MATTERS YEAR 2000 In 1996, a system-wide program to prepare CSW's computer systems and applications for the year 2000 was initiated. CSW expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. Testing and conversion is expected to cost between $20 million and $21 million over the next two years including both domestic and foreign operations. A significant portion of these costs is likely to be covered through the redeployment of existing resources. The major applications which pose the greatest risk for CSW if implementation is not successful are the transmission and distribution automation system; the time in use, demand and recorder metering system for commercial and industrial customers; and the power billing system. The potential problems related to these systems are electric service interruptions to customers, interrupted revenue data gathering and poor customer relations resulting from delayed billing, respectively. Costs related to the year 2000 program will be expensed as incurred. CSW 2-27 ADOPTION OF RIGHTS PLAN In September 1997, CSW's board of directors adopted a Rights Plan, subject to SEC approval under the Holding Company Act. SEC approval was received in December 1997, and on December 22, 1997, CSW executed the Rights Plan which had been modified to permit the AEP Merger. The Rights Plan was initially adopted and ultimately executed as part of the fiduciary responsibility of CSW's board of directors and was not adopted because of any takeover offer or threat. The intent of the Rights Plan is to assure fair and equal treatment for all of CSW's stockholders in the event of a hostile takeover attempt and to encourage a potential acquirer to negotiate with CSW's board of directors before attempting a takeover to assure a fair price for all stockholders. On January 6, 1998, CSW made a dividend distribution of one right for each outstanding share of its common stock. Each right initially entitles the holder to buy one-tenth of one share of CSW Common for $50. Prior to the date upon which the rights become exercisable under the Rights Plan, CSW's outstanding stock certificates will represent both the shares of common stock and the rights, and the rights will trade only together with the shares. Under the Rights Plan, a "triggering event" would occur ten days after a person or group acquires or announces a tender or exchange offer to acquire fifteen percent or more of CSW's outstanding common stock. Upon such a "triggering event," the rights would become exercisable and trade independently of CSW's common stock. After a person or group acquires fifteen percent or more of CSW's outstanding common stock, each right (except those held by such acquiring person or group, whose rights would become void), entitles the holder to purchase, at the exercise price, CSW common shares having a current market value of two times the exercise price. If CSW was acquired in a merger or other business combination, each right would entitle the holder to purchase, at the exercise price, common stock of the acquirer having a current market value of two times the exercise price. In either case, after a triggering event occurs but before an acquiring person becomes the owner of at least fifty percent of CSW's outstanding common stock, CSW's board of directors may direct the exchange of one share of CSW's common stock for each right then outstanding and not exercised. The Rights Plan exempts the AEP Merger transaction. Therefore, neither the execution of the AEP merger agreement nor consummation of the AEP Merger caused, or will cause a "triggering event" or the rights to become exercisable. See PROPOSED AEP MERGER for additional information on the proposed merger. CSW's board of directors may redeem the rights for a price of one cent per right prior to the earlier of the rights becoming exercisable or the expiration of the Rights Plan. The rights will expire ten years from the effective date unless they are earlier redeemed or exchanged by CSW. NEW ACCOUNTING STANDARDS SFAS NO. 125 SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities using a financial-components approach that focuses on control. An entity recognizes assets it controls and derecognizes assets when control has been surrendered and liabilities when they have been extinguished. A transfer of assets in which control of the asset is surrendered is recorded as a sale. Control of an asset is surrendered only when and if certain conditions are met. Likewise, a liability is only extinguished under certain distinct conditions. The Registrants adopted SFAS No. 125 effective January 1, 1997. Adoption of this standard has not had a material adverse effect on the Registrants' results of operations or financial condition. CSW 2-28 SFAS NO. 128 On March 3, 1997, the FASB issued SFAS No. 128, effective for financial statements for periods ending after December 15, 1997. SFAS No. 128 will simplify the computation of earnings per share for many companies by eliminating calculation provisions which were required by the prior earnings per share standard, Accounting Principles Board Opinion No. 15. CSW adopted SFAS No. 128 effective December 31, 1997. Adoption of SFAS No. 128 did not have a material effect on its calculation of earnings per share. SFAS NO. 130 This statement is effective for fiscal years beginning after December 15, 1997. The statement adds the requirement to present comprehensive income and all of its components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Though effective at the beginning of 1998, comprehensive income is not required to be disclosed in interim statements in the year adopted. CSW will adopt this statement beginning with 1998 year-end financial statements. SFAS NO. 131 This statement is effective for fiscal years beginning after December 15, 1997, and requires that certain information about operating segments be presented in complete sets of financial statements. It also requires the presentation of information regarding products and services, geographic areas in which the entity operates, and concentrations of major customers. The objective of this statement is to provide information about the different types of business activities in which an entity engages and the different economic environments in which it operates to help users of financial statements better understand an entity's performance and prospects for future cash flows and make more informed judgments about the enterprise as a whole. An operating segment is a component of an enterprise that earns revenues and incurs expenses, whose results are regularly reviewed by the chief decision maker, and for which discrete financial information is available. Separate information is required to be presented for any segment that is 10 percent or more of reported income, profit or loss, or assets of the combined entity. CSW will adopt this statement beginning with 1998 year-end financial statements. CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 CSW's earnings decreased to $153 million in 1997 from $429 million in 1996. CSW's return on average common stock equity was 4.2% in 1997 compared to 12.1% in 1996. The primary reason for the lower earnings and return on average common stock equity was the accrual of the one-time United Kingdom windfall profits tax. The impact of CSW's final settlement of litigation with El Paso contributed to the decline in earnings as well. Also contributing to the decrease in earnings was the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on CSW's final settlement of litigation with El Paso, the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the windfall profits tax. Further reducing earnings for 1997 were certain asset write-offs predominately at the U.S. Electric Operating Companies. Partially offsetting the lower earnings was the gain on the reacquisition of a portion of the U.S. Electric Operating Companies' preferred stock and an adjustment to CSW 2-29 deferred tax balances of $15 million resulting from a 2% reduction in the United Kingdom corporation tax rate. Further offsetting the decline in earnings was an increase in non-fuel electric revenues. Significant items impacting 1997 earnings are listed below (in millions). Earnings Impact ------------- United Kingdom Windfall Profits Tax $(176) CPL 1997 Final Order (48) Asset Write-offs and Reserves (48) PSO 1997 Rate Settlement Agreement (27) Settlement of Litigation with El Paso (23) Gain on the Reacquisition of Preferred Stock 10 United Kingdom Deferred Tax Adjustment 15 In addition, several items that occurred in 1996 were not present in 1997. Prior to the sale of Transok in 1996, CSW realized $12 million of earnings from Transok's operations. As a result of the sale, CSW also recorded an after-tax gain of approximately $120 million in 1996. However, the U.S. Electric Operating Companies and CSW Energy recorded charges totaling $102 million, after-tax, for certain investments in the second quarter of 1996 which decreased earnings. See NOTE 14. DISCONTINUED OPERATIONS for additional information concerning the effects of the sale of Transok. Operating revenues increased $113 million in 1997 compared to 1996. The revenue variances are shown in the following table. 1997 REVENUE VARIANCES INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS U.S. Electric CPL and WTU Transmission Revenues $56 KWH Sales, Growth and Usage 41 Fuel Revenue 23 CPL 1996 Fuel Agreement 18 Sales for Resale 12 CPL 1997 Final Order (45) KWH Sales, Weather-Related (37) PSO 1997 Rate Settlement Agreement (32) Other Electric 37 ---- 73 United Kingdom 22 Other Diversified 18 ---- $113 ---- U.S. Electric revenues increased $73 million, or 2%, in 1997 compared to 1996. Retail MWH sales increased 2.5% with increases in all customer classes. U.S. Electric revenues increased primarily due to higher MWH sales resulting from increased customer usage and new transmission access revenues at CPL and WTU in accordance with FERC Order No. 888 and the Texas Commission's rule regarding transmission access and pricing. The new transmission revenues had no material effect on earnings because they were almost completely offset by a corresponding amount of transmission expense. Revenues increased due in part to the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel Agreement. An increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. Partially offsetting the revenue increase was a decrease in weather-related demand due to milder weather in the first nine months of 1997. Further offsetting the increase in U.S. Electric revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million, CSW 2-30 or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate movement between the British pound and the U.S. dollar, partially offset by a reduction in the fossil fuel levy collected on behalf of the United Kingdom. Other diversified revenues increased $18 million, or 31%, in 1997 compared to 1996 due primarily to increased revenues from CSW International, C3 Communications, CSW Credit and EnerShop. During 1997 and 1996 the U.S. Electric Operating Companies generated 93% of their electric energy requirements. U.S. Electric fuel expense increased $26 million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also contributing to the increase was the absence in 1997 of a one-time reduction to fuel expense of approximately $9 million recorded in the first quarter of 1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these increases in fuel expense was the effect of lower-cost coal. United Kingdom cost of sales decreased approximately $40 million to $1.3 billion in 1997 compared to 1996 due primarily to a reduction in the fossil fuel levy collected on behalf of the United Kingdom government, which was partially offset by the effect of the exchange rate movement between the British pound and the U.S. dollar. Other operating expense increased $196 million to $981 million in 1997 compared to 1996 due in part to the absence in 1997 of a $27 million pension adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased pension expense. The effect of the exchange rate movement between the British pound and U.S. dollar also contributed to the increase in other operating expense of SEEBOARD U.S.A. In addition, approximately $56 million in new transmission access expense was recorded at CPL and WTU in 1997 related to FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also increasing other operating expense were asset write-offs of approximately $57 million including certain regulatory assets, capitalized demand side management assets and obsolete inventories. In addition, the settlement of litigation with El Paso increased other operating expense $35 million. Further contributing to the increase in other operating expense was the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Partially offsetting these increases were the absence in 1997 of expenses recorded in 1996 related to inventory write-offs of $10 million and CPL rate case adjustments of $15 million. Further offsetting the increases were charges in 1996 associated with restructuring costs. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan. Depreciation and amortization expense increased $33 million, or 7%, in 1997 due primarily to the implementation of depreciation and amortization in accordance with the CPL 1997 Final Order. As a result of that order, the increase in depreciation due to the accelerated recovery of ECOM property was offset in part by the implementation of lower depreciation rates. Taxes other than income increased $17 million, or 10%, in 1997 compared to 1996 due primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas franchise tax refund and true-up in 1996. Income tax expense decreased $73 million to $151 million in 1997 due primarily to lower pre-tax income and a $15 million adjustment to deferred income tax balances resulting from a 2% reduction in the United Kingdom corporation tax rate. Other income and deductions increased to a gain of $32 million in 1997 from a loss of $61 million in 1996 due primarily to the absence in 1997 of charges for certain investments recorded in the second quarter of 1996 of approximately $84 million, after tax, at the U.S. Electric Operating Companies and $18 million at CSW Energy. Long-term interest expense increased $8 million, or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter 1996 debt issuance by CSW Energy. Short-term and other interest expense decreased $8 million to $86 million in 1997 when compared to 1996 due primarily to lower levels of short-term borrowings. Distributions on newly-issued Trust Preferred Securities increased interest and other charges by $17 million in 1997, which was partially offset by lower dividend requirements resulting from CSW 2-31 the related preferred stock reacquisitions at the U.S. Electric Operating Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on the new securities. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 CSW's earnings increased to $429 million in 1996 compared to $402 million in 1995. Although earnings increased, earnings per share decreased from $2.10 in 1995 to $2.07 in 1996 due to the issuance of additional shares of common stock during 1996. The return on average common stock equity was 12.1% in 1996 compared to 13.1% in 1995. U.S. Electric operations contributed approximately 57% of total earnings in 1996 and approximately 105% of total earnings in 1995. The lower percent for U.S. Electric operations is mostly attributed to the gain on the sale of Transok, higher earnings from SEEBOARD U.S.A. and the recording of charges at each of the U.S. Electric Operating Companies for certain investments. SEEBOARD U.S.A. contributed 24% of total earnings in 1996 as compared to 2% in 1995, reflecting a full year of earnings in 1996 compared to only a partial quarter in 1995. Earnings increased in 1996 compared to 1995 due primarily to the gain from the sale of Transok, the additional earnings from SEEBOARD U.S.A., the absence of charges in 1996 related to the termination of the proposed El Paso Merger in June 1995 and the effect of the CPL 1995 Agreement. Also contributing to the increase were higher non-fuel electric revenues resulting from increased usage, customer growth and weather-related demand. Partially offsetting these increases in earnings were the recording of charges by the U.S. Electric Operating Companies in June 1996 associated with certain investments, write-offs of certain equity investments and other project development costs for CSW Energy, restructuring charges, the effect of the CPL 1996 Fuel Agreement, the asset reserves for the pending CPL rate case and the absence in 1996 of favorable tax adjustments made in 1995. Additional information related to the reserves recorded in June 1996 is discussed below. For further discussion of CPL's regulatory activities, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Increased depreciation and amortization, increased other operating expense, increased interest expense and the loss of Mirror CWIP earnings also reduced the increase in earnings. Significant items impacting 1996 earnings are listed below (in millions). Earnings Impact ------------ Gain on the Sale of Transok $120 Charges for Certain Investments (104) CPL Pending Rate Case Write-offs (8) CPL 1996 Fuel Agreement (7) CSW 2-32 Revenues increased approximately $2.0 billion or 64% in 1996 when compared to 1995. The revenue variances are shown in the following table. 1996 REVENUE VARIANCES INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS U.S. Electric Fuel Revenues $181 CPL 1995 Agreement 112 KWH Sales, Growth and Usage 83 KWH Sales, Weather-Related 21 WTU 1995 Stipulation and Agreement 21 Other Electric (35) CPL 1996 Fuel Agreement (18) ------ 365 United Kingdom 1,640 Other Diversified 7 ------ $2,012 ------ U.S. Electric revenues increased $365 million or 13% in 1996 compared to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales among all retail customer classes. Customer growth, increased usage and weather-related demand contributed to the increased revenues along with higher fuel revenues as discussed below. Also contributing to the increase was the absence in 1996 of reserves for refunds recorded in 1995 in accordance with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. KWH sales to retail customers increased in 1996 as a result of customer growth, increased customer usage and weather-related demand. CSW's operating revenues also include approximately $1.8 billion from a full year of revenues from SEEBOARD U.S.A. for 1996 compared to $208 million of revenues for a partial quarter of operations in 1995. Other diversified revenues increased 13% to $59 million in 1996 as compared to $52 million in 1995 due primarily to increased revenues from CSW Energy projects, increased factoring revenues at CSW Credit and new revenues from C3 Communications and EnerShop. During 1996 and 1995 the U.S. Electric Operating Companies generated 93% and 95%, respectively, of their electric energy requirements. U.S. Electric fuel expense increased 15% to approximately $1.1 billion in 1996 at the U.S. Electric Operating Companies due primarily to an increase in the average unit cost of fuel to $1.81 per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting higher natural gas prices. Partially offsetting this increase was a reduction in the delivered cost of coal at the U.S. Electric Operating Companies resulting from lower coal transportation costs and lower spot market coal prices. U.S. Electric purchased power increased $36 million to $77 million in 1996 due primarily to increased economy energy purchases at a higher cost per MWH. CSW's operating expenses include $1.3 billion for cost of sales from a full year of United Kingdom operations in 1996 compared to $158 million recorded in United Kingdom cost of sales for a partial quarter of operations in 1995. Other operating expenses in 1996 increased $228 million, or 41%, from 1995 due primarily to the addition in 1996 of a full year of operating expenses from SEEBOARD U.S.A. as well as the absence in 1996 of reduced expenses in 1995 related to $28 million of regulatory assets established for previously expensed restructuring charges and the reversal of rate case costs pursuant to the CPL 1995 Agreement. Also contributing to the increase was the recognition in 1995 of a $13 million regulatory asset for previously recorded restructuring charges in accordance with the WTU 1995 Stipulation and Agreement. Another factor contributing to increased other operating expense was a CSW restructuring charge recorded in 1996. A $42 million reserve for deferred merger and acquisition costs was recorded in 1995 from the terminated El Paso merger. Maintenance expense decreased $5 million to $150 million in 1996 from $155 million in 1995 due primarily to a $10 million decrease in maintenance expense at CPL resulting from lower production and distribution maintenance costs. Partially offsetting CSW 2-33 this decrease was a $7 million increase in maintenance due to a write-down of production inventory at the U.S. Electric Operating Companies in 1996. Depreciation and amortization increased 31% to $464 million in 1996 from $353 million in 1995 due primarily to the addition of depreciable fixed assets and the goodwill amortization related to the purchase of SEEBOARD, as well as increases in depreciable fixed assets at the U.S. Electric Operating Companies. Also contributing to the increase were the amortization of the regulatory assets established in 1995 associated with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement along with accelerated amortization of deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and Agreement. Taxes, other than income increased 10% to $178 million in 1996 from $162 million in 1995. The increase was due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates recorded in 1995. Also contributing to the increase were higher ad valorem and state franchise taxes at SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher state assessed value in Louisiana and the addition of the HVdc tie in Texas. The state franchise taxes increased due mainly to higher federal taxable income associated with Texas franchise tax. Income taxes increased $132 million to $224 million during 1996 compared to 1995. During 1995, income taxes were lower primarily due to adjustments relating to prior year taxes, as well as the tax effect from both the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. Income taxes of $46 million were recorded for SEEBOARD U.S.A. from a full year of operations in 1996 compared to $6 million for a partial quarter of operations in 1995. Other income and deductions decreased $160 million in 1996 when compared to 1995 due primarily to charges recorded in June 1996 associated with certain investments for plant sites, engineering studies and lignite reserves for the U.S. Electric Operating Companies. See the table below for additional detail on these charges. Other income and deductions was also lower as a result of certain write-offs recorded by CSW Energy. In addition, CPL's Mirror CWIP liability, which has now been fully amortized, contributed $41 million to income in 1995. Pre-tax effect Income tax Net income on income benefit effect -------------------------------------- (thousands) CPL $(21,509) $5,940 $(15,569) PSO (51,109) 15,401 (35,708) SWEPCO (29,700) 7,885 (21,815) WTU (14,949) 4,003 (10,946) ------------------------------------- $(117,267) $33,229 $(84,038) ------------------------------------- Interest on long-term debt increased $102 million or 46% during 1996 compared to 1995 due to higher levels of long-term debt outstanding related to the SEEBOARD acquisition. CSW's 1996 embedded cost of long-term debt was unchanged from 1995 at 7.2%. Interest on short-term debt decreased $7 million or 7% in 1996 compared to 1995 due to lower interest rates and lower levels of short-term debt outstanding. CSW used a portion of the proceeds from the sale of Transok to reduce short-term debt. The $120 million gain on the sale of Transok as well as Transok's 1996 operations are shown separately in discontinued operations. Transok's earnings for the first five months of 1996 were $12 million compared to $25 million from a full year of operations for 1995. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information, including comparative statements of income, related to the sale of Transok. CSW 2-34 CSW CONSOLIDATED STATEMENTS OF INCOME CENTRAL AND SOUTH WEST CORPORATION - ------------------------------------------------------------------------ For the Years Ended December 31, ---------------------------- 1997 1996 1995 ------- ------- ------ ($ in millions, except share amounts) Operating Revenues U.S. Electric $3,321 $3,248 $2,883 United Kingdom 1,870 1,848 208 Other diversified 77 59 52 ------- ------- ------ 5,268 5,155 3,143 ------- ------- ------ Operating Expenses and Taxes U.S. Electric fuel 1,177 1,151 1,004 U.S. Electric purchased power 89 77 41 United Kingdom cost of sales 1,291 1,331 158 Other operating 981 785 557 Maintenance 152 150 155 Depreciation and amortization 497 464 353 Taxes, other than income 195 178 162 Income taxes 151 224 92 ------- ------- ------ 4,533 4,360 2,522 ------- ------- ------ Operating Income 735 795 621 ------- ------- ------ Other Income and Deductions Mirror CWIP liability amortization -- -- 41 U.S. Electric charges for investments and plant development costs (3) (117) -- Other 29 16 56 Non-operating income taxes 6 40 2 ------- ------- ------ 32 (61) 99 ------- ------- ------ Income Before Interest and Other Charges 767 734 720 ------- ------- ------ Interest and Other Charges Interest on long-term debt 333 325 223 Distributions on Trust Preferred Securities 17 -- -- Interest on short-term debt and other 86 94 101 Preferred dividend requirements of subsidiaries 12 18 19 Gain on reacquired preferred stock (10) -- -- ------- ------- ------ 438 437 343 ------- ------- ------ Income from Continuing Operations 329 297 377 ------- ------- ------ Discontinued Operations Income from discontinued operations, net of tax of $6 for 1996 and $13 for 1995 -- 12 25 Gain on the sale of discontinued operations, net of tax of $72 -- 120 -- ------- ------- ------ -- 132 25 ------- ------- ------ Income Before Extraordinary Item 329 429 402 Extraordinary Item - United Kingdom windfall profits tax (176) -- -- ------- ------- ------ Net Income for Common Stock $153 $429 $402 ======= ======= ====== Average Common Shares Outstanding 212.1 207.5 191.7 Basic and Diluted EPS from Continuing Operations $1.55 $1.43 $1.97 Basic and Diluted EPS from Discontinued Operations -- 0.64 0.13 ------- ------- ------ Basic and Diluted EPS before Extraordinary Item 1.55 2.07 2.10 Basic and Diluted EPS from Extraordinary Item (0.83) -- -- ------- ------- ------ Basic and Diluted EPS $0.72 $2.07 $2.10 ======= ======= ====== Dividends Paid per Share of Common Stock $1.74 $1.74 $1.72 ======= ======= ====== The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-35 CSW CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CENTRAL AND SOUTH WEST CORPORATION - --------------------------------------------------------------------------- For the Years Ended December 31, -------------------------- 1997 1996 1995 ------- ------ ------ (millions) Common Stock at Beginning of Year $740 $675 $667 Sale of Common Stock 3 65 8 ------- ------ ------ Common Stock at End of Year 743 740 675 ------- ------ ------ Paid-in Capital at Beginning of Year 1,022 610 561 Sale of Common Stock 17 412 49 ------- ------ ------ Paid-in Capital at End of Year 1,039 1,022 610 ------- ------ ------ Retained Earnings at Beginning of Year 1,963 1,893 1,824 Net income for common stock 153 429 402 Deduct: Common stock dividends 369 358 329 Deduct: Other 1 1 4 ------- ------ ------ Retained Earnings at End of Year 1,746 1,963 1,893 ------- ------ ------ Foreign Currency Translation and Other at Beginning of Year 77 -- -- Net Change (49) 77 -- ------- ------ ------ Foreign Currency Translation and Other at End of Year 28 77 -- ------- ------ ------ ------- ------ ------ Total Stockholders' Equity $3,556 $3,802 $3,178 ======= ====== ====== The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-36 CSW CONSOLIDATED BALANCE SHEETS CENTRAL AND SOUTH WEST CORPORATION - --------------------------------------------------------------------------- As of December 31, ----------------- 1997 1996 ------- ------- (millions) ASSETS Fixed Assets Electric Production $5,824 $5,830 Transmission 1,558 1,538 Distribution 4,453 4,237 General 1,381 1,318 Construction work in progress 184 230 Nuclear fuel 196 184 ------- ------- 13,596 13,337 Other diversified 250 84 ------- ------- 13,846 13,421 Less - Accumulated depreciation and amortization 5,218 4,940 ------- ------- 8,628 8,481 ------- ------- Current Assets Cash and temporary cash investments 75 254 Accounts receivable 916 837 Materials and supplies, at average cost 172 185 Electric utility fuel inventory 65 102 Under-recovered fuel costs 84 46 Prepayments and other 78 85 ------- ------- 1,390 1,509 ------- ------- Deferred Charges and Other Assets Deferred plant costs 503 509 Mirror CWIP asset 285 299 Other non-utility investments 448 371 Securities available for sale 103 -- Income tax related regulatory assets, net 329 236 Goodwill 1,428 1,525 Other 337 402 ------- ------- 3,433 3,342 ------- ------- $13,451 $13,332 ======= ======= The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-37 CSW CONSOLIDATED BALANCE SHEETS CENTRAL AND SOUTH WEST CORPORATION - ---------------------------------------------------------------------- As of December 31, ---------------------- 1997 1996 -------- -------- CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 212.2 million shares in 1997 and 211.5 million shares in 1996 $ 743 $ 740 Paid-in capital 1,039 1,022 Retained earnings 1,746 1,963 Foreign currency translation and other 28 77 -------- -------- 3,556 45% 3,802 47% -------- --- --------- --- Preferred Stock Not subject to mandatory redemption 176 292 Subject to mandatory redemption 26 33 -------- --------- 202 2% 325 4% Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 335 4% -- --% Long-term debt 3,898 49% 4,024 49% -------- --- --------- --- Total Capitalization 7,991 100% 8,151 100% -------- --- --------- --- Current Liabilities Long-term debt and preferred stock due within twelve months 32 204 Short-term debt 721 364 Short-term debt - CSW Credit, Inc. 636 579 Loan notes 56 76 Accounts payable 558 630 Accrued taxes 171 324 Accrued interest 87 82 Other 238 166 -------- -------- 2,499 2,425 -------- -------- Deferred Credits Accumulated deferred income taxes 2,432 2,272 Investment tax credits 278 291 Other 251 193 -------- -------- 2,961 2,756 -------- -------- $ 13,451 $ 13,332 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-38 CSW CONSOLIDATED STATEMENTS OF CASH FLOWS CENTRAL AND SOUTH WEST CORPORATION - ----------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------- 1997 1996 1995 ------- ------- ------ (millions) OPERATING ACTIVITIES Net income for common stock $153 $429 $402 Non-cash Items and Adjustments Depreciation and amortization 529 521 425 Deferred income taxes and investment tax credits 110 62 (11) Preferred stock dividends 12 18 19 Gain on reacquired preferred stock (10) -- -- Mirror CWIP liability amortization -- -- (41) Charges for investments and assets 53 147 -- Gain on sale of subsidiary -- (192) -- Changes in Assets and Liabilities Accounts receivable (140) (86) (36) Accounts payable 45 23 (32) Accrued taxes (153) (14) 25 Fuel recovery (37) (89) 76 Other 164 56 (28) ------- ------- ----- 726 875 799 ------- ------- ----- INVESTING ACTIVITIES Construction expenditures (507) (521) (474) Acquisitions expenditures -- (1,394) (421) CSW Energy/CSW International projects (382) (124) 109 Sale of National Grid assets -- 99 -- Cash proceeds from sale of subsidiary -- 690 -- Other (15) (36) (26) ------- ------- ----- (904) (1,286) (812) ------- ------- ----- FINANCING ACTIVITIES Common stock sold 20 477 57 Proceeds from issuance of long-term debt -- 437 456 SEEBOARD acquisition financing -- 350 731 Reacquisition/Maturity of long-term debt (253) (239) (363) Redemption of preferred stock (114) (1) (1) Trust Preferred Securites Sold 323 -- -- Other financing activities (3) 67 -- Change in short-term debt 414 (395) (226) Payment of dividends (383) (376) (348) ------- ------- ----- 4 320 306 ------- ------- ----- Effect of exchange rate changes on cash and cash equivalents (5) (56) -- ------- ------- ----- Net Change in Cash and Cash Equivalents (179) (147) 293 Cash and Cash Equivalents at Beginning of Year 254 401 108 ======= ======= ===== Cash and Cash Equivalents at End of Year $75 $254 $401 ======= ======= ===== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $396 $356 $301 ======= ======= ===== Income taxes paid $301 $196 $77 ======= ======= ===== The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-39 CENTRAL AND SOUTH WEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS CSW is a registered holding company under the Holding Company Act subject to regulation by the SEC. CSW's U.S. Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of CSW's U.S. Electric Operating Companies is the generation, transmission, and distribution of electric power and energy. These companies are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Texas Commission. The principal business of CSW's United Kingdom electric operating subsidiary, SEEBOARD, is the distribution and supply of electric power and energy in Southeast England. SEEBOARD is subject to rate regulation by the DGES. In addition to electric utility operations, CSW has subsidiaries involved in a variety of business activities. CSW Energy and CSW International pursue cogeneration and other energy-related ventures; CSW Credit factors the accounts receivable of affiliated and non-affiliated companies; C3 Communications pursues telecommunications projects; CSW Leasing has investments in leveraged leases; EnerShop offers energy-management services and CSW Energy Services will pursue retail energy markets outside of CSW's traditional service territory. The more significant accounting policies of the CSW System are summarized below. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CSW and its subsidiary companies. The consolidated financial statements for CPL, PSO and SWEPCO include their respective capital trusts. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities along with disclosure of contingent liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FIXED ASSETS AND DEPRECIATION U.S. Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used during construction. SEEBOARD's fixed assets are stated at their original fair market value which existed on the date of acquisition plus the original cost of property acquired or constructed since the acquisition, less disposals. Provisions for depreciation of plant are computed using the straight-line method, generally at individual rates applied to the various classes of depreciable property. The annual average consolidated composite rates of the Registrants are presented in the following table. CSW 2-40 CSW CPL PSO SWEPCO WTU ----- ------- ------- ---------- ------- 1997 3.4% 3.0% 3.3% 3.2% 3.3% 1996 3.4% 2.9% 3.6% 3.2% 3.2% 1995 3.4% 2.9% 3.6% 3.2% 3.2% CPL NUCLEAR DECOMMISSIONING OF STP At the end of STP's service life, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its pre-plant state. CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalations for expected inflation to the expected time of decommissioning, and is net of expected earnings on the trust fund. CPL's portion of the costs of decommissioning STP were estimated to be $258 million in 1995 dollars based on a site specific study completed in 1995. CPL is recovering these decommissioning costs through rates based on the service life of STP at a rate of $8.2 million per year. The $8.2 million annual cost of decommissioning is reflected on the income statement in other operating expense. Due to the fact that the funds are deposited with a trustee under the terms of an irrevocable trust and because of the ongoing nature of the FASB project, as described below, CPL believes it inappropriate to reflect the trust assets on its financial statements. At December 31, 1997, the trust balance was $45.7 million. The FASB is currently reviewing the utility industry's accounting treatment of nuclear and certain other plant decommissioning costs. An exposure draft regarding this matter was issued in February 1996. In November 1997 the FASB abandoned all previous decisions on the scope of this project and began a new project related to decommissioning and other environmental remediation costs. It is not known at this time when any new pronouncement would result from this project. ELECTRIC REVENUES AND FUEL The U.S. Electric Operating Companies record revenues based upon cycle-billings. Electric service provided subsequent to billing dates through the end of each calendar month are accrued for by estimating unbilled revenues in accordance with industry standards. CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of base rates whereby over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers after Texas Commission approval. The cost of fuel is charged to expense as incurred, with resulting fuel over-recoveries and under-recoveries recorded as regulatory assets and liabilities. PSO recovers fuel costs in Oklahoma and SWEPCO recovers fuel costs in Arkansas and Louisiana through automatic fuel recovery mechanisms. The application of these mechanisms varies by jurisdiction. See ITEM 1. BUSINESS-FUEL RECOVERY and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information about fuel recovery. CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale customers through formula rates. CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In addition to fuel CSW 2-41 amortization, CPL also records nuclear fuel expense as a result of other items, including spent fuel disposal fees assessed on the basis of net MWHs sold from STP and DOE special assessment fees for decontamination and decommissioning of the enrichment facilities on the basis of prior usage of enrichment services. ACCOUNTS RECEIVABLE CSW Credit, as a wholly owned subsidiary of CSW, purchases, without recourse, the billed and unbilled accounts receivable of the U.S. Electric Operating Companies, certain non-affiliated public utility companies and, prior to its sale by CSW in June 1996, Transok. REGULATORY ASSETS AND LIABILITIES For their regulated activities, the U.S. Electric Operating Companies follow SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent probable future revenue to the company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory assets are currently being recovered in rates or are probable of being recovered in rates. The unamortized asset balances are included in the table below.
CSW CPL PSO SWEPCO WTU -------------------------------------------------------------- (millions) (thousands) ---------------------------------------------------- AS OF DECEMBER 31, 1997 Regulatory Assets Deferred plant costs $503 $484,277 $ -- $ -- $18,637 (3) Mirror CWIP asset 285 285,431 -- -- -- Income tax related regulatory assets, net 329 390,149 -- -- -- Deferred restructuring and rate case costs 36 24,049 (1) -- -- 12,369 (3) Demand side management costs 10 9,669 -- -- -- OPEBs 3 -- 2,829 -- -- Under-recovered fuel costs 84 43,229 15,365 (2) 13,013 11,968 Loss on reacquired debt 166 84,070 16,882 39,873 24,710 Fuel settlement 16 -- -- 15,710 (5) -- Other 8 3,669 377 2,140 2,787 ---------------------------------------------------------- $1,440 $1,324,543 $35,453 $70,736 $70,471 Regulatory Liabilities Refunds due customers $64 $63,713 $ -- $ -- $366 Income tax related regulatory liabilities, net -- -- 41,793 10,072 9,482 Other 1 1,205 -- -- -- ---------------------------------------------------------- $65 $64,918 $41,793 $10,072 $9,848 ----------------------------------------------------------
CSW 2-42
CSW CPL PSO SWEPCO WTU ------------------------------------------------------- (millions) (thousands) --------------------------------------------- AS OF DECEMBER 31, 1996 Regulatory Assets Deferred plant costs $509 $486,978 $ -- $ -- $22,365 (3) Mirror CWIP asset 299 298,708 -- -- -- Income tax related regulatory assets, net 236 335,226 -- -- -- Deferred restructuring and rate case costs 46 30,965 (1) -- -- 14,973 (3) Deferred storm costs 2 -- 2,448 (4) -- -- Demand side management costs 15 7,070 8,278 -- -- OPEBs 3 -- 3,325 -- -- Under-recovered fuel costs 47 26,298 2,651 (2) 9,120 8,961 Loss on reacquired debt 180 90,751 18,068 42,844 28,116 Fuel settlement 17 -- -- 17,414 (5) Other 13 3,453 4,997 1,326 1,576 ---------------------------------------------------- $1,367 $1,279,449 $39,767 $70,704 $75,991 Regulatory Liabilities Refunds due customers $43 $43,266 $ -- $ -- $2 Income tax related regulatory liabilities, net -- -- 46,007 36,106 16,918 Other 2 1,339 -- -- -- ---------------------------------------------------- $45 $44,605 $46,007 $36,106 $16,920 ---------------------------------------------------- (1) Earning no return, amortized by the end of 2000 (2) Earning no return, amortized over 12 month period, recalculated semiannually (3) Earning no return, amortized through 2002 (4) Earning no return, amortized by the end of 1997 (5) Earning no return, amortized by the end of 2006
In accordance with orders of the Texas Commission, CPL and WTU deferred carrying costs, as well as operating costs, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began commercial operation until the date the plants were included in rate base. CPL is amortizing and recovering these deferred costs through rates over the life of the plant. WTU began amortizing and recovering such costs over a seven year period beginning January 1, 1996. In accordance with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which is being amortized over the life of STP. For further information regarding the deferred plant costs at CPL and WTU, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and MD&A-RECENT DEVELOPMENTS AND TRENDS, REGULATORY ACCOUNTING. SEEBOARD ACQUISITION The acquisition of SEEBOARD was accounted for as a purchase combination. An allocation of the purchase price has been performed and is reflected in the consolidated financial statements. The goodwill is being amortized on a straight-line basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31, 1997 was $1.4 billion. CSW continually evaluates whether circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. NATIONAL GRID ASSETS Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK) plc, as a shareholder of SEEBOARD, received approximately 32.5 million shares of National Grid common stock. On February 2, 1996, all of these shares were sold for approximately $99 million. CSW 2-43 FOREIGN CURRENCY TRANSLATION The financial statements of SEEBOARD U.S.A., which are included in CSW's consolidated financial statements, have been translated from British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are translated at the exchange rate at the end of the period and all income statement items are translated at the average exchange rate for the applicable period. At December 31, 1997 the current exchange rate was approximately (pound)1.00=$1.65, and the average exchange rate for the twelve month period ended December 31, 1997 was approximately (pound)1.00=$1.58. At December 31, 1996 the current exchange rate was approximately (pound)1.00=$1.71, and the average exchange rate for the twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56. The average exchange rate for the twelve month period ended December 31, 1995 was approximately (pound)1.00=$1.58. All resulting translation adjustments are recorded directly to Foreign currency translation and other on CSW's Consolidated Balance Sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The non-cash impact of the changes in exchange rates on cash and cash equivalents, resulting from the translation of items at the different exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in Effect of exchange rate changes on cash and cash equivalents. STATEMENTS OF CASH FLOWS Cash equivalents are considered to be highly liquid instruments with a maturity of three months or less. Accordingly, temporary cash investments, which for CSW subsidiaries includes receivables from affiliates, are considered cash equivalents. RISK MANAGEMENT CSW has been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound since its purchase of SEEBOARD in 1995. CSW has utilized certain risk management tools, including cross currency swaps, foreign currency futures and foreign currency options, to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. CSW accounts for these transactions as hedge transactions and any gains or losses associated with the risk management tools are recognized in the financial statements at the time the hedge transactions are settled. CSW believes its credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT and NOTE 7. FINANCIAL INSTRUMENTS for additional information. SECURITIES AVAILABLE FOR SALE CSW accounts for its investments in equity securities in accordance with SFAS No. 115. The investments have been designated as available for sale, and as a result are stated at fair value. Unrealized holding gains and losses, net of related taxes, are included within Foreign currency translation and other on CSW's Consolidated Balance Sheets. Information related to these Securities available for sale as of December 31, 1997 is presented in the following table. Original Unrealized Holding Gains/ Cost (Losses) Fair Value ------------------------------------------------- (millions) Securities available for sale $110 $5 $(12) $103 CSW 2-44 ACCOUNTING CHANGE Effective January 1, 1997, CPL and WTU began utilizing the LIFO method for the valuation of all fossil fuel inventories. Previously, CPL had used the weighted average cost method and WTU had used the LIFO method for coal and the weighted average cost method for other fuel inventories. PSO utilizes the LIFO method. SWEPCO continues to utilize the weighted average cost method pending approval of the Arkansas Commission to utilize the LIFO method. The change in accounting did not affect the results of operations due to the regulatory treatment of such costs. RECLASSIFICATION Certain financial statement items for prior years have been reclassified to conform to the 1997 presentation. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information related to the classification of Transok activities. 2. LITIGATION AND REGULATORY PROCEEDINGS SETTLEMENT OF LITIGATION RELATED TO TERMINATION OF EL PASO MERGER In May 1993, CSW entered into a merger agreement pursuant to which El Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. In June 1995, following its notification that CSW was terminating the El Paso Merger Agreement, El Paso filed suit against CSW seeking a $25 million termination fee from CSW, as well as, unspecified damages for various contract and tort claims. Subsequently, CSW filed suit against El Paso seeking a $25 million termination fee from El Paso and recovery of certain rate case expenses incurred by CSW on behalf of El Paso. 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. On April 11, 1997, the court issued an interim order in which it ruled that CSW owed El Paso a $25 million termination fee and reserved judgment on certain disputed interest. In July 1997, CSW and El Paso reached a settlement agreement that resolved all of the pending litigation. Under the terms of the settlement agreement, CSW and El Paso dismissed all pending claims in the litigation and CSW paid $35 million to El Paso, various of its creditor groups under its plan of reorganization, and its attorneys. CSW recorded a charge of $25 million in the first quarter of 1997 following the court's interim order and recorded an additional charge of $10 million in the second quarter of 1997 to fully recognize the $35 million settlement amount. The bankruptcy court vacated the interim order and approved the settlement agreement. LITIGATION RELATED TO THE RIGHTS PLAN AND AEP MERGER Two lawsuits have been filed in Delaware state court seeking to enjoin the AEP Merger. CSW and each of its directors have been named as defendants in both cases. The first suit alleges that the Rights Plan, approved by the CSW Board of Directors on September 27, 1997 and which became effective after SEC approval under the Holding Company Act on December 19, 1997, constitutes a "poison pill" precluding acquisition offers and resulting in a heightened fiduciary duty on the part of the CSW Board of Directors to pursue an auction-type sales process to obtain the best value for CSW stockholders. The second suit alleges that the AEP Merger is unfair to CSW stockholders in that it does not recognize the underlying intrinsic value of CSW's assets and its future profitability. The second suit also seeks an auction-type sale process. CSW believes that both suits are without merit and intends to defend them vigorously. CPL RATE REVIEW - DOCKET NO. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million, and in May 1996, CPL placed a $70 million base rate increase into effect under bond, subject to refund based on the receipt of a final order of the Texas Commission. On March 31, 1997, the CSW 2-45 Texas Commission issued the CPL 1997 Original Rate Order in CPL's rate review, Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested the reconsideration of numerous provisions of the order. Motions for rehearing were also filed by other parties to the rate proceeding. In response to the motions for rehearing, in June 1997, the Texas Commission made several modifications to the CPL 1997 Original Rate Order and also agreed to rehear on remand several other issues. CPL restored its rates in July 1997, with two exceptions, to levels existing prior to the May 1996 implementation of bonded rates. On August 21, 1997, after reconsidering the issues on remand, the Texas Commission voted to issue a revised final order and on September 10, 1997, CPL received a revised final order. CPL filed its second motion for rehearing on September 30, 1997. The second motion for rehearing again requested reconsideration of numerous issues in the rate case. On October 16, 1997 the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowers the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates will be reduced by an additional $13 million in mid-1998 and another $13 million in mid-1999. The CPL 1997 Original Rate Order established a separate docket, Docket No. 17280, to consider the recoverability of $20 million of rate case expenses incurred in the current rate case and in two prior dockets. CPL reached a settlement with all parties to resolve Docket No. 17280 which provides for CPL to recover $14 million out of the total $20 million of rate case expenses originally requested. Approximately $8 million of the rate case expenses will be recovered as an offset to the refund in the rate case, and the remaining $6 million of expenses will be surcharged to customers over three years. CPL expensed the $6 million in foregone rate case expenses during the first quarter of 1997. CPL implemented bonded rates subject to refund in May 1996. On July 17, 1997, CPL restored its rates, with two exceptions, to levels existing prior to the implementation of the bonded rates. The two exceptions are for industrial interruptible rates and customer service charges for which the Texas Commission approved the increases requested by CPL. On October 31, 1997, CPL filed with the Texas Commission a proposed methodology for issuing an interim refund to customers in December 1997. A second refund was made in March 1998. The different components that were all incorporated into the December 1997 refund made to customers, a breakdown of the December 1997 refund, as well as the March 1998 refund, including interest, is shown below (millions). December 1997 Amount collected from customers under bond $81.7 Surcharge for rate case expenses (13.3) Surcharge for fuel cost under-recovery (23.6) ------ Net refund to customers $44.8 ------ March 1998 (estimated) Remaining refund available $59.0 Surcharge for fuel cost under-recovery (34.3) ------ Net refund to customers $24.7 ------ The following table details the financial impact of the CPL 1997 Final Order as compared to the rates existing prior to CPL placing bonded rates into effect. Although the entire impact has been recorded in CPL's 1997 results of operations, the financial impact on its results of operations for 1996 and for the year 1997 is shown below. CSW 2-46 1996 Retroactive 1997 Only Impact Impact ----------- --------- (millions) Decrease in revenue $(20.7) $(24.2) ----------- --------- Items included in decrease in revenue with offsetting effect on expense: Accelerated recovery of STP (ECOM) 13.3 20.0 Change in depreciation (7.5) (11.3) Decommissioning 1.9 4.3 Other -- 6.8 ----------- --------- 7.7 19.8 ----------- --------- Change in current year income before tax (28.4) (44.0) Federal income taxes 9.5 14.8 ----------- --------- Impact on net income - all recorded in 1997 $(18.9) $(29.2) ----------- --------- CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of disallowed affiliate transactions from CSW Services. As part of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology, currently scheduled to begin in May 1998. A hearing has been set for the temporary injunction on April 3, 1998. Management is unable to predict how the final resolution of these issues will ultimately affect CSW's and CPL's results of operations and financial condition. See MD&A - RATES AND REGULATORY MATTERS, CPL RATE REVIEW - DOCKET NO. 14965 for additional discussion of the CPL 1997 Final Order, including the estimated ongoing financial impact of the final order and information regarding the difference between the rates originally requested by CPL and those ordered by the Texas Commission. CPL 1995 AGREEMENT On April 5, 1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million. In addition, CPL refunded approximately $30 million in over-recovered fuel costs through April 1995. Furthermore, CPL did not charge customers for $62.25 million in replacement power costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests filed prior to September 28, 1995. CPL also reduced its fuel factors, effective in July 1995, by approximately $55 million on an annual basis due to projections of lower fuel costs. The Texas Commission approved the CPL 1995 Agreement on October 4, 1995. Details of the items in the CPL 1995 Agreement and the total 1995 earnings impact for CPL, including certain accounting provisions, are set forth in the following table. CSW 2-47 Pre-tax After-tax ------------------- (millions) Base rate refund $(50.0) $(32.5) Fuel disallowance (62.3) (40.5) Wholesale fuel refund (3.2) (2.1) Current flowback of excess deferred federal income taxes 34.3 34.3 Capitalization of previously expensed restructuring and rate case costs 27.6 17.9 Recognition of factoring income 16.1 10.5 Amortization, interest and other (6.6) (4.4) CPL DEFERRED ACCOUNTING By orders issued in 1989 and 1990, the Texas Commission authorized CPL to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial operation dates of those units and the effective date of rates reflecting the operation of those units. Upon appeal of the 1989 CPL order, and a related order involving another utility, the Supreme Court of Texas in 1994 sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals. On August 16, 1995, the Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects. By orders issued in October 1990 and December 1990, the Texas Commission quantified the STP Unit 1 and Unit 2 deferred accounting costs and authorized the inclusion of the amortization of the costs and associated return in CPL's retail rates. These Texas Commission orders were appealed to the Travis County District Court where the appeals are still pending. Language in the Supreme Court of Texas' opinion in the appeal of the deferred accounting authorization case suggests that the appropriateness of including deferred accounting costs in rates charged to customers is dependent on a finding in the first case in which the deferred STP costs are recovered through rates that the deferral was actually necessary to preserve the utility's financial integrity. If in the appeals of the October 1990 and December 1990 rate orders, the courts decide that subsequent review under the financial integrity standard is required and was not made in those orders, such rate orders would be remanded to the Texas Commission for the purpose of entering findings applying the financial integrity standard. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. If CPL's deferred accounting matters are not favorably resolved, CSW and CPL could experience a material adverse effect on their respective results of operations and financial condition. While CPL's management is unable to predict the ultimate outcome of these matters, management believes either that CPL will receive approval of its deferred accounting amounts or that CPL will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CSW's or CPL's results of operation or financial condition. CPL FUEL PROCEEDING In January 1998, CPL filed a request with the Texas Commission to recover approximately $41.4 million in uncollected fuel and purchased power costs and related interest from its retail customers and to increase the fuel factors used to recover fuel costs incurred to provide service in the future. The fuel surcharge will be subtracted from the remaining refund totaling approximately $59.0 million that was ordered by the Texas Commission in CPL's recent general rate case, Docket No. 14965. This net refund is being issued as a one-time adjustment to customers' March 1998 bills. In the same filing with the Texas Commission, CPL also requested permission to increase its fixed fuel factors by approximately $23.4 million effective with March 1998 bills. The primary cause of CPL's current fuel cost under-recovery and the need to increase its current fuel factors is the unanticipated increase in the price of natural gas. CSW 2-48 In February 1998, stipulations were reached on both the fuel factor and surcharge. The fuel factor increase is being reduced to $15.4 million, and the fuel surcharge including interest is being reduced to $34.3 million. The reductions are not a disallowance and will be considered as part of CPL's fuel reconciliation filing to be made in December 1998. CPL NUCLEAR INSURANCE CLAIMS In 1994, CPL filed a claim under its NEIL I policy relating to the 1993-1994 outage at STP Units 1 and 2. NEIL denied CPL's claim in 1995. CPL filed an action in April 1996 against both NEIL and Johnson & Higgins of Texas, Inc., the former insurance broker for STP, seeking recovery under the policy and other relief. Subsequently, CPL and NEIL agreed to dismiss all litigation between them concerning CPL's claim for NEIL coverage, and they agreed to submit their disputes over coverage to a non-binding, neutral evaluation process. Hearings were held by the neutral evaluator in February 1997 and April 1997. On April 22, 1997, the neutral evaluator made the recommendation that CPL's claim was not covered by its NEIL I policy. CPL abided by this recommendation. CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE Three suits naming CPL and others as defendants relating to a third-party owned and operated site in Corpus Christi, Texas formerly used for commercial reclamation of used electrical transformers, lead acid batteries and other scrap metals, were pending in federal and state court in Corpus Christi, Texas. The plaintiffs' complaints sought damages for alleged property damage and health impairment as a result of operations on the site and cleanup activities. During 1997, these suits were settled with no material adverse effect on CSW's or CPL's results of operation or financial condition. CPL MUNICIPAL FRANCHISE FEE LITIGATION In May 1996, the city of San Juan, Texas filed a purported class action in Hidalgo County, Texas District Court on behalf of all cities served by CPL based upon CPL's alleged underpayment of municipal franchise fees. The plaintiff's petition asserts various contract and tort claims against CPL as well as certain audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed a counterclaim for any overpayment of franchise fees it may have made as well as its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement asserting that the Texas Commission has primary jurisdiction over the claims. In May 1996 and December 1996, respectively, the cities of Pharr, Texas and San Benito, Texas filed individual suits making claims virtually identical to those claimed by the city of San Juan. In January, 1997, CPL filed an original petition at the Texas Commission requesting the Texas Commission to declare its jurisdiction over CPL's collection and payment of municipal franchise fees. In April 1997, the Texas Commission issued a declaratory order in which it declined to assert jurisdiction over the claims of the City of San Juan. CPL appealed the Texas Commission's decision to the Travis County, Texas District Court. After the Texas Commission's order, the Hidalgo County court overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County court entered an order certifying the case as a class action. CPL appealed this order to the Corpus Christi Court of Appeals. In February 1998, the court of appeals' affirmed the trial court's order certifying the class. CPL appealed the court of appeals ruling to the Texas Supreme Court. Although CPL believes that it has substantial defenses to the cities' claims and intends to defend itself against the cities' claims and pursue its counterclaims vigorously, CPL cannot predict the outcome of these lawsuits. CSW 2-49 CPL AND WTU TEXAS UTILITIES COMPLAINT (DOCKET NO. 17285) A Proposal for Decision was received in February 1998 in a joint CPL/WTU complaint at the Texas Commission that since January 1, 1997, Texas Utilities was effectively double charging for transmission service within the Electric Reliability Council of Texas. The Proposal recommends approval of a CPL/WTU proposed offset of $15.5 million annually of payments to Texas Utilities under FERC-approved transmission service agreements against amounts that CPL and WTU would otherwise owe Texas Utilities pursuant to Texas Commission rules for transmission service in ERCOT. The Texas Commission will consider the Proposal in April 1998. PSO RATE REVIEW In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings. In accordance with the established schedule, PSO subsequently filed financial data, cost of service and rate design testimony supporting both its current rates and an increase in annual depreciation expense of $26 million. In July 1997, the Oklahoma Commission staff and other intervenors to the proceeding filed their revenue requirements testimony. In its filing, the Oklahoma Commission staff recommended a rate reduction of $76.8 million for PSO. On October 15, 1997, PSO reached a stipulated agreement with parties to settle the rate inquiry that was pending before the Oklahoma Commission. On October 23, 1997, the Oklahoma Commission issued a final order approving the agreement. The PSO 1997 Rate Settlement Agreement calls for PSO to lower its retail base rates beginning with the December 1997 billing cycle by approximately $35.9 million annually, or a 5.3 percent decrease below the current level of retail rates. Part of the rate reduction includes a reduction in annual depreciation expense of approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement resulted in PSO making a one-time $29 million refund to customers in December 1997. The PSO 1997 Rate Settlement Agreement also calls for PSO to eliminate or amortize before its next rate filing approximately $41 million in certain deferred assets, approximately $26 million of which had been expensed in 1996. The remaining $15 million of deferred assets, which included approximately $9 million of costs incurred for customer energy management incentive programs, were written off in 1997. The following table represents the financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations. 1997 Impact ------ (millions) Decrease in revenue Refund to customers $(29.0) Change in rates (2.5) ------ (31.5) ------ Changes in expenses (offsetting impact included in revenues) Depreciation (6.3) Rate case deferred costs 2.2 Income tax (10.2) ------ (14.3) ------ (17.2) Write-off of deferred assets, net of tax (10.2) ------ $(27.4) ------ The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing impact because of the rate decrease. However, it reduced significant risks for PSO related to this regulatory proceeding and should allow PSO's rates to remain competitive for the foreseeable future. CSW 2-50 See MD&A - RATES AND REGULATORY MATTERS, PSO 1997 RATE SETTLEMENT AGREEMENT for additional discussion of the PSO 1997 Rate Settlement Agreement, including the estimated ongoing financial impact of the agreement. PSO PCB CASES PSO has been named a defendant in petitions filed in state court in Oklahoma in February and August, 1996. The petitions allege that the plaintiffs suffered personal injury and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April, 1982 at the Page Belcher Federal Building in Tulsa. Each of the plaintiffs seeks actual and punitive damages in excess of $10,000. As previously reported, other claims arising from this incident have been settled and the suits dismissed. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Management believes that the remaining claims are covered by insurance. Management also believes that the ultimate resolution of the remaining lawsuits will not have a material adverse effect on CSW's or PSO's results of operations or financial condition. PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES In 1989, PSO found PCB contamination in a Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to comply with provisions of the Toxic Substances Control Act. The EPA alleged improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual cleanup at the site. The complaint also alleged failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims in the suit by March 1998. The settlement did not have a material adverse effect on CSW's or PSO's results of operations or financial condition. SWEPCO FUEL PROCEEDING In April 1997, SWEPCO filed with the Texas Commission an application concerning fuel cost under-recoveries and a possible fuel surcharge. The application included a motion to either abate the requested interim surcharge and consolidate the surcharge with a filed fuel reconciliation as discussed below, or alternatively, implement an interim surcharge in the months of July 1997 through June 1998. The Texas Commission's Office of Policy Development, on behalf of the Texas Commission, approved the consolidation. In addition, the Texas Commission has waived the requirement for SWEPCO to file biannual surcharge requests while this proceeding is pending, and has deferred the implementation of any surcharge and interest until after final disposition. In May 1997, SWEPCO filed with the Texas Commission an application to reconcile fuel costs and implement a 12 month surcharge of fuel cost under-recoveries. Because of the uncertainty as to when a surcharge may commence, SWEPCO did not establish in its filing a proposed surcharge period or a total surcharge amount which would reflect interest through the entire surcharge period. However, SWEPCO indicated that it had an under-recovered Texas jurisdictional fuel cost balance of approximately $16.8 million, including interest through December 1996. Included in the $16.8 million balance are fuel related litigation expenses of $5.0 million and an interest return of $2.0 million on the unamortized balance of a fuel contract termination payment. On December 8, 1997, SWEPCO and the other parties to the above consolidated proceedings before the Texas Commission filed a settlement on all issues except for one issue which will be decided by the Texas Commission. The outstanding issue concerns transmission equalization payments and whether they should be included in fuel or base revenues. The settlement is subject to approval by the Texas Commission. Of the $16.8 million in under-recovered fuel costs as of December 31, 1996, the settlement would result in a decrease of the under-recovered fuel costs, and the resulting surcharge recovery, by approximately $6.0 million. This disallowance will not result in an increase to fuel expense since the $5.0 million of litigation expense and the interest return of $2.0 million included in the requested surcharge amount were previously expensed. However, should SWEPCO not prevail on the outstanding issue, SWEPCO would be required to reduce earnings by approximately $1.8 million. The settlement also provides that SWEPCO's fuel and fuel-related CSW 2-51 expenses during the reconciliation period were reasonable and necessary and would allow them to be reconciled as eligible fuel. Also, the settlement provides that SWEPCO's actions in litigating and renegotiating certain fuel contracts, together with the prices, terms and conditions of the renegotiated contracts were prudent. The $6.0 million reduction is not associated with any particular activity or issue within the fuel proceedings. SWEPCO cannot predict whether approval of the settlement will be granted by the Texas Commission. SWEPCO BURLINGTON NORTHERN TRANSPORTATION CONTRACT In January 1995, a state district court in Bowie County, Texas entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power stations. The court awarded SWEPCO approximately $72 million that would benefit customers, if collected, representing damages for the period from April 27, 1989 through September 26, 1994, as well as post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals and, in April 1996, that court reversed the judgment of the state district court. In October 1996, SWEPCO filed an application with the Supreme Court of Texas to grant a writ of error to review and reverse the judgment of the Texarkana, Texas Court of Appeals. In June 1997, the Supreme Court of Texas granted SWEPCO's application for writ of error. Oral argument was held before the Supreme Court of Texas in October 1997. On March 13, 1998, the Supreme Court of Texas affirmed the judgment of the court of appeals. SWEPCO LIGNITE MINING AGREEMENT LITIGATION SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1 and jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement with the DHMV, a partnership for the mining and delivery of lignite from a portion of these reserves. On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its partners in the United States District Court for the Western District of Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining agreement, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed an answer denying the allegations in the suit and filed a counterclaim asserting various contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have denied the allegations in the counterclaims. SWEPCO intends to vigorously prosecute the claims against DHMV and defend against the counterclaims which DHMV has asserted. Although SWEPCO cannot predict the ultimate outcome of this matter, management believes that the resolution of this matter will not have a material adverse effect on SWEPCO's results of operations or financial condition. WTU FUEL PROCEEDINGS In March 1997, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $4.2 million, or 4.2%, on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $13.3 million, including accumulated interest, over a twelve month period to collect its under-recovered fuel costs. WTU requested authority to implement the revised fuel factors with its May 1997 billings and to commence the surcharge with its June 1997 billings. On April 14, 1997, an agreement in principle was reached among the parties to settle this docket. Under the proposed settlement, WTU agreed not to increase the fuel factors and to implement the $13.3 million surcharge over the period from June 1997 through February 1999. The Texas Commission approved the settlement in May 1997. CSW 2-52 On December 31, 1997, WTU filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. WTU did not seek a surcharge of the reconciled balance in the December 31, 1997 filing. During the reconciliation period of July 1, 1994 through June 30, 1997 WTU incurred approximately $418 million in eligible fuel and fuel-related expenses to generate and purchase electricity. The Texas jurisdictional allocation of such fuel and fuel-related expenses is approximately $292 million. In March 1998, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $6.8 million, including accumulated interest, over a six month period to collect its under-recovered fuel costs. WTU requested authority to implement the revised fuel factors and to commence the surcharge with its June 1998 billings. WTU 1995 STIPULATION AND AGREEMENT The WTU 1995 Stipulation and Agreement which was approved by the Texas Commission in October 1996 has affected WTU's results of operations for 1996 and 1997. Details of the items with significant earnings impact for 1995, including certain accounting treatments, are set forth in the following table. Pre-tax After-tax ------------------ (millions) Refund to retail customers $(21.0) $(13.7) Effect of retail rate reduction (2.4) (1.6) Current flowback of property related excess deferred federal income taxes 6.9 6.9 Five year flowback of non-property related excess deferred federal income taxes 0.1 0.1 Capitalization and amortization of previously expensed restructuring costs 12.7 8.2 Other amortization (0.2) (0.1) Other one-time items 1.0 0.7 The WTU 1995 Stipulation and Agreement also eliminated several significant risks that have been the subject of regulatory proceedings relating to deferred accounting and rates and will enable WTU's rates to remain at competitive levels for the foreseeable future. OTHER The Registrants are party to various other legal claims, actions and complaints arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on the Registrants' results of operations or financial condition. 3. COMMITMENTS AND CONTINGENT LIABILITIES CONSTRUCTION AND CAPITAL EXPENDITURES It is estimated that CSW, including the U.S. Electric Operating Companies, SEEBOARD and other diversified operations, will spend approximately $569 million in capital expenditures (but excluding capital CSW 2-53 that may be required for acquisitions) during 1998. Substantial commitments have been made in connection with these programs. CPL - $129 million PSO - $71 million SWEPCO - $95 million WTU - $36 million FUEL AND RELATED COMMITMENTS To supply a portion of their fuel requirements, the U.S. Electric Operating Companies have entered into various commitments for the procurement of fuel. SWEPCO HENRY W. PIRKEY POWER PLANT In connection with the South Hallsville lignite mining contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining contractor. As of December 31, 1997, the maximum amount SWEPCO believes it could potentially assume is $67 million. However, the maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding at December 31, 1997 was $59 million. SWEPCO SOUTH HALLSVILLE LIGNITE MINE As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining at the South Hallsville lignite mine and expansion into the Marshall South Lignite Project area, SWEPCO has agreed to provide guarantees of mine reclamation in the amount of $85 million. Since SWEPCO uses self-bonding, the guarantee provides for SWEPCO to commit to use its resources to complete the reclamation in the event the work is not completed by the third party miner. The current cost to reclaim the mine is estimated to be approximately $36 million. OTHER COMMITMENTS AND CONTINGENCIES CPL NUCLEAR INSURANCE In connection with the licensing and operation of STP, the owners have purchased nuclear property and liability insurance coverage as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1, 2002. The limit of liability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of December 1997. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling $8.72 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. CSW 2-54 CPL purchased, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 23 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same accident, such insurance will reimburse CPL up to 80% of the recovery. The maximum amount recoverable for a single unit outage is $118.6 million for both Unit 1 and 2. CPL is subject to an additional assessment up to $1.8 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. CPL renewed its current NEIL I Business Interruption and/or Extra Expense policy September 15, 1997. For further information relating to litigation associated with CPL nuclear insurance claims, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. SWEPCO CAJUN ASSET PURCHASE PROPOSAL Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets, for $940.5 million in cash, subject to adjustment pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for SWEPCO and the Cajun member cooperatives to enter into long-term power supply agreements which will provide the Cajun member cooperatives with rate plan options and market access provisions designed to ensure the long-term competitiveness of the cooperatives. Eight cooperatives and CLECO, successor to Teche Electric Cooperative, already have agreed to purchase power from SWEPCO if SWEPCO's plan is confirmed by the bankruptcy court. Entergy Texas is no longer a co-plan proponent with SWEPCO and the Cajun Members Committee, as it had been under SWEPCO plans filed prior to the January 15, 1998 plan. SWEPCO continues to work with Entergy Texas to resolve its objection to the plan. The SWEPCO Plan filed March 18, 1998 replaces plans filed previously by SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April 19, 1996. Two competing plans of reorganization for the non-nuclear assets of Cajun have been filed with the bankruptcy court, each with different purchase prices, rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy case are now scheduled through April 1998. Consummation of the SWEPCO Plan is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their board approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external borrowings and internally generated funds with approximately 70% of the external borrowings funded with non-recourse debt. There can be no assurance that the SWEPCO Plan will be confirmed by the bankruptcy court or, if it is confirmed, that it will be approved by federal and state regulators. SWEPCO RENTAL AND LEASE COMMITMENTS SWEPCO has entered into various financing arrangements primarily with respect to coal transportation and related equipment, which are treated as operating leases for rate-making purposes. At December 31, 1997, leased assets of $45.7 million, less accumulated amortization of $39.0 million, were included in Electric Utility Plant on the Consolidated Balance Sheets and at December 31, 1996, leased assets were $46.0 million, less accumulated amortization of $36.9 million. CSW 2-55 SWEPCO BILOXI, MISSISSIPPI MGP SITE SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as on the subsequent sampling of the site. The sampling results indicated contamination at the property as well as the possibility of contamination of an adjacent property. A risk assessment was submitted to the MDEQ, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to a residential scenario is appropriate since this site has been industrial/commercial for more than 100 years, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. The MDEQ has not agreed to a non-residential future land use scenario and has requested further testing. Following the additional testing and resolution of whether cleanup must meet a residential usage scenario or a commercial/industrial scenario, a feasibility study will be conducted to more definitively evaluate remedial strategies for the property. The feasibility study process will require public input prior to a final decision being made. At the present time, SWEPCO has not had any further substantive discussions with MDEQ regarding the ultimate resolution of this issue. Therefore, a final range of cleanup costs is not yet determinable. SWEPCO has incurred approximately $200,000 to date for its portion of the cleanup of this site, and based on its preliminary estimates, anticipates that an additional $2 million may be incurred. Accordingly, SWEPCO has accrued $2 million for the cleanup of the site. SWEPCO VODA PETROLEUM SUPERFUND SITE In April 1996, SWEPCO received correspondence from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records review to compile documentation relating to SWEPCO's past use of the Voda Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost approximately $2 million and to take approximately twelve months to complete. An option for over 30 PRPs to conduct the cleanup in lieu of EPA conducting the cleanup is under consideration. Any SWEPCO liability associated with this project is not expected to have a material adverse effect on its results of operations or financial condition. CSW ENERGY LOANS AND COMMITMENTS CSW Energy has agreed to provide construction financing and other credit support up to $235 million for the 330 MW Phillips Sweeny project. CSW Energy obtained the funds for this project through CSW's short-term borrowing program. Construction of this plant began in September 1996 and commenced commercial operations in February 1998. At December 31, 1997, CSW Energy had provided $163 million, including development, construction and financing, of the total estimated $189 million in project costs. CSW Energy expects to obtain permanent project financing in the second quarter of 1998 at which time the project will return a significant portion of the investment and the short-term borrowings will be repaid. In addition, CSW has provided letters of credit and guarantees on behalf of other independent power projects totaling approximately $27 million. CSW INTERNATIONAL ENERTEK PROJECT In July 1996, CSW International announced a joint venture with Alpek, through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. CSW International and Alpek each will have 50% ownership in the project, Enertek, which will cost approximately $75 million. CSW International has agreed to provide construction financing for the project of which $62 million had been CSW 2-56 funded at December 31, 1997. The Enertek project began operations in the first quarter of 1998. 4. INCOME TAXES CSW files a consolidated United States federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes United States federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the amounts computed by applying the United States federal statutory income tax rate to income before taxes for a number of reasons which are presented in the INCOME TAX RATE RECONCILIATION table below. Information concerning income taxes, including total income tax expense, the reconciliation between the United States federal statutory tax rate and the effective tax rate and significant components of deferred income taxes follow. INCOME TAX EXPENSE CSW CPL PSO SWEPCO WTU ---------------------------------------------- 1997 (millions) (thousands) ------------------------------------- INCLUDED IN OPERATING EXPENSES AND TAXES Current (1) $47 $43,600 $14,543 $46,358 $11,765 Deferred (1) 117 35,263 8,498 (1,984) (954) Deferred ITC (2) (13) (4,819) (2,278) (4,662) (1,321) -------------------------------------------- 151 74,044 20,763 39,712 9,490 INCLUDED IN OTHER INCOME AND DEDUCTIONS Current -- (4,271) (2,230) (1,962) (471) Deferred (6) (779) (50) (260) -- -------------------------------------------- (6) (5,050) (2,280) (2,222) (471) -------------------------------------------- $145 $68,994 $18,483 $37,490 $9,019 -------------------------------------------- 1996 INCLUDED IN OPERATING EXPENSES AND TAXES Current (1) $118 $46,588 $26,152 $33,904 $6,953 Deferred (1) 120 57,416 14,190 10,696 9,706 Deferred ITC (2) (14) (5,553) (2,784) (4,730) (1,321) -------------------------------------------- 224 98,451 37,558 39,870 15,338 INCLUDED IN OTHER INCOME AND DEDUCTIONS Current (1) 639 (895) (973) (406) Deferred (39) (5,940) (15,518) (7,847) (3,988) -------------------------------------------- (40) (5,301) (16,413) (8,820) (4,394) INCOME TAXES FOR DISCONTINUED OPERATIONS (includes $72 resulting from the gain on the sale) 78 -- -- -- -- -------------------------------------------- $262 $93,150 $21,145 $31,050 $10,944 -------------------------------------------- 1995 INCLUDED IN OPERATING EXPENSES AND TAXES Current (1) $105 $51,626 $37,687 $41,852 $4,892 Deferred 1 (30,025) 2,704 6,287 1,971 Deferred ITC (2) (14) (5,789) (2,789) (4,786) (1,321) -------------------------------------------- 92 15,812 37,602 43,353 5,542 INCLUDED IN OTHER INCOME AND DEDUCTIONS Current 2 129 (197) (721) 1,564 Deferred (4) -- -- -- -- -------------------------------------------- (2) 129 (197) (721) 1,564 INCOME TAXES FOR DISCONTINUED OPERATIONS 13 -- -- -- -- -------------------------------------------- $103 $15,941 $37,405 $42,632 $7,106 -------------------------------------------- (1) Approximately $30 million, $49 million and $7 million of CSW's Current Income Tax Expense was attributable to SEEBOARD U.S.A. operations and was recognized as United Kingdom corporation tax expense for 1997, 1996 and 1995, respectively. In addition, approximately $7 million and CSW 2-57 $19 million of CSW's Deferred Income Tax Expense in 1997 and 1996, respectively, was attributed to SEEBOARD U.S.A. (2) ITC deferred in prior years are included in income over the lives of the related properties. INCOME TAX RATE CSW CPL PSO SWEPCO WTU RECONCILIATION ------------------------------------------------------- 1997 ($ in millions) ($ in thousands) ----------------------------------------- Income before taxes attributable to: Domestic operations $327 Foreign operations 147 ---- Income before taxes $474 $197,465 $64,689 $130,392 $30,480 Tax at U.S. statutory rate $166 $69,113 $22,641 $45,637 $10,668 Differences Amortization of ITC (13) (4,819) (2,278) (4,662) (1,321) Mirror CWIP 5 4,647 -- -- -- Non-deductible goodwill amortization 12 -- -- -- -- Tax credit on foreign operations dividend (3) -- -- -- -- United Kingdom deferred income tax adjustment (16) -- -- -- -- Adjustments (4) (1,361) (1,324) (633) (177) Other (2) 1,414 (556) (2,852) (151) ------------------------------------------------- $145 $68,994 $18,483 $37,490 $9,019 ------------------------------------------------- Effective tax rate 31% 35% 29% 29% 30% 1996 Income before taxes attributable to: Domestic operations $562 Foreign operations 146 ---- Income before taxes $708 $240,201 $52,622 $97,605 $27,515 Tax at U.S. statutory rate $248 $84,070 $18,418 $34,162 $9,630 Differences Amortization of ITC (14) (5,553) (2,784) (4,730) (1,321) Mirror CWIP 5 4,584 -- -- -- Non-deductible goodwill amortization 13 -- -- -- -- Tax credit on foreign operations dividend (18) -- -- -- -- Adjustments 10 5,127 201 1,544 1,467 Other 18 4,922 5,310 74 1,168 ------------------------------------------------- $262 $93,150 $21,145 $31,050 $10,944 ------------------------------------------------- Effective tax rate 37% 39% 40% 32% 40% 1995 Income before taxes attributable to: Domestic operations $506 Foreign operations 13 ---- Income before taxes $519 $222,388 $119,233 $159,675 $41,636 Tax at U.S. statutory rate $182 $77,836 $41,732 $55,886 $14,573 Differences Amortization of ITC (14) (5,789) (2,789) (4,786) (1,321) Mirror CWIP (11) (10,843) -- -- -- CPL 1995 Agreement (34) (34,289) -- -- -- WTU 1995 Stipulation and Agreement (7) -- -- -- (6,859) Adjustments (22) (13,462) (2,949) (2,783) 953 Other 9 2,488 1,411 (5,685) (240) ------------------------------------------------- $103 $15,941 $37,405 $42,632 $7,106 ------------------------------------------------- Effective tax rate 20% 7% 31% 27% 17% CSW 2-58
DEFERRED INCOME TAXES (1) CSW CPL PSO SWEPCO WTU ------------------------------------------------- (millions) (thousands) --------------------------------------- 1997 Deferred Income Tax Liabilities Depreciable utility plant $1,920 $802,279 $291,547 $410,313 $144,690 Deferred plant costs 176 169,497 -- -- 6,523 Mirror CWIP asset 100 99,901 -- -- -- Income tax related regulatory assets 211 149,834 10,539 38,603 12,284 Other 371 147,513 36,836 36,237 20,651 ------------------------------------------------ 2,778 1,369,024 338,922 485,153 184,148 Deferred Income Tax Assets Income tax related regulatory liability (123) (40,552) (26,704) (40,916) (14,969) Unamortized ITC (100) (49,830) (15,920) (24,673) (9,771) Alternative minimum tax carryforward (27) (16,129) -- -- -- Other (76) (3,744) (35,188) (19,061) (9,859) ------------------------------------------------ (326) (110,255) (77,812) (84,650) (34,599) ------------------------------------------------ Net Accumulated Deferred Income Taxes $2,452 $1,258,769 $261,110 $400,503 $149,549 ------------------------------------------------ Net Accumulated Deferred Income Taxes Noncurrent $2,432 $1,237,387 $258,848 $395,909 $149,346 Current 20 21,382 2,262 4,594 203 ------------------------------------------------ $2,452 $1,258,769 $261,110 $400,503 $149,549 ------------------------------------------------ 1996 Deferred Income Tax Liabilities Depreciable utility plant $1,867 $791,693 $275,938 $389,575 $135,215 Deferred plant costs 178 170,442 -- -- 7,237 Mirror CWIP asset 105 104,548 -- -- -- Income tax related regulatory assets 207 156,059 10,976 30,486 9,743 Other 307 72,798 35,626 38,875 26,055 ------------------------------------------------ 2,664 1,295,540 322,540 458,936 178,250 Deferred Income Tax Assets Income tax related regulatory liability (126) (39,202) (28,771) (42,533) (15,664) Unamortized ITC (105) (51,517) (16,802) (26,394) (10,234) Alternative minimum tax carryforward (83) (16,129) -- -- -- Other (99) (19,331) (28,519) (13,295) (9,285) ------------------------------------------------ (413) (126,179) (74,092) (82,222) (35,183) ------------------------------------------------ Net Accumulated Deferred Income Taxes $2,251 $1,169,361 $248,448 $376,714 $143,067 ------------------------------------------------ Net Accumulated Deferred Income Taxes Noncurrent $2,272 $1,162,051 $251,007 $372,552 $144,146 Current (21) 7,310 (2,559) 4,162 (1,079) ------------------------------------------------ $2,251 $1,169,361 $248,448 $376,714 $143,067 ------------------------------------------------ (1) In 1996, CSW generated $33 million of excess foreign tax credits against which a full valuation allowance was established as of December 31, 1996. In 1997, the valuation reserve was reduced to $17 million due to lower levels of excess foreign tax credits. Other than excess foreign tax credits, CSW did not have other valuation allowances recorded against other deferred tax assets at December 31, 1997 and 1996 due to a favorable earnings history.
5. BENEFIT PLANS PENSION PLANS Prior to June 30, 1997, CSW maintained a tax qualified, non-contributory defined benefit pension plan covering substantially all CSW employees in the United States. Benefits were based on employees' years of credited service, age at retirement, and final average annual earnings with an offset for the participant's primary Social Security benefit. The CSW board of CSW 2-59 directors approved an amendment, effective July 1, 1997, which converted the present value of accrued benefits under the existing pension plan into a cash balance pension plan. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. The applicable percentage is determined by age and years of vested service the participant has with CSW as of December 31 of each year. The purpose of the plan change is to continue to provide retirement income benefits which are competitive both within the utility industry as well as with other companies within the United States. As the plan sponsor, CSW will continue to reflect the costs of the pension plan according to the provisions of SFAS No. 87 and allocate such costs to each of the participating employers. As a result of the July 1, 1997 amendment, CSW realized a savings in 1997 of approximately $20 million in pension expense and will also realize significant ongoing reductions in operating and maintenance expense because of the change. The change to the pension plan was applied retroactively to the beginning of 1997, so these savings were recognized evenly throughout 1997 with a portion being capitalized. The approximate amount of savings attributable to the U.S. Electric Operating Companies for 1997 is as follows. CPL-$4.7 million PSO-$3.6 million SWEPCO-$4.4 million WTU-$2.6 million Pension plan assets consist primarily of common stocks and short-term and intermediate-term fixed income investments. The majority of SEEBOARD's employees joined a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee-administered fund that is actuarially valued every three years. SEEBOARD and its participating employees both contribute to the plan. Subsequent to July 1, 1995, new employees were no longer able to participate in that plan. Instead, two new pension plans were made available to new employees, both of which are also separate trustee-administered plans. Information about the two separate pension plans (the U.S. plan and the non-U.S. plan), including: (i) pension plan net periodic costs and contributions; (ii) pension plan participation; (iii) a reconciliation of the funded status of the pension plan to the amounts recognized on the balance sheets; and (iv) assumptions used in accounting for the pension plan follow. CSW 2-60
NET PERIODIC NON- PENSION PLAN COSTS CSW U.S. U.S. AND CONTRIBUTIONS PLANS PLAN PLAN CPL PSO SWEPCO WTU ---------------------------------------------------------- (millions) (thousands) ------------------------------------ 1997 Net Periodic Pension Costs Service cost $34 $20 $14 $4,602 $3,421 $4,260 $2,488 Interest cost on projected benefit obligation 137 65 72 15,085 11,214 13,965 8,156 Actual return on plan assets (245) (163) (82) (38,031) (28,272) (35,206) (20,561) Net amortization and deferral 68 66 2 15,648 11,633 14,486 8,460 ---------------------------------------------------------- $(6) $(12) $6 $(2,696) $(2,004) $(2,495) $(1,457) ---------------------------------------------------------- Pension Plan Contributions $6 $-- $6 $-- $-- $-- $-- 1996 Net Periodic Pension Costs Service cost $37 $23 $14 $5,367 $4,238 $4,891 $3,005 Interest cost on projected benefit obligation 136 69 67 16,233 12,817 14,793 9,089 Actual return on plan assets (184) (110) (74) (26,033) (20,554) (23,723) (14,576) Net amortization and deferral 27 27 -- 6,509 5,139 5,932 3,645 ---------------------------------------------------------- $16 $9 $7 $2,076 $1,640 $1,893 $1,163 ---------------------------------------------------------- Pension Plan Contributions $35 $28 $7 $6,622 $5,228 $6,034 $3,708 1995 Net Periodic Pension Costs Service cost $20 $20 $-- $4,699 $3,614 $4,220 $2,609 Interest cost on projected benefit obligation 64 64 -- 14,860 11,428 13,345 8,251 Actual return on plan assets (117) (117) -- (27,137) (20,869) (24,370) (15,068) Net amortization and deferral 44 44 -- 10,136 7,795 9,102 5,628 ---------------------------------------------------------- $11 $11 $-- $2,558 $1,968 $2,297 $1,420 ---------------------------------------------------------- Pension Plan Contributions $29 $29 $-- $6,754 $5,195 $6,066 $3,751
APPROXIMATE NUMBER NON- OF PARTICIPANTS IN CSW U.S. U.S. PLANS DURING 1997 PLANS PLAN PLAN CPL PSO SWEPCO WTU -------------------------------------------------------- Active employees 10,100 7,200 2,900 1,800 1,300 1,700 1,000 Retirees 10,200 4,200 6,000 1,400 1,300 900 600 Terminated employees 6,800 2,000 4,800 400 400 200 200 CSW 2-61 RECONCILIATION OF FUNDED 1997 1996 STATUS OF PLAN TO AMOUNTS 1997 1997 NON- 1996 1996 NON- RECOGNIZED ON THE CSW CSW U.S. U.S. CSW U.S. U.S. CONSOLIDATED BALANCE SHEETS PLANS PLAN PLANS PLANS PLAN PLAN ---------------------------------------------- (millions) Actuarial present value of Accumulated benefit obligation for service rendered to date $1,860 $896 $964 $1,748 $781 $967 Additional benefit for future salary levels 94 35 59 200 141 59 --------------------- -------------------- Projected benefit obligation 1,954 931 1,023 1,948 922 1,026 Plan assets, at fair value 2,290 1,109 1,181 2,077 991 1,086 --------------------- -------------------- Plan assets in excess of the projected benefit obligation 336 178 158 129 69 60 Unrecognized net loss (86) 12 (98) 30 27 3 Unrecognized prior service cost (93) (88) (5) (12) (7) (5) Unrecognized net obligation 16 11 4 16 12 4 --------------------- -------------------- Prepaid pension cost $173 $113 $59 $163 $101 $62 --------------------- -------------------- The vested portion of the accumulated benefit obligations for the combined plans was $1.8 billion at December 31, 1997 and $1.7 billion for the combined plans at December 31, 1996. The unrecognized net obligation for the U.S. plan is being amortized over the average remaining service life of employees or 15 years. Prepaid pension cost is included in Deferred Charges and Other Assets on the balance sheets. No reconciliation of the funding status of the plan for CPL, PSO, SWEPCO or WTU is presented because the plan is administered for the CSW System as a whole and such information is unavailable for the U.S. Electric Operating Companies individually. In addition to the amounts shown in the above table, CSW has a non-qualified excess benefit plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code through the qualified plan. CSW's net periodic cost for this non-qualified plan for the years ended December 31, 1997, 1996 and 1995 was $3.7 million, $4.8 million and $2.4 million, respectively. ASSUMPTIONS USED IN Long-Term ACCOUNTING FOR Discount Compensation Return on THE PENSION PLAN Rate Increase Plan Assets -------------------------------------- 1997 U.S. Plan 7.50% 5.46% 9.00% Non-U.S. Plan 6.75% 4.75% 7.25% 1996 U.S. Plan 8.00% 5.46% 9.50% Non-U.S. Plan 7.75% 5.75% 8.25% 1995 U.S. Plan 8.00% 5.46% 9.50% POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (U.S. COMPANIES ONLY) CSW, including each of the U.S. Electric Operating Companies, adopted SFAS No. 106 effective January 1, 1993. The transition obligation established at adoption is being amortized over twenty years, with fifteen years remaining. Prior to 1993, these benefits were accounted for on a pay-as-you-go basis. Pursuant to an order by the Oklahoma Commission, PSO established a regulatory asset of approximately $5 million in 1993 for the difference between the pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is recovering the amortization of this regulatory asset over a ten year period. Information about the non-pension postretirement benefit plan, including: (i) net periodic postretirement benefit costs; (ii) a reconciliation of the funded status of the postretirement benefit plan to the amounts recognized on the balance sheets; and (iii) assumptions used in accounting for the postretirement benefit plan follow. CSW 2-62 NET PERIODIC POSTRETIREMENT BENEFIT COSTS CSW CPL PSO SWEPCO WTU ------------------------------------------- (millions) (thousands) ---------------------------------- 1997 Service cost $ 8 $2,076 $1,694 $1,771 $1,120 Interest cost on APBO 18 5,663 4,794 4,190 2,564 Actual return on plan assets (22) (4,948) (6,707) (6,737) (2,266) Amortization of transition obligation 9 2,900 2,528 1,967 1,225 Net amortization and deferral 11 2,047 3,344 3,769 1,009 ----------------------------------------- $24 $7,738 $5,653 $4,960 $3,652 ----------------------------------------- 1996 Service cost $8 $2,077 $1,705 $1,810 $1,111 Interest cost on APBO 19 5,887 5,018 4,321 2,602 Actual return on plan assets (7) (1,695) (2,236) (2,168) (766) Amortization of transition obligation 9 2,900 2,528 1,967 1,225 Net amortization and deferral (2) (560) (250) (100) (261) ----------------------------------------- $27 $8,609 $6,765 $5,830 $3,911 ----------------------------------------- 1995 Service cost $8 $2,123 $1,986 $1,803 $1,113 Interest cost on APBO 18 5,929 5,175 4,299 2,561 Actual return on plan assets (8) (1,948) (2,597) (2,466) (870) Amortization of transition obligation 9 2,900 2,528 1,967 1,225 Net amortization and deferral 2 238 631 679 96 ----------------------------------------- $29 $9,242 $7,723 $6,282 $4,125 ----------------------------------------- RECONCILIATION OF FUNDED STATUS OF PLAN TO AMOUNTS RECOGNIZED ON THE BALANCE SHEETS CSW CPL PSO SWEPCO WTU ------------------------------------------- (millions) (thousands) ---------------------------------- 1997 APBO Retirees $158 $51,426 $43,732 $34,906 $21,607 Other fully eligible participants 24 5,449 5,707 6,559 3,184 Other active participants 59 16,116 11,995 12,749 7,725 ---------------------------------------- Total 241 72,991 61,434 54,214 32,516 Plan assets at fair value (159) (44,168) (43,366) (39,630) (20,411) ---------------------------------------- APBO in excess of plan assets 82 28,823 18,068 14,584 12,105 Unrecognized transition obligation (135) (43,508) (37,928) (29,502) (18,372) Unrecognized gain 53 15,443 19,018 14,715 6,503 ---------------------------------------- Accrued/(Prepaid) Cost $-- $758 $(842) $(203) $236 ---------------------------------------- 1996 APBO Retirees $163 $54,158 $45,736 $36,013 $22,880 Other fully eligible participants 18 4,281 3,789 5,302 2,398 Other active participants 55 14,871 12,534 12,694 7,857 ---------------------------------------- Total 236 73,310 62,059 54,009 33,135 Plan assets at fair value (123) (34,566) (33,748) (30,028) (15,806) ---------------------------------------- APBO in excess of plan assets 113 38,744 28,311 23,981 17,329 Unrecognized transition obligation (144) (46,408) (40,456) (31,469) (19,597) Unrecognized gain 32 8,723 11,569 7,527 2,662 ---------------------------------------- Accrued/(Prepaid) Cost $1 $1,059 $(576) $39 $394 ---------------------------------------- ASSUMPTIONS USED IN THE Discount Return on Tax Rate for ACCOUNTING FOR SFAS NO. 106 Rate Plan Assets Taxable Trusts ---------------------------------------- 1997 7.50% 9.00% 39.6% 1996 8.00% 9.50% 39.6% 1995 8.00% 9.50% 39.6% Health care cost trend rates 1997 Average Rate of 7.0% grading down .50% per year to an ultimate average rate of 5.00% in 2001. 1996 Average Rate of 9.0% grading down .75% per year to an ultimate average rate of 5.25% in 2001. 1995 Average Rate of 10.25% grading down .75% per year to an ultimate average rate of 5.75% in 2001. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the APBO and the aggregate of the service and interest costs components on net postretirement benefits by the amounts presented in the following table. CSW CPL PSO SWEPCO WTU ------------------------------------------- (millions) APBO $25.1 $7.1 $5.7 $6.9 $3.2 Service and interest costs 3.6 0.9 0.7 1.0 0.5 HEALTH AND WELFARE PLANS CSW provides medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment insurance plans for substantially all active CSW System employees in the United States. The total contributions, recorded on a pay-as-you-go basis, for the years 1995 - 1997 are listed in the following table. CSW CPL PSO SWEPCO WTU ----------------------------------------- (millions) 1997 $35.6 $9.0 $7.0 $8.3 $5.1 1996 28.4 7.0 5.5 6.5 4.0 1995 27.0 6.6 5.3 6.2 3.6 Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority of its employees. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT The U.S. Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for the joint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December 31, 1997, the U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table. CPL SWEPCO SWEPCO SWEPCO CSW(1) STP Flint Creek Pirkey Dolet Hills Oklaunion Nuclear Coal Lignite Lignite Coal Plant Plant Plant Plant Plant ---------------------------------------------------------- ($ in millions) Plant in service $2,336 $80 $437 $230 $398 Accumulated $517 $47 $176 $84 $122 depreciation Plant capacity-MW 2,501 528 675 650 676 Participation 25.2% 50.0% 85.9% 40.2% 78.1% Share of capacity-MW 630 264 580 262 528 CSW 2-64 (1) CPL, PSO and WTU have joint ownership agreements with each other and other non-affiliated entities. Such agreements provide for the joint ownership and operation of Oklaunion Power Station. Each participant provided financing for its share of the project, which was placed in service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7% ownership interest represents CSW's 78.1% participation in the plant. The statements of income reflect CPL's, PSO's and WTU's respective portions of the operating costs of Oklaunion Power Station. The total investments, including AFUDC, in Oklaunion Power Station for CPL, PSO and WTU were $37 million, $80 million and $281 million, respectively, at December 31, 1997. Accumulated depreciation was $11 million, $32 million and $79 million for CPL, PSO and WTU, respectively, at December 31, 1997. 7. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the following fair values of each class of financial instruments for which it is practicable to estimate fair value. The fair value does not affect any of the liabilities unless the issues are redeemed prior to their maturity dates. CASH, TEMPORARY CASH INVESTMENTS, ACCOUNTS RECEIVABLE, OTHER FINANCIAL INSTRUMENTS AND SHORT-TERM DEBT The fair value equals the carrying amount as stated on the balance sheets due to the short maturity of those instruments. SECURITIES HELD FOR SALE The fair values, which are based on quoted market prices, equal the carrying amounts as stated on the balance sheet because the accounting treatment prescribed under SFAS No. 115. LONG-TERM DEBT The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities. TRUST PREFERRED SECURITIES The fair value of the Trust Preferred Securities are based on quoted market prices on the New York Stock Exchange. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION The fair value of preferred stock subject to mandatory redemption is estimated based on quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock with the same or similar remaining redemption provisions. LONG-TERM DEBT AND PREFERRED STOCK DUE WITHIN 12 MONTHS The fair value of current maturities of long-term debt and preferred stock due within 12 months are estimated based on quoted market prices for the same or similar issues or on the current rates offered for long-term debt or preferred stock with the same or similar remaining redemption provisions. CSW 2-65 CARRYING VALUE AND ESTIMATED FAIR VALUE CSW CPL PSO SWEPCO WTU -------------------------------------------------- (millions) (thousands) ---------------------------------------- LONG-TERM DEBT 1997 carrying amount $3,898 $1,302,266 $421,821 $547,751 $278,640 fair value 4,052 1,361,539 435,908 576,387 290,489 1996 carrying amount 4,024 1,323,054 420,301 597,151 275,070 fair value 4,065 1,346,306 420,863 605,853 275,355 TRUST PREFERRED SECURITIES 1997 carrying amount 335 150,000 75,000 110,000 -- fair value 344 153,375 78,000 112,750 -- PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION 1997 carrying amount 26 -- -- 25,930 -- fair value 27 -- -- 26,809 -- 1996 carrying amount 33 -- -- 32,464 -- fair value 34 -- -- 33,579 -- LONG-TERM DEBT AND PREFERRED STOCK DUE WITHIN 12 MONTHS 1997 carrying amount 32 28,000 -- 3,555 -- fair value 32 28,000 -- 3,555 -- 1996 carrying amount 204 200,000 -- 3,760 -- fair value 204 200,000 -- 3,760 -- CROSS-CURRENCY SWAPS AND SEEBOARD'S ELECTRICITY CONTRACTS FOR DIFFERENCES The fair value of cross currency swaps reflect third-party valuations calculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $43 million at December 31, 1997. This unrealized loss is offset by unrealized gains related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. The fair value of SEEBOARD's contracts for differences is not determinable due to the absence of a trading market. DERIVATIVE CONTRACTS NOTIONAL AMOUNTS Notional Fair AND ESTIMATED FAIR VALUES Amount Value ---------------------- (millions) CROSS CURRENCY SWAPS Maturities: 2001 and 2006 $400 $443 CSW 2-66 8. LONG-TERM DEBT The CSW System's long-term debt outstanding as of the end of the last two years is presented in the following table. Maturities Interest Rates December 31, From To From To 1997 1996 - ---------------------------------------------------------------------- (millions) Secured bonds 1998 2025 5.25% 7.75% $2,080 $2,108 Unsecured bonds 2001 2030 3.9%(1) 8.88% 1,353 1,384 Notes and Lease Obligations 1999 2003 5.54% 9.75% 641 724 Unamortized discount (10) (12) Unamortized cost of reacquired debt (166) (180) --------------------- $3,898 $4,024 --------------------- (1) Variable rate The mortgage indentures, as amended and supplemented, securing FMBs issued by the U.S. Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plant. The U.S. Electric Operating Companies may offer additional FMBs, medium-term notes and other securities subject to market conditions and other factors. CSW's year end weighted average cost of long-term debt was 7.2% for 1995-1997. For additional information about the U.S. Electric Operating Companies' long term debt, see their STATEMENTS OF CAPITALIZATION in the FINANCIAL STATEMENTS. ANNUAL REQUIREMENTS Certain series of outstanding FMBs have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have been, satisfied by the application of net expenditures for bondable property in an amount equal to 166-2/3% of the annual requirements. Certain series of pollution control revenue bonds also have sinking fund requirements. At December 31, 1997, the annual sinking fund requirements and annual maturities (including sinking fund requirements) for all long-term debt for the next five years are presented in the following table. CSW CPL PSO SWEPCO WTU - ---------------------------------------------------------------------- (millions) (thousands) ---------------------------------------------- Sinking Fund Requirements 1998 $1 $360 $550 $145 $-- 1999 1 360 300 595 -- 2000 1 360 300 595 -- 2001 1 -- 300 595 -- 2002 1 -- -- 595 -- Annual Maturities 1998 $31 $28,360 $550 $2,355 $-- 1999 195 125,360 25,300 43,932 -- 2000 208 100,360 20,300 47,807 40,000 2001 517 36,000 20,300 595 -- 2002 181 115,000 30,000 595 35,000 CSW 2-67 DIVIDENDS At December 31, 1997, approximately $1.4 billion of CSW's subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. The mortgage indentures, as amended and supplemented, at CPL and PSO contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not currently limit the ability of CSW to pay dividends to its shareholders. The amounts of retained earnings available for dividends attributable to each of the U.S. Electric Operating Companies at December 31, 1997 is as follows. CPL-$747 million PSO-$137 million SWEPCO-$324 million WTU-$119 million REACQUIRED LONG-TERM DEBT During 1996 and 1995, the U.S. Electric Operating Companies reacquired $205 million and $355 million of long-term debt, respectively, including reacquisition premiums, prior to maturity. The premiums and related reacquisition costs and discounts are included in long-term debt on the balance sheets and are being amortized over periods consistent with their expected ratemaking treatment. The remaining amortization periods for such items range from 2 to 33 years. No long-term debt was reacquired prior to maturity during 1997. Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further information related to long-term debt, including new issues and reacquisitions of long-term debt during 1997 as well as information related to the financing of the SEEBOARD acquisition. 9. PREFERRED STOCK The outstanding preferred stock of the U.S. Electric Operating Companies as of the end of the last two years is presented in the following table. Current Dividend Rate December 31, Redemption Price From - To 1997 1996 From - To -------------------------------------------------- (millions) Not subject to mandatory redemption 1,352,900 shares 4.00% - 8.72% $19 $135 $102.75 - $109.00 1,600,000 shares auction 160 160 $100.00 Issuance expenses/premiums (3) (3) ------------ $176 $292 ------------ Subject to mandatory redemption 340,000 shares 6.95% $27 $34 $102.32 To be redeemed within one year (1) (1) ------------ $26 $33 ------------ Total authorized shares 6,405,000 All of the outstanding preferred stock is redeemable at the option of the U.S. Electric Operating Companies upon 30 days notice at the current redemption price per share. During 1997, 1996 and 1995, SWEPCO redeemed $1.2 million annually pursuant to its annual sinking fund requirement. In addition during 1997, each of the U.S. Electric Operating Companies reacquired a significant portion of its outstanding preferred stock. As a result of differences between the dividend rates on the reacquired securities and prevailing market rates, CSW realized an overall gain of approximately $10 million on the transactions. This gain is shown separately, as Gain on reacquired preferred stock, on the Consolidated Statements of Income. The following table shows the results of the tender offers of the U.S. Electric Operating Companies' preferred stock. CSW 2-68 Shares Shares Reacquired Remaining -------------------------- CPL Series 4.00% 57,952 42,048 Series 4.20% 57,524 17,476 Series 7.12% 260,000 -- Series 8.72% 500,000 -- PSO Series 4.00% 53,260 44,640 Series 4.24% 91,931 8,069 SWEPCO Series 4.28% 52,614 7,386 Series 4.65% 23,092 1,908 Series 5.00% 37,261 37,739 Series 6.95% 65,990 274,010 WTU Series 4.40% 36,325 23,675 CPL The dividends on CPL's $160 million auction and money market preferred stocks are adjusted every 49 days, based on current market rates. The dividend rates averaged 4.3%, 4.1% and 4.5% during 1997, 1996 and 1995, respectively. SWEPCO The minimum annual sinking fund requirement for SWEPCO's preferred stock subject to mandatory redemption is $1.2 million for the years 1997 through 2001. This sinking fund retires 12,000 shares annually. For additional information about the U.S. Electric Operating Companies' preferred stock, see their STATEMENTS OF CAPITALIZATION in the FINANCIAL STATEMENTS. 10. TRUST PREFERRED SECURITIES The following Trust Preferred Securities issued by the wholly-owned statutory business trusts of CPL, PSO and SWEPCO were outstanding at December 31, 1997. They are classified on the balance sheets as Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries (or CPL/PSO/SWEPCO). Amount Description of Underlying Business Trust Security Units (millions) Debentures of Registrant - ------------------------------------------------------------------------------ CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million, 8.00%, Series A PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million, 8.00%, Series A SWEPCO Capital I 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million, 7.875%, Series A ---------- ----- 13,400,000 $335 ---------- ----- Each of the business trusts will be treated as a subsidiary of its parent company. The only assets of the business trusts are the subordinated debentures issued by their parent company as specified above. In addition to the obligations under their subordinated debentures, each of the parent companies has also agreed to a security obligation which represents a full and unconditional guarantee of its capital trust's obligation. CSW 2-69 11. SHORT-TERM FINANCING The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinate short-term borrowings for certain subsidiaries and also incurs borrowings outside the money pool for other subsidiaries. As of December 31, 1997, CSW had revolving credit facilities totaling $1.4 billion to back up its commercial paper program. At December 31, 1997, CSW had $721 million outstanding in short-term borrowings. The maximum amount of such short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $725 million during December 1997. CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-alone basis. At December 31, 1997, CSW Credit had a $900 million revolving credit agreement that is secured by the assignment of its receivables to back up its commercial paper program which had $637 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield for the year of 5.6%, was $890 million during September 1997. 12. COMMON STOCK CSW adopted SFAS No. 128 during 1997. SFAS No. 128 requires the computation of earnings per share on both a basic as well as a diluted basis. CSW's basic earnings per share of common stock are computed by dividing net income for common stock by the average number of common shares outstanding for the respective periods. Diluted earnings per share reflect the potential dilution that could occur if all options outstanding under CSW's stock incentive plan were converted to common stock and then shared in the income for common stock. CSW's basic and diluted earnings per share were the same for the years 1995 - 1997. CSW's dividends per common share reflect per share amounts paid for each of the periods. CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, through the LTIP, a stock option plan, PowerShare and ThriftPlus. Following the issuance of the CPL 1997 Original Rate Order and the decline in the market price of CSW's common stock, which CSW believes is attributable in part to the CPL 1997 Original Rate Order, the determination was made that it was appropriate for CSW to begin funding these plans through open market purchases, effective April 1, 1997. Prior to that time, CSW had issued $20 million in new common stock in 1997. Information concerning common stock activity issued through the LTIP, the stock option plan, PowerShare and ThriftPlus is presented in the following table. 1997 1996 1995 ------------------------------------------------------- Number of new shares issued (millions) 0.8 2.9 2.3 Range of stock price for new shares $21 1/4 - $25 5/8 $24 3/8 - $28 7/8 $22 5/8 - $28 3/8 New common stock equity (millions) $20 $79 $57 During February 1996, CSW sold 15,525,000 shares of CSW Common in a primary stock offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of indebtedness incurred during the acquisition of SEEBOARD. 13. STOCK-BASED COMPENSATION PLANS CSW has a key employee incentive plan. This plan is accounted for under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined consistent with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric CSW 2-70 Operating Companies' net income for common stock and earnings per share as required by SFAS No. 123 would not have changed significantly from amounts reported. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. CSW may grant options for up to 4.0 million shares of CSW Common under the stock option plan. Under the stock option plan, the option exercise price equals the stock's market price on the date of grant. The grant vests over three years, one-third on each of the three anniversary dates of the grant, and expires 10 years after the original grant date. CSW has granted 2.8 million shares through December 31, 1997. A summary of the status of CSW's stock option plan at December 31, 1997, 1996 and 1995 and the changes during the years then ended is presented in the following table.
1997 1996 1995 ----------------------------------------------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (thousands) Exercise (thousands) Exercise (thousands) Exercise Price Price Price Outstanding at beginning of year 1,412 $26 1,564 $26 1,616 $26 Granted 694 21 70 27 -- -- Exercised -- 22 (147) 24 (23) 22 Canceled (204) 28 (75) 27 (29) 27 ------ ----- ---- Outstanding at end of year 1,902 24 1,412 26 1,564 26 Exercisable at end of year 1,162 n/a 1,004 n/a 828 n/a Weighted average fair value of options $2.24 - $2.39
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997: (i) risk-free interest rate of 5.9%; (ii) expected dividend rate of 6.5%; (iii) and expected volatility of 19%. The expected life of the options granted did not materially impact the values produced. CSW 2-71 14. BUSINESS SEGMENTS CSW's business segments at December 31, 1997 included the U.S. Electric operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric operations (SEEBOARD U.S.A.). See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the SEEBOARD acquisition. Eight additional non-utility companies are included with CSW in Corporate items and Other (CSW Energy, CSW International, C3 Communications, CSW Credit, CSW Leasing, CSW Services, EnerShop and CSW Energy Services). Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business segment information is presented in the following tables. 1997 1996 1995 -------- -------- -------- (millions) OPERATING REVENUES Electric Operations United States $3,321 $3,248 $2,883 United Kingdom (1) 1,870 1,848 208 Corporate items and Other 77 59 52 -------- -------- -------- $5,268 $5,155 $3,143 -------- -------- -------- OPERATING INCOME Electric Operations United States $661 $768 $719 United Kingdom (1) 255 236 21 Corporate items and Other (30) 15 (27) -------- -------- -------- Operating income before taxes 886 1,019 713 Income taxes (151) (224) (92) -------- -------- -------- $735 $795 $621 -------- -------- -------- DEPRECIATION AND AMORTIZATION Electric Operations United States $389 $362 $335 United Kingdom (1) 92 88 7 Corporate items and Other 16 14 11 -------- -------- -------- $497 $464 $353 -------- -------- -------- IDENTIFIABLE ASSETS Electric Operations United States $9,172 $9,142 $9,278 United Kingdom (1) 2,931 3,061 2,821 Corporate items and Other 1,348 1,129 1,004 -------- -------- -------- 13,451 13,332 13,103 Gas Operations (Discontinued) -- -- 766 -------- -------- -------- $13,451 $13,332 $13,869 -------- -------- -------- CAPITAL EXPENDITURES AND ACQUISITIONS Electric Operations United States $346 $356 $398 United Kingdom (1), (2) 126 1,543 731 Corporate items and Other (3) 276 109 19 -------- -------- -------- 748 2,008 1,148 Gas Operations (Discontinued) -- 23 66 -------- -------- -------- $748 $2,031 $1,214 -------- -------- -------- (1) Represents equity method of accounting for November 1995 (27.6%) and full consolidation accounting for December 1995 (76.45%). (2) Includes $1,394 million and $731 million in 1996 and 1995, respectively, used to purchase SEEBOARD. (3) Includes CSW Energy and CSW International equity investments. CSW 2-72 15. TRANSOK DISCONTINUED OPERATIONS On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of operations for Transok have been reported as discontinued operations and prior periods have been restated for consistency. As a wholly owned subsidiary of CSW, Transok operated as an intrastate natural gas gathering, transmission, marketing and processing company that provided natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other gas customers throughout the United States. CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and $200 million in existing long-term debt that remained with Transok after the sale. A portion of the cash proceeds was used to repay borrowings incurred related to the SEEBOARD acquisition and the remaining proceeds were used to repay commercial paper borrowings. CSW recorded an after tax gain on the sale of Transok of approximately $120 million in 1996. Transok's operating results for 1996 and 1995 are summarized in the following table (transactions with CSW have not been eliminated). 1996 1995 ------------------- Total revenue $362 $721 Operating income before income taxes 23 52 Earnings before income taxes 18 38 Income taxes (6) (13) ------------------- Net income from discontinued operations $12 $25 ------------------- 16. PROPOSED AEP MERGER In December 1997, CSW and AEP entered into a definitive merger agreement for a tax-free, stock-for stock transaction with AEP being the surviving corporation. The transaction is subject to the approval of various state and federal regulatory agencies. The shareholders of CSW will be asked to approve the AEP Merger and the shareholders of AEP will be asked to approve the issuance of shares of AEP common stock pursuant to the AEP Merger Agreement and to amend AEP's certificate of incorporation to increase the number of authorized shares of AEP common stock from 300 million shares to 600 million shares. The proposed AEP Merger, with a targeted completion date in the first half of 1999, is expected to be accounted for as a pooling of interests. Upon completion of the AEP Merger, CSW common stockholders will receive 0.6 shares of AEP common stock for each share of CSW common stock. At that time, CSW common stockholders will own approximately 40% of the outstanding common stock of AEP. Under the AEP Merger Agreement, there will be no changes required with respect to the outstanding debt, preferred stock or Trust Preferred Securities of CSW or its subsidiaries. The transaction must satisfy many conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated. CSW 2-73 17. EXTRAORDINARY ITEM In the general election held in the United Kingdom on May 1, 1997, the United Kingdom's Labour Party won control of the government with a considerable majority. Prior to the general election, the Labour Party had announced that, if elected, it would impose a windfall profits tax on certain industries in the United Kingdom, including the privatized utilities, to fund a variety of social improvement programs. On July 2, 1997, the one-time windfall profits tax was introduced in the Labour Party's Budget and the legislation enacting the tax subsequently was passed during the third quarter of 1997. Accordingly, during the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item, (pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a one-time, windfall profits tax enacted by the United Kingdom government. The windfall profits tax is payable in two equal installments, due December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on the difference between nine times the average profits after tax for the four years following flotation in 1990, and SEEBOARD's market capitalization calculated as the number of shares issued at flotation multiplied by the flotation price per share. On December 1, 1997, SEEBOARD made the first such payment. As enacted, the windfall profits tax is not tax deductible for United Kingdom purposes. To date, no United States income tax benefit has been recognized due to the uncertainty as to the impact on the use of foreign tax credits. CSW continues to analyze the potential United States income tax benefit from the use of foreign tax credits. 18. PRO FORMA INFORMATION (UNAUDITED) CSW secured effective control of SEEBOARD in December 1995. The unaudited pro forma information is presented in response to applicable accounting rules relating to acquisition transactions. The pro forma information gives effect to the acquisition of SEEBOARD accounted for under the purchase method of accounting for the twelve months ended December 31, 1995 as if the transaction had been consummated at the beginning of the period presented. The unaudited pro forma information has been prepared in accordance with United States generally accepted accounting principles. The pro forma information in the following table is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the SEEBOARD acquisition had taken place at the beginning of the period specified, nor is it necessarily indicative of future operating results. The following pro forma information has been prepared reflecting the February 1996 issuance of CSW Common, and has been converted at an exchange rate of (pound)1.00=$1.58 for the twelve months ended December 31, 1995. 1995 ----------------- (millions except EPS) Operating Revenues $5,404 Operating Income 750 Net Income for Common Stock 445 EPS of Common Stock $2.15 CSW 2-74 19. QUARTERLY INFORMATION (UNAUDITED) The following unaudited quarterly information includes, in the opinion of management, all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. QUARTER ENDED 1997(1) 1996(2) - ------------------------------------------------------------------------------- (millions, except EPS) MARCH 31 Operating Revenues $1,278 $1,215 Operating Income 127 144 Income from Continuing Operations 25 43 Net Income for Common Stock 25 51 Basic and Diluted EPS from Continuing Operations $0.12 $0.22 Basic and Diluted EPS $0.12 $0.26 JUNE 30 Operating Revenues $1,184 $1,267 Operating Income 169 214 Income from Continuing Operations 83 11 Net Income for Common Stock 83 128 Basic and Diluted EPS from Continuing Operations $0.39 $0.05 Basic and Diluted EPS $0.39 $0.61 SEPTEMBER 30 Operating Revenues $1,477 $1,438 Operating Income 303 284 Income from Continuing Operations 196 190 Extraordinary Item (176) -- Net Income for Common Stock 20 190 Basic and Diluted EPS from Continuing Operations $0.93 $0.90 Basic and Diluted EPS from Extraordinary Item $(0.83) -- Basic and Diluted EPS $0.10 $0.90 DECEMBER 31 Operating Revenues $1,329 $1,235 Operating Income 136 153 Income from Continuing Operations 25 53 Net Income for Common Stock 25 60 Basic and Diluted EPS from Continuing Operations $0.11 $0.26 Basic and Diluted EPS $0.11 $0.28 TOTAL Operating Revenues $5,268 $5,155 Operating Income 735 795 Income from Continuing Operations 329 297 Extraordinary Item (176) -- Net Income for Common Stock 153 429 Basic and Diluted EPS from Continuing Operations $1.55 $1.43 Basic and Diluted EPS from Extraordinary Item $(0.83) -- Basic and Diluted EPS $0.72 $2.07 (1) The first, second and third quarters of 1997 include the effect of certain reclassifications to conform with the 1997 year end financial statement presentation. (2) In 1996, CSW EPS of Common Stock for the year do not sum to the total of the individual quarters' EPS of Common Stock due to different levels of average shares outstanding for the different periods. CSW 2-75 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CENTRAL AND SOUTH WEST CORPORATION: We have audited the accompanying consolidated balance sheets of Central and South West Corporation (a Delaware corporation) and subsidiary companies as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows, for each of the three years ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of CSW UK Finance Company (1997 - which includes CSW Investments) and CSW Investments (1996), which statements reflect total assets and total revenues of 22 percent and 35 percent in 1997 and 23 percent and 36 percent in 1996, respectively, of the consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Central and South West Corporation and subsidiary companies as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas February 16, 1998 CSW 2-76 AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY We have audited the consolidated balance sheets of CSW UK Finance Company and subsidiaries as of 31 December 1997 and the related consolidated statement of earnings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used in and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW UK Finance Company and subsidiaries at 31 December 1997 and the result of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 1997 to the extent summarised in Note 23 to the consolidated financial statements. KPMG Audit Plc Chartered Accountants London, England Registered Auditor 19 January 1998 CSW 2-77 AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS We have audited the consolidated balance sheets of CSW Investments and subsidiaries as of 31 December 1996 and the related consolidated statement of earnings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used in and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW Investments and subsidiaries at 31 December 1996 and the result of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 1996 to the extent summarised in the notes to the consolidated financial statements. KPMG Audit Plc Chartered Accountants London, England Registered Auditor 22 January 1997 CSW 2-78 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central and South West Corporation and subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports of independent public accountants are presented elsewhere in this report. CSW, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CSW and its subsidiaries believe that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1997. E. R. Brooks Glenn D. Rosilier Lawrence B. Connors Chairman and Executive Vice President and Controller Chief Executive Officer Chief Financial Officer CSW 2-79 CENTRAL POWER AND LIGHT COMPANY CPL 2-80 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CPL. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. --------------------------------------------------------- 1997 1996 (1) 1995 1994 1993(2) (thousands except ratios) INCOME STATEMENT DATA Revenues $1,376,282 $1,300,688 $1,073,469 $1,217,979 $1,223,528 Income before cumulative effect of changes in 128,471 147,051 206,447 205,439 145,130 accounting principles Net income for common 121,350 133,488 191,978 191,635 158,422 stock BALANCE SHEET DATA Assets 4,813,310 4,828,263 4,881,136 4,822,699 4,781,745 Long-term obligations (3) 1,452,266 1,323,054 1,517,347 1,466,393 1,384,820 Capitalization ratios Common stock equity 47% 48% 45% 45% 47% Preferred stock 5 8 8 8 9 CPL-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of CPL 5 -- -- -- -- Long-term debt 43 44 47 47 44 Ratio of earnings to fixed 2.48 2.86 2.63 3.24 2.69 charges (SEC Method) (4) (1) Earnings in 1996 reflect a $15.6 million one-time charge, net of tax, associated with certain investments for plant sites, engineering studies and lignite reserves and the expiration in 1995 of Mirror CWIP liability amortization income. (2) Earnings in 1993 were significantly affected by restructuring charges, the $27 million cumulative effect of changes in accounting principles and prior year tax adjustments. CPL changed its method of accounting for unbilled revenues in 1993. (3) Long-term obligations includes long-term debt and Trust Preferred Securities, and for 1993 preferred stock subject to mandatory redemption. (4) Ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of change in accounting principles. CPL 2-81 CENTRAL POWER AND LIGHT COMPANY RESULTS OF OPERATIONS Reference is made to CPL's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock decreased to $121.4 million, or 9%, compared to $133.5 million in 1996. The major reason for the decrease was the impact of the CPL 1997 Final Order. This decrease was partially offset by an increase in other income and deductions of $19.4 million, primarily due to the absence in 1997 of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $15.6 million, net of tax, recorded in the second quarter of 1996. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for more information related to the CPL 1997 Final Order. Total electric operating revenues increased $75.6 million, or 5.8%, in 1997 compared to 1996 due primarily to a 3% increase in retail MWH sales resulting from increased customers and demand as well as higher fuel related revenue due to higher fuel costs, as discussed below. Another factor that contributed to the increase was a $41.5 million increase in transmission revenues as a result of the January 1997 implementation of open access tariffs in accordance with FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing, offset by a decrease related to provisions for refunds in 1997 and 1996 associated with the CPL rate case. The impact on net income of the increase in transmission access revenues was offset by a corresponding increase in transmission expense. Fuel expense increased $55.7 million, or 16%, during 1997 as compared to 1996. The increase in fuel expense was due primarily to a 13% increase in the average unit cost of fuel from $1.62 per MMbtu in 1996 to $1.83 per MMbtu in 1997. The increase in fuel costs reflects an increase in the spot market price of natural gas partially offset by a decrease in the delivery cost of coal. Also contributing to this increase was the absence in 1997 of a one-time $8.8 million reduction in fuel expense recorded in the first quarter of 1996 in accordance with the CPL 1996 Fuel Agreement. Purchased power expense decreased 5% from $59.9 million in 1996 to $56.4 million in 1997 due primarily to decreased economy energy purchases. Other operating expense increased $52.1 million to $283.6 million in 1997 when compared to 1996. The increase is due primarily to an increase in transmission operations expenses as a result of the January 1997 implementation of open access tariffs in accordance with FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing, the write-off of previously deferred rate case expenses in accordance with the settlement in principle of the rate case expense phase of CPL's Rate Review - Docket No. 14965 and the write-off of obsolete inventory of $3.8 million. The increase in other operating expense was offset in part by reductions in pension expense, other employee related expenses and the absence in 1997 of the write-off of a canceled transmission project of $9.5 million. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Maintenance expense increased $6.7 million, or 12%, in 1997 as compared to 1996 due primarily to higher steam and nuclear production and distribution overhead line expenses in 1997. Depreciation and amortization expenses increased $18.5 million compared to 1996 due primarily to the impact of the CPL 1997 Final Order. Taxes, other than income increased approximately $8.8 million during 1997 as compared to 1996 due primarily to an increase in ad valorem and franchise taxes. CPL 2-82 Other income and deductions increased $19.4 million from a loss of $11.1 million in 1996 to $8.2 million in 1997 due primarily to the absence in 1997 of the one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $15.6 million, net of tax, recorded in 1996. Also contributing to this increase was additional interest income in 1997 due primarily to a higher level of short-term investments. Interest and other charges increased $3.7 million in 1997 due primarily to the new distributions on Trust Preferred Securities of $7.7 million. For additional information on these new securities see NOTE 10. TRUST PREFERRED SECURITIES. Partially offsetting this increase was a decrease of $5.3 million in long-term debt expense due primarily to the maturity of CPL's $200 million, Series BB, 6% FMBs in October 1997 and also refinancing activities in 1996. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Net income for common stock for 1996 decreased 30% to $133 million from $192 million in 1995. The decrease was due primarily to the expiration of Mirror CWIP liability amortization, the CPL 1996 Fuel Agreement, a charge in 1996 associated with certain investments for plant sites, engineering studies and lignite reserves of $15.6 million, net of tax, and management's expectation of the outcome of CPL's pending rate review . Partially offsetting the decline was the absence of the net effect of the CPL 1995 Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information. Electric operating revenues were $1.3 billion in 1996, an increase of 21% when compared to 1995 revenues of $1.1 billion. The increase was due primarily to a $96.6 million increase in fuel revenues resulting primarily from higher average unit fuel costs and purchased power as discussed below. The increase was also attributable to a one-time $50 million base rate refund and a $62.3 million disallowance of under-recovered fuel costs in 1995 as a result of the CPL 1995 Agreement. KWH sales increased 6% resulting primarily from increased customer and favorable weather-related demand as well as residential and commercial customer growth. Fuel expense increased $53.0 million, or 18%, during 1996 as compared to 1995. The increase in fuel expense was due primarily to an 18% increase in the average unit cost of fuel from $1.37 per MMbtu in 1995 to $1.62 per MMbtu in 1996. The fuel costs reflect an increase in the spot market price of natural gas partially offset by a decrease in the delivered cost of coal and a one-time $9.6 million reduction in fuel expense as a result of the CPL 1996 Fuel Agreement. Purchased power increased $39.9 million during 1996 when compared to the prior year primarily as a result of increased economy energy purchases at a higher cost per MWH. Also contributing to this increase were additional cogeneration purchases in 1996. Other operating expenses increased $22.5 million, or 11%, during 1996 when compared to 1995. This increase was due primarily to a $9.5 million write-off associated with the cancellation of a transmission project, a $2.2 million write-off of demand side management assets as well as increased rate case and decommissioning expenses, all associated with management's expectation of the outcome of CPL's pending rate review. Also contributing to the increase was the establishment of a regulatory asset for rate case costs previously expensed and subsequent amortization of such regulatory asset pursuant to the CPL 1995 Agreement. Further contributing to this increase were lower employee-related costs in 1995. The overall restructuring charges increase of $25.4 million during 1996 when compared to 1995 was due primarily to the recognition of a $20.7 million regulatory asset established in accordance with the CPL 1995 Agreement for previously recorded restructuring charges. In 1996, the CSW System began implementation of organizational and executive changes which were completed in 1997. CPL recorded its $4.6 million portion of the estimated cost of the restructuring during 1996. Maintenance expenses decreased $10.1 million or 16% during 1996 when compared to 1995 due primarily to lower production and distribution maintenance. The decrease in production maintenance was the result of fewer scheduled steam maintenance repair projects in 1996 as well as lower nuclear maintenance due to fewer scheduled refueling outages in CPL 2-83 1996. The decrease in distribution maintenance was due primarily to lower tree trimming expenses in 1996. Depreciation and amortization increased $2.3 million, or 2%, during 1996 as compared to 1995 as a result of an increase in depreciable property and the amortization of regulatory assets associated with the CPL 1995 Agreement. Such increases were partially offset by a decrease in depreciation rates, effective May 1996, in accordance with management's expectation of the outcome of CPL's pending rate review. Taxes, other than income increased $8.1 million during 1996 as compared to 1995 due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates. Income taxes increased $82.6 million in 1996 as compared to 1995 due primarily to the accelerated flowback in 1995 of $34.3 million of unprotected excess deferred income taxes in accordance with the CPL 1995 Agreement. This increase was also attributable to prior year tax adjustments, higher pre-tax income, excluding the effects of the one-time charge, as discussed below, and the permanent tax effect associated with the expiration of the Mirror CWIP liability amortization, also discussed below. Other income and deductions decreased $67.5 million in 1996 when compared to 1995. Mirror CWIP liability amortization, which expired in 1995, contributed $41.0 million to other income and deductions in 1995. Also, a one-time charge in 1996 associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $15.6 million, net of tax, contributed to this decline. Furthermore, other income and deductions decreased in 1996 as a result of the recognition of previously deferred factoring income in 1995 pursuant to the CPL 1995 Agreement. Interest on long-term debt also decreased $5.8 million during 1996 when compared to 1995 as a result of refinancing activity in 1995. Interest on short-term debt and other decreased $1.4 million during 1996 when compared to 1995 primarily as a result of lower levels of short-term debt outstanding at lower interest rates partially offset by an increase in the amortization of debt issuance costs and AFUDC for borrowed funds. CPL 2-84 CPL CONSOLIDATED STATEMENTS OF INCOME CENTRAL POWER AND LIGHT COMPANY - ------------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (thousands) Electric Operating Revenues Residential $541,169 $528,916 $465,478 Commercial 400,412 388,008 355,238 Industrial 330,481 308,186 256,223 Sales for resale 70,461 72,164 52,081 Other 33,759 3,414 (55,551) ----------- ----------- ----------- 1,376,282 1,300,688 1,073,469 ----------- ----------- ----------- Operating Expenses and Taxes Fuel 396,707 340,962 287,979 Purchased power 56,475 59,562 19,632 Other operating 283,640 231,501 209,021 Restructuring charges -- 4,628 (20,793) Maintenance 59,791 53,077 63,201 Depreciation and amortization 171,349 152,831 150,508 Taxes, other than income 82,909 74,029 65,925 Income taxes 74,044 98,451 15,812 ----------- ----------- ----------- 1,124,915 1,015,041 791,285 ----------- ----------- ----------- Operating Income 251,367 285,647 282,184 ----------- ----------- ----------- Other Income and Deductions Charges for investments and plant development costs (2,060) (21,509) -- Allowance for equity funds used during construction 1,724 427 442 Mirror CWIP liability amortization -- -- 41,000 Other 3,563 4,636 15,009 Non-operating income taxes 5,050 5,301 (129) ----------- ----------- ----------- 8,277 (11,145) 56,322 ----------- ----------- ----------- Income Before Interest Charges 259,644 274,502 338,506 ----------- ----------- ----------- Interest Charges Interest on long-term debt 105,081 110,375 116,205 Distributions on Trust Preferred Securities 7,533 -- -- Interest on short-term debt and other 20,613 18,494 19,926 Allowance for borrowed funds used during construction (2,054) (1,418) (4,072) ----------- ----------- ----------- 131,173 127,451 132,059 ----------- ----------- ----------- Net Income 128,471 147,051 206,447 Less: Preferred stock dividends 9,523 13,563 14,469 Gain on reacquired preferred stock 2,402 -- -- ----------- ----------- ----------- Net Income for Common Stock $121,350 $133,488 $191,978 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements. CPL 2-85 CPL CONSOLIDATED STATEMENTS OF RETAINED EARNINGS CENTRAL POWER AND LIGHT COMPANY - ---------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands) Retained Earnings at Beginning of Year $868,932 $863,444 $857,466 Net income for common stock 121,350 133,488 191,978 Deduct: Common stock dividends 157,000 128,000 186,000 -------- -------- -------- Retained Earnings at End of Year $833,282 $868,932 $863,444 ======== ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. CPL 2-86 CPL CONSOLIDATED BALANCE SHEETS CENTRAL POWER AND LIGHT COMPANY - ------------------------------------------------------------------------------- As of December 31, ----------------------- 1997 1996 ---------- ---------- (thousands) ASSETS Electric Utility Plant Production $3,106,576 $3,102,929 Transmission 517,903 505,801 Distribution 1,021,759 956,928 General 295,974 271,347 Construction work in progress 77,390 95,336 Nuclear fuel 196,147 184,229 ---------- ---------- 5,215,749 5,116,570 Less - accumulated depreciation 1,845,730 1,697,552 ---------- ---------- 3,370,019 3,419,018 ---------- ---------- Current Assets Cash -- 3,299 Special deposits -- 113 Accounts receivable 61,311 53,038 Materials and supplies, at average cost 65,290 75,732 Fuel inventory 14,816 15,461 Under-recovered fuel costs 43,229 26,298 Prepayments 2,595 4,371 ---------- ---------- 187,241 178,312 ---------- ---------- Deferred Charges and Other Assets Deferred STP costs 484,277 486,978 Mirror CWIP asset 285,431 298,708 Income tax related regulatory assets, net 390,149 335,226 Other 96,193 110,021 ---------- ---------- 1,256,050 1,230,933 ---------- ---------- $4,813,310 $4,828,263 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. CPL 2-87 CPL CONSOLIDATED BALANCE SHEETS CENTRAL POWER AND LIGHT COMPANY - -------------------------------------------------------------------------- As of December 31, ---------------------------- 1997 1996 ---------- ---------- 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 833,282 868,932 ---------- ---------- Total Common Stock Equity 1,407,170 47% 1,442,820 48% ---------- ---- ---------- ---- Preferred stock 163,204 5% 250,351 8% CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL 150,000 5% -- -- Long-term debt 1,302,266 43% 1,323,054 44% ---------- ---- ---------- ---- Total Capitalization 3,022,640 100% 3,016,225 100% ---------- ---- ---------- ---- Current Liabilities Long-term debt due within twelve months 28,000 200,000 Advances from affiliates 142,781 52,525 Accounts payable 84,160 69,941 Accrued taxes 13,558 64,207 Accumulated deferred income taxes 21,382 7,310 Accrued interest 28,379 31,566 Refund due customers 63,713 43,266 Other 14,551 19,048 ---------- ---------- 396,524 487,863 ---------- ---------- Deferred Credits Accumulated deferred income taxes 1,237,386 1,162,051 Investment tax credits 142,371 147,191 Other 14,389 14,933 ---------- ---------- 1,394,146 1,324,175 ---------- ---------- $4,813,310 $4,828,263 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. CPL 2-88 CPL CONSOLIDATED STATEMENTS OF CASH FLOWS CENTRAL POWER AND LIGHT COMPANY - ------------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (thousands) OPERATING ACTIVITIES Net Income $128,471 $147,051 $206,447 Non-cash Items Included in Net Income Depreciation and amortization 192,775 178,271 173,711 Deferred income taxes and investment tax credits 29,666 45,923 (35,815) Mirror CWIP liability amortization -- -- (41,000) Establishment of regulatory assets -- -- (20,652) Refund due customers 20,447 43,266 -- Charges for investments and assets 2,061 21,374 -- Inventory reserve 3,834 717 -- Changes in Assets and Liabilities Accounts receivable (8,273) (7,852) (15,321) Fuel inventory 645 11,011 (3,556) Material and supplies 10,442 (4,620) (4,902) Accrued interest (3,187) 1,176 (8,061) Accounts payable 14,219 19,780 (35,101) Accrued taxes (50,649) 2,593 2,228 Fuel recovery (16,931) (38,884) 66,712 Other deferred credits 2,701 (2,856) 2,022 Other 13,419 (6,672) 13,106 --------- --------- --------- 339,640 410,278 299,818 --------- --------- --------- INVESTING ACTIVITIES Construction expenditures (126,693) (136,901) (150,372) Other 1,185 (3,257) (4,072) --------- --------- --------- (125,508) (140,158) (154,444) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 63,930 337,828 Retirement of long-term debt -- (231) -- Reacquisition of long-term debt (200,000) (67,720) (295,938) Redemption of preferred stock (84,745) -- -- Proceeds from issuance of Trust Preferred Securities 144,706 -- -- Change in advances from affiliates 90,256 (123,809) 15,014 Payment of dividends (167,648) (141,874) (200,037) --------- --------- --------- (217,431) (269,704) (143,133) --------- --------- --------- Net Change in Cash and Cash Equivalents (3,299) 416 2,241 Cash and Cash Equivalents at Beginning of Year 3,299 2,883 642 --------- --------- --------- Cash and Cash Equivalents at End of Year $ -- $3,299 $2,883 ========= ========= ========= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities) $116,782 $117,974 $115,845 ========= ========= ========= Income taxes paid $61,509 $44,082 $37,151 ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. CPL 2-89 CPL CONSOLIDATED STATEMENTS OF CAPITALIZATION CENTRAL POWER AND LIGHT COMPANY - ------------------------------------------------------------------------------- As of December 31, ----------------------- 1997 1996 ---------- ---------- (thousands) COMMON STOCK EQUITY $1,407,170 $1,442,820 ---------- ---------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 3,035,000 shares Current Number of Shares Redemption Series Outstanding Price - ----------------------------------------------- Not Subject to Mandatory Redemption 4.00% 42,048 $105.75 4,205 10,000 4.20% 17,476 $103.75 1,748 7,500 7.12% -- -- -- 26,000 8.72% -- -- -- 50,000 Auction Money Market 750,000 $100.00 75,000 75,000 Auction Series A 425,000 $100.00 42,500 42,500 Auction Series B 425,000 $100.00 42,500 42,500 Issuance Expense (2,749) (3,149) ---------- ---------- 163,204 250,351 ---------- ---------- TRUST PREFERRED SECURITIES CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL, 8.00%, due April 30, 2037 150,000 -- ---------- ---------- LONG-TERM DEBT First Mortgage Bonds Series J, 6 5/8%, due January 1, 1998 28,000 28,000 Series L, 7%, due February 1, 2001 36,000 36,000 Series T, 7 1/2%, due December 15, 2014* (Matagorda) 111,700 111,700 Series AA, 7 1/2%, due March 1, 2020* (Matagorda) 50,000 50,000 Series BB, 6%, due October 1, 1997 -- 200,000 Series CC, 7 1/4%, due October 1, 2004 100,000 100,000 Series DD, 7 1/8%, due December 1, 1999 25,000 25,000 Series EE, 7 1/2%, due December 1, 2002 115,000 115,000 Series FF, 6 7/8%, due February 1, 2003 50,000 50,000 Series GG, 7 1/8%, due February 1, 2008 75,000 75,000 Series HH, 6%, due April 1, 2000 100,000 100,000 Series II, 7 1/2%, due April 1, 2023 100,000 100,000 Series JJ, 7 1/2%, due May 1, 1999 100,000 100,000 Series KK, 6 5/8%, due July 1, 2005 200,000 200,000 Installment Sales Agreements - PCRBs Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265 Series 1995, 6.10%, due July 1, 2028 (Matagorda) 100,635 100,635 Series 1995, variable rate, due November 1, 2015 (Guadalupe) 40,890 40,890 Series 1996, 6 1/8%, due June 1, 2020 (Red River) 6,330 6,330 Series 1996,6 1/2%, due May 1, 2030 (Matagorda) 60,000 60,000 Unamortized Discount (4,484) (5,015) Unamortized Costs of Reacquired Debt (84,070) (90,751) Amount to be Redeemed Within One Year (28,000) (200,000) ---------- ---------- 1,302,266 1,323,054 ---------- ---------- TOTAL CAPITALIZATION $3,022,640 $3,016,225 ========== ========== *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to consolidated financial statements are an integral part of these statements. CPL 2-90 CENTRAL POWER AND LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. TRUST PREFERRED SECURITIES See CSW's NOTE 10. 11. SHORT-TERM FINANCING See CSW's NOTE 11. 12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. CPL 2-91 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CENTRAL POWER AND LIGHT COMPANY: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Central Power and Light Company (a Texas corporation and a wholly owned subsidiary of Central and South West Corporation) and subsidiary company as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Central Power and Light Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Power and Light Company and subsidiary company as of December 31, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Exhibit 12 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This exhibit has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas February 16, 1998 CPL 2-92 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central Power and Light Company and subsidiary company as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CPL's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. CPL and its subsidiary company believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. CPL, together with its subsidiary company, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that CPL will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CPL or its subsidiary company, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CPL and its subsidiary believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1997. J. Gonzalo Sandoval R. Russell Davis General Manager/President - CPL Controller - CPL CPL 2-93 PUBLIC SERVICE COMPANY OF OKLAHOMA PSO 2-94 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for PSO. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. --------------------------------------------------------- 1997 1996 (1) 1995 1994 1993 (2) (thousands, except ratios) INCOME STATEMENT DATA Revenues $ 712,690 $ 735,265 $ 690,823 $ 740,496 $ 707,536 Income before cumulative effect of changes in accounting principles 46,206 31,478 81,828 68,266 40,496 Net income for common stock 50,053 30,662 81,012 67,450 45,903 BALANCE SHEET DATA Assets 1,447,681 1,431,597 1,480,816 1,465,114 1,420,379 Long-term obligations (3) 496,821 420,301 379,250 402,752 401,255 Capitalization ratios Common stock equity 49% 52% 55% 52% 51% Preferred stock -- 2 2 2 2 PSO-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of PSO 8 -- -- -- -- Long-term debt 43 46 43 46 47 Ratio of earnings to fixed 2.68 2.45 4.32 4.03 2.78 charges (SEC Method) (4) (1) Earnings in 1996 reflect a $35.7 million one-time charge, net of tax, associated with certain investments for plant sites, engineering studies and lignite reserves. (2) Earnings in 1993 were significantly affected by restructuring charges, the $6 million cumulative effect of changes in accounting principles and the establishment of reserves for fuel and other properties. (3) Long-term obligations includes long-term debt and Trust Preferred Securities. (4) Ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of changes in accounting principles. PSO 2-95 PUBLIC SERVICE COMPANY OF OKLAHOMA RESULTS OF OPERATIONS Reference is made to PSO's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential to understanding, the following discussion and analysis. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock increased to $50.1 million for the year ended 1997 from $30.7 million in 1996. The increase resulted primarily from the absence in 1997 of a one-time charge for certain investments for plant sites, engineering studies and lignite reserves of approximately $35.7 million, net of tax, recorded in 1996 partially offset by the impact of recording the effects associated with the outcome of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to the PSO 1997 Rate Settlement Agreement. Electric operating revenues were $712.7 million during 1997, a 3% decrease from $735.3 million for the same period in 1996. The decrease was due primarily to a $29 million provision for rate refund established in September and paid in December related to the PSO 1997 Rate Settlement Agreement. Partially offsetting this decrease was an increase in transmission access and wheeling revenues. Fuel expense decreased $11.4 million during 1997 compared to 1996 due primarily to a 4% reduction in generation. Also contributing to this decrease was a decline in the average unit cost of fuel from $2.04 per MMbtu in 1996 to $1.98 per MMbtu in 1997. The decline in the average unit cost of fuel was due primarily to utilizing lower cost coal in place of higher cost spot market natural gas. Partially offsetting the decrease in fuel expense was a decline in the amount of under-recovered fuel costs in 1997 when compared to 1996. Purchased power expenses increased 25% to $51.6 million in 1997 from $41.2 million in 1996 as a result of increased purchases of economy energy along with increased cogeneration purchases in 1997. Other operating expenses increased $14.7 million, or 12%, to $135.9 million in 1997 when compared to 1996. The increase was due primarily to the write-off of previously capitalized demand side management energy efficiency incentives of $9.6 million, the write-off of $2.2 million of rate case related expenses, both associated with the aforementioned rate settlement agreement, as well as the write-off of $0.8 million of obsolete inventory. Operating expenses were also affected by a decrease in pension related expenses. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Maintenance expenses decreased 13% to $33.6 million in 1997 from $38.5 million in 1996. The decrease was due primarily to a $3.2 million write-down of production inventory in 1996 and lower tree management expenses in 1997. Depreciation and amortization expense increased $3.8 million, or 5%, during 1997 when compared to the prior year. This increase was due primarily to the write-off of $5.8 million of regulatory assets resulting from the PSO 1997 Rate Settlement Agreement, as well as an increase in depreciable assets, offset in part by a decrease in depreciation expense of $5.2 million also attributable to the agreement. Taxes, other than income were $28.8 million in 1997, a 6% increase from $27.2 million in 1996 as a result of higher ad valorem tax expense in 1997. Operating income taxes were $20.8 million in 1997 compared to $37.6 million in 1996 due primarily to lower taxable operating income in 1997. Other income and deductions increased $37.2 million in 1997 when compared to 1996 primarily as a result of the absence in 1997 of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $35.7 million, net of tax, recorded in 1996. PSO 2-96 Interest and other charges increased $2.5 million, or 7%, in 1997 when compared to the same period in 1996 primarily due to the new distributions on Trust Preferred Securities, partially offset by a decrease in short-term interest expense as a result of a reduction of short-term debt outstanding during 1997. For information on the new securities see NOTE 10. TRUST PREFERRED SECURITIES. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Net income for common stock for 1996 was $30.7 million, a 62% decrease from 1995 net income for common stock of $81 million. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $35.7 million, net of tax, and prior year tax adjustments recorded in 1995 offset in part by increased non-fuel revenue. Electric operating revenues increased 6% to $735.3 million during 1996 from $690.8 million during 1995. The increase was due primarily to increased fuel revenues, as discussed below and a 6% increase in retail KWH sales resulting from increased customer usage, as well as additional weather-related demand. Fuel expense for 1996 was $290.4 million, a 6% increase compared to $273.5 million during 1995. The increase was due primarily to an increase in average unit fuel costs from $1.73 per MMbtu in 1995 to $2.04 per MMbtu in 1996. The increase in average unit fuel costs is attributable to an increase in the spot market price of natural gas brought about by strong demand offset in part by a decline in the delivered cost of coal resulting from lower transportation charges as well as purchases of lower priced spot market coal. Offsetting these factors in part was an under-recovery of fuel costs in 1996 compared to an over-recovery in 1995, as well as decreased KWH generation. Purchased power expense increased 75% to $41.2 million for 1996 from $23.6 million for 1995. The increase was due primarily to increases in purchases of economy energy at a higher cost per MWH. Other operating expenses increased 4% to $121.2 million in 1996 from $116.2 million in 1995 due primarily to the 1996 restructuring charges, increased employee-related expenses and increased outside services expenses. Maintenance expenses increased 9% to $38.5 million in 1996 from $35.4 million in 1995. The increase was due primarily to a $3.2 million write-down of production inventory in 1996. Depreciation and amortization expense increased approximately $9.8 million during 1996 when compared to the prior year due to increases in depreciable property and completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. Income tax expense for 1996 compared to 1995 was affected by prior year tax adjustments recorded in 1995 offset in part by lower pre-tax income, excluding the effects of a one-time charge associated with certain investments as discussed below. Other income and deductions for 1996 decreased approximately $39 million when compared to 1995 as a result of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $35.7 million, net of tax. Other income and deductions were also affected by the $2.7 million gain on the sale of non-utility fiber optic telecommunication property in the first quarter of 1995. PSO 2-97 PSO CONSOLIDATED STATEMENTS OF INCOME PUBLIC SERVICE COMPANY OF OKLAHOMA - ---------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (thousands) Electric Operating Revenues Residential $297,265 $299,550 $280,127 Commercial 226,525 221,985 210,875 Industrial 161,974 157,509 147,811 Sales for resale 30,896 39,285 34,273 Other (3,970) 16,936 17,737 --------- --------- --------- 712,690 735,265 690,823 --------- --------- --------- Operating Expenses and Taxes Fuel 278,976 290,408 273,533 Purchased power 51,619 41,194 23,584 Other operating 135,943 121,235 116,175 Maintenance 33,608 38,469 35,356 Depreciation and amortization 81,227 77,470 67,657 Taxes, other than income 28,778 27,194 25,147 Income taxes 20,763 37,558 37,602 --------- --------- --------- 630,914 633,528 579,054 --------- --------- --------- Operating Income 81,776 101,737 111,769 --------- --------- --------- Other Income and Deductions Allowance for equity funds used during construction 995 292 1,270 Charges for investments and plant development costs (123) (51,109) -- Other (1,503) (1,107) 2,077 Non-operating income taxes 2,280 16,413 197 --------- --------- --------- 1,649 (35,511) 3,544 --------- --------- --------- Income Before Interest Charges 83,425 66,226 115,313 --------- --------- --------- Interest Charges Interest on long-term debt 30,474 30,555 29,594 Interest on short-term debt and other 4,100 5,623 6,355 Distributions on Trust Preferred Securities 3,967 -- -- Allowance for borrowed funds used during construction (1,322) (1,430) (2,464) --------- --------- --------- 37,219 34,748 33,485 --------- --------- --------- Net Income 46,206 31,478 81,828 Less: Preferred stock dividends 364 816 816 Gain on reacquired preferred stock 4,211 -- -- --------- --------- --------- Net Income for Common Stock $50,053 $30,662 $81,012 ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-98 PSO CONSOLIDATED STATEMENTS OF RETAINED EARNINGS PUBLIC SERVICE COMPANY OF OKLAHOMA - ---------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands) Retained Earnings at Beginning of Year $145,943 $150,281 $124,269 Net income for common stock 50,053 30,662 81,012 Deduct: Common stock dividends 59,000 35,000 55,000 -------- -------- -------- Retained Earnings at End of Year $136,996 $145,943 $150,281 ======== ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-99 PSO CONSOLIDATED BALANCE SHEETS PUBLIC SERVICE COMPANY OF OKLAHOMA - ------------------------------------------------------------------------------- As of December 31, ----------------------- 1997 1996 ---------- ---------- (thousands) ASSETS Electric Utility Plant Production $907,735 $902,813 Transmission 375,111 368,280 Distribution 818,806 773,590 General 197,264 186,252 Construction work in progress 40,992 59,241 ---------- ---------- 2,339,908 2,290,176 Less - Accumulated depreciation 1,031,322 987,283 ---------- ---------- 1,308,586 1,302,893 ---------- ---------- Current Assets Cash 2,171 1,479 Accounts receivable 34,974 11,069 Materials and supplies, at average cost 32,211 34,542 Fuel inventory, at LIFO cost 11,427 14,061 Accumulated deferred income taxes -- 2,558 Prepayments and other 3,366 2,991 ---------- ---------- 84,149 66,700 ---------- ---------- Deferred Charges and Other Assets 54,946 62,004 ---------- ---------- $1,447,681 $1,431,597 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-100 PSO CONSOLIDATED BALANCE SHEETS PUBLIC SERVICE COMPANY OF OKLAHOMA - ----------------------------------------------------------------------- As of December 31, ---------------------------- 1997 1996 ---------- ---------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $15 par value Authorized shares: 11,000,000 shares Issued 10,482,000 shares and outstanding 9,013,000 shares $ 157,230 $ 157,230 Paid-in capital 180,000 180,000 Retained earnings 136,996 145,943 ---------- ---------- Total Common Stock Equity 474,226 49% 483,173 52% ---------- ---- ---------- ---- Preferred stock 5,287 -- 19,826 2% PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO 75,000 8% -- -- Long-term debt 421,821 43% 420,301 46% ---------- ---- ---------- ---- Total Capitalization 976,334 100% 923,300 100% ---------- ---- ---------- ---- Current Liabilities Advances from affiliates 4,874 42,867 Payables to affiliates 29,011 27,425 Accounts payable 55,179 47,604 Payables to customers 18,837 14,329 Accrued taxes -- 12,306 Accumulated deferred income taxes 2,262 -- Accrued interest 9,090 9,193 Other 4,178 7,421 ---------- ---------- 123,431 161,145 ---------- ---------- Deferred Credits Accumulated deferred income taxes 258,848 251,007 Investment tax credits 41,160 43,438 Income tax related regulatory liabilities, net 41,793 46,007 Other 6,115 6,700 ---------- ---------- 347,916 347,152 ---------- ---------- $1,447,681 $1,431,597 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-101 PSO CONSOLIDATED STATEMENTS OF CASH FLOWS PUBLIC SERVICE COMPANY OF OKLAHOMA - ------------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (thousands) OPERATING ACTIVITIES Net Income $46,206 $31,478 $81,828 Non-cash Items Included in Net Income Depreciation and amortization 85,459 83,424 73,218 Deferred income taxes and investment tax credits 6,169 (4,112) (85) Charges for investments and assets 12,803 50,854 -- Inventory reserve 838 3,150 -- Changes in Assets and Liabilities Accounts receivable (23,905) 6,888 3,574 Other investments and property (5,682) (6,264) 2,196 Accounts payable 13,433 (5,878) (22,970) Accrued taxes (12,306) (14,708) 9,658 Other deferred credits (585) 1,078 (3,193) Other (776) (3,292) (338) --------- --------- --------- 121,654 142,618 143,888 --------- --------- --------- INVESTING ACTIVITIES Construction expenditures (79,568) (83,509) (98,415) Other (6,008) (8,596) (9,715) --------- --------- --------- (85,576) (92,105) (108,130) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 51,744 -- Retirement of long-term debt -- (25,000) -- Reacquisition of long-term debt -- (13,040) -- Reacquisition of preferred stock (10,329) -- -- Proceeds from issuance of Trust Preferred Securities 72,450 -- -- Change in advances from affiliates (37,993) (27,643) 15,350 Payment of dividends (59,514) (35,839) (55,817) --------- --------- --------- (35,386) (49,778) (40,467) --------- --------- --------- Net Change in Cash and Cash Equivalents 692 735 (4,709) Cash and Cash Equivalents at Beginning of Year 1,479 744 5,453 --------- --------- --------- Cash and Cash Equivalents at End of Year $2,171 $1,479 $744 ========= ========= ========= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities) $35,557 $32,488 $31,285 ========= ========= ========= Income taxes paid $34,244 $30,353 $27,651 ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-102 PSO CONSOLIDATED STATEMENTS OF CAPITALIZATION PUBLIC SERVICE COMPANY OF OKLAHOMA - ----------------------------------------------------------------------------- As of December 31, ------------------- 1997 1996 -------- -------- (thousands) COMMON STOCK EQUITY $474,226 $483,173 -------- -------- PREFERRED STOCK (Cumulative $100 Par Value, Authorized 700,000 shares, redeemable at the option of PSO upon 30 days notice) Number Current of Shares Redemption Series Outstanding Price - ----------------------------------------- 4.00% 44,640 $105.75 4,464 9,790 4.24% 8,069 $103.19 807 10,000 Premium 16 36 -------- -------- 5,287 19,826 -------- -------- TRUST PREFERRED SECURITIES PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO, 8.00%, due April 30, 2037 75,000 -- -------- -------- LONG-TERM DEBT First Mortgage Bonds Series K, 7 1/4%, due January 1, 1999 25,000 25,000 Series L, 7 3/8%, due March 1, 2002 30,000 30,000 Series S, 7 1/4%, due July 1, 2003 65,000 65,000 Series T, 7 3/8%, due December 1, 2004 50,000 50,000 Series U, 6 1/4%, due April 1, 2003 35,000 35,000 Series V, 7 3/8%, due April 1, 2023 100,000 100,000 Series W, 6 1/2%, due June 1, 2005 50,000 50,000 Medium-term Notes, 5.89%-6.43%, due December 15, 2000-March 1, 2001 40,000 40,000 Installment sales agreement - PCRBs Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700 Series 1996, 6.0%, due June 1, 2020 (Red River) 12,660 12,660 Unamortized discount (3,657) (3,991) Unamortized costs of reacquired debt (16,882) (18,068) -------- -------- 421,821 420,301 -------- -------- TOTAL CAPITALIZATION $976,334 $923,300 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-103 PUBLIC SERVICE COMPANY OF OKLAHOMA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. TRUST PREFERRED SECURITIES See CSW's NOTE 10. 11. SHORT-TERM FINANCING See CSW's NOTE 11. 12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. PSO 2-104 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF PUBLIC SERVICE COMPANY OF OKLAHOMA: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Public Service Company of Oklahoma (an Oklahoma corporation and a wholly owned subsidiary of Central and South West Corporation) and subsidiary companies, as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows, for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Public Service Company of Oklahoma's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of Oklahoma and subsidiary companies as of December 31, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Exhibit 12 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This exhibit has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas February 16, 1998 PSO 2-105 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Public Service Company of Oklahoma and its subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by PSO's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. PSO and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. PSO, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that PSO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of PSO or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. PSO and its subsidiaries believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1997. T. D. Churchwell R. Russell Davis President - PSO Controller - PSO PSO 2-106 SOUTHWESTERN ELECTRIC POWER COMPANY SWEPCO 2-107 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for SWEPCO. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. -------------------------------------------------------- 1997 1996 (1) 1995 1994 1993 (2) (thousands, except ratios) INCOME STATEMENT DATA Revenues $ 939,869 $ 920,786 $ 836,705 $ 825,296 $ 837,192 Income before cumulative effect of changes in 92,902 66,566 117,114 105,712 78,471 changes in accounting principles Net income for common stock 92,254 63,503 113,870 102,351 78,514 BALANCE SHEET DATA Assets 2,094,746 2,099,156 2,116,719 2,079,207 1,968,285 Long-term obligations(3) 683,681 629,615 632,579 630,661 638,093 Capitalization ratios Common stock equity 51% 52% 51% 51% 50% Preferred stock 2 4 4 4 4 SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of SWEPCO 8 -- -- -- -- Long-term debt 39 44 45 45 46 Ratio of earnings to fix 3.46 2.81 3.80 3.70 3.27 (SEC Method) (4) (1) Earnings in 1996 reflect a $21.8 million one-time charge, net of tax, associated with certain investments for plant sites, engineering studies and lignite reserves. (2) Earnings in 1993 were significantly affected by restructuring charges, the $3 million cumulative effect of changes in accounting principles and the establishment of reserves for fuel properties. (3) Long-term obligations includes long-term debt, preferred stock subject to mandatory redemption and Trust Preferred Securities. (4) Ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of changes in accounting principles. SWEPCO 2-108 SOUTHWESTERN ELECTRIC POWER COMPANY RESULTS OF OPERATIONS Reference is made to SWEPCO's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock increased 45% during 1997 to $92.3 million from $63.5 million in 1996. The increase resulted primarily from the absence in 1997 of a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $21.8 million, net of tax. Electric operating revenues increased $19.1 million, or 2%, to $939.9 million in 1997 from $920.8 million in 1996. The increase was due primarily to an increase in non-fuel revenue of $31.5 million, including $15.9 million in non-fuel wholesale sales, as a result of increased retail customer usage and customer growth, offset in part by a $12.4 million decrease in fuel revenue. Fuel and purchased power expense decreased for 1997 when compared to 1996. Fuel expense decreased $6.1 million, or 2%, due primarily to a decrease in average unit fuel costs from $1.76 per MMbtu in 1996 to $1.69 per MMbtu in 1997, which resulted from lower coal transportation charges as well as purchases of lower priced spot market coal. A decrease in natural gas generation because of its relatively higher cost per MMbtu also contributed to the lower fuel expense for 1997. Purchased power expenses decreased approximately $1.2 million, or 5%, during 1997 when compared to 1996 due primarily to a decrease in economy energy purchases. Other operating expenses increased $15.6 million, or 11%, to $157.2 million during 1997 when compared to 1996. The increase is due primarily to costs associated with a canceled transmission project of $10.2 million, the write-off of previously capitalized energy efficiency incentives of $4.2 million and the write-off of obsolete inventory of $1.2 million. Operating expenses were also positively affected by a decrease in pension expenses. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Depreciation and amortization expense increased $3.7 million, or 4%, during 1997 when compared to 1996 due primarily to increases in depreciable plant. Taxes, other than income, increased $5.6 million, or 11%, during 1997 when compared to 1996 due primarily to an increase in ad valorem taxes due to higher assessed values and the expiration of a 10-year exemption on one of SWEPCO's power plants. Other income and deductions increased $25.2 million for 1997 compared to 1996 due primarily to a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $21.8 million, net of tax, recorded in 1996, and a $1.1 million, net of tax, gain on the sale of lignite properties recorded in 1997. Interest expense on long-term debt decreased $3.6 million due to retirement of long-term debt in 1997. Interest expense on short-term debt decreased $2.6 million resulting from decreased short-term debt outstanding. Offsetting these decreases were the distributions on newly-issued Trust Preferred Securities of $5.6 million. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on the new securities. SWEPCO 2-109 COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND 1995 Net income for common stock decreased 44% during 1996 to $63.5 million from $113.9 million in 1995. The decrease resulted primarily from increased other operating expenses and a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $21.8 million, net of tax. Increased depreciation and amortization also contributed to the decrease in net income for common stock. Total electric operating revenues increased $84.1 million, or 10%, to $920.8 million in 1996 due primarily to a $61 million increase in fuel revenues and a $22 million increase in non-fuel revenues. The increase in fuel revenues was due to higher average unit fuel cost as discussed below. The increase in non-fuel revenues was primarily due to a 3% increase in retail KWH sales resulting from increased customer demand. Fuel expense increased 22% to $388.5 million due primarily to a 10% increase in generation and an increase in the average unit cost of fuel from $1.61 per MMbtu in 1995 to $1.76 per MMbtu in 1996. The increase in the average unit cost of fuel is attributable to an increase in the spot market price of natural gas offset in part by a decline in the delivered cost of coal resulting from lower transportation charges as well as purchases of lower priced spot market coal. Purchased power expense increased $8.1 million, or 42%, during 1996 when compared to 1995 due primarily to an increase in economy energy purchases at higher cost per MWH. Other operating expenses increased $20.3 million, or 17%, during 1996 when compared to 1995. The increase is due primarily to $4.6 million in restructuring charges, an increase in outside services employed and a $3.0 million increase in factoring costs. The increase in factoring costs resulted from an increase in accounts receivable factored and the correction in 1995 of an error relating to a prior year, partially offset by a decrease in the average interest rate associated with factored receivables. Also contributing to the increase in other operating expense was the write-off of $3.6 million in deferred SFAS 106 costs which SWEPCO began deferring in 1993 pursuant to an order issued by the Arkansas Commission. The order allowed deferral of the difference between OPEB costs recorded under SFAS 106 and OPEB costs paid to retirees for up to five years. The order required such deferrals to be expensed if at the end of five years amortization of such deferrals is not included in rates. Depreciation and amortization expense increased $8.3 million, or 10%, during 1996 when compared to 1995 due primarily to increases in depreciable plant and the completion in 1995 of the amortization of previously expensed inventory and supply items that were credited through amortization to cost of service. Taxes, other than income, increased $5.2 million, or 12%, during 1996 when compared to 1995 due primarily to an increase in ad valorem taxes and state franchise taxes. The higher ad valorem taxes resulted primarily from a higher state assessed value in Louisiana and the addition of an HVdc tie in Texas. The state franchise taxes increased due mainly to higher federal taxable income associated with Texas franchise tax. Income tax expense decreased approximately $3.5 million in 1996 due primarily to lower pre-tax income partially offset by prior year tax adjustments recorded in 1995. Other income and deductions decreased $25.6 million during 1996 when compared to 1995 due primarily to a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $21.8 million, net of tax. SWEPCO 2-110 SWEPCO CONSOLIDATED STATEMENTS OF INCOME SOUTHWESTERN ELECTRIC POWER COMPANY - ---------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (thousands) Electric Operating Revenues Residential $289,723 $290,020 $278,319 Commercial 192,115 189,954 177,135 Industrial 263,207 262,878 246,182 Sales for resale 146,916 134,836 94,638 Other 47,908 43,098 40,431 --------- --------- --------- 939,869 920,786 836,705 --------- --------- --------- Operating Expenses and Taxes Fuel 382,404 388,450 318,506 Purchased power 25,928 27,160 19,077 Other operating 157,188 141,542 121,248 Maintenance 44,038 43,742 43,320 Depreciation and amortization 95,228 91,566 83,272 Taxes, other than income 55,962 50,373 45,153 Income taxes 39,712 39,870 43,353 --------- --------- --------- 800,460 782,703 673,929 --------- --------- --------- Operating Income 139,409 138,083 162,776 --------- --------- --------- Other Income and Deductions Charges for investments and plant development costs (743) (29,700) -- Allowance for equity funds used during construction 934 325 4,290 Other 1,616 (623) (543) Non-operating income taxes 2,222 8,820 721 --------- --------- --------- 4,029 (21,178) 4,468 --------- --------- --------- Income Before Interest Charges 143,438 116,905 167,244 --------- --------- --------- Interest Charges Interest on long-term debt 40,440 44,066 44,468 Distributions on Trust Preferred Securities 5,582 -- -- Interest on short-term debt and other 5,736 8,381 10,706 Allowance for borrowed funds used during construction (1,222) (2,098) (5,044) --------- --------- --------- 50,536 50,349 50,130 --------- --------- --------- Net Income 92,902 66,556 117,114 Less: Preferred stock dividends 2,467 3,053 3,244 Gain on reacquired preferred stock 1,819 -- -- --------- --------- --------- Net Income for Common Stock $92,254 $63,503 $113,870 ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. SWEPCO 2-111 SWEPCO CONSOLIDATED STATEMENTS OF RETAINED EARNINGS SOUTHWESTERN ELECTRIC POWER COMPANY - --------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------------- 1997 1996 1995 --------- --------- -------- (thousands) Retained Earnings at Beginning of Year $321,801 $302,334 $297,462 Net income for common stock 92,254 63,503 113,870 Gain/(loss) on reacquisition of preferred stock (5) (36) 2 Deduct: Common stock dividends 90,000 44,000 109,000 --------- --------- -------- Retained Earnings at End of Year $324,050 $321,801 $302,334 ========= ========= ======== The accompanying notes to consolidated financial statements are an integral part of these statements. SWEPCO 2-112 SWEPCO CONSOLIDATED BALANCE SHEETS SOUTHWESTERN ELECTRIC POWER COMPANY - ------------------------------------------------------------------------------- As of December 31, ----------------------- 1997 1996 ---------- ---------- (thousands) ASSETS Electric Utility Plant Production $1,391,676 $1,407,134 Transmission 456,401 463,425 Distribution 870,378 844,503 General 311,323 283,878 Construction work in progress 51,665 45,374 ---------- ---------- 3,081,443 3,044,314 Less - Accumulated depreciation 1,225,865 1,192,356 ---------- ---------- 1,855,578 1,851,958 ---------- ---------- Current Assets Cash and temporary cash investments 2,298 1,879 Accounts receivable 81,507 68,140 Materials and supplies, at average cost 24,523 29,265 Fuel inventory 26,415 55,775 Under-recovered fuel costs 13,013 9,120 Prepayments and other 13,678 13,499 ---------- ---------- 161,434 177,678 ---------- ---------- Deferred Charges and Other Assets 77,734 69,520 ---------- ---------- $2,094,746 $2,099,156 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. SWEPCO 2-113 SWEPCO CONSOLIDATED BALANCE SHEETS SOUTHWESTERN ELECTRIC POWER COMPANY - ------------------------------------------------------------------------- As of December 31, ----------------------------- 1997 1996 ---------- ---------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $18 par value Authorized: 7,600,000 shares Issued and outstanding: 7,536,640 shares $ 135,660 $ 135,660 Paid-in capital 245,000 245,000 Retained earnings 324,050 321,801 ---------- ---------- Total Common Stock Equity 704,710 51% 702,461 52% ---------- ---- ---------- ---- Preferred stock Not subject to mandatory redemption 4,709 16,032 Subject to mandatory redemption 25,930 32,464 ---------- ---------- 30,639 2% 48,496 4% SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO 110,000 8% -- --% Long-term debt 547,751 39% 597,151 44% ---------- ---- ---------- ---- Total Capitalization 1,393,100 100% 1,348,108 100% ---------- ---- ---------- ---- Current Liabilities Long-term debt and preferred stock due within twelve months 3,555 3,760 Advances from affiliates 25,175 57,495 Accounts payable 73,582 48,826 Payables to affiliates 63,583 68,708 Customer deposits 14,359 10,497 Accrued taxes 12,884 25,241 Accumulated deferred income taxes 4,594 4,162 Accrued interest 13,425 14,782 Other 9,551 27,449 ---------- ---------- 220,708 260,920 ---------- ---------- Deferred Credits Accumulated deferred income taxes 395,909 372,552 Investment tax credits 66,845 71,507 Income tax related regulatory liabilities, net 10,072 36,106 Other 8,112 9,963 ---------- ---------- 480,938 490,128 ---------- ---------- $2,094,746 $2,099,156 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. SWEPCO 2-114 SWEPCO CONSOLIDATED STATEMENTS OF CASH FLOWS SOUTHWESTERN ELECTRIC POWER COMPANY - ----------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (thousands) OPERATING ACTIVITIES Net Income $92,902 $66,556 $117,114 Non-cash Items Included in Net Income Depreciation and amortization 100,015 101,204 93,624 Deferred income taxes and investment tax credits (6,907) (1,881) 1,501 Charges for investments and assets 16,493 29,590 -- Inventory reserve 1,150 1,632 -- Changes in Assets and Liabilities Accounts receivable (13,367) (13,512) (284) Fuel inventory 29,360 17,501 (11,575) Accounts payable 24,374 12,253 (3,303) Payables to affiliates (5,125) 16,234 11,735 Accrued taxes (12,357) (27) 17,844 Other current liabilities (17,699) (3,076) (5,161) Fuel recovery (3,893) (18,043) (3,277) Other (4,458) (8,506) (4,706) --------- --------- --------- 200,488 199,925 213,512 --------- --------- --------- INVESTING ACTIVITIES Construction expenditures (108,126) (92,737) (105,193) Other (4,545) (7,510) (9,437) --------- --------- --------- (112,671) (100,247) (114,630) --------- --------- --------- FINANCING ACTIVITIES Proceeds from sale of long-term debt -- 79,346 -- Reacquisition of long-term debt -- (83,334) -- Redemption of preferred stock (16,043) (1,236) (1,198) Proceeds from issuance of Trust Preferred Securities 106,231 -- -- Retirement of long-term debt (52,600) (3,901) (3,600) Change in advances from affiliates (32,320) (43,734) 19,360 Payment of dividends (92,666) (46,642) (113,038) --------- --------- --------- (87,398) (99,501) (98,476) --------- --------- --------- Net Change in Cash and Cash Equivalents 419 177 406 Cash and Cash Equivalents at Beginning of Year 1,879 1,702 1,296 --------- --------- --------- Cash and Cash Equivalents at End of Year $2,298 $1,879 $1,702 ========= ========= ========= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities) $49,847 $53,231 $46,243 ========= ========= ========= Income taxes paid $57,715 $35,549 $28,079 ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. SWEPCO 2-115 SWEPCO CONSOLIDATED STATEMENTS OF CAPITALIZATION SOUTHWESTERN ELECTRIC POWER COMPANY - ------------------------------------------------------------------------------- As of December 31, ----------------------- 1997 1996 ---------- ---------- (thousands) COMMON STOCK EQUITY $704,710 $702,461 ---------- ---------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 1,860,000 shares Current Number of Shares Redemption Series Outstanding Price - ------------------------------------------------------ Not Subject to Mandatory Redemption 5.00% 37,749 $109.00 3,775 7,500 4.65% 1,908 $102.75 191 2,500 4.28% 7,386 $103.90 739 6,000 Premium 4 32 ---------- ---------- 4,709 16,032 ---------- ---------- Subject to Mandatory Redemption 6.95% 274,010 $102.32 27,401 34,000 Issuance Expense (271) (336) Amount to be redeemed within one year (1,200) (1,200) ---------- ---------- 25,930 32,464 ---------- ---------- 30,639 48,496 ---------- ---------- TRUST PREFERRED SECURITIES SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO, 7.875%, due April 30, 2037 110,000 -- ---------- ---------- LONG-TERM DEBT First Mortgage Bonds Series V, 7 3/4%, due June 1, 2004 40,000 40,000 Series W, 6 1/8%, due September 1, 1999 40,000 40,000 Series X, 7%, due September 1, 2007 90,000 90,000 Series Y, 6 5/8%, due February 1, 2003 55,000 55,000 Series Z, 7 1/4%, due July 1, 2023 45,000 45,000 Series AA, 5 1/4%, due April 1, 2000 45,000 45,000 Series BB, 6 7/8%, due October 1, 2025 80,000 80,000 1976 Series A, 6.20%, due November 1, 2006* (Siloam Springs) 6,230 6,375 1976 Series B, 6.20%, due November 1, 2006* (Siloam Springs) 1,000 1,000 Installment Sales Agreements - PCRBs 1978 Series A, 6%, due January 1, 2008 (Titus County) 14,420 14,420 1991 Series A, 8.2%, due August 1, 2011 (Titus County) 17,125 17,125 1991 Series B, 6.9%, due November 1, 2004 (Titus County) 12,290 12,290 Series 1992, 7.6%, due January 1, 2019 (DeSoto) 53,500 53,500 Series 1996, 6.1%, due April 1, 2018 (Sabine) 81,700 81,700 Bank Loan, Variable Rate, due June 15, 2000 -- 50,000 Railcar lease obligations 7,759 10,242 Unamortized discount and premium 955 903 Unamortized costs of reacquired debt (39,873) (42,844) Amount to be redeemed within one year (2,355) (2,560) ---------- ---------- 547,751 597,151 ---------- ---------- TOTAL CAPITALIZATION $1,393,100 $1,348,108 ========== ========== *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to consolidated financial statements are an integral part of these statements. SWEPCO 2-116 SOUTHWESTERN ELECTRIC POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. TRUST PREFERRED SECURITIES See CSW's NOTE 10. 11. SHORT-TERM FINANCING See CSW's NOTE 11. 12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. SWEPCO 2-117 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF SOUTHWESTERN ELECTRIC POWER COMPANY: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Southwestern Electric Power Company (a Delaware corporation and a wholly owned subsidiary of Central and South West Corporation) and subsidiary company as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Southwestern Electric Power Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwestern Electric Power Company and subsidiary company as of December 31, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Exhibit 12 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This exhibit has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas February 16, 1998 SWEPCO 2-118 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Southwestern Electric Power Company and its subsidiary company as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the financial statements. The financial statements have been audited by SWEPCO's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. SWEPCO and its subsidiary believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. SWEPCO, together with its subsidiary, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that SWEPCO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of SWEPCO or its subsidiary provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. SWEPCO and its subsidiary believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1997. Michael D. Smith R. Russell Davis President - SWEPCO Controller - SWEPCO SWEPCO 2-119 WEST TEXAS UTILITIES COMPANY WTU 2-120 SELECTED FINANCIAL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for WTU. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. --------------------------------------------------------- 1997 1996 (1) 1995 1994 1993 (2) (thousands, except ratios) INCOME STATEMENT DATA Revenues $397,778 $377,057 $319,835 $342,991 $345,445 Income before cumulative effect of changes in changes in accounting principles 21,461 16,571 34,530 37,366 26,517 Net income for common 22,402 16,307 34,266 36,914 29,329 stock BALANCE SHEET DATA Assets 802,148 810,379 815,614 771,977 754,443 Long-term obligations 278,640 275,070 273,245 210,047 176,882 Capitalization ratios Common stock equity 48% 48% 49% 56% 59% Preferred stock -- 1 1 1 1 Long-term debt 52 51 50 43 40 Ratio of earnings to 2.21 2.05 2.63 3.37 2.79 fixed charges (SEC Method) (3) (1) Earnings in 1996 reflect a $10.9 million one-time charge, net of tax, associated with certain investments for plant sites, engineering studies and lignite reserves. (2) Earnings in 1993 were significantly affected by restructuring charges and the $4 million cumulative effect of changes in accounting principles. (3) Ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of change in accounting principles. WTU 2-121 WEST TEXAS UTILITIES COMPANY RESULTS OF OPERATIONS Reference is made to WTU's Financial Statements and related Notes to Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential to understanding, the following discussion and analysis. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996 Net income for common stock increased 37% during 1997 to $22.4 million from $16.3 million in 1996. The increase resulted primarily from the absence of a one-time charge incurred in 1996 associated with certain investments for plant sites, engineering studies, and lignite reserves of approximately $10.9 million, net of tax, and the gain on reacquisition of preferred stock of $1.1 million recognized in 1997. Electric operating revenues increased $20.7 million, or 6%, in 1997 when compared to 1996. The increase was due primarily to a $16.0 million increase in transmission revenues as a result of the January 1997 implementation of open access tariffs in accordance with FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also contributing to the increase was a 4% increase in total MWH sales. The impact on net income of the transmission revenues was offset by a corresponding increase of $17.2 million in transmission expense related to these transmission activities. Also contributing to the increase was $2.8 million in additional fuel revenues due to higher purchased power expense as discussed below. Fuel expense decreased $12.9 million, or 10%, for 1997 compared to 1996 due to lower-priced spot market coal and a 16% decrease in natural gas generation. This decrease was also reflected by a decline in the average unit cost of fuel to $1.98 per MMbtu in 1997 from $2.02 per MMbtu in 1996. Purchased power expenses increased $18.7 million for 1997 as compared to 1996, primarily as a result of additional economy purchases at a higher cost per MWH. Other operating expense increased $26.7 million, or 40%, for 1997 compared to 1996 due primarily to a $17.2 million increase in transmission expenses as a result of the Texas Commission rules regarding transmission access and pricing. Also contributing to the increase was a $5.2 million write-off of previously capitalized demand side management energy efficiency incentives and the write-off of obsolete inventory for $1.5 million. Partially offsetting the increase in other operating expense was a decrease in pension expense for 1997 compared to 1996. See NOTE 5. BENEFIT PLANS for additional information related to changes in the pension plan. Depreciation and amortization increased $1.8 million, or 4.6%, as a result of an increase in depreciable plant. Taxes, other than income increased $1.3 million due to changes in ad valorem, local franchise, and gross receipt taxes. Income taxes decreased $5.8 million in 1997 compared to 1996 due primarily to lower taxable income in 1997 and timing differences. Other income and deductions increased $11.4 million for 1997 compared to 1996 as a result of the absence in 1997 of a one-time charge incurred in 1996 associated with certain investments for plant sites, engineering studies, and lignite reserves of $10.9 million, net of tax. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Net income for common stock decreased 52% during 1996 to $16.3 million from $34.2 million in 1995. The decrease resulted primarily from a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $10.9 million, net of tax. Electric operating revenues increased $57.2 million in 1996 when compared to the prior year. The increase was attributable primarily to an increase in fuel revenues as well as a one-time $21 million base rate refund WTU 2-122 made pursuant to the WTU 1995 Stipulation and Agreement. Also contributing to the variance was a $14.3 million increase in non-fuel revenues resulting from a 5% increase in KWH sales due to additional weather-related demand as well as increased customer demand. Partially offsetting this increase in non-fuel revenues was a $6.0 million reduction reflecting the lower rates implemented in accordance with the WTU 1995 Stipulation and Agreement. Fuel expense was $132.0 million in 1996, which represented an increase of 7% when compared to 1995 fuel expense of $123.7 million. The increase was primarily attributable to a 10% increase in average unit fuel costs from $1.83 per MMbtu in 1995 to $2.02 per MMbtu in 1996 due largely to higher spot gas market prices. The increase was partially offset by lower coal costs resulting from resolution of coal transportation litigation as well as purchases of lower priced spot market coal. Purchased power expenses increased approximately $20.8 million during 1996 when compared with 1995, primarily as a result of increased economy energy purchases at a higher cost per MWH. Other operating expense increased $3.3 million during 1996 when compared to 1995. The increase was primarily due to increased expenses associated with regulatory activity, increased employee-related expenses, increased expenses associated with accounts receivable factoring due to higher revenues, and the amortization of a regulatory asset for rate case expenses in accordance with the WTU 1995 Stipulation and Agreement. Depreciation and amortization expense increased $6.5 million during 1996 when compared to the prior year due primarily to the accelerated amortization of Oklaunion deferred costs and amortization of a regulatory asset for restructuring costs, both in accordance with the WTU 1995 Stipulation and Agreement. Also contributing to the increase were additions to depreciable property. Income taxes increased approximately $9.8 million when compared with 1995 due primarily to a reduction of $6.9 million of deferred income taxes in accordance with the WTU 1995 Stipulation and Agreement recorded in 1995 and prior year tax adjustments recorded in 1996. During 1996, the CSW System began implementation of organizational and executive changes. Although implementation will not be complete until early 1997, WTU recorded its portion of the estimated cost of the implementation, $1.8 million, during 1996. In 1995, WTU established a $13.2 million regulatory asset for previously expensed restructuring costs in accordance with the WTU 1995 Stipulation and Agreement Other income and deductions decreased $9.8 million in 1996 due primarily to a one-time charge associated with certain investments for plant sites, engineering studies and lignite reserves of $10.9 million, net of tax. WTU 2-123 WTU STATEMENTS OF INCOME WEST TEXAS UTILITIES COMPANY - --------------------------------------------------------------------------- For the Years Ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- (thousands) Electric Operating Revenues Residential $124,578 $124,214 $114,269 Commercial 73,196 72,422 66,363 Industrial 56,928 52,375 51,443 Sales for resale 88,814 88,921 73,905 Other 54,262 39,125 13,855 --------- --------- --------- 397,778 377,057 319,835 --------- --------- --------- Operating Expenses and Taxes Fuel 119,158 132,034 123,723 Purchased power 50,493 31,803 10,998 Other operating 93,796 67,060 63,727 Restructuring charges -- 1,809 (13,582) Maintenance 14,013 14,122 13,931 Depreciation and amortization 41,592 39,755 33,290 Taxes, other than income 24,669 23,402 22,720 Income taxes 9,490 15,338 5,542 --------- --------- --------- 353,211 325,323 260,349 --------- --------- --------- Operating Income 44,567 51,734 59,486 --------- --------- --------- Other Income and Deductions Charges for investments and plant development costs -- (14,949) -- Allowance for equity funds used during construction 227 423 378 Other 766 210 1,101 Non-operating income taxes 471 4,394 (1,564) --------- --------- --------- 1,464 (9,922) (85) --------- --------- --------- Income Before Interest Charges 46,031 41,812 59,401 --------- --------- --------- Interest Charges Interest on long-term debt 20,352 21,169 21,413 Interest on short-term debt and other 4,911 4,925 4,111 Allowance for borrowed funds used during construction (693) (853) (653) --------- --------- --------- 24,570 25,241 24,871 --------- --------- --------- Net Income 21,461 16,571 34,530 Less: Preferred stock dividends 144 264 264 Gain on Reaquired Preferred Stock 1,085 -- -- --------- --------- --------- Net Income for Common Stock $22,402 $16,307 $34,266 ========= ========= ========= The accompanying notes to financial statements are an integral part of these statements. WTU 2-124 WTU STATEMENTS OF RETAINED EARNINGS WEST TEXAS UTILITIES COMPANY - ----------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands) Retained Earnings at Beginning of Year $123,077 $125,770 $132,504 Net income for common stock 22,402 16,307 34,266 Deduct: Common stock dividends 26,000 19,000 41,000 -------- -------- -------- Retained Earnings at End of Year $119,479 $123,077 $125,770 ======== ======== ======== The accompanying notes to financial statements are an integral part of these statements. WTU 2-125 WTU BALANCE SHEETS WEST TEXAS UTILITIES COMPANY - ------------------------------------------------------------------------------- As of December 31, ----------------------- 1997 1996 ---------- ---------- (thousands) ASSETS Electric Utility Plant Production $417,849 $417,467 Transmission 208,905 200,688 Distribution 363,911 347,328 General 104,026 92,622 Construction work in progress 14,154 30,036 ---------- ---------- 1,108,845 1,088,141 Less - Accumulated depreciation 441,281 414,777 ---------- ---------- 667,564 673,364 ---------- ---------- Current Assets Cash 811 664 Receivables from affiliates 19,802 -- Accounts receivable 10,570 24,123 Materials and supplies, at average cost 14,246 15,966 Fuel inventory 12,471 16,674 Accumulated deferred income taxes -- 1,079 Under-recovered fuel costs 11,968 8,961 Prepayments and other 4,006 1,331 ---------- ---------- 73,874 68,798 ---------- ---------- Deferred Charges and Other Assets Deferred Oklaunion costs 18,637 22,365 Restructuring costs 8,966 10,854 Other 33,107 34,998 ---------- ---------- 60,710 68,217 ---------- ---------- $802,148 $810,379 ========== ========== The accompanying notes to financial statements are an integral part of these statements. WTU 2-126 WTU BALANCE SHEETS WEST TEXAS UTILITIES COMPANY - --------------------------------------------------------------------- As of December 31, ------------------------- 1997 1996 -------- -------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $25 par value Authorized: 7,800,000 shares Issued and outstanding: 5,488,560 shares $137,214 $137,214 Paid-in capital 2,236 2,236 Retained earnings 119,479 123,077 -------- -------- Total Common Stock Equity 258,929 48% 262,527 48% -------- ---- -------- ---- Preferred stock 2,483 --% 6,291 1% Long-term debt 278,640 52% 275,070 51% -------- ---- -------- ---- Total Capitalization 540,052 100% 543,888 100% -------- ---- -------- ---- Current Liabilities Advances from affiliates -- 14,833 Payables to affiliates 21,569 13,578 Accounts payable 15,419 19,669 Accrued taxes 11,375 13,463 Accumulated deferred income taxes 203 -- Accrued interest 4,525 5,403 Other 3,859 4,124 -------- -------- 56,950 71,070 -------- -------- Deferred Credits Accumulated deferred income taxes 149,346 144,146 Investment tax credits 27,918 29,239 Income tax related regulatory liabilities, net 9,482 16,918 Other 18,400 5,118 -------- -------- 205,146 195,421 -------- -------- $802,148 $810,379 ======== ======== The accompanying notes to financial statements are an integral part of these statements. WTU 2-127 WTU STATEMENTS OF CASH FLOWS WEST TEXAS UTILITIES COMPANY - ------------------------------------------------------------------------------ For the Years Ended December 31, -------------------------------- 1997 1996 1995 -------- --------- --------- (thousands) OPERATING ACTIVITIES Net Income $21,461 $16,571 $34,530 Non-cash Items Included in Net Income Depreciation and amortization 43,138 41,342 34,382 Deferred income taxes and investment tax credits (2,275) 4,397 650 Charges for investments and assets 5,296 14,905 -- Inventory Reserve 1,498 809 -- Regulatory asset established for previously incurred restructuring charges -- -- (13,213) Changes in Assets and Liabilities Accounts receivable 13,553 4,800 (5,758) Fuel inventory 4,203 (2,848) 1,845 Accounts payable (4,182) 584 (4,922) Payables to affiliates 7,991 5,334 3,697 Accrued taxes (2,088) 281 5,730 Fuel recovery (3,007) (11,917) 2,474 Refunds due customers -- (1,811) 1,812 Other deferred credits 13,284 (5,482) (1,039) Other (3,626) 3,798 (6,848) -------- --------- --------- 95,246 70,763 53,340 -------- --------- --------- INVESTING ACTIVITIES Construction expenditures (31,817) (42,453) (44,076) Other 261 (1,795) (2,517) -------- --------- --------- (31,556) (44,248) (46,593) -------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 43,256 118,376 Reacquisition of long-term debt -- (45,639) (59,082) Redemption of preferred stock (2,724) -- -- Payment of dividends (26,184) (19,198) (41,330) Change in advances from affiliates (14,833) (4,987) (26,495) -------- --------- --------- (43,741) (26,568) (8,531) -------- --------- --------- Net Change in Cash and Cash Equivalents 19,949 (53) (1,784) Cash and Cash Equivalents at Beginning of Year 664 717 2,501 -------- --------- --------- Cash and Cash Equivalents at End of Year $20,613 $664 $717 ======== ========= ========= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $19,659 $20,248 $20,496 ======== ========= ========= Income taxes paid $15,710 $6,295 $8,399 ======== ========= ========= The accompanying notes to financial statements are an integral part of these statements. WTU 2-128 WTU Statements of Capitalization West Texas Utilities Company - ------------------------------------------------------------------------------ As of December 31, ----------------------- 1997 1996 -------- -------- (thousands) COMMON STOCK EQUITY $258,929 $262,527 -------- -------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 810,000 shares Number Current of Shares Redemption Series Outstanding Price - --------------------------------------------- 4.40% 23,675 $107.00 2,368 6,000 Premium 115 291 -------- -------- 2,483 6,291 -------- -------- LONG-TERM DEBT First Mortgage Bonds Series P, 7 3/4%, due June 1, 2007 25,000 25,000 Series Q, 6 7/8%, due October 1, 2002 35,000 35,000 Series R, 7%, due October 1, 2004 40,000 40,000 Series S, 6 1/8%, due February 1, 2004 40,000 40,000 Series T, 7 1/2%, due April 1, 2000 40,000 40,000 Series U, 6 3/8%, due October 1, 2005 80,000 80,000 Installment Sales Agreements - PCRBs Series 1996, 6%, due June 1, 2020 (Red River) 44,310 44,310 Unamortized discount (960) (1,128) Unamortized costs of reacquired debt (24,710) (28,112) -------- -------- 278,640 275,070 -------- -------- TOTAL CAPITALIZATION $540,052 $543,888 ======== ======== The accompanying notes to financial statements are an integral part of these statements. WTU 2-129 WEST TEXAS UTILITIES COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1. 2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2. 3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3. 4. INCOME TAXES See CSW's NOTE 4. 5. BENEFIT PLANS See CSW's NOTE 5. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6. 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7. 8. LONG-TERM DEBT See CSW's NOTE 8. 9. PREFERRED STOCK See CSW's NOTE 9. 10. SHORT-TERM FINANCING See CSW's NOTE 11. 11. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13. WTU 2-130 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF WEST TEXAS UTILITIES COMPANY: We have audited the accompanying balance sheets and statements of capitalization of West Texas Utilities Company (a Texas corporation and a wholly owned subsidiary of Central and South West Corporation) as of December 31, 1997 and 1996, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of West Texas Utilities Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Texas Utilities Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Exhibit 12 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This exhibit has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas February 16, 1998 WTU 2-131 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the financial statements of West Texas Utilities Company as well as other information contained in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the financial statements. The financial statements have been audited by WTU's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. WTU believes that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report. WTU maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that WTU will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of WTU, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. WTU believes that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1997. Paul J. Brower R.Russell Davis General Manager/President - WTU Controller - WTU WTU 2-132 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CSW None. CPL None. PSO None. SWEPCO None. WTU None. 2-133 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. CSW has filed with the SEC its Joint Proxy Statement relating to its 1998 Annual Meeting of Stockholders. The information required by ITEM 10, other than with respect to certain information regarding the executive officers of CSW which is included in ITEM 1-BUSINESS, is hereby incorporated by reference herein from the CSW MEETING - ADDITIONAL MATTERS of the Joint Proxy Statement. (A) Directors of each of the U.S. Electric Operating Companies, together with certain information with respect to each of them, are listed below. Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- CPL JOHN F. BRIMBERRY AGE - 65 1995 Chief Executive Officer Professional Insurance Agents, Inc., Victoria, Texas. E. R. BROOKS AGE - 60 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. GLENN FILES AGE - 50 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. RUBEN M. GARCIA AGE - 66 1981 President and Chief Executive Officer of Modern Construction Inc. and Modern Machine Shop, Inc., Laredo, Texas. ALPHONSO R. JACKSON AGE - 51 1998 President of CSW-Texas since 1998. Vice President of CSW Energy, Inc., from 1996 to 1997. President and CEO of The Housing Authority of the City of Dallas, Texas, from 1989 to 1996. Director of Chase Bank of Texas N.A., Dallas, Texas. ROBERT A. McALLEN AGE - 63 1983 Robert A. McAllen, Insurance Agency, Weslaco, Texas. PETE MORALES, JR. AGE - 57 1990 President of Morales Feed Lots, Inc., Devine, Texas. 3-1 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- H. LEE RICHARDS AGE - 64 1987 Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas. J. GONZALO SANDOVAL AGE - 49 1992 President and General Manager of CPL since February 1998. General Manager of CPL since 1996. Vice President, Operations and Engineering of CPL from 1993 to 1996. Vice President, Regional Operations of CPL from 1992 to 1993. GERALD E. VAUGHN AGE - 55 1993 Vice President, Nuclear of CSW Services since 1994. Vice President, Nuclear Affairs of CPL from 1993 to 1994. Vice President for Shearon Harris Nuclear Plant from 1992 to 1993. Chairman for the STPNOC since its formation in September 1997. Each of the directors and executive officers of CPL is elected to hold office until the first meeting of CPL's Board of Directors after the 1998 Annual Meeting of Stockholders. CPL's 1998 Annual Meeting of Stockholders is presently scheduled to be held on April 17, 1998. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. PSO E. R. BROOKS AGE - 60 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. T. D. CHURCHWELL AGE - 53 1996 President of PSO since 1996. Executive Vice President, Operations and Engineering of WTU from 1995 to 1996. Executive Vice President of WTU from 1993 to 1995. Vice President, Corporate Services of CSW Services from 1991 to 1993. HARRY A. CLARKE AGE - 69 1972 General Partner and President of HAC Investments, Afton, Oklahoma. GLENN FILES AGE - 50 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. PAUL K. LACKEY, JR. AGE - 54 1992 Chief of Staff for the Governor of the State of Oklahoma, since 1997. Secretary of Health and Human Services, Executive Director of the Office of Juvenile Affairs, State of Oklahoma, from 1995 to 1997. Consultant, Flint Industries, Inc., a construction, electronics manufacturing, and environmental services company, Tulsa, Oklahoma during a portion of 1995. President, Flint Industries, Inc., from 1986 to 1995. Advisory Director of Bank IV-Tulsa, Tulsa, Oklahoma. 3-2 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- PAULA MARSHALL-CHAPMAN AGE - 44 1991 Chief Executive Officer of Bama Companies, a baked goods produce company, Tulsa, Oklahoma. WILLIAM R. McKAMEY AGE - 51 1993 General Manager of PSO since 1996. Vice President, Marketing and Business Development of PSO from 1993 to 1996. Director of Marketing and Business Development of CSW from 1992 to 1993. DR. ROBERT B. TAYLOR, JR. AGE - 69 1975 Dentist, Okmulgee, Oklahoma. Each of the directors and executive officers of PSO is elected to hold office until the first meeting of PSO's Board of Directors after the 1998 Annual Meeting of Stockholders. PSO's 1998 Annual Meeting of Stockholders is presently scheduled to be held on April 22, 1998. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. SWEPCO E. R. BROOKS AGE - 60 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. JAMES E. DAVISON AGE - 60 1993 President and CEO of Davison Terminal Services, Inc. President and CEO of Davison Motor Company, Inc. President and CEO of Davison Insurance Company, Inc. All of the above entities are located in Ruston, Louisiana. Director of Bank One, Louisiana, Baton Rouge, Louisiana. GLENN FILES AGE - 50 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. DR. FREDERICK E. JOYCE AGE - 63 1990 President of Chappell-Joyce Pathology Association, P.A., Texarkana, Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana, Texas. Director of State First National Bank, Texarkana, Arkansas. Director of First Commercial Corporation, Little Rock, Arkansas. JOHN M. LEWIS AGE - 58 1997 Chairman and Chief Executive Officer of The Bank of Fayetteville, Fayetteville, Arkansas. 3-3 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- KAREN C. MARTIN AGE - 37 1996 General Manager of SWEPCO since 1996. Director of Regulatory Services at CSW from 1995 to 1996. Administrative Director of the El Paso Transition Team at CSW from 1993 to 1995. Director of Audits at SWEPCO from 1992 to 1993. WILLIAM C. PEATROSS AGE - 54 1990 President and CEO of United Title of Louisiana, Inc. Director of Deposit Guaranty Bank. Both entities are located in Shreveport, Louisiana. MAXINE P. SARPY AGE - 58 1996 Vice President and Office Manager for Sarpy Medical Clinic; Shreveport, Louisiana. MICHAEL D. SMITH AGE - 46 1996 President of SWEPCO since 1996. Vice President of Mergers and Acquisitions at CSW from 1995 to 1996. Vice President of CSW Corporate Services from 1993 to 1995. Controller of CSW from 1990 to 1993. Each of the directors and executive officers of SWEPCO is elected to hold office until the first meeting of SWEPCO's Board of Directors after the 1998 Annual Meeting of Stockholders. SWEPCO's 1998 Annual Meeting of Stockholders is presently scheduled to be held on April 8, 1998. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. WTU E. R. BROOKS AGE - 60 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. PAUL J. BROWER AGE - 49 1991 President and General Manager of WTU since 1998. General Manager of WTU since 1996. Vice President, Marketing and Business Development of WTU from 1991 to 1996. GLENN FILES AGE - 50 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996. ALPHONSO R. JACKSON AGE - 51 1998 President of CSW-Texas since 1998. Vice President of CSW Energy, Inc., from 1996 to 1997. President and CEO of The Housing Authority of the City of Dallas, Texas, from 1989 to 1996. Director of Chase Bank of Texas N.A., Dallas, Texas. 3-4 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- TOMMY MORRIS AGE - 63 1976 President of The Tommy Morris Agency, an independent insurance and investment agency, Abilene, Texas. DIAN G. OWEN AGE - 58 1994 Corporate Executive/Founder of Owen Healthcare, Inc., hospital pharmacy management company services, Abilene, Texas. JAMES M. PARKER AGE - 67 1987 President and CEO of J. M. Parker and Associates, Inc., an investment company, Abilene, Texas. Director of First Financial Bankshares, Inc. and First National Bank of Abilene, Abilene, Texas. F. L. STEPHENS AGE - 60 1980 Chairman and CEO of Town & Country Food Stores, Inc., San Angelo, Texas. Each of the directors and executive officers of WTU is elected to hold office until the first meeting of WTU's Board of Directors after the 1998 Annual Meeting of Stockholders. WTU's 1998 Annual Meeting of Stockholders is presently scheduled to be held on March 31, 1998. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. (B) The following is a list of officers who are not directors of the registrants, together with certain information with respect to each of them: Year First Name, Age, Principal Elected to Occupation, Business Experience Present Position - -------------------------------------------------------------------------------- U.S. ELECTRIC OPERATING COMPANIES WENDY G. HARGUS AGE - 40 1996 Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services since 1996. Controller of CSW from 1993 to 1996. Director of Strategic Planning during a portion of 1993 at CSW and Director of Investor Relations at CSW from 1990 to 1993. R. RUSSELL DAVIS AGE - 41 1994 Controller of CPL, WTU, SWEPCO and CSW Services since 1994. Controller of PSO since 1993. Assistant Controller of CSW from 1992 to 1993. CPL BRENDA I. SNIDER AGE - 44 1996 Corporate Secretary of CPL since 1996. Manager of Planning and Analysis at CPL since 1996. Senior Financial Consultant at CPL from 1994 to 1996. Internal Business Consultant of Business Development at CPL from 1991 to 1994. 3-5 Year First Name, Age, Principal Elected to Occupation, Business Experience Present Position - -------------------------------------------------------------------------------- PSO LINA P. HOLM AGE - 57 1997 Corporate Secretary and Executive Secretary to the President of PSO since 1997. Executive Secretary to the President and Assistant Corporate Secretary of PSO from 1992 to 1997. SWEPCO MARILYN S. KIRKLAND AGE - 50 1995 Corporate Secretary of SWEPCO since 1995. Executive Administrator since 1997. Senior executive secretary to the president, from 1992 to 1997. WTU MARTHA MURRAY AGE - 52 1992 Corporate Secretary of WTU since 1992. Previously a senior secretary at WTU. 3-6 ITEM 11. EXECUTIVE COMPENSATION. CASH AND OTHER FORMS OF COMPENSATION CSW Information required by ITEM 11 with respect to CSW is hereby incorporated by reference herein from the CSW MEETING - ADDITIONAL MATTERS of the Joint Proxy Statement. The following table sets forth the aggregate cash and other compensation for services rendered for the fiscal years of 1997, 1996 and 1995 for the President of each of the U.S. Electric Operating Companies and the Named Executive Officers as defined below. Because of the functional restructuring undertaken by CSW during 1996, certain of the Executive Officers of the U.S. Electric Operating Companies, Messrs. Files, Bremer, Zemanek and Verret, are not actually employed by any of the U.S. Electric Operating Companies. Instead, they are employed by CSW Services and manage CSW business units and perform policy-making functions that are integral to the U.S. Electric Operating Companies. Therefore, these individuals are included in the Summary Compensation Table as Named Executive Officers due to the functional perspective regarding the management of the companies. For additional information regarding the restructuring, see PART II-MD&A. U.S. ELECTRIC OPERATING COMPANIES
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION --------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------- ------------------------ ------- CSW Other CSW Securities Annual Restricted Underlying All Other Name and Compen- Stock Options/ LTIP Compen- Principal Position Salary Bonus sation Award(s) SARs Payouts sation At Registrant YEAR ($) ($)(1) ($)(2) ($)(1)(3) (#) ($) ($)(4) - ------------------------------------------------------------------------------------------------------------- Glenn Files, Senior 1997 374,999 143,099 8,534 -- 31,000 -- 23,757 Vice President of CSW 1996 331,135 44,860 66,415 153,750 -- -- 23,992 Electric Operations (2,5) 1995 266,223 85,048 19,144 -- -- -- 23,117 Richard H. Bremer, 1997 307,462 99,993 4,648 -- 26,000 -- 21,357 President of CSW Energy 1996 305,910 144,404 73,711 153,750 -- -- 21,742 Services business unit 1995 298,372 89,358 14,691 -- -- -- 21,706 (2,5) Robert L. Zemanek, 1997 283,250 89,279 10,272 -- 24,000 -- 23,757 President of CSW Energy 1996 283,250 176,863 6,500 153,750 -- -- 23,992 Delivery business unit (5) 1995 276,270 91,436 9,192 -- -- -- 23,117 Richard P. Verret, 1997 251,230 83,390 2,083 -- 21,000 -- 7,953 President of CSW 1996 236,154 84,788 6,055 89,688 -- -- 7,590 Production (5) M. Bruce Evans 1997 208,000 65,780 882 -- 14,000 -- 5,520 President of CPL (2,5) 1996 208,000 91,376 70,783 89,688 -- -- 4,500 T. D. Churchwell, 1997 192,500 53,672 2,167 -- 13,000 -- 6,398 President of PSO (2,5) 1996 192,500 24,097 79,730 38,438 -- -- 5,340 1995 180,400 40,388 9,206 -- -- -- 4,500 Michael D. Smith, 1997 190,923 64,306 945 -- 13,000 -- 6,419 President of SWEPCO (2,5) 1996 184,269 64,050 115,322 38,438 -- -- 5,340 Floyd W. Nickerson, 1997 160,769 40,293 1,806 -- 11,000 -- 6,661 President of WTU (2,5) 1996 147,692 36,384 69,665 38,438 -- -- 5,270 3-7 (1) Amounts in this column are paid or awarded in a calendar year for performance in a preceding year. (2) The following are the perquisites and other personal benefits required to be identified in respect of each Named Executive Officer. 1996 Relocation Reimbursements - -------------------------------------------------------------- Glenn Files $25,662 Richard H. Bremer 34,117 M. Bruce Evans 32,537 T.D. Churchwell 38,955 Michael D. Smith 63,818 Floyd W. Nickerson 37,416 (3) Grants of restricted stock are administered by the Executive Compensation Committee of the CSW Board of Directors, which has the authority to determine the individuals to whom and the terms upon which restricted stock grants, including the number of underlying shares, shall be made. The awards reflected in this column all have four-year vesting periods with 25% vesting on the first, second, third and fourth anniversary dates of the award. Upon vesting, CSW Shares are re-issued without restrictions. The individuals receive dividends and may vote shares of restricted stock, even before they are vested. The amount reported in the table represents the market value of the shares at the date of grant. As of December 31, 1997, the aggregate restricted stock holdings of each of the Named Executive Officers are presented in the following table. Restricted Stock Held Market Value at Name at December 31, 1997 December 31, 1997 - -------------------------------------------------------------------- Glenn Files 4,500 $121,781 Richard H. Bremer 4,500 121,781 Robert L. Zemanek 4,500 121,781 Richard P. Verret 2,625 71,039 M. Bruce Evans 2,625 71,039 T. D. Churchwell 1,125 30,445 Michael D. Smith 1,125 30,445 Floyd W. Nickerson 1,125 30,445 (4) Amounts shown in this column consist of: (i) the annual employer matching payments to CSW's Retirement Savings Plan, (ii) premiums paid per participant for personal liability insurance and (iii) average amounts of premiums paid per participant in those years under CSW's memorial gift program. Under this program, for certain executive officers, directors and retired directors from the CSW System, CSW will make a donation in a participant's name to up to three charitable organizations in an aggregate of $500,000, payable by CSW upon such person's death. CSW maintains corporate-owned life insurance policies to fund the program. The annual premiums paid by CSW are based on pooled risks and averaged $15,803 per participant for 1997, $16,402 for 1996 and $16,367 for 1995. In 1997, 1996 and 1995, Messrs. Bremer, Files and Zemanek participated. (5) System Affiliations. In the first quarter of 1998, the positions of President and General Manager at both CPL and WTU were combined into one. These position's were assumed by J. Gonzalo Sandoval for CPL and Paul J. Brower for WTU. Messrs. Evans and Nickerson assumed other positions within the CSW System. 3-8 Messrs. Files, Bremer, Zemanek and Verret assumed policy making functions for each of the U.S. Electric Operating Companies in 1996. Messrs. Evans, Smith and Nickerson assumed policy-making positions at the U.S. Electric Operating Companies in 1996. Messrs. Verret, Evans, Smith and Nickerson received no compensation from any of the U.S. Electric Operating Companies in 1995.
OPTION/SAR GRANTS Shown below is information on grants of stock options made in 1997 pursuant to the CSW stock option plan to the Named Executive Officers. No stock appreciation rights were granted in 1997.
CSW OPTION/SAR GRANTS IN 1997(1) Potential Realizable Value at Assumed Annual Rates of CSW Stock Price Appreciation for Individual Grants Option Terms(3) - ---------------------------------------------------------------------------- ------------------ Number of CSW % of Total Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees In Base Price Expiration Name Granted(#)(2) Fiscal Year ($/Sh) Date 5%($) 10%($) - ---- ------------- ----------- ------------ ------------ ------- --------- Glenn Files 31,000 4.5 20.750 5/23/2007 405,248 1,022,768 Richard H. Bremer 26,000 3.8 20.750 5/23/2007 339,885 857,805 Robert L. Zemanek 24,000 3.5 20.750 5/23/2007 313,740 791,820 Richard P. Verret 21,000 3.0 20.750 5/23/2007 274,523 692,843 M. Bruce Evans 14,000 2.0 20.750 5/23/2007 183,015 461,895 T. D. Churchwell 13,000 1.9 20.750 5/23/2007 169,943 428,903 Michael D. Smith 13,000 1.9 20.750 5/23/2007 169,943 428,903 Floyd W. Nickerson 11,000 1.6 20.750 5/23/2007 143,798 362,918 (1) The stock option plans are administered by the Executive Compensation Committee of the Board, which has the authority to determine the individuals to whom and the terms upon which option and SAR grants shall be made. (2) All options were granted on May 23, 1997, and are first exercisable 12 months after the grant date, with one-third of the shares becoming exercisable at that time and with an additional one third of the aggregate becoming exercisable on each of the next two anniversary dates. (3) The annual rates of appreciation of 5% and 10% are specifically required by SEC disclosure rules and in no way guarantee that such annual rates of appreciation will be achieved by CSW nor should this be construed in any way to constitute any representation by CSW that such growth will be achieved.
3-9 OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE Shown below is information regarding option/SAR exercises during 1997 and unexercised options/SARs at December 31, 1997 for the Named Executive Officers. AGGREGATED OPTION/SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUES Number of CSW Securities Value of Underlying Unexercised In-the-Money Shares Options/SARs at Options/SARs Name Acquired Value Year-End at Year-End on Exercise Realized Exercisable/ Exercisable/ (#) ($) Unexercisable Unexercisable (1) - ------------------------------------------------------------------------------- Glenn Files -- -- 23,653/31,000 5,593/195,688 Richard H. Bremer -- -- 28,332/26,000 3,915/164,125 Robert L. Zemanek -- -- 25,430/24,000 6,015/151,500 Richard P. Verret 100 1,081 13,325/21,000 14,889/132,563 M. Bruce Evans -- -- 8,928/14,000 9,810/88,375 T. D. Churchwell -- -- 9,268/13,000 5,763/82,063 Michael D. Smith -- -- 7,779/13,000 2,413/82,063 Floyd W. Nickerson -- -- 4,867/11,000 675/69,438 (1) Calculated based upon the difference between the closing price of CSW's Shares on the New York Stock Exchange on December 31, 1997 ($27.0625 per share) and the exercise price per share of the outstanding unexercisable and exercisable options ($16.250, $20.750, $24.813 and $29.625, as applicable). LONG-TERM INCENTIVE PLAN-AWARDS IN 1997 The following table shows information concerning awards made to the Named Executive Officers during 1997 under the CSW stock option plan. Estimated Future Payouts under Number of Performance or Non-stock Price Based Plans Shares, Units Other Period ---------------------------- or Other Until Maturation Threshold Target Maximum Name Rights or Payout ($) ($) ($) - -------------------------------------------------------------------------------- Glenn Files -- 2 years -- 225,000 337,500 Richard H. Bremer -- 2 years -- 183,546 275,319 Robert L. Zemanek -- 2 years -- 169,950 254,925 Richard P. Verret -- 2 years -- 150,000 225,000 M. Bruce Evans -- 2 years -- 90,667 136,001 T. D. Churchwell -- 2 years -- 63,258 94,887 Michael D. Smith -- 2 years -- 54,740 82,110 Floyd W. Nickerson -- 2 years -- 47,369 71,054 Payouts of these awards are contingent upon CSW's achieving a specified level of total stockholder return, relative to the S&P Electric Index, for a three-year period, or cycle, and exceeding a certain defined minimum threshold. If the Named Executive Officer's employment is terminated during the performance period for any reason other than death, total and permanent disability or retirement, then the award is canceled. The CSW stock option plan contains a provision accelerating awards upon a change in control of CSW. Except as provided in the next sentence, if a change in control of CSW occurs, all options become fully exercisable and all restrictions, terms and conditions applicable to all restricted stock are deemed lapsed and satisfied and all performance-based units are deemed to have been fully earned, as of the date of the change in control. Awards which have been outstanding for less than six months prior to the date the change in control occurs are not subject to acceleration upon the occurrence of a change of control. The CSW stock option 3-10 plan also contains provisions designed to prevent circumvention of the above acceleration provisions through coerced termination of an employee prior to a change in control. RETIREMENT PLAN CSW maintains the Retirement Plan for eligible employees, in addition, CSW maintains the SERP, a non-qualified ERISA excess plan, that primarily provides benefits that cannot be payable under the qualified Retirement Plan because of maximum limitations imposed on such plans by the Internal Revenue Code. Through June 30, 1997, the Retirement Plan was structured as a traditional, defined benefit final average pay plan. Effective, July 1, 1997, the present value of accrued benefits under the Retirement Plan was converted to a cash balance. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which pay credits are allocated annually based on a percentage of the participant's pay. As of July 1, 1997, the definition of pay for the CSW Cash Balance Plan was expanded to include not only base pay but also bonuses, overtime, and commissions. The applicable percentage is determined by the age and years of vesting service the participant has with CSW and its affiliates as of December 31 of each year (or termination date, if earlier). The following table shows the Applicable Percentage used to determine credits at the age and years of service indicated. Sum of Age plus YEARS OF SERVICE APPLICABLE PERCENTAGE < 30 3.0% 30-39 3.5% 40-49 4.5% 50-59 5.5% 60-69 7.0% 70 or more 8.5% As of December 31, 1997, the sum of age plus years of service of the Named Executive Officers for the cash balance formula are as follows: Mr. Files, 76; Mr. Bremer, 69; Mr. Zemanek, 73; Mr. Verret, 76; Mr. Evans, 60; Mr. Churchwell, 72; Mr. Smith, 53; Mr. Nickerson, 58. All balances in the accounts of participants earn a fixed rate of interest which is also credited annually. The interest rate for a particular year is the average rate of return of the 30-year Treasury Rate for November of the prior year. For 1997, the interest rate was 6.48%. For 1998, the interest rate is 6.11%. Interest continues to be credited as long as the participant's balance remains in the plan. At retirement or other termination of employment, an amount equal to the vested balance (including qualified and SERP benefit) then credited to the account is payable to the participant in the form of an immediate or deferred lump-sum or annuity. Benefits (both from the CSW Cash Balance Plan and the SERP) under the cash balance formula are not subject to reduction for Social Security benefits or other offset amounts. The estimated annual benefit payable to each of the Named Officers as a single life annuity at age 65 under the Retirement Plan and the SERP is: Mr. Files, $272,378; Mr. Bremer, $213,333; Mr. Zemanek, $243,305; Mr. Verret, $173,626; Mr. Evans, $185,905; Mr. Churchwell; $109,329; Mr. Smith, $91,560; Mr. Nickerson, $139,609. These projections are based on the following assumptions: (1) participant remains employed until age 65; (2) salary used is base pay paid for calendar year 1997 assuming no future increases plus bonus at 1997 target level; (3) interest credit at 6.11% for 1998 and future years; (4) the conversion of the lump-sum cash balance to a single life annuity at normal retirement age is based on an interest rate of 6.11% and the 1983 Group Annuity Mortality Table, which sets forth generally accepted life expectancies. 3-11 In addition, certain employees who were 50 or over and had completed at least 10 years of service as of July 1, 1997, also continue to earn a benefit using the prior pension formula. At commencement of benefits, the following Named Officers have a choice of their accrued benefit using the cash balance formula or their accrued benefit using the prior pension formula: Mr. Verret and Mr. Churchwell. Once the participant selects either the earned benefit under the cash balance formula or the earned benefit under the prior pension formula, the other earned benefit is no longer available. The table below shows the estimated combined benefits payable from both the prior pension formula and the SERP based on retirement age of 65, the average compensation shown, the years of credited service shown , continued existence of the prior pension formula without substantial change and payment in the form of a single life annuity. ANNUAL BENEFITS AFTER SPECIFIED YEARS OF CREDITED SERVICE Average Compensation 15 20 25 30 or More ----------------------------------------------------------------------- $100,000 $ 25,050 $ 33,333 $ 41,667 $ 50,000 150,000 37,575 50,000 62,500 75,000 200,000 50,100 66,667 83,333 100,000 250,000 62,625 83,333 104,167 125,000 300,000 75,150 100,000 125,000 150,000 350,000 87,675 116,667 145,833 175,000 450,000 112,725 150,000 187,500 225,000 550,000 137,775 183,333 229,167 275,000 650,000 162,825 216,667 270,833 325,000 750,000 187,875 250,000 312,500 375,000 850,000 212,500 283,333 357,000 425,000 Benefits payable under the prior pension formula are based upon the participant's years of credited service, age at retirement, and covered compensation earned by the participant. The annual normal retirement benefit payable under the prior pension formula and the SERP are based on 1.67 percent of "Average Compensation" times the number of years of credited service (reduced by no more than 50 percent of a participant's age 62 or later Social Security benefit). "Average compensation" is covered compensation for the prior pension formula and equals the average annual compensation, reported as salary in the Summary Compensation Table, during the 36 consecutive months highest pay during the 120 months prior to retirement. Respective years of credited service and ages, as of December 31, 1997, for the following officers who continue to earn a benefit under the prior pension formula are: Mr. Verret, 25 and 51, Mr. Churchwell, 19 and 53. The registrants have entered into change in control agreements with certain individuals named in the Summary Compensation Table. The purpose of the agreements is to assure the objective judgment, and to retain the loyalties of these key individuals in the event CSW is faced with a potential change in control. Consummation of the proposed AEP Merger will constitute a change in control under these agreements, information related to the change in control agreements is incorporated by reference herein from THE MERGER - CSW LONG-TERM INCENTIVE PLAN and CHANGE IN CONTROL AGREEMENTS of the Joint Proxy Statement. 3-12 MEETINGS AND COMPENSATION Those directors who are not also officers of CPL, PSO, SWEPCO and WTU receive annual directors' fees and a fee of $300 plus expenses for each board or committee meeting attended, as described below. They are also eligible to participate in a deferred compensation plan. Under this plan such directors may elect to defer payment of annual directors' and meeting fees until they retire from the board or as they otherwise direct. The number of board meetings and annual directors' fees are presented in the following table. CPL PSO SWEPCO WTU ---------------------------------------- Number of regular board meetings 4 4 4 4 Annual directors' fees $6,000 $6,000 $6,600 $6,000 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No person serving during 1997 as a member of the Executive Compensation Committee of the Board of Directors of CSW served as an officer or employee of any registrant during or prior to 1997. No person serving during 1997 as an executive officer of the U.S. Electric Operating Companies serves or has served on the compensation committee or as a director of another company whose executive officers serve or has served as a member of the Executive Compensation Committee of CSW or as a director of one of the U.S. Electric Operating Companies. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. CSW The information required by ITEM 12 is incorporated by reference herein from THE CSW MEETING ADDITIONAL MATTERS of the Joint Proxy Statement. U.S. ELECTRIC OPERATING COMPANIES All of the outstanding shares of common stock of each of the U.S. Electric Operating Companies, presented in the following table, is owned beneficially and of record by CSW, 1616 Woodall Rodgers Freeway, Dallas, Texas 75202-1234. Company Shares Par Value - ------------------------------------------------------------- CPL 6,755,535 $25 PSO 9,013,000 15 SWEPCO 7,536,640 18 WTU 5,488,560 25 SECURITY OWNERSHIP OF MANAGEMENT The following tables show securities beneficially owned as of December 31, 1997, by each director, the President and Executive Officers of each of the U.S. Electric Operating Companies. Share amounts shown in this table include options exercisable within 60 days after December 31, 1997, restricted stock, CSW Shares credited to thrift plus accounts and all other CSW Shares beneficially owned by the listed persons. Each of the U.S. Electric Operating Companies has one or more series of preferred stock outstanding. As of December 31, 1997, none of the individuals listed in the following tables owned any shares of preferred stock of any U.S. Electric Operating Company. 3-13 BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1997 CSW Common CPL Underlying CSW Restricted Immediately Name Common (1) Stock (2) (3) Exercisable Options (3) - -------------------------------------------------------------------------------- John F. Brimberry 765 -- -- E. R. Brooks 131,529 12,225 65,175 M. Bruce Evans 12,574 2,625 8,928 Glenn Files 42,269 4,500 23,653 Ruben M. Garcia -- -- -- Robert A. McAllen 1,500 -- -- Pete Morales, Jr. -- -- -- H. Lee Richards 1,400 -- -- J. Gonzalo Sandoval 16,850 1,125 6,926 Gerald E. Vaughn 6,023 1,125 1,337 All of the above and other officers as a group 223,958 22,725 112,742 PSO E. R. Brooks 131,529 12,225 65,175 T. D. Churchwell 12,597 1,125 9,268 Harry A. Clarke -- -- -- Glenn Files 42,269 4,500 23,653 Paul K. Lackey, Jr. -- -- -- Paula Marshall-Chapman -- -- -- William R. McKamey 13,554 1,125 3,323 Dr. Robert B. Taylor, Jr. -- -- -- All of the above and other officers as a group 210,428 20,100 108,142 SWEPCO E. R. Brooks 131,529 12,225 65,175 James E. Davison -- -- -- Glenn Files 42,269 4,500 23,653 Dr. Frederick E. Joyce -- -- -- John M. Lewis -- -- -- Karen C. Martin 3,741 -- 2,005 William C. Peatross -- -- -- Maxine P. Sarpy 100 -- -- Michael D. Smith 10,176 1,125 7,779 All of the above and other officers as a group 198,867 18,975 105,335 WTU E. R. Brooks 131,529 12,225 65,175 Paul J. Brower 10,911 1,125 7,145 Glenn Files 42,269 4,500 23,653 Tommy Morris 2,000 -- -- Floyd W. Nickerson 6,403 1,125 4,867 Dian G. Owen 100 -- -- James M. Parker 5,000 -- -- F. L. Stephens 2,800 -- -- All of the above and other officers as a group 214,142 20,100 107,563 (1) Beneficial ownership percentages are all less than one percent and therefore are omitted. (2) These individuals currently have voting power, but not investment power, with respect to these shares. (3) These shares are included in the CSW Common column. 3-14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CSW The information required by ITEM 13 is incorporated herein by reference from THE CSW MEETING ADDITIONAL MATTERS of the Joint Proxy Statement. U.S. ELECTRIC OPERATING COMPANIES None. 3-15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT ON THIS FORM 10-K. (1) FINANCIAL STATEMENTS. Reports of Independent Public Accountants on the financial statements for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein. The financial statements filed as a part of this report for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein. (2) EXHIBITS. Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (C) INDEX TO EXHIBITS below. (B) REPORTS ON FORM 8-K. CSW ITEM 5. OTHER EVENTS and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS, dated December 22, 1997, reporting SEC approval of CSW's stockholders rights plan, as amended. CSW AND PSO ITEM 5. OTHER EVENTS, dated October 15, 1997, reporting the PSO 1997 Rate Settlement Agreement. CSW, CPL, PSO, SWEPCO AND WTU ITEM 5. OTHER EVENTS and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS, dated December 22, 1997, reporting the proposed merger between CSW and AEP. 4-1 CSW SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 1998. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant and any subsidiaries thereof. CENTRAL AND SOUTH WEST CORPORATION By: Lawrence B. Connors Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1998. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant and any subsidiaries thereof. SIGNATURE TITLE E. R. Brooks Chairman, CEO and Director (Principal Executive Officer) Glenn D. Rosilier Executive Vice President and Chief Financial Officer (Principal Financial Officer) Lawrence B. Connors Controller (Principal Accounting Officer) *Molly Shi Boren Director *Dr. Donald M. Carlton Director *T. J. Ellis Director *Joe H. Foy Director *William R. Howell Director *Dr. Robert W. Lawless Director *James L. Powell Director *Dr. Richard L. Sandor Director *T. V. Shockley, III President, Chief Operating Officer and Director *Lawrence B. Connors, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: Lawrence B. Connors Attorney-in-Fact 4-2 CPL SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 1998. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. CENTRAL POWER AND LIGHT COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1998. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. SIGNATURE TITLE J. Gonzalo Sandoval General Manager/President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *John F. Brimberry Director *E. R. Brooks Director *Glenn Files Director *Ruben M. Garcia Director *Alphonso R. Jackson Director *Robert A. McAllen Director *Pete Morales, Jr. Director *H. Lee Richards Director *Gerald E. Vaughn Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-3 PSO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 1998. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. PUBLIC SERVICE COMPANY OF OKLAHOMA By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1998. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. SIGNATURE TITLE T. D. Churchwell President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *Harry A. Clarke Director *Glenn Files Director *Paul K. Lackey, Jr. Director *Paula Marshall-Chapman Director *William R. McKamey General Manager and Director *Dr. Robert B. Taylor, Jr. Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-4 SWEPCO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 1998. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. SOUTHWESTERN ELECTRIC POWER COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1998. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. SIGNATURE TITLE Michael D. Smith President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *James E. Davison Director *Glenn Files Director *Dr. Frederick E. Joyce Director *John M. Lewis Director *Karen C. Martin General Manager and Director *William C. Peatross Director *Maxine P. Sarpy Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-5 WTU SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 1998. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. WEST TEXAS UTILITIES COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1998. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. SIGNATURE TITLE Paul J. Brower General Manager/President and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *Glenn Files Director *Alphonso R. Jackson Director *Tommy Morris Director *Dian G. Owen Director *James M. Parker Director *F. L. Stephens Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person. *By: R. Russell Davis Attorney-in-Fact 4-6 (C) INDEX TO EXHIBITS. The following exhibits indicated by an asterisk (*) preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filed with the SEC, respectively, as the exhibits and in the file numbers indicated and are incorporated herein by reference. The exhibits marked with a plus (+) are management contracts or compensatory plans or arrangements required to be filed herewith and required to be identified as such by ITEM 14. of Form 10-K. Reference is made to a duplicate list of exhibits being filed as a part of this Form 10-K, which list, prepared in accordance with Item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this Form 10-K. (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. CSW AND SWEPCO 1 Plan of Reorganization for Cajun Electric Power Cooperative, Inc. Submitted Jointly by The Members Committee, SWEPCO and Gulf States Utilities Company (incorporated herein by reference to CSW and SWEPCO's Form 8-K dated April 19, 1996). 2 Amended Plan of Reorganization for Cajun Electric Power Cooperative, Inc. Submitted Jointly by the Members Committee, SWEPCO and Entergy Texas, Inc. (incorporated herein by reference to CSW and SWEPCO's Form 8-K dated September 30, 1996). * 3 Amended and Restated Joint Plan of Reorganization for Cajun Electric Power Cooperative, Inc. Submitted Jointly by the Committee of Certain Members and Southwestern Electric Power Company dated March 18, 1998. (3) ARTICLES OF INCORPORATION AND BY-LAWS. CSW 1 Certificate of Amendment to Second Restated Certificate of Incorporation of CSW (incorporated herein by reference to Item 10, Exhibit B-1.2 to the 1993 CSW annual report on Form U5S). * 2 Bylaws of CSW, as amended. CPL 3 Restated Articles of Incorporation Without Amendment, Articles of Correction to Restated Articles of Incorporation Without Amendment, Articles of Amendment to Restated Articles of Incorporation, Statements of Registered Office and/or Agent (3), and Articles of Amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to CPL's Form 10-Q for the quarterly period ended March 31, 1997). 4 Bylaws of CPL, as amended (incorporated herein by reference to Exhibit 3.1 to CPL's Form 10-Q dated September 30, 1996, File No. 0-346). PSO 5 Restated Certificate of Incorporation of PSO (incorporated herein by reference to Exhibit B-3.1 of CSW's 1996 Form U5S, File No. 1-1443). 6 Bylaws of PSO, as amended (incorporated herein by reference to Exhibit B-3.2 of CSW's 1996 Form U5S, File No. 1-1443). SWEPCO 7 Restated Certificate of Incorporation, as amended through May 6, 1997, including Certificate of Amendment of Restated Certificate of Incorporation (both incorporated herein by reference to Exhibit 3.4 to SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 8 Bylaws of SWEPCO, as amended (incorporated herein by reference to Exhibit 3.3 to SWEPCO's Form 10-Q dated September 30, 1996, File No. 1-3146). 4-7 WTU 9 Restated Articles of Incorporation, as amended, and Articles of Amendment to the Articles of Incorporation (both incorporated herein by reference to Exhibit 3.5 to WTU's March 31, 1997 Form 10-Q, File No. 0-340). 10 Bylaws of WTU, as amended (incorporated herein by reference to Exhibit 3.4 to WTU's Form 10-Q dated September 30, 1996, File No. 0-340). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDER, INCLUDING INDENTURES. CSW 1 Rights Agreement dated as of December 22, 1997 between CSW and Central and South West Services, Inc., as Rights Agent (incorporated herein by reference to Exhibit 1 to CSW Form 8-A/A dated March 19, 1998, File No. 1-1443). CPL (a) Indenture of mortgage or deed of trust date November 1, 1943, executed by CPL to the First National Bank of Chicago and Robert L. Grinnell as trustee, as amended through October 1, 1977, (incorporated herein by reference to Exhibit 5.01 in File No. 2-60712). (b) Supplemental Indentures to the First Mortgage Indenture: DATED FILE REFERENCE EXHIBIT September 1, 1978 2-62271 2.02 December 15, 1984 Form U-1, No. 70-7003 17 July 1, 1985 2-98944 4 (b) May 1, 1986 Form U-1, No. 70-7236 4 November 1, 1987 Form U-1, No. 70-7249 4 June 1, 1988 Form U-1, No. 70-7520 2 December 1, 1989 Form U-1, No. 70-7721 3 March 1, 1990 Form U-1, No. 70-7725 10 October 1, 1992 Form U-1, No. 70-8053 10 (a) December 1, 1992 Form U-1, No. 70-8053 10 (b) February 1, 1993 Form U-1, No. 70-8053 10 (c) April 1, 1993 Form U-1, No. 70-8053 10 (d) May 1, 1994 Form U-1, No. 70-8053 10 (e) July 1, 1995 Form U-1, No. 70-8053 10 (f) (c) CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL: 2 Indenture, dated as of May 1, 1997, between CPL and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 of CPL's March 31, 1997 Form 10-Q, File No. 0-346). 3 First Supplemental Indenture, dated as of May 1, 1997, between CPL and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.2 of CPL's March 31, 1997 Form 10-Q, File No. 0-346). 4 Amended and Restated Trust Agreement of CPL Capital I, dated as of May 1, 1997, among CPL, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.3 of CPL's March 31, 1997 Form 10-Q, File No. 0-346). 4-8 5 Guarantee Agreement, dated as of May 1, 1997, delivered by CPL for the benefit of the holders of CPL Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.4 of CPL's March 31, 1997 Form 10-Q, File No. 0-346). 6 Agreement as to Expenses and Liabilities, dated as of May 1, 1997, between CPL and CPL Capital I (incorporated herein by reference to Exhibit 4.5 of CPL's March 31, 1997 Form 10-Q, File No. 0-346). PSO (a) Indenture dated July 1, 1945, as amended, of PSO (incorporated herein by reference to Exhibit 5.03 in Registration No. 2-60712). (b) Supplemental Indentures to the First Mortgage Indenture: DATED FILE REFERENCE EXHIBIT June 1, 1979 2-64432 2.02 December 1, 1979 2-65871 2.02 March 1, 1983 Form U-1, No. 70-6822 2 May 1, 1986 Form U-1, No. 70-7234 3 July 1, 1992 Form S-3, No. 33-48650 4 (b) December 1, 1992 Form S-3, No. 33-49143 4 (c) April 1, 1993 Form S-3, No. 33-49575 4 (b) June 1, 1993 Form 10-K, No. 0-343 4 (b) February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.01 February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.02 February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.03 (c) PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO: 7 Indenture, dated as of May 1, 1997, between PSO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.6 of PSO's March 31, 1997 Form 10-Q, File No. 0-343). 8 First Supplemental Indenture, dated as of May 1, 1997, between PSO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.7 of PSO's March 31, 1997 Form 10-Q, File No. 0-343). 9 Amended and Restated Trust Agreement of PSO Capital I, dated as of May 1,1997, among PSO, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.8 of PSO's March 31, 1997 Form 10-Q, File No. 0-343). 10 Guarantee Agreement, dated as of May 1, 1997, delivered by PSO for the benefit of the holders of PSO Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.9 of PSO's March 31, 1997 Form 10-Q, File No. 0-343). 11 Agreement as to Expenses and Liabilities, dated as of May 1, 1997, between PSO and PSO Capital I (incorporated herein by reference to Exhibit 4.10 of PSO's March 31, 1997 Form 10-Q, File No. 0-343). SWEPCO (a) Indenture dated February 1, 1940, as amended through November 1, 1976, of SWEPCO (incorporated herein by reference to Exhibit 5.04 in Registration No. 2-60712). (b) Supplemental Indentures to the First Mortgage Indenture: 4-9 DATED FILE REFERENCE EXHIBIT August 1, 1978 2-61943 2.02 January 1, 1980 2-66033 2.02 April 1, 1981 2-71126 2.02 May 1, 1982 2-77165 2.02 August 1, 1985 Form U-1, No. 70-7121 4 May 1, 1986 Form U-1, No. 70-7233 3 November 1, 1989 Form U-1, No. 70-7676 3 June 1, 1992 Form U-1, No. 70-7934 10 September 1, 1992 Form U-1, No. 72-8041 10 (b) July 1, 1993 Form U-1, No. 70-8041 10 (c) October 1, 1993 Form U-1, No. 70-8239 10 (a) (c) SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO: 12 Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.11 of SWEPCO's March 31, 1997 Form 10-Q, File No. 1-3146). 13 First Supplemental Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.12 of SWEPCO's March 31, 1997 Form 10-Q, File No. 1-3146). 14 Amended and Restated Trust Agreement of SWEPCO Capital I, dated as of May 1, 1997, among SWEPCO, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.13 of SWEPCO's March 31, 1997 Form 10-Q, File No. 1-3146). 15 Guarantee Agreement, dated as of May 1, 1997, delivered by SWEPCO for the benefit of the holders of SWEPCO Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.14 of SWEPCO's March 31, 1997 Form 10-Q, File No. 1-3146). 16 Agreement as to Expenses and Liabilities, dated as of May 1, 1997 between SWEPCO and SWEPCO Capital I (incorporated herein by reference to Exhibit 4.15 of SWEPCO's March 31, 1997 Form 10-Q, File No. 1-3146). WTU (a) Indenture dated August 1, 1943, as amended through July 1, 1973, of WTU, incorporated herein by reference to Exhibit 5.05 in File No. 2-60712. 4-10 (b) Supplemental Indentures to the First Mortgage Indenture: DATED FILE REFERENCE EXHIBIT May 1, 1979 2-63931 2.02 November 15, 1981 2-74408 4.02 November 1, 1983 Form U-1, No. 70-6820 12 April 15, 1985 Form U-1, No. 70-6925 13 August 1, 1985 2-98843 4 (b) May 1, 1986 Form U-1, No. 70-7237 4 December 1, 1989 Form U-1, No. 70-7719 3 June 1, 1992 Form U-1, No. 70-7936 10 October 1, 1992 Form U-1, No. 72-8057 10 February 1, 1994 Form U-1, No. 70-8265 10 March 1, 1995 Form U-1, No. 70-8057 10 (b) October 1, 1995 Form U-1, No. 70-8057 10 (c) (10) MATERIAL CONTRACTS. CSW * + 1 Change in Control Agreement between CSW and E. R. Brooks. * + 2 Change in Control Agreement between CSW and Thomas V. Shockley, III. * + 3 Change in Control Agreement between CSW and Ferd. C. Meyer, Jr. * + 4 Change in Control Agreement between CSW and Glenn D. Rosilier. * + 5 Change in Control Agreement between CSW and Venita McCellon-Allen. * + 6 Change in Control Agreement between CSW and Thomas M. Hagan. * + 7 Change in Control Agreement between CSW and Glenn Files. * + 8 Change in Control Agreement between CSW and Robert L. Zemanek. * + 9 Change in Control Agreement between CSW and Richard H. Bremer. * + 10 Change in Control Agreement between CSW and Richard P. Verret. * + 11 Change in Control Agreement between CSW and T. J. Ellis. * + 12 Change in Control Agreement between CSW and Terry D. Dennis. * + 13 Change in Control Agreement between CSW and Bruce Evans. * + 14 Change in Control Agreement between CSW and Pete Churchwell. * + 15 Change in Control Agreement between CSW and Michael D. Smith. * + 16 Change in Control Agreement between CSW and Floyd Nickerson. + 17 Restricted Stock Plan for Central and South West Corporation (incorporated herein by reference to Exhibit 10(a) to CSW's 1990 Form 10-K, File No. 1-1443). + 18 Central and South West System Special Executive Retirement Plan (incorporated herein by reference to Exhibit 10(b) to CSW's 1990 Form 10-K, File No. 1-1443). + 19 Executive Incentive Compensation Plan for Central and South West System (incorporated herein by reference to Exhibit 10(c) to the Corporation's 1990 Form 10-K, File No. 1-1443). 20 Central and South West Corporation Stock Option Plan (incorporated herein by reference to Exhibit 10(d) to the Corporation's 1990 Form 10-K, File No. 1-1443). 21 Central and South West Corporation Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10(e) to the Corporation's 1990 Form 10-K, File No. 1-1443). + 22 Central and South West Corporation 1992 Long-Term Incentive Plan (incorporated herein by reference to Appendix A to the Central and South West Corporation Notice of 1992 Annual Meeting of Shareholders and Proxy Statement). 4-11 23 Agreement and Plan of Merger, dated as of December 21, 1997, by and among American Electric Power Company, Inc.; a New York Corporation, Augusta Acquisition Corporation, a Delaware Corporation and a wholly-owned subsidiary of AEP; and Central and South West Corporation, a Delaware Corporation (incorporated herein by reference to the Joint Proxy Statement, File No. 1-1443). (12) STATEMENTS RE COMPUTATION OF RATIOS. CPL, PSO, SWEPCO AND WTU * 1 CPL's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1997. * 2 PSO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1997. * 3 SWEPCO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1997. * 4 WTU's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1997. * (13) ANNUAL REPORT TO SECURITY HOLDERS. CSW's 1997 Financial Report. * (21) SUBSIDIARIES OF THE REGISTRANT (CSW). (23) CONSENT OF EXPERTS AND COUNSEL. CSW, CPL, PSO * 1 CSW's Consent of Independent Public Accountants. * 2 CSW UK Finance Company Consent of Independent Public Accountants. * 3 CPL's Consent of Independent Public Accountants. * 4 PSO's Consent of Independent Public Accountants. (24) POWER OF ATTORNEY. CSW * 1 Power of Attorney. * 2 Power of Attorney. * 3 Power of Attorney. * 4 Power of Attorney. CPL * 5 Power of Attorney. * 6 Power of Attorney. * 7 Power of Attorney. PSO * 8 Power of Attorney. * 9 Power of Attorney. * 10 Power of Attorney. SWEPCO * 11 Power of Attorney. * 12 Power of Attorney. * 13 Power of Attorney. 4-12 WTU * 14 Power of Attorney. * 15 Power of Attorney. * 16 Power of Attorney. (27) FINANCIAL DATA SCHEDULES. SWEPCO * 1 SWEPCO's Financial Data Schedule (D) INDEX TO FINANCIAL STATEMENT SCHEDULES. OTHER SCHEDULES. All other exhibits and schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or related notes to financial statements. 4-13 EX-2.3 2 EXHIBIT 2.3 UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF LOUISIANA IN RE: CASE NO. 94-11474 CAJUN ELECTRIC POWER COOPERATIVE, INC., Chapter 11 DEBTOR. USDC NO. 94-CV-2763-B2 AMENDED AND RESTATED JOINT PLAN OF REORGANIZATION FOR CAJUN ELECTRIC POWER COOPERATIVE, INC. SUBMITTED JOINTLY BY THE COMMITTEE OF CERTAIN MEMBERS AND SOUTHWESTERN ELECTRIC POWER COMPANY DATED MARCH 18, 1998 The Committee of Certain Members of Cajun Electric Power Cooperative Inc. ("Committee of Certain Members") and Southwestern Electric Power Company ("SWEPCO")(collectively the "Proponents") hereby propose the following plan of reorganization ("Plan") which provides for the liquidation of Cajun Electric Power Cooperative, Inc., the debtor herein ("Debtor" or "Cajun"): SUMMARY OF THE PLAN The Proponents have joined together to present to the creditors of Cajun and the Court a Plan that will resolve Cajun's bankruptcy through the sale of Cajun's non-nuclear assets to a SWEPCO affiliate, and the voluntary initiation of new power supply arrangements by and between a SWEPCO affiliate and Cajun's former members. The Plan has the goal of offering competitive wholesale rates to the Cajun member cooperatives ("Members"), while maximizing value to the Cajun estate. The Plan provides for the acquisition of Cajun's non-nuclear assets by a subsidiary or affiliate of SWEPCO. The consideration paid under the Plan will be $940.5 million (subject to adjustments as provided in the Asset Purchase Agreement and this Plan). The Plan in addition, includes a settlement of a variety of pending litigation involving the lien claims of the Rural Utilities Service("RUS"). This Plan is the only plan which relies exclusively on the execution of consensual agreements with the Members for the purchase of wholesale power. In addition, the Plan incorporates the River Bend Settlement negotiated among the Proponents and Entergy Gulf States, Inc. ("GSU"). The Plan is the only plan that has the potential to harmonize the distinct perspectives of the Members, the LPSC and the RUS. In short, the Proponents' Plan is the only feasible plan that can be confirmed without years of litigation. The distinguishing attribute of the Plan is that it produces competitive wholesale rates to cooperatives serving over one million Louisiana residents and maximizes the value of the Cajun estate. The cooperatives cannot and will not remain viable at non-competitive rates, as evidenced by the bankruptcy of Washington St. Tammany Electric Cooperative, Inc., the insolvency and acquisition of Bossier Rural Electric Membership Corporation, the sale of Teche Electric Cooperative, Inc. to Central Louisiana Electric Company, Inc., and the financial difficulties currently experienced by other cooperatives. The Plan includes consensually negotiated average wholesale rates at a competitive level, which would immediately provide significant rate relief to Louisiana ratepayers while also maximizing the value of the estate. Any plan that unilaterally proposes higher, non-competitive and non-consensual rates in an effort to extract excessive value from Louisiana ratepayers would not provide a permanent solution to the substantial rate disparity between cooperatives on the one hand, and investor-owned and municipal utilities on the other hand. The Plan provides for an enterprise (hereinafter "SWECO") to be formed by SWEPCO as a wholly owned subsidiary or affiliate to acquire Cajun's non-nuclear assets more specifically defined in the Asset Purchase Agreement (hereinafter the "Acquired Assets"). Under the Plan, SWECO will purchase the Acquired Assets for a price of $940.5 million (subject to adjustments as set forth in the Asset Purchase Agreement and this Plan payable in cash (the "Purchase Price") pursuant to the terms and conditions proposed in an Asset Purchase Agreement. SWEPCO/Members Page 2 First Amended Joint Plan of Reorganization The Asset Purchase Agreement that will be executed by SWECO shall be substantially in the form of the Asset Purchase Agreement which is attached as EXHIBIT 1 to the Plan. On the Effective Date of the Plan, the Members and SWECO shall voluntarily enter into new Power Supply Agreements substantially in the form of EXHIBIT 2 attached to the Plan, whereby pursuant to the terms and conditions of the Power Supply Agreements, SWECO shall be obligated to supply the Members, and the Members electing to enter into the Power Supply Agreements shall be obligated to purchase all of their power requirements from SWECO. To the extent that there are any conflicts between the terms of the Plan and the Asset Purchase Agreement, the provisions of the Asset Purchase Agreement shall control. Unless specifically provided otherwise in the Plan, the Plan generally contemplates that any assets remaining in Cajun after the consummation of the Asset Purchase Agreement and the River Bend Settlement will be (i) liquidated by the Trustee with the proceeds of such liquidation distributed in accordance with the Plan; or (ii) conveyed by the Trustee to the holder of the lien on such assets. The Purchase Price, liquid assets and any proceeds of other assets liquidated by the Trustee shall be distributed in accordance with the terms of this Plan. On August 26, 1996, Judge Frank J. Polozola signed an Order and Judgment Approving Settlement by and among Cajun Electric Power Cooperative, Inc., Entergy Gulf States, Inc., Entergy Corporation, and the Rural Utilities Service of the Department of Agriculture (the "Order"). A true and correct copy of the Order is attached as EXHIBIT 3 to the Plan. The settlement approved by the Order (hereinafter the "River Bend Settlement"), among other things: puts an end to years of expensive litigation among Cajun, GSU, and the RUS; provides for the transfer of Cajun's River Bend Interest at the discretion of the RUS to a bidder, the RUS or GSU; provides for the establishment of a Decommissioning Trust Fund; and settles the claims of GSU that put at issue the Trustee's ability to transfer Cajun's non-River Bend assets apart from the River Bend assets and obligations and free and clear of all liens and encumbrances. The Order provides that the settlement could be consummated independent of any plan of reorganization. The Order has been affirmed by the United States Court of Appeals for the Fifth Circuit and GSU has acquired Cajun's River Bend Interest pursuant to the terms of the River Bend Settlement. The Committee of Certain Members, SWEPCO and the RUS reached a settlement of certain issues concerning the validity of the liens and security interests of the RUS against the estate. The Amended and Restated Settlement Agreement is attached hereto as EXHIBIT 4 and is incorporated in this Plan as if fully set forth herein. Certain terms of the Amended and Restated Settlement Agreement are effective without Court approval. The terms of paragraphs 4 and 7 require approval of the Court, and the Proponents seek approval of those terms as part of this Plan. This Plan is contingent on approval of the Amended and Restated Settlement Agreement. TERMS OF THE PLAN ARTICLE 1: DEFINITIONS 1.1 "ACQUIRED ASSETS" is defined in the Asset Purchase Agreement. 1.2 "ADMINISTRATIVE EXPENSE CLAIM" means any Claim constituting a cost or expense of administration of Cajun's Chapter 11 case incurred on or after the Petition Date of the kind described in Section 503(b) of the Bankruptcy Code, including, without limitation, any fees or charges assessed against Cajun's estate under Chapter 123 of title 28, United States Code, fees and expenses of the Trustee and professionals employed by the Estate, costs and expenses of preserving the Estate, taxes described in Section 503(b)(1)(B) of the Bankruptcy Code, certain employee claims arising after the Petition Date, cure amounts for executory contracts and unexpired leases assumed or assumed and assigned by the Trustee under the Plan. 1.3 "ALLOWED ADMINISTRATIVE EXPENSE CLAIM" means any Administrative Expense Claim which, after notice and hearing, is determined by Final Order of the Court to be an Administrative Expense Claim entitled to payment in accordance the Bankruptcy Code. 1.4 "ALLOWED CLAIM" means any Claim against the Debtor, (i) the proof of which was filed on or before the Bar Date; or (ii) that was scheduled by the Debtor as liquidated in amount and not disputed or contingent; and (iii) in either case, a Claim to which no objection is timely filed or that is allowed by a Final Order of the Court. SWEPCO/Members Page 3 First Amended Joint Plan of Reorganization 1.5 "ALLOWED CONVENIENCE CLAIM" means any Allowed Claim originally scheduled by the Debtor in the amount of $20,000 or less. 1.6 "ALLOWED SECURED CLAIM" means any Allowed Claim to the extent of the value of (i) a lien on the assets which are property of the estate, or (ii) a right of set-off under Code Section 553. 1.7 "ALLOWED UNSECURED CLAIM" means any Allowed Claim to the extent it is not secured either by a valid, enforceable and unavoidable lien on the Debtor's assets or a right of set-off under Code Section 553. 1.8 "ASSET PURCHASE AGREEMENT" means the agreement by and between the Trustee and SWECO providing for the sale of the Acquired Assets to SWECO substantially in the form as attached hereto as EXHIBIT 1. 1.9 "AVOIDANCE ACTIONS" means all direct or derivative rights, claims and causes of action which constitute property of the Estate, including but not limited to claims under Code Sections 506, 510, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551 and 553, and any state laws corresponding thereto. 1.10 "BAR DATE" means October 1, 1995, the date designated by the Court in its Order dated August 21, 1995 as the last day for filing a proof of Claim. 1.11 "BIG CAJUN II, UNIT 3 JOPOA" means that Joint Ownership Participation and Operating Agreement by and between Debtor and GSU, dated as of November 14, 1980. 1.12 "CAJUN" means Cajun Electric Power Cooperative, Inc., the debtor in this Chapter 11 Case. 1.13 "CHAPTER 11 CASE" means this Chapter 11 case of Cajun (Case No. 94-11474; USDC No. 94-CV-2763-B2). 1.14 "CLAIM" means a claim as defined in Code Section 101(5) against Cajun. 1.15 "CLAIMANT" means a person or entity who holds or asserts a Claim. 1.16 "CLASS 6 FUND" means a fund to be established by the Trustee for distribution to holders of Class 6 Claims under section 6.3 hereof. 1.17 "CLECO" means Central Louisiana Electric Company, Inc., as successor in interest to Teche Electric Cooperative, Inc. 1.18 "COBANK" means CoBank, N.A., formerly National Bank for Cooperatives. 1.19 "COBANK CLASS E STOCK" means the Class E stock of CoBank owned by Cajun. 1.20 "CODE SECTION" means a section of the United States Bankruptcy Code, 11 U.S.C. '101 et seq., as in effect with respect to the Reorganization Case. 1.21 "COMMITTEE OF CERTAIN MEMBERS" means the Committee of Certain Members of Cajun Electric Power Cooperative, Inc., an unofficial committee currently composed of the following seven Members: Beauregard Electric Cooperative, Inc., Dixie Electric Membership Corporation, Jefferson Davis Electric Cooperative, Inc., Northeast Louisiana Power Cooperative, Inc., South Louisiana Electric Cooperative Association, Valley Electric Membership Corporation and Washington-St. Tammany Electric Cooperative, Inc. 1.22 "CONFIRMATION DATE" means the date of entry by the Court or other court of competent jurisdiction of the Confirmation Order. 1.23 "CONFIRMATION ORDER" means the order of the Court confirming this Plan. SWEPCO/Members Page 4 First Amended Joint Plan of Reorganization 1.24 "COURT" means the United States District Court for the Middle District of Louisiana, exercising its original bankruptcy jurisdiction pursuant to 28 U.S.C. Section 1334, or the United State Bankruptcy Court for the Middle District of Louisiana to the extent any proceeding was referred to it by said District Court. 1.25 "DEBTOR" means Cajun Electric Power Cooperative, Inc., the debtor in this Chapter 11 Case. 1.26 "DECOMMISSIONING TRUST FUND" means a segregated trust fund to be established to satisfy obligations for Decommissioning Costs (as defined in the River Bend Settlement). 1.27 "DISBURSEMENT ACCOUNTS" means that certain interest bearing accounts to be established under the supervision of the Trustee pursuant to section 6.4 hereof, into which the Purchase Price, Net Proceeds of Excluded Assets, Net Proceeds of Avoidance Actions and the Class 6 Fund are deposited. 1.28 "DISPUTED CLAIM" means a Claim which is not an Allowed Claim. 1.29 "EFFECTIVE DATE" means a date selected by the Proponents for this Plan to become effective, for documents to be executed to implement the provisions of the Plan, and for the Acquired Assets to be transferred to SWECO pursuant to the terms of the Asset Purchase Agreement which date shall be not later than 90 days after the Confirmation Order becomes a Final Order and all required conditions to closing set forth in the Asset Purchase Agreement and all conditions to effectiveness specified herein are satisfied. As set forth in the Asset Purchase Agreement, the Effective Date of the Plan shall be the same date as the "Closing Date" of the Asset Purchase Agreement (as that term is defined in the Asset Purchase Agreement), on which date the closing of the sale of the Acquired Assets to SWECO and related transactions shall occur. The Effective Date of the Plan shall occur on the same date as the Closing Date, but the Effective Date of the Plan shall occur at the close of business on such date and immediately after the closing of the sale of assets pursuant to the Plan. 1.30 "ESTATE" means the bankruptcy estate of the Debtor created by Bankruptcy Code Section 541. 1.31 "EXCESS FUNDS" means (a) the funds contained in a certain segregated account that are collected by Debtor pursuant to the Order Concerning Use of Cash Collateral and Adequate Protection approved by the Court on February 13, 1995; (b) the funds contained in a certain segregated account (variously referred to in Debtor's bankruptcy proceedings as the "Interest Escrow Account," the "Ratepayer Trust Fund," the "Debt Service Escrow Account," and the ALPSC Escrow Account') that are collected pursuant to LPSC Order No. U-17735-F, as amended by LPSC Order No. U-17735-H; and (c) all interest on the funds described in (a) and (b) immediately preceding, less any sums necessary to fund the Decommissioning Trust Fund as provided in the River Bend Settlement. 1.32 "EXCLUDED ASSETS" is defined in the Asset Purchase Agreement. 1.33 "FINAL ORDER" means an order or judgment (a) as to which the time has expired within which a proceeding for review (whether by way of rehearing, appeal, certiorari or otherwise) may be commenced, without any such proceeding having been commenced, or (b) which, if such a review proceeding was timely commenced, has been affirmed by the highest tribunal in which review was sought or remains in effect without modification following termination of such proceeding for review, and the time has expired within which any further proceeding for review may be commenced. 1.34 "GSU" means Entergy Gulf States, Inc., a Texas corporation formerly known as Gulf States Utilities Company. 1.35 "HIBERNIA" means Hibernia National Bank, acting as indenture trustee for the Industrial Revenue Bonds (Cajun Electric Power Cooperative, Inc. Project), Series 1982. 1.36 "INITIAL DISTRIBUTION DATE" shall mean a date no later than 30 days after the Effective Date when the initial payments on account of Allowed Claims, as set forth in this Plan, shall be made. 1.37 "LPSC" means the Louisiana Public Service Commission. SWEPCO/Members Page 5 First Amended Joint Plan of Reorganization 1.38 "AMEMBER INTERESTS" means the Members' interests in Cajun as evidenced by a Membership Certificate issued by Cajun to each Member pursuant to Section 2 of Cajun's Bylaws. 1.39 "MEMBERS" means Beauregard Electric Cooperative, Inc., Claiborne Electric Cooperative, Inc., CLECO, Concordia Electric Cooperative, Inc., Dixie Electric Membership Corporation, Jefferson Davis Electric Cooperative, Inc., Northeast Louisiana Power Cooperative, Inc., Pointe Coupee Electric Membership Corporation, South Louisiana Electric Cooperative Association, Southwest Louisiana Electric Membership Corporation, Valley Electric Membership Corporation and Washington-St. Tammany Electric Cooperative, Inc. 1.40 "NET PROCEEDS" means as to any Excluded Asset or Avoidance Action the total gross proceeds less all reasonable and necessary costs associated with the liquidation of such Excluded Asset or prosecution of such Avoidance Action. 1.41 "ORDINARY COURSE ADMINISTRATIVE EXPENSE CLAIMS" shall be limited to Administrative Expense Claims incurred in the ordinary course of Cajun's business and shall not include: (i) any post-petition obligations which are past due or cure payments; (ii) any fees or expenses of the Trustee or "professional persons" (as that term is used in Section 327 of the Bankruptcy Code) and any expenses, compensation, or reimbursement requested pursuant to subsections 503(b)(2), (3), (4) or (5) of the Bankruptcy Code; (iii) any Taxes (including income, sales, use, property or other Taxes) except for sales and use Taxes incurred other than in the sale of Cajun's assets pursuant to the Asset Purchase Agreement or the River Bend Settlement; (iv) any claims for breach of contract, tort, or other actionable conduct; and (v) any post-petition obligations incurred under executory contracts or unexpired leases which are rejected in this Plan or prior to the Effective Date of the Plan. 1.42 "PETITION DATE" means December 21, 1994. 1.43 "PROPONENTS" means the Committee of Certain Members and SWEPCO. 1.44 "PRO RATA" means the factor of the amount of the Allowed Claim multiplied by the fraction of the funds available for distribution to a class divided by total Allowed Claims in a class plus reserves determined in accordance with section 6.6 of the Plan for all Disputed Claims in a class. 1.45 "PURCHASE PRICE" is defined in the Asset Purchase Agreement. 1.46 "REPRESENTATIVE" means, with respect to any specified entity, the officers, directors (or functional equivalent, if any), employees, agents, attorneys, accountants, financial advisors, other representatives, subsidiaries, affiliates or any person who controls any of these within the meaning of the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended. 1.47 "RIVER BEND" means River Bend Nuclear Station Unit 1, a 936MW nuclear generating facility located in St. Francisville, Louisiana, which was co-owned by Cajun and GSU and which is now owned and operated by GSU. 1.48 "RIVER BEND JOA" means the River Bend Joint Operating Agreement between GSU and Cajun. 1.49 "RIVER BEND SETTLEMENT" means the settlement between Cajun, GSU and the RUS as currently defined in the Order and Judgment Approving Settlement by and among Cajun Electric Power Cooperative, Inc., Entergy Gulf States, Inc., Entergy Corporation, and the Rural Utilities Service of the Department of Agriculture, signed by the Honorable Frank J. Polozola on August 26, 1996, in Civil Action No. 94 2763-B2 in the United States District Court for the Middle District of Louisiana. 1.50 "RUS" means the United States of America, acting through the Rural Utilities Service (formerly the Rural Electrification Administration), an agency within the United States Department of Agriculture. 1.51 "RUS SETTLEMENT" means the settlement terms described in paragraphs 4 and 7 of the Amended and Restated Settlement Agreement by and among SWEPCO, the Committee of Certain members and the RUS, attached as Exhibit 4 hereto, and incorporated herein. SWEPCO/Members Page 6 First Amended Joint Plan of Reorganization 1.52 "SETTLEMENT AMOUNT" means the amount of $20.24 million payable to the Class 6 Fund pursuant to the RUS Settlement. 1.53 "SUPPLY CONTRACTS" means the long term all-requirements contracts between the Debtor and each of its Members. 1.54 "SWECO" means Southwestern Wholesale Electric Company, an entity to be formed as a wholly owned subsidiary or affiliate by SWEPCO to acquire the Acquired Assets. 1.55 "SWEPCO" means Southwestern Electric Power Company, a Louisiana-based investor owned utility. 1.56 "TAXES" means all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation and property taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and any interest and penalties imposed with respect to the filing, obligation to file or failure to file any return for such tax, and shall include any transferee liability in respect to Taxes. 1.57 "TRUSTEE" means the Chapter 11 trustee appointed herein by the Court, or any successor Trustee that may be subsequently appointed by the Court. ARTICLE II: TREATMENT OF UNCLASSIFIED CLAIMS. 2.1 TREATMENT OF ADMINISTRATIVE CLAIMS. (a) Each holder of an Allowed Administrative Expense Claim shall receive, on account of such Administrative Expense Claim, cash in the amount of such Allowed Administrative Expense Claim on the later of the Effective Date or within ten days after the date the Administrative Expense Claim becomes an Allowed Administrative Expense Claim, except to the extent any holder agrees to a different treatment. An Administrative Expense Claim which is subject to the Administrative Expense Claim Bar Date and the Supplemental Administrative Claim Bar Date shall be paid only to the extent such claim is timely filed and allowed as Administrative Expense Claim by the Court by Final Order. Notwithstanding the foregoing, the Trustee and professionals employed at the expense of the Estate and entities which may be entitled to reimbursement or the allowance of fees and expenses from the Estate pursuant to subparagraphs (2) through (6) of Code Section 503 (b) shall receive cash in the amount awarded to such professionals and entities at such times and only in accordance with a Final Order entered pursuant to Code Sections 330, 331 or Code Sections 503 (b) (2) through (6). (b) (1) On the Effective Date, all real (immovable) property and personal (movable) property Taxes with respect to the Acquired Assets for the tax years occurring prior to the Effective Date, which are Ordinary Course Administrative Expense Claims and which have not already been paid in the ordinary course of business, shall be paid in full in cash by the Trustee, except to the extent that the holder agrees to a different treatment. All immovable property and movable property Taxes with respect to the Acquired Assets for the tax year in which the Effective Date occurs, which are Ordinary Course Administrative Expense Claims, shall be prorated through the Effective Date based on the most current assessment information available from the offices of the assessor and sheriff of the respective parishes in which the Acquired Assets are located. Cajun's share of such prorated Taxes shall be paid in cash on the Effective Date by the Trustee, except to the extent the holder agrees to a different treatment. All special assessments against the Acquired Assets for utilities or otherwise, which are Ordinary Course Administrative Expense Claims, shall be paid in full by the Trustee in cash prior to or on the Effective Date, except to the extent a holder agrees to a different treatment. SWEPCO/Members Page 7 First Amended Joint Plan of Reorganization (2) All real (immovable) property and personal (movable) property Taxes with respect to Excluded Assets, which are Ordinary Course Administrative Expense Claims shall be paid when due in cash in the ordinary course of business. (3) All Taxes with respect to Acquired Assets or Excluded Assets, which are Administrative Expense Claims, but which are not Ordinary Course Administrative Expense Claims, and all other Allowed Administrative Expense Claims which are not Ordinary Course Administrative Expense Claims, and which are therefore subject to the Administrative Expense Claim Bar Date will be paid in cash only to the extent such claims are timely filed and are Allowed as Administrative Expense Claims by the Court by Final Order. Such Allowed Administrative Expense Claims will be paid on the later of the Effective Date or ten (10) days after the date such claims are Allowed by the Court by Final Order, except to the extent a holder agrees to a different treatment. (4) For the tax year in which the Effective Date occurs, any income Taxes which may be owing for that tax year shall be deemed to be incurred by the Estate, for purposes of the application of Code Section 503(b)(1)(B), to the extent that such Taxes would be owed if the Effective Date was the date on which the tax year closed for Cajun (the "Effective Date Tax Year"). For the tax year in which the Petition Date occurred, any income Tax which may be owing for that tax year shall be deemed to be incurred by the Estate, for the purpose of Code Section 503(b)(1)(B), to the extent such Taxes would be owed if the Petition Date was the date on which the tax year began for Cajun (the "Petition Date Tax Year"). Any unpaid Allowed Administrative Expense Claim for income Taxes through and including the Effective Date Tax Year shall be paid from the Purchase Price. (c) Ordinary Course Administrative Expense Claims shall be paid in the ordinary course of business of Cajun as and when incurred and due. Any such Ordinary Course Administrative Expense Claims incurred prior to the Effective Date, and for which consideration has been provided to Cajun prior to the Effective Date, but which are not yet due in the ordinary course of business on the Effective Date, shall be paid by Cajun when due. 2.2 ADMINISTRATIVE EXPENSE CLAIM BAR DATES (a) The Confirmation Order or a separate Court Order shall set a bar date for the filing of Administrative Expense Claims arising prior to the Confirmation Date (the "Administrative Expense Claim Bar Date"). Any Administrative Expense Claims which are subject to the Administrative Expense Claim Bar Date that are not filed on or prior to such bar date shall be discharged under the Plan, but shall not be treated as an Administrative Expense Claim or any other Claim for purposes of distribution under the Plan, whether or not an objection is initiated. (b) The Confirmation Order or a separate Court Order shall set a bar date for the filing of Administrative Expense Claims arising subsequent to the Confirmation Date, but prior to the Effective Date (the "Supplemental Administrative Expense Claim Bar Date"). Such Administrative Expense Claims filed pursuant to the Supplemental Administrative Expense Claim Bar Date may only include Claims for the period between the Confirmation Date and the Effective Date, and may not allege any Claims arising out of or from the period prior to the Confirmation Date. Any Administrative Expense Claims which are subject to the Supplemental Administrative Expense Claim Bar Date that are not filed on or prior to such bar date shall be discharged under the Plan, but shall not be treated as an Administrative Expense Claim or any other Claim for purposes of distribution under the Plan, whether or not an objection is initiated. (c) This subsection and not subsections 2.2(a) and (b) shall apply to income Taxes described in Code Section 503(b)(1)(B). The Confirmation Order or a separate Court Order will set a bar date for the filing of Administrative Expense Claims arising from income Taxes for the period beginning on the Petition Date and ending on the Effective Date (the "Tax Administrative Expense Claim Bar Date"). The Tax Administrative Expense Claim Bar Date shall be ninety (90) days after the Effective Date, provided that such ninety (90) day period shall not begin to run until Cajun shall file an appropriate tax return or, in the case of the Petition Date Tax Year or the Effective Date Tax Year, until Cajun shall provide the equivalent tax return information for such tax years. The tax return for information for the purpose of determining federal income Taxes shall be signed under penalty of perjury, shall include all information that a corporate income tax return would contain, and shall be provided to the SWEPCO/Members Page 8 First Amended Joint Plan of Reorganization Internal Revenue Service within a reasonable time after the Effective Date. Any Administrative Expense Claim arising out of an income Tax claim described in Code Section 503(b)(1)(B) subject to the Tax Administrative Expense Claim Bar Date that is not filed on or prior to such bar date shall be discharged under the Plan, but shall not be treated as an Administrative Expense Claim or any other Claim for purposes of distribution under the Plan, whether or not an objection is initiated. Any Administrative Expense Claim timely filed pursuant to this subsection 2.2(c) on or prior to the Tax Administrative Expense Claim Bar Date shall be allowed as filed unless an objection to such Administrative Expense Claim is filed and served not later than 180 days after the filing of the Administrative Expense Claim, and, after notice and a hearing conducted pursuant to the Bankruptcy Code and Rules, the Court allows such claim in a lesser amount. 2.3 TREATMENT OF PRE-PETITION, PRIORITY TAX CLAIMS. The Trustee shall pay in cash on the Initial Distribution Date the full amount of each Allowed Unsecured Claim entitled to priority under Code Section 507(a)(8) from the Disbursement Accounts either, at the option of the Trustee: (a) on the latest of (i) the Effective Date; (ii) within 60 days after the date on which such Claim becomes an Allowed Claim; or (iii) such other time as is agreed upon by the holder of such Claim and the Trustee; or (b) through deferred cash payments over a period to not exceed six (6) years after the date of assessment of such Claim, of a value as of the date such Claim becomes an Allowed Claim or such other time as is agreed upon by the holder of such Claim and the Trustee. If the Trustee opts to make deferred cash payments, such payments shall be made in equal annual installments of principal, plus simple interest accruing from the date such Claim becomes an allowed Claim at 6% per annum on the unpaid portion of the Allowed Claim or such other rate as the Court may approve. The first such payment shall be payable at the latest of (a) the Effective Date; (b) within 60 days after the date on which such Claim becomes an Allowed Claim; or (c) such other time as is agreed upon by the holder of such Claim and the Trustee; provided, however, that the Trustee shall have the right to prepay any such Allowed Claim or any remaining balance of such Claim, in full or in part, at any time on or after the Effective Date without premium or penalty. The foregoing treatment is consistent with the requirements of Code Section 1129(a)(9)(C). In no event shall SWECO or SWEPCO be liable for the payment of any Tax claim allowed under Code Section 507(a)(8) whether such claims are payable in cash or through deferred cash payments. ARTICLE III: CLASSIFICATION OF CLAIMS AND INTERESTS. Claims required to be classified under Code Section 1123(a)(1) and Member Interests are classified as follows: 3.1 CLASS 1. ALL OTHER PRIORITY CLAIMS. All Allowed Unsecured Claims entitled to priority under Code Section 507(a) (other than 507(a)(1) and (8)) shall be treated in Class 1. Class 1 is unimpaired. 3.2 CLASS 2. ALLOWED SECURED CLAIM OF RUS. Class 2 consists of the Allowed Secured Claim of the RUS. Class 2 is impaired. 3.3 CLASS 3. ALLOWED SECURED CLAIM OF COBANK. Class 3 consists of the Allowed Secured Claim of CoBank. Class 3 is impaired. 3.4 CLASS 4. ALLOWED SECURED CLAIM OF HIBERNIA. Class 4 consists of the Allowed Secured Claim of Hibernia. Class 4 is impaired. 3.5 CLASS 5. ALLOWED OTHER SECURED CLAIMS. Class 5 consists of all Allowed Secured Claims not otherwise classified above, if any. Each secured claim will be treated as a separate class for purposes of voting and treatment under the Plan. Class 5 is impaired. 3.6.1 CLASS 6(A). ALLOWED CONVENIENCE CLAIMS. The Allowed Convenience Claims consist of all Claims listed by the Debtor's schedules as being in an amount of $20,000 or less. SWEPCO/Members Page 9 First Amended Joint Plan of Reorganization 3.6.2 CLASS 6(B). ALLOWED UNSECURED CLAIMS. Class 6(b) consists of all Allowed Unsecured Claims, not otherwise classified, including but not limited to Members' claims,1 deficiency claims and claims arising from the rejection of executory contracts. Class 6(b) is impaired. 3.7 CLASS 7. MEMBER INTERESTS. Class 7 consists of the interests of the Members in the Debtor. Class 7 is impaired. ARTICLE IV: CLASSES IMPAIRED BY THE PLAN. Claimants in Class 1 are UNIMPAIRED under the Plan and, therefore, are not being solicited to vote on the Plan pursuant to 11 U.S.C. Section 1126(f). Claimants and holders of Member Interests in Classes 2, 3, 4, 5, 6, and 7 are IMPAIRED under the Plan and are being solicited to accept or reject the Plan. The Proponents, however, specifically reserve the right to contest (1) the impaired or unimpaired status of a class under the Plan; and (2) whether any ballots cast by holders of claims or interests in of such class should be allowed to be counted for purposes of confirmation of the Plan. ARTICLE V: TREATMENT OF CLASSIFIED CLAIMS. 5.1 CLASS 1. ALL OTHER PRIORITY CLAIMS. All Allowed Priority Claims entitled to priority treatment under Code Section 507(a) (except Administrative Expense Claims in Section 2.1) shall be paid in cash on the Initial Distribution Date. 5.2 CLASS 2. ALLOWED SECURED CLAIM OF THE RUS. The claims of the RUS include its contingent liability arising out of its guarantees of Cajun's obligations arising from eight (8) promissory notes payable to First Interstate Bank of Arizona, N.A., Trustee of Cooperative Utility Trust (Cajun Series) ("FIB"). FIB has filed proofs of claim totaling $982,648.00 constituting non-priority, general unsecured claims (the "FIB Claims"). The RUS has made payments to FIB pursuant to its guarantees of the FIB Claims and to the extent that RUS has made payments pursuant to its guarantees, it is subrogated to the FIB Claims. To the extent FIB has Claims which are not subrogated to RUS, unless FIB and RUS agree otherwise, FIB will vote its unsubrogated Claim as a Unsecured Claim in Class 6 and the amount of the RUS's Unsecured Claim will be reduced by the amount of the unsubrogated FIB Claims. The Allowed Secured Claim of the RUS shall be treated as follows: (a) If the RUS Settlement is approved by separate order of the Court or as part of the Confirmation Order, then in complete and full satisfaction of the Allowed Secured Claim of the RUS, on the Initial Distribution Date, the RUS will receive (1) the Purchase Price less amounts necessary to pay all Allowed Administrative Expense Claims, Allowed Ordinary Course Administrative Expense Claims, Allowed Priority Tax Claims, Allowed Other Priority Claims, the Allowed Secured Claim of Hibernia, Allowed Other Secured Claims to the extent secured by the Acquired Assets; and the Settlement Amount payable to the Class 6 Fund; and (2) all Excluded Assets (or the Net Proceeds thereof) not otherwise subject to liens or interests securing Allowed Other Secured Claims; and (3) the RUS and the Committee of Certain Members have asserted claims to Excess Funds. If a Final Order is entered in favor of the Members, the funds, or a portion thereof, in accordance with the terms of the Final Order will be disbursed to Members or to the Members' constituents subject to the approval of the LPSC. Alternatively, if a Final Order is entered in favor of - -------- 1 The Trustee or other parties may contend that a portion or all of the Members' Allowed Unsecured Claims are subordinated to other Allowed Unsecured Claims. If the subordination is established by Final Order, some or all of the Members' Allowed Unsecured Claims will be treated as subordinate to Allowed Unsecured Claims not otherwise subject to subordination. SWEPCO/Members Page 10 First Amended Joint Plan of Reorganization the RUS, the funds or a portion thereof, in accordance with the Final Order will be disbursed to the RUS as part of its Allowed Secured Claim. 5.3 CLASS 3. ALLOWED SECURED CLAIM OF COBANK. CoBank filed a proof of claim asserting a secured claim in the amount of $25,486,702.50 plus interest, renewal fees, and expenses. In June 1983, pursuant to a Tax Benefit Transfer Agreement, Cajun transferred federal income tax ownership of certain property to the Clorox Company ("Clorox"). In July 1983, Cajun entered into a similar transaction with Eastman Kodak Company ("Kodak"). These Tax Benefit Transfer Agreements (the "TBT Agreements") require Cajun to issue and maintain for the benefit of Clorox and Kodak, respectively, letters of credit in scheduled amounts which were expected to be sufficient to reimburse Clorox and Kodak for any losses of tax benefits caused by Cajun. In connection with each TBT Agreement, Cajun and New Orleans Bank for Cooperatives ("NOBC"), CoBank's predecessor, executed a Letter of Credit and Reimbursement Agreement (collectively the "Letter of Credit Agreements") for Cajun to reimburse CoBank if draws were made under the letter of credit issued for the benefit of Clorox and Kodak. CoBank and its predecessor have twice renewed the letter of credit. The amounts now available to be drawn by Clorox and Kodak are $10,632,750.00 and $11,309,847.50, respectively (the "LC Debt"). The LC Debt is purportedly secured by a Supplemental Mortgage, a Subordinated Mortgage, Security Agreement and Financing Statements as amended and supplemented from time to time, an Act of Collateral Pledge dated January 23, 1988 and certain statutory liens. It is believed that this claim of CoBank is largely contingent and matures only if a disqualifying event occurs under the TBT Agreements or if the letter of credit is not renewed prior to its expiration. In a proof of claim, filed September 27, 1995 with the Court, CoBank made a Claim for certain loan obligations owed it by Cajun, which Claim is represented by the outstanding principal balances on four separate promissory notes made by Cajun to CoBank, which notes were guaranteed by RUS. These notes (collectively the "Incorporated Indebtedness") were incorporated into the indebtedness owed RUS by Cajun pursuant to a certain Debt Restructure Agreement, dated May 31, 1990, between RUS and Cajun. No distribution under the Plan shall be made to CoBank, on account of the Incorporated Indebtedness, but all such distributions shall be made to RUS. In addition, RUS shall have the sole right to vote the Claims represented by the Incorporated Indebtedness as part of its Class 2(a)(1) Allowed Secured Claim. Under the Plan, liability for the contingent claims of CoBank shall be assumed by SWECO on the Effective Date as and to the extent provided in the Asset Purchase Agreement, and SWECO will execute with CoBank new Letter of Credit Agreements to further evidence the purchaser's assumption. SWECO will seek to structure the Asset Purchase Agreement in such a way as to avoid a disqualifying event occurring under the TBT Agreements. However, in the event that the sale of Cajun's assets to SWECO pursuant to the acquisition or the implementation of the acquisition or the action or structure of the purchaser on the Effective Date causes the indemnity obligation of Cajun to Kodak and/or Clorox to mature and a subsequent draw on a letter of credit, SWECO will assume the reimbursement obligation of the Estate to CoBank arising solely as a result of an act or omission by SWECO (net of the existing cash collateral held by CoBank). If such indemnity obligation so matures, CoBank shall apply all cash collateral it then holds against the reimbursement obligation, and SWECO shall immediately pay the balance of the reimbursement obligation to CoBank, and SWECO shall be entitled to Cajun's rights to the future retirement payments made by CoBank to retire the Class E Stock from time to time, together with any CoBank patronage dividends, etc. until such time as SWECO has been paid in full its reimbursement obligation with interest. Following payment to SWECO of any reimbursement obligation, all future retirement payments and patronage dividends shall be paid by CoBank directly to the RUS. If it is determined that a triggering event occurred such that Cajun's indemnity obligation to CoBank matures and constitutes an Administrative Expense Claim of the Estate, then CoBank shall apply all cash collateral it then holds against the indemnity obligation, and the Estate shall immediately pay the balance of the indemnity obligation to CoBank. The Estate shall then be entitled to Cajun's rights in the future retirement payments made by CoBank to retire the Class E Stock from time to time, together with future patronage dividends, proceeds, etc., and SWECO shall not assume Cajun's indemnity obligation. Subsequent to the Effective Date, if no disqualifying event has occurred under the tax benefit transfer agreements on or prior to the Effective Date, the contingent claims of CoBank shall continue to be secured by existing and future CoBank Class E Stock, proceeds thereof and related collateral (including patronage dividends, accumulated cash accounts, CoBank Class E Stock, retirements and the proceeds thereof) ("CoBank Collateral") as more fully described in the Pledge Agreement to be entered into between CoBank and the SWEPCO/Members Page 11 First Amended Joint Plan of Reorganization owners and beneficial owners of such collateral, and CoBank's liens on CoBank Collateral and its proceeds shall not be discharged or otherwise released or extinguished by confirmation of the Plan, but shall be retained by CoBank following the Effective Date. In addition, on the Effective Date, CoBank shall be entitled to charge the existing cash collateral account it holds for all unpaid letter of credit fees from the Petition Date through the Effective Date, and SWECO shall pay all letter of credit fees thereafter. CoBank shall also be entitled to charge the existing cash collateral account $250,000 for reimbursement of a portion of its legal fees and expenses incurred since the inception of the chapter 11 case. On the Effective Date, however, CoBank shall be deemed to have released any other mortgage or lien on Cajun or reorganized Cajun's assets securing CoBank's claims, except for the CoBank Collateral. Accordingly, on and after the Effective Date, CoBank shall have no interest in any other assets, including, but not limited to, the Acquired Assets and the sales proceeds thereof. In addition, on and after the Effective Date of the Plan, to the extent that the sum of 75% of the face amount of the Class E Stock and the amount of all funds accumulated in the cash account held by CoBank from time to time (calculated quarterly) exceeds 110% of the then aggregate amount of the indemnity obligation assumed by SWECO, the excess shall be paid by CoBank to the RUS. If, the RUS, the holder of the CoBank Class E Stock designated by the Plan is not an "eligible borrower" of CoBank, then CoBank shall issue replacement Participation Certificates with the only difference from the CoBank Class E Stock being the right to vote. Nothing contained in the Plan is intended to extinguish or reduce any rights of CoBank against RUS on any RUS guarantee, nor any continuing obligations of RUS to make timely payments on such guarantees, and such claims and obligations as between RUS and CoBank shall survive confirmation of the Plan. To the extent any inconsistencies exist between (a) Section 3.11 of the Asset Purchase Agreement and/or any other provisions of the Asset Purchase Agreement and (b) this Section 5.3, Section 5.3 of this Plan shall control the treatment of CoBank's Allowed Secured Claim. 5.4 CLASS 4. ALLOWED SECURED CLAIM OF HIBERNIA. The Allowed Secured Claim of Hibernia representing the Industrial Development bonds, secured by the Debtor's current headquarters, building and land, shall, unless Hibernia Bank agrees otherwise, be paid in full in cash totaling the amount of its Allowed Secured Claim on the later of (a) the Effective Date or (b) if an objection to such claim has been filed, within ten days of the date on which an order allowing such Claim becomes a Final Order. Hibernia shall retain its rights, liens and security interests until its Allowed Secured Claim is paid in full. The contingencies contained in previous orders of the Court, upon the occurrence of which Hibernia would be required to return the funds previously paid to it are eliminated. Therefore, Hibernia will unconditionally retain the funds that have been paid to it and its claim will be $900,000 (minus any amounts applied to principal when Hibernia received the payment pursuant to the June 19, 1997 Order, and any future principal payments received) plus, as allowed, interest, fees, expenses and premiums and other amounts to Hibernia pursuant to the terms of the agreements governing these obligations. 5.5 CLASS 5. ALLOWED OTHER SECURED CLAIMS. Each holder of an Allowed Other Secured Claim shall, at the Trustee's option: (a) be paid, on the Initial Distribution Date, on account of its Allowed Secured Claim, cash totaling the amount of such Allowed Secured Claim; (b) be paid, on account of its Allowed Secured Claim, the Net Proceeds of the sale of any property which is subject to the lien or interest securing said Allowed Claim, which sales shall be made in accordance with Code Section 1129(a)(2)(A)(ii); or (c) receive the property which is subject to the lien or interest securing said Allowed Claim in full satisfaction of the Allowed Claim of such holder. In the event of option (b) above, such amount shall be paid on the last to occur of (1) the Effective Date, (2) within ten (10) days after the date on which an order allowing such Allowed Other Secured Claim becomes a Final Order, or (3) within ten (10) days after closing of a sale of the property which is subject to the liens securing said Allowed Claim. In the event of option (c) above, the property which is subject to the liens securing said Allowed Other Secured Claim shall be transferred on the later of (1) the Effective Date, or (2) as soon as practicable after the date on which an order allowing such Secured Claim becomes a Final Order. Any such property transferred to holders of Allowed Other Secured Claims under this paragraph shall be transferred either by abandonment of such property by the Trustee under Code Section 554 or by transfer of such property "as-is, where-is," without representation or warranty by Debtor or the Trustee, at the Trustee's sole option and discretion. 5.6 CLASS 6(A) AND 6(B). ALLOWED UNSECURED CLAIMS AND ALLOWED CONVENIENCE CLAIMS. In full and complete satisfaction of all Allowed Convenience Claims and Allowed Unsecured Claims, holders of such Claims will be paid a Pro SWEPCO/Members Page 12 First Amended Joint Plan of Reorganization Rata share of the Class 6 Fund. If the RUS Settlement is approved by Final Order or as part of the Confirmation Order, the RUS shall waive its right to distribution from the Class 6 Fund on account of its Allowed Unsecured Claim, and the members of the Committee of Certain Members shall waive their right to distribution on account of their Allowed Unsecured Claims. If, after payment in full of Allowed Unsecured Claims and Allowed Convenience Claims under the Plan (other than the deficiency claim of the RUS), funds remain from the liquidation of assets and from successful avoidance actions, the RUS, as the sole remaining holder of an Allowed Unsecured Claim, will receive such remaining funds until its unsecured claim is paid in full. 5.7 CLASS 7. MEMBER INTERESTS. The interests of the Members in the Debtor shall be canceled as of the Effective Date. ARTICLE VI: MEANS FOR IMPLEMENTING PLAN. 6.1 CONSUMMATION OF THE RIVER BEND SETTLEMENT. The River Bend Settlement shall be consummated pursuant to the Order and Judgment Approving Settlement by and among Cajun Electric Power Cooperative, Inc., Entergy Gulf States, Inc., Entergy Corporation and the Rural Utilities Service of the Department of Agriculture dated August 26, 1996 (the "Order"). The Order provides that the River Bend Settlement may be consummated independent of any plan of reorganization. 6.2 SALE OF ACQUIRED ASSETS TO SWECO. On the Effective Date, SWECO shall purchase the Acquired Assets and the Acquired Assets shall be transferred to SWECO pursuant to the terms and conditions of the Asset Purchase Agreement, a copy of which is attached hereto as EXHIBIT 1 and incorporated herein for all purposes. The Purchase Price shall be deposited in the Disbursement Accounts. On the Effective Date, unless otherwise specifically provided in this Plan, the Acquired Assets shall be transferred by the Trustee to SWECO free and clear of all liens, claims and interests. The Trustee shall be deemed to have entered into the Asset Purchase Agreement as of the date of the Confirmation Order. 6.3 CLASS 6 FUND. The Class 6 Fund shall be established and deposited in one of the Disbursement Accounts for purposes of establishing a fund available for Pro Rata distribution to Class 6. The amount of the Class 6 Fund shall be the Settlement Amount of $20,240,000 plus all Net Proceeds from Avoidance Actions. 6.4 DISBURSEMENT ACCOUNTS. On or prior to the Effective Date, the Trustee shall set up one or more interest bearing accounts to be designated as the Disbursement Accounts, which account or accounts shall comply with Code Section 345 except as otherwise ordered by the Court. Except as otherwise provided in the Plan, the Purchase Price and all Net Proceeds from the sale or other disposition of Excluded Assets and Avoidance Actions shall be deposited in the Disbursement Accounts with all valid liens and interests attaching to said Net Proceeds. 6.5 CLAIMS OBJECTION DEADLINE. Each Claim as to which a proof of claim has been filed prior to the Bar Date or that is listed as undisputed, liquidated and non-contingent in the schedules filed by the Debtor shall be allowed without order of the Court unless an objection thereto is filed and served in accordance with Bankruptcy Rule 3007 no later than 180 days after the Confirmation Date or 180 days after such Claim is first filed, whichever is later. 6.6 DISPUTED OR UNDETERMINED CLAIMS AND RESERVES THEREFOR. (1) No payments or distributions shall be made with respect to all or any portion of a Claim which does not constitute an Allowed Claim. The Trustee shall reserve funds for the payment of those Claims which are to receive distributions under the Plan and which, as of the date of any distribution, do not constitute an Allowed Claim. Such reserve shall be made by retaining an amount equal to the distribution such claim would have received from such distribution based on the lesser of (i) the amount of the Claim, or (ii) the amount in which the Claim shall be estimated by the Court pursuant to Code Section 502(c) for the purpose of allowance, which amount shall be the maximum amount in which such Claim may ultimately become an Allowed Claim. (2) In order to pay any Administrative Expense Claim for federal income Taxes that may be Allowed and payable under this Plan, the Trustee shall reserve the amount of $20 million until the allowed Administrative Expense Claim, if any, for the Estate's federal income Tax(es) is paid in full (the "Income Tax SWEPCO/Members Page 13 First Amended Joint Plan of Reorganization Reserve Fund"). Upon the establishment of the Income Tax Reserve Fund, the Trustee may distribute the remainder of the Purchase Price, in accordance with the provisions of this Plan and shall be absolved and released from any personal liability for the Estate's federal income Taxes; notwithstanding the foregoing, the Trustee shall be obligated under this Plan to distribute to the United States of America through the Internal Revenue Service (the "IRS") any amounts necessary from the Income Tax Reserve Fund to satisfy any Allowed Administrative Expense Claim for the Estate's federal income Taxes. In the event the Allowed Administrative Expense Claim for the Estate's federal income Taxes exceeds the Income Tax Reserve Fund, the governmental entities, the RUS and the IRS, will resolve any issues regarding disgorgement of funds between themselves, in accordance with the terms of this paragraph. If the allowed Administrative Expense Claim for the Estate's federal income Taxes is less than the Income Tax Reserve Fund, then, after payment of the allowed Administrative Expense Claim for federal income taxes in full, the remainder of the Income Tax Reserve Fund shall be distributed in accordance with the provisions of this Plan. In the event the Allowed Administrative Expense Claim for the Estate's federal income Taxes exceeds the Income Tax Reserve Fund, the RUS shall disgorge part of the funds distributed to it pursuant to this Plan sufficient to pay any remaining amounts due to the IRS in order to satisfy the allowed Administrative Expense Claim for the Estate's federal income Taxes in full. In the event that this subsection 6.6(2) is complied with and a $20 million reserve fund is established, then, in no event shall the IRS be entitled to disgorgement of, nor shall the Trustee be required to recover by disgorgement, any funds distributed to creditors other than the RUS under this Plan in order to satisfy the Allowed Administrative Expense Claim for the Estate's federal income Taxes. 6.7 IMPLEMENTATION. Pursuant to Code Section 1142(b) and Bankruptcy Rule 7070, the Trustee shall execute or deliver any and all documents or instruments, or to perform any other act necessary to implement or consummate this Plan. If the Trustee refuses to comply with such direction, the Court may direct the Trustee's compliance with the Plan, or direct the U.S. Trustee to appoint a new trustee to implement and consummate this Plan. ARTICLE VII: EXECUTORY CONTRACTS. 7.1 SUPPLY CONTRACTS. On the Effective Date, SWECO and the Members who have consensually agreed to do so, shall execute new power supply agreements to replace and supersede the Supply Contracts with the Debtor substantially in the form attached hereto as EXHIBIT 2. Any power supply agreements between the Debtor and those Members who have not agreed to enter into new power supply agreements as set forth above, shall be neither assumed nor rejected, but shall remain in effect and subject to any collateral assignments to the RUS, to the extent of applicable state and federal law: 7.2 RIVER BEND JOA. Cajun shall be deemed to have rejected the River Bend JOA. 7.3 BIG CAJUN II, UNIT 3 JOPOA. The Big Cajun II, Unit 3 JOPOA will be assumed by the Trustee and assigned to SWECO on the Effective Date. 7.4 ALL OTHER EXECUTORY CONTRACTS. On the Effective Date, the Trustee shall be deemed to reject all other executory contracts of the Debtor, except as may expressly be otherwise set forth in the Asset Purchase Agreement, and for executory contracts identified on a list of assumed executory contracts which has been filed by SWEPCO with the Court. The contracts so identified shall be deemed assumed as of the Effective Date. All payments necessary to cure any defaults on contracts to be assumed and assigned to SWECO, shall be paid as Administrative Expense Claims under Section 2.1 on the Initial Distribution Date. ARTICLE VIII: MISCELLANEOUS PROVISIONS. 8.1 VOTING. All of the classes (except Class 1) are eligible to vote on the Plan. SWEPCO/Members Page 14 First Amended Joint Plan of Reorganization 8.2 CRAMDOWN. In the event any class of creditors that is impaired does not accept the Plan as provided in Code Section 1129(a)(8)(A), the Proponents request that the Court confirm the Plan pursuant to Code Section 1129(b). 8.3 MODIFICATIONS OF THE PLAN. The Proponents may jointly modify the Plan in accordance with Code Section 1127. 8.4 U.S. TRUSTEE FEES. All fees payable by the Debtor pursuant to 28 U.S.C. Section 1930 have been paid or shall be paid as of the Effective Date by the Trustee. 8.5 RELEASE. In consideration for agreements made by each of the parties set forth herein in connection with the terms and conditions of the Plan, the Trustee shall, on the Effective Date, release and discharge all direct or derivative rights, claims and causes of action which constitute property of the Estate, including but not limited to claims under Code Sections 506, 510, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551 and 553, and any state laws corresponding thereto, arising prior to the Effective Date, against (i) SWEPCO, SWECO, Central and South West Corporation, and their respective current and former Representatives, and, (ii) if the RUS Settlement is approved by Final Order or as part of the Confirmation Order, the RUS and its respective current and former Representatives. 8.6 SETOFFS. Subject to the limitations provided in Code Section 553, all parties retain their rights of setoff or recoupment pursuant to applicable law. Neither the failure to set off the Estate's claim nor the allowance of any Claim hereunder shall constitute a waiver or release by the Estate of any such claim that the Estate may have against the holder, nor shall it constitute a bar by res judicata and/or collateral estoppel to the assertions of Claims, either prepetition or postpetition, by the Estate as the case may be. 8.7 SURRENDER OF INSTRUMENTS AND RELEASE OF LIENS. Each claimant who is to receive distributions under the Plan in satisfaction of a Claim shall not receive such distributions until such claimant executes a release of any lien(s) (in recordable form if appropriate) and delivers the same to the Trustee. Any such claimant that fails to surrender such instrument or satisfactorily explain its non-availability or to execute such release of liens shall be deemed to have no further Claim and shall not participate in any distribution under the Plan. 8.8 CONDITIONS TO EFFECTIVENESS. This Plan shall not become effective and the Effective Date will not occur until the following conditions have been met or shall have been waived in writing by SWEPCO: (a) All conditions specified in Article VI: "Conditions to the Acquisition" in the Asset Purchase Agreement; (b) Judgment(s) that are Final Order(s) shall have been entered determining that GSU has no liability to Burlington Northern and Santa Fe Railway Co., American Commercial Marine Service Company, Triton Coal Company or Western Fuels Association relating to any obligations, contractual or otherwise, owed or contracted for by Cajun to or with such entities; (c) No order or judgment shall have been entered in favor of any entity determining that GSU has liability to such entity relating to any obligations, contractual or otherwise, owed or contracted for by Cajun to or with such entity; and (d) Court approval in the confirmation Order or by separate Order of the RUS Settlement. 8.9 FEES AND EXPENSES. Pursuant to Code Section 1123(a)(4), fees for services, costs and expenses incurred in connection with Cajun's bankruptcy case or in connection with the Plan and incident to Cajun's bankruptcy case, including, but not limited to the reasonable fees, costs and expenses of secured creditors, parties to unexpired leases or executory contracts to be assumed, and indenture trustees shall be subject to approval of the Court. SWEPCO/Members Page 15 First Amended Joint Plan of Reorganization ARTICLE IX: RESERVATION OF RIGHTS AND PROPERTY. 9.1 CAUSES OF ACTION. Except for claims expressly settled or released pursuant to this Plan, and claims set forth in the following sentence, the Trustee shall retain all causes of action it may have under state or federal law including the United States Bankruptcy Code, and the Trustee in his discretion shall be authorized to prosecute (or not prosecute) any such actions as fully and completely as if the same were being prosecuted by a trustee in bankruptcy. The Trustee shall be provided with a litigation fund to pay fees and expenses in pursuing such causes of action in the amount of $150,000 from the purchase price, and such amount shall be reserved as an anticipated administrative expense. All claims and causes of action of the estate of any nature or kind, known or unknown, asserted or unasserted which arise from or relate to the assets purchased by and conveyed to SWECO, shall on the Effective Date be deemed assigned and conveyed to SWECO. 9.2 VESTING OF PROPERTY IN TRUSTEE AND SWECO. On the Effective Date, all of the property of the Estate that is not sold to SWECO, if any, or otherwise liquidated shall be vested in the Trustee, free and clear of all Claims and interests of creditors except as provided for in the Plan, and the Trustee at his election shall be entitled to liquidate such assets without further order of the Court pursuant to Code Section 1141(b) or transfer them to any lienholder in full satisfaction of the secured claim on such assets. Upon the completion of the liquidation of the assets or re-vesting in the Trustee, if any, the Trustee shall cause and implement the dissolution of Cajun under Louisiana law. All assets conveyed to SWECO (i.e. the Acquired Assets) shall be conveyed free and clear of all liens, claims, interests and encumbrances, whether lien claims or otherwise, unless otherwise specifically authorized by this Plan. The conveyance to SWECO shall further be free and clear of any claims of successorship liability, and SWECO shall have no successor liability as a result of its purchase of the Acquired Assets, or as a result of any provisions of this Plan or of the Asset Purchase Agreement. ARTICLE X. REQUIRED APPROVALS. The effectiveness of the Plan and the obligations of the Proponents hereunder are subject to regulatory approvals by Final Order and all other conditions as set forth in the Asset Purchase Agreement. The boards of directors of the Proponents reserve the right to approve all final closing documents. ARTICLE XI. RETENTION OF JURISDICTION. After confirmation of the Plan, the Court shall retain jurisdiction for the following purposes: (1) For the classification of Claims and for the re-examination of any Claims that have been allowed for purposes of voting, and the determination of such objections as may be filed to Claims. The failure to object to or to examine any Claim for the purpose of voting shall not be deemed to be a waiver of the right to object to, or re-examine the Claim in whole or in part; (2) For determination of all questions and disputes regarding title to the assets of the estate, determination of all causes of action, controversies, disputes, or conflicts, whether or not subject to action pending as of the date the Confirmation Order is entered, between the Trustee and any other party, including but not limited to, any rights of the Trustee to prosecute Avoidance Actions, and to recover money or assets pursuant to the provisions of the Bankruptcy Code; (3) For the correction of any defect, the curing of any omission, or the reconciliation of any inconsistency in this Plan or the Confirmation Order as may be necessary to carry out the purposes and intent of this Plan; (4) To consider any matters brought before the Court by an interested party necessary to carry out the terms, conditions and intent of this Plan; (5) For the modification of this Plan after confirmation pursuant to the Bankruptcy Rules and the Bankruptcy Code; SWEPCO/Members Page 16 First Amended Joint Plan of Reorganization (6) To enforce and interpret the terms and conditions of this Plan; (7) To enter any order, including injunctions, necessary to enforce the title, rights and powers of the Debtor and to impose such limitations, restrictions, terms and conditions of such title, rights, and powers as this Court may deem necessary; (8) To determine whether a default has occurred under the Plan or the Asset Purchase Agreement, and make such orders as the Court deems necessary to enforce the provisions of the Plan or the Asset Purchase Agreement; and (9) To enter an order concluding and terminating this case. Respectfully submitted on this 18th day of March, 1998. Respectfully submitted on this 18th day of March, 1998. COMMITTEE OF CERTAIN MEMBERS OF CAJUN ELECTRIC By: Bobby S. Gilliam Bobby S. Gilliam Louisiana State Bar No. 6227 Wilkinson, Carmody & Gilliam 400 Travis Street, Suite 1700 Shreveport, La 71101 Telephone: 318/221-4196 Facsimile: 318/221-3705 By: Henry J. Kaim Henry J. Kaim Texas State Bar No. 11075400 Edward L. Ripley Texas State Bar No. 16935950 Patricia Baron Tomasco Texas State Bar No. 01797600 SHEINFELD, MALEY & KAY, P.C. 3700 First City Tower 1001 Fannin Street, Suite 3700 Houston, Texas 77002-6797 Telephone: (713) 658-8881 Fascimile: (713) 658-9756 ATTORNEYS FOR SOUTHWESTERN ELECTRIC POWER COMPANY COMMITTEE OF CERTAIN MEMBERS OF CAJUN ELECTRIC By: Melanie Rovner Cohen, Attorney Melanie Rovner Cohen, Attorney Melanie Rovner Cohen Altheimer & Gray 10 South Wacker Drive Chicago, Illinois 60606 312-715-4000 COMMITTEE OF CERTAIN MEMBERS OF CAJUN ELECTRIC By: John M. Sharp John M. Sharp, Local Counsel John M. Sharp (Bar No. 19149) A Professional Law Corporation 14481 Old Hammond Highway, Suite 2 Baton Rouge, LA 70816 504-273-8510 SWEPCO/Members Page 18 First Amended Joint Plan of Reorganization CERTIFICATE OF SERVICE The undersigned hereby certifies that a copy of the Amended and Restated Joint Plan of Reorganization has been served, via Federal Express, on this 18th day of March, 1998, to all parties on the attached distribution list. Henry J. Kaim Henry J. Kaim SHEINFELD, MALEY & KAY, P.C. 3700 First City Tower 1001 Fannin Street, Suite 3800 Houston, Texas 77002-6797 PARTIES RECEIVING SERVICE OF SWEPCO PLAN/DISCLOSURE STATEMENT Ralph Mabey, Trustee NRG Energy, Inc./Zeigler Coal Holding c/o Lon A. Jenkins Company LeBoeuf Lamb Green & MacRae c/o Brad Axelrod 1000 Kearns Building Jones, Walker, Waechter, Potevent, Carrere 136 South Main Street & Denegre Salt Lake City, UT 84101 8555 United Plaza, Fifth Floor Baton Rouge, LA 70809-7000 Ralph Mabey, Trustee Southern Electric International, Inc. c/o David S. Rubin c/o J. Robert Stoll Kantrow, Spaht, Weaver & Blitzer Mayer, Brown & Platt City Plaza - Suite 300 190 South La Salle Street 445 North Boulevard Chicago, IL 60603 Baton Rouge, LA 70821 Ralph Mabey, Trustee Southern Electric International, Inc. c/o Keith A. Lord c/o Matt J. Farley Wasserstein Perella & Co., Inc. Deutsch, Kerrigan & Stiles, L.L.P. 31 West 52nd Street, 26th Floor 755 Magazine Street New York, NY 10019 New Orleans, LA 70130 Cajun Electric Power Enron Capital & Trade Resources Corp. Cooperative, Inc. c/o Alfredo R. Perez 10719 Airline Highway Bracewell & Patterson LLP P.O. Box 15540 711 Louisiana Street, Suite 2900 Baton Rouge, LA 70895 Houston, TX 77002 NRG Energy, Inc./Zeigler Coal Enron Capital & Trade Resources Corp. Holding c/o J. Kenton Parsons c/o Michael A. Rosenthal Roedel, Parsons, Hill & Kock Gibson, Dunn & Crutcher 3440 Jefferson Highway, Suite 301 1717 Main Street, Suite 5400 Baton Rouge, LA 70809 Dallas, TX 75201 Southwestern Electric Power Rural Utilities Service Company c/o Frances M. Toole c/o Bobby S. Gilliam United States Department of Justice Wilson, Carmody & Gilliam Civil Division, Commercial Litigation 400 Travis Street Branch 1700 Beck Building P.O. Box 81100 P.O. Box 1707 Washington, DC 20044 Shreveport, LA 71166 Milanie Cohen Louisiana Public Service Commission Altheimer & Gray c/o Michael R. Fontham 10 South Wacker Drive Stone, Pigman, Walther, Wittman & Chicago, Illinois 60606 Hutchinson LLP 546 Carondolet Street New Orleans, LA 70130 Gulf States Utilities Securities and Exchange Commission c/o Tom F. Phillips, Esq. Document Control Taylor, Porter, Brooks & Stop 1-4, Room 1004 Phillips, LLP 450 5th Street, N.W. 451 Florida Street, 8th Floor Washington, DC 20549 Baton Rouge, LA 70801 Official Unsecured Creditors' John Lee, Esq. Committee Securities and Exchange Commission c/o Gerald M. Amero 500 W. Madison One Monument Place Chicago, IL 60661 Portland, ME 04104 Official Unsecured Creditors' Office of the United States Trustee Committee Attn: Janice Taylor Breazeale, Sachse & Wilson LLP Texaco Center, Suite 2110 One American Plaza 400 Poydras Street 23rd Floor New Orleans, LA 70130 Baton Rouge, LA 70825 Rural Utilities Service James R. Lackie c/o Frances M. Toole Kean, Miller, Hawthorne, D'Armond, United States Department of McCowan & Jarman, L.L.P. Justice One American Place Civil Division, Commercial 22nd Floor Litigation Baton Rouge, Louisiana 70825 1100 L Street, N.W., Room 10102 Washington, DC 20005 John David Ziober James B. Supple, Esq. Shockey & Ziober Biggs, Trowbridge, Supple & Cremaldi 5551 Corporate Boulevard Lawless Building Suite 3-A 200 Willow Street Baton Rouge, Louisiana 70808 Franklin, Louisiana 70538-0565 Steve McDonnell John W. Hutchison, Esq. Central and South West Voorhies & Labbe', A P.L.C Corporation 700 St. John Street 1616 Woodall Rodgers Freeway Lafayette, Louisiana 70501 Dallas, Texas 75266 Ronald M. Martin Jack L. Smith Holland & Hart Holland & Hart, LLP 90 S. Cascade, Suite 1000 555 Seventeenth Street, Suite 3200 Colorado Springs, CO 80903 Denver, Colorado 80202 Janet M. Weiss Carl H. Hanchey, Esq. Gibson, Dunn & Crutcher Jones, Tete, Nolen, Hanchey, Swift & 200 Park Avenue Spears, L.L.P. 47th Floor First Federal Building New York, NY 10016 1135 Lakeshore Drive, 6th Floor Lake Charles, Louisiana 70601 Edna Latchem William N. Knight, Esq. Thibaut, Thibaut, Bacot, 906 North Lake Arthur Avenue Latchem & Vogt, L.L.P. Jennings, Louisiana 70546 7809 Jefferson Highway, Building G Baton Rouge, LA 70809 R. Patrick Vance E. Rudolph McIntyre, Esq. Jones, Walker McIntyre, McIntyre & McIntyre 207 St. Charles Avenue 810 Pine Street New Orleans, LA 70130 Winnsboro, Louisiana 71295 Patrick E. Henry, Esq. James M. Funderburk, Esq. Shaw, Weaver & Henry, L.L.C. Duval, Funderburk, Sundbery & Lovell 522 East Main Street 101 Wilson Avenue Homer, Louisiana 71040 Houma, Louisiana 70364 V. Russell Purvis, Esq. James J. Davidson, III, Esq. Smith, Taliaferro, Seibert & Davidson, Meaux, Sonnier, McElligott & Purvis Swift 407 Mound Street 810 South Buchanan Street Jonesville, Louisiana 71343 Lafayette, Louisiana 70501 Henry C. Gahagan, Jr., Esq. Gahagan & Conlay 727 Second Street Natchitoches, Louisiana 71457 Nicholas F. LaRocca, Jr., Esq. Nicholas F. LaRocca, Jr., Ltd. 607 Brashear Avenue Morgan City, Louisiana 70380 Clint Pierson, Esq. Talley, Anthony, Hughes & Knight 4565 LaSalle Street, Suite 300 Acadian Bank Building Mandeville, Louisiana 70471 Tom Brice Southwestern Electric Power Company 416 Travis Street Shreveport, LA 71101 Judah L. Rose 9300 Lee Highway Fairfax, Virginia 22031-1207 Mike Smith Central and South West Corporation 1616 Woodall Rogers Freeway, 7th Floor Dallas, TX 75202 Mike Rico Central and South West Corporation 1616 Woodall Rogers Freeway, 7th Floor Dallas, TX 75202 Stephen J. Baron Kennedy & Associates 35 Glenlake Parkway, Suite 475 Atlanta, Georgia 30328 770/395-1288 Steve Tick Sullivan & Tick 7445 East Peakview Avenue Englewood Colorado 80111 303/740-9775 Mike Yokell Hagler Bailley 1881 9th Street, Suite 201 Boulder, CO 80302 303/449-5515 Raymond Shapiro Blank, Rome, Comiskey & McCauley 1200 Four Penn Center Plaza Philadelphia, PA 19103 215/569-5500 Patrick Johnson, Jr. Lemle & Kelleher, L.L.P. Pan-American Life Center, 21st Floor 601 Poydras Street New Orleans, LA 70130-6097 (504) 584-9417 DRAFT OF MARCH 17, 1998 ASSET PURCHASE AGREEMENT AMONG SOUTHWESTERN WHOLESALE ELECTRIC COMPANY RALPH R. MABEY, AS CHAPTER 11 TRUSTEE OF CAJUN ELECTRIC POWER COOPERATIVE, INC. AND AS TO SECTION 7.4 OF THE AGREEMENT ONLY, SOUTHWESTERN ELECTRIC POWER COMPANY DATED AS OF ___________, 1998 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Defined Terms.................................................1 SECTION 1.2 Interpretation................................................1 SECTION 1.3 Conflict With Plan or Other Transaction Documents.............2 SECTION 1.4 Legal Representation of Parties...............................2 ARTICLE II THE ACQUISITION SECTION 2.1 Assets to be Conveyed Free and Clear of Encumbrances..........3 SECTION 2.2 Purchase Price for Acquired Assets............................3 SECTION 2.3 Purchase Price Adjustment for Asset Impairment................3 SECTION 2.4 Other Purchase Price Adjustments. ...........................5 SECTION 2.5 Prorations....................................................5 SECTION 2.6 Liabilities Assumed by SWECO..................................6 SECTION 2.7 Payment of Initial Cash Payment for Acquired Assets...........6 SECTION 2.8 Allocation of Purchase Price..................................6 SECTION 2.9 Further Assurances............................................6 SECTION 2.10 Closing.......................................................7 ARTICLE III COVENANTS SECTION 3.1 Access; Due Diligence.........................................7 SECTION 3.2 Conduct of Business...........................................8 SECTION 3.3 Cooperation in Consummation of the Plan and Related Matters..10 SECTION 3.4 Sales Taxes..................................................10 SECTION 3.5 Teche-CLECO Transfer.........................................10 SECTION 3.6 Treatment of Executory Contracts and Unexpired Leases and Post-Petition Contracts......................................11 SECTION 3.7 Filings, Consents and Approvals..............................12 SECTION 3.8 Employee Matters.............................................13 SECTION 3.9 Notice of Actions and Proceedings............................13 SECTION 3.10 Bankruptcy Filings...........................................13 SECTION 3.11 Safe Harbor Leases...........................................13 SECTION 3.12 Cooperation as to Tax Matters; Proration.....................13 ii ARTICLE IV STATEMENTS AS TO THE EXISTENCE OR NON-EXISTENCE OF CERTAIN FACTS, CONDITIONS OR EVENTS RELATING TO DEBTOR SECTION 4.1 Organization and Good Standing...............................14 SECTION 4.2 Authorization of Agreement...................................14 SECTION 4.3 No Violation.................................................14 SECTION 4.4 Ownership of Acquired Assets.................................15 SECTION 4.5 Financial Condition..........................................15 SECTION 4.6 Absence of Undisclosed Liabilities...........................16 SECTION 4.7 Real Property................................................16 SECTION 4.8 Tangible Personal Property...................................16 SECTION 4.9 Intellectual Property Rights.................................16 SECTION 4.10 Employee Benefit Plans.......................................17 SECTION 4.11 Litigation...................................................17 SECTION 4.12 Contracts....................................................17 SECTION 4.13 Compliance with Law; Permits.................................18 SECTION 4.14 Labor and Employment Matters.................................18 SECTION 4.15 Environmental Matters........................................18 ARTICLE V REPRESENTATIONS OF SWECO SECTION 5.1 Organization. ..............................................20 SECTION 5.2 Authorization of Agreement...................................20 SECTION 5.3 Approvals....................................................21 SECTION 5.4 No Violation.................................................21 SECTION 5.5 Litigation...................................................21 ARTICLE VI CONDITIONS TO THE ACQUISITION SECTION 6.1 Conditions to the Obligations of Each Party..................21 SECTION 6.2 Conditions to the Obligation of SWECO to Consummate the Acquisition..................................................22 SECTION 6.3 Conditions to the Obligation of the Trustee to Consummate the Acquisition..............................................26 iii ARTICLE VII Page AMENDMENT, TERMINATION, EXPENSE REIMBURSEMENT,LIQUIDATED DAMAGES SECTION 7.1 Amendment....................................................27 SECTION 7.2 Termination..................................................27 SECTION 7.3 Effect of Termination........................................28 SECTION 7.4 Trustee's Liquidated Damages for SWECO Breach................28 SECTION 7.5 Reimbursement of SWECO's Expenses............................28 SECTION 7.6 SWECO's Liquidated Damages for Trustee Breach................29 SECTION 7.7 First Priority Expenses......................................29 ARTICLE VIII MISCELLANEOUS SECTION 8.1 Expenses.....................................................30 SECTION 8.2 Entire Agreement, Disclosures in Writing.....................30 SECTION 8.3 Counterparts.................................................30 SECTION 8.4 Headings.....................................................30 SECTION 8.5 Notices......................................................30 SECTION 8.6 Governing Law................................................31 SECTION 8.7 No Third-Party Beneficiaries.................................32 SECTION 8.8 Non-Survival of Certain Statements and Representations.......32 SECTION 8.9 Binding, Effect, Assignment..................................32 SECTION 8.10 Further Assurances...........................................32 SECTION 8.11 Waivers and Amendments: Non-Contractual Remedies.............32 SECTION 8.12 No Personal Liability of Trustee.............................32 SECTION 8.13 Obligations of Trustee Subject to Court Approval.............32 iv APPENDIX A Definitions SCHEDULES 2.4 Coincident Peak Demand 3.6(c) List of Assumed and Assigned Contracts 4.5 Cajun Financial Statements 4.7 List of Real Property 4.8 List of Tangible Personal Property 4.10 List of ERISA Plans 4.11 List of Certain Litigation 4.12 List of Material Contracts 4.13 List of Permits 4.14 Exceptions Regarding Labor and Employment Matters v ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (including Schedules and Exhibits, this "Agreement"), dated as of _____________, 1998, is by and among Southwestern Wholesale Electric Company, a Delaware corporation ("SWECO"), Ralph R. Mabey, as Chapter 11 Trustee of Cajun Electric Power Cooperative, Inc. (in such capacity, the "Trustee"), and, solely for purposes of Section 7.4, Southwestern Electric Power Company, a Delaware corporation ("SWEPCO"). W I T N E S S E T H: A. Cajun Electric Power Cooperative, Inc. ("Cajun" or the "Debtor") is the debtor in Chapter 11 case number 94-11474 (the "Case") pending before the United States Bankruptcy Court for the Middle District of Louisiana; B. On August 23, 1995, the Trustee was duly appointed as the Chapter 11 trustee of the Debtor in the Case and, on August 30, 1995, the Trustee was duly qualified to act as the Chapter 11 trustee of the Debtor in the Case; and C. SWECO, a wholly-owned subsidiary of Central and South West Corporation, a Delaware corporation ("CSW"), desires to purchase, and the Trustee desires to cause the Debtor to sell, subject to approval of the Court (as hereinafter defined), certain assets owned by the Debtor and in connection therewith SWECO and the Trustee agree to consummate or cause to be consummated certain other related transactions (such purchase and sale and related transactions being referred to hereinafter as the "Acquisition") on the terms and conditions set forth below and otherwise pursuant to the Plan of Reorganization for the Debtor, dated October 28, 1996, proposed by SWEPCO, Entergy Gulf States Utilities, Inc. and a committee comprised of certain members of the Debtor (as it may hereafter be amended or supplemented from time to time, the "Plan"), NOW, THEREFORE, in consideration of the premises and the mutual covenants, agreements. representations and warranties herein contained, and subject to the conditions hereinafter set forth, the Parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. DEFINED TERMS. Terms that are defined in Appendix A shall have the respective meanings ascribed to them therein when such terms are used in this Agreement and the other Transaction Documents, unless a clear contrary intent appears herein or therein. SECTION 1.2 INTERPRETATION. In this Agreement and the other Transaction Documents, unless a clear contrary intention appears herein or therein: (a) the singular includes the plural and vice versa; (b) reference to any Person includes such Person's successors and assigns unless such Person is a Party hereto in which case such reference shall include such Person's successors and assigns only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (c) reference to any gender includes each other gender; (d) reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (e) reference to any Law means such Law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, and shall include any rules and regulations promulgated thereunder by the Governmental Authority having jurisdiction thereunder to adopt such rules and regulations; (f) reference to any Article, Section, Appendix or Schedule, unless qualified by reference to some other document or instrument, means such Article or Section of this Agreement or such Appendix or Schedule to this Agreement, as the case may be, and references in any such Article or Section or in any definition contained in Appendix A hereto to any clause means such clause of such Article, Section or definition; (g) "hereunder", "hereof", "hereto" and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article or Section hereof; (h) "includes" and "including" are not limiting: (i) "or" is not exclusive; and (j) relative to the determination of any period of time, "from" means "from and including", "to" means "to but excluding" and "through" means "through and including". SECTION 1.3 CONFLICT WITH PLAN OR OTHER TRANSACTION DOCUMENTS. If there is any conflict between this Agreement and the Plan or any other Transaction Document, this Agreement and the Plan or such other Transaction Document, as the case may be, shall be interpreted and construed, if possible, so as to avoid or minimize such conflict. To the extent (and only to such extent) of such conflict, this Agreement shall prevail and control, except that if there is any inconsistency between Section 3.11 of this Agreement or any other provision of this Agreement and Section 5.3 of the Plan, then Section 5.3 of the Plan shall prevail and control. 2 SECTION 1.4 LEGAL REPRESENTATION OF PARTIES. This Agreement was negotiated by the Parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any Party shall not apply to any construction or interpretation hereof. ARTICLE II THE ACQUISITION SECTION 2.1 ASSETS TO BE CONVEYED FREE AND CLEAR OF ENCUMBRANCES. On the terms and subject to the conditions set forth in this Agreement, on the Closing Date, the Trustee shall cause the Debtor to convey, transfer, assign, sell and deliver to SWECO, and SWECO shall acquire, accept and purchase, all of the Acquired Assets, free and clear of all Encumbrances other than Permitted Encumbrances; PROVIDED, HOWEVER, that any of the Acquired Assets may, at SWECO's sole election, be transferred to and acquired by a designee or designees of SWECO. The Confirmation Order shall provide that the Acquired Assets will be transferred by the Debtor to SWECO (or, as appropriate, such designee or designees) on the Closing Date free and clear of all Encumbrances other than Permitted Encumbrances pursuant to Bankruptcy Code sections 363(f) and 1123 and that SWECO is purchasing the Acquired Assets in good faith and in exchange for fair consideration and reasonably equivalent value. The Debtor is not selling, and SWECO is not purchasing, any of the Excluded Assets pursuant to this Agreement. SECTION 2.2 PURCHASE PRICE FOR ACQUIRED ASSETS. Subject to the adjustments provided in Sections 2.3 and 2.4, the purchase price for the Acquired Assets (as so adjusted, the "Purchase Price") shall be equal to the sum of (i) Nine Hundred Thirty-Three Million Five Hundred Thousand Dollars ($933,500,000) payable in cash by SWECO to the Trustee on the Closing Date and (ii) the lesser of (a) Seven Million Dollars ($7,000,000) and (b) the allowed amount of unsecured claims (excluding administrative and priority claims) described and listed in paragraph I.B.2.a. of SWEPCO's Supplemental Disclosure Statement dated November 12, 1996. SECTION 2.3 PURCHASE PRICE ADJUSTMENT FOR ASSET IMPAIRMENT (a) If, during the period from the date hereof through the Closing, (i) there shall occur any actual or constructive loss, destruction or damage affecting any of the Acquired Assets or (ii) any of the Core Article IV Representations shall be untrue and incorrect when made (the occurrence of any event referred to in the foregoing clauses (i) and (ii) being referred to as an "Impairment"), then, subject to the other terms and conditions hereof, the purchase price for the Acquired Assets shall be reduced by the amount (the "Impaired Asset Adjustment Amount") by which the net economic loss or diminution in value (on the basis of fair market value) to each Acquired Asset as to which there has been an Impairment or Impairments (an "Impaired Asset") or the diminution in the value of the Business resulting or expected to result from the Impairment, determined after giving effect to any replacements, repairs or renovations thereof to the extent effected prior to the Closing and any related insurance proceeds, net of costs of collection, held for transfer to SWECO as part of the Acquired Assets, exceeds Two Million Five Hundred Thousand Dollars 3 ($2,500,000) in the aggregate. SWECO shall notify the Trustee of any Impairment known to SWECO by a written notice delivered at least ten (10) Business Days prior to Closing or, if an Impairment occurs thereafter, on or before the Closing Date (any such notification of a proposed Impaired Asset Adjustment Amount is referred to as an "Impaired Asset Notice"). The Impaired Asset Notice shall include SWECO's good faith estimate of the Impaired Asset Adjustment Amount. The Impaired Asset Adjustment Amount shall be determined by the mutual agreement of SWECO and the Trustee or, failing such agreement, by the dispute resolution procedure specified in Section 2.3(b). Notwithstanding the foregoing, if the Impaired Asset Adjustment Amount shall exceed Twenty Million Dollars ($20,000,000), the Trustee (if the Impairment does not constitute or result from a breach by the Trustee of the provisions of this Agreement) and SWECO shall each have the right to terminate this Agreement pursuant to Section 7.2(b). If the Impaired Asset Adjustment Amount does not exceed Twenty Million Dollars ($20,000,000), neither Party hereto shall have, in the absence of a breach of this Agreement by the other Party other than any such breach giving rise to an Impairment, any right to terminate this Agreement. If the Impaired Asset Adjustment Amount does not exceed $2,500,000, then the purchase price for the Acquired Assets shall not be reduced. (b) If the Trustee and SWECO (or their respective Representatives) are unable to resolve any disagreement with respect to the Impaired Asset Adjustment Amount within five (5) Business Days following receipt by the Trustee of the Impaired Asset Notice then: (i) The matter(s) in dispute shall be immediately referred to an independent third party, valuation expert qualified to value the matter(s) in dispute (a "Valuation Expert") (A) selected by the Trustee and SWECO mutually within five (5) Business Days following receipt by the Trustee of the Impaired Asset Notice or (B) if the Trustee and SWECO fail so to select a Valuation Expert within such period, designated as promptly as practicable thereafter by the Court, which designation shall be final and binding on the Parties, without right of appeal or other review. (ii) The Valuation Expert shall, as promptly as practicable, determine the Impaired Asset Adjustment Amount, which valuation shall be final and binding on the Parties, without right of appeal or other review. (iii) If the Valuation Expert fails to make such determination prior to the Closing Date and SWECO's estimate of the Impaired Asset Adjustment Amount is less than Five Million Dollars ($5,000,000), the Parties shall, subject to the terms and conditions of this Agreement, consummate the Closing of the Transactions (notwithstanding such dispute and referral to the Valuation Expert). At such Closing, SWECO shall deliver to the Trustee a report that sets forth in reasonable detail its estimate of the Impaired Assets Adjustment Amount, as determined by it in good faith and the basis therefor, and shall pay to the Trustee the disputed portion of the Impaired Asset Adjustment Amount, and the Trustee shall place such amount in an escrow account established by Order of the Court pending final determination of the Impaired Asset Adjustment Amount. 4 (iv) If SWECO's estimate of the Impaired Asset Adjustment Amount is more than Five Million Dollars ($5,000,000) and neither Party shall have elected to exercise any right it may have to terminate this Agreement, then the Closing of the Transactions shall be deferred pending final determination of the Impaired Asset Adjustment Amount. (v) Any amount paid into escrow pursuant to clause (iii) shall, upon final determination of the Impaired Asset Adjustment Amount, be retained by the Trustee or paid to SWECO as their interests may appear based on such determination. SECTION 2.4 OTHER PURCHASE PRICE ADJUSTMENTS. (a) If the Coincident Peak Demand (as set forth on Schedule 2.4) of the Members that enter into New Power Supply Contracts on or prior to the Closing Date totals less than 1,538.5 megawatts, then, subject to Section 6.2(d) (v), the purchase price for the Acquired Assets may be reduced, at SWECO's option, by an amount equal to the product obtained by multiplying (i) the difference in the number of megawatts between the Coincident Peak Demand (as set forth on Schedule 2.4) of the Members that have entered into a New Power Supply Contract and 1,538.5 megawatts, by (ii) an amount, not to exceed, $325,000 per megawatt, selected by SWECO. If SWECO elects to exercise such option, it shall deliver a notice to that effect to the Trustee prior to the Closing Date, which notice shall set forth the amount of the reduction per megawatt and the total amount of the reduction. (b) If the Closing Date Yield is below 6.26% or above 7.06%, then the purchase price for the Acquired Assets shall be subject to the following adjustments: (i) if the Closing Date Yield is less than 6.26%, then such purchase price shall be increased by an amount equal to the product obtained by multiplying the number of Basis Points by which the Closing Date Yield is less than 6.26% by $700,000; and (ii) if the Closing Date Yield is greater than 7.06%, then such purchase price shall be reduced by an amount equal to the product obtained by multiplying the number of Basis Points by which the Closing Date Yield exceeds 7.06% by $700,000. SECTION 2.5 PRORATIONS. (a) All of the items, including those listed below, relating to the Business and the operation of the Acquired Assets that would normally be prorated between a buyer and a seller in accordance with custom and usage applicable to contracts for the purchase and sale of commercial assets in the State of Louisiana shall be prorated as of the Closing Date between the Debtor, which shall be liable to the extent such items relate to any time period to and including the Closing Date, and SWECO, which shall be liable to the extent such items relate to periods subsequent to the Closing Date: 5 (i) personal property, real estate, occupancy and water taxes, assessments and other charges of Governmental Authorities, if any, on or with respect to ownership or operation of the Acquired Assets; (ii) rents and other lease payments, taxes and other items payable by the Debtor under any of the Assumed and Assigned Contracts, (iii) any permit, license or registration fees with respect to any Permits that are being assigned or transferred hereunder; and (iv) sewer rents and charges for water, telephone, electricity and other utilities. (b) If actual taxes, fees and other amounts to be prorated are not available at the Closing Date, then the proration shall be based upon the actual taxes, fees and other amounts for the preceding year (or appropriate period) for which actual taxes, fees and other amounts are available and such taxes, fees and other amounts shall be reprorated upon the request of either Party made within 60 days of the date that the actual amounts become available. The Parties shall furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 2.5. (c) The amount of all salaries, wages, vacation credits and payroll taxes which under generally accepted accounting principles would be accrued as a liability on the balance sheet of Debtor as of the close of business on the Closing Date shall be paid by the Debtor. SECTION 2.6 LIABILITIES ASSUMED BY SWECO. As further consideration for consummation of the Transactions, at the Closing, SWECO shall assume and agree to pay thereafter when due and discharge the Assumed Liabilities. SWECO shall not assume or be liable for any Liabilities of the Debtor other than the Assumed Liabilities. Except as to the Assumed Liabilities, SWECO is not a successor to Cajun, and none of SWEPCO, SWECO, SWECO's Representatives or their Affiliates shall have any liability, as transferee or otherwise, for claims against Cajun (whether or not currently known) as a result of SWECO's purchase of the Acquired Assets or the consummation of the Transactions hereunder, and the Confirmation Order shall so provide. SECTION 2.7 PAYMENT OF INITIAL CASH PAYMENT FOR ACQUIRED ASSETS. At the Closing, SWECO shall pay the Purchase Price to the Trustee by wire transfer to an account designated by the Trustee by notice given to SWECO not less than five (5) Business Days prior to the Closing Date. SECTION 2.8 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated to the Acquired Assets in accordance with Section 1060 of the Tax Code. The Parties shall negotiate in good faith the value of each of the Acquired Assets and the resulting allocation of the Purchase Price among the Acquired Assets. SWECO and the Trustee each agrees to file (or to cause to be filed) Internal Revenue Service Form 8594, and all federal, state, local and foreign Tax Returns, in accordance with such agreed allocation and not to take a position in any Tax Return, tax proceeding or tax audit which is inconsistent 6 with such allocation. SWECO and the Trustee each agrees to provide the other promptly with any other information required to complete Form 8594. SECTION 2.9 FURTHER ASSURANCES. From time to time after the Closing, the Trustee or the Debtor shall execute and deliver or shall cause to be executed and delivered to SWECO or its designee such instruments of sale, transfer, conveyance, assignment and delivery, consents, assurances, powers of attorney and other instruments as may be reasonably requested by SWECO in order to vest in SWECO or its designee all right, title and interest of the Debtor in and to the Acquired Assets and otherwise in order to carry out the purpose and intent of this Agreement and the other Transaction Documents. SECTION 2.10 CLOSING. The closing of the Transactions (the "Closing") shall, unless another date, time or place is mutually agreed to in writing by the Parties, take place at the offices of Wilkinson, Carmody & Gilliam, 400 Travis Street, Shreveport, Louisiana at 10:00 a.m., local time, on the Closing Date. ARTICLE III COVENANTS SECTION 3.1 ACCESS; DUE DILIGENCE (a) From the date hereof to the Closing Date and subject to the confidentiality obligations of the Debtor or the Trustee under the Scheduled Contracts (from which obligations the Trustee shall use all reasonable efforts to be relieved so that the access contemplated to be given to SWECO and SWECO's Representatives hereunder may be given by the Trustee and the Trustee's Representatives to the fullest extent permitted hereunder), the Trustee shall (i) provide SWECO and SWECO's Representatives with reasonable access to the Trustee's Representatives and all properties, offices and other facilities of the Debtor, including all Books and Records, during normal business hours (and, with the Trustee's consent, which shall not be withheld unreasonably, during non-business hours) and in a manner not unreasonably disruptive to the operation of the Business, (ii) use reasonable efforts to provide SWECO and SWECO's Representatives reasonable access to the Debtor's outside auditors and their work papers and (iii) furnish promptly to SWECO all financial and operating data and other information regarding the Business and the Acquired Assets that SWECO may from time to time reasonably request. Without limiting the generality of the foregoing, the Trustee shall provide SWECO and its Representatives reasonable access to the Debtor's Real Property and Leaseholds for such inspection, examination and other assessment as SWECO deems necessary in order to determine whether the statements contained in Section 4.13 are true and correct SWECO agrees to exercise the foregoing rights in conformity with any applicable legal requirements. (b) In addition to the access and information rights provided by Section 3.1(a), SWECO and SWECO's Representatives shall have, at its own risk and expense, reasonable access to enter the Real Property and Leaseholds during normal business hours and, with the Trustee's consent (which shall not be 7 withheld unreasonably), during non-business hours, to investigate, inspect, audit, study and test, including the examination of soil, groundwater and all other physical features in a manner not unreasonably disruptive to the operation of the Business. The existence of this right shall in no manner obligate SWECO to perform part or all of any investigation whatsoever. (c) From and after the Confirmation Date, SWECO may designate two of its Representatives as Transition Managers to monitor the Debtor's operations and activities during the period from the Confirmation Date to the Effective Date. During that period, the Transition Managers and their Representatives shall be given access to the Debtor's personnel, properties, offices and other facilities and Books and Records, shall be informed of and invited to attend management and staff meetings, shall be provided all written, non-privileged information distributed to the Trustee and his staff or to management of the Debtor, and shall be provided, without cost, office space in the Debtor's headquarters facility and reasonably necessary clerical support. (d) The Trustee acknowledges that, prior to the date hereof, the opportunity for SWEPCO, SWECO and their Representatives to undertake and complete the investigations, inquiries and other due diligence customary for comparable transactions (collectively, the "Due Diligence Investigation") has been limited. SWECO agrees to initiate and complete its Due Diligence Investigation as promptly as practicable and the Trustee agrees to provide, or use all reasonable efforts to cause the Debtor to provide, to SWEPCO, SWECO and their Representatives information in their possession or control that is responsive to any Due Diligence Investigation requests made by SWEPCO, SWECO and their Representatives as promptly as practicable. SECTION 3.2 CONDUCT OF BUSINESS (a) From the date hereof to the Closing Date, except as permitted by the prior written consent of SWECO (i) the Business shall be conducted only in, and the Debtor shall not take any action in connection with the conduct of the Business except in, the ordinary course of business and in a manner consistent with Prudent Utility Practice, (ii) the Trustee shall use, and shall cause the Debtor to use, reasonable efforts (A) to preserve the Business substantially intact, (B) to maintain the Acquired Assets in due repair, order and condition (subject to ordinary wear and tear) in accordance with Prudent Utility Practice, (C) to comply with all material Laws applicable to the Business (subject to the Trustee taking or omitting to take any actions, which action or omission is asserted by a Governmental Authority to be a violation of any Law and the application of which to the Trustee, the Debtor, the Business or the Transactions is being or will be contested by the Trustee in good faith in appropriate proceedings), (D) to keep available the services of employees whose continuing employment in connection with the Business is necessary to the conduct of the Business (subject to any steps the Trustee may take in consultation with SWECO in an effort to minimize employee severance costs); PROVIDED, HOWEVER, that nothing herein shall be deemed to affect SWECO's right, in its sole discretion, to determine whether any employee will be employed by SWECO after the Closing Date, (E) to preserve the present relationships of the Business with customers, including the Members, and suppliers and other Persons with which the Business has significant business relations (excluding any such customers, other than the Members, or suppliers that are not parties to Contracts with the Debtor that constitute Assumed and Assigned Contracts), and 8 (F) to prepare and file timely all filings necessary or desirable to obtain new or additional Permits under applicable Law or to renew or extend existing Permits which are otherwise due to terminate or expire and for transfer or reissue of such Permits to SWECO or its designee or otherwise to amend or modify such Permits to reflect the Acquisition pursuant to applicable Law. By way of amplification and not limitation, except as specifically contemplated by this Agreement, the Trustee shall not, and shall cause the Debtor not to, between the date of this Agreement and the Closing Date, directly or indirectly, do, or propose or agree to do, any of the following without the prior written consent of SWECO: (i) sell, assign, pledge, dispose of or encumber any of the Acquired Assets, except for the sale in the ordinary course of business of any tangible personal property that has been retired from operation as a result of the acquisition of a replacement asset of equal or greater value or utility that will be transferred to SWECO at the Closing as an Acquired Asset; (ii) fail to comply with all material requirements of, and otherwise to maintain Permits required under, applicable Law or fail to defend or initiate any material proceeding before any Governmental Authority that is necessary to protect the Acquired Assets or to ensure the continued, uninterrupted operation of the Business, including the timely prosecution of any material Permit application or renewal; (iii) fail (A) to maintain an inventory of coal consistent with past practices so that the quality and quantity of coal existing as of the Closing Date shall not be materially less than that existing on October 30, 1996, (B) to maintain inventory levels of fuel oil or other inventory, spare parts, material and other supplies of a quality and quantity required under Prudent Utility Practice in connection with the conduct of the Business, (C) to make capital expenditures consistent with Prudent Utility Practice, (D) to maintain the Acquired Assets in due repair, order and condition in accordance with Prudent Utility Practice or (E) to maintain insurance for the Acquired Assets consistent with Prudent Utility Practice; (iv) fail to comply with or perform all of the Debtor's obligations under any Assumed and Assigned Contract or Assigned Post-Petition Contract (except for defaults that are capable of being cured through the payment on the Closing Date of cure payments under Bankruptcy Code section 365(b)(1) or defaults of the kind specified in Bankruptcy Code section 365(e)(1)); (v) terminate, replace, amend or otherwise modify (A) any Assumed and Assigned Contract or Assigned Post-Petition Contract, or waive any of the obligations of the parties (other than the Debtor) to any such Contract or the Debtor's rights under any such Contract or (B) any other Material Contract (whether a Material Contract before or after giving effect to such termination, replacement, amendment or other modification); PROVIDED, HOWEVER, that, at any time prior to the Confirmation Date, any Contract that is not a Collective Bargaining Agreement and that at the time in question has not yet been designated as (1) an Assumed and Assigned Contract, (2) an Assigned Post-Petition Contract or (3) a Rejected Contract, as the case may be, pursuant to 9 Section 3.6, may be terminated, replaced, amended or otherwise modified if the Trustee shall have provided written notice to SWECO of the action proposed to be taken at least ten (10) Business Days prior to the effectiveness of any such action and SWECO, prior to the expiration of such period, shall not have designated such Contract as an Assumed and Assigned Contract or an Assigned Post-Petition Contract, as the case may be, pursuant to Section 3.6, in the case of (1) and (2); (vi) enter into any Post-Petition Contract that relates to the Business, and would be a Material Contract, unless the Trustee shall have used all reasonable efforts to negotiate a provision to be included in such Post-Petition Contract that would permit the assignment thereof to SWECO at the Closing in accordance with Section 3.6; (vii) enter into any Post-Petition Contract that constitutes a Collective Bargaining Agreement or otherwise relates to labor or employee benefits, other than as permitted pursuant to Section 3.8; or (viii) depart from the normal and customary trade, discount and credit policies of the Debtor, except in the ordinary course of business and consistent with past practice. (b) If the Trustee intends to take any action (or cause the Debtor to take any action) or omit to take any action (or permit the Debtor to omit to take any action) which action or omission, pursuant to Section 3.2(a), requires the prior written consent of SWECO, then the Trustee shall, as soon as practicable, inform the Transition Managers of the proposed action or omission and a proposed reasonable time frame for obtaining the required written consent. With respect to any such proposed action or omission, the Trustee or his designated Representatives and the Transition Managers shall use their reasonable efforts to resolve any disputes regarding the proposed action or omission so that the necessary written consent to the proposed action can be provided or withheld by SWECO within the appropriate time frame. If, however, the Transition Managers inform the Trustee or his designated Representative that SWECO will not consent to the proposed action or omission, the Trustee and SWECO will submit the matter to the Court for resolution. The Trustee shall request the Court not to approve the proposed action or omission unless the Court finds that, regardless of the benefit that may be conferred on the Cajun Estate thereby, the Trustee has established that such proposed action or omission would not have a Material Adverse Effect or a material adverse effect on the confirmability of the Plan or the benefits of the Plan or the Transactions to SWECO. SECTION 3.3 COOPERATION IN CONSUMMATION OF THE PLAN AND RELATED MATTERS. The Trustee, subject to its fiduciary duties under the Bankruptcy Code, and SWECO each will fully cooperate with the other in the consummation of the Plan and in connection with any litigation or proceeding already instituted or which may be instituted hereafter against or by such Party relating to the Plan or which may affect the consummation of the Plan or satisfaction of the conditions precedent to consummation of the Acquisition (other than litigation between the Parties arising out of the Transactions). The Trustee and SWECO agree to use their reasonable efforts to (a) obtain the Required Regulatory Approvals as 10 promptly as practicable and in any case prior to the Outside Date; and (b) to consummate the Acquisition within a reasonable time period thereafter and in any case prior to the Outside Date. SECTION 3.4 SALES TAXES. To the extent that the sale of the Acquired Assets is subject under applicable Law to sales, transfer, use, stamp or similar Taxes that are not exempt under Bankruptcy Code section 1146, such Taxes shall be paid by SWECO. SECTION 3.5 TECHE-CLECO TRANSFER. The Trustee and SWECO acknowledge that CLECO has acquired Teche and that a New Power Supply Contract, to be effective on the Effective Date, may be entered into directly by CLECO and SWECO. SECTION 3.6 TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES AND POST-PETITION CONTRACTS. (a) It is a condition precedent to SWECO's obligation to consummate the Acquisition that Members whose Coincident Peak Demand (as set forth in Schedule 2.4), when added together, equals or exceeds 1,000 megawatts shall have executed and delivered New Power Supply Contracts in form and substance satisfactory to SWECO. The Existing Power Supply Contract of each Member that executes and delivers a New Power Supply Contract shall be terminated as of the Effective Date. If a Member fails to execute and deliver a New Power Supply Contract, then the Existing Power Supply Contract of that Member shall be neither assumed nor rejected; instead, such Existing Power Supply Contract shall be treated as provided in Section 7.1 of the Plan. (b) SWECO shall not be obligated under any current or future collective bargaining agreements entered into or negotiated by Cajun, the Debtor or the Trustee. However, if and when SWECO hires a majority of Cajun's employees in units appropriate for collective bargaining, then SWECO will recognize those unions representing those employees and negotiate in good faith with representatives of those unions. (c) Schedule 3.6(c) lists the Contracts that are to be assumed by the Trustee and assigned to SWECO or its designee on the Closing Date under the Plan pursuant to Bankruptcy Code sections 365 and 1123 (Contracts that are so listed are collectively referred to as the "Assumed and Assigned Contracts"). The Trustee shall seek authorization by the Court, either pursuant to the Confirmation Order or an Order of the Court obtained by separate motion filed by the Trustee of the assumption and assignment of each of the Assumed and Assigned Contracts that has not theretofore been assumed by Order of the Court under Bankruptcy Code section 365. (d) Each Member entitled to preference shall execute a Contract with SPA for the sale and purchase of SPA Hydro Peaking Power (as such term is defined in the New Power Supply Contracts). The amount of SPA Hydro Peaking Power purchased by each Member shall be allocated by the SPA in accordance with applicable law. SWEPCO shall act as the Scheduling Agent of the SPA Hydro 11 Peaking Power for such Members pursuant to Section 3.2 of the New Power Supply Contracts. (e) Subject to the treatment of the River Bend JOPOA under the Plan, all executory contracts or unexpired leases, other than the Hydro Contract, to which the Debtor was a party on the Petition Date or which have been identified on Schedule 4.12 as a Post-Petition Contract and, in each case, that have not been designated as Assumed and Assigned Contracts shall be rejected by the Trustee, effective on the Closing Date, under the Plan pursuant to Bankruptcy Code sections 365 and 1123. The Trustee shall use all reasonable efforts to obtain an Order or Orders of the Court on or prior to the Closing Date making such findings and determinations regarding such executory contracts and unexpired leases (collectively, the "Rejected Contracts") as SWECO may reasonably request. (f) All cure payments which may be required to be made pursuant to Bankruptcy Code section 365(b)(1) under any Assumed and Assigned Contracts, and all other amounts that have become due and owing prior to the Closing under any Assumed and Assigned Contract shall be made by the Debtor on the Closing Date in accordance with the Plan. SWECO shall not be responsible for any cure payments required to be made under Bankruptcy Code section 365(b)(1) in connection with the assumption of an Assumed and Assigned Contract or that otherwise are due and owing under an Assumed and Assigned Contract prior to the Closing. If a dispute exists on the Closing Date as to the amount required to be paid to any party to an Assumed and Assigned Contract under Bankruptcy Code section 365(b)(1) in order for such Assumed and Assigned Contract to be assumed, pending a determination by the Court after the Closing Date of the actual amount owing, an appropriate reserve shall be maintained by the Debtor or the Trustee to cover any additional amount that the Court ultimately may determine to be due to such party in connection with such assumption. SWECO shall not assume or be liable in any respect for any Liability of the Debtor under any Rejected Contract. Following assignment by the Trustee to SWECO or its designee of an Assumed and Assigned Contract on the Closing Date, SWECO or such designee shall be responsible, as assignee of the Debtor, for the performance under such Assumed and Assigned Contract of all obligations of the Debtor that first arise after the Closing. SWECO shall have no Liability under any unexpired lease or executory contract except for Assumed and Assigned Contracts that are designated by SWECO in accordance with the applicable terms of this Section 3.6 and shall have no Liability under an Assumed and Assigned Contract other than the performance of obligations arising after the Closing Date. (g) On or prior to the Confirmation Date, SWECO shall specify in writing those Post-Petition Contracts that shall be assigned to SWECO on the Closing Date (other than Post-Petition contracts entered into prior to the date of this Agreement which have been identified in Schedule 4.12 as a Post-Petition Contract) and all such Post-Petition Contracts (other than those as to which the consent of the other party thereto is required in order for such Post-Petition Contract to be assigned to SWECO or its designee and such party has withheld such consent) shall be assigned to SWECO on the Closing Date (collectively, the "Assigned Post-Petition Contracts"). SWECO shall have no liability for any amounts that become due from the Debtor under an Assigned Post-Petition Contract prior to the Closing. 12 SECTION 3.7 FILINGS, CONSENTS AND APPROVALS. From and after the Confirmation Date until the Closing Date, each of the Trustee and SWECO shall file or cause to be filed any and all petitions, applications, declarations, or other pleadings as may be necessary or desirable to obtain, and thereafter shall use all reasonable efforts to obtain, the Required Regulatory Approvals in a timely manner. During this period, each Party shall consult with the other as to the appropriate time of filing, shall cooperate with each other as to the preparation of such notifications and the substance of such filings and shall use its reasonable efforts to make such filings at the agreed upon time and to respond promptly to any requests made to it for additional information by any Governmental Authority. The Trustee, in cooperation with SWECO, shall take all reasonable actions necessary or desirable to obtain all Governmental Approvals required to be obtained by the Trustee and to give all notices to, and make all filings with, any Governmental Authorities and third parties necessary to authorize, approve or permit the consummation of the Transactions in accordance with the Plan and the terms of the Transaction Documents. The Trustee, in cooperation with SWECO, shall take all reasonable actions necessary or desirable to obtain the consents of third parties to the assignment of the Assumed and Assigned Contracts required by the provisions thereof. SECTION 3.8 EMPLOYEE MATTERS (a) All Employee Benefit Plans shall be terminated on or before the Closing Date. SWECO shall have no obligation to establish, contribute to or maintain any Employee Benefit Plan or maintain any particular level of benefits (it being agreed and acknowledged that no such plan will be transferred to or assumed by SWECO under section 4204 of ERISA or otherwise), unless expressly agreed by SWECO under the applicable provisions of (i) any collective bargaining agreement that SWECO may negotiate with any employee bargaining agent, or (ii) any employment contract or the terms and conditions of employment that SWECO may assume or establish. SWECO shall in no event assume or have any liability for any employee severance costs or employee-related Liabilities of the Debtor or any other liabilities (including withdrawal liabilities) related, in any way, to any Employee Benefit Plan. (b) Subject to the provisions of any collective bargaining agreement SWECO may negotiate pursuant to Section 3.6(b), SWECO and its Affiliates shall have no obligation to hire any employees of the Debtor. Subject to such provisions, SWECO shall have the right to establish the terms and conditions of employment at any of the facilities, offices or operations included in the Acquired Assets and to offer employment on such terms and conditions. SECTION 3.9. NOTICE OF ACTIONS AND PROCEEDINGS. From and after the date here of until the Closing Date, the Trustee shall promptly notify SWECO of any written notice received by the Trustee with respect to Actions commenced or, to its knowledge, threatened involving or affecting the Debtor or the Business or which could have a Material Adverse Effect. SECTION 3.10 BANKRUPTCY FILINGS. From and after the Confirmation Date until the Closing Date, the Trustee shall deliver to SWECO (a) copies of all pleadings, motions, notices, statements, schedules, applications, reports and other papers that the Trustee files in the Case within a reasonable time after 13 filing, but with respect to any such papers that relate, in whole or in part, to this Agreement, the Plan, the Transactions, or SWECO, SWEPCO or its or their Representatives, the Trustee shall use all reasonable efforts to provide such prior notice as may be reasonable under the circumstances before the filing of such papers and (b) copies of all other pleadings, motions, notices, statements, schedules, applications, reports and other papers filed in the Case. SECTION 3.11 SAFE HARBOR LEASES. Reference is made to Section 5.3 of the Plan regarding certain arrangements relating to certain Tax Benefit Transfer Agreements, CoBank and related matters. The Trustee shall cooperate, and shall cause the Debtor to cooperate, in effectuating such arrangements. SECTION 3.12 COOPERATION AS TO TAX MATTERS; PRORATION. (a) The Trustee shall cooperate, and shall cause the Debtor to cooperate, with SWECO, and the Trustee shall keep and shall cause the Debtor to keep SWECO fully apprised of all meetings, correspondence and other communications with the IRS (and any state or local taxing authorities) relating to the liability of the Debtor for Taxes for any period ending before, on or including the Closing Date. (b) All real property and personal property Taxes with respect to the Acquired Assets for the tax years occurring prior to the Closing Date shall be paid in full by the Trustee prior to or at the Closing. All real property and personal property Taxes with respect to the Acquired Assets for the tax year in which the Closing Date occurs shall be prorated through the Closing Date based on the most current assessment information available from the offices of the assessor and sheriff of the respective parishes in which the Acquired Assets are located. All special assessments against the Acquired Assets for utilities or otherwise shall be paid in full by the Trustee prior to or at the Closing. ARTICLE IV STATEMENTS AS TO THE EXISTENCE OR NON-EXISTENCE OF CERTAIN FACTS, CONDITIONS OR EVENTS RELATING TO DEBTOR All of the obligations of SWECO and SWEPCO under this Agreement are subject to the condition that each of the statements set forth below in this Article IV shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. SECTION 4.1 ORGANIZATION AND GOOD STANDING. The Debtor is a cooperative association duly organized, validly existing and in good standing under the Laws of the State of Louisiana, with full power to carry on the Business as it is now conducted and to own, lease or operate the Acquired Assets and the Excluded Assets. The Debtor is qualified to do business and is in good standing in each jurisdiction in which the nature of the Business or the character of the Debtor's properties makes such qualification necessary. 14 SECTION 4.2 AUTHORIZATION OF AGREEMENT. Subject to Section 8.13, the Trustee has all requisite power and authority to enter into this Agreement and the Transaction Documents and to consummate the Transactions. Subject to Section 8.13, this Agreement and all other agreements and instruments to be executed by the Trustee in connection herewith have been (or upon execution will have been) duly executed and delivered by the Trustee, have been effectively authorized by all necessary action, and constitute (or upon execution will constitute) legal, valid and binding obligations of the Trustee enforceable against the Trustee and the Cajun Estate in accordance with their respective terms. SECTION 4.3 NO VIOLATION. Assuming the termination or expiration of any applicable waiting periods imposed by the HSR Act and receipt of all Required Regulatory Approvals, neither the execution and delivery by the Trustee of this Agreement or any Transaction Document nor the performance by the Trustee of his obligations hereunder or thereunder will (a) violate or breach the terms of or cause a default under (i) any applicable Law or Order, (ii) the Organizational Documents or (iii) any Assumed and Assigned Contract (except as the terms of any such Assumed and Assigned Contract have been invalidated or modified pursuant to applicable bankruptcy law or an order of the Court), (b) result in the creation or imposition of any Encumbrance on any of the Acquired Assets other than a Permitted Encumbrance, (c) result in the cancellation, forfeiture, revocation, suspension or adverse modification of any Permit owned or held by the Debtor and necessary for the operation of the Business or (d), 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 or a material adverse effect on the confirmability of the Plan or the benefits of the Plan or the Transactions to SWECO. SECTION 4.4 OWNERSHIP OF ACQUIRED ASSETS. The Debtor has defensible title to all of the Acquired Assets (other than the Transmission Assets and the Pipeline Assets, as to which it has such title or interest as is sufficient to enable the Debtor to conduct the Business as currently conducted without material interference, and other than any Acquired Assets that (a) are the subject of leases or (b) are not, individually or in the aggregate, material to the Debtor) free and clear of Encumbrances other than Permitted Encumbrances. The Debtor holds under valid lease agreements, each of which is an Assumed and Assigned Contract, all real and personal properties included in the Acquired Assets that are subject to leases, and enjoys peaceful and undisturbed possession of such properties under such leases, other than any properties that, individually or in the aggregate, are not material to the Debtor or the Business. The Debtor has not received any written notice of any adverse claim to the title to any properties included in the Acquired Assets or with respect to any lease under which any Acquired Assets are held by it, other than any claims that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Business. Upon transfer to SWECO or its designee on the Closing Date of ownership of the Acquired Assets that are owned by the Debtor, SWECO or such designee will acquire good and marketable title to the Acquired Assets (including the Assumed and Assigned Contracts and the Assigned Post-Petition Contracts but other than the Transmission Assets and the Pipeline Assets, as to which SWECO will acquire all of the Debtor's right, title and interest therein), free and clear of all Encumbrances other than Permitted Encumbrances (subject, in the case of Assigned Post-Petition Contracts, to any 15 required consent of the other parties to such Contracts). The Acquired Assets, taken as a whole, constitute all the properties, assets and rights relating to or used or held for use in connection with the business and operations of the Debtor since (date of last financial statement), other than (i) inventory sold, cash disposed of, accounts receivables collected, contracts fully performed, and property or assets replaced by equivalent or superior properties or assets, in each case in the ordinary course of business, and (ii) the Excluded Assets. SECTION 4.5 FINANCIAL CONDITION. The Trustee has furnished to SWECO the financial statements or reports listed in Schedule 4.5 (the "Cajun Financial Statements"). The Cajun Financial Statements: (a) were prepared from and in accordance with the books and records of the Debtor; (b) except as may be indicated in the notes thereto, were prepared in accordance with GAAP (subject, in the case of unaudited statements or reports, to the absence of any footnote disclosures and to year-end audit adjustments required by GAAP which consist solely of normal, recurring adjustments), and (c) fairly present the financial position, results of operations and cash flows of the Debtor, all in conformity with GAAP, as of the dates thereof and for the periods covered thereby. Since the date of the latest balance sheet contained in the Cajun Financial Statements, except as set forth in Schedule 4.5, the Business has been conducted only in the ordinary course and there has not been any action taken by the Debtor which would violate the provisions of Section 3.2 hereof had it been in effect during such period or any Material Adverse Effect. SECTION 4.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except for liabilities set forth on the latest balance sheet included in the Cajun Financial Statements and liabilities incurred in the ordinary course of business since that date which, in the aggregate, are not material, there are no liabilities or obligations of any nature, accrued, absolute, contingent or otherwise, whether due or to become due, which relate to the Business or which would be Assumed Liabilities. Following the Closing, no claimants shall have any recourse to SWECO, any Affiliate of SWECO or any Acquired Assets except in respect of the Assumed Liabilities. SECTION 4.7 REAL PROPERTY. Schedule 4.7 sets forth a legally adequate description of each principal parcel of Real Property and a list of all Contracts with respect to its Leasehold interests. The Debtor has made available to SWECO (a) all deeds, title insurance policies, surveys, mortgages and other Contracts granting or relating to the Debtor's ownership of such Real Property and (b) all Contracts with respect to its Leasehold interests. Except as set forth in Schedule 4.7: (i) the Real Property described in Schedule 4.7 constitutes all of the Real Property necessary for the continued conduct by SWECO on the Closing Date of the Business as presently conducted; (ii) the Debtor enjoys peaceful and undisturbed possession of the improvements located on the Real Property described in Schedule 4.7 and of all real property subject to its Leasehold interests; and 16 (iii) all of the buildings, fixtures and other improvements located on the Real Property described in Schedule 4.7 are in good operating condition and repair, ordinary wear and tear excepted, and the operation thereof as presently conducted is not in violation in any material respect of any applicable building codes, zoning ordinance or other Law. SECTION 4.8 TANGIBLE PERSONAL PROPERTY. Schedule 4.8 sets forth a listing of machinery, equipment, spare parts, furniture, fixtures, supplies and other tangible personalty which on the date hereof is carried on the Books and Records of the Debtor with a net book value of One Hundred Thousand Dollars ($100,000) or more. Except for any such property that is sold prior to the Closing as permitted under Section 3.2 and for Excluded Assets, all such property will be included in the Acquired Assets transferred to SWECO at the Closing. Except as otherwise disclosed in Schedule 4.8, all tangible personal property and fixtures included in the Acquired Assets are (a) structurally sound with no material defects, (b) in good working order and free from any material defects or otherwise suitable for the use for which they are intended (ordinary wear and tear excepted) and (c) adequate and sufficient for the operation of the Business as presently conducted. SECTION 4.9 INTELLECTUAL PROPERTY RIGHTS. There are no Intellectual Property Rights held by the Debtor that are material to the conduct of the Business as it is presently conducted. SECTION 4.10 EMPLOYEE BENEFIT PLANS (a) Except as set forth in Schedule 4.10, there is no Employee Benefit Plan. Unless expressly identified as such on Schedule 4.10, no Employee Benefit Plan is an ERISA Multiemployer Plan. In the event of a partial or complete withdrawal from any ERISA Multiemployer Plan as of the Closing Date, the Debtor would not be subject to any withdrawal liability under Title IV of ERISA. The Acquired Assets are not subject to a lien in favor of the Pension Benefit Guaranty Corporation under Section 4068 of ERISA. (b) The Debtor has made available to SWECO true and correct copies of each Employee Benefit Plan set forth in Schedule 4.10 and its summary plan description (if such description is required under Section 102 of ERISA). SECTION 4.11 LITIGATION. Except for adversary proceedings and other matters pending in the Case and appearing on the docket of the clerk of the Court with respect to the Case or which are described in Schedule 4.11, there are no claims, disputes or Actions of any nature before or by any Governmental Authority or arbitral authority pending or, to the knowledge of the Trustee and the Debtor, threatened, or any unsatisfied judgments, awards or settlements, in each case against the Debtor or the Trustee, the Business or any of the directors, officers, or employees of the Debtor in connection with the Business. SECTION 4.12 CONTRACTS (a) Schedule 4.12 sets forth a true and correct list of each Existing Power Supply Contract and each other Contract under which the Debtor 17 sells power, including all power marketing Contracts, and a true and correct list of each other Material Contract, including Collective Bargaining Agreements, fuel and transportation Contracts and Post-Petition Contracts (all such Contracts being herein called the "Scheduled Contracts"). The Debtor has made available to SWECO a true and correct copy of each Scheduled Contract. (b) Except as set forth in Schedule 4.12: (i) subject to the Debtor's assumption under Bankruptcy Code section 365, each Scheduled Contract is a valid and binding agreement of the Debtor enforceable in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditor rights generally and by equitable principles) and the Debtor does not have any knowledge that any of the Scheduled Contracts is not a valid and binding agreement of the other parties thereto enforceable in accordance with its terms (except as aforesaid); and (ii) the Debtor has fulfilled all material obligations required pursuant to each Scheduled Contract to have been performed by the Debtor on its part prior to the date hereof, the Debtor will fulfill, when due, all of the Debtor's obligations under the Scheduled Contracts which are to be performed prior to the Closing Date and the Debtor does not have any knowledge that the other parties to the Scheduled Contracts have failed to perform their material obligations under the Scheduled Contracts. SECTION 4.13 COMPLIANCE WITH LAW; PERMITS. The Business of the Debtor as presently conducted does not violate any Law in any material respect. The Debtor is in possession of all Permits from all Governmental Authorities, including all certificates of public convenience and necessity and rate authorizations required by the FERC and the LPSC and all Permits required by applicable Law relating to any of the operations currently being conducted at or on any of the Real Property described on Schedule 4.6, as are necessary to carry on its Business as currently conducted, except for any such Permits that (a) are listed in Schedule 4.13 or (b) the failure to possess which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. To the extent such Permits are transferable, the Trustee shall fully cooperate in the transfer thereof so as to permit SWECO to continue to have the use and benefit thereof and the rights granted thereby after the Closing shall have occurred. To the extent such Permits are not transferable, the Trustee shall fully cooperate with and assist SWECO in applying for and obtaining such Permits. SECTION 4.14 LABOR AND EMPLOYMENT MATTERS. Except as set forth in Schedule 4.14, there is no (a) unfair labor practice or unlawful employment practice charge or complaint against the Debtor pending before any federal, state or local agency, or any basis for any such complaint; (b) pending labor strike or other material labor dispute; (c) pending labor grievance; (d) pending petition or question of representation respecting the employees of the Debtor; (e) pending arbitration proceedings arising out of or under any Collective Bargaining Agreement to which the Debtor is a party; or (f) any pending or, to the knowledge of the Trustee or the Debtor, threatened claim against the Debtor regarding the terms and conditions of employment or discharge or dismissal of any employee or the failure to hire any individual employee and there is no basis for any such claim. 18 SECTION 4.15 ENVIRONMENTAL MATTERS (a) (i) Debtor has not engaged in or allowed any operation or activity upon, or any use or occupancy of, any Real Property or any Leasehold for the purpose of or in any way involving the handling, manufacture, treatment, storage, use, generation, release, discharge, processing, recycling, refining, dumping or disposal of any Hazardous Materials on, under, in or about such Real Property or Leasehold, or transported or arranged for transport of any Hazardous Materials to, from or across such Real Property or Leasehold, in each case which constitutes or otherwise causes a material violation of or for which remediation or other corrective action is or may be required under any Environmental Law, (ii) no Hazardous Materials have been used, manufactured, produced, constructed, deposited, disposed of, stored or otherwise located on, under, in or about any Real Property or any Leasehold, in a manner or condition which constitutes or otherwise causes a material violation of or for which remediation or other corrective action is or may be required under any Environmental Law; (iii) no Hazardous Materials have migrated, or due to their location or condition are threatening to migrate, from any Real Property or any Leasehold on, under, in or about other properties, and no Hazardous Materials have migrated, or due to their location or condition are threatening to migrate, from other properties on, under, in or about any Real Property or any Leasehold, in a manner or condition which constitutes or otherwise causes a [material] violation of or for which investigation, remediation or other corrective action is or may be required under any Environmental Law; (iv) no underground improvement, including any treatment, sump, or storage tank or water, gas or oil well, has been installed or located on any Real Property or any Leasehold, in a manner or condition which constitutes or otherwise causes a material violation of any Environmental Law; and (v) neither the Debtor or the Trustee nor any Representative thereof has received any written notice or other written communication concerning (A) any violation or alleged violation of Environmental Laws arising out of the conduct of the Business (except for any such violations which have been corrected to the satisfaction of the appropriate authority); (B) any alleged liability for environmental damages, third party injury or property damages (including property rights or usage) arising from a failure to comply with Environmental Laws in any material respect and relating to any Real Property or Leasehold or arising out of the conduct of the Business; or (C) any alleged liability for the presence or suspected presence, or Release or suspected Release of Hazardous Materials on any Real Property, Leasehold, or other property used or held for use in connection with the Business or any property upon which waste generated through the conduct of the Business has been disposed or otherwise has become located. No directive, citation, notice, writ, injunction, decree, order or judgment relating to the foregoing is outstanding, and the Debtor is not in default in any material respect with respect to any currently existing and effective directive, citation, notice, writ, injunction, order or 19 decree arising pursuant to Environmental Laws and relating to the conduct of the Business or governing the possession or use of any Real Property or any Leasehold known to or served upon the Debtor by any court, arbitrator or Governmental Authority. There is no lawsuit, claim, proceeding, citation, directive, summons or investigation pending or, to the knowledge of the Debtor and the Trustee, threatened pursuant to Environmental Laws concerning or against the Debtor relating to the ownership, use, occupation, maintenance or operation of any Real Property or any Leasehold by any Person, or relating to any alleged violation of any applicable Environmental Laws relating to any Real Property or any Leasehold or arising out of the conduct of the Business or the suspected presence of any Hazardous Materials on any Real Property, Leasehold or other property used or held for use in connection with the Business or any property upon which waste generated through the conduct of the Business has been disposed or otherwise has become located. (b) The Debtor has been and remains in compliance in all material respects with the terms and conditions of each Permit issued to it in connection with Environmental Laws by any Governmental Authority with respect to its activity on any Real Property or Leasehold. The Debtor maintains and has maintained at all times all Permits required pursuant to Environmental Laws for the Business or with respect to any Real Property or Leasehold. Immediately prior to the Closing, each such Permit will be in full force and effect and shall not be subject to any pending or threatened suspension, termination or other modification by any Governmental Authority. (c) The Debtor has timely prepared and made all necessary or desirable filings, reports, plans, applications, renewals, modifications and other disclosures and maintains and has maintained at all times all Books and Records required under any Environmental Law or with respect to any Real Property or Leasehold. (d) The Debtor is in compliance in all material respects with all Environmental Laws in each jurisdiction in which any Real Property or Leasehold is located or in which it conducts the Business. (e) There has been no exposure of any Person or property to any Hazardous Materials in connection with the Business or any Real Property or Leasehold which exposure could reasonably be expected to give rise to or otherwise form the basis for a claim for damages or compensation. (f) The Debtor has made available to SWECO copies of all claims, complaints, material reports or other material documents in its files relating to Environmental Laws that relate to the conduct of the Business or any Real Property or Leasehold. (g) Nothing in this Section 4.15 relates to River Bend and any Environmental Liabilities associated therewith. 20 ARTICLE V REPRESENTATIONS OF SWECO Subject to Sections 7.4 and 8.8, SWECO represents and warrants to the Trustee as follows: SECTION 5.1 ORGANIZATION. SWECO 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 5.2 AUTHORIZATION OF AGREEMENT. SWECO has all requisite corporate power and authority to execute and deliver this Agreement and each Transaction Document, to perform its obligations hereunder and thereunder and to consummate the Transactions contemplated hereby or thereby. The execution and delivery by SWECO of this Agreement and each Transaction Document and the performance of its obligations hereunder and thereunder have been duly and validly authorized by all requisite corporate action on the part of SWECO. This Agreement has been duly executed and delivered by SWECO and (assuming due authorization, execution and delivery hereof by the other party hereto) constitutes a legal, valid and binding obligation of SWECO, enforceable against SWECO in accordance with its terms, except as the same may be limited by bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors rights generally and by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 5.3 APPROVALS. Except for the Required Regulatory Approvals and for those Laws and Orders noncompliance with which could not reasonably be expected to have a material adverse effect on the ability of SWECO to perform its obligations under this Agreement, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law or Order applicable to SWECO to permit SWECO to execute, deliver or perform this Agreement or any Transaction Document. SECTION 5.4 NO VIOLATION. Assuming termination or expiration of any applicable waiting periods imposed by the HSR Act and receipt of all Required Regulatory Approvals, neither the execution and delivery by SWECO of this Agreement or any Transaction Document nor the performance by SWECO of its obligations hereunder or thereunder will (a) violate or breach the terms of or cause a default under (i) any Law or Order applicable to SWECO, (ii) the certificate of incorporation or bylaws of SWECO or (iii) any contract or agreement to which SWECO is a party or by which it or any of its properties or assets is bound or (b), 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 SWECO to perform its obligations under this Agreement. 21 SECTION 5.5 LITIGATION. There are no Actions pending, or, to the knowledge of SWECO, threatened against SWECO 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 SWECO to perform its obligations under this Agreement. SECTION 5.6 SWEPCO'S AGREEMENT. The agreements contained in Section 7.4 of this Agreement have been duly authorized by SWEPCO and constitute legal, valid and binding obligations of SWEPCO enforceable against SWEPCO in accordance with their terms except as enforceability may be limited by bankruptcy, reorganization, insolvency, moratorium, and other laws affecting creditors rights generally and by general equitable principles. ARTICLE VI CONDITIONS TO THE ACQUISITION SECTION 6.1 CONDITIONS TO THE 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 by each Party of each of the following conditions: (a) All requirements of any applicable Law or Order necessary for the valid consummation of the transactions contemplated herein to occur at the Closing shall have been fulfilled, and all filings required to be made with any Governmental Authority under any applicable Law or Order and all Permits and Orders required to be obtained from any Governmental Authority or court under any applicable Law or Order, in each case, in order to permit the Trustee or SWECO 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 Trustee, the Debtor or SWECO and other than the Required Regulatory Approvals referred to in Section 6.2(g) which are subject to the satisfaction of (or waiver by) SWECO only). (b) No Order of any nature issued by any court of competent jurisdiction that (i) prohibits consummation of all or any part of the Transactions or (ii) materially and adversely affects the validity, enforceability or binding effect of any Transaction Document shall be in effect. SECTION 6.2 CONDITIONS TO THE OBLIGATION OF SWECO TO CONSUMMATE THE ACQUISITION. The obligations of SWECO 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 by SWECO of each of the following conditions: (a) STATEMENTS AND COVENANTS OF THE TRUSTEE. Except to the extent contemplated by Section 2.3, each of the Article IV Statements shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, and each of the covenants and agreements of the Trustee 22 to be performed after the date hereof and prior to the Closing or such shorter period as specifically set forth in a particular covenant or agreement shall have been duly performed by the prescribed date or for the duration of the prescribed time period. (b) PERMITS. All Permits required for the conduct of the Business as presently conducted or in connection with any Real Property or Leasehold shall have been transferred or reissued to SWECO or its designee or otherwise amended or modified to reflect the Acquisition pursuant to applicable Law. (c) NO PROCEEDINGS OR ORDERS. 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 SWECO or any of its Affiliates to divest any material assets, which would, in the judgment of the Board of Directors of SWECO, made in good faith and based upon the advice of counsel, involve expense or lapse of time or result in a reconfiguration of the business of SWECO or any of its Affiliates which expense, lapse of time or result would be materially adverse to the interests of SWECO or any such Affiliate, and there shall be no Order of any nature in effect issued by any court or Governmental Authority of competent jurisdiction that would require the divesture of SWECO or any of its Affiliates of any of the Acquired Assets. (d) ADDITIONAL CLOSING DOCUMENTS. SWECO shall have received at the Closing the following documents, each dated the Closing Date (or such earlier date as SWECO may agree): (i) bills of sale and assignments, in form and substance reasonably satisfactory to counsel for SWECO, covering the items of personal property included in the Acquired Assets to be transferred or assigned to SWECO at the Closing; (ii) general warranty deeds, acts of sale in authentic form or similar forms of conveyance in proper statutory form for recording duly executed and acknowledged by the Debtor covering the Real Property to be conveyed to SWECO pursuant to this Agreement; (iii) such further instruments of sale, transfer, conveyance, assignment or delivery covering the Acquired Assets or any part thereof as SWECO may reasonably require to assure the full and effective sale, transfer, conveyance, assignment and delivery to it of the Acquired Assets; (iv) title insurance policies (which shall be at the expense of SWECO) issued by title insurance companies reasonably acceptable to SWECO under an ALTA Standard Form B policy insuring good and marketable title of SWECO in and to the Real Property (other than that involving the Transmission Assets and the Pipeline), subject only to Permitted Encumbrances and such other exceptions as are generally 23 contained in such ALTA Standard Form B Policy, for such amounts as may be reasonably specified by SWECO; (v) New Power Supply Contracts in form and substance satisfactory to SWECO executed and delivered by Members having Coincident Peak Demands (as set forth in Schedule 2.4) which, when added together, equals or exceeds 1,000 megawatts, each duly executed and delivered by the applicable Member, together with (A) evidence of such Member's valid existence, (B) evidence of such Member's due authorization of the execution, delivery and performance of such Member's New Power Supply Contract, (C) opinions of counsel to such Member (who shall be satisfactory to SWECO) with respect to the valid existence of such Member, the due authorization, execution and delivery by such Member of such Member's New Power Supply Contract, and that such Member's New Power Supply Contract constitutes such Member's legal, valid and binding obligation and is enforceable against such Member in accordance with its terms and (D) such other matters as SWECO may reasonably request from such Member; (vi) any documents required to effect the arrangements contemplated by Section 5.3 of the Plan, which shall be in form satisfactory to SWECO and shall have been duly executed and delivered by CoBank or other appropriate party; and (vii) such other documents as may be specified herein, the Transaction Documents or in the Plan or as SWECO may reasonably request. (e) NO ADVERSE CHANGES; OTHER CONDITIONS. (i) Between the Confirmation Date and the Closing Date there shall not have occurred any damage, destruction or loss of any of the Acquired Assets, whether or not covered by insurance, which has had or could reasonably be expected to have a Material Adverse Effect (other than an Impaired Asset for which the Purchase Price will be adjusted pursuant to Section 2.3) nor shall there have occurred any other event or condition or any change from the information available to SWECO on the date hereof which has had or which could reasonably be expected to have a Material Adverse Effect. (ii) No replacement, addition or other modification to any equipment or process used to conduct the Business which would have a Material Adverse Effect will be necessary to comply with any additional or different requirements which, as of the Closing Date, are existing or proposed under any Permit or Environmental Law but which will not become effective or otherwise applicable until after the Closing Date. (iii) Between the Confirmation Date and the Closing Date, SWECO shall have received information regarding each Member's condition (financial and other), business, operations and prospects satisfactory to SWECO and there shall have occurred no adverse change therein. 24 (iv) On the Closing Date, SWECO shall have determined that: (A) the Debtor has coal and other fuel oil inventory, spare parts, materials and other supplies of a quality and a quantity to continue to operate the Business in accordance with Prudent Utility Practice and the quantity and quality of the coal shall not be materially less than that existing on the date hereof; and (B) the Debtor has all the sulfur dioxide allowances attributable to the Acquired Assets under applicable Environmental Law. (f) THE PLAN. (i) The Bar Date Order, the Disclosure Statement Order and the Ballot and Solicitation Order, in form and substance reasonably satisfactory to SWECO, shall have been entered and shall not have been modified, amended, dissolved, revoked or rescinded in any material respect detrimental to SWECO. (ii) The Plan shall not have been amended, supplemented or modified in any respect other than as permitted by its terms. (iii) The Confirmation Order, which shall comply with Sections 2.1 and 2.4 and shall otherwise be in form and substance reasonably satisfactory to SWECO, shall have been entered, shall remain in effect without any modification or amendment thereto and shall have become a Final Order. (iv) The Orders referred to in Section 3.6(c) and (e) shall have been entered and shall not have been modified, amended, dissolved, revoked or rescinded. (v) All conditions precedent to the consummation of the Plan on the Effective Date (other than the satisfaction or waiver of the conditions to the obligations of SWECO set forth in Section 6.2 or the Trustee set forth in Section 6.3) shall have been satisfied or waived as provided therein. (vi) The Trustee shall have complied in all material respects with the Bankruptcy Code, the Bankruptcy Rules and all applicable orders of the Court entered in the Case. (vii) The Plan shall be substantially consummated on the Effective Date thereof simultaneously with the Closing hereunder. (g) REQUIRED REGULATORY APPROVALS; CONSENTS. Each Required Regulatory Approval shall have been received in form and substance satisfactory to SWECO on or prior to the Closing Date, shall be in full force and effect and shall not be subject to rehearing or appeal on the Closing Date. To the extent required pursuant to the provisions of an Assigned and Assumed Contract or by 25 applicable law, the Trustee shall have obtained consents to the assignment of the Assumed and Assigned Contracts to SWECO (or shall have entered into other arrangements satisfactory to SWECO) and such consents shall not contain any conditions, requirements, or limitations (other than those contained in the underlying contract) determined by SWECO to be unacceptable. (h) OPINION OF COUNSEL. SWECO shall have received from the Trustee an opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Trustee, that the Confirmation Order has been entered and that no notice of appeal has been timely filed, or the Confirmation Order otherwise constitutes a Final Order, as of the Closing Date. (i) SIMULTANEOUS CLOSING. The Excluded Transmission Assets shall have been transferred to GSU pursuant to the terms of the Plan and, subject to the terms and conditions set forth in this Agreement, the closing of the other Transactions contemplated to be consummated at the Closing shall have occurred simultaneously. (j) EXERCISE OF RIGHTS UNDER LIENS. None of the Acquired Assets shall have been sold, assigned, transferred or delivered to any Person through the enforcement of any Lien. (k) NO EMPLOYEE-RELATED LIABILITIES. SWECO shall not be responsible for any employee related Liabilities of Cajun incurred on or prior to the Closing Date, including those relating to Employee Benefit Plans, post-retirement benefits, severance, accrued vacation or sick leave, COBRA coverage, failure to hire Liability, withdrawal Liability (complete or partial) under any retirement program and liabilities occasioned by the dismissal or layoff of any employees or under equal employment or civil rights Laws, including those Laws regarding discrimination based on sex, race, national origin, religion, age, veteran's status or disability. The Debtor shall have complied with all its obligations, if any, under the WARN Act. (l) FUEL, TRANSMISSION AND TRANSPORTATION ARRANGEMENTS. SWECO shall have entered into such transmission, interconnection and interchange arrangements satisfactory to SWECO as may be reasonably necessary for the transmission of power generated by SWECO or purchased by SWECO for sale in a manner no less favorable to SWECO than the current arrangements of the Debtors. (m) NO OTHER LIABILITIES. SWECO shall not be liable for any other claims or Liabilities of Cajun, other than the Assumed Liabilities, that have arisen prior to the Closing Date, including any and all claims or Liabilities with respect to River Bend. SECTION 6.3 CONDITIONS TO THE OBLIGATION OF THE TRUSTEE TO CONSUMMATE THE ACQUISITION. The obligation of the Trustee to consummate the Acquisition and the other Transactions to be consummated at the Closing as contemplated by this Agreement shall be subject to the satisfaction or waiver in writing by the Trustee on or prior to the Closing Date of each of the following conditions: 26 (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of SWECO contained in this Agreement shall be true and correct in all material respects as of the date hereof, and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of such dates (except representations and warranties that are made as of a specific date need be true and correct only as of such date), and each of the covenants and agreements of SWECO to be performed after the date hereof and prior to the Closing Date shall have been duly performed by the prescribed date or for the duration of the prescribed time period, in all material respects. (b) ENTRY OF ORDERS; CONSUMMATION OF THE PLAN. The Bar Date Order, the Disclosure Statement Order and the Ballot and Solicitation Order, in form and substance reasonably satisfactory to the Trustee, shall have been entered and shall not have been modified, amended, dissolved, revoked or rescinded in any material respect detrimental to the Cajun Estate and the Confirmation Order, in form and substance reasonably satisfactory to the Trustee, shall have been entered, shall remain in effect without any modification or amendment thereto and shall have become a Final Order. (c) CERTAIN CLOSING DELIVERIES. (i) OTHER AGREEMENTS. The relevant parties shall have entered into all agreements necessary to consummate the Plan, in form and substance reasonably satisfactory to the Trustee. (ii) OTHER DOCUMENTS. The Trustee shall have received from SWECO any other documents required to be delivered by SWECO to the Trustee pursuant to the provisions of this Agreement, the Transaction Documents or the Plan in form and substance reasonably satisfactory to the Trustee. ARTICLE VII AMENDMENT, TERMINATION, EXPENSE REIMBURSEMENT, LIQUIDATED DAMAGES SECTION 7.1 AMENDMENT. Subject to any Bankruptcy Court approval requirement that may be applicable, this Agreement may be amended by the written agreement (and only by the written agreement) of the Trustee and SWECO at any time prior to the Closing Date. SECTION 7.2 TERMINATION. This Agreement may be terminated prior to the Closing as follows (the actual date on which this Agreement is terminated being referred to herein as the "Termination Date"). (a) at any time on or prior to the Closing Date, by mutual written consent of the Trustee and SWECO; 27 (b) at any time after final determination of the Impaired Asset Adjustment Amount, by either the Trustee (if the Impairment does not constitute or result from a breach of the Trustee of its obligations under this Agreement) or SWECO if such amount exceeds Twenty Million Dollars ($20,000,000); (c) at the election of the Trustee, if any one or more of the conditions to the obligations of the Trustee to close as set forth in Section 6.1 or 6.3 has not been fulfilled by July 1, 1999 (the "Outside Date"); (d) at the election of SWECO, if any one or more of the conditions to the obligations of SWECO to close as set forth in Section 6.1 or 6.2 has not been fulfilled by the Outside Date; (e) at the election of SWECO, if any of the following shall occur; (i) approval by the Court of an Alternative Plan; (ii) confirmation of a plan of reorganization that does not accomplish the Acquisition; (iii) entry of an order of the Court authorizing the sale of all or a substantial part of the assets of Cajun (in one or more related transactions and pursuant to any form of transaction) to a Person other than SWECO or another designated affiliate of SWEPCO (other than the Excluded Transmission Assets pursuant to the GSU Settlement); (iv) dismissal or conversion to Chapter 7 of the Case; or (v) the Court shall not have signed the Confirmation Order by July 1, 1998; and (f) by either SWECO or the Trustee if the Closing has not occurred on or before the Outside Date, time being of the essence. (g) by either SWECO or the Trustee if any Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action restraining, enjoining or otherwise prohibiting the Transaction (which the party seeking to terminate this Agreement shall have used all reasonable efforts to have lifted or reversed) and such Order shall have become final and nonappealable. SECTION 7.3 EFFECT OF TERMINATION. If this Agreement is terminated and the Transactions are not consummated, this Agreement shall become void and of no further force and effect, except that any such termination shall be without prejudice to the rights and obligations of the parties hereto under Sections 7.4, 7.5 and 7.6. 28 SECTION 7.4 TRUSTEE'S LIQUIDATED DAMAGES FOR SWECO BREACH. If this Agreement is terminated solely as a result of a breach by SWECO of its obligations under this Agreement, then the Trustee shall be entitled to payment of the SWECO Termination Fee. SWEPCO agrees to pay the SWECO Termination Fee to the Trustee if SWECO does not promptly pay the SWECO Termination Fee if and when the SWECO Termination Fee is payable under this Section 7.4. Payment of the SWECO Termination Fee shall (a) be full consideration for the Trustee's efforts and expenses in connection with this Agreement, the Plan. the other Transaction Documents and all Transactions contemplated hereby and thereby, and (b) constitute liquidated and agreed damages in respect of this Agreement and the Transactions, and SWECO, SWEPCO and their respective Affiliates shall have no further liability to the Trustee, the Cajun Estate or to any Claimant. The Trustee agrees that it is impossible to determine accurately the amount of all of the damages that the Cajun Estate would incur by virtue of a breach by SWECO of its obligations to proceed with the Transactions, and agrees that the sole and exclusive remedy for any such breach shall be for the Trustee to receive payment of the SWECO Termination Fee. Except as provided in this Section 7.4, the Trustee shall have no right or remedy against SWECO, SWEPCO or their respective Affiliates at law or in equity by reason of a breach by SWECO of its obligations under this Agreement. The Trustee agrees and acknowledges that he has no recourse to the Affiliates, officers, directors, shareholders, employees, or agents of SWEPCO or SWECO with respect to the obligations of SWEPCO and SWECO hereunder, and the Trustee agrees not to assert any claim hereunder against any Person other than SWEPCO or SWECO. SECTION 7.5 REIMBURSEMENT OF SWECO'S EXPENSES. The Trustee hereby acknowledges and agrees that SWECO has incurred and is continuing to incur substantial expenses, including the fees and expenses of legal counsel and financial advisors in connection with investigating the business and operations of the Debtor and in preparing this Agreement, the Transaction Documents and other various documentation, and that the Debtor has derived and will continue to derive benefit from such expenditures by SWECO. In recognition of such expenditures and to induce SWECO to continue to incur such expenses in connection with the Acquisition, subject to Sections 7.6 and 8.12, the Trustee shall cause the Debtor to pay SWECO up to Seven Million Five Hundred Thousand Dollars ($7,500,000) in respect of the Reimbursable Expenses if (a) the Plan is confirmed, and (b) the Acquisition is not consummated for any reason other than a material default by SWECO of its obligations under this Agreement that results in the SWECO Termination Fee being payable under Section 7.4 (a "Reimbursable Termination"). SWECO shall be entitled to the payment of such Reimbursable Expenses upon demand, subject to reasonable substantiation. Funds from the Cajun Estate shall not be paid to SWECO or SWEPCO for payments made by SWEPCO to reimburse the Committee of Certain Members (or the members thereof) with respect to bankruptcy and litigation expenses. SECTION 7.6 SWECO'S LIQUIDATED DAMAGES FOR TRUSTEE BREACH (a) The Trustee agrees that, in the event of a Reimbursable Termination that results from a breach by the Trustee of its obligations under this Agreement after entry of the Confirmation Order, then, subject to Section 8.12, the Trustee shall, upon demand, pay, or cause the Debtor to pay, to SWECO or such other Person as SWECO shall designate, the Trustee Termination Fee. 29 Neither (i) a failure of the Article IV Representations to be true and correct nor (ii) a failure of any condition specified in Section 6.1 or Section 6.2 to be satisfied prior to the Outside Date (other than part of Section 6.2 that relates to the Trustee's performance of his covenants hereunder) shall constitute such a default for purposes of this Section 7.6. If the Trustee Termination Fee is paid by the Trustee, then no Reimbursable Expenses shall be payable. (b) Payment of the Trustee Termination Fee shall (i) be full consideration for SWECO's, SWEPCO's and their respective Affiliates' efforts and expenses in connection with this Agreement, the Plan, the other Transaction Documents and all Transactions contemplated hereby and thereby, including the substantial due diligence efforts of SWECO, SWEPCO or their Affiliates and their Representatives, and (ii) constitute liquidated and agreed damages in respect of this Agreement and the Transactions, and the Trustee (on behalf of the Cajun Estate) shall have no further liability to SWECO, SWEPCO or their respective Affiliates. SWECO agrees that it is impossible to determine accurately the amount of all of the damages that it would incur by virtue of a breach by the Trustee of his obligations under this Agreement, and agrees that its sole and exclusive remedy for any such breach shall be to receive payment of the Trustee Termination Fee. Except as provided in this Section 7.6 and in Sections 6.2, 7.2 and 8.8, SWECO shall have no right or remedy against the Trustee, at law or in equity, by reason of a breach by the Trustee of his obligations under this Agreement. SECTION 7.7 FIRST PRIORITY EXPENSES. The Reimbursable Expenses and the Trustee Termination Fee shall constitute first priority administrative expenses of the Debtor pursuant to section 503(b) of the Bankruptcy Code and shall be paid upon the entry of any Order of the Court directing payment by the Trustee of such amounts. From and after the Outside Date, until payment in full of the Reimbursable Expenses and the Trustee Termination Fee, interest shall accrue on any unpaid portion of the Reimbursable Expenses or Trustee Termination Fee, as the case may be, at a rate per annum equal to the prime commercial lending rate announced from time to time by The Chase Manhattan Bank, N.A. ARTICLE VIII MISCELLANEOUS SECTION 8.1 EXPENSES. Except as otherwise provided herein, the parties hereto shall bear their own respective costs and expenses (including all compensation and expenses of counsel, financial advisors, consultants, actuaries and independent accountants) incurred in connection with the preparation and execution of this Agreement and the Transaction Documents and consummation of the Transactions. SECTION 8.2 ENTIRE AGREEMENT, DISCLOSURES IN WRITING. Except as otherwise contemplated herein, this Agreement, together with the Appendices and Schedules hereto, and the Transaction Documents constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof 30 SECTION 8.3 COUNTERPARTS. This Agreement and any amendments hereto may be executed in one or more counterparts, each of which will be deemed to be an original by the party executing such counterpart, but all of which shall be considered one and the same instrument. SECTION 8.4 HEADINGS. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. SECTION 8.5 NOTICES. All notices hereunder shall be deemed given if in writing and delivered or sent by facsimile, courier or by registered or certified mail (return receipt requested) to the following addresses or facsimile numbers (or at such other addresses or facsimile numbers as shall be specified by like notice): (a) if to the Trustee, to: The Honorable Ralph R. Mabey c/o LeBoeuf Lamb, Greene & MacRae, L.L.P. 1000 Kearns Building 136 South Main Street Salt Lake City, Utah 84101 Telephone (801) 321-6721 Facsimile (801) 359-3256 With a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 1000 Kearns Building 136 South Main Street Salt Lake City, Utah 84101 Attention: Lon Jenkins, Esq. Telephone: (801) 321-6721 Facsimile: (801) 359-8256 and to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 633 Seventeenth Street Suite 2800 Denver, Colorado 80202 Attention: Thomas J. Moore, Esq. Telephone: (303) 291-2600 Facsimile: (303) 297-0422 31 if to SWECO, to: Southwestern Wholesale Electric Power Company 428 Travis Street Shreveport, Louisiana 71101 Attention: Michael D. Smith Telephone: (318) 673-3395 Facsimile: (318) 673-3681 With a copy to: Central and Southwest Corporation 1616 Woodall Rogers Freeway Dallas, Texas 75202 Attention: F. C. Meyer, Esq. General Counsel Telephone: (214) 777-1096 Facsimile: (214) 777-1528 Any, notice given by delivery, mail or courier shall be effective when received. Any notice given by facsimile shall be effective upon oral or machine confirmation of transmission. SECTION 8.6 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the Laws of the State of Louisiana applicable to agreements made and to be performed entirely within such state (without regard to conflict of laws provisions of Louisiana law that would result in the application of the laws of another jurisdiction) and, to the extent applicable, the Bankruptcy Code. SECTION 8.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is for the sole benefit of the parties hereto and their permitted assigns, and nothing herein express or implied shall give or be construed to give to any other Person any legal or equitable rights hereunder. SECTION 8.8 NON-SURVIVAL OF CERTAIN STATEMENTS AND REPRESENTATIONS. The statements contained in Article IV and the representations of SWECO set forth in this Agreement shall not survive the Closing. SECTION 8.9 BINDING, EFFECT, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns, including any Person appointed for or in connection with any chapter 11 case involving the Debtor in any subsequent case under the Bankruptcy Code in which the Debtor may be a debtor. Except as provided in the preceding sentence and in Section 2.1, this Agreement and the rights and remedies hereunder are not assignable by the Trustee or SWECO, except that SWECO may assign its rights and remedies hereunder to any one or more of its Affiliates. 32 SECTION 8.10 FURTHER ASSURANCES. The Trustee, on the one hand, and SWECO, on the other, agree, to the extent necessary (and only to such extent), on or any time after the Closing Date, to execute and deliver, or to cause to be executed and delivered, all such instruments, and to take all such actions, as the other may reasonably request in order to effectuate the intent and purpose of, and to otherwise carry out the terms of, this Agreement. SECTION 8.11 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, the party waiving compliance. Except as otherwise provided herein, no delay on the part of any party in exercising any right, power or privilege hereunder, nor any single or partial exercise of any such right, power or privilege hereunder, shall preclude any other or further exercise thereof or the exercise of any other such right, power or privilege hereunder. The rights and remedies herein provided are cumulative and, except as otherwise provided herein, are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. SECTION 8.12 NO PERSONAL LIABILITY OF TRUSTEE. Notwithstanding anything herein to the contrary, the Trustee shall have no personal liability for any of his obligations under this Agreement, including under Section 7.5 and Section 7.6, all of which the Trustee has undertaken for and on behalf of the Cajun Estate and all liability for which will be the sole responsibility of the Cajun Estate. SECTION 8.13 OBLIGATIONS OF TRUSTEE SUBJECT TO COURT APPROVAL. SWECO and SWEPCO agree and acknowledge that the Trustee's obligations hereunder are subject to the approval of the Court in the Case, as and to the extent required by the applicable provisions of the Bankruptcy Code. IN WITNESS WHEREOF, this Agreement has been signed on behalf of each of the parties hereto by their respective duly appointed representatives thereunder duly authorized as of the date first above written. SOUTHWESTERN WHOLESALE ELECTRIC COMPANY By: Name: Title: Ralph R. Mabey, as Chapter 11 Trustee for Cajun Electric Power Cooperative, Inc., subject to Section 8.12 33 As to Section 7.4 only: SOUTHWESTERN ELECTRIC POWER COMPANY By: Name: Title: 34 APPENDIX A DEFINITIONS "ACQUIRED ASSETS" shall mean any and all assets owned by the Debtor or in which the Debtor has rights or privileges, of every type and description, real, personal and mixed, tangible, choate or inchoate, known or unknown, fixed or unfixed, accrued, absolute, contingent or otherwise, wheresoever located, and whether or not specifically referred to in this Agreement, excluding only the Excluded Assets, but including the following: (i) Big Cajun I; (ii) Big Cajun II, Units I and 2; (iii) the Debtor's 58% undivided ownership interest in Big Cajun II, Unit 3; (iv) the Debtor's 86% undivided interest in Big Cajun II common facilities; (v) the Energy Control Center; (vi) the 37,500 sq. ft. headquarters building in Baton Rouge, Louisiana situated on approximately 5.5 acres of land, together with all servitudes, easements, rights of way and other real property rights related thereto; (vii) approximately 4,200 acres of agricultural land near Coushatta, Louisiana, together with all servitudes, easements, rights of way and other real property rights related thereto; (viii) the 540 MW General Electric turbine generator; (ix) the Pipeline System, together with all servitudes, easements, rights of way and other real property rights related thereto; (x) all railcars owned by the Debtor or in which the debtor has an interest, including 836 steel rotary dump railcars; (xi) all annual Phase II sulfur dioxide allowances attributable to the other Acquired Assets under applicable Environmental Laws; (xii) all of the Assumed and Assigned Contracts and the Assigned Post-Petition Contracts, including all of the Leaseholds, transmission/interconnection contracts, and the other power sales contracts that SWECO designates as Assumed and Assigned Contracts or Assigned Post-Petition Contracts pursuant to Section 3.6; A-1 (xiii) all other office furniture, furnishings, machinery, equipment, supplies and computer hardware and software owned by the Debtor or in which the Debtor has an interest that are not Excluded Assets; (xiv) all coal, fuel oil and other inventories, material, spare parts and other supplies owned by the Debtor or in which the Debtor has an interest that are not Excluded Assets; (xv) the Big Cajun II Solid Waste Closure Fund; (xvi) all motor vehicles owned by the Debtor or in which the Debtor has an interest that are not Excluded Assets; (xvii) all of the Designated Transmission Assets and all other substations, through buses, and microwave stations owned by the Debtor or in which the Debtor has an interest, and all servitudes, easements, rights of way and other real property rights related thereto, other than any Excluded Transmission Assets; (xviii) all Real Property not otherwise specifically referred to in the foregoing clauses (i) through (xvii); (xix) the proceeds of any insurance or condemnation award resulting from any casualty to or condemnation of an Acquired Asset occurring prior to the Closing Date which are not applied to the payment of the cost of restoration of such Acquired Asset; and (xx) all other assets and properties, except Excluded Assets, listed in Schedule 4.7 and 4.8. "ACQUISITION" shall have the meaning set forth in the recitals to this Agreement. "ACTION" shall mean any civil, criminal, or administrative action, suit, arbitration, charge, petition, complaint, inquiry, litigation, proceeding or investigation by or before any Governmental Authority or Arbitral Authority, including any class actions or investigations. "AFFILIATE" shall mean, with respect to any Person, any other Person controlling, controlled by; or under common control with such Person. For purposes of this definition, "CONTROL" shall mean the power to direct, or cause the direction of, the management or policies of any Person, whether through ownership of securities, by contract or otherwise. "AGREEMENT" shall mean this Agreement and the Appendices and Schedules hereto. "ARTICLE IV STATEMENTS" shall mean the statements set forth in Article IV. "ASSIGNED POST-PETITION CONTRACTS" shall have the meaning set forth in Section 3.6(g). A-2 "ASSUMED AND ASSIGNED CONTRACTS" shall have the meaning set forth in Section 3.6(c). "ASSUMED LIABILITIES" shall mean (i) the obligations of the Debtor under any Assumed and Assigned Contracts or Assigned Post-Petition Contracts that first arise on or after the Closing Date (excluding any amounts that are required to be paid in order to assume any of such Contracts pursuant to Bankruptcy Code sections 365 and 1123 or that otherwise are due and owing under any such Contracts prior to the Closing) and (ii) any obligations of the Debtor that are assumed by SWECO under Section 3.11. "BALLOT AND SOLICITATION ORDER" shall mean the order to be entered by the Court, approving the procedures for the solicitation of acceptances and rejections of the Plan and the form of ballots related thereto. "BANKRUPTCY CODE" shall mean title 11 of the United States Code, " 101, et M., as amended and in effect on the Petition Date. "BANKRUPTCY RULES" shall mean the Federal Rules of Bankruptcy Procedure as promulgated by the United States Supreme Court under section 2075, title 28, United States Code. and any local rules of the Court. "BAR DATE ORDER" shall mean an order of the Court establishing a bar date for the filing of certain administrative expense claims under Bankruptcy Code section 503(b) against the Debtor. "BASIS POINT" shall mean one one-hundredth of one percent (1/100 of 1%). "BIG CAJUN I" shall mean Big Cajun I, Units 1 and 2, which are natural gas-fired electric generating facilities located in New Roads, Louisiana, owned 100% by Cajun, both of which were recertified to a capacity of net 110MW in 1995, and all related switchyards, machinery, equipment, tools, spare parts, supplies, fuel oil in storage, other items in inventory, docking facilities, Transferable Permits and other personal and Real Property, including all servitudes, easements. rights of way and other real property rights related thereto. "BIG CAJUN II" shall mean Big Cajun II, Units I and 2 and Big Cajun II, Unit 3. "BIG CAJUN II JOPOA" shall mean the Joint Ownership Participation and Operating Agreement dated November 14, 1980 between the Debtor and GSU related to Big Cajun II, Unit 3. "BIG CAJUN II SOLID WASTE CLOSURE FUND" shall mean the funds held in account No. 98-0005-01-1 maintained at Hibernia National Bank in Baton Rouge, Louisiana. "BIG CAJUN II, UNITS I AND 2" shall mean Big Cajun II, Units 1 and 2, which are coal-fired electric (generating facilities located in New Roads, Louisiana, owned 100% by Cajun, each of which is rated at a capacity of net 575MW and all related machinery, equipment, switchyards, coal inventory. fuel oil in storage, A-3 other items in inventory, docking facilities, tools, spare parts, supplies, Transferable Permits and other personal and Real Property, including all servitudes, easements. rights of way and other real property fights related thereto. "BIG CAJUN II, UNIT 3" shall mean Big Cajun II, Unit 3, a coal-fired electric generating facility, located in New Roads, Louisiana, in which the Debtor owns a 58% undivided interest and GSU owns a 42% undivided interest and which is operated by the Debtor and rated at a capacity of net 40%TW (with the Debtor's share being 313MW), and all related machinery, equipment, standards, coal inventory, fuel oil in storage, other items in inventory, docking facilities, tools, spare parts., supplies, Transferable Permits and other personal and Real Property, including all servitudes. easements, rights of way and other real property rights related thereto. "BOOKS AND RECORDS" shall mean all books and records (or true and complete copies thereof) of this Debtor, including all computerized books and records, including all such books and records relating to the purchase or sale of power, materials, supplies and services or dealings with customers and all records and other documentation relating to Environmental Laws and Environmental Liabilities. "BUSINESS" shall mean the business and operations of Cajun currently conducted by the Trustee with the Acquired Assets. "BUSINESS DAY" shall mean any day excluding Saturday, Sunday and any day which is a legal holiday under the Laws of the State of Texas, Louisiana or New York or is a day on which banking institutions located in any such state are authorized or required by Law or other government action to close. "CAJUN" shall have the meaning set forth in the recitals to this Agreement. "CAJUN ESTATE" A shall mean the bankruptcy estate of the Debtor created under Bankruptcy Code section 541(a) upon commencement of the Case. "CAJUN FINANCIAL STATEMENTS" shall have the meaning set forth in Section 4.5. "CAJUN RIVER BEND INTEREST" shall mean the undivided 30% interest of the Debtor in River Bend "CASE" shall have the meaning set forth in the recitals to this Agreement. "CLAIMANTS" shall mean the holders of claims against, or equity interests in, the Debtor. "CLECO" shall mean Central Louisiana Electric Company, Inc., a Louisiana corporation. "CLOSING" shall have the meaning set forth in Section 2.8. "CLOSING DATE" shall mean the Effective Date. A-4 "CLOSING DATE YIELD" means the yield to maturity implied by (i) the yields reported in Bloomberg Business News, as of the close of business on the Business Day immediately preceding the Closing Date, for actively traded U.S. Treasury securities having a constant maturity of ten (10) years, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the Business Day immediately preceding the Closing Date, in U.S. Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity of ten (10) years. "COBANK" shall mean CoBank ACB, formerly the National Bank for Cooperatives. "COBANK CLASS E STOCK" shall mean the Class E stock of CoBank owned by the Debtor. "COBANK LETTERS OF CREDIT" shall mean the letter of credit issued by CoBank for the account of the Debtor and for the benefit of The Clorox Company dated June 30, 1983, as renewed or replaced from time to time, and the letter of credit issued by CoBank for the account of the Debtor and for the benefit of Eastman Kodak Company dated July 7, 1983, as renewed or replaced from time to time. "COBANK PATRONAGE DIVIDENDS" shall mean the patronage dividends payable by CoBank to the Debtor and held by CoBank immediately prior to the Closing. "COBANK REIMBURSEMENT AGREEMENT" shall mean the separate Letter of Credit Reimbursement Agreements dated June 30, 1983 and July 7, 1983, respectively, as amended, executed and delivered by the Debtor in favor of CoBank and any other similar agreement that governs the CoBank Letters of Credit then outstanding. "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985. "COINCIDENT PEAK DEMAND" shall mean, with respect to each Member, the amount set forth opposite such Member's name in Schedule 2.4. "COLLECTIVE BARGAINING AGREEMENTS" shall mean all collective bargaining agreements to which the Debtor is a party, including: (i) the Collective Bargaining Agreement dated April 1, 1995 between the Debtor and the United Steelworkers of America, (ii) the Collective Bargaining Agreement dated April 1, 1995 between the Debtor and the International Brotherhood of Electrical Workers, and (iii) the Collective Bargaining Agreement dated December 1, 1994 between the Debtor and the International Brotherhood of Electrical Workers. "CONFIRMATION DATE" shall mean the date on which the Confirmation Order is entered on the docket for the Case by the clerk of the Court. "CONFIRMATION HEARING" shall mean the hearing on confirmation of the Plan. A-5 "CONFIRMATION ORDER" shall mean the order to be entered by the Court, confirming the Plan in accordance with section 1129 of the Bankruptcy Code. "CONTRACTS" shall mean all contracts, agreements, indentures, notes, bonds, loans, instruments. leases, sub-leases, deeds of trust, conditional sales contracts, mortgages, franchises, licenses. commitments or other binding agreements, understandings and other arrangements, express or implied. "CORE ARTICLE IV STATEMENTS" means the Article IV Statements set forth in Sections 4.4, 4.5 (as to the last two sentences thereof), 4.7 (as to the last sentence thereof), 4.8, 4.12, and 4.15. "COURT" shall mean the United States District Court for the Middle District of Louisiana having jurisdiction over the Case and, to the extent of any references under section 157, title 28, United States Code, the unit of such District Court constituted under section 15 1, title 28, United States Code. "CREDITORS" shall mean any Person that holds a claim against the Debtor (i) that arose at the time of or before the commencement of the Case or (ii) of a kind specified in section 502(g), 502(h) or 502(i) of the Bankruptcy Code. "DEBTOR" shall have the meaning set forth in the recitals to this Agreement. "DESIGNATED TRANSMISSION ASSETS" shall mean the Transmission Assets consisting of those interconnecting transmission facilities that are necessary to effect the sale by SWECO of capacity and associated energy at wholesale, excluding any Excluded Transmission Assets. "DIRECTORS AND OFFICERS TRUST FUND" shall mean the directors and officers trust fund maintained at City National Bank and relating to the Debtor's retained Liability under its directors and officers liability insurance policy. "DISCLOSURE STATEMENT" shall mean the Disclosure Statement, including all exhibits and schedules thereto, relating to the Plan filed by SWEPCO with the Court pursuant to section 1125 of the Bankruptcy Code. "DISCLOSURE STATEMENT ORDER" shall mean the order to be entered by the Court, approving the Disclosure Statement pursuant to section 1125 of the Bankruptcy Code and establishing the procedure and method of providing notice of the hearing on confirmation of the Plan. "DOLLARS" and "$" shall mean lawful currency of the United States of America. "DUE DILIGENCE INVESTIGATION" shall have the meaning set forth in Section 3.1(c). "EFFECTIVE DATE" shall mean the Effective Date of the Plan, which shall be the earlier of (i) a Business Day after the Confirmation Date selected by SWECO and the Trustee; or (ii) ten (10) Business Days after the date on which the A-6 conditions precedent to the effectiveness of the Plan have been fulfilled or waived by the Trustee and SWECO as set forth in the Plan. "EMPLOYEE BENEFIT PLAN" shall mean each ERISA Plan and each other pension, profit sharing, retirement, bonus, deferred compensation, stock option, stock purchase, fringe benefit, severance pay or insurance plan for officers or employees (as well as any other policy or practice that provides health, welfare, or post-retirement benefits to officers or employees), which currently is established, maintained, contributed to or legally obligated to be contributed to (i) by the Debtor or (ii) any current or former ERISA Affiliate. "ENCUMBRANCE" shall mean any Lien, claim, option, leasehold interest, right of way, option, restriction or other right of any third party of any kind or any nature whatsoever. "ENERGY CONTROL CENTER" shall mean the operations control center located in New Roads, Louisiana, and all related personal and Real Property, including all servitudes, easements, rights of way and other real property rights related thereto. "ENVIRONMENT" shall mean any indoor or outdoor ambient air, surface water, ground water, drinking water, building surface, material surface, land surface or subsurface strata or natural resources. "ENVIRONMENTAL LAWS" shall mean any United States federal, state or local Law relating or applicable to pollution or protection of the Environment, including any of the foregoing relating or applicable to emissions, discharges, spills, Releases or threatened Releases of any Hazardous Materials into the Environment, the investigation, removal, remediation or other cleanup or corrective action for Hazardous Materials, interference with the use of property caused by or resulting from Hazardous Materials or human or natural resource exposure to any Hazardous Materials, or otherwise relating to the manufacture, generation, processing, distribution, use, treatment. storage, disposal, recycling, transport or handling of any Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act (42 U S C, Section 960 1, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.), the Clean Air Act (42 U.S.C. Section 7401, et seq.), the Federal Water Pollution Control Act (13 U S C Section 12-1, et seq.), the Safe Drinking Water Act (42 U.S.C. Section 300, et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.), the Hazardous Materials Transportation Act (49 U.S.C.Section 180 1, et seq.), and all regulations issued under such statutes, and all analogous and similar state statutes and regulations issued thereunder, and all obligations, duties, and requirements arising from or related to Hazardous Materials under common law (including nuisance and trespass). "ENVIRONMENTAL LIABILITIES" shall mean any known or reasonably expected liability or obligation under any Environmental Law, including liability for investigatory costs, oversight costs, remediation and cleanup costs, governmental or private response costs and cost recovery actions, natural resource damages, property damages, personal injuries, expenditures for process or operational changes necessary to remedy violations of any Environmental Law, A-7 consequential economic damages, administrative, civil or criminal penalties or forfeitures, and attorneys' fees or other costs of defending an Action asserting liability under any Environmental Law. "ERISA" shall mean the Employee Retirement Income Security Act of 1974. "ERISA AFFILIATE" shall mean any corporation or trade or business (including a sole proprietorship, partnership, trust, estate or corporation) that is a member of any group of organizations described in section 414(b), (c), (m) or (o) of the Tax Code and the regulations issued thereunder of which the Debtor is a member. "ERISA MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in section 3(37) or 4001(a)(1)) of ERISA. "EWG" shall mean an "exempt wholesale generator" under Section 32 of the Public Utility Holding Company Act of 1935. "EXCLUDED ASSETS" shall mean (i) the Cajun River Bend Interest and all assets related thereto; (ii) cash and cash equivalents of the Debtor on the Closing Date, whether such cash or cash equivalents are held by the Debtor or by a third party, including (A) the cash collateral account established for the benefit of the RUS pursuant to the cash collateral stipulations entered into between the RUS and the Debtor or the Trustee, as applicable, on and after the Petition Date; (B) the River Bend decommissioning fund maintained at Hibernia; (C) the River Bend low level waste fund maintained by GSU; and (D) the Board Escrow Fund maintained at Hibernia, but excluding the Big Cajun II Solid Waste Closure Fund; (iii) all of the Debtor's accounts receivable existing immediately prior to the Closing (iv) the insurance claims of the Debtor relating to loss, destruction or other damage to any of the Acquired Assets prior to the Closing Date that results in an adjustment to the Purchase Price pursuant to Section 2.3(a); (v) the Rejected Contracts; (vi) the Excluded Transmission Assets; (vii) any and all directors and officers liability insurance policies and rights with respect thereto, including the Directors and Officers Trust Fund; (viii) the Debtor's membership in the U.S. Southwestern Power Pool; (ix) the capital term certificates issued by the Natural Rural Utilities Cooperative Finance Corporation to the Debtor, and all related dividends or credits; (x) the Debtor's investment in Western Fuels Association, Inc. as and to the extent it exists on the Closing Date; and (xi) the CoBank Class E Stock and the CoBank Partronage Dividends, subject to the pledge thereon to secure the SHL Indemnity Obligations assumed by SWECO pursuant to Section 5.3 of the Plan. "EXCLUDED TRANSMISSION ASSETS" shall mean the 500KV Transmission Assets, together with the related through bus facilities located in certain substations and the revenue metering facilities affixed to the high-voltage side of the through bus facilities situated in certain substations. "EXISTING POWER SUPPLY CONTRACTS" shall mean those long-term wholesale power contracts between the Debtor and the Members, nine of which expire in the year 2026 and three of which expire in the year 2021. A-8 "FERC" A shall mean the Federal Energy Regulatory Commission. "FINAL ORDER" shall mean (i) an order of the Court as to which the time to appeal, petition for certiorari or move for reargument or rehearing has expired and as to which no appeal, petition for certiorari or other proceedings for reargument or rehearing shall then be pending, or (ii) if an appeal, writ of certiorari, reargument or rehearing thereof has been filed or sought, such order of the Court shall have been affirmed by the highest court to which such order was appealed, or certiorari shall have been denied or reargument or rehearing shall have been denied or resulted in no modification of such order, and the time to take any further appeal, petition for certiorari or move for reargument or rehearing shall have expired, PROVIDED, HOWEVER, that the possibility that a motion under Rule 59 or Rule 60 of the Federal Rules of Civil Procedure, or any analogous Bankruptcy Rule, may be filed with respect to such order shall not cause such order not to be a Final Order. "500KV TRANSMISSION ASSETS" shall mean the 29 miles of 500 KV transmission near Big Cajun II known as 500KV line number 745 and line number 746. "FTC" shall mean the Federal Trade Commission. "GAAP" shall mean generally accepted accounting principles in effect in the United States, consistently applied. "GOVERNMENTAL APPROVALS" shall mean the consents, approvals, authorizations and other requirements prescribed by any Law, including the Required Regulatory Approvals, which must be obtained or satisfied by Cajun, the Trustee or SWECO and which are necessary for the execution and performance by the Trustee or SWECO of this Agreement and the Transaction Documents or for the consummation of any of the Transactions in accordance with the terms of the Transaction Documents. "GOVERNMENTAL AUTHORITY" shall mean any domestic or foreign federal, state or local court, department, legislative body, commission, council, board or other administrative or governmental Person. "GSU" shall mean Entergy Gulf States Utilities, Inc., a Texas corporation formerly known as Gulf States Utilities, Inc. "GSU SETTLEMENT" shall mean the proposed settlement between the Cajun Estate and GSU settling all mutual claims relating to River Bend and all other disputes and claims between the Cajun Estate and GSU. "HAZARDOUS MATERIALS" shall mean any substance: (i) that is defined as "hazardous waste," "hazardous substance," "hazardous material," "extremely hazardous substance," "toxic substance," "pollutant", "contaminant" or "solid waste" under any Environmental Law; (ii) that is toxic, explosive, corrosive, flammable, infectious, reactive, radioactive, carcinogenic, mutagenic or otherwise hazardous and is regulated by any Governmental Authority; (iii) that is or contains oil, petroleum products, natural gas or liquefied natural gas; or A-9 (iv) that contains PCBS, asbestos, radon gas or urea formaldehyde foam insulation. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976. "HYDRO CONTRACT" shall mean the contract between the Debtor and the Southwestern Power Administrator, designated No. DE-PM75-945WO0244, pursuant to which the Debtor is purchasing hydroelectric capacity and associated energy. "IMPAIRED ASSETS" shall have the meaning set forth in Section 2.3(a). "IMPAIRED ASSET NOTICE" shall have the meaning set forth in Section 2.3(a). "IMPAIRED ASSETS ADJUSTMENT AMOUNT" shall have the meaning set forth in Section 2.3(a). "IMPAIRMENT" shall have the meaning set forth in Section 2.3(a). "INTELLECTUAL PROPERTY RIGHTS" shall mean, collectively, any and all patents, trademarks, service marks, copyrights, trade names, know how, technical information and data, trade secrets and other proprietary information or intellectual property rights. "IRS" shall mean the Internal Revenue Service. "LAW" shall mean any statute, law (including common law), rule, regulation, ordinance, order, decree, ruling, permit, authorization, action, restriction, requirement or policy of any Governmental Authority (each as may be in effect from time to time). "LEASEHOLD" means a lease of Real Property that is included in the Acquired Assets, including any space use agreement, license or other right to use or occupy. "LIABILITY" shall mean any debt, liability or obligation, whether accrued, contingent, disputed, undisputed, secured, unsecured, liquidated, unliquidated, matured or unmatured, including (i) those arising under (a) any Law or Order, (b) any Employee Benefit Plan or (c) any Contract; (ii) all Environmental Liabilities; (iii) liabilities for Taxes and interest, penalties or other charges payable with respect to any such Liability and (iv) all tort liabilities. "LIEN" shall mean a charge against or interest in property to secure payment of a debt or performance of a liability, whether granted voluntarily or involuntarily, including any security interest, pledge, mortgage or charge. "LPSC" shall mean the Louisiana Public Service Commission. "MATERIAL ADVERSE EFFECT" shall mean any condition, change or event that, individually or in the aggregate, could reasonably be expected to materially and A-10 adversely affect the Acquired Assets, the Retained Assets or the business, operations, financial condition or prospects of SWECO or Cajun. "MATERIAL CONTRACTS" shall mean any Contract (i) the term of which could reasonably be expected to extend beyond the Closing, (ii) involves aggregate future consideration of One Hundred Thousand Dollars ($100,000) or more or (iii) is otherwise material to the Business. "MEMBERS" shall mean the following 12 distribution cooperatives who are members of Cajun BeaureLyard Electric Cooperative, Inc., Claiborne Electric Cooperative, Inc., Concordia Electric Cooperative, Inc., Dixie Electric Membership Corp., Jefferson Davis Electric Cooperative, Inc., Northeast Louisiana Power Cooperative, Inc., Pointe Coupee Electric Membership Cooperative, South Louisiana Electric Cooperative Association, Southwest Louisiana Electric Membership Corp., Teche, Valley Electric Membership Corp., and Washington St. Tammany Electric Cooperative, Inc. "NEW POWER SUPPLY CONTRACT" shall mean a long-term wholesale power purchase agreement, in form and substance acceptable to SWECO and to take effect on the Closing Date, between SWECO and a Member pursuant to which SWECO will provide, subject to certain limitations, the applicable Member with a supply of power sufficient to fulfill certain of such Member's respective capacity and energy requirements. "NON-CORE ARTICLE IV STATEMENTS" shall mean those Article IV Statements that are not Core Article IV Representations. "138KV TRANSMISSION ASSETS" shall mean the assets associated with the 24 miles of 138KV transmission in the Lake Charles, Louisiana area, including all related through buses, substations and other transmission assets owned by the Debtor, regardless of voltage level or classification, other than the 500 KV Transmission Assets. "ORDER" shall mean any order, writ, judgment, injunction, decree, determination or award of a Governmental Authority. "ORGANIZATIONAL DOCUMENTS" shall mean the articles of incorporation, by-laws and other organizational documents of the Debtor. "OUTSIDE DATE" shall have the meaning set forth in Section 7.2(c). "PARTY" shall mean Cajun, the Trustee, SWECO or SWEPCO and any Representative of such Party, as the context may require or allow. "PCB" shall mean polychlorinated biphenyl. "PERMITS" shall mean all permits, licenses, certificates, franchises and other authorizations, consents and approvals of any Governmental Authority. A-11 "PERMITTED ENCUMBRANCES" shall mean Permitted Liens and such zoning restrictions, covenants, easements, rights of way, licenses, profits, restrictions or other Encumbrances (other than Liens) on Real Property or minor irregularities in the title thereto as do not impair the use thereof in the operation of the Business as it is presently conducted by the Debtor and is presently contemplated by the Debtor to be conducted in the future or the value thereof to the Debtor in the conduct of the Business as it is presently conducted by the Debtor. "PERMITTED LIENS" shall mean the Lien on the CoBank Collateral referred to in Section 5.3 of the Plan, the Lien of Hibernia National Bank on the headquarters building and related land in Baton Rouge, Louisiana and the other rights, liens and security interest of Hibernia National Bank referred to in Section 5.4 of the Plan, and any Liability owing by Cajun to SWEPCO or any affiliate thereof. "PERSON" shall mean any natural person, corporation, partnership, firm, joint venture, association, joint-stock, trust, unincorporated organization, governmental or regulatory body or other entity. "PETITION DATE" shall mean December 21, 1994, the date on which the Debtor commenced the Case in the Court. "PETROLEUM PRODUCTS" shall mean petroleum, gasoline, oil, fuel oil, diesel fuel and petroleum solvents or derivatives. "PIPELINE ASSETS" shall mean the 17.5 mile gas pipeline system, together with all servitudes, easements, rights of way and other real property rights related thereto. "PLAN" shall have the meaning set forth in the recitals to this Agreement. "POST-PETITION CONTRACTS" shall mean any Contracts entered into by Cajun or the Trustee on or after the Petition Date. "PRUDENT UTILITY PRACTICE" or "PUP" shall mean, at any time, any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry prior to such time, having due regard for, among other things, manufacturers' recommendations and warranties, requirements, of Governmental Authorities and the requirements of this Agreement. "PURCHASE PRICE" shall have the meaning set forth in Section 2.2. "REAL PROPERTY" shall mean real property and interests in real property, including buildings, structures and improvements (including construction in progress) located thereon, fixtures contained therein and appurtenances thereto, together with all servitudes, easements, rights of way and other real property rights related thereto, owned by the Debtor or in which the Debtor has an interest other than any real property or interests in real property relating to River Bend. A-12 "REIMBURSABLE EXPENSES" shall mean all reasonable expenses or obligations of SWECO, SWEPCO, or any of their Affiliates or advisors (including the fees and expenses of legal, accounting and financial advisors to such Persons, and all engineers, rate consultants and other professionals retained by any of such Persons) incurred on or after July 1, 1996 in connection with the investigation of the business of Cajun, negotiations with Cajun and its creditors, Members and other constituencies in the Case, this Agreement, the Plan, the Disclosure Statement, and financing commitments, and related fees and expenses, and the preparation of documentation relating to the financing of the Acquisition and the other documents contemplated hereby and thereby, and all other acts taken in furtherance of obtaining confirmation and substantial consummation of the Plan and the Acquisition. Reimbursable Expenses shall not include any payments made by SWEPCO to reimburse the Committee of Certain Members (or the members of such Committee) for bankruptcy and litigation expenses. "REIMBURSABLE TERMINATION" shall have the meaning set forth in Section 7.5. "REJECTED CONTRACTS" shall have the meaning set forth in Section 3.6(e). "RELEASE" shall mean any spilling, leaking, leaching, pumping, pouring, emitting, emptying, placing, discharging, injecting, escaping, dumping or disposing of a substance into the Environment, whether intentional or unintentional. "REPRESENTATIVES" shall mean, with respect to any Party, the directors (or functional equivalent. if any), officers, employees, representatives or agents of such Party or its Affiliates and its accountants, legal counsel, financial advisors and technical advisors, as the context may require or allow. "REQUIRED REGULATORY APPROVALS" shall mean the following required consents, approvals or other authorizations of the indicated or otherwise applicable Governmental Authorities, which shall be issued in a final order, no longer subject to rehearing or appeal, and in a form and substance satisfactory to SWECO: (i) at SWECO's election, either (a) of the SEC for SWEPCO or an Affiliate of SWEPCO to acquire stock of SWECO and for SWECO to acquire the Acquired Assets (unless the SEC concurs that an exemption is available under Section 9(b) of PUHCA), and for SWECO to issue securities to SWEPCO and SWECO's lenders, or (b) a determination by FERC that SWECO is an EWG (both before and after giving effect to the Acquisition); (ii) if SWECO is determined to be an EWG, of the SEC of the issuance of securities by SWEPCO or Central and South West Corporation or an Affiliate thereof to finance the Acquisition and, if such financing involves a guarantee by SWEPCO or Central and South West Corporation or an Affiliate thereof of securities issued by SWECO, the approval of the SEC of such guarantee; PROVIDED, HOWEVER, that SWECO and its Affiliates may rely on existing SEC authority to finance the acquisition depending upon circumstances existing at the time of consummation; A-13 (iii) under the HSR Act for SWECO to acquire the Acquired Assets; (iv) of FERC of the rates, terms and conditions under which SWECO will provide capacity and energy to the Members and other purchasers under the New Power Supply Contracts, one or more Assumed and Assigned Contracts, and new power sale or purchase contracts or similar agreements, including, at SWECO's election, either (a) a finding that the cost of the Acquired Assets reflected in the rates in the New Power Supply Contracts is prudent, and the rates therein are just and reasonable, or (b) that SWECO is authorized to enter into the New Power Supply Contracts as market-based, negotiated rate contracts; (v) of FERC or the LPSC, or both, as applicable, for SWECO's financing of the Acquisition; (vi) of FERC of the tariff for the provision of transmission services by SWECO; (vii) of FERC for the acquisition by SWECO of any Acquired Assets over which FERC would have jurisdiction under the Federal Power Act; (viii) of the LPSC for the Members' obligations under and in connection with the New Power Supply Contracts, including the charges for demand, variable overhead and maintenance and fuel thereunder and other charges, fees and other amounts payable thereunder, the recovery from the Members' ratepayers of such obligations, and of the New Power Supply Contracts and finding that (1) the terms and conditions thereof are prudent, (2) the cost of the Acquired Assets reflected in the New Power Supply Contracts is prudent, and (3) the rates thereunder are just and reasonable; (ix) if SWECO is an EWG, of the LPSC for the Acquired Assets to be "eligible facilities" within the meaning of section 32(c) of the PUHCA; (x) of the assignment of the Hydro Contract to the Members that execute and deliver New Power Supply Contracts; (xi) of the Commissioner, Office of Conservation of the Louisiana Department of Natural Resources, of the acquisition and operation by SWECO of the Pipeline System; and (xii) any and all other consents, approvals and other authorizations of any Governmental Authority required under any applicable law in connection with the execution and delivery of the Transaction Documents, the consummation of the Transactions and the operation of the Business by SWECO and GSU after the Closing Date. A-14 "RIVER BEND" shall mean River Bend Nuclear Station Unit 1, a net 936MW nuclear electric generating facility located in St. Francisville, Louisiana, owned 30% by the Debtor and 70% by GSU and operated by an affiliate of GSU. "RIVER BEND JOPOA" shall mean the Joint Ownership Participation and Operating Agreement between the Debtor and GSU relating to River Bend and dated August 20, 1979, as amended. "RUS" shall mean the Rural Utilities Services, an agency of the United States Government. "SCHEDULED CONTRACTS" shall have the meaning set forth in Section 4.11. "SEC" shall mean the Securities and Exchange Commission. "SHL INDEMNITY OBLIGATION" shall mean the indemnity obligations relating to the CoBank Letters of Credit and the CoBank Reimbursement Agreement assumed by SWECO as set forth in Section 3.11. "SPA" shall mean the Southwestern Power Administration. "SWECO TERMINATION FEE" shall mean Twenty Million Dollars ($20,000,000). "TAX CODE" shall mean the Internal Revenue Code of 1986. "TAXES" shall mean all taxes, charges, fees, imposts, levies or other assessments, including all net income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, and property taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and any interest and penalties imposed with respect to the filing, obligation to file or failure to file any Tax Return, and shall include any transferee liability in respect of Taxes. "TAX RETURN" shall mean all returns, declarations, reports, claims for refund, estimates, information returns, statements or other similar documents relating to Taxes, including any schedule attached thereto, and including any amendment thereof. "TECHE" shall mean Teche Electric Cooperative, Inc. "TERMINATION DATE" shall have the meaning set forth in Section 7.2. "TRANSACTION DOCUMENTS" shall mean the contracts, agreements, documents and instruments contemplated to be entered into by the terms of this Agreement and the Plan. A-15 "TRANSACTIONS" shall mean the Acquisition and related transactions contemplated by this Agreement and the Transaction Documents. "TRANSFERABLE PERMITS" shall mean Permits that are transferable to SWECO in accordance with their terms or as to which any consent required to transfer such Permits to SWECO at the Closing shall have been obtained. "TRANSITION MANAGERS" shall mean the two individuals appointed by SWECO pursuant to Section 3.1(b). "TRANSMISSION ASSETS" shall mean the 500KV Transmission Assets and the 138KV Transmission Assets. "TRUSTEE" shall have the meaning set forth in the preamble of this Agreement. "TRUSTEE-MODIFIED CONTRACTS" shall have the meaning set forth in Section 3.2(a)(v). "TRUSTEE TERMINATION FEE" shall mean Twenty Million Dollars ($20,000,000). "TRUSTEE'S REPRESENTATIVES" shall mean the Representatives of the Trustee. "VALUATION EXPERT" shall have the meaning set forth in Section 2.3(b). A-16 SCHEDULE 2.2 COINCIDENT PEAK DEMAND MEMBER KILOWATTS Beauregard Electric Cooperative 139,043 Claiborne Electric Cooperative 72,647 Concordia Electric Cooperative 27,837 Dixie Electric Membership Corp 332,843 Jefferson Davis Electric Corp 38,553 Northeast Louisiana Power Coop 43,751 Pointe Coupee Electric Membership Corp 35,319 South Louisiana Electric Coop 79,252 Southwest LA Electric Membership Corp 422,802 Teche Electric Cooperative 42,621 Valley Electric Membership Corp 109,391 Washington-St. Tammany Electric Coop 194,505 ----------- Total 1,538,564 2.2-1 SCHEDULES 4.5-4.14 [TO BE PROVIDED BY TRUSTEE] SCHEDULE 3.6(C) EXECUTORY CONTRACTS TO BE ASSUMED AND ASSIGNED TO SWECO 1. AES Power, Inc. Interchange Agreement 2. Alabama Electric Cooperative Interchange Agreement 3. Arkansas Electric Cooperative Interchange Agreement 4. Associated Electric Cooperative Interchange Agreement 5. Central Louisiana Electric Company Interconnection Agreement 6. Citizen's Power & Light Corp. Interchange Agreement 7. Duke Power Company Economy Energy Interchange Agreement 8. Duke Power Company Short Term Power Agreement 9. East Kentucky Power Cooperative Interchange Agreement 10. ENRON Power Marketing Interchange Agreement 11. Florida Municipal Power Agency Interchange Agreement 12. Florida Power Corporation Economy Energy Agreement 13. Florida Power & Light Company Economic Energy Agreement 14. Gulf States Utilities Company (Entergy) Interconnection Agreement 15. Jacksonville Electric Authority Interchange and Economic Energy Agreement 16. City of Lafayette Interchange Agreement 17. LG&E Power Marketing, Inc. Interchange Agreement 18. InterCoast Power Marketing Co. Interchange Agreement 19. Louisiana Power & Light Company (Entergy) Interchange Agreement 20. Preamble to Louisiana Power & Light (Entergy) Settlement Agreement 21. Mississippi Power & Light Company (Entergy) Interconnection Agreement 22. Municipal Energy Agency of Mississippi (MEAM) Interchange Agreement 23. Mississippi Energy Agency of Mississippi (MEAM) Power Sale Agreement 24. NorAm Energy Services Interchange Agreement 25. Oglethorpe Power Corp. Interchange Agreement 26. Orlando Utilities Commission Interchange Agreement 27. Rainbow Energy Marketing Corp. Interchange Agreement 28. Santee Cooper Interchange Agreement 29. South Carolina Public Service Authority Interchange Agreement 30. Seminole Electric Interchange Agreement 31. City Utilities of Springfield Interchange Agreement 32. City of Tallahassee Interchange Agreement 33. Sonat Power Marketing, Inc. Interchange Agreement 34. South Mississippi Electric Power Association (SMEPA) Interchange and Power Sales Agreement 35. Southern Company Services, Inc. Interchange Agreement 36. Southern Illinois Power Cooperative Interchange Agreement 37. Hydro Contract 38. Southwestern Electric Power Company Interchange Agreement 39. Tennessee Valley Authority Interchange Agreement 40. Western Farmers Electric Cooperative Interchange Agreement 41. Western Systems Power Pool, Pool Agreement 2 42. Western Power Services, Inc. Interchange Agreement 43. Vitol Gas and Electric, L.L.C. Interchange Agreement 44. Acadian Gas Pipeline Co. Interruptible Agreement 45. Bridgeline Gas Distribution Co. Interruptible Agreement 46. Bridgeline Gas Distribution Co. Pipeline Maintenance Agreement 47. Excel Resources Interruptible Agreement 48. The Clorox Company Tax Benefit Transfer Agreement 49. Eastman Kodak Company Tax Benefit Transfer Agreement 50. All Miscellaneous Tower Agreements 51. All Cajun Land Leases with Cajun as Lessor 52. The Land Lease between Cajun and M.A. Patout and Son Ltd. for the Patout Substation in Iberia Parish, La. 53. The Land Lease between Cajun and the State of Louisiana for coal dock on the Mississippi River at Big Cajun II 54. The Equipment Storage Agreement with General Electric for storage of Big Cajun III steam turbine and generator components 55. All Executory Insurance Policies or Contracts of Cajun 56. Any additional contracts as may be identified by SWECO after the date of this Agreement and noticed to the Trustee as contracts to be assumed 57. Joint Ownership Participation and Operating Agreement by and between Cajun Electric Power Cooperative Inc. and Gulf States Utilities Inc. (now known as Entergy Gulf States Inc.) dated as of November 14, 1980. 3 POWER SUPPLY AND SERVICE AGREEMENT BETWEEN SOUTHWESTERN WHOLESALE ELECTRIC COMPANY AND ______________ ELECTRIC MEMBERSHIP COOPERATIVE TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS 4 1.1 Additional Investment 4 1.2 Agreement 4 1.3 Ancillary Services 4 1.4 Benchmark Year 4 1.5 Billing Month 5 1.6 CLECO Contract 5 1.7 Common Facilities 5 1.8 Contract Year 5 1.9 Depreciated Book Value 6 1.10 Economic Power 6 1.11 Effective Date 6 1.12 Excess Requirements 6 1.13 Extraordinary Load 7 1.14 FERC 7 1.15 Good Utility Practice 7 1.16 Group 8 1.17 Group Load 9 1.18 Initial Facilities 9 1.19 LPSC 9 1.20 Maximum Point of Delivery Demand 9 1.21 MEAM Contract 10 1.22 Member Base Supply 10 1.23 MEMBER Hydro and MEMBER Hydro Energy 13 1.24 MEMBER Load 13 1.25 MEMBER Share 14 1.26 Other Resources 14 1.27 Parties 14 1.28 Party 14 1.29 Point of Delivery 15 1.30 Power Sales Contract 15 1.31 Project Capacity 15 1.32 Project Capacity Energy 16 1.33 Qualifying Facility 16 1.34 Separately Metered Load 16 1.35 SMEPA Contract 17 1.36 Specific Facilities 17 i PAGE 1.37 Supplemental Supply 17 1.38 Third-Party Supplier 18 1.39 Transmission Service Agreement(s) 18 1.40 Transmission Supplier 18 ARTICLE II TERMS AND CONDITIONS OF POWER SUPPLY SERVICE 19 2.1 General Obligations 19 2.2 MEMBER Base Supply 20 2.3 Supplemental Supply 21 2.4 Power Supplied from Qualifying Facilities and Other Resources 26 2.5 Maintenance of Member Base Supply Requirement 27 ARTICLE III SCHEDULING SERVICES 28 3.1 Control Area and Ancillary Services 28 3.2 SWECO Transmission and Ancillary Services 29 3.3 Scheduling Services for MEMBER Hydro 30 3.4 Scheduling Services for Other Resources 32 ARTICLE IV BILLING CREDITS FOR MEMBER HYDRO AND OTHER RESOURCES 32 4.1 MEMBER Hydro 32 4.2 Capacity and Energy Credits for MEMBER Hydro and Other Resources 33 ARTICLE V TRANSMISSION SERVICE 34 5.1 Transmission Service 34 5.2 Transmission and Distribution Service Costs 35 ARTICLE VI MEMBER FACILITIES CHARGES 36 6.1 Responsibility for and Permitted Uses of Specific Facilities 36 6.2 Additional Investments for Common Facilities 37 6.3 Responsibilities for Common Facilities 37 6.4 Additional Investments for Common Facilities 37 6.5 Facilities 37 6.6 Abondonment of Specific Facilities 39 6.7 Option to Purchase Specific Facilities 39 ii PAGE ARTICLE VII POINTS OF DELIVERY 40 7.1 Delivery Points 40 7.2 Changes in Points of Delivery 40 7.3 New Points of Delivery 41 7.4 Notice of Point of Delivery Abandonment 42 7.5 SWECO or Transmission Supplier Facilities 42 ARTICLE VIII OPERATING RESPONSIBILITIES 44 8.1 Operating Responsibilities of MEMBER and SWECO 44 8.2 Power Factor 45 8.3 Emergency Load Relief 45 8.4 Coordination of Temporary Transfer of Load 46 8.5 Extended Outage 47 8.6 Qualifying Facility 50 ARTICLE IX METERING 53 9.1 Meter Reading 53 9.2 Billing Meters and Associated Instrument Transformers 53 9.3 Meter Tests 54 9.4 Meter Accuracy 55 9.5 Meter Adjustments 55 ARTICLE X BILLINGS AND PAYMENTS 56 10.1 Compensation 56 10.2 Fuel and Economic Power Costs 58 10.3 Audits of Cost Records 58 10.4 Economic Development and Incentive Rates 58 10.5 Payment by MEMBER to SWECO 60 ARTICLE XI ADDITIONAL PROVISIONS 61 11.1 Planning 61 11.2 Technical Committee 62 11.3 Responsibility for Electricity 63 11.4 Continuity of Service 63 11.5 Right of Access 65 11.6 Hold Harmless Provisions 65 11.7 Right of First Refusal in Case of Proposed Sale, Merger or Consolidation 66 11.8 Acquisition of Facilities to Serve Retail Customers Formerly Served by Other Suppliers 68 iii PAGE 11.9 Extraordinary Load 69 11.10 Competitive Territory Credits 70 11.11 SWECO Covenants 73 11.12 MEMBER Covenants 74 ARTICLE XII DEFAULT 75 12.1 Default Defined 75 12.2 Notice of Default 75 12.3 Remedies for Default 75 ARTICLE XIII GENERAL PROVISIONS 76 13.1 Governing Law 76 13.2 Notice 76 13.3 Successors and Assigns 77 (a) Permitted Assignments by SWECO 77 (b) Permitted Assignments by MEMBERS 78 (c) Other Assignment 79 (d) Effect of Assignments 80 13.4 Rules of Construction 80 13.5 Effective Date of Agreement 81 13.6 Term 81 13.7 Counterparts 82 13.8 Amendments 82 13.9 Further Assurances 82 13.10 Schedules 83 13.11 Severability of Contract Provisions 83 13.12 Severability of MEMBER Contracts 83 13.13 Computation of Time 84 13.14 Limitation 84 13.15 Waivers 84 13.16 Regulation 84 13.17 Reasonableness of Rates - Pre-Established Rate Contract 85 13.18 Rounding 85 13.19 Survivorship of Obligations 86 13.20 Force Majeure 86 13.21 Authority of MEMBER 89 13.22 Warranties 89 iv PAGE SCHEDULE A RATES AND CHARGES FOR MEMBER BASE SUPPLY SERVICE 91 SCHEDULE A-1 ECONOMIC DEVELOPMENT RIDER 111 SCHEDULE A-2 ECONOMIC DEVELOPMENT CREDITS RIDER 117 SCHEDULE A-3 RATES AND CHARGES FOR EXISTING INCENTIVE LOAD CUSTOMERS 119 SCHEDULE B RATES AND CHARGES FOR SUPPLEMENTAL SERVICE 135 SCHEDULE C SOUTHWESTERN ELECTRIC WHOLESALE COMPANY MEMBER HYDRO ALLOCATION 143 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY 144 SCHEDULE E DATA TO BE SUPPLIED WITH MONTHLY BILLING TO ENABLE VERIFICATION 154 v POWER SUPPLY AND SERVICE AGREEMENT BETWEEN SOUTHWESTERN WHOLESALE ELECTRIC COMPANY AND ______________ ELECTRIC MEMBERSHIP COOPERATIVE THIS AGREEMENT, is made and entered into this _______ day of ___________, 1997, by and between Southwestern Wholesale Electric Company, a Delaware corporation engaged in the business of generating and transmitting electricity in, among other places, certain parts of the state of Louisiana, and having its principal office and place of business at 428 Travis Street, Shreveport, Louisiana (hereinafter referred to as SWECO), and _____________ Electric Cooperative, Inc., an electric membership cooperative existing under the laws of the State of Louisiana and having its principal office and place of business in ______________________, Louisiana (hereinafter referred to as MEMBER). WITNESSETH: WHEREAS, MEMBER, together with eleven other electric membership cooperative corporations doing business in the State of Louisiana, was formerly a member of Cajun Electric Power Cooperative, Inc. (Cajun), a generation and transmission cooperative formed to provide an economical supply of electric capacity and energy for the benefit of its members; WHEREAS, on December 21, 1994, Cajun filed a voluntary petition for reorganization in the United States Bankruptcy Court; WHEREAS, pursuant to a plan of reorganization submitted by SWECO and certain former members of Cajun and confirmed in such bankruptcy proceeding, SWECO has acquired certain electric generating plants and related facilities formerly owned by Cajun for the purpose, among others, of supplying electric capacity and energy to MEMBER and such former Cajun members; WHEREAS, SWECO has financed the acquisition of such facilities in whole or in part through loans, and may in the future obtain additional loans, evidenced by debt securities that are or may be secured by the revenues SWECO shall be entitled to collect from MEMBER under this Agreement; WHEREAS, MEMBER must purchase electric power and energy in order to serve its retail customers; WHEREAS, in order to secure a portion of such power and energy, MEMBER has entered into a Power Sales Contract with the United States of America acting through the Secretary, Department of Energy, as represented by the Administrator of the Southwestern Power Administration (SPA), which, among other things, 2 entitles MEMBER to purchase, for the benefit and use of its retail customers, hydroelectric capacity and associated energy (SPA Hydro Peaking Power) in accordance with such Power Sales Contract and, at MEMBER's option, also to purchase SPA Supplemental Peaking Energy as such energy is available from time to time as determined by SPA; WHEREAS, MEMBER has determined that the power and energy that SWECO is willing to sell to MEMBER pursuant to the terms and conditions set forth in this Agreement represent an economical and reliable power supply resource suitable for use in serving MEMBER's retail customer loads and that the interests of MEMBER's retail customers will be well served by MEMBER's purchasing such power and energy; and WHEREAS, SWECO and MEMBER desire to enter into this Power Supply and Service Agreement under which SWECO shall sell to MEMBER and MEMBER shall purchase from SWECO power and energy in accordance with and subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the Parties hereto mutually contract and agree as follows: 3 ARTICLE I DEFINITIONS The following terms used herein shall have the respective meanings set forth below: 1.1 ADDITIONAL INVESTMENT. Additional Investment means the total installed cost of transmission, distribution, and communication facilities owned by SWECO that are necessary to provide service to MEMBER Load or Group Load and that are installed after the Effective Date. 1.2 AGREEMENT. Agreement means this Power Supply and Service Agreement. 1.3 ANCILLARY SERVICES. Ancillary Services shall have the meaning given that term by the FERC in its Order No. 888 issued April 24, 1996 in FERC Docket Nos. RM95-8-000 and RM94-7-000, as modified by FERC's Order No. 888-A issued March 4, 1997, and FERC's Order No. 888-B issued November 25, 1997, in such proceeding. 1.4 BENCHMARK YEAR. Benchmark Year means the Contract Year in which the Group Load plus the contract demand of CLECO first equals or exceeds the sum of 1,270 mW 4 and an amount (in mW) equal to the sum of Member Hydro capacity for all Group Members. 1.5 BILLING MONTH. Billing Month shall be a calendar month. 1.6 CLECO. CLECO means Central Louisiana Electric Company. 1.6 CLECO CONTRACT. CLECO Contract means that certain Power Supply Agreement dated ________ between CLECO and SWECO. 1.7 COMMON FACILITIES. Common Facilities means certain communication, transmission and distribution facilities owned by SWECO and listed on Schedule E to this Agreement, as such Schedule E may be from time to time supplemented or revised, that are not specifically necessary to provide service to distinct MEMBER Load but are reasonably required to provide service hereunder to Group Load for the term of this Agreement. SWECO shall, in its sole discretion, determine if any such asset owned by SWECO is a Common Facility. 1.8 CONTRACT YEAR. Contract Year means the 12-month period beginning on January 1 and extending through December 31 of any calendar year, except that the 5 first Contract Year shall begin on the Effective Date and end on December 31, 1999. 1.9 DEPRECIATED BOOK VALUE. Depreciated Book Value means the original book cost of electric plant net of accumulated depreciation determined using FERC depreciation rates. 1.10 ECONOMIC POWER Economic Power means the costs incurred in the Billing Month for capacity or energy purchased over a period of twelve months or less where the total cost of the purchase is less than SWECO's total avoided variable cost. 1.11 EFFECTIVE DATE. The Effective Date shall be the date assigned by the FERC when accepting this Agreement for filing for the effectiveness of this Agreement as a FERC rate schedule. 1.12 EXCESS REQUIREMENTS. Excess Requirements means the capacity and energy required by MEMBER to serve MEMBER Load in excess of the capacity and energy provided by SWECO to MEMBER as MEMBER Base Supply and provided from MEMBER Hydro. 6 1.13 EXTRAORDINARY LOAD. Extraordinary Load means the load of any single retail customer not previously served by MEMBER that is equal to or exceeds five mW that is to be served by MEMBER pursuant to Section 11.9 of this Agreement. Extraordinary Load shall not be counted as MEMBER Load. 1.14 FERC. FERC means the Federal Energy Regulatory Commission or any successor regulatory agency having jurisdiction over this Agreement. 1.15 GOOD UTILITY PRACTICE. Good Utility Practice means any of the practices, methods or acts engaged in or approved by significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts that in the exercise of reasonable judgment in light of the facts known at the time a decision was made, could have been expected to accomplish the desired result at reasonable cost consistent with reliability, safety, expedition and the requirements of governmental agencies having jurisdiction. Good Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be a spectrum of acceptable 7 practices, methods or acts. Good Utility Practice shall include, but not be limited to, conformance with the applicable reliability criteria, standards and operating guides of the Southwest Power Pool ("SPP") and the North American Electric Reliability Council, or successor organizations that may exist in the future and of which SWECO is then a member in effect at the time a decision is made or an action is taken or not taken. 1.16 GROUP Group means all of the following: Beauregard Electric Cooperative, Inc. Claiborne Electric Cooperative, Inc. Dixie Electric Membership Corporation Jefferson Davis Electric Cooperative, Inc. Northeast Louisiana Power Cooperative, Inc. South Louisiana Electric Cooperative Association Valley Electric Membership Corporation Washington-St. Tammany Electric Corp. Inc. 8 1.17 GROUP LOAD. Group Load means the maximum coincidental 60-minute integrated peak demand incurred by the Group in any Contract Year during the term of this Agreement to serve their retail loads at all Points of Delivery other than Extraordinary Load or any Separately Metered Load. 1.18 INITIAL FACILITIES. Initial Facilities means the Specific Facilities and Common Facilities owned by SWECO as of the Effective Date. 1.19 LPSC. LPSC means the Louisiana Public Service Commission. 1.20 MAXIMUM POINT OF DELIVERY DEMAND. Maximum Point of Delivery Demand shall be the maximum non-coincident 60-minute demand, measured in kW, experienced at any Point of Delivery during a Billing Month. 9 1.21 MEAM CONTRACT. MEAM Contract means that certain Power Sales Contract dated _________ between the Municipal Energy Agency of Mississippi and Cajun Electric Power Cooperative, Inc. that is to be assumed by SWECO under the Plan of Reorganization submitted to the Bankruptcy Court by SWECO and certain members of the Group. 1.22 MEMBER BASE SUPPLY MEMBER Base Supply shall consist of a monthly capacity component and an annual energy component. The respective obligations of MEMBER and SWECO to purchase and to provide MEMBER Base Supply are stated in Section 2.2 of this Agreement. In each Contract Year through and including the Benchmark Year, the monthly capacity component for any calendar month, measured in kilowatts, shall be equal to the sum of the MEMBER's Maximum Point of Delivery Demands at the MEMBER's Points of Delivery for such month less the sum of the following amounts: 1. capacity associated with MEMBER Hydro for the Contract Year to serve load at such Point of Delivery; 10 2. Extraordinary Load served from MEMBER'S Points of Delivery during the Billing Month; and 3. any Separately Metered Load. Beginning in the Contract Year following the Benchmark Year, the monthly capacity component of MEMBER Base Supply for any Billing Month, measured in kilowatts, shall be the lesser of (a) the highest monthly capacity component of MEMBER Base Supply established for the MEMBER's Points of Delivery in the aggregate during the Benchmark Year or (b) the sum of MEMBER's Maximum Point of Delivery Demands at the MEMBER'S Points of Delivery for such month less the following amounts: 1. capacity associated with MEMBER Hydro for the Contract Year; 2. Extraordinary Load served from MEMBER Points of Delivery during the Billing Month; and 3. any Separately Metered Load. For the Benchmark Year and Contract Years prior to the Benchmark Year, the energy component of the MEMBER Base Supply in any Contract Year, measured in kilowatt-hours, shall be the energy required each hour to supply the Member Load at the MEMBER Points of Delivery not supplied from MEMBER Hydro (adjusted for losses in delivery). For any Contract 11 Year following the Benchmark Year, the energy component of the MEMBER Base Supply, measured in kilowatt-hours, shall be the energy required each hour to supply the Member Load at the MEMBER'S Points of Delivery not supplied from MEMBER Hydro (adjusted for losses in delivery) up to an amount equal to the MEMBER Share of Project Capacity Energy in such hour. In no event shall SWECO be obligated in any Contract Year following the Benchmark Year to supply more than 7,350,000,000 kilowatt-hours of Project Capacity Energy to the Group for the purpose of furnishing the energy component of MEMBER Base Supply under this Agreement or similar agreements between SWECO and other Group members. However, in addition to MEMBER's MEMBER Share of Project Capacity Energy, SWECO shall make available to MEMBER in any hour kilowatt-hours of Project Capacity Energy that is not used by other Group members during such hour as long as the annual limit on SWECO's obligation to supply Project Capacity Energy to all Group members is not exceeded. SWECO shall notify MEMBER within a reasonable time after Project Capacity Energy furnished to the Group by SWECO to meet its obligation to furnish MEMBER Base Supply under this Agreement and such agreements with other Group members exceeds 6,500,000,000 kilowatt-hours in any 12 consecutive twelve-month period. MEMBER agrees that it will thereafter join SWECO and other Group members taking MEMBER Base Supply from SWECO promptly to negotiate in good faith alternative limits on SWECO's obligation to furnish the energy component of MEMBER Base Supply so that SWECO's obligation to furnish such energy component to all Group members does not exceed 7,350,000,000 kilowatt-hours in any Contract Year and that Project Capacity Energy is fairly distributed among the Group members. In the event that in any hour more than one Group member requires Project Capacity Energy in excess of such Group member's MEMBER Share the available Project Capacity Energy not used by other Group members shall be allocated among the Group members requiring such excess energy in proportion to their respective MEMBER Shares. 1.23 MEMBER HYDRO AND MEMBER HYDRO ENERGY MEMBER Hydro means in any Contract Year the amount of capacity (in mW) available for the account of Member under the Power Sales Contract as shown on Schedule C. MEMBER Hydro Energy means in any Billing Month the amount of energy (in kWh) available from Member Hydro in such Billing Month. 1.24 MEMBER LOAD. 13 MEMBER Load means the aggregate amount of capacity and energy required by the MEMBER to serve its retail customers in any hour during the term of this Agreement at all MEMBER Points of Delivery other than Extraordinary Load or Separately Metered Load. 1.25 MEMBER SHARE. MEMBER Share is the ratio of the sum of MEMBER Load (in mW) served at the MEMBER's Points of Delivery in the hour in which the Group Load was established in the immediately preceding Contract Year (or in the Benchmark Year if specified) to the total Group Load served at all Points of Delivery. 1.26 OTHER RESOURCES. Other Resources means power supply resources acquired by MEMBER during the term of this Agreement to meet Excess Requirements as further described in Section 2.4 (not including capacity and energy purchased from a Qualifying Facility in accordance with a statutory obligation to make such purchase and subject to compliance with the provisions of Section 8.6 of this Agreement). 1.27 PARTIES. Parties mean SWECO and MEMBER collectively. 1.28 PARTY. 14 Party means either SWECO or MEMBER individually. 1.29 POINT OF DELIVERY. Point of Delivery means any point listed on Schedule D hereto, as such exhibit may be amended from time to time, at which any member of the Group receives capacity and energy pursuant to this Agreement or other power supply and service agreements with SWECO entered into in connection with the resolution of the Cajun reorganization proceedings. 1.30 POWER SALES CONTRACT. Power Sales Contract means the MEMBER's contract with SPA providing for the purchase by MEMBER from the SPA of firm hydroelectric capacity (SPA Hydro Peaking Power) and associated energy and, at MEMBER'S option, also to purchase SPA Supplemental Peaking Energy, at times when SPA determines that such energy is available. 1.31 PROJECT CAPACITY. The Project Capacity means that portion of the aggregate rated generating capability (in mW) of Big Cajun I (Unit 1 and Unit 2) and Big Cajun II (Unit 1, Unit 2, and 58% of Unit 3) and any firm resource acquired by SWECO after the Effective Date that shall be adequate in the aggregate to enable SWECO to serve a portion of Group Load that does not 15 exceed the sum of the capacity components of MEMBER Base Supply for all members of the Group in Contract Years following the Benchmark Year. 1.32 PROJECT CAPACITY ENERGY. Project Capacity Energy means for any period the energy output of the Project Capacity during such period (adjusted for losses in delivery) plus energy purchased by SWECO in such period (adjusted for losses in delivery) to replace energy output from Project Capacity to serve MEMBER Base Supply under this Agreement and similar agreements between SWECO and the other Group members. 1.33 QUALIFYING FACILITY Qualifying Facility means a facility certified to be a Qualifying Facility under subpart (B) of Part 292 of the FERC's Regulations under Section 201 of the Public Utility Regulatory Policies Act of 1978 (PURPA) and as further defined and discussed in Section 8.6. 1.34 SEPARATELY METERED LOAD Separately Metered Load means any retail load served by MEMBER that SWECO and MEMBER have agreed shall not be billed under Schedule A or Schedule B to this Agreement, including without limitation retail load MEMBER serves with Other Resources pursuant to Section 11.8 of this 16 Agreement, or with capacity and energy supplied by SWECO and billed by SWECO to MEMBER under Schedule A-3 to this Agreement. 1.35 SMEPA CONTRACT SMEPA Contract means that certain Power Sales Contract dated ________ between the South Mississippi Electric Power Association and Cajun Electric Power Cooperative, Inc. that is to be assumed by SWECO under the Plan of Reorganization submitted to the Bankruptcy Court by SWECO and certain members of the Group. 1.36 SPECIFIC FACILITIES Specific Facilities means the transmission and distribution facilities and any telecommunications facilities that are necessary to provide service under this Agreement to a distinct Point of Delivery that are owned by SWECO and located between a point of interconnection with a Transmission Supplier and a Point of Delivery to MEMBER. 1.37 SUPPLEMENTAL SUPPLY Supplemental Supply means capacity and energy provided to MEMBER by SWECO under this Agreement to serve MEMBER's Excess Requirements. 17 1.38 THIRD-PARTY SUPPLIER Third-Party Supplier means any supplier of power or energy to MEMBER other than SWECO. 1.39 TRANSMISSION SERVICE AGREEMENT(S) Transmission Service Agreement(s) means any or all of the agreements between SWECO and any Transmission Supplier relating to transmission service and Ancillary Services needed by SWECO to perform its obligations to MEMBER under this Agreement. 1.40 TRANSMISSION SUPPLIER Transmission Supplier means SWECO or any one or more of Entergy (specifically including the systems of Louisiana Power & Light (LP&L) and Gulf States Utilities (GSU)), Central Louisiana Electric Company (CLECO), Southwestern Electric Power Company (SWEPCO), or any other owner or operator of a transmission facility that SWECO needs to perform its obligations to MEMBER under this Agreement, their successors in interest and assigns. 18 ARTICLE II TERMS AND CONDITIONS OF POWER SUPPLY SERVICE 2.1 GENERAL OBLIGATIONS The MEMBER's obligation and agreement to purchase MEMBER Base Supply and any Supplemental Supply MEMBER elects to take from SWECO is intended to give full effect to SWECO's rights hereunder to serve the MEMBER Load and future normal load growth in MEMBER's service territory. MEMBER agrees that SWECO's rights to serve MEMBER Load are the essential consideration and inducement for SWECO to acquire the Project Capacity. MEMBER shall exercise continuing good faith efforts to retain its existing customers and to obtain new customers, thereby increasing MEMBER Load, and to maintain MEMBER Load at a level at least equal to the MEMBER Base Supply obligation. The Parties recognize that they must obtain approvals of certain regulatory agencies in order to perform this Agreement. Without limiting the foregoing, the MEMBER must obtain the approval of the LPSC to enter into and perform MEMBER's obligations under this Agreement and SWECO must obtain all regulatory approvals from the LPSC and the FERC needed for SWECO lawfully to perform its obligations under the Agreement. Each 19 Party agrees to cooperate with the other Party so as to secure the necessary approvals. SWECO shall operate and maintain the Project Capacity and transmission, distribution and general electric plant that SWECO owns or controls to fulfill SWECO's contract obligations to the members of the GROUP and SWECO's obligations under the CLECO Contract, the MEAM Contract and the SMEPA Contract in a least-cost manner in accordance with Good Utility Practice. SWECO shall use the Project Capacity to furnish to members of the Group the energy associated with their respective entitlements to Member Base Supply and to furnish the energy that SWECO is obligated to furnish under the CLECO Contract, the MEAM Contract and the SMEPA Contract. SWECO shall make no distinction between Group members, CLECO, MEAM or SMEPA in calculating the cost of furnishing such energy except in the case the SMEPA Contract, which provides that energy shall be furnished from a specific generating unit. 2.2 MEMBER BASE SUPPLY SWECO agrees to sell to MEMBER, and MEMBER agrees to purchase from SWECO, the MEMBER Base Supply. SWECO shall supply the MEMBER Base Supply at rates and charges determined in accordance with Schedule A and, if 20 and to the extent applicable, Schedules A-1, A-2 and A-3 to this Agreement, and any other provision of this Agreement relating to rates and charges for service. SWECO shall use the generating capability acquired from the Cajun estate to provide the MEMBER Base Supply, and to fulfill SWECO's obligations under the CLECO Contract, the MEAM Contract and the SMEPA Contract, before using such generating capability to make sales to other purchasers. 2.3 SUPPLEMENTAL SUPPLY SWECO agrees to make available to MEMBER Supplemental Supply beginning as of the first day of the first Contract Year if MEMBER elects to take Supplemental Supply (which election must be made in writing delivered to SWECO no later than the earlier of (1) the date that is six months prior to the first day of the first Contract Year in which MEMBER expects to have Excess Requirements or (2) July 1, 1999). Subject to MEMBER's option to limit its obligation to take Supplemental Supply described below, Supplemental Supply shall consist of capacity and energy in excess of MEMBER Base Supply, MEMBER Hydro, and any capacity and energy provided by a Qualifying Facility in accordance with Section 8.6 that in the aggregate shall be adequate to meet MEMBER's full requirements for electricity needed to serve MEMBER Load. If MEMBER 21 exercises its right to contract for Supplemental Supply from SWECO, SWECO shall supply such capacity and energy at rates and charges determined in accordance with Schedule B to this Agreement and subject to all other applicable terms and conditions set forth in this Agreement. In the event that MEMBER has elected to take Supplemental Supply in accordance with this Section 2.3 and SWECO thereafter gives MEMBER notice of its intention to construct or purchase additional capacity in order to provide Supplemental Supply and that SWECO expects the cost of such additional capacity will exceed $400/kW, MEMBER shall have the option to limit its obligation to take Supplemental Supply service from SWECO to such capacity and associated energy furnished as Supplemental Supply in the Contract Year immediately preceding the Contract Year in which such option, if exercised, becomes effective. Any such notice to MEMBER shall state (1) the estimated cost to construct or purchase additional capacity, (2) the amount of capacity that SWECO is planning to add to its power supply resources, (3) the revised rates SWECO would propose to charge MEMBER for Supplemental Supply, and (4) the date ("rate change effective date") on which SWECO would propose to place the 22 revised rates in effect. The rate change effective date shall be the first day of the Contract Year in which the new capacity is expected to be needed to furnish Supplemental Supply. Such notice to MEMBER shall be given in writing at least twelve months prior to the rate change effective date stated in the notice. MEMBER shall notify SWECO no later than six months after receipt of SWECO's notice whether MEMBER will elect to limit its Supplemental Supply obligation or to pay the revised rates for Supplemental Supply. In the event MEMBER elects to limit the amount of Supplemental Supply MEMBER will purchase from SWECO, MEMBER and SWECO shall execute and deliver an amendment to this Agreement that, INTER ALIA, shall provide that (1) the limit on MEMBER's obligation to take Supplemental Supply from SWECO shall be effective as of the rate change effective date stated in the notice given by SWECO to MEMBER, (2) that SWECO's obligation to provide Supplemental Supply to MEMBER shall not exceed the average of the four highest monthly values for MEMBER's Supplemental Total Billing Demands (as determined by applying Step 1 of Section 1.3 of Schedule B of this Agreement) in the Contract Year immediately preceding the Contract Year in which the limit on MEMBER's obligation to 23 purchase Supplemental Supply becomes effective (Fixed Amount), (3) that SWECO shall provide and MEMBER shall purchase its capacity requirements in excess of Member Base Supply as Supplemental Supply an amount up to but not exceeding the Fixed Amount from SWECO in each Billing Month throughout the remaining term of this Agreement, and (4) that the demand charges that shall apply to such capacity purchases shall continue to be the Schedule B demand charges in effect as of the time of the MEMBER's election to limit its obligation to take Supplemental Supply from SWECO and (5) SWECO shall provide and MEMBER may purchase energy associated with the Fixed Amount of Supplemental Supply an amount based on a load factor to be mutually agreed upon by the Parties between 30 and 60 percent (%). If MEMBER elects to limit its Supplemental Supply obligation, it may purchase Other Resources to meet its needs for capacity and energy after it has used all of its Member Base Supply and the Fixed Amount up to the agreed upon load factor. If MEMBER elects not to limit its Supplemental Supply obligation, SWECO shall be obligated to continue to provide Supplemental Supply to MEMBER as originally contemplated at the time of the MEMBER's initial 24 election to take Supplemental Supply except that the rates set forth in Schedule B to this Agreement shall be revised in the manner indicated in SWECO's notice to MEMBER or as MEMBER and SWECO may otherwise agree. Nothing provided for in this Section 2.3 shall affect in any way the obligation of the MEMBER to purchase MEMBER Base Supply or the obligation of SWECO to provide MEMBER's Base Supply through Contract Year 25. In the event that MEMBER enters into an amendment to this Agreement in accordance with the third paragraph of this Section 2.3 to limit SWECO's obligations to furnish Supplemental Supply, SWECO will nevertheless furnish MEMBER with all notices contemplated by the second paragraph of this Section 2.3, and MEMBER shall have the right to respond to any such notice no later than six months after receipt thereof by requesting that SWECO suspend the amended limit on SWECO's obligation to furnish Supplemental Supply and agree to furnish additional amounts of Supplemental Supply to MEMBER. SWECO shall no later than eight months after the date the notice was sent respond to any such request by agreeing either to (1) furnish all or part of such additional amounts of Supplemental Supply under this Agreement if such additional amounts can 25 be made available from the additional power supply resources referenced in the notice without adversely affecting the other members of the Group or (2) negotiate with MEMBER a new power supply agreement under which the additional capacity and energy sought by MEMBER can be made available. In the event that SWECO determines that additional Supplemental Supply can be furnished to MEMBER without adversely affecting any other Group member, then all Supplemental Supply furnished to MEMBER shall be priced at the increased rate referenced in the notice. 2.4 POWER SUPPLIED FROM QUALIFYING FACILITIES AND OTHER RESOURCES Subject to the provisions of Section 8.6 of this Agreement, MEMBER may purchase capacity and energy from a Qualifying Facility to comply with any obligation of MEMBER under federal law to make such purchase. Subject to the provisions of this Section 2.4, MEMBER may otherwise purchase capacity and energy from any Third-Party Supplier as needed to meet its Excess Requirements if the MEMBER has elected not to purchase Supplemental Supply from SWECO, either initially or by exercising its option to limit MEMBER's Supplemental Supply obligations pursuant to Section 2.3. 26 Any capacity the MEMBER purchases from a Qualifying Facility or other Third-Party Supplier to meet its Excess Requirements must be backed-up by reserve capacity sufficient to meet the reserve criteria established by the Southwest Power Pool, or its successor in function. The MEMBER shall coordinate with SWECO, as control area operator, the planning and scheduling in accordance with Good Utility Practice of deliveries of power and energy from such Other Resources to the MEMBER's Points of Delivery. Unless MEMBER has elected to take Supplemental Supply, SWECO shall have no obligation to supply the MEMBER's Excess Requirements. 2.5 MAINTENANCE OF MEMBER BASE SUPPLY REQUIREMENT MEMBER recognizes and agrees that MEMBER's obligation to purchase its MEMBER Base Supply from SWECO was a material and substantial inducement for SWECO to enter into this Agreement and to acquire the Project Capacity. Except as permitted by Section 2.4, the MEMBER covenants and agrees that it will not directly or indirectly acquire, own, operate or lease any interest in any generating facility, finance, operate or maintain disbursed diesel generation, fuel cells or any other generating 27 facility or technology, or acquire any right to any portion of the output of a generating facility or contract to purchase any electric power for the purpose of supplying MEMBER Load or Group Load that SWECO has the right or obligation to serve under this Agreement, or under similar agreements with other Group members. Nothing in this Section 2.5 shall be construed to prevent MEMBER from owning or operating for reliability purposes any electric generating equipment used by MEMBER in emergency conditions to supply energy needed at its offices, to operate MEMBER's communications equipment or to back up battery supply used to operate other MEMBER facilities. Nothing in this Section 2.5 shall be construed to prevent any retail customer of MEMBER from owning or operating for reliability purposes any electric generating equipment and using such generation as back-up supply during times when MEMBER cannot supply such retail customer's electricity requirements. ARTICLE III SCHEDULING SERVICES 3.1 CONTROL AREA AND ANCILLARY SERVICES MEMBER Load at all of the Points of Delivery listed in Schedule D shall be electronically transferred into the SWECO load control area on 28 the Effective Date. Unless the Parties otherwise agree, MEMBER Load shall be operated in the SWECO control area throughout the term of this Agreement. SWECO will provide to MEMBER or acquire on MEMBER's behalf from other Transmission Suppliers, all necessary control area and Ancillary Services needed to serve the MEMBER Load in accordance with Good Utility Practice. SWECO shall purchase from other Transmission Suppliers only those control area and Ancillary Services that SWECO cannot provide from SWECO controlled generating capacity used to furnish the MEMBER Base Supply and Supplemental Supply purchased by MEMBER under this Agreement. As between SWECO and MEMBER, SWECO shall bear and pay for any penalties or other charges imposed by a Transmission Supplier as a result of SWECO's scheduling and dispatch of capacity and energy furnished by SWECO to MEMBER as MEMBER Base Supply or Supplemental Supply under this Agreement. 3.2 SWECO TRANSMISSION AND ANCILLARY SERVICES SWECO shall bear the cost of the following operations and services: 29 (a) the operation of SWECO's control area, including the costs of SWECO's energy management system and other control equipment and related labor costs; and (b) the following Ancillary Services provided by SWECO from SWECO controlled generating capacity used to furnish the MEMBER Base Supply and Supplemental Supply purchased by MEMBER under this Agreement: (1) Regulation and Frequency Response Service; (2) Energy Imbalance Service; (3) Operating Reserve--Spinning Reserve Service; and (4) Operating Reserve--Supplemental Reserve Service. Notwithstanding the foregoing MEMBER shall purchase from SWECO and pay SWECO for Ancillary Services provided by SWECO in respect of MEMBER's use of Other Resources and the output of Qualifying Facilities pursuant to Section 8.6 of this Agreement in accordance with SWECO's applicable FERC rate schedule. 3.3 SCHEDULING SERVICES FOR MEMBER HYDRO MEMBER hereby designates SWECO as its duly authorized agent through which all transactions with SPA under the Power Sales Contract between MEMBER and SPA shall be conducted. SWECO shall be, and hereby is, 30 authorized and directed to accept and receive from SPA, for the account of MEMBER, SPA Hydro Peaking Power and SPA Supplemental Peaking Energy; to prepare and to submit, and to receive and accept, all accounting statements and a copy of all bills; and to act for and on behalf of MEMBER as to all matters pertaining to scheduling, receipt and delivery of the SPA Hydro Peaking Power and SPA Supplemental Peaking Energy with the same force and effect as if MEMBER were acting through its duly authorized officials. To the maximum extent practicable in keeping with Good Utility Practice SWECO shall utilize for MEMBER's benefit all SPA Supplemental Peaking Energy available to MEMBER. The scheduling provisions of this Section 3.3 are subject to the terms and conditions of Member's Power Sales Contract with SPA and to SPA's recognition and acceptance of the designation and appointment of SWECO as MEMBER's agent under the MEMBER's Power Sales Contract with SPA for the purposes described above and to SPA's agreement to furnish SWECO a copy of each energy accounting statement, notice and bill furnished by SPA to MEMBER pursuant to the provisions of such Power Sales Contract. 31 3.4 SCHEDULING SERVICES FOR OTHER RESOURCES The delivery of power and energy obtained by MEMBER from Other Resources shall be scheduled and dispatched by SWECO as necessary to assure system reliability pursuant to SWECO's Open Access Transmission Tariff filed with the FERC. SWECO may schedule and use such capacity and energy to meet SWECO's system requirements, including service to MEMBER Load, in an efficient manner and in accordance with Good Utility Practice. In scheduling Member's Other Resources SWECO shall make no adverse distinction between such sources of power and sources used by SWECO to supply Member. SWECO shall not be obligated to schedule any resource in a manner that would impair the reliability of the SWECO control area or be inconsistent with the MEMBER's obligation under Section 2.5. ARTICLE IV BILLING CREDITS FOR MEMBER HYDRO AND OTHER RESOURCES 4.1 MEMBER HYDRO A portion of the capacity and energy requirements of MEMBER shall be supplied from MEMBER Hydro. MEMBER hereby agrees that it will not terminate its Power Sales Contract with SPA without first providing 32 reasonable notice to and consulting with SWECO with respect to such termination. MEMBER hereby agrees that it will give SWECO reasonable prior notice regarding any changes in its contract arrangements with SPA regarding MEMBER Hydro, and that the MEMBER Hydro shall be limited to the rights to hydroelectric capacity and associated energy shown on Schedule C, as it may be revised from time to time. The Parties agree that SWECO shall have no obligation under this Agreement to replace MEMBER Hydro listed on Schedule C independent of SWECO's obligation to provide the MEMBER Base Supply and any obligation of SWECO to provide Supplemental Supply pursuant to Section 2.3 of this Agreement. 4.2 CAPACITY AND ENERGY CREDITS FOR MEMBER HYDRO AND OTHER RESOURCES. MEMBER shall receive credits on each monthly bill determined in accordance with Schedules A and B in respect of capacity and energy supplied from MEMBER Hydro as shown on Schedule C, as it may be revised from time to time, to which MEMBER shall be entitled and from permitted Other Resources scheduled by MEMBER to serve MEMBER Load. 33 ARTICLE V TRANSMISSION SERVICE 5.1 TRANSMISSION SERVICE SWECO shall make arrangements for, and as the designated agent for all Members of the Group, shall enter into all agreements with Transmission Suppliers necessary to obtain from the Transmission Suppliers, the transmission and Ancillary Services needed by SWECO to fulfill its obligations to MEMBER under this Agreement. Unless SWECO and MEMBER otherwise agree, SWECO shall arrange for firm point-to-point or network integration transmission service. MEMBER will coordinate with SWECO as needed to assure compliance with the terms and conditions of any Transmission Service Agreement. SWECO shall use its best efforts diligently to obtain all necessary Transmission Service Agreements with any Transmission Supplier and all required regulatory approvals relating thereto. MEMBER agrees to support such efforts. In its dealings with Transmission Suppliers, SWECO shall vigorously advocate the interests of MEMBER, and shall coordinate with the Technical Committee to be established pursuant to Section 11.2 of this Agreement as to matters involving Transmission or Ancillary Service 34 expenses that will be borne by MEMBER or quality of service. SWECO shall invite a MEMBER representative of the Technical Committee to accompany SWECO at any meeting with a Transmission Supplier involving any such matter. 5.2 TRANSMISSION AND DISTRIBUTION SERVICE COSTS To the extent practicable SWECO shall separate the transmission and Ancillary Services costs that SWECO pays to the Transmission Suppliers in any month to serve the Group Load among costs related to such services taken to serve Group Load at delivery voltages of less than 69 Kv, costs related to such services taken to serve Group Load at a delivery voltage of 69 Kv, and costs related to such services taken to serve Group Load at delivery voltages higher than 69 Kv. Such costs shall be grouped by voltage level and then allocated and charged to MEMBER based on the ratio of the Maximum Point of Delivery Demand determined separately for each MEMBER Point of Delivery during the Billing Month to which such costs relate to the sum of the Maximum Point of Delivery Demands at all Points of Delivery served during such Billing Month in the same delivery voltage group. 35 ARTICLE VI MEMBER FACILITIES CHARGES 6.1 RESPONSIBILITY FOR AND PERMITTED USES OF SPECIFIC FACILITIES. SWECO shall be responsible for installing, owning, operating, and maintaining the Specific Facilities for MEMBER that are listed on Schedule D to this Agreement. Upon reasonable request, SWECO shall allow MEMBER to use such Specific Facilities in connection with MEMBER's protective relaying schemes. Any permitted use of such facilities shall be in accordance with Good Utility Practice and shall be subject to SWECO's prior written approval of MEMBER's equipment installation. Nothing in this Article VI shall be construed to prohibit MEMBER from installing, owning, operating and maintaining transmission or telecommunications facilities that are necessary to MEMBER's receipt of service hereunder at a Point of Delivery. 6.2 ADDITIONAL INVESTMENTS FOR SPECIFIC FACILITIES The Parties will amend Schedule D from time to time to list any Additional Investments for Specific Facilities installed to serve MEMBER Load. The Parties shall amend Schedule D within 30 days after the end of 37 each Contract Year to list Additional Investments for Specific Facilities totaling less than $100,000 made during such Contract Year. The Parties shall amend Schedule D within 30 days after the in-service date of Specific Facilities after Additional Investments for Specific Facilities made during any Contract Year exceed $100,000. 6.3 RESPONSIBILITIES FOR COMMON FACILITIES SWECO shall be responsible for installing, owning, operating, and maintaining the Common Facilities listed on Schedule D of this Agreement. 6.4 ADDITIONAL INVESTMENTS FOR COMMON FACILITIES The Parties will amend Schedule D from time to time to list any Additional Investments for Common Facilities. The Parties shall amend Schedule D within 30 days after the end of each calendar year to list Additional Investments for Common Facilities totaling less than $100,000 made during any Contract Year. The Parties shall amend Schedule D within 30 days after the in-service date of such Common Facilities after Additional Investments for Common Facilities made during any Contract Year exceed $100,000. 6.5 FACILITIES MEMBER shall pay SWECO a monthly facilities charge for Specific Facilities and Common Facilities in accordance with Article X and 37 Schedule A. Such monthly facilities charge shall be the sum of (a) 1/12 of the annual charge to MEMBER for Initial Facilities plus (b) the product of 1.75% times the Additional Investments for Specific Facilities, as listed on Schedule D of this Agreement (as it is revised from time to time pursuant to Sections 6.2 and 6.4 of this Agreement) plus (c) the product of 1.75% times the MEMBER Share times the Additional Investments for Common Facilities, as listed on Schedule D of this Agreement (as so revised); provided however that MEMBER may elect to maintain the Specific Facilities and any such Additional Investments. If MEMBER so elects, then the carrying charge rate set forth in Schedule D shall be 1.25% and not 1.75%. (Any such agreement that MEMBER shall maintain such facilities shall be memorialized in writing and shall contain reasonable terms relating to MEMBER's maintenance duties and obligations.) The annual charge to MEMBER in any Contract Year for Initial Facilities shall be as shown on Schedule D. In the event that such Specific Facilities are deemed to serve more than one Group member, the investment associated with such Specific Facilities shall be allocated among such Group members. 38 6.6 ABANDONMENT OF SPECIFIC FACILITIES In the event MEMBER abandons or transfers load from a Point of Delivery owned by a Transmission Supplier, MEMBER shall pay SWECO an amount sufficient to pay any and all abandonment charges due under the relevant Transmission Service Agreements. In the event MEMBER abandons a Point of Delivery or other Specific Facilities owned by SWECO, MEMBER shall purchase said facilities from SWECO at Depreciated Book Value. MEMBER shall remove or otherwise disconnect said abandoned facilities from the applicable SWECO or Transmission Supplier system. 6.7 OPTION TO PURCHASE SPECIFIC FACILITIES MEMBER shall have the option to purchase from SWECO within 180 days following the termination of this Agreement in accordance with its terms any Specific Facilities being used by SWECO at the termination date to serve MEMBER Load. The MEMBER shall pay SWECO for such Specific Facilities the depreciated book value of SWECO's Additional Investment in such Specific Facilities. The initial specific facilities will have a depreciated book value of zero at the termination date. 39 ARTICLE VII POINTS OF DELIVERY 7.1 DELIVERY POINTS SWECO shall furnish the electric capacity and deliver the energy purchased by the MEMBER from SWECO under this Agreement to the MEMBER at the Point(s) of Delivery. Title and risk of loss of such energy shall pass from SWECO to the MEMBER at such Points of Delivery. 7.2 CHANGES IN POINTS OF DELIVERY. Whenever MEMBER seeks the establishment of a new Point of Delivery, or to change the capacity of, or the voltage at, an existing Point of Delivery, or to abandon a Point of Delivery on the Transmission System of SWECO or a Transmission Supplier, MEMBER shall notify SWECO, in writing, of the change desired, as far in advance as is practical, but at least 30 days in advance of the time at which SWECO must give notice of the change to any Transmission Supplier under the terms of any relevant Transmission Service Agreement. Such notice shall provide the information needed by SWECO to request a change in Points of Delivery under the terms of any relevant Transmission Service Agreement. 40 Subject to the conditions set forth in Section 7.5 below, SWECO shall use its best efforts to effect a requested change in an existing Point of Delivery or to furnish a new Point of Delivery at an available standard distribution or transmission voltage. In no event shall SWECO be obligated to seek a change in an existing Point of Delivery or to establish a new Point of Delivery that would violate Good Utility Practice. In the event that a Transmission Supplier does not agree to establish a requested new Point of Delivery or to make a requested change to an existing Point of Delivery, SWECO shall request that the Transmission Supplier file with the FERC an unexecuted service agreement or unexecuted service agreement amendment setting forth the terms on which the Transmission Supplier is willing to provide the requested service to MEMBER Load. SWECO and MEMBER shall cooperate in seeking FERC review of any Transmission Supplier's refusal to provide requested service. 7.3 NEW POINTS OF DELIVERY If MEMBER desires to establish a new Point of Delivery on the transmission system of SWECO or a Transmission Supplier, MEMBER shall so notify SWECO. Such notice shall be given in accordance with the requirements of Section 7.2 of this Agreement. MEMBER and SWECO shall 41 enter into a written delivery point agreement for each new Point of Delivery containing, among other things, the location of the new Point of Delivery, capacity required, and a description of the facilities to be installed. Such delivery point agreement shall be subject to approval by SWECO or the appropriate Transmission Supplier and obtaining any required regulatory approval. SWECO shall not unreasonably withhold any such approval. 7.4 NOTICE OF POINT OF DELIVERY ABANDONMENT Whenever MEMBER desires to abandon a Point of Delivery, MEMBER shall notify SWECO of such abandonment, in writing, as far in advance of the proposed abandonment date as is practical, but not less than the notice required for abandonment, if any, as specified in the relevant Transmission Service Agreements. Any Point of Delivery abandonment shall be subject to the abandonment charges provided for in Sections 6.7 and 6.8 of this Agreement. 7.5 SWECO OR TRANSMISSION SUPPLIER FACILITIES If a change requested by MEMBER pursuant to Section 7.2 or Section 7.3 is mutually agreeable to SWECO and the relevant Transmission Supplier, SWECO shall furnish MEMBER a written construction schedule within 30 days after said construction schedule is received by SWECO from the 42 Transmission Supplier. To the extent such change in service or additional service would require investment by a Transmission Supplier in additional transmission or distribution facilities, SWECO shall not be obligated to provide service to the new or changed Point of Delivery until the relevant Transmission Service Agreement has been amended and such amendment becomes effective and any required construction is completed. In the event SWECO, the Transmission Supplier or other agency for coordinating the use of transmission facilities determines that a request for a new or changed Point of Delivery is not feasible, SWECO shall consult with MEMBER for the purpose of suggesting a feasible alternative to the request made by MEMBER and a representative of MEMBER shall be invited by SWECO to participate in any meeting with such Transmission Supplier or other agency. From time to time, SWECO or another Transmission Supplier may convert its line operating voltages to higher voltages. MEMBER shall be required to accept any such change to a higher voltage at any Point of Delivery in accordance with the terms and conditions, if any, of the applicable Transmission Service Agreements. SWECO shall give notice to MEMBER of such changes at least 24 months in 43 advance of any such change in SWECO facilities initiated by SWECO or within 15 days after receipt of any such notice from Transmission Supplier, as the case may be. In negotiating the Transmission Service Agreements, SWECO shall endeavor to obligate the Transmission Supplier to give SWECO at least 24 months' prior written notice of the Transmission Supplier's intention to convert its transmission line operating voltages to higher voltages. ARTICLE VIII OPERATING RESPONSIBILITIES 8.1 OPERATING RESPONSIBILITIES OF MEMBER AND SWECO MEMBER and SWECO each shall exercise reasonable diligence to use and provide any service furnished under this Agreement to secure the efficiency of their respective apparatus and systems in keeping with Good Utility Practice in the area, shall coordinate their respective systems' relaying and fusing and with those of the Transmission Suppliers so as to preclude unnecessary interruptions, shall maintain their respective lines at all times in a safe operating condition in accordance with Good Utility Practice, shall operate their respective facilities in a manner designed not to interfere with the service to 44 customers of the other Party, and shall coordinate maintenance activities which may adversely affect the operation of their respective facilities. 8.2 POWER FACTOR The amounts that SWECO bills MEMBER for service under this Agreement shall be adjusted to reflect adjustments, charges, fees or penalties relating to power factor charged SWECO by a Transmission Supplier relating to service provided hereunder. Such billing adjustments shall be made by individual Points of Delivery. SWECO agrees to provide MEMBER information concerning charges, fees or penalties that are imposed by a Transmission Supplier and will attempt to notify MEMBER when MEMBER is approaching a potential penalty power factor level. SWECO will also notify MEMBER if and when SWECO becomes aware that MEMBER is operating its facilities in a manner that violates power factor requirements imposed under any applicable Transmission Service Agreement. However, SWECO shall have no obligation to provide reactive power to remedy a MEMBER's failure to maintain the power factor levels required by a Transmission Supplier. 8.3 EMERGENCY LOAD RELIEF 45 SWECO shall develop a load relief plan to comply with contingent situations that may arise in the region. MEMBER shall participate in SWECO's load relief plan, pro rata, on a non-discriminatory basis. 8.4 COORDINATION OF TEMPORARY TRANSFER OF LOAD To the extent permitted under any applicable Transmission Service Agreement, MEMBER may temporarily transfer load from one Delivery Point to another as necessary to facilitate the safe, reliable and economic provision of service to its retail customers while system maintenance activities are being conducted or to respond to system emergencies. Such transfers shall not exceed the physical capacity or constraints of the SWECO facilities or of any Transmission Supplier's system. MEMBER shall notify SWECO's system dispatcher of any proposed transfer as far in advance as is practical and shall coordinate any such transfer with SWECO's system dispatcher to assure compliance with Good Utility Practice. Such notice shall state, among other things, the duration of the expected transfer, the Points of Delivery involved in the proposed load transfer and the amount of said load to be transferred. After the load has been transferred back to the original Point of Delivery, the MEMBER shall provide SWECO with written verification of the exact 46 duration of the transfer. Any additional costs of transmission incurred due to the temporary transfer shall be borne by the MEMBER. Monthly billing will be adjusted as necessary to avoid duplicative billing for demand charges. 8.5 EXTENDED OUTAGE During any outage of all or any part of the Project Capacity (whether or not the cause of such outage is a force majeure event), the Member shall pay the charges described in Schedule A for MEMBER Base Supply provided under this Agreement. In the event that any of the Project Capacity is out of service for more than 60 consecutive days for any reason (whether or not the result of force majeure), the demand charges payable by MEMBER for MEMBER Base Supply in accordance with Schedule A shall be reduced by the difference (net of any abatement from the Rate Fund described in Schedule A) between the cost of replacement power (in mills per kWh) purchased to cover the outage after the sixtieth consecutive day of outage and charged MEMBER in accordance with Schedule A and the sum of energy and fuel costs (in mills per kWh) charged MEMBER for energy provided from operating Project Capacity and Economic Power (as defined in Schedule A) in the Billing Month times the amount of such 47 replacement energy delivered to serve MEMBER Load in the Billing Month; provided, however, that the demand charges payable by MEMBER for the Billing Month shall not be less than an amount sufficient when added to demand charges payable by other Group members for such Billing Month to pay SWECO's debt service requirements relating to Project Capacity and other assets acquired by SWECO from the Cajun estate for such Billing Month. Such reductions in demand charges will be determined utilizing a twenty-five (25) year debt amortization schedule and in a manner that results in all Group members paying the same reduced demand rate. For purposes of this Section 8.5, the amount of replacement energy deemed to be delivered to MEMBER Load in any Billing Month shall be equal to a fraction of the replacement energy delivered to serve Group Load in the Billing Month that has as its numerator total energy deliveries to the MEMBER's Points of Delivery and as its denominator total energy deliveries to all Group Points of Delivery. Because the effect of Rate Fund reductions on MEMBER billings will not be calculated and applied until after the close of any Contract Year, monthly billing adjustments made to take account of Extended Outages shall be tentatively determined 48 without reference to Rate Fund applications and shall be recalculated at the time Rate Fund allocations for the Contract Year are determined. In the event of an outage of Project Capacity that persists beyond 60 consecutive days, SWECO shall have the option to reduce its obligation to serve MEMBER Load by an amount not to exceed the MEMBER Share of the outaged capacity divided by .85. To exercise such option SWECO must notify MEMBER in writing no later than 59 days following the first day of any outage of Project Capacity of the amount by which SWECO has elected to reduce its obligation to serve MEMBER Load. The indicated reduction in SWECO's obligation shall take effect on the earlier of (x) the date on which SWECO calls debt securities equal to its Depreciated Book Value in the outaged Project Capacity that is the basis of the reduction in SWECO's obligation or (y) a date that is 18 months after the date on which such outage began, and the amount of capacity by which SWECO's obligation to serve MEMBER Base Supply is reduced shall become part of MEMBER's Excess Requirements. MEMBER may not use Other Resources to serve that part of MEMBER Load that is equal to the reduction in SWECO's MEMBER Base Supply obligation until the reduction in SWECO's MEMBER Base Supply obligation to such MEMBER takes effect. Beginning with the effective date of such reduction in SWECO's MEMBER Base Supply 49 Obligation, the calculation of the demand ratchet under Schedule A, Section 1.3, Step 3 (2) shall exclude the amount of kilowatts, if any, that exceed the reduced MEMBER Base Supply Obligation. If SWECO elects to reduce its obligation to serve MEMBER load, SWECO shall provide a credit on MEMBER billing determined by the product of the energy rate under Schedule A and the amount of replacement energy delivered to serve MEMBER load in the Billing Month. 8.6 QUALIFYING FACILITY MEMBER shall notify SWECO of the proposed connection to any part of MEMBER's transmission or distribution facilities of any Qualifying Facility (as determined under Subpart B of Part 292 of the FERC's regulations under Section 201 of the Public Utility Regulatory Policies Act of 1978 (PURPA)). The Qualifying Facility must agree to operate under the criteria for non-utility generation established by the Southwest Power Pool or its successor in function. MEMBER shall give SWECO as much notice as possible, but not less than 90 days' notice, of its intention to connect its system to a Qualifying 50 Facility and shall give SWECO reasonable notice prior to the initial energizing or start-up testing of the Qualifying Facility so as to allow SWECO to have a representative present at such test. In addition, MEMBER shall secure approval from SWECO and the appropriate Transmission Supplier of any interconnection facilities so that adequate safety and metering provisions can be made prior to such interconnection. MEMBER shall supply, at no cost to SWECO, the metering equipment required to determine the amount of capacity and energy supplied to MEMBER by the Qualifying Facility. The metering equipment must be compatible with the existing translation equipment of SWECO or the Transmission Supplier as appropriate. SWECO or the Transmission Supplier shall approve the compatibility of the metering equipment before the equipment is installed. MEMBER shall make its metering data available to SWECO. SWECO's approval of such facilities shall not be construed as confirming or endorsing the design, or as a warranty of safety, durability or reliability, of any facility or equipment. It will be MEMBER's sole responsibility to meet or comply with all permits, license 51 agreements, fees, rules, regulations, ordinances, inspection, or other requirements that may be imposed. If, during the billing month, MEMBER purchases power from a Qualifying Facility, SWECO will credit MEMBER's charges for the current billing month in an amount equal to the capacity- and energy-related compensation SWECO would have been required to pay such Qualifying Facility for such power, in accordance with the rules of the LPSC, had such Qualifying Facility elected to require SWECO to purchase its output. In turn, SWECO will bill MEMBER in such month at the otherwise applicable rates under this Agreement for the sum of capacity and energy delivered from any such Qualifying Facility and from SWECO's system in accordance with Article X and Schedules A and B. In the alternative, if MEMBER and the Qualifying Facility so agree, SWECO will execute a contract with the Qualifying Facility for the purchase of capacity and energy at SWECO's avoided cost, in accordance with the rules of the LPSC. All other provisions of this Section 8.6 shall apply to the transaction (including particularly those related to billing) without regard to whether SWECO or MEMBER executes the contract for purchase of the energy generated by the Qualifying Facility. Any 52 capacity and energy purchased by SWECO directly from a Qualifying Facility shall not be considered Project Capacity. ARTICLE IX METERING 9.1 METER READING The Parties shall cause meters to be read monthly at times agreed upon. Metering records shall be available at all reasonable times to authorized representatives and employees of the Parties. 9.2 BILLING METERS AND ASSOCIATED INSTRUMENT TRANSFORMERS SWECO shall be responsible for the purchase, installation, ownership, operation and maintenance of the billing meters and associated instrument transformers at all the existing and new Points of Delivery to MEMBER. SWECO's records of data collected from such meters shall be available at all reasonable times to the duly authorized representatives of MEMBER. If necessary to accommodate a specific installation at a location other than the physical Points of Delivery, losses may be added to the actual meter readings to create the equivalent readings that would have been obtained if the meters were installed at the physical Points of Delivery. 53 SWECO's investments in billing meters and associated instrument transformers after the Effective Date of the Agreement shall be listed as Additional Investments on Schedule D to this Agreement. Upon reasonable request, SWECO shall make available for MEMBER's use SWECO's instrument transformers located at MEMBER's Points of Delivery for purposes of installing check meters or for load research purposes. MEMBER's use of such instrument transformers shall be subject to SWECO's prior approval of MEMBER's equipment installation, which approval shall not be unreasonably withheld 9.3 METER TESTS SWECO shall test and calibrate meters used in connection with service provided hereunder by reference to accurate standards at intervals of approximately every twenty-four (24) months or at other intervals mutually agreed to by the Parties. If SWECO finds a meter is not registering accurately, SWECO shall restore the meter to an accurate condition or substitute in its place an accurate meter. SWECO shall bear the expense of all such routine tests. 54 9.4 METER ACCURACY SWECO and MEMBER shall have the right to request that a special test of metering equipment be made at any time. If any test made at MEMBER's request discloses that the metering equipment tested is registering within plus or minus one percent accuracy, MEMBER shall bear the expense thereof. The expense of all other such tests shall be borne by SWECO. 9.5 METER ADJUSTMENTS The results of all meter tests and calibrations shall be open to examination by MEMBER. Any meter tested and found to be within plus or minus one percent accuracy shall be considered to be accurate. In the event that SWECO determines that, as the result of a test of any meter, a meter is not accurate within the limits of plus or minus one percent accuracy, SWECO shall estimate the amount of electrical usage upon which MEMBER's bill should have been rendered. Such estimate shall be based on all known pertinent facts (which will be developed jointly by SWECO and MEMBER) and shall be made for service provided from the date of the last previous test of the metering equipment found to be in error, but in no event shall such estimate be made for electrical use prior to the twelve 55 (12) Billing Months immediately preceding the date on which the inaccuracy was discovered. To adjust for the difference between metered electrical usage upon which billing amounts were determined and estimated electrical usage upon which MEMBER should have been billed, SWECO will make appropriate adjustments (upward or downward) during the next Billing Month to correct for such metering errors. Such adjustment shall be the difference between the amount billed and the estimated amount which should have been billed to account for such past metering errors. If the meter in error has not been in service for twelve (12) full preceding Billing Months, or if the meter inaccuracy can be determined to have begun less than twelve (12) months prior to the date on which the inaccuracy was discovered, then the estimated amount to be refunded or credited by SWECO or paid by MEMBER shall reflect these factors. ARTICLE X BILLINGS AND PAYMENTS 10.1 COMPENSATION The rates, charges, and fees used to determine the amounts that MEMBER shall pay to SWECO each month during the term of this Agreement for service hereunder shall be determined in accordance with the rate 56 schedules attached hereto, including without limitation Schedules A, A-1, A-2, A-3, and B to this Agreement, and any other provision of this Agreement relating to rates and charges for service. SWECO may make adjustments to any bill for a period of up to one year after the date of the original bill in order to reflect differences in charges resulting from SWECO's receipt of more accurate data. SWECO may make additional adjustments to bills to the extent such additional adjustments are required to reflect the final resolution of any claim, action, or proceeding that affects data contained in an original bill and that is formally initiated by or noticed to SWECO prior to the end of the period provided for in Section 10.3 for auditing SWECO's fuel costs. SWECO shall provide notice of any such claim, action, or proceeding promptly upon learning of same. SWECO shall furnish bills that separately state the charges by individual Point of Delivery. SWECO shall also provide to a designated representative of the MEMBER the information listed on Schedule F with each monthly bill in order that such representative may verify that the bill has been properly computed. 57 10.2 FUEL AND ECONOMIC POWER COSTS Fuel and Economic Power costs incurred by SWECO to serve MEMBER Load shall be calculated monthly in accordance with the Fuel Cost Provisions of Schedules A and B to this Agreement. 10.3 AUDITS OF COST RECORDS Within three years following any calendar year for which service was provided pursuant to this Tariff, and subject to any confidentiality agreement between SWECO and any supplier of goods or services, MEMBER, acting through the designated representative referred to in Section 10.1, shall have the right to audit SWECO's records of fuel and Economic Power costs, MEMBER Hydro costs, and charges paid to Transmission Suppliers at the offices where such records are maintained during normal business hours; provided that appropriate notice shall have been given prior to any audit and provided that the audit shall be limited to those portions of such records that relate to service under this Agreement for such calendar year. The costs of any such audit shall be borne by the MEMBER. 58 10.4 ECONOMIC DEVELOPMENT AND INCENTIVE RATES SWECO shall sell to MEMBER power and energy needed to serve qualifying economic development and incentive loads as follows: (a) For the economic development and incentive loads in respect of which MEMBER has made a formal written commitment of reduced rates (based on Cajun incentive tariffs) as of the Effective Date and that are listed on Schedule F to this Agreement, SWECO shall provide electric service to MEMBER at the rates set forth in either Schedule A or Schedule A-3. On or before the Effective Date, MEMBER shall determine which rate option is best and elect for each retail load being served at the Effective Date with power and energy purchased from Cajun at LPSC approved incentive rates on file with the LPSC on March 31, 1997 (which are the Cajun Riders JCIC, LPI, VLP and EEDS and the Cotton Gins Rider that are described in Schedule A-3) whether to be billed under Schedule A or Schedule A-3 to this Agreement. Any loads greater than 10 mW in respect of which MEMBER has made a formal written offer of reduced rates (based on Cajun rate VLP) shall be deemed to be Separately Metered Load that SWECO shall supply to MEMBER in accordance with the rates and terms 59 set forth in Schedule A-3 that are applicable to VLP customers and shall not be counted as MEMBER Load. If MEMBER elects Schedule A-3 for certain incentive loads, such Schedule A-3 rates shall be applicable only during the remaining term of the original incentive load contracts as referenced in Schedule A-3 and thereafter such incentive loads shall be billed in accordance with Schedule A. (b) For economic development and incentive loads that are first served by MEMBER after the Effective Date of this Agreement, SWECO shall provide electric service to MEMBER at the applicable rates, terms and conditions set forth in Schedules A-1 and A-2 to this Agreement. 10.5 PAYMENT BY MEMBER TO SWECO MEMBER shall make payment to SWECO for electric service billed under this Agreement in a manner that will assure that collected funds are available to SWECO within twenty (20) days from the date said bills are mailed. No dispute in regard to billing shall delay payment. Payment shall be made to SWECO by check or by electronic transfer of funds to the bank and account as indicated on the bill. All payments for service not electronically transferred hereunder shall be mailed to SWECO's address. 60 Unpaid amounts shall be subject to a late payment charge equal to one percent (1%) per month; provided, however, that such late payment charge shall not exceed the maximum charge which may be collected under the applicable provisions of Louisiana law. If MEMBER makes collected funds available to SWECO sooner than 15 days after the date a bill is mailed, MEMBER's account shall be credited with the product of .0001369863 and the amount paid early for each day sooner than 15 days after the date a bill is mailed that such amount is available to SWECO in collected funds. The payment of that portion of any bill that MEMBER may be contesting shall not be construed as waiving MEMBER's right to recover the contested portion. ARTICLE XI ADDITIONAL PROVISIONS 11.1 PLANNING In order to keep SWECO advised of MEMBER's future requirements so that SWECO may make provision for such requirements in its long-range system plans, MEMBER shall cooperate with SWECO in its system planning and shall provide SWECO prior to the earlier of (1) the time specified in 61 the appropriate Transmission Service Agreements, or (2) June 1 of each Contract Year, a forecast of MEMBER's anticipated load requirements in, or proposed to be placed in, SWECO's load control area for each of the next ten Contract Years or the remaining Contract Years if fewer than ten. MEMBER shall also advise SWECO of its maximum load requirements at each existing Point of Delivery, and its anticipated need for additional Point(s) of Delivery for each such Contract Year. 11.2 TECHNICAL COMMITTEE As soon after the Effective Date as possible, SWECO and the members of the Group shall establish a Technical Committee consisting of representatives of SWECO and of each member of the Group. The Technical Committee shall meet as often as reasonably required to keep the Group informed of SWECO's planning decisions and operating procedures. SWECO shall entertain suggestions and advice from the Technical Committee in respect of SWECO's obligations under this Agreement; however, such suggestions and advice from the Technical Committee shall not be binding upon SWECO, but shall be advisory only. 62 11.3 RESPONSIBILITY FOR ELECTRICITY MEMBER assumes all responsibility for electricity on its side of each Point of Delivery and SWECO assumes all responsibility for electricity present on electric facilities owned by SWECO. It is also understood and agreed that neither SWECO nor MEMBER assumes any responsibility with respect to the construction, installation, insulation, maintenance or operation of the systems of the other or any part thereof and neither SWECO nor MEMBER shall, in any event, be liable for damage or injury to any person or property whatsoever arising, accruing or resulting from, in any manner, the receipt, transmission, control, use, application or distribution by the other Party of said electricity. Both SWECO and MEMBER shall use reasonable diligence in maintaining their respective lines and equipment in proper and serviceable condition, and shall take reasonable steps and precautions for maintaining the services agreed to be performed and received under this Agreement. 11.4 CONTINUITY OF SERVICE SWECO shall endeavor at all times to provide in an uninterrupted fashion the service contemplated by this Agreement in keeping with Good Utility Practice. In no event, however, shall SWECO be liable to MEMBER 63 for losses or damages arising from failure, interruption or suspension of service resulting from SWECO's operations conducted in accordance with Good Utility Practice, or any interruption or suspension of transmission or ancillary service by any Transmission Supplier or any other failure of any Transmission Supplier to provide service unless such interruption, suspension or failure of transmission or ancillary service is a result of SWECO's failure to discharge one or more of its obligations under this Agreement. SWECO reserves the right to suspend service pursuant to Good Utility Practice without any liability on its part at such times and for such periods and in such manner as it may deem advisable including, without limitation, suspensions for the purpose of making necessary adjustments to, changes in, or repairs on, its lines, substations and facilities, and suspensions in cases where, in its opinion, the continuance of service to MEMBER would endanger persons or property. SWECO shall use its best efforts to provide MEMBER with reasonable notice in the event of a suspension of service. Monthly billing will be adjusted as necessary to avoid duplicative billing related to load shifts made by MEMBER to respond to any such suspension 64 of service. Any additional costs of transmission incurred due to load shifts made at the request of SWECO shall be borne by SWECO. 11.5 RIGHT OF ACCESS Each Party shall give all necessary permission to the other Party to enable the agents of the other Party to carry out this Agreement, and shall give the other Party the right to enter its premises by the other Party's fully authorized agents and employees at all reasonable times for the purposes of reading or checking meters; for inspecting, testing, repairing, renewing or exchanging any or all of the other Party's equipment; or for performing any other work incident to rendering the services covered by this Agreement. Except as otherwise agreed by the Parties or in emergencies, whenever the agent of one Party enters the premises of the other Party, such agent shall be accompanied by personnel of the Party owning such premises. It is agreed, however, that neither Party hereto assumes the duty of inspecting the equipment, lines, or other facilities of the other. 11.6 HOLD HARMLESS PROVISIONS Each Party shall indemnify and hold harmless the other Party from and against any and all legal and other expenses, claims, costs, losses, 65 suits or judgments for damages to any person or destruction of any property arising in any manner directly or indirectly by reason of the sole negligence or willful misconduct of such Party's authorized representatives. TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY, FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, MULTIPLE, OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LIABILITY BASED UPON OR DAMAGES FOR LOSS OF PROFITS) WITH RESPECT TO ANY CLAIM ARISING OUT OF THIS AGREEMENT WHETHER BASED ON CONTRACT, TORT (INCLUDING THE NEGLIGENCE OR THE SOLE NEGLIGENCE OF A PARTY) OR OTHERWISE. For purposes of this Section 11.6 the term Party shall mean SWECO or MEMBER and their respective officers, directors, employees and independent contractors. 11.7 RIGHT OF FIRST REFUSAL IN CASE OF PROPOSED SALE, MERGER OR CONSOLIDATION. In the event MEMBER receives an offer to sell, merge, consolidate or otherwise transfer all or substantially all of the assets of MEMBER, MEMBER shall first offer to sell such assets to SWECO, or any of its affiliates, on the same terms and conditions as are received from any 66 other party unless the offering party is a member of the Group that is a rural electric cooperative that is purchasing from SWECO the capacity and energy required to meet such party's MEMBER Load under a Power Supply and Service Agreement with SWECO having terms similar to the terms of this Agreement and such party's offer includes an obligation to assume MEMBER's obligation to SWECO under this Agreement. After SWECO receives written notification of said offer and of MEMBER's agreement or desire to sell, SWECO shall have 120 days to notify MEMBER of SWECO's agreement to purchase MEMBER's assets on the same terms and conditions, or on more favorable terms and conditions than those that were submitted by the offering party. During the 120-day notification period, MEMBER shall not enter into any memorandum of understanding, contract or other agreement with the third party without specifically noting therein that said agreement is subject to this right of first refusal. In the event SWECO or any of its affiliates notify MEMBER during the 120-day period that it desires to purchase MEMBER's assets, the Parties will proceed, with due diligence, to complete the transaction; provided, however, that SWECO's right to purchase MEMBER's assets shall be subject to obligations relating to disposition of MEMBER's assets that MEMBER may 67 have under its by-laws in effect on January 1, 1997 that continue in effect as of the date on which the MEMBER first receives an offer from the third party to sell, merge, consolidate or otherwise transfer the MEMBER's assets. In the event SWECO does not respond within 120 days or notifies MEMBER during such period of its election not to submit an offer, MEMBER shall be free to sell, merge, consolidate or otherwise transfer its assets to the third party. MEMBER specifically agrees to abide by the terms of this provision and acknowledges that in the event of noncompliance with any terms of this provision, any contract, agreement or transfer of assets to a third party shall be null and void, without force and effect and subject to any and all remedies pursuant to applicable law. 11.8 ACQUISITION OF FACILITIES TO SERVE RETAIL CUSTOMERS FORMERLY SERVED BY OTHER SUPPLIERS. In the sole event that the MEMBER determines to purchase or otherwise acquire facilities for the provision of electrical service to a customer or customers not served by MEMBER on the Effective Date and if it is necessary in order to consummate the transaction for the MEMBER to assume an existing power purchase agreement from the seller of the 68 acquired facilities or execute a new power purchase agreement with such seller, MEMBER shall have the right to purchase power under the MEMBER's agreement with the seller solely to serve the electric load of customers being served in the new service territory. Any electric load so served shall not be counted as MEMBER Load while so served, and if served through a Point of Delivery shall be separately metered at MEMBER's sole expense. After the expiration of the primary term of any such agreement, MEMBER shall purchase from SWECO the power and energy needed to serve the new customer or customers if MEMBER would otherwise have been obligated to purchase such power and energy from SWECO under this Agreement and, in such event, MEMBER hereby renounces any right to extend the primary term of any agreement assumed or entered into by MEMBER in accordance with this Section 11.8. 11.9 EXTRAORDINARY LOAD SWECO and MEMBER shall cooperate to facilitate the attraction of Extraordinary Load to SWECO's control area. MEMBER shall keep SWECO informed regarding any proposals to potential Extraordinary Load customers. In the event any such potential Extraordinary Load customer rejects such proposal and MEMBER demonstrates to SWECO's reasonable 69 satisfaction that, unless such potential Extraordinary Load customer is offered a lower price for electricity than MEMBER can offer based on its costs incurred under this Agreement, or under other power supply arrangements that SWECO is willing to offer to MEMBER, SWECO shall have no obligation to serve such Extraordinary Load, which shall not become part of MEMBER Load, and MEMBER shall have the right to purchase from a Third-Party Supplier the capacity and energy needed to serve such Extraordinary Load. Such right to purchase from a Third-Party Supplier shall be subject to SWECO's right of first refusal to furnish the capacity and energy MEMBER requires in order to serve such Extraordinary Load. If served through a Point of Delivery, such Extraordinary Load shall be separately metered at MEMBER's sole expense. 11.10 COMPETITIVE TERRITORY CREDITS The MEMBER shall use all reasonable efforts to oppose any activities by any municipality or any other entity that threatens to reduce MEMBER Load or cause SWECO to sustain loss or impair SWECO's ability to recover the costs it has incurred to provide service under this Agreement. Nothing in this Section 11.10 shall, however, require MEMBER to take any action that is in conflict with MEMBER's obligations under any agreement 70 between MEMBER and a political subdivision of the State of Louisiana that is in force and effect as of November 1, 1997, so long as such Agreement remains in effect. The MEMBER acknowledges and recognizes that SWECO has made a substantial investment and incurred substantial costs to enable it to serve MEMBER load. In the event that a political subdivision, as defined by the Louisiana Constitution in effect on the Effective Date, that serves electric utility customers in a geographic area that is contiguous to the geographic area in which MEMBER provides electric utility service, poses a significant competitive threat to MEMBER because such political subdivision either (a) has offered to provide electric utility service at lower cost (after considering the value of services or subsidies that such political subdivision has offered to MEMBER's electric utility customers) or (b) has taken or initiated official action, or Member and SWECO in good faith believe such action is likely, to annex any part of the geographic area in which MEMBER serves retail customers or to condemn any member facilities: (1) SWECO shall establish a separate fund ("Territory and Cooperative Defense Fund") to be available to Member to assist Member and other 71 members of the Group to defend against condemnation, hostile takeover, and annexation efforts. On the first day of Contract Year one, SWECO shall deposit $900,000 in the "Territory and Cooperative Defense Fund" to be available to qualifying Members during Contract Year one (1) through five (5). Beginning on the first day of Contract Year Six, such fund shall be reduced to an amount equal to the lesser of $500,000 or the actual balance in the fund at the end Contract Year 5. Such fund shall continue to be available until the earlier of the exhaustion of the fund or the end of Contract Year 25. Any amount remaining in the fund at the end of Contract Year 25 shall revert to SWECO. (2) Beginning in Year 6, and for each Contract Year through the end of Contract Year 25, SWECO shall establish a separate fund of up to $500,000 per year ("Contingent Fund"). The Contingent Fund shall be available to all qualifying Members of the Group in order to assist such Members in defending against the condemnation and annexation efforts described in this section, 72 but shall not be available to defend hostile takeover activities of Third Parties. For each of the Territory and Cooperative Defense Fund and the Contingent Fund, a qualifying Member is entitled to utilize up to the full amount of each fund for the purposes specified, unless more than one qualifying Member is entitled to participate in such fund, in which case Member shall be entitled to its pro rata share of such fund, which pro rata share shall be determined by the ratio of the MEMBER's Member Share to sum of the Member Shares of the qualifying Members. 11.11 SWECO COVENANTS In addition to its other obligations under this Agreement, SWECO specifically warrants and covenants to MEMBER that it will (a) maintain its status as a validly existing corporate entity in good standing with full power and authority to carry out its business as contemplated by this Agreement; and (b) pay all principal and interest SWECO accrues, and comply with all other covenants and obligations, under any financing documents executed by SWECO to finance its acquisition of the Project Capacity. 73 11.12 MEMBER COVENANTS In addition to its other obligations under this Agreement, MEMBER specifically warrants and covenants to SWECO that MEMBER will: (a) maintain its status as a validly existing corporate or other legal entity in good standing with full power and authority to carry on its business as it is now conducted; (b) pay all principal and interest it accrues, and comply with all other covenants and obligations, under any financing documents executed by MEMBER; (c) establish and maintain, to the extent permitted by all regulatory bodies having jurisdiction thereof, rates and collect charges for retail service based thereon sufficient to pay all indebtedness and all expenses of MEMBER, including but not limited to all payments due and owed to SWECO pursuant to this Agreement; and (d) oppose and not allow any substantial part of its electric distribution system to be sold, transferred or leased, or any of its customers to be served by others except as is specifically authorized by this Agreement or required by law. 74 ARTICLE XII DEFAULT 12.1 DEFAULT DEFINED As used in this ARTICLE XII, "default" shall mean the failure of MEMBER or SWECO to make any payment, perform any obligation in the time and/or manner required by this Agreement or otherwise breach any covenant or warranty contained herein, except where such failure to discharge obligations (other than the payment of money) is the result of Force Majeure (as defined in Section 13.20 of this Agreement). 12.2 NOTICE OF DEFAULT Upon failure of a Party hereto to make a payment or to perform an obligation required hereunder, the other Party shall give written notice of such default to the Party in default. The Party in default shall have twenty (20) days within which to cure such default and, if cured within such time, the default specified in such notice shall cease to exist. 12.3 REMEDIES FOR DEFAULT If a default is not cured as provided in Section 12.2, the Party not in default may resort to all remedies available at law or in equity, including the initiation of a proceeding at the FERC to terminate 75 service. If it is necessary for SWECO to institute legal proceedings or retain an attorney in attempting to collect a delinquent bill, MEMBER will also pay and be responsible for all interest provided for in Section 10.3 and all expenses and costs of collection, including reasonable attorneys' fees, incurred by SWECO. ARTICLE XIII GENERAL PROVISIONS 13.1 GOVERNING LAW The validity, interpretation and performance of this Agreement and each of its provisions shall be governed by the laws of the State of Louisiana, except as to matters that are governed by federal law. 13.2 NOTICE Any notice, request, demand, or statement, which may be given to or made upon a Party hereto by the other Party hereto under any of the provisions of this Agreement, shall be in writing unless it is specifically provided otherwise herein, and shall be treated as duly delivered when the same is either (1) personally delivered to the President of SWECO or the General Manager of MEMBER, or (2) deposited in 76 the United States mail, by certified mail, postage prepaid, or (3) delivered by facsimile transmission, and properly addressed to the party to be served, as follows: If the notice is to SWECO: President Southwestern Wholesale Electric Company P. O. Box 21106 Shreveport, Louisiana 71156 FAX (318) 221-____ If the notice is to MEMBER: General Manager "CO-OP" "Address" ___________, Louisiana FAX ( ) ___-____ The names, titles, addresses and fax telephone numbers of either party in this section may be changed by written notification to the other party. 13.3 SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of SWECO and MEMBER and their respective successors and assigns. (a) PERMITTED ASSIGNMENTS BY SWECO The MEMBER acknowledges that SWECO's lenders will advance funds in reliance on this Agreement and similar agreements between SWECO and other Group members and that such agreements will secure SWECO's 77 obligations to repay its lenders. The Parties specifically agree that SWECO, without further consent or approval, may assign, transfer, mortgage and/or pledge or otherwise use this Agreement in order to secure financing and/or refinancing of SWECO, or any of its successors and assigns, and further to allow enforcement, by assignees, receivers or trustees and/or creditors to this Agreement. In this regard, it is further acknowledged and agreed that SWECO, or any of its successors and/or assigns, is hereby authorized and permitted, without further approval, to sell, transfer, merge or consolidate all or substantially all of its assets with any other party or entity and to assign this Agreement in the event of such sale, transfer, merger or consolidation. (b) PERMITTED ASSIGNMENTS BY MEMBERS MEMBER, without the approval of SWECO, may assign, transfer, mortgage or pledge this Agreement to create a security interest for the benefit of the United States of America, acting through the administrator of the Rural Utilities Services (the "Administrator"). Thereafter, the Administrator, without the approval of SWECO, may (1) cause this Agreement to be sold, assigned, transferred or otherwise disposed of to 78 a third party pursuant to the terms governing such security interest, or (2) if the Administrator first acquires this Agreement pursuant to 7 U.S.C. ' 907, sell, assign, transfer or otherwise dispose of this Agreement to a third party; provided, however, that in either case (a) MEMBER is in default of its obligations to the Administrator that are secured by such security interest and the Administrator has given SWECO notice of such default; and (b) the Administrator has given SWECO thirty (30) days prior notice of its intention to sell, assign, transfer or otherwise dispose of this Agreement indicating the identity of the third-party assignee or purchaser. In addition, MEMBER, without the approval of SWECO, may assign, transfer, mortgage or pledge this Agreement to create a security interest for the benefit of any lender other than the Administrator. (c) OTHER ASSIGNMENT Except as otherwise provided in this Section 13.3, neither Party shall assign its interest in or delegate its duties under this Agreement in whole or in part without the prior written consent of the other Party. Such consent shall not be unreasonably withheld. 79 (d) EFFECT OF ASSIGNMENTS No assignment, sale, transfer, merger or consolidation shall in any way relieve or discharge any Party of its obligations under this Agreement or impose additional obligations or burdens on the other Party unless specifically so agreed in writing by the other Party. 13.4 RULES OF CONSTRUCTION (a) The descriptive headings of the various articles and sections of this Agreement have been inserted for convenience of reference only and shall in no way modify, expand, or restrict any of the terms and provisions hereof. (b) Wherever the term "including" is used in this Agreement and the Schedules attached hereto, such term shall not be construed as limiting the generality of any statement, clause, phrase or term. (c) The terms defined in this Agreement and the Schedules attached hereto shall include the plural as well as the singular and the singular as well as the plural. (d) The language used in this Agreement is the product of both Parties' efforts, and each Party hereby irrevocably waives the benefit 80 of any rule of contract construction that disfavors the drafter of a contract or the drafter of specific words in a contract. 13.5 EFFECTIVE DATE OF AGREEMENT This Agreement and all obligations hereunder are expressly conditioned upon (i) acceptance for filing by the FERC by a final, nonappealable order, without change, modification, or refund conditions; (ii) receipt of a final, nonappealable order of the LPSC approving MEMBER's execution of this Agreement as prudent; and (iii) upon the granting of all other necessary regulatory approvals and authorizations required by law. SWECO shall file this Agreement with the FERC and request that the Agreement become effective as of the Effective Date. This Agreement shall become effective on the date specified by the FERC in such order accepting this Agreement for filing. 13.6 TERM Unless terminated sooner in accordance with Article XII of this agreement, the provisions of this Agreement shall continue in effect from the first day of the month in which the Effective Date occurs through and including December 31 of the twenty-fifth Contract Year. SWECO and MEMBER shall negotiate in good faith to execute a separate agreement three years prior to the such termination date, to establish 81 the ownership, operation, and maintenance of the Common Facilities listed in Schedule E to this Agreement that will be in-service at the projected termination date. 13.7 COUNTERPARTS This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.8 AMENDMENTS This Agreement may be amended only by a written Agreement executed by both Parties. The Agreements by and between SWECO and each of the Group members are separate contracts, and any amendment to a contract shall only be binding and enforceable upon SWECO and the Group member that are parties thereto and said amendment shall not require the amendment of other agreements between SWECO and other Group members. 13.9 FURTHER ASSURANCES Each Party will execute such further documents and instruments and take such further actions as may be reasonably requested by the other Party in order to carry out and perform this Agreement in accordance with its terms. 82 13.10 SCHEDULES Schedules referred to herein and attached hereto are made a part hereof for all purposes. 13.11 SEVERABILITY OF CONTRACT PROVISIONS In the event any material term, covenant or condition of this Agreement, or any amendment hereto shall be held invalid, illegal or unenforceable as to any Party by any court or regulatory authority having jurisdiction, all remaining provisions of this Agreement not affected by such judgment or order shall continue in full force and effect. The Parties shall conduct good faith negotiations and use best efforts in reaching a mutually acceptable written Agreement to replace deleted provision(s) that will most nearly accomplish the purpose and intent of the said deleted provision(s). 13.12 SEVERABILITY OF MEMBER CONTRACTS If a power supply and service agreement between SWECO and any other member of the Group is held invalid, illegal or unenforceable by any court or regulatory authority having jurisdiction or in the event that any MEMBER contract is rejected, canceled or terminated for any reason whatsoever, this Agreement shall nevertheless remain in full force and effect. 83 13.13 COMPUTATION OF TIME In computing any period of time, prescribed or allowed by this Agreement (other than the beginning and ending dates of a billing month), the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included unless it is a Saturday, Sunday, or legal holiday, in which event the period shall run until the end of the next business day which is neither a Saturday, Sunday, nor legal holiday. 13.14 LIMITATION This Agreement is not intended to and shall not create rights of any character whatsoever in favor of any person, corporation, association, or entity other than the Parties to this Agreement, and the obligations herein assumed are solely for the use and benefit of the Parties to this Agreement, their successors in interest, or assigns. 13.15 WAIVERS A waiver by a Party of a default by the other Party shall not be deemed a waiver of any other or subsequent default. 13.16 REGULATION This Agreement is subject to approval by the regulatory authorities having jurisdiction. This Agreement is also subject to applicable 84 federal, state, and local laws, ordinances, rules, and regulations. Nothing herein contained shall be construed as a waiver of any right to question or contest any such law, ordinance, rule, regulation or asserted regulatory jurisdiction. 13.17 REASONABLENESS OF RATES - PRE-ESTABLISHED RATE CONTRACT This Agreement reflects negotiated, "market based" rates and a pricing regime established by the Parties that takes into account the MEMBER's present and projected needs for electric capacity and energy, the costs of the power supply resources that SWECO shall acquire as contemplated by this Agreement and the power supply alternatives available to MEMBER. The parties agree that the rates and other pricing modalities established hereunder are just and reasonable and take into account specific benefits expected to be achieved by the Parties by this Agreement and not otherwise available to the Parties. 13.18 ROUNDING Whenever the provisions of this Agreement require the use of kilowatts or kilowatt-hours, the actual kilowatt or kilowatt-hour figure involved shall be adjusted by rounding upward to the next full kilowatt or kilowatt-hour if the actual figure is 0.5 kilowatt or kilowatt-hour, or 85 higher, or downward to the last full kilowatt or kilowatt-hour if the actual figure is less than 0.5 kilowatt or kilowatt-hour. 13.19 SURVIVORSHIP OF OBLIGATIONS The termination or cancellation of this Agreement shall not discharge any Party from any obligation it owes to the other Party under this Agreement by reason of any transaction, loss, cost, damage, expense or liability which shall occur or arise prior to such termination. It is the intention of the Parties that any such obligation owed (whether the same shall be known or unknown as of the termination or cancellation of this Agreement) shall survive the termination or cancellation of this Agreement. The Parties also intend that the indemnification and limitation of liability provisions contained in ARTICLE XI hereof shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement, except with respect to actions or events occurring or arising after such termination or cancellation is effective. 13.20 FORCE MAJEURE Except as specifically otherwise provided in this Agreement, neither Party shall be liable to the other Party for failure to perform its 86 obligations under this Agreement (other than an obligation to pay money) when such failure is attributable solely to Force Majeure. Force Majeure shall mean any cause beyond the reasonable control of either Party, including, without limitation, failure, or imminent threat of failure, of facilities or equipment, flood, freeze, earthquake, storm, fire, lightning, other acts of God, epidemic, war, acts of a public enemy, riot, civil disturbance or disobedience, strike, lockout, work stoppages, other industrial disturbance or dispute, labor or material shortage, sabotage, restraint by court order or other public authority, and action or non-action by, or failure or inability to obtain the necessary authorizations or approvals from, any governmental agency or authority, which by the exercise of due diligence such Party could not reasonably have been expected to avoid and by exercise of due diligence it could not overcome. Nothing contained herein shall be construed so as to require the Parties to settle any strike, lockout, work stoppage or any industrial disturbance or dispute in which it may be involved, or to seek review of or take an appeal from any administrative or judicial action. 87 Neither the sale by SWECO to the MEMBER of electric capacity and associated energy under this Agreement, nor any other provision of this Agreement, shall constitute either (i) a sale, lease, transfer, dedication or conveyance of an ownership interest in or to any asset of SWECO or (ii) an entitlement to the electric capacity or associated energy from any specific SWECO asset. SWECO shall have the sole authority, which it may exercise in its discretion, to manage, control and operate all SWECO resources, subject to SWECO's obligations to provide electric capacity and associated energy to the MEMBER pursuant to this Agreement. In the event of an interruption of service, SWECO and the MEMBER shall use all due diligence to restore their respective systems to enable the delivery and receipt of electric capacity and energy. In the event of a power shortage, or an adverse condition or disturbance, SWECO may, without incurring liability, take such emergency action as, in the judgment of SWECO, may be necessary; provided that SWECO in determining the action to be taken shall make no adverse distinction against MEMBER Load. Such emergency action may include, but shall not be limited to, reduction or interruption of the supply of electricity to some Points of 88 Delivery in order to compensate for an emergency condition on the system of SWECO, or on any other directly or indirectly interconnected system. 13.21 AUTHORITY OF MEMBER MEMBER represents and warrants that by resolutions duly adopted at a properly called and noticed meeting of MEMBER's Board of Directors at which a quorum was present and otherwise, MEMBER has taken all necessary corporate action required by MEMBER's Articles of Incorporation and Bylaws to be taken to authorize MEMBER's execution, delivery and performance of this Agreement and that this Agreement constitutes a valid and legally binding obligation of MEMBER. MEMBER will provide SWECO with copies of such resolutions. 13.22 WARRANTIES THE PARTIES HAVE EXECUTED THIS AGREEMENT IN RELIANCE SOLELY ON THE EXPRESS WARRANTIES AND COVENANTS CONTAINED HEREIN. THE PARTIES EXPRESSLY DISCLAIM AND NEGATE ANY AND ALL OTHER REPRESENTATIONS OR WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING ANY REPRESENTATION OR WARRANTY OF (1) MERCHANTABILITY, (2) CONFORMITY TO MODELS OR SAMPLES, AND (3) FITNESS FOR A PARTICULAR PURPOSE. 89 IN WITNESS WHEREOF, SWECO and MEMBER have caused this Agreement to be executed in multiple copies in their names by their respective duly authorized officials as of the date and year first above written. SOUTHWESTERN WHOLESALE ELECTRIC COMPANY By: _____________________________ ATTEST: - --------------------------- MEMBER COOPERATIVE ASSOCIATION By: _____________________________ General Manager ATTEST: - ------------------------ 90 SCHEDULE A RATES AND CHARGES FOR MEMBER BASE SUPPLY SERVICE 1.1 For MEMBER Base Supply SWECO shall bill MEMBER each month a Demand Charge, an Energy Charge, and a Fuel Cost Charge and all other charges and credits contemplated by this Agreement to be applicable to MEMBER Base Supply Service, including without limitation the Rate Fund Credits, Wheeling Charges and Facilities Charges described in this Schedule A. 1.2 The Demand Charge for MEMBER Base Supply at a Point of Delivery shall be equal to the Demand Rate shown below times the Kilowatts of Billing Demand associated with MEMBER Base Supply, subject to adjustment in accordance with Section 8.5 for extended outages. 1.3 To determine the Kilowatts of Billing Demand that are associated with MEMBER Base Supply furnished by SWECO to a Point of Delivery during a Billing Month, SWECO shall perform the following calculations: Step 1: SWECO shall separately determine (for each hour of the Billing Month being analyzed) MEMBER's total demand for power at each MEMBER Point of Delivery by reference to 91 actual metered values, including without limitation metered amounts of the kilowatts of capacity supplied by any Qualifying Facility to serve Member Load located behind a Point of Delivery (Total Demand). Step 2: SWECO shall subtract from Total Demand (for each hour of the Billing Month being analyzed) the sum of (a) the kilowatts of MEMBER Hydro (after adjustment for losses in delivery) available for delivery to the Point of Delivery during the Billing Month plus (b) the kilowatts of any Extraordinary Load (after adjustment for losses in delivery) served during the hour being analyzed plus (c) the kilowatts of any Separately Metered Load of MEMBER occurring during such hour plus (d) the kilowatts associated with capacity scheduled for delivery from Other Resources (after adjustment for losses in delivery) and allocated to the MEMBER's Points of Delivery in proportion to the ratio of the Maximum Point of Delivery Demand in the Billing Month at the Point of Delivery to the sum of the Maximum Point of 92 Delivery Demands for all MEMBER's Points of Delivery (Adjusted Total Demand). The MEMBER Hydro available for delivery to the Point of Delivery shall be equal to the amount of MEMBER Hydro available in the current Contract Year times the ratio of (x) the highest Maximum Point of Delivery Demand established for the Point of Delivery in the immediately preceding Contract Year and (y) the sum of the highest Maximum Point of Delivery Demands established for all MEMBER'S Points of Delivery in such Contract Year. Step 3: The Kilowatts of Demand associated with MEMBER Base Supply furnished to the Point of Delivery during the current Billing Month shall be the higher of the following measures: (1) the highest hourly Adjusted Total Demand at the Point of Delivery determined in Step 2 for any hour in the Billing Month; or (2) 70% of the highest hourly Adjusted Total Demand at the Point of Delivery established during any hour of the immediately preceding months of June, July, August or September. 93 Step 4: If the Billing Month for which a bill is being prepared occurs in the Benchmark Year or any Contract Year prior to the Benchmark Year, the total Kilowatts of Billing Demand associated with MEMBER Base Supply for the current Billing Month shall be the sum of the Kilowatts of Demand determined in accordance with Steps 1-3 for all MEMBER Points of Delivery. If the Billing Month for which a bill is being prepared occurs in any Contract Year after the Benchmark Year, the Demand Charge for MEMBER Base Supply shall be equal to the product of the Demand Rate shown below and the lesser of (a) the sum of the Kilowatts of Demand determined for the current Billing Month in accordance with Steps 1-3 for all MEMBER Points of Delivery or (b) the highest Kilowatts of Demand established for all MEMBER Points of Delivery determined in accordance with Steps 1-4 in any Billing Month of the Benchmark Year plus any load billed to MEMBER under Schedule A-3 of this Agreement in such Billing Month. 94 Step 5: If clause (b) of Step 4 is used to determine Demand Charges for MEMBER Base Supply for the Billing Month and if requested by MEMBER, SWECO will allocate the aggregate Demand Charges to MEMBER so determined among MEMBER's Points of Delivery in the proportion that Adjusted Total Demand at a Point of Delivery bears to the sum of the Adjusted Total Demands at all MEMBER's Points of Delivery. 1.4 DEMAND RATE A.SCHEDULE OF DEMAND RATES The Demand Rate shall be $5.99 per kilowatt from the Effective Date through December 31, 1999. The Demand Rate shall be $6.24 per kilowatt from January 1, 2000 through December 31, 2000. The Demand Rate shall be $6.51 per kilowatt from January 1, 2001 through December 31, 2001. The Demand Rate shall be $6.73 per kilowatt from January 1, 2002 through December 31, 2002. The Demand Rate shall be $6.93 per kilowatt from January 1, 2003 through December 31, 2003. The Demand Rate shall be $7.31 per kilowatt from January 1, 2004 through December 31, 2004. The Demand Rate shall be $7.51 per kilowatt from January 1, 2005 through December 31, 2005. The Demand Rate shall be $7.71 per kilowatt from January 1, 2006 through December 31, 2006. The Demand Rate shall be $7.92 per kilowatt from January 1, 2007 through December 31, 2007. The Demand Rate shall be $8.12 per kilowatt from January 1, 2008 through December 31, 2008. The Demand Rate shall be $8.55 per kilowatt from January 1, 2009 through December 31, 2009. The Demand Rate shall be $8.75 per kilowatt from January 1, 2010 through December 31, 2010. The Demand Rate shall be $8.94 per kilowatt from January 1, 2011 through December 31, 2011. The Demand Rate shall be $8.74 per kilowatt from January 1, 2012 through December 31, 2012. The Demand Rate shall be $8.66 per kilowatt from January 1, 2013 through December 31, 2013. The Demand Rate shall be $8.82 per kilowatt from January 1, 2014 through December 31, 2014. The Demand Rate shall be $8.72 per kilowatt from January 1, 2015 through December 31, 2015. The Demand Rate shall be $8.59 per kilowatt from January 1, 2016 through December 31, 2016. The Demand Rate shall be $8.46 per kilowatt from January 1, 2017 through December 31, 2017. 95 The Demand Rate shall be $8.31 per kilowatt from January 1, 2018 through December 31, 2018. The Demand Rate shall be $8.13 per kilowatt from January 1, 2019 through December 31, 2019. The Demand Rate shall be $7.94 per kilowatt from January 1, 2020 through December 31, 2020. The Demand Rate shall be $7.73 per kilowatt from January 1, 2021 through December 31, 2021. The Demand Rate shall be $7.50 per kilowatt from January 1, 2022 through December 31, 2022. The Demand Rate shall be $7.26 per kilowatt from January 1, 2023 until termination of the Agreement. B. ADJUSTMENT TO DEMAND RATES. The foregoing Demand Rates shall be subject to increase to account for the cost of plant additions required to comply with new or changed legal requirements first imposed after the Effective Date, including but not limited to plant additions required to comply with: a. environmental legislation or regulation enacted or promulgated after the Effective Date, as provided in Section 1.8 of this Schedule A, or b. or occupational safety and health laws or regulations enacted or promulgated after the Effective Date, but not for any penalties, fines costs or expenses imposed on SWECO as a result of SWECO's noncompliance, breach or violation of any environmental or occupational safety and health law or regulation or other laws, rules, regulations or ordinances. 96 C. COSTS COVERED BY STATED BASE RATES. Except as provided otherwise in Section 1.3 of this Schedule A, the Parties intend that the following costs shall be deemed to be recovered by the Demand Rate (DR) and the Energy Rate (ER): a. plant site coal handling operations and maintenance expenses; b. reserve capacity (whether owned or purchased from third parties) required to be provided by SWECO under this Agreement; c. the initial planned heat rate upgrades to the plants acquired from the Cajun estate; d. any and all ad valorem taxes assessed on the capital improvements referenced in Section 1.6(b)(iii)(C) that were identified prior to MEMBER's execution of this Agreement, except such taxes on rail cars included in such capital improvements. 97 1.5 The Energy Charge shall be equal to the Energy Rate times the sum of the kilowatt-hours metered at the MEMBER Points of Delivery that are associated with the energy component of MEMBER Base Supply for the Billing Month. The Energy Rate shall be $0.0033 per kilowatt-hour for Contract Years 1 through 5 and shall be $0.003 per kilowatt-hour for Contract Years 6 through 25. To determine the kilowatt-hours that are associated with the Energy component of MEMBER Base Supply for the Billing Month, SWECO shall perform the following calculations: Step 1: SWECO shall separately determine for each MEMBER Point of Delivery the total kilowatt-hours metered at such Point of Delivery during the Billing Month plus the kilowatt hours of energy delivered to serve Member Load from a Qualifying Facility located behind such POD and subtract from such total kilowatt-hours the kilowatt-hours associated with (a) Extraordinary Load, (b) separately metered load that is billed under Schedule A-3 of this Agreement and (c) any Separately Metered Load of MEMBER. The net amount is referred to below as Total Energy. 98 Step 2: SWECO shall sum the kilowatt-hours of energy scheduled to all MEMBER Points of Delivery during the Billing Month from MEMBER Hydro Energy and from permitted Other Resources. Step 3: SWECO shall adjust the amount determined in Step 2 to take account of losses in delivery to the MEMBER's Points of Delivery and shall allocate the adjusted amount to each MEMBER Point of Delivery in the proportion the kilowatt-hours metered at such Point of Delivery bears to the sum of the kilowatt-hours metered at all MEMBER Points of Delivery for the Billing Month. Step 4: For each MEMBER Point of Delivery, SWECO shall subtract the amount determined in Step 3 from the Total Energy determined for such Point of Delivery in Step 1. Step 5: If the Billing Month occurs in the Benchmark Year or a Contract Year that precedes the Benchmark Year, the kilowatt-hours associated with the energy component of MEMBER Base Supply for the Billing Month shall be the amount (in kilowatt-hours) determined in Step 4. If the Billing 99 Month occurs in a Contract Year after the Benchmark Year, the kilowatt-hours associated with the energy component of MEMBER Base Supply for the Billing Month shall be an amount (in kilowatt-hours) equal to the lesser of (x) the amount determined in Step 4 or (y) the Point of Delivery allocation which is equal to: 1) the MEMBER Share of Project Capacity Energy for all hours of the Billing Month; 2) plus any Project Capacity Energy in excess of its MEMBER Share provided to MEMBER in accordance with Section 1.21 of this Agreement; and 3) for purposes of clause (y) above Project Capacity Energy shall be allocated to the Point of Delivery in the manner described in Step 3. COMPETITIVE TERRITORY CREDITS In any Billing Month in which Member qualifies for use of the funds specified in Section 11.10 of this Agreement, the Member may elect to receive a credit on its next monthly bill equal to the amount determined in accordance with Section 11.10. 100 1.6 The monthly Fuel Cost Charge (FCC) shall be equal to the Fuel Cost Rate (FCR) times the monthly sum of the kilowatt-hours determined in Step 5 described in Section 1.5 of this Schedule A. The FCR shall be an amount computed monthly in accordance with the following formula: 101 FCR = F.C.-N.M.C.+E.P.+ R.P.C.-S.E. KWH Definitions: F.C. = the total costs incurred in the Billing Month for fuel consumed in Project Capacity generating plants N.M.C.= the average fuel costs incurred in the Billing Month associated with the use by SWECO of Project Capacity generating plants to generate energy for sale to purchasers that are not Group members after deducting the fuel costs associated with sales under the SMEPA Contract E.P. = the costs incurred in the Billing Month for power or energy purchased over a period of twelve months or less where the total cost of the purchase is less than SWECO's total avoided variable cost, and where SWECO has available Project Capacity adequate to generate the amount of energy that is purchased R.P.C.= the cost of replacement power permitted by Section 8.5 of this Agreement to be passed through to MEMBER S.E. = the fuel costs incurred by SWECO in the Billing Month to generate energy using the Project Capacity generating plants to furnish Supplemental Supply or to supply energy to serve loads billed pursuant to Schedule A-3 to this Agreement or similar agreements with other Group members KWH = the sum for the Billing Month of the kilowatt-hours determined in Step 5 described in Section 1.5 of this Schedule A and in Schedule A to all other agreements between SWECO and other Group members for all Group Points of Delivery less the kilowatt-hours of energy supplied in such Billing Month to the Points of Delivery from Qualifying Facilities For purposes of the foregoing formula, the Parties agree that fuel costs include (a) all costs that are properly chargeable to Account 501 of the FERC's Uniform System of Accounts for Public Utilities and a reasonable return on and return over ten years of, and all operating and 102 maintenance expenses associated with, any capital investment made by SWECO in fuel-related facilities that in advance of SWECO's commitment of capital all members of the Group have agreed can be expected to provide a net benefit to the Group and (b) any such capital related costs associated with investments in fuel-related facilities identified prior to the date of execution of this Agreement that by executing this Agreement MEMBER agrees should be made. Notwithstanding the foregoing sentence, however, the Parties further agree that: (1) during any period in which the fuel-related facilities identified prior to the date of execution of this Agreement are not used to the benefit of the Group, and as a result MEMBER would experience increased coal costs, the cost of such facilities will not be included in fuel costs, but SWECO shall have the sole right of redress against any third party arising from such circumstances; and (2) fuel costs shall not include costs of compliance with laws and regulations in effect on January 1, 1998 that limit emissions of sulfur dioxide. The FCC for any Billing Month shall be estimated by applying the most current previous Billing Month's actual FCR available. Any difference 103 between the estimated FCC and the actual FCC shall be billed or credited to the MEMBER on the first bill rendered after the actual FCR for such Billing Month has been determined. The FCR shall be calculated to the nearest $0.00001 and when applied the result will be rounded to the nearest cent. 1.7 On the date of execution of this Agreement, MEMBER shall, in relation to MEMBER Base Supply service, elect either to: (1) pay the FCC determined in accordance with the FCR formula described in paragraph 1.6 above beginning on the Effective Date; (2) to pay an adjusted FCC determined in accordance with the FCR formula described in paragraph 1.6 above but assuming that all coal-fired Project Capacity has a heat rate of 10,600 when determining the fuel costs associated with coal burned in such coal-fired Project Capacity; or (3) to pay the fuel costs determined by using the following fixed fuel factors for such service beginning on the Effective Date and ending on December 31, 2008, unless in Contract Year 5 MEMBER elects to pay the FCC determined in accordance with clause (1) or clause (2) for Contract Years 6 through 10. CONTRACT YEAR FIXED FUEL FACTOR 1998-99 $ 0.01677 104 2000 0.01638 2001 0.01582 2002 0.01539 2003 0.01505 2004 0.01424 2005 0.01387 2006 0.01352 2007 0.01316 2008 0.01282 Such election shall be made effective beginning on the Effective Date. On or before the first day of June in Contract Years 5, 10, 15 and 20, SWECO shall inform MEMBER of the fixed fuel factors that would apply to billings for MEMBER Base Supply service provided in the five-year periods beginning on the first day of Contract Years 6, 11, 16 and 21, respectively. On or before the first day of September in Contract Years 5, 10, 15, and 20, MEMBER shall advise SWECO of MEMBER's election to pay for fuel costs for the subsequent five-year period based on either: (a) fixed fuel factors; or (b) a monthly FCR determined in accordance with paragraph 1.6 above with reference to actual heat rates; or (c) a monthly FCR determined in accordance with paragraph 1.6 above based on an assumed heat rate for coal-fired Project Capacity of 10,600. In the event MEMBER makes an initial election pursuant to this Section 1.7 to 105 pay the fixed fuel factors listed above, MEMBER may not elect to pay for fuel using the fixed fuel factors offered in Contract Year 5 for application in the five Contract Years beginning with Contract Year 6. 1.8 OTHER CHARGES. MEMBER and SWECO agree that the demand rates set forth in this Schedule A reflect all ad valorem taxes that apply to the Project Capacity as of January 1, 1998. MEMBER and SWECO further agree that none of the rates described in this Schedule A makes provision for the potential effects of new or additional sales, excise, or other applicable taxes (excluding income taxes), fees and charges incurred in accordance with federal, state or local law other than increases in ad valorem taxes associated with assets purchased by SWECO from the Cajun estate resulting from the change in ownership. For purposes of this Agreement, "new or additional sales, excise or other applicable taxes and fees and charges" shall be construed to mean any such taxes, fees and charges enacted after the date hereof or that are increased after the date hereof for any reason other than the nature or identity of the new owner of the Cajun assets. Any expense incurred by SWECO as the result of the imposition of any 106 such new or additional taxes shall be appropriately allocated to and paid by MEMBER and other members of the Group. 1.9 ENVIRONMENTAL LEGISLATION. Except as provided under Section 1.4 of this Schedule A, MEMBER and SWECO agree that the rates contained in this Agreement make no provision for the potential effects of new environmental control legislation or the additional costs of providing electric service to MEMBER resulting from any such legislation. Any such costs resulting from such legislation shall be appropriately allocated to and paid by MEMBER. 1.10 RATE FUND CREDITS. SWECO will establish an interest bearing Rate Fund to be used beginning in Contract Year Six to ameliorate unanticipated fuel costs. SWECO shall establish the Rate Fund by depositing $12,240,000 in an interest bearing account on or before the last business day of Contract Year Six. No later than the end of the first quarter of each of Contract Years Seven through Twenty-five and the end of the first quarter of the calendar year following Contract Year Twenty-five, SWECO will determine whether the average cost of MEMBER Base Supply to the Group members that elected 107 to pay the FCC determined in accordance with the FCR formula set forth in Section 1.6 of this Schedule A exceeded 40 mills per kWh for the immediately preceding Contract Year (taking into account the effect on such average costs of Group Hydro deliveries to all such Group members). The Rate Fund, including accumulated interest, will be used (to the extent of remaining funds) to return to each Group member that elected to pay the FCC determined in accordance with the FCR formula set forth in Section 1.6 of this Schedule A an amount per kWh of MEMBER Base Supply energy delivered by SWECO in the preceding Contract Year equal to the amount charged all such Group members for MEMBER Base Supply service that exceeded 40 mills/kWh on average (taking into account the effect on such average costs of Group Hydro deliveries to such Group members). The Rate Fund will be so applied to billings for Contract Year Six through Twenty-five or until depleted if the Rate Fund is depleted before the end of Contract Year Twenty-five. Any such credit to which MEMBER is entitled in respect of Contract Years Seven through Twenty-five shall be applied in equal dollar amounts to bills for the Billing Months of May through August in the year in which such credit is determined. Any credit relating to service during the last Contract Year shall be paid 108 to MEMBER no later than April 30 of the following calendar year. Any amounts remaining in the Rate Fund after application, if any, of the Rate Fund to reduce amounts billed in Contract Year Twenty-five shall be returned to SWECO for its sole use and benefit. 1.11 WHEELING CHARGE. Each monthly bill to MEMBER shall reflect adjustments, charges, fees or penalties relating to transmission and Ancillary Services charged SWECO by a Transmission Supplier in connection with service to the MEMBER Points of Delivery in accordance with Sections 5.2 and 8.2 of this Agreement. Such Transmission Supplier costs shall be allocated to individual MEMBER Points of Delivery in accordance with Section 5.2. SWECO agrees to provide MEMBER information concerning any such charges, fees or penalties imposed by a Transmission Supplier. Charges for services provided to MEMBER under SWECO's Open Access Transmission Tariff shall be billed to MEMBER separately. 1.12 FACILITIES CHARGE. In addition to the other charges contemplated by this Schedule A MEMBER shall also pay to SWECO each month a Facilities Charge determined in accordance with Article VI of this Agreement. 109 1.13 CREDIT FOR LOAD SERVED BY QUALIFYING FACILITY SWECO shall provide any credits due MEMBER during the Billing Month for capacity and energy provided to MEMBER by a qualifying Facility that contracts directly with MEMBER in accordance with Section 8.6 of this Agreement. Such credit shall be equal to the capacity and energy related compensation SWECO would have been required by pay such Qualifying Facility for such capacity and energy, in accordance with the rules of the LPSC, had such Qualifying Facility elected to require SWECO to purchase its output. 1.14 ECONOMIC DEVELOPMENT RIDER CREDITS SWECO shall credit MEMBER's bill each month for any credits available in accordance with Schedule A-1 or A-2 of this Agreement. 110 SCHEDULE A-1 ECONOMIC DEVELOPMENT RIDER AVAILABILITY This Rider is available to MEMBER in connection with the sale by SWECO to MEMBER of wholesale electricity pursuant to this Agreement to the extent used by MEMBER to serve any retail customer (Customer) that meets the requirements of this Rider. Otherwise, all provisions of this Agreement will apply to the provision of power and energy to MEMBER needed to serve such Customer except as modified herein. SWECO shall accept new applications for this Rider as long as service to the new or additional load to which a new application relates would not cause Group Load to exceed Project Capacity. SWECO reserves the right to accept a new application for this Rider that would result in Group Load exceeding Project Capacity if SWECO determines that so doing would be mutually beneficial to SWECO and MEMBER. To qualify for use of the Rider the Customer must meet all of the following requirements: 1) The load of the Customer that qualifies for use of this Rider 111 must be a new load of a new Customer of at least 300 kW or an additional load of an existing Customer of at least 300 kW. 2) Businesses and industries eligible for service under this Rider must fall within one of the following categories; * Industries manufacturing a product for sale or resale; * Regional warehousing and distributing facilities; * Scientific and industrial research and development facilities; * Corporate relocations to MEMBER's service area in which the Corporation takes electric service in its own name; * Petroleum and chemical refineries, pipeline pumping and pipeline compressor loads; * Process and storage industries; * Agricultural-related industries; * Mining industries; * Any other category of industry which SWECO and MEMBER agree should be eligible for electric service under this Rider; and * Governmental agencies (including correctional institutions). 112 3) Service under this Rider is available only if MEMBER has a contract for electric service with a new Customer for a new load that has an initial term of at least five years or a contract for electric service with an existing customer (whose qualifying load is an additional load) that has a remaining term of at least five years and that in either case such contract requires at least thirty (30) days advance notice to cancel after such contract term has expired. 4) Prior to service being rendered under this Rider, MEMBER must furnish SWECO a copy of MEMBER's contract with Customer and a written statement from Customer confirming that this Rider was an important contributing factor in Customer's decision to open a new facility or expand an existing facility. 5) This Rider is not available to additional load from Customers that have begun construction or installation of equipment prior to the effective date of this Rider. 113 6) Resumption of service to load that has been inactive 12 months or more that meets the requirements of this Rider is eligible. DEFINITION OF BASE PERIOD The Base Period shall be the 12 months immediately preceding the month that service is requested under this Rider, or as mutually agreed upon by the SWECO and MEMBER. DETERMINATION OF MONTHLY BASE DEMAND THRESHOLD The Monthly Base Demand Threshold for an existing Customer that adds load that is eligible for credit under this Rider shall be the kilowatts of Metered Demand for the month of the Base Period that corresponds to the Billing Month; provided, however, that the kilowatts of Billing Demand for any month of the Base Period may be adjusted as mutually agreed upon by SWECO and MEMBER to reflect the Customer's normalized load profile. The Monthly Base Demand Threshold for a new Customer's new load shall be zero. DETERMINATION OF ECONOMIC DEVELOPMENT DEMAND CREDIT The credit for Economic Development Demand subject to the provisions of this Rider shall be applied in each Billing Month in which the Customer's metered demand above the Monthly Base Demand Threshold exceeds 300 kW. In any month in which MEMBER qualifies for such credit, the credit shall be applied to all demand above the Monthly Base Demand Threshold. The credit shall be applied 114 to the coincident demand impact of the MEMBER's Customer's additional or new load on MEMBER's Point of Delivery and such demand impact shall be subject to verification by SWECO personnel. ECONOMIC DEVELOPMENT DEMAND CHARGE CREDIT FACTORS DEMAND CREDIT Year 1-First 12 monthly billing periods 50% Year 2-Next 12 monthly billing periods 40% Year 3-Next 12 monthly billing periods 30% Year 4-Next 12 monthly billing periods 20% Year 5-Next 12 monthly billing periods 10% SPECIAL TERMS AND CONDITIONS Customer load will be disqualified from this Rider if the Kilowatts of Billing Demand for 12 consecutive months is below the corresponding Monthly Base Demand Threshold. MEMBER shall be responsible for the costs of providing the necessary metering and related telecommunications equipment and will send to SWECO by facsimile or other electronic transfer hourly load data required for billing purposes no later than the third business day following the end of the Billing Month to which such data relate. SWECO and MEMBER will develop standard coincidence factors and load profiles in lieu of real-time load data for given load categories to apply to loads ranging from 300 kW to 1000 kW. For loads served under this Schedule A-1 that exceed 1000 kW, MEMBER shall furnish real-time metering at the retail 115 customer's premises and related telecommunications equipment that will be adequate to assure to SWECO its reliable real-time access to metered measurement of the Customer's hourly use of electricity. 116 SCHEDULE A-2 ECONOMIC DEVELOPMENT CREDITS RIDER AVAILABILITY This rider is available to MEMBER in connection with sales by SWECO to Member of wholesale electricity pursuant to this Agreement when such electricity is used by MEMBER to serve any retail customer under purchase incentive arrangements by which MEMBER offers to the retail customer qualifying credits to encourage economic development. QUALIFICATIONS Subject to the conditions set forth below, SWECO will match any energy credits given by MEMBER for new loads or additions to existing loads of at least 100 kW and that increase employment by at least 26 permanent full-time jobs or the equivalent number of full-time and part-time jobs.. SWECO will make such credits available to MEMBER if it has contracted with an all-requirements customer to add a new or expanded load of at least 100 kW, and the customer's new or additional load is 100 kW or more in at least 8 months out of 12, and the customer maintains increased employment of at least 26 full-time permanent jobs. 117 The energy credit shall be provided only for the months in which the customer's new or expanded load is equal to or greater than 100 kW. APPLICATION AND TERM OF ENERGY CREDIT For qualifying loads, SWECO will match energy credits given by MEMBER up to $0.00126/kWh. For new loads, the energy credit will be applied to the total amount of energy supplied. For qualifying existing customers, the energy credit will be applied to energy sales in excess of the energy sales in the corresponding month of the base year, where the base year is defined to be the twelve calendar months immediately preceding application for service under this Rider. The matching energy credit will be applied to all qualifying loads for a period of up to 5 years for up to 10,000,000 kWh annually per customer. 118 SCHEDULE A-3 RATES AND CHARGES FOR EXISTING INCENTIVE LOAD CUSTOMERS A. Experimental Economic Development Service (EEDS) - Existing 1.1 EEDS Rate - Subject to the election of Member, SWECO shall charge the EEDS rates set forth in this section to MEMBER for MEMBER'S customers which qualified under Cajun's EEDS rate as of the Effective Date of this Agreement and which do not receive any other special rates. 1.2 Existing EEDS Customers The Members of the Group with existing EEDS customers are listed below: Member EEDS Customer Beginning Termination Cooperative Customer Number Date Date - ------------------------------------------------------------- Beauregard Union BEC00000 7/97 6/04 Resources Beauregard Southern BEC00000 3/96 2/04 Wood Claiborne ConAgra CLA00000 5/92 4/00 Claiborne Wilamette CLA00000 4/96 3/04 Claiborne Wilamette 8DC00000 10/98 9/06 Jeff Davis Shell 0DC00000 12/90 11/98 Jeff Davis Nottie JDC00000 3/98 ?/05 Jeff Davis Global JDC00000 4/98 3/05 Northeast Midvalley NEL00000 8/90 7/98 SLECA La. SLE00000 5/92 2/00 Interstate Gas 119 SLECA Global Plus SLE00000 1/92 12/98 SLECA Weatherford SLE00000 2/93 1/00 SLEMCO Liberty Rice SLM00000 5/95 4/02 1.3 Demand Charge - The demand rate for service to EEDS customers will depend on the number of years the EEDS customer has been receiving service under this Schedule A-3 or the previous Cajun EEDS rate as shown above. Demand Rate for YEAR OF EXISTING EEDS CUSTOMER CONTRACT (Dollars Per KW Month) --------------- ---------------------------------- ------------- Year 8 and Years Year 5 Year 6 Year 7 Thereafter --------------- ---------------------------------- ------------- Above 69 kV $4.00 $5.00 $6.00 $7.00 Demand Charge as Specified in Schedule A At 69 kV $4.25 $5.25 $6.25 $7.25 Below 69 kV $4.50 $5.50 $6.50 $7.50 The EEDS demand rate will be applied at each Point of Delivery which services one or more EEDS customers as follows: In the months of June, July, August, and September, for each EEDS customer the applicable EEDS demand rate will be applied to the higher of (1) 1,000 kW or (2) the EEDS customer's contribution to the Maximum Point of Delivery Demand during the hours of 1:00 p.m. to 9:00 p.m. Central Time in such Billing Month. In all other months, for each EEDS customer the applicable EEDS demand rate will be applied to 80% of the average of the kW's for which the EEDS customer 120 was billed during each of the most recent June, July, August, and September. 1.4 Energy Charge - The energy charge per kWh for existing EEDS customer contracts will be as shown below. Existing EEDS Contract Year 1 Year78 and Thereafter ------------------------------------------------------------- $.006 Energy Charge Specified in Schedule A 1.5 Fuel Charge - The fuel charge per kWh for existing EEDS customer contracts shall be as shown below. Existing EEDS Contract Year 1-7 Year 8 and Thereafter ------------------------------------------------------------- $.016 Fuel Cost as Determined Under Schedule A 1.6 Other Charges - During the existing term of the contract for the EEDS customer, no other charges will be included in calculating the delivered cost to the EEDS customer. All other charges specified in Schedule A of this Agreement will apply for year 8 and afterwards. 1.7 Other Provisions - SWECO shall not be obligated to provide special rates to the EEDS customers served under this Schedule A-3 upon the termination, at the end of the seventh year, of the existing EEDS customer contract. 121 B. Large Power Incentive Service (LPI) - Existing 1.1 LPI Rate - Subject to the election of MEMBER, SWECO shall charge the LPI rates set forth in this section to MEMBER for MEMBER'S customers which qualified under Cajun's LPI rate as of the Effective Date of this Agreement and which do not receive any other special rates. 1.2 LPI Existing Customers The Members of the Group with existing LPI customers are shown below. MEMBER COOPERATIVE LPI CUSTOMER CUSTOMER NUMBER -------------------------------------------------------------- Claiborne Lamamco Drilling LCLA000005 SLECA McDermotte W LSLE000001 SLECA McDermotte E LSLE000008 1.3 Application - The LPI rate applies only to wholesale power and energy that will be resold to individual "all-requirements" customers which has contracted with MEMBER at the Effective Date of this Agreement for a load equal to or greater than 5,000 kW and whose actual load is 5,000 kW or more in at least eight (8) months out of twelve (12). The LPI rate will be implemented only in those months in which the LPI customer load is equal to or greater than 5,000 kW. 1.4 Demand Charge - The monthly demand rate for LPI customers will be equal to the demand rate as shown below. 122 $7.80 per kilowatt (kW) of billing demand for power delivered above 69 kV. $8.25 per kilowatt (kW) of billing demand for power delivered at 69 kV. $8.95 per kilowatt (kW) of billing demand for power delivered below 69 kV. The billing demand at each Point of Delivery shall be the following: 1. During the billing months of June, July, August, and September, the kilowatts consumed during Maximum Point of Delivery Demand during the hours of 1:00 p.m. and 9:00 p.m. Central Time; and 2. For all other months, eighty percent (80%) of the average of the most recent June, July, August, and September billing demands. 1.5 Energy Charge - The energy charge will be $.006 per kilowatt-hour (kWh). 1.6 Fuel Charge - The fuel charge will be $.016 per kilowatt-hour (kWh). 1.7 Other Charges - While this section is available for LPI customers, no other charges will be included in calculating the delivered cost to the customer. All other charges specified in Schedule A of this Agreement will be assessed after 123 the expiration date provided for in Section 1.8 below. 1.8 Other Provisions - SWECO shall provide special rates to the LPI customers served under this Schedule A-3 through 12/31/1999 and thereafter on a year to year basis at SWECO's discretion. SWECO shall provide not less than one year written notice of termination of LPI service to MEMBER. C. Jobs Creation Incentive Credit (JCIC) - Existing 1.1 JCIC Rate - Subject to the election of MEMBER, SWECO shall charge the JCIC rates set forth in this section to MEMBER for MEMBER'S customers which qualified under Cajun's JCIC rate as of the Effective Date of this Agreement and which do not receive any other special rates. 1.2 Availability - The JCIC rate is available to the Members of the Group which had customers enrolled under the Cajun JCIC rider as of the Effective Date of the Agreement. SWECO will provide a credit as noted in the table below for the amount of energy supplied to each respective JCIC customer contracting with MEMBER. The JCIC credit is subject to MEMBER offering energy credits equal to the JCIC credit to the JCIC customer. The Members of the Group, their JCIC customers and the amount of the JCIC credit are listed below. 124 Member Customer Start Termination Credit Amt Cooperative Customer Number Date Date (4/kWh) - ------------------------------------------------------------------------------- Claiborne McDonalds JCLA000002 9/93 8/99 .00126 Claiborne Temple Island JCLA000003 8/95 7/01 .00126 Claiborne ConAgra JCLA000001 3/92 2/98 .00126 Claiborne McDonalds #2 JCLA000004 11/96 10/99 .00126 Dixie Winn Dixie JCIX000002 11/93 10/99 .00426 Dixie KMART JCIX000003 4/95 3/01 .00426 Dixie Cal-Maine JCIX000001 8/92 7/98 .00126 SLECA Rainbow JSLE000017 1/95 12/00 .00126 SLECA Oil & Gas JSLE000024 3/94 2/00 .00126 SLECA La Com Mtn JSLE000011 1/92 12/97 .00063 SLECA Ryans JSLE000013 5/92 4/98 .00126 SLECA Walmart JSLE000023 11/94 10/00 .00126 SLECA Surgery Center JSLE000031 5/96 4/92 .00126 SLECA Copelands JSLE000032 6/96 5/02 .00426 SLECA Chet Morrison JSLE000016 10/93 9/99 .00426 SLECA Tomahawk JSLE000026 9/96 8/02 .00126 SLECA Service Marine JSLE000030 6/96 5/02 .00426 Teche AM Oil Divers JTEC000006 10/95 9/01 .00126 Teche Chart Coastal JTEC000007 10/95 9/01 .00426 Teche Southern Magic JTEC000004 9/91 8/97 .00063 Valley Campti JVEM000004 1/92 12/97 .00063 Valley Trus Joint JVEM000005 1/93 12/98 .00126 Valley Timberland 6/92 5/98 .00126 1.3 Demand Charge - The monthly demand rate for JCIC customers will be equal to the demand rate as shown below. $7.80 per kilowatt (kW) of billing demand for power delivered above 69 kV. $8.25 per kilowatt (kW) of billing demand for power delivered at 69 kV. $8.95 per kilowatt (kW) of billing demand for power delivered below 69 kV. The billing demand at each Point of Delivery shall be the following: 125 1. During the billing months of June, July, August, and September, the kilowatts consumed during Maximum Point of Delivery Demand during the hours of 1:00 p.m. and 9:00 p.m. Central Time; and 2.For all other months, eighty percent (80%) of the average of the most recent June, July, August, and September billing demands. 1.4 Energy Charge - The JCIC credit will be applied to the following energy charges. For each delivery point, the energy charge before applying the JCIC credit shall be the sum of energy charges billed under Blocks 1 and 2 as described below. Block 1: For an amount of energy delivered which is less than or equal to the product of the delivery point actual monthly peak demand and the factor 300 kWh/kW, the rate shall be: $.00998 per kWh delivered above 69 kV. $.01058 per kWh delivered at 69 kV. $.01183 per kWh delivered below 69 kV. Block 2: For all energy delivered above the quantity specified in Block 1, above, the rate shall be $.00936 per kWh delivered. 126 1.5 Fuel Charge - The fuel charge will be $.016 per kilowatt-hour (kWh). 1.6 Other Charges - During the existing term of the contract for the JCIC customer, no other charges will be included in calculating the delivered cost to the JCIC customer. All other charges specified in Schedule A of this Agreement will be assessed after the initial contract period. 1.7 Other Provisions - SWECO shall not be obligated to provide special rates to the JCIC customers served under this Schedule A-3 upon the termination of the existing JCIC customer contract. D. Very Large Power Incentive (VLP) - Existing 1.1 VLP Rate - Subject to the election of MEMBER, SWECO shall charge the VLP rates set forth in this section to MEMBER or MEMBER'S customers which qualified under Cajun's VLP rate as of the Effective Date of this Agreement and which do not receive any other special rates. 1.2 Availability - The VLP Rate only applies to wholesale power that will be resold by the MEMBER to customers whose load is at least 10,000 kW and no more than 100,000 kW. Additionally, service under this section is available only to customer whose load factors are at least 50%. For a customer to receive interruptible service under this section, SWECO must have supervisory control over the customer's delivery point. If a customer contracts for interruptible 127 power, a minimum interruptible load of 7,000 kW shall be required. THE ONLY QUALIFIED CUSTOMER AS OF THE EFFECTIVE DATE OF THIS AGREEMENT IS MG INDUSTRIES, WHICH IS A BEAUREGARD CUSTOMER. 1.3 Customer Charge - $500 per month 1.4 Demand Charge - The monthly demand charges are as follows: Firm Service: $7.15 per kW of billing demand. Interruptible Subject to 60 minutes notice: $5.50 per kW of interruptible billing demand. Interruptible Subject to 5 minutes notice: $2.50 per kW of interruptible billing demand. FIRM SERVICE The firm billing demand shall be the actual kilowatts (kW) consumed by the retail customer during the sixty (60) minutes of maximum use during the month less the 5-minute and 60-minute interruptible billings demands, but shall be: 1. no less than 80% of the customer's contracted firm demand; 2. no less than 80% of the maximum firm billing demand in the preceding 11 months; and 3. no less than 10,000 kW minus the 5-minute and 60-minute interruptible billing demands. INTERRUPTIBLE 128 For retail customers that contract for firm demand, the 5-minute and 60-minute interruptible billing demands shall be equal to the respective 5-minute and 60-minute contract demands specified in the contract for service. For retail customers that do not contract for firm demand all demand shall be subject to interruption. In this case, the interruptible billing demand shall be determined as follows: If the retail customer contracts only for 5-minute interruptible demand or only for 60-minute interruptible demand, then the interruptible billing demand shall be the highest of the actual kilowatts consumed by the retail customer during the sixty (60) minutes of maximum use during the current month or the previous eleven (11) months, but in no case shall be less than the contract amount. If the retail customer contracts for both 5-minute interruptible demand and 60-minute interruptible demand, the 60-minute interruptible demand shall be equal to the contract 60-minute interruptible demand. The 5-minute interruptible demand shall be the highest of the actual kilowatts consumed by the retail customer during the sixty (60) minutes of maximum use during the current month or the previous eleven (11) months less the 60-minute interruptible demand, but in no case shall be less than the contract 5-minute interruptible demand. 129 INTERRUPTION Interruptions shall be requested by SWECO as it deems necessary for any justifiable reason, including, but not limited to, maintaining service to firm loads, maintaining service integrity in the area, or other situations when reduction in load on the MEMBER system is required. In order to ensure interruptibility of interruptible loads, SWECO will have supervisory control over the breakers serving the customer's interruptible loads. Loads with five-minute interruption notice will be notified of the need to reduce the load by SWECO dispatchers. If the load is not reduced to the required level within the time required, which can be as short as five minutes, SWECO will interrupt the entire load. For loads with 60-minute notification, SWECO dispatchers shall notify the retail customer and the MEMBER when possible, at least one hour prior to the time at which the load reduction must take place. SWECO shall also give notification of the firm demand which the customer can use and the approximate length of the interruption. If the customer does not reduce its load to the required demand level in the time required, the customer's entire load will be interrupted. Notwithstanding the above, at the time interruptible customer is notified of the need to interrupt, the customer may request that service be continued through SWECO's purchase of power on the market. If SWECO is able to provide such power, 130 the full cost of obtaining such power, including opportunity costs, shall be substituted for the fuel cost in the charge for that block of power. SWECO shall make all reasonable efforts to comply with such request; however, the final determination as to whether it is able to comply with such request will be at SWECO's sole discretion. Upon return to normal system conditions, as determined by SWECO dispatchers, customers previously notified of the interruption will be notified of permissible restoration of full service. Interruptions initiated by SWECO will be limited to a maximum of 50 hours per week and 600 hours per year. Notwithstanding any of the above, in the event of a system emergency beyond the control of SWECO and the MEMBER, service may be interrupted with less than the required notice and for periods longer than those maximum listed above. SWECO will make all efforts necessary to return service to normal as quickly as possible. 1.5 Delivery Voltage Adjustment - An additional $.70 per kW per month of billing demand (firm and interruptible) for delivery voltage below 69 kV. 1.6 Energy Charge - The energy charge will be $.006 per kWh. 1.7 Fuel Charge - The fuel charge will be $.016 per kilowatt-hour (kWh). 131 1.8 Other Charges - During the existing term of the contract for the VLP customer, no other charges will be included in calculating the delivered cost to the VLP customer. All other charges specified in Schedule A of this Agreement will be assessed after the initial contract period. 1.9 Other Provisions - SWECO shall not be obligated to provide special rates to the VLP customers served under this Schedule A-3 upon the termination of the existing VLP customer contract. E. Cotton Gins - Existing 1.1 Cotton Gin Ratchet - Subject to the election of MEMBER, SWECO shall utilize the ratchet provisions set forth in this section for MEMBER'S customers which qualified under Cajun's Cotton Gin Rider as of the Effective Date of this Agreement and which do not receive any other special rates. 1.2 Availability - This rider is available to all MEMBERS with cotton gins on their systems, who properly executed the Implementation Agreement and Application(s) while under the Cajun rider. 1.3 Qualifications - The operating season for the cotton gin will start after August 31 in any Contract Year and will end no later than December 31 of such Contract Year. 1.4 Determination of Billing Demand - All kW and kWh used by the cotton gin will be billed according to the rates set forth in Schedule A. However, the kilowatts 132 used by the cotton gin in September will not be utilized in the calculation of the ratchet under Schedule A. The metered demand of the cotton gin at the time of the Maximum Point of Delivery Demand for September shall be subtracted from the September Maximum Point of Delivery Demand, with the result used as the value for the Billing Month of September in the Schedule A calculation of the ratchet. 1.5 Other Provisions - SWECO shall apply the ratchet provisions of this section to MEMBERS with cotton gins served under this Schedule A-3 through 12/31/1999 and thereafter on a year to year basis at SWECO's discretion. SWECO shall provide not less than one year written notice of termination of cotton gin service to MEMBER. F. Off-Peak Rider - Existing 1.1 Off-Peak Billing - Subject to the election of MEMBER, SWECO shall make available the off-peak billing provisions of this section to MEMBER for MEMBER'S off-peak customers existing as of the Effective Date of this Agreement and which do not receive any other special rates. 1.2 Qualifications - Each qualifying off-peak load will be measured using time-of-use metering and MEMBER shall be responsible for all costs of owning, operating and maintaining necessary metering. 133 1.3 Existing Off-Peak Customers - The list of customers is to be provided and such list could result in some modification of Section F of this Schedule A-3. 1.4 Demand Charge - The demand rate for service to off-peak customers under this section shall be as follows: $7.80 per kilowatt (kW) of billing demand for power delivered above 69 kV. $8.25 per kilowatt (kW) of billing demand for power delivered at 69 kV. $8.95 per kilowatt (kW) of billing demand for power delivered below 69 kV. During any Billing Month, the demand rate will be applied to the Maximum Point of Delivery Demand established between the hours of 1:00 p.m. to 9:00 p.m. Central Time. The demand charge will not be applied to kilowatts of usage between the hours of 9:00 p.m. to 1:00 p.m. Central Time. 1.5 Other Charges - The off-peak customers will be charged for fuel, energy charges and other applicable charges provided for under Schedule A of this Agreement. 1.6 Other Provisions - SWECO shall not be obligated to provide special rates to off-peak customers served under this Schedule A-3 after the initial term of any existing agreements between the MEMBER and the off-peak customers. 134 SCHEDULE B RATES AND CHARGES FOR SUPPLEMENTAL SERVICE 1.1 For Supplemental Supply SWECO provides to MEMBER under this Agreement SWECO shall bill MEMBER in any Billing Month a Demand Charge, an Energy Charge, and a Supplemental Supply Fuel Cost Charge. 1.2 The Demand Charge for Supplemental Supply shall be equal to the Demand Rate shown below times the Kilowatts of Demand associated with Supplemental Supply. 1.3 To determine the Kilowatts of Demand associated with Supplemental Supply provided to MEMBER during a Billing Month, SWECO shall perform the following calculations: Step 1: SWECO shall refer to the calculations performed under Schedule A to this Agreement for the Billing Month and subtract from the amount determined in accordance with clause (a) of Step 4 of Section 1.3 of such Schedule A the amount determined pursuant to clause (b) of such Step 4. Step 2: The Kilowatts of Billing Demand associated with Supplemental Supply furnished by SWECO to MEMBER during the current Billing Month shall be the higher of the following measures: (1) the Kilowatts of 135 Demand determined in Step 1 of this Section 1.3 for the Billing Month; or (2) 70% of the highest Kilowatts of Demand for Supplemental Supply determined in accordance with such Step 1 for any of the immediately preceding months of June, July, August or September. Step 3: If requested by MEMBER, the Demand Charges for Supplemental Supply shall be allocated to each of MEMBER's Points of Delivery in the same proportion that Demand Charges for MEMBER Base Supply are allocated to each Point of Delivery pursuant to Step 5 described in Section 1.3 of Schedule A to this Agreement. 1.4 DEMAND RATE The Demand Rate shall be $5.99 per kilowatt from the Effective Date through December 31, 1999. The Demand Rate shall be $6.24 per kilowatt from January 1, 2000 through December 31, 2000. The Demand Rate shall be $6.51 per kilowatt from January 1, 2001 through December 31, 2001. The Demand Rate shall be $6.73 per kilowatt from January 1, 2002 through December 31, 2002. The Demand Rate shall be $6.93 per kilowatt from January 1, 2003 through December 31, 2003. The Demand Rate shall be $7.31 per kilowatt from January 1, 2004 through December 31, 2004. The Demand Rate shall be $7.51 per kilowatt from January 1, 2005 through December 31, 2005. The Demand Rate shall be $7.71 per kilowatt from January 1, 2006 through December 31, 2006. The Demand Rate shall be $7.92 per kilowatt from January 1, 2007 through December 31, 2007. The Demand Rate shall be $8.12 per kilowatt from January 1, 2008 through December 31, 2008. The Demand Rate shall be $8.55 per kilowatt from January 1, 2009 through December 31, 2009. The Demand Rate shall be $8.75 per kilowatt from January 1, 2010 through December 31, 2010. The Demand Rate shall be $8.94 per kilowatt from January 1, 2011 through December 31, 2011. 136 The Demand Rate shall be $8.74 per kilowatt from January 1, 2012 through December 31, 2012. The Demand Rate shall be $8.66 per kilowatt from January 1, 2013 through December 31, 2013. The Demand Rate shall be $8.82 per kilowatt from January 1, 2014 through December 31, 2014. The Demand Rate shall be $8.72 per kilowatt from January 1, 2015 through December 31, 2015. The Demand Rate shall be $8.59 per kilowatt from January 1, 2016 through December 31, 2016. The Demand Rate shall be $8.46 per kilowatt from January 1, 2017 through December 31, 2017. The Demand Rate shall be $8.31 per kilowatt from January 1, 2018 through December 31, 2018. The Demand Rate shall be $8.13 per kilowatt from January 1, 2019 through December 31, 2019. The Demand Rate shall be $7.94 per kilowatt from January 1, 2020 through December 31, 2020. The Demand Rate shall be $7.73 per kilowatt from January 1, 2021 through December 31, 2021. The Demand Rate shall be $7.50 per kilowatt from January 1, 2022 through December 31, 2022. The Demand Rate shall be $7.26 per kilowatt from January 1, 2023 until termination of the Agreement. The foregoing demand rates shall be subject to increase to account for the cost of: 1) the foregoing demand rates shall be subject to increase to account for the cost of plant additions required to comply with new or changed legal requirements first imposed after the Effective Date, including but not limited to plant additions required to comply with: a) environmental legislation or regulation enacted or promulgated after the Effective Date, as provided in Section 1.8 of this Schedule A, or b) occupational safety and health laws or regulations enacted or promulgated after the Effective Date, but not for any penalties, fines, costs or expenses imposed on SWECO as a result of SWECO's noncompliance, breach or violation of any environmental or occupational safety and health law or regulation or other laws, rules, regulations or ordinances; 2) additional capacity constructed or purchased by SWECO to provide Supplemental Supply 137 to serve Group Load that exceeds $400 per kW of installed or purchased capacity (such cost to include the cost of transmission to the boundary of a Transmission Supplier). The demand rate adjustments made to reflect the cost of such additional capacity shall be made as set forth in the notice given MEMBER pursuant to Section 2.3 of this Agreement. 1.5 The monthly Energy Charge shall be equal to the Energy Rate times the sum of the Supplemental Supply kilowatt-hours provided to MEMBER during the Billing Month determined separately for each MEMBER Point of Delivery. The Supplemental Supply kilowatt-hours for a Point of Delivery shall be the difference between the amount determined for such Point of Delivery by applying Step 4 under Section 1.5 of Schedule A and the amount determined for such Point of Delivery by applying Step 5 of Section 1.5 of Schedule A. The Energy Rate shall be $0.003 per kilowatt-hour. 1.6 The monthly Supplemental Supply Fuel Cost Charge (SSFCC) shall be equal to the Supplemental Supply Fuel Cost Rate (SSFCR) times the sum for the Billing Month of the kilowatt-hours of Supplemental Supply determined in accordance with Section 1.5 of this Schedule B. The SSFCR shall be an amount computed monthly in accordance with the following formula to reflect 138 the fuel and purchased power cost incurred by SWECO in the Billing Month to provide Supplemental Supply to Group Load: SSFCR = F.C. + P.P.C. + E.P. - N.M.C. KWH Definitions: F.C. = the costs incurred in the Billing Month for fuel consumed in generating plants that are used to provide Supplemental Supply to Group members P.P.C. = the costs incurred in the Billing Month for purchased power (excluding identifiable capacity charges) required to provide Supplemental Service to Group Load that is not Economic Power (E.P.) E.P. = the costs incurred in the Billing Month for power and energy purchased over a period of twelve months or less where the total cost of the purchase is less than SWECO's total avoided variable cost, and where SWECO has available generating capability adequate to generate the amount of energy that is purchased N.M.C. = the fuel costs incurred in the Billing Month associated with energy sales made to Non-Members from generating units that are also used to provide Supplemental Supply to Group members or to supply loads billed under Schedule A-3 to this Agreement or similar agreements with other Group members KWH = the sum for the Billing Month of the kilowatt-hours determined in paragraph 1.5 of this Schedule B and in all other agreements between SWECO and other Group members for all Group Points of Delivery less the kilowatt-hours of energy supplied in such Billing Month to the Points of Delivery from Qualifying Facilities. For purposes of the foregoing formula, fuel costs shall include all costs that are properly chargeable to Account 501 of the FERC's Uniform System of Accounts for Public Utilities and a reasonable return on and return over ten years of, and all operating and maintenance expenses associated with, 139 any capital investment made by SWECO in fuel-related facilities that in advance of SWECO's commitment of capital all members of the Group that receive Supplemental Supply have agreed can be expected to provide a net benefit to such Group members and any cost of operating or maintaining such capital investment. The current billing month's SSFCC shall be estimated by applying the most current previous month's actual SSFCR available. Any difference between the estimated SSFCC and the actual SSFCC shall be billed or credited to the MEMBER on the first bill rendered after the actual SSFCR for such preceding Billing Month has been determined. The SSFCR shall be calculated to the nearest $0.00001 and when applied the result will be rounded to the nearest cent. 1.6 OTHER CHARGES. MEMBER and SWECO agree that the demand rates set forth in this Schedule B reflect all ad valorem taxes that apply to the Project Capacity as of January 1, 1998. MEMBER and SWECO further agree that none of the rates described in this Schedule B makes provision for the potential effects of new or additional sales, excise, and other applicable taxes (excluding income taxes), fees and charges incurred in accordance with federal, state or local law other than increases in ad valorem taxes associated with 140 assets purchased by SWECO from the Cajun estate resulting from the change in ownership. Any expense incurred by SWECO as the result of the imposition of any such new or additional taxes shall be appropriately allocated to and paid by MEMBER and other members of the Group. 1.7 ENVIRONMENTAL LEGISLATION. Except as provided under Section 1.4 of this Schedule B, MEMBER and SWECO agree that the rates for Supplemental Supply contained in this Agreement make no provision for the potential effects of new environmental control legislation or the additional costs of providing electric service to MEMBER resulting from any such legislation. Any such costs resulting from such legislation shall be appropriately allocated to and paid by MEMBER. 1.8 WHEELING CHARGE. Each monthly bill to MEMBER shall reflect adjustments, charges, fees or penalties relating to transmission and Ancillary Services charged SWECO by a Transmission Supplier in connection with service to the MEMBER Points of Delivery in accordance with Sections 5.2 and 8.2 of this Agreement. Such Transmission Supplier costs shall be allocated to individual MEMBER Points of Delivery in accordance with Section 5.2. SWECO agrees to provide MEMBER 141 information concerning any such charges, fees or penalties imposed by a Transmission Supplier. Charges for services provided to MEMBER under SWECO's Open Access Transmission Tariff shall be billed to MEMBER separately. 142 SCHEDULE C SOUTHWESTERN ELECTRIC WHOLESALE COMPANY MEMBER HYDRO ALLOCATION Member Load Member Member HYDRO DEMAND ALLOCATION 1996 kW* Share** Hydro Beauregard Electric Cooperative, Inc. 1,391,749 0.0907 8,290 Claiborne Electric Cooperative, Inc. 915,356 0.0596 5,447 Concordia Electric Cooperative, Inc. 344,869 0.0225 2,057 Dixie Electric Membership Corporation 3,185,301 0.2075 18,966 Jefferson Davis Electric Cooperative, Inc. 421,085 0.0274 2,504 Northeast Louisiana Power Cooperative, Inc. 541,846 0.0353 3,226 Pointe Coupee Electric Membership Corporation 430,729 0.0281 2,568 South Louisiana Electric Cooperative Association 942,164 0.0614 5,612 Southwest Louisiana Electric Membership Corporation 3,810,506 0.2483 22,695 Teche Electric Cooperative, Inc. 434,706 0.0283 2,587 Valley Electric Membership Corporation 1,199,480 0.0781 7,138 Washington - St. Tammany Electric Cooperative, Inc. 1,731,466 0.1128 10,310 -------------------------- ALL COOPERATIVES 15,349,257 1.0000 91,400 =========================== Group Load 15,349,257 Group Hydro 91,400 * January - December 1996 Actual Data ** At the time of the hydro allocation. 143 WORK IN PROCESS 718197 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY BEAUREGARD ELECTRIC COOPERATIVE, INC.
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Sugartown 1014 34.5 $ - $ - $ - $ - Moss Bluff 1022 69 1,523,565 319,949 - - Merryvilie 1034 34.5 - - - - Oakdale 1044 13.2 - - - - Sulpher 1052 69 127,015 26,673 - - DeRidder West 1054 13.2 4,533 952 - - Serpent 1062 69 68,200 14,322 - - Oberlin 1074 13.2 - - - - Anacoco 1084 13.2 - - - - Elizabeth 1094 34.5 - - - - Sugartown East 1114 34.5 - - - - DeRidder 69 Bulk 1124 69 1,415,935 297,346 - - New Llano 1134 69 - - - - Dequincy 69 1144 69 17,884 3,756 - - MGI EEDS* 4,271 897 - - Shell Pipeline EEDS* 7,711 1,619 - - --------------------------------------------------- Total $ 3,169,114 $ 665,514 $ - $ - =================================================== *Specific facilities behind a point of delivery.
144 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY CLAIBORNE ELECTRIC COOPERATIVE, INC.
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ------------------------------------------------------------------------------------------------- Farmervilie 3023 34.5 $ - $ - $ - $ - Shongaloo 3043 13.8 - - - - Dubberly 3053 13.8 - - - - Bernice 3063 34.5 - - - - Grambling 3073 13.8 - - - - Point 3083 34.5 - - - - Cross Roads 3093 34.5 - - - - Pine Hill 3113 34.5 - - - - Marion Bulk 3123 115 224,887 47,226 - - Mount Union 3133 34.5 - - - - Minden Bulk 3143 69 900,931 189,196 - - Ruston East 3153 115 485,747 102,007 - - Trussell's Crossing 3173 115 - - - - Williamette Industries EEDS* 5,424 1,139 - - Conagra EEDS* 6,950 1,460 - - Mandeville EEDS* 19,268 4,046 - - ---------------------------------------------- Total $ 1,643,207 $ 345,074 $ - $ - =============================================== *Specific facilities behind a point of delivery.
145 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY DIXIE ELECTRIC MEMBERSHIP CORPORATION
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Zachary 5012 69 $ - $ - $ - $ - Clinton 5022 69 5,976 1,255 - - French Settlement 5023 230 388,374 81,559 - - Elm Park 5032 69 4,999 1,050 - - Flannery Road 5042 69 7,927 1,665 - - Terrell Road 5052 69 398,964 83,782 - - Coly 69 5062 69 11,432 2,401 - - Vignes 5072 69 - - - - Darlington* - - - - Dyer* 3,484 732 - - Greenwell* 3,484 732 - - Indian Mound* 3,484 732 - - Wallcrossing* 3,484 732 - - Fancy Point* 15,230 3,198 - - --------------------------------------------------- Total $ 846,838 $ 177,838 $ - $ - ==================================================== * These appear to be points which are no longer served but have investment.
146 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY JEFFERSON DAVIS ELECTRIC COOPERATIVE, INC.
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Compton 6032 69 $ 5,684 $ 1,194 $ - $ - Holly 6052 69 5,684 1,194 - - Klondike 6072 69 5,671 1,191 - - Robbie 6082 69 7,895 1,658 - - Chalkley 6092 69 2,472,509 519,227 - - Potter 6102 69 109,225 22,937 - - Derouen 6112 69 81,545 17,124 - - Tupper 6122 69 78,428 16,470 - - Creole* 1,154,131 242,368 - - Andruscove* 1,114 234 - - Transmission Line Connecting - - - - Chalkley and Creole 580,226 121,847 - - --------------------------------------------------- Total $ 4,502,112 $ 945,444 $ - $ - =================================================== * These appear to be points which are no longer served but have investment.
147 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY NORTHEAST LOUISIANA POWER COOPERATIVE, INC.
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Delhi 7013 13.2 $ 11,214 $ 2,361 $ - $ - Oak Grove 7033 13.2 - - - - Lone Cedar 7043 13.2 - - - - Darnell 7053 13.2 - - - - Crowville 7073 13.2 - - - - Como 7083 34.5 - - - - Chickasaw 7093 115 151,973 31,914 - - Gilbert 7103 115 380,899 79,989 - - Log Cabin 7113 115 542,894 114,008 - - Archibald 7123 34.5 398 84 - - Midvall EEDS* $ 7,936 1,667 - - --------------------------------------------------- Total $ 1,095,341 $ 230,023 $ - $ - =================================================== specific facilities behind a point of delivery.
148 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY SOUTH LOUISIANA ELECTRIC COOPERATIVE ASSOCIATION
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Bayou Ramos Bulk 9014 138 $ 189,194 $ 39,731 $ - $ - Gheens 9033 13.2 89,569 18,809 - - Greenwood 9073 115 374,254 78,593 - - Ashland 9093 115 523,578 109,951 - - Landry 9103 115 1,301,700 273,357 - - Bayou L'Ourse 9113 115 448,805 94,249 - - Gemoeo EEDS* 1,111 233 - - Lig EEDS* 4,590 964 - - --------------------------------------------------- Total $ 2,932,801 $ 615,887 $ - $ - =================================================== *Specific facilities behind a point of delivery.
149 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY VALLEY ELECTRIC MEMBERSHIP CORPORATION
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Campti 12013 34.5 $ - $ - $ - $ - Colfax 12014 13.2 50,461 10,597 - - Robson Road 12015 69 17,239 3,620 - - Mansfield 12024 34.5 - - - - Gahagan 12034 34.5 - - - - Carroll 12044 34.5 - - - - Grand Ecore 12073 34.5 - - - - Creston 12074 34.5 - - - - Verda 12083 13.2 - - - - Derry 12084 34.5 - - - - Cane River Bulk 12093 115 316,605 66,487 - - Provencal 12103 115 135,660 28,489 - - Powhatan 12104 34.5 - - - - Kurthwood 12124 34.5 - - - - Red Oak 12154 34.5 - - - - East Leesville Bulk 12174 69 1,780,282 373,859 Many Bulk 12204 69 1,587,854 333,449 - - -------------------------------------------------- Total $ 3,888,101 $ 816,501 $ - $ - ===================================================
150 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY WASHINGTON - ST. TAMMANY ELECTRIC COOPERATIVE, INC.
Assigned Annual Initial Annual Additional Delivery Initial Facilities Additional Facilities NAME/LOCATION POINT NUMBER VOLTAGE INVESTMENT CHARGE INVESTMENT CHARGE - ---------------------------------------------------------------------------------------------- Blond 13014 34.5 $ 5,976 $ 1,255 $ - $ - Pine Cliff 13023 69 1,142,838 239,996 - - Mandeville 13136 34.5 78,758 16,539 - - Talisheek 13043 69 1,418,892 297,967 - - French Branch 13083 69 1,821,078 382,426 - - ---------------------------------------------------- Total $ 4,467,542 $ 938,183 $ - $ - =====================================================
151 WORK IN PROCESS 7/8/97 SCHEDULE D SPECIFIC FACILITIES AT POINTS OF DELIVERY SPECIFIC PER ABOVE $ 31,488,531 SPECIFIC ERROR (66,650) SPECIFIC PER TOM $ 31,421,881 SPECIFIC $ 6,612,591 COMMON 345,450 CWIP 552,766 -------------- TOTAL $ 7,510,829 ============== INITIAL AMOUNT SPECIFIC ERROR TOTAL FACILITIES CALCULATED CHARGE TOTAL x 1.75% x 12 INITIAL CHARGE FACTOR 152 WORK IN PROCESS 7/8/97 SCHEDULE D COMMON FACILITIES
Member Annual Initial Addition Annual Additional Member Load Member Assigned Facilities Common Common Facilities 1996 kW* Share** Common Charge Investment Charge Beauregard Electric Cooperative, Inc. 1,391,749 0.0907 $ 149,202 $ 31,332 $ - $ - Claiborne Electric Cooperative, Inc. 915,356 0.0596 98,042 20,589 - - Concordia Electric Cooperative, Inc. 344,869 0.0225 37,013 7,773 - - Dixie Electric Membership Corporation 3,185,301 0.2075 341,338 71,681 - - Jefferson Davis Electric Cooperative, Inc. 241,085 0.0274 45,073 9,465 - - Northeast Louisiana Power Cooperative, Inc. 541,846 0.0353 58,069 12,194 - - Pointe Coupee Electric Membership Corporation 430,729 0.0281 46,225 9,707 - - South Louisiana Electric Cooperative Association 942,164 0.0614 101,003 21,211 - - Southwest Louisiana Electric Membership Corporation 3,810,506 0.2483 408,454 85,775 - - Teche Electric Cooperative, Inc. 434,706 0.0283 46,554 9,776 - - Valley Electric Membership Corporation 1,199,480 0.0781 128,475 26,980 - - Washington - St. Tammany Electric Cooperative, Inc. 1,731,466 0.1128 185,556 38,967 - - ----------------------------------------------------------------------- ALL COOPERATIVES 15,349,257 1.0000 $1,645,004 $ 345,450 $ - $ - ======================================================================== * January - December 1996 Actual Data ** At the time of the facilities allocation
CONSTRUCTION WORK IN PROCESS FACILITIES
Member Annual Initial Addition Annual Additional Assigned Facilities CWIP CWIP Facilities CWIP** Charge Investment Charge Beauregard Electric Cooperative, Inc. $ 47,552 $ 9,986 $ - $ - Claiborne Electric Cooperative, Inc. 1,035,305 217,414 - - Concordia Electric Cooperative, Inc. - - - - Dixie Electric Membership Corporation 1,304,479 273,941 - - Jefferson Davis Electric Cooperative, Inc. Northeast Louisiana Power Cooperative, Inc. 38,354 8,054 - - Pointe Coupee Electric Membership Corporation 181,369 38,087 - - South Louisiana Electric Cooperative Association 25,269 5,306 - - Southwest Louisiana Electric Membership Corporation - - - - Teche Electric Cooperative, Inc. - - - - Valley Electric Membership Corporation - - - - Washington - St. Tammany Electric Cooperative, Inc. - ------------------------------------------------------- ALL COOPERATIVES $ 2,632,328 $552,788 $ - $ - ======================================================= *** Specific by Cooperative
153 SCHEDULE E DATA TO BE SUPPLIED WITH MONTHLY BILLING TO ENABLE VERIFICATION 1.Point to Point Demand Allocation. 2.Point to Point Energy Allocation 3.Transmission Charge Summary-Grouped by Delivery Voltage 4.Facility Charge Summary-Initial and Additional Specific and Common 5.Separately Metered Load Summary-Customers Billed Under Schedule A-4 6.Monthly Fuel and Purchased Energy Cost Calculations 7.Summary Incentive Load Credits-Credits from Schedules A-1 and A-2 8.Detailed Billing for Each Point of Delivery 154 IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF LOUISIANA IN RE: CIVIL ACITON NO. 94-2763-B2 CAJUN ELECTRIC POWER COOPERATIVE, INC. BANKRUPTCY CASE NO. 94-11474 Debtor. Chapter 11 Federal Tax Id. No.: 72-0655799 ORDER AND JUDGEMENT APPROVING SETTLEMENT BY AND AMONG CAJUN ELECTRIC POWER COOPERATIVE, INC., ENTERGY GULF STATES, INC., ENTERGY CORPORATION, AND THE RURAL UTILITIES SERVICE OF THE DEPARTMENT OF AGRICULTURE This matter coming to be heard on the Motion (the "Motion") of Ralph R. Mabey, Chapter 11 Trustee (the "Trustee") pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure to approve a settlement between Cajun Electric Power Cooperative, Inc. ("Cajun"or the "Debtor") and Entergy Gulf States, Inc. formerly known as Gulf States Utilities Company ("GSU"), in accordance with the terms set forth in the Settlement Term Sheet, dated May 2, 1996, executed by the Trustee, GSU, and Entergy Corporation ( "Entergy" ) and recommended for adoption by the Rural Utilities Service of the United States Department of Agriculture (the "RUS") ("Settlement Term Sheet," a copy of which is attached hereto as Exhibit A), the Motion, and this order (the "Settlement"); Upon consideration of the Motion, due and proper notice having been provided thereof to parties entitled thereto, and on the basis of the record of this case, including the evidence presented at the hearing on the Motion to approve the Settlement, the litigation involving the parties described in the Motion and attachments thereto (and the Court having taken judicial notice of litigation pending before it), and the Court's oral Finding of Fact and Conclusions of law on the record on August 26, 1996, which are incorporated herein by reference and a transcript of which shall be filed by the Trustee as soon as practicable, and pursuant to SUBSECTION 11 USC 105(a) and 363(b) and Federal Rule of Bankruptcy Procedure Rule 9019(a); The Court having considered all objections not withdrawn (the "Objections") to approve the Settlement and to this Order and Judgement (hereinafter, the "Order") ; The Court is of the opinion that the Motion is meritorious; accordingly, IT IS ORDERED, ADJUDGED AND DECREED THAT: 1. The relief requested in the Motion is granted. 2. The Settlement is approved. 3. All Objections are denied with prejudice. 4. The Settlement as approved includes, but is not, limited to: a. A global settlement of all disputes between GSU and Cajun which will result in a reciprocal dismissal with prejudice of all-claims and counterclaims and a general release of any liability of any kind rising out of the transactions or occurrences upon which the presently litigated matters are based; b. A global settlement of all disputes between GSU and RUS which will result in a dismissal with prejudice of all pending litigated matters in which the RUS has intervened and a judgment in favor of RUS on GSU's subordination complaint against the RUS; c. A settlement of certain disputes between RUS and Cajun including all matters related to the River Bend nuclear power facility ("River Bend") including a release and waiver of all claims and causes of action, whether known or uknown, by Cajun against RUS for equitable subordination, all claims and causes of action by Cajun against RUS for "lender liability," alleging waiver of deficiency judgment rights under Louisiana 13:4108.1. 5. The Settlement as approved does not resolve claims between RUS and Cajun not involving River Bend unless dealt with in the Settlement. 6. The terms and provisions of the Settlement which are intended to apply prior to the closing of the Settlement (the"Consummation Date") shall be binding, effective, and enforceable against each of the Trustee, GSU, Entergy and the RUS as of the date hereof. The terms and provisions of the Settlement which are intended to apply on and after the Consummation Date shall be binding, effective and enforceable against each of the Trustee, GSU, Entergy and RUS as of the Consummation Date. 7. The Trustee is authorized to set aside in a decommissioning trust fund or other appropriate vehicle the sum of $125,000,000 in 1995 dollars. When the Trustee acts pursuant to this authorization, he shall transfer the funds in Cajun's existing decommissioning trust fund and will use funds on hand to make up the difference. The funds on hand used to make up the difference, which may be funds subject to the Order Concerning Use of Cash Collateral to Substitute Cajun's "1996 Budget" for all references in said Order to Cajun's "1995 Budget" (Docket No. 1536), will be transferred free and clear of any lien, claim or other interest asserted by any party. Moreover, the transfer of these funds shall not result in a transfer of any party's lien on, claim against, or other interest in these funds to other assets of Cajun or its estate, and shall not create rights or claims in any party against any other party or against the assets of Cajun or its estate. The transfer of these funds is a necessary and proper expense of Cajun's estate, and no party shall thereafter assert any rights, except as granted herein, relating to these funds including any claims that the funds were cash collateral, were not property of the estate, were subject to refund or repayment, were subject to actual or constructive trust, or were subject to an equitable lien. This prohibition on the assertion of rights is not a ruling on, and shall not preclude the assertion of, claims that other funds not transferred into the decommissioning trust fund or other appropriate vehicle are cash collateral, are not property of the estate, are subject to refund or repayment, are subject to actual or constructive trust, or are subject to an equitable lien, except insofar as such claims relate to or rely on the transfer of the funds into the decommissioning trust fund or other appropriate vehicle. The funding of the trust fund, together with the transfer of the Cajun River Bend Interest (the "Cajun River Bend Interest" as that term is defined in the Term Sheet) will absolve Cajun, its member cooperatives, and any successor to assets, other than the Cajun River Bend Interest, now owned by Cajun (but not others who may succeed to the ownership of the Cajun River Bend Interest) of all responsibility for River Bend Decommissioning Costs (as that term is defined in the Term Sheet). 8. The Trustee is authorized without the necessity of any further order or approval of this Court, to transfer all assets as provided in the Settlement, including but not limited to the Cajun River Bend Interest, Cajun's interest in River Bend fuel and spare parts (under the option provided for in the Term Sheet), Tranmission lines 745 and 746 (provided, as required by the Term Sheet, that Entergy's Network Service Tariff and its Transmission Service Tariff, under which Cajun receives service, makes the continued ownership of the Transmission Line or Lines by Cajun or the transferee of its generating assets unnecessary for Cajun or its transferee's provision of current or future services by reason of the benefits provided under the new tariffs), and any other assets required by the Settlement, free and clear of any lien or other interest asserted by any party. 9. RUS is authorized to receive from GSU and Cajun Cajun's share of all cash payments resulting from the litigation presently being conducted against General Electric in connection with claims alleging River Bend design defects. Cajun's share of all payments in kind and other non-cash consideration received or promised as a result of the litigation shall be paid to the owner of the Cajun River Bend Interest at the time such payments in kind or other non-cash consideration become due. All of such transfers and payments shall be free and clear of any lien or other interest asserted by any party. 10. The Trustee is authorized and directed, without the necessity of any further order or approval of this Court, to take any and all actions necessary or appropriate to implement, effectuate, and consummate the Settlement and any transactions contemplated thereby or by this Order, including, without limitation, the issuance, execution and delivery of any document, certificate, agreement or instrument, the filing of any pleading, and the transfer or other disposition of any assets. No action or approval of the Board of Directors of Cajun shall be required with respect to the implementation and consummation of the Settlement. 11. Without limiting the generality of the foregoing, between the date hereof and until and including the Consummation Date: a. the Trustee, and GSU, Entergy, and RUS, as necessary, shall undertake any and all such actions as are necessary or appropriate to cause the Consummation Date to occur no later than June 1, 1997; b. the Trustee shall cause Cajun to cease prosecution of all of its objections to any and all relief sought by GSU or Entergy, or any of their affiliates, in any regulatory or administrative proceeding in which approval of the merger of Entergy and GSU is sought, including any related appellate proceedings to the extent that Cajun's objection to such relief is intended to be settled or resolved on or prior to the Consummation Date in accordance with the terms of the Settlement; c. the Trustee, with the intervention of GSU, if required, shall cause to be stayed all civil actions and regulatory and administrative proceedings, other than proceedings which are the subject of paragraph 9(b) of this Order, which are pending between Cajun, on the one hand, and GSU or Entergy, on the other hand, including any related appellate proceedings, and which are intended to be settled or resolved on the Consummation Date in accordance with the terms of the Settlement; d. the Trustee, and RUS, GSU, and Entergy, as necessary or appropriate, shall undertake such actions as are necessary or appropriate to cause the disposition of the Cajun River Bend Interest on the Consummation Date in the manner provided in Section 1 of the Settlement Term Sheet, and will cooperate to effect, at the option of RUS, the disposition of the Cajun River Bend Interest before the Consummation Date subject to consent of the parties and further court order as provided in paragraph 13 below; e. the Trustee and GSU, jointly or singly, shall undertake to obtain all regulatory approvals reasonably considered to be required to implement, consumate, and effectuate the Settlement (the "Regulatory Approvals"); and f. the Trustee, GSU, Entergy, and RUS shall undertake all such other necessary or appropriate actions as are intended to occur prior to the Consummation Date in accordance with the terms and provisions of the Settlement Term Sheet. 12. As soon as practicable after the conditions precedent to the closing of the Settlement, as contained in the Settlement Term Sheet, shall have been satisified or waived by the affected party or parties, the Trustee, GSU, Entergy and the RUS shall cause the closing of the Settlement to occur. 13. The preliminary injunction in the Service Water Litigation will be continued in full force and effect until the Consummation Date, as set forth in Section 3 (b) of the Settlement Term Sheet. 14. If the Consummation Date has not occurred by the close of business on June 1, 1997, the Trustee, GSU, Entergy and the RUS may by agreement continue to undertake to implement, effectuate and consummate the Settlement. However, in the absence of an agreement, any of the parties may move the Court to order the extension of the Consummation Date upon hearing and finding that the Settlement will likely be effectuated within a reasonable time upon the terms set forth in the Settlement Term Sheet and that such extension is in the best interest of the estate. 15. The Settlement may not be modified by any Plan of Reorganization in this bankruptcy case except as may be agreed to by the Trustee, GSU and the RUS. The terms of the Settlement shall be binding upon any successors to the parties thereto, including, without limitation, any purchaser of Cajun or Cajun's assets. 16. RUS is now authorized to seek a purchaser for the Cajun River Bend Interest (as defined in the Motion and the Settlement Term Sheet). In the event that a purchase offer that is acceptable to RUS is received prior to the closing of the Settlement or to the receipt by the parties of all regulatory approvals required by the Settlement, the Trustee, with the consent of RUS and GSU, may submit a motion for early approval of the sale of the Cajun River Bend Interest on terms that protect the interests of the parties to the Settlement under the Settlement Term Sheet. 17. Each of the actions taken, documents executed, and payments and transfers of assets made pursuant to provisions of the Settlement and Order shall be valid, binding and enforceable and not preferential,fraudulent or an otherwise avoidable transfer under the Bankruptcy Code or under applicable law of the United States or any state, province or other jurisdiction, and will, to the fullest extent permitted by the Bankruptcy Code, vest in the transferee good title to such property, free and clear of all liens, claims, and encumbrances, except as otherwise provided in the Settlement, and shall not be subject to modification in any Plan of Reorganization in this bankruptcy case, except as agreed by the parties receiving the benefit under this Settlement. 18. The record of the hearing to approve the Settlement is closed. 19. This Order shall be effective according to its terms upon the entry thereof. 20. This is a final order and immediately subject to appeal. Baton Rouge, Louisiana, this 26TH day of AUGUST , 1996. FRANK J. POLOZOLA UNITED STATES DISTRICT JUDGE David S.Rubin Ralph R Mabry Tom Phillips Brian Jackson Office of the U.S. Trustee EXHIBIT A SETTLEMENT TERM SHEET WHEREAS Cajun Electric Power Cooperative, Inc.(Cajun)operating through its Chapter 11 Trustee Ralph R. Mabey (Trustee), Rural Utilities Service of the United States Department of Agriculture (RUS) and Gulf States Utilities (GSU) desire to resolve longstanding disputes and disagreements respecting various issues including operation and ownership of Cajun's undivided thirty per cent interest in the River Bend nuclear facility (the Cajun River Bend Interest), the Trustee and GSU desire to establish mutually favorable business relationships and Trustee, RUS and GSU desire to arrange for the transfer of certain specified assets, the Trustee, RUS and GSU agree to the terms and Provisions set forth herein (the"Settlement"), recognizing that various of the components of these terms and provisions may reqire approvals of regulatory agencies to complete and may require more formal documentation to be executed at a closing of the Settlement in order to give full effect to the intentions of the parties set forth herein: 1. Disposition of River Bend (a) On or before the closing of the Settlement, Cajun will set aside in a decommissioning trust fund or other appropriate vehicle the sum of $125,000,000 in 1995 dollars. This fund will be made up of Cajun's new contribution, and the amount in Cajun's existing decommissioning trust fund (the "Trust Fund"). The establishment of the Trust Fund, together with the transfer of the Cajun River Bend Interest as provided herein will absolve Cajun and any successor to assets, other than the Cajun River Bend Interest, now owned by Cajun (but not others who may succeed to the ownership of the Cajun River Bend Interest) of all responsibility for River Bend Decommissioning Costs as defined below. "Decommissioning" means al1 actions taken to render the River Bend nuclear power plant permanently inactive, inoperable and free of radioactive materials. The term decommissioning is intended to be comprehensive and include, without limitation, the entombment, decontamination, dismantlement, removal and disposal of structures, systems and components of the River Bend nuclear power plant in order to permanently cease the nuclear generation of electric energy, including all actions necessary to bring the plant site to "greenfield" status and any other item included in a study accepted and approved by regulatory authorities of competent jurisdiction as a basis for the termination of operations under the license to own or operate River Bend. The term also includes preparation for decommissioning, such as engineering and other planning activities, and all associated activities to be performed after the actual dismantlement occurs, such as physical security and radiation monitoring. The term also includes activities associated with spent fuel storage, disposal, transfer, transportation and removal of low leve waste storage as well as Cajun's future obligations with respect to decontamination and decommissioning of DOE's uranium enrichment facilities. Also included is the preparation of studies and supporting documentation required by regulatory authorities. The foregoing specification is not intended to form a basis for excluding any action or cost-legitimately part of decommissioning and returning the site to "greenfield" status because of the failure to separately identify or to fall witin a category specifically identified. "Decommissioning Costs" means the funds expended to perform Decomissioning. The term includes expenditures whether they are treated as capital items or expense items for regulatory, financial, or tax accounting purposes. (b) The Trust Fund may be used only for the prudent expenditure of Decommissioning Costs for the Cajun River Bend Interest. If, upon the completion of Decommissioning of the River Bend plant, the Trust Fund, and such additional amounts as have been added to it as a result of the investment and management of funds included therein, is not exhausted by the prudent expenditure of Decommisioning Costs for the Cajun River Bend Interest, the remainder will be remitted to RUS. (c) Upon the transfer of the Cajun River Bend Interest, Cajun shall deliver title thereto free and clear of all liens and encumbrances except those agreed to by the purchaser. In the event the Cajun River Bend Interest is transferred to RUS, its liens and encumbrances on the Cajun River Bend Interest shall be merged with the title which it obtains. In the event the Cajun River Bend Interest is transferred to any other person, RUS will release all of its liens and encumbrances on the Cajun River Bend Interest. The foregoing releases by RUS shall not be construed as a waiver or release of the portion of RUS's claim against Cajun which remain unsatisfied by the transfers of title for which provision is made herein. Notwithstanding RUS's release of liens on the Cajun River Bend Interest or the merger of title if the Cajun River Bend Interest is transferred to RUS, the amount of RUS's claims against Cajun shall be reduced only to the extent of RUS's receipt of proceeds from the sale of the Cajun River Bend Interest. If the Cajun River Bend Interest is transferred to GSU under paragraph l(f) below, the amount of RUS's claims against Cajun shall not be reduced on account of the transfer of the Cajun River Bend Interest. The parties hereto agree that any disposition of the Cajun River Bend Interest under the Settlement shall be considered commercially reasonable. (d) In the sole discretion of RUS, the Cajun River Bend Interest will be transferred under one of the two options or subparagraph (f) set forth below. In connection with such transfers, Cajun will satisfy the obligation to fund the Trust Fund required by paragraph l(a) and GSU will make available to all prospective purchasers records, personnel and facilities such that prospective purchasers can conduct an appropriate due diligence evaluation before making their bid. GSU may subject the examination of personnel, records and facilities to reasonable confidentiality and business requirements. RUS shall have substantial flexibility in exercising its discretion to arrange for the transfer of the Cajun River Bend Interest. In furtherance of that end, RUS's flexibility shall include, but shall not be limited to, negotiating with and selecting a prospective purchaser, being permitted to establish a reserve price which must be met before consummating a sale at auction, not being required to accept the highest bid received at an auction and taking title to the Cajun River Bend Interest itself for subsequent reconveyance. Option 1 The Cajun River Bend Interest and Cajun's interest in River Bend fuel and spare parts will be sold, with net proceeds remitted to RUS. The purchaser will become obligated to fully comply with the Cajun NRC license requirements, all other applicable laws and regulations and the provisions of the River Bend JOPOA, as amended in the respects described in Exhibit No. 1, commencing with the date of the transfer of the Cajun River Bend Interest. The Big Cajun No. 2, Coal Unit #3 JOPOA will also be similarly amended, as may be required. All of Cajun's interest and obligations under the River Bend JOPOA, the NRC license and any recorded documents of transfer between GSU and Cajun relating to River Bend will be canceled and terminated as to Cajun and, subject to the provisions in this paragraph, will be assumed by the purchaser. As used herein, the obligations under the River Bend JOPOA for which a successor shall be obligated shall be limited to obligations for operations commencing with the c1osing of the Settlement and for fuel and spare parts purchased only after the closing of the Settlement and shall not include unfulfilled or unpaid obligations which Cajun incurred while it was still the owner. GSU may elect to become a bidder if RUS elects to conduct an auction under this option. Option 2 The Cajun River Bend Interest and Cajun's interest in River Bend fuel and spare parts will be transferred to RUS which will become obligated to fully comply with the Cajun NRC license requirements, all other applicable laws and regulations and the provisions of the River Bend JOPOA, as amended in the respects described in Exhibit No. 1, commencing with the date of its succession to the Cajun River Bend Interest. The Big Cajun No. 2, Coal Unit #3 JOPOA will also be similarly amended, as may be required. All of Cajun's interest and obligations under the River Bend JOPOA, the NRC license and any recorded domments of transfer between GSU and Cajun relating to River Bend will be canceled and terminated as to Cajun and will be assumed by RUS. As used herein, the obligations under the River Bend JOPOA for which RUS shall be obligated shall be limited to obligations for operations commencing with the closing of the Settlement and for fuel and spare parts purchased only after the closing of the Settlement and shall not include unfulfilled or unpaid obligations which Cajun incurred while it was still the owner. (e) RUS will receive from GSU and Cajun Cajun's share of all cash payments resulting from the litigation presently being conducted against General Electric in connection with claims alleging River Bend design defects. Cajun's share of all payments in kind and other non-cash consideration received or promised as a result of the litigation will be payable to the owner of the Cajun river Bend Interest at the time such payments in kind or other non-cash consideration become due. The same allocation shall be made between RUS and a transferee of the Cajun River Bend Interest of refunds or other benefit related to the payment by Cajun to the U.S. Government to fund the decontaminating and decommissioning of DOE's uranium enrichment facilities. (f) In the event that no offer is accepted by RUS under Option 1 above and in the further event that RUS elects not to become the transferee of the Cajun River Bend Interest, together with Cajun's interest in River Bend fuel and spare parts, will be transferred to GSU with no payment by GSU to Cajun's estate or to RUS. 2. Transmission and Certain Other Issues (a) Pursuant to existing FERC decisions, the claim due GSU for past transmission services under the CTOC credits and QTF Dockets amounts to $55,000,000 (the "Liquidated Transmission Debt"). The Liquidated Transmission Debt consists of S32,000,000 due under the QTF Docket and $23,000,000 due under the CTOC Credits Docket. GSU waives its right to collect the Liquidated Transmission Debt from Cajun. (b) Cajun or Cajun's transferee or transferees of its generation assets will receive transmission services under Entergy's Network Service Tariff Entergy's Transmission Service Tariff as of the later of (i) twelve months from the date of the Settlement or (ii) the date of the closing of the Settlement. Neither GSU nor Entergy will oppose the entitlement of Cajun or such transferee to service thereunder or its effectiveness at such date. (c) All previous transmission agreements existing between Cajun and Entergy, GSU, LP&L or MP&L will terminated upon the commencement of services described in paragraph 2(b) hereinabove. Cajun will use its best efforts to obtain agreement from its distribution co-ops to be bound by the terms and provisions of Entergy's Network Service Tariff, during the time they receive service over facilities to which such tariff is applicable. (d) Cajun or its transferee under a plan of reorganization will retain ownership of its BC1 and BC2 Switchyards and its Through Bus facilities. Cajun will transfer to GSU its ownership of each of Transmission lines 745 and 746 (provided that Entergy's Network Service tariff and its Transmission Service tarff, under which Cajun receives service under subparagraph 2(b) above, make the continued ownership of the Transmission line or lines by Cajun or by the transferee of its generating assets unnecessary for Cajun or its transferee's provision of current or future services by reason of the benefits provided under the new tariffs), as of the later of (i) twelve months from the date of the Settlement or (ii) the date of the closing of the Settlement. Unleae Transmission lines 745 and 746 are not transferred to GSU as set forth herein, Cajun will pay RUS an amount equal to the amount by which NRG Energy, Inc. and Zeigler Coal Holding Company reduce the amount of their bid for the purchase of Cajun's assets as a result of the transfer of Transmission lines 745 and 746 pursuant to the Settlement and RUS will release its liens on Transmission lines 745 and 746 upon such payment by Cajun. 3. Settlement of all Claims and Disputes (a) Any and all claims of any nature or kind, whether or not now pending in Court, whether known or unknown, whether founded in law, equity or otherwise, whether or not already asserted for any and all acts or omissions between Cajun and GSU or Entergy, and between RUS and GSU or Entergy, will be dismissed with prejudice and released and satisfied in full, including, but not limited to, all claims for the River Bend litigation, the fraud and breach of contract case, the antitrust case, the nullity case and the service water litigation, and any claims of equitable subordination of RUS's rights, all pending cases before any regulatory agency or on appeal from any regulatory agency (such as the transmission cases before FERC, the merger appeals before FERC, the SEC and NRC and any and all other matters pending before any regulatory agency) and any and all other claims or disputes between the parties of any nature whatsoever, whether or not in litigation. (The foregoing does not include resolution of claims of RUS against Cajun that are not specifically identified as resolved in this paragraph.) Judgment will be rendered in favor of RUS in GSU's adversary proceeding asserting claims of equitable subordination of RUS's rights. Any and all claims Cajun may have against RUS for equitable subordination, whether known or unknown, will be released. Cajun will use its best efforts to obtain a waiver of all claims held by its members against GSU or Entergy under the nullity case, and against RUS. (b) The preliminary injunction issued by the U.S. District Court in the service water litigation between GSU and Cajun shall continue in full force and effect until the closing of the Settlement and upon such date, all funds paid and to be paid into the Registry of the Court pursuant to said injunction shall be paid over to GSU, together with all interest earned thereon. 4. Approvals The Settlement is subject to the approval of (1) all regulatory agencies having jurisdiction over the subject matter; (2) the bankruptcy court; (3) the Entergy Board of Directors; (4) the United States of America on behalf of RUS. The parties intend to give effect to an to close the Settlement irrespective of the confirmation or lack of Confirmation of a plan of reorganization of Cajun. The parties will use their best efforts promptly to obtain all required approvals and to close the Settlement. The structure of the Settlement may be modified based upon tax or regulatory advice received by a party provided the modification does not adversely affect another party. The Settlement shall close no later than June 1, 1997, unless the parties otherwise agree. This Settlement is dated as of May 1, 1996. Seen and Agreed this 9th day of May, 1996 Ralph R. Mabey Cajun Electric Power Cooperative, Inc. through its Chapter ll Trustee, Ralph R. Mabey Seen and Agreed this 26th day of April, 1996 Michael G. Thompson Entergy Corporation and Gulf States Utilities by Michael G. Thompson Senior Vice President & General Counsel Recommended for Adoption by Rural Utilities Senice this 2nd day of May, 1996. Larry A. Belluzzo Program Advisor EXHIBIT NO. 1 RIVER BEND JOPOA - AMENDMENT CONSIDERATIONS New owner(s) of River Bend may wish to amend the JOPOA as follows: a. Section 1.6 ADMINISTRATIVE GENERAL CHARGES Section 1.6 should be revised to specifically spell out defintion and method of calculating GSU's A&G "add ons." b. Section 4.2 GSU ACCEPTS APPOINTMENT OF AGENT Needs a mutual agreeable definition of "Good Utility Practice." c. Section 6.5 "DAMAGE OR DESTRUCTION" Needs better definition as to a minority owner's right NOT to take part in any major capital addition whether it is part of a replacement of damaged equipment or expansion of capacity. d. Section 8.5.1. METHOD OF BILLING AND PAYMENT The current section has been mofidied by mutual agreement as follows: 1. The right to include a contingency amount to the estimated bill has been dropped. 2. The current estimated monthly bill with a two month true up. Both sides have agreed to use prime rate for interest either charged or credited. These changes should be carried to a new owner. c. ARTICLE 10 - DEFAULT: DEFAULTING Party should have input in advance as to where the power is being sold and the price for the power being sold. Also the power should be able to be sold for a 6 to 9 month period. Current sale period is 90 days which can limit value received. A non-defaulting party which pays a defaulting party's costs should have protection. f. BUDGET REVIEW AND INPUT - The Current JOPOA Does not contain any language on budget formulation or forecasts. We suggest a new section calling for the owners to jointly review the budget formation process and forecast process. This would prevent misunderstanding over the plant's needs. Provide minority owner with adequate and reasonable safeguards against excessive expenditures. Parties should have access to additional information on fuel and transportation costs. March _ 1998 PRIVILEGED SETTLEMENT NEGOTIATIONS Mr. Larry A. Belluzzo VIA FAX Rural Utilities Service - USDA 14th and Independence S. W. Room 4031- S Washington, D.C. 20250 Re: Cajun Electric Power Cooperative, Inc. ("Cajun") Dear Mr. Belluzzo: When executed by the Rural Utilities Service ("RUS") in the space provided below, this letter shall evidence the agreement between Southwestern Electric Power Company ("SWEPCO") and the RUS with respect to the treatment of the claim of the RUS under the Plan of Reorganization filed by SWEPCO and the Committee of Certain Members of Cajun Electric Power Cooperative, Inc. ("Cajun") as modified (the "Joint Plan"). Negotiations between SWEPCO and the RUS have now progressed to a stage where the RUS has reached an agreement with SWEPCO on the terms on which the RUS will withdraw iti objection to the Joint Plan, vote for the Joint Plan, and the RUS and SWEPCO will take certain other affirmative actions regarding the Joint Plan all as more particularly set forth herein. Now therefore, for and in consideration of the mutual benefits received by the RUS and SWEPCO, the RUS and SWEPCO agree as follows: 1. SWEPCO shall increase the "Purchase Price" under its Asset Purchase Agreement to Nine Hundred Thirty-three Million Five Hundred Thousand and No/100 ($933,500,000) cash, subject to adjustments as provided in Section 2.3 and 2.4 of the Asset Purchase Agreement. There will be no reduction in purchase price if SWEPCO fails to sign the three cooperatives that have not yet agreed to sign power supply agreements with SWEPCO. 2. SWEPCO shall amend the Asset Purchase Agreement to pay to Cajun, as additional purchase price, an amount not to exceed $7 million, equal to the allowed amount of usecured claims (not administrative or priority claims) described and listed in paragraph I.B.2.a of SWEPCO'S Supplemental Disclosure Statement, dated November 12, 1996. These funds will be the first funds paid by the estate to the RUS on its secured claim. On the Effective Date, the estate will place these funds in a separate account for distribution to the RUS, solely Mr. Larry A. Belluzzo Page 2 March _, 1998 for the use of the RUS as set forth herein. On the Effective Date, the RUS will, outside the Joint Plan, use the additional purchase price funds to pay, on or before the fourteenth day after confirmation of the Joint Plan, the allowed, unsecured claims (not administrative or priority claims) described in paragraph I.B.2.a of SWEPCO'S Supplemental Disclosure Statement. Upon such payment the claims, and any obligations of SWEPCO to purchase them, shall be satisfied and extinguished without further distribution from the estate. 3. SWEPCO shall amend the definition of "Excluded Assets" and SUBSECTION 3.11 of its Asset Purchase Agreement such that Cobank Class E Stock and patronage dividends will be Excluded Assets and will be treated on a similar basis as the Enron and Trustee Asset Purchase Agreements. 4. SWEPCO shall eliminate any condition in its Asset Purchase Agreement to SWEPCO'S closing due to the failure of SWEPCO to obtain acceptable fuel transportation contracts. 5. SWEPCO'S performance of its obligations hereunder and under the Asset Purchase Agreement will be subject to all the existing rights and satisfaction of all other conditions precedent in the Joint Plan and the Asset Purchase Agreement as well as the following: (a) All nine (9) of the Louisiana electric distribution cooperatives that constitute the members of Cajun (including CLECO, the successor to Teche) that have signed term agreements, continue to agree to enter into new twenty-five year contracts with SWEPCO or a SWEPCO affiliate on terms and conditions mutually acceptable to SWEPCO and such members; 6. The Joint Plan shall be conditioned on approval of the Amended and Restated Settlement Agreement. However, in the event that the Trustee's Plan of Reorganization, which is presently conditioned on a similar settlement agreement by the RUS with the Trustee, is amended such that the Trustee's Plan is not conditioned on approval of the Trustee's settlement agreement with the RUS, then the Joint Plan maybe similarly amended to eliminate the condition of approval of the Amended and Restated Settlement Agreement. 7. SWEPCO agrees, either through the Amended and Restated Settlement Agreement filed by SWEPCO and the RUS or by amendments to the Joint plan, to provide for the treatment of the RUS's claim as secured by all the assets upon which the RUS claims a lien. The RUS and SWEPCO shall modify the Amended and Restated Settlement Agreement to allow a fund of $20.24 million from the purchase price, plus any recoveries from avoidance actions, to be available to unsecured creditors other than the RUS; and any surplus to be returned to the RUS on its Mr, Larry A. Belluzzo Page 3 March _, 1998 unsecured claim. The Trustee shall be limited to the amount of $150,000 from the Purchase Price, for fees and expenses incurred in pursuing avoidance actions. 8. The RUS shall use its best efforts to obtain Bankruptcy Court approval (and appellate approvals) of the Amended and Restated Settlement Agreement, including but not limited to providing necessary witnesses and documents, and assisting in the prosecution of the case seeking approval of the Amended and Restated Settlement Agreement. 9. The Amended and Restated Settlement Agreement will include a provision that will allow the parties by mutual agreement thereto to further amend the agreement in the event a modification is necessary to cure any impediments to approval of the settlement or confirmation of the Joint Plan announced or ruled upon by the Bankruptcy Court. 10. The RUS will use its best efforts to encourage the Trustee to support the Amended and Restated Settlement Agreement. 11. The RUS shall use its best efforts to contact the general manager of those three cooperatives who have not yet agreed to sign power supply agreements with SWEPCO, and encourage them to negotiate power supply agreements with SWEPCO. 12. Since the RUS is consenting to the entry by the Members to power supply agreements with SWEPCO under the Joint Plan on the Effective Date of the Joint Plan, SWEPCO shall withdraw its opposition to the relief sought by the RUS in Adversary 1066 pertaining to the requirement of RUS consent. However, nothing herein precludes or waives the right of SWEPCO to assert any and all defenses in Adversary 1066 to causes of action pertaining to the requirement of Cajun's (or the Trustee's) consent to the entry into power supply agreements by the Members. 13. On or before March 23, 1998, the RUS will file a Motion with the Bankruptcy Court seeking to change its vote on the Joint Plan from a rejection to an acceptance of the Joint Plan, and on approval will so change their vote. 14. On or before March 23, 1998, the RUS will withdraw all of its objections to the Joint Plan, and will modify its appeal presently before Federal District Judge Polozola to dismiss any relief seeking to disqualify the Joint Plan. The RUS will not object to or vote against the Joint Plan in the future solely because of any increase in purchase price or other consideration paid by any other plan. Mr. Larry A. Belluzzo Page 4 March _, 1998 15. On or before March 23, 1998, or as soon thereafter as possible, the RUS will announce to the Bankruptcy Court that it supports the Joint Plan, will vote to accept the Joint Plan, and will withdraw all objections to the Joint Plan. 16. The RUS will not take any action that directly or indirectly hinders, impedes or delays confirmation of the Joint Plan. The RUS may however vote for other plans of reorganization, and state a preference for other plans of reorganization. 17. The RUS will not express a preference for any other plan, unless such plan provides more than $10 million in net value to the RUS according to RUS calculations (as opposed to gross purchase price), than does the Joint Plan. 18. One business day after the RUS files its Motion to Change its Vote, and its withdrawal of objections to the Joint Plan, SWEPCO will withdraw any opposition to the relief sought by the Trustee and the RUS in adversary 1073 pertaining to the interest escrow fund. 19. Upon execution of this letter agreement by both parties hereto, the terms and conditions hereof shall constitute the binding obligations of each and may not be amended or modified except in writing executed by each. Both parties agree to proceed with their respective obligations hereunder in good faith and in reliance upon the agreed to terms and conditions hereof. This offer shall expire unless accepted in writing and delivered to SWEPCO on or before noon central time on March 17, 1998. Very truly yours, Southwestern Electric Power Company By: Name: Title: AGREED: Rural Utilities Service Mr. Law A. Belluzzo Page 5 March _, 1998 By: Larry A. Belluzzo AMENDED AND RESTATED SETTLEMENT AGREEMENT Southwestern Electric Power Company ("SWEPCO"), the Committee of Certain Members of Cajun Electric ("Committee") Claiborne Electric Cooperative Inc. ("Claiborne") and the Rural Utilities Service of the United States Department of Agriculture ("RUS") have previously entered an Amended Settlement Agreement dated October 31, 1997. This agreement amends, supersedes and restates such settlement agreement. WHEREAS, SWEPCO and the Committee assert that the Cajun bankruptcy estate holds a number of potential lien avoidance actions against RUS whereby RUS's lien would be avoided on certain assets of Cajun and would otherwise reduce the amount of the RUS allowed secured claim; and WHEREAS, RUS denies that any of its liens on Cajun's assets could be avoided by Cajun's estate; and WHEREAS, RUS asserts claims against Cajun totaling in excess of $4.1 billion and asserts unsecured deficiency claims likely totaling in excess of $3 billion; and WHEREAS, RUS's unsecured deficiency claims against Cajun represent most of Cajun's unsecured debt such that any avoidance of liens by the Cajun estate for the benefit of unsecured creditors will in large part be for the benefit of RUS as a general unsecured creditor; and WHEREAS, the Trustee and RUS have entered into a settlement agreement that deals with the settlement of the estate's avoidance actions against the RUS's liens; and WHEREAS, SWEPCO, Claiborne and the Committee have indicated an intention to object to such settlement agreement; and WHEREAS, SWEPCO has filed a plan along with the Committee whereby SWEPCO proposes to purchase the assets of the Cajun estate for up to $940.5 million; and WHEREAS, the RUS has filed an objection to the Joint Plan alleging, among other things, that SWEPCO may not use alleged cash collateral under the Joint Plan without the RUS's consent; and WHEREAS, the RUS, SWEPCO, Claiborne and the Committee desire to avoid litigation over potential lien avoidance actions and cash collateral disputes and the cost thereof; and WHEREAS, in consideration of the mutual promises, conditions and covenants contained herein, the RUS, SWEPCO, Claiborne and the Committee desire to settle the disputes among them pertaining to the perfection of the liens of the RUS and the ability of SWEPCO to use cash collateral under the Joint Plan; NOW, THEREFORE, the RUS, SWEPCO, Claiborne and the Committee agree to the terms and provisions set forth below: 1. DEFINITIONS. As used in this Agreement, the following defined terms shall have the following meanings: "Agreement" means this Settlement Agreement. "Approval Order" means the Order of the Court approving each of paragraphs 4 and 7 of this Agreement. "Cajun" means Cajun Electric Power Cooperative, Inc. "Court" means the United States Bankruptcy Court for the Middle District of Louisiana or the United States District Court for the Middle District of Louisiana, as appropriate. "Joint Plan" shall mean the Joint Plan of Reorganization filed by SWEPCO, the Committee and by Entergy Gulf States, Inc. as amended, modified or supplemented. "RUS" means the Rural Utilities Service of the United States Department of Agriculture. "Settlement Amount" means $20.24 million to be provided for the benefit of unsecured creditors from the purchase price under the Joint Plan, plus any funds constituting recoveries from avoidance actions by the estate. "Trustee" means Ralph R. Mabey or his successor as Chapter 11 Trustee of Cajun Electric Power Cooperative, Inc. 2. RUS SETTLEMENT WITH THE TRUSTEE. SWEPCO, Claiborne and the Committee agree not to file objections to the Motion by Ralph R. Mabey, Chapter 11 Trustee Seeking Order Approving Settlement between the Trustee and the Rural Utilities Service pursuant to Federal Rule of Bankruptcy Procedure 9019 filed on November 26, 1996. 3. PERFECTION OF RUS' LIENS. SWEPCO, Claiborne and the Committee agree not to file, and to withdraw if already filed, any objections to the perfection of the liens asserted by the RUS. 4. ALLOWED SECURED CLAIM. The RUS shall be deemed under the Joint Plan, without taking further steps, to have as against Cajun and its estate, a fully perfected security interest in all Cajun assets and proceeds thereof as to which it is a party to a security agreement, mortgage or pledge (subject only to any other prior interest held by a third-party not involving a claim of Cajun or its estate). 5. RATE ESCROW FUND. The Rate Escrow Fund (held by Cajun and currently in the amount of approximately $42 million and growing) shall be deemed property of the estate, subject to any final non-appealable orders of any court of competent jurisdiction. 6. RUS CONSENT TO USE OF CASH COLLATERAL. The RUS consents to the use of cash collateral under the Joint Plan for payment of administrative and priority expenses through the Effective Date of the Joint Plan, or any other plan proposed by the Committee or SWEPCO which provides equivalent value to the RUS. 7. TRANSFER OF FUNDS FOR THE BENEFIT OF UNSECURED CREDITORS. The RUS consents to the transfer on the Effective Date of the Joint Plan, from the proceeds of the sale of assets securing RUS's claims, $20.24 million to unsecured creditors in Classes 6 (a) and (b) under the Joint Plan. The RUS agrees that, as to the Settlement Amount, RUS shall not be entitled to receive any distributions on account of any of its claims whether secured, unsecured, or administrative in nature. If, after payment in full of allowed unsecured claims under the Joint Plan (other than the deficiency claim of the RUS), funds remain from the liquidation of assets and from successful avoidance actions, the RUS, as the sole remaining holder of a general unsecured claim, will receive such remaining funds. 8. WITHDRAWAL OF OBJECTIONS TO JOINT PLAN. The RUS shall withdraw all objections to the Joint Plan, including those based on the use of cash or cash collateral to pay administrative or priority expenses without RUS consent. 9. CONDITIONS. (a) Paragraphs 4 and 7 become effective only after the occurrence of the following conditions: (i) the Approval Order being entered by the Court, (ii) confirmation of the Joint Plan by the Court and (iii) the Joint Plan becoming effective. (b) All paragraphs other than 4 and 7 of this Agreement shall become effective upon execution, and shall remain effective irrespective of whether the Court approves paragraphs 4 and 7. 10. REPRESENTATION AND WARRANTY OF SWEPCO, CLAIBORNE AND THE COMMITTEE. SWEPCO, Claiborne and the Committee represent and warrant as of the date this Agreement is executed that they have all the requisite power and authority to execute and deliver this Agreement and the other documents necessary to consummate this Agreement and to perform their obligations hereunder and thereunder. 11. REPRESENTATION AND WARRANTY OF RUS. RUS represents and warrants as of the date this Agreement is executed that it has all requisite power and authority to execute and deliver this Agreement and any other documents necessary to consummate this Agreement and perform its obligations hereunder and thereunder. 12. TERMINATION. (a) The obligations of the parties under paragraphs 4 and 7 shall terminate and be of no further force and effect, and the parties shall be released therefrom, if any of the conditions set forth in paragraph 9 are not met. 13. MISCELLANEOUS. a. Notices. All notices, requests and other communications to parties hereunder shall be in writing and delivered by certified mail, return receipt requested, by Federal Express or by facsimile and shall be given to such parties at the following respective addresses: If to RUS: With a copy to: Larry A. Belluzzo Brendan Collins Program Advisor Civil Division Financial Services Staff Department of Justice Rural Utilities Service-USDA P.O. Box 875, Ben Franklin Station 14th and Independence, S.W. 550 11th Street, N.W. Room 4031-S Washington, D.C. 20044-0875 Washington, D.C. 20250 If to the SWEPCO: With copies to: Tom Brice Henry Kaim Central and South West Corporation Sheinfeld, Maley & Kay, P.C. SWEPCO 3700 First City Tower 416 Travis Street 1001 Fannin, Suite 3700 Shreveport, LA 71101 Houston, Texas 77002 If to the Committee: With copies to: Henry Locklar Melanie Cohen Dixie Electric Cooperative Altheimer & Gray P.O. Box 15659 10 S. Wacker Drive, Suite 4000 Baton Rouge, LA 70895 Chicago, IL 60606-7482 and John M. Sharp 14481 Old Hammond Highway, Suite 2 Baton Rouge, LA 70816 If to Claiborne: With Copies to: Jerry Williams Patrick Henry P.O. Box 719 P.O. Box 239 Homer, LA 71040 Homer, LA 71040 14. BENEFIT OF AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, including without limitations any successors or assigns under the Joint Plan. 15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement agreed to by the parties hereto relating to the subject matter hereof, and may not be amended, altered or modified, except by a writing executed by a duly authorized representative of each of the parties hereto. This Agreement shall in no event be construed or deemed to be evidence of any admission on the part of any party of any liability or wrongdoing. 16. HEADINGS. The headings herein are inserted for convenience of reference only and shall not affect the construction or interpretation thereof. 17. COUNTERPARTS AND MULTIPLE ORIGINALS. This Agreement may be executed in any number of counterparts, and/or originals, each of which shall be an original, with the same effect as if the signatures thereto and hereto were on the same instrument. 18. GOVERNING LAW. This Agreement shall be governed and construed in accordance with Louisiana law except to the extent federal law is applicable, in which case, this Agreement shall be governed and construed in accordance with federal law. 19. COURT JURISDICTION. The Court shall have jurisdiction to resolve all disputes concerning the interpretation and enforcement of this Agreement and any other documents executed in conjunction with this Agreement and to enforce this Agreement. Signed and Agreed this 18th day of March, 1998. LARRY A BELLUZZO - ---------------------------------------------- Rural Utilities Service of the United States Department of Agriculture by Larry A. Belluzzo, Program Advisor MICHAEL D. SMITH - ---------------------------------------------- Southwestern Electric Power Company JOHN M. SHARP - ---------------------------------------------- Committee of Certain Members of Cajun Electric PATRICK HENRY - ---------------------------------------------- Claiborne Electric Cooperative Inc. March 18, 1998 PRIVILEGED SETTLEMENT NEGOTIATIONS Mr. Larry A. Belluzzo VIA FAX Rural Utilities Service - USDA 14th and Independence S.W. Room 4031 - S Washington, D.C. 20250 Re: Cajun Electric Power Cooperative, Inc. ("Cajun") Dear Mr. Belluzzo: When executed by the Rural Utilities Service ("RUS") in the space provided below, this letter shall evidence the agreement between Southwestern Electric Power Company ("SWEPCO") and the RUS with respect to the treatment of the claim of the RUS under the Plan of Reorganization filed by SWEPCO and the Committee of Certain Members of Cajun Electric Power Cooperative, Inc. ("Cajun") as modified (the "Joint Plan"). Negotiations between SWEPCO and the RUS have now progressed to a stage where the RUS has reached an agreement with SWEPCO on the terms on which the RUS will withdraw its objection to the Joint Plan, vote for the Joint Plan, and the RUS and SWEPCO will take certain other affirmative actions regarding the Joint Plan all as more particularly set forth herein. Now therefore, for and in consideration of the mutual benefits received by the RUS and SWEPCO, the RUS and SWEPCO agree as follows: 1. SWEPCO shall increase the "Purchase Price" under its Asset Purchase Agreement to Nine Hundred Thirty-three Million Five Hundred Thousand and No/100 ($933,500,000) cash, subject to adjustments as provided in Section 2.3 and 2.4 of the Asset Purchase Agreement. There will be no reduction in purchase price if SWEPCO fails to sign the three cooperatives that have not yet agreed to sign power supply agreements with SWEPCO. 2. SWEPCO shall amend the Asset Purchase Agreement to pay to Cajun, as additional purchase price, an amount not to exceed $7 million, equal to the allowed amount of unsecured claims (not administrative or priority claims) described and listed in paragraph I.B.2.a of SWEPCO's Supplemental Disclosure Statement, dated November 12, 1996. These funds will be the first funds paid by th estate to the RUS on its secured claim. On the Effective Date, the estate will place these funds in a separate account for distribution to the RUS, solely for the use of the RUS as set forth herein. On the Effective Date, the RUS will, outside the Joint Plan, use the additional purchase price funds to pay, on or before the fourteenth day after confirmation of the Joint Plan, the allowed, unsecured claims (not administrative or priority claims) described in paragraph I.B.2.a of SWEPCO's Supplemental Disclosure Statement. Upon such payment the claims, and any obligations of SWEPCO to purchase them, shall be satisfied and extinguished without further distribution from the estate. 3. SWEPCO shall amend the definition of "Excluded Assets" and Section 3.11 of its Asset Purchase Agreement such that Cobank Class E Stock and patronage dividends will be Excluded Assets and will be treated on a similar basis as the Enron and Trustee Asset Purchase Agreements. 4. SWEPCO shall eliminate any condition in its Asset Purchase Agreement to SWEPCO's closing due to the failure of SWEPCO to obtain acceptable fuel transportation contracts. 5. SWEPCO's performance of its obligations hereunder and under the Asset Purchase Agreement will be subject to all the existing rights and satisfaction of all other conditions precedent in the Joint Plan and the Asset Purchase Agreement as well as the following: (a) All nine (9) of the Louisiana electric distribution cooperatives that constitute the members of Cajun (including CLECO, the successor to Teche) that have signed term agreements, continue to agree to enter into new twenty-five year contracts with SWEPCO or a SWEPCO affiliate on terms and conditions mutually acceptable to SWEPCO and such members; 6. The Joint Plan shall be conditioned on approval of the Amended and Restated Settlement Agreement. However, in the event that the Trustee's Plan of Reorganization, which is presently conditioned on a similar settlement agreement by the RUS with the Trustee, is amended such that the Trustee's Plan is not conditioned on approval of the Trustee's settlement agreement with the RUS, then the Joint Plan may be similarly amended to eliminate the condition of approval of the Amended and Restated Settlement Agreement. 7. SWEPCO agrees, either through the Amended and Restated Settlement Agreement filed by SWEPCO and the RUS or by amendments to the Joint plan, to provide for the treatment of the RUS's claim as secured by all the assets upon which the RUS claims a lien. The RUS and SWEPCO shall modify the Amended and Restated Settlement Agreement to allow a fund of $20.24 million from the purchase price, plus any recoveries from avoidance actions, to be available to unsecured creditors other than the RUS; and any surplus to be returned to the RUS on its unsecured claim. The Trustee shall be limited to the amount of $150,000 from the Purchase Price, for fees and expenses incurred in pursuing avoidance actions. 8. The RUS shall use its best efforts to obtain Bankruptcy Court approval (and appellate approvals) of the Amended and Restated Settlement Agreement, including but not limited to providing necessary witnesses and documents, and assisting in the prosecution of the case seeking approval of the Amended and Restated Settlement Agreement. 9. The Amended and Restated Settlement Agreement will include a provision that will allow the parties by mutual agreement thereto to further amend the agreement in the event a modification is necessary to cure any impediments to approval of the settlement or confirmation of the Joint Plan announced or ruled upon by the Bankruptcy Court. 10. The RUS will use its best efforts to encourage the Trustee to support the Amended and Restated Settlement Agreement. 11. The RUS shall use its best efforts to contact the general manager of those three cooperatives who have not yet agreed to sign power supply agreements with SWEPCO, and encourage them to negotiate power supply agreements with SWEPCO. 12. Since the RUS is consenting to the entry by the Members to power supply agreements with SWEPCO under the Joint Plan, on the Effectice Date of the Joint Plan, SWEPCO shall withdraw its opposition to the relief sought by the RUS in Adversary 1066 pertaining to the requirement of RUS consent. However, nothing herein precludes or waives the right of SWEPCO to assert any and all defenses in Adversary 1066 to causes of action pertaining to the requirements of Cajun's (or the Trustee's) consent to the entry into power supply agreements by the Members. 13. On or before March 25, 1998, if the Board of Directors approvals discussed in paragraph 18 have been obtained, the RUS will file a Motion with the Bankruptcy Court seeking to change its vote on the Joint Plan from a rejection to an acceptance of the Joint Plan, and on approval will so change their vote. 14. On or before March 25, 1998, if the Board of Director approvals discussed in paragraph 18 have been obtained, the RUS will withdraw all of its objections to the Joint Plan, and will modify its appeal presently before Federal District Judge Polozola, to dismiss any relief seeking to disqualify the Joint Plan. The RUS will not object to or vote against the Joint Plan in the future solely because of any increase in purchase price or other consideration paid by any other plan. 15. On or before March 25, 1998, or as soon thereafter as possible, if the Board of Director approvals discussed in paragraph 18 have been obtained, the RUS will announce to the Bankruptcy Court that it supports the Joint Plan, will vote to accept the Joint Plan, and will withdraw all objections to the Joint Plan. 16. The RUS, if the Board of Director approvals discussed in paragraph 18 have been obtained, will not take any action that directly or indirectly hinders, impedes or delays confirmation of the Joint Plan. The RUS may however vote for other plans of reorganization, and state a preference for other plans of reorganization. 17. The RUS will not express a preference for any other plan, unless such plan provides more than $10 million in net value to the RUS according to RUS calculations (as opposed to gross purchase price), than does the Joint Plan. 18. On or before March 25, SWEPCO and the Members Committee, and Claiborne will withdraw any opposition to the relief sought by the Trustee and the RUS in adversary 1073 pertaining to the interest escrow fund. Such withdrawal shall be subject to approval of the Board of Directors of each of the members of the Committee of Certain Members and Claiborne, where required, and such withdrawal shall not require SWEPCO, any member of the Members Committee nor Claiborne to violate any Order of the Bankruptcy Court, the Louisiana Public Service Commission or any other Court of competent jurisdiction which is unstayed pertaining to the interest escrow funds. Furthermore such withdrawal shall not waive rights of the ultimate consumer rate payers to the interest escrow funds, if any. 19. Upon execution of this letter agreement by both parties hereto, the terms and conditions hereof shall constitute the binding obligations of each and may not be amended or modified except in writing executed by each. Both parties agree to proceed with their respective obligations hereunder in good faith and in reliance upon the agreed to terms and conditions hereof. This offer shall expire unless accepted in writing and delivered to SWEPCO on or before noon central time on March 18, 1998. Very truly your, Southwestern Electric Power Company EX-3.2 3 CSW BY-LAWS CENTRAL AND SOUTH WEST CORPORATION BYLAWS Revised effective January 21, 1998 CENTRAL AND SOUTH WEST CORPORATION BYLAWS ARTICLE I STOCK AND TRANSFERS SECTION 1. Each holder of fully paid stock shall be entitled to a certificate or certificates of stock stating the number of shares owned by such holder. All certificates shall at the time of their issuance be signed by the Chairman, the Vice Chairman, if any, the President, or a Vice President and also by the Treasurer, the Secretary, an Assistant Treasurer or an Assistant Secretary, shall be countersigned by a Transfer Agent, and shall be authenticated and registered by a Registrar, provided that in case any officer, Transfer Agent or Registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, Transfer Agent or Registrar before such certificate is issued, it may be issued with the same effect as if such officer, Transfer Agent or Registrar had not ceased to be such at the date of its issue. The Board of Directors shall appoint one or more Transfer Agents, none of whom shall be the Corporation or any officer or employee thereof, and one or more Registrars, each of which Registrars shall be a bank or trust company. If a certificate is countersigned manually by either a Transfer Agent or a Registrar, any other signature on the certificate may be a facsimile. SECTION 2. Shares of stock shall be transferable only on the books of the Corporation and, except as otherwise required by law, shall be transferred only upon proper endorsement and surrender of the certificates theretofore issued therefor. If an outstanding certificate of stock shall be lost, stolen or destroyed, there shall be issued to the holder thereof a new certificate upon production of evidence satisfactory to the Board of Directors of such loss, theft or destruction and upon furnishing to the Corporation, the Transfer Agents and the Registrars a bond of indemnity deemed sufficient by the Board of Directors against claims on account of such alleged loss, theft or destruction or on account of the issuance of such new certificate. ARTICLE II STOCKHOLDERS SECTION 1. A meeting of the stockholders shall be held on the third Thursday in April of each year or on such other day as may, in any year, be specified by the Board of Directors. Each such annual meeting shall be held at such place and hour as may be fixed by the Board of Directors. SECTION 2. Special meeting of the stockholders may be called by the Chairman, by the Board of Directors, by a majority of the Directors individually or by the holders of not less than one-third of the total outstanding shares of stock of the Corporation. Each special meeting of the stockholders shall be held at such place, date and hour as may be fixed by the person or persons calling the meeting. SECTION 3. Written notice stating the place, date and hour of each meeting of the stockholders, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten or more than fifty days before the date of the meeting except as otherwise required by law, either personally or by mail, to each stockholder of record entitled to vote at such meeting. SECTION 4. At all meetings of the stockholders a majority of the outstanding shares of stock, excluding such shares as may be owned by the Corporation, represented in person or by proxy, shall constitute a quorum for the transaction of business, but the stockholders represented at a meeting, though less than a quorum, may adjourn the meeting to some other day or SINE DIE. If a quorum is present the affirmative vote of a majority of the shares of stock represented at the meeting shall be the act of the stockholders, unless the vote of a greater number is required by law or the Second Restated Certificate of Incorporation. SECTION 5. At every meeting of the stockholders, each share of stock shall entitle the holder of record on the date fixed by the Board of Directors to one vote upon each matter voted upon. In the election of directors of the Corporation, the principle of cumulative voting shall not apply. Votes may in all cases be cast by duly authorized proxy, but no stockholder shall be entitled to designate more than three persons as proxies to vote shares held by him. SECTION 6. At least ten days before each meeting of the stockholders the Secretary shall prepare a complete list, in alphabetical order, of all the stockholders of the Corporation entitled to vote at the meeting, showing the address of each and the number of shares registered in the name of each. Such list shall be open to the examination of any stockholders, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, at a place specified in the notice of the meeting, within the city where the meeting is to be held, or at the place where the meeting is to be held. SECTION 7. For the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders or an adjournment thereof, or to receive payment of a dividend or other distribution or allotment of rights, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix, in advance, a record date which shall be not more than sixty days nor less than ten days before the date of such meeting, except as otherwise required by law. ARTICLE III BOARD OF DIRECTORS SECTION 1. (a) At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. The directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of the stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors elected at the April 19, 1990 annual meeting and designated as members of such Class. At each annual meeting after the April 19, 1990 annual meeting, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and shall qualify. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. (b) Any director may be removed from office only for cause and only by the affirmative vote of the holders of eighty percent (80%) of the voting power of the outstanding shares of Common Stock. (c) The number of directors constituting the entire Board of Directors shall be not less than nine nor more than fifteen as may be fixed from time to time by resolution adopted by a majority of the entire Board of Directors; provided, however, that no decrease in the number of directors constituting the entire Board of Directors shall shorten the term of any incumbent director. A majority of the entire Board of Directors may adopt a resolution at any time to increase the number of directors to not more than fifteen and, by vote of a majority of the Board of Directors, elect a new director or directors to fill any such newly created directorship. Any such new director shall hold office until the next annual meeting of stockholders and until his successor shall have been duly elected and qualified. (d) Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next succeeding annual meeting of stockholders of the Corporation and until his or her successor shall have been duly elected an qualified. SECTION 2. Except with respect to those persons who were serving as directors of the Corporation on October 12, 1987, and who at that time were 60 years of age or over (all of whom shall be eligible for election as directors until they, respectively, attain the age of 72 years), the Board of Directors shall not elect nor propose for election by the stockholders of the Corporation (a) any non-employee of the Corporation who has attained the age of 70 or who will have attained that age on or before the date of his election by the Board or proposed election by the stockholders, or (b) any employee of the Corporation or any of its subsidiaries (other than a past or present Chief Executive Officer of the Corporation) whose service as such employee has terminated or will in normal course terminate on or before the date of his election by the Board or proposed election by the stockholders. Any person who, under the foregoing provisions of this Section 2, would be eligible for election as a director after age 70 shall, should he elect to withdraw himself from consideration for such election, be entitled to the retirement benefits he would have been entitled to receive had he served as a director until age 72 and the commencement of such benefits shall, in that event, be accelerated to age 70 or such later date as such election may be made. The term "retirement benefits" as used herein shall include but not be limited to deferred compensation payable under any compensation plan of the Corporation for the benefit of its directors. The term of any director who is an employee of the Corporation or any of its subsidiaries shall expire concurrently with the termination of service of that director as such an employee. SECTION 3. A regular meeting of the Board of Directors shall be held immediately or as soon as practicable after the election of Directors in each year, provided a quorum for such meeting can be obtained. Thereafter regular meetings of the Board shall be held on such dates and at such hour and place as to each meeting as the Board by resolution determines. Notice of every regular meeting of the Board, except the first meeting after the election of Directors in each year, stating the date, hour and place at which such meeting will be held, shall be given to each Director personally, by telephone, by telegraph or by mail, at least seven days before the day of such meeting. SECTION 4. Special meetings of the Board of Directors may be called by the Chairman, by the President, the Vice Chairman, if any, or a Vice President, when acting in the Chairman's stead, or by any two Directors. Notice of every special meeting of the Board, stating the time and place at which it will be held, shall be given to each Director personally, by telephone, by telegraph or by mail, at least four days before the day of such meeting. SECTION 5. Notice to a Director of any meeting may be waived in writing by such Director, either before or after the meeting, and shall be deemed to have been waived by his attendance at the meeting. SECTION 6. A majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business at any meeting of the Board, but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn SINE DIE. Except as otherwise provided in the Second Restated Certificate of Incorporation of the Corporation, at every meeting of the Board of Directors at which a quorum is present a majority vote of the Directors present shall be decisive of all questions before the meeting. No Director may participate in meetings of the Board or committees thereof by means of conference telephone or similar communications equipment except upon prior notice to such Director from the Chairman, or in the case of a meeting of a committee, from the chairman thereof, and, in the case of a meeting of the Board, unanimous approval of the Directors present. SECTION 7. Directors who are not officers of the Corporation or an affiliate shall receive annual retainers and fees for attending meetings of the Board or committees of the Board in such amounts as the Executive Compensation Committee of this Board shall from time to time set. No retainers or attendance fees shall be paid to Directors who are also officers of the Corporation or an affiliate. All Directors shall be reimbursed by the Corporation for their out of pocket traveling and other expenses incurred in connection with attending meetings of the Board or committees of the Board. Nothing therein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor, including such compensation as may be specified by the Board of Directors for services as a member of any committee of the Board. ARTICLE IV COMMITTEES SECTION 1. The Board of Directors may from time to time establish, by resolution passed by a majority of the whole Board, standing or special committees, each consisting of two or more directors. Each committee shall have those duties and powers, permitted by law, as the Board may determine. Except for the Chairman of the Corporation, no committee member shall also be an officer or employee of the Corporation or any of its subsidiaries. The whole Board shall appoint the committee members and chairmen, and determine the duties and powers of each committee, annually, upon recommendation of the Chairman of the Corporation, after the conclusion of the Corporation's Annual Stockholders' Meeting. SECTION 2. Meetings of a committee may be called by the chairman of the committee, by any two members of the committee or by the Chairman. Notice of each committee meeting, stating the date, hour and place at which it will be held, shall be given to each member of the committee personally, by telephone, by telegraph or by mail, at least four days before the day of such meeting. A majority of the members of a committee shall constitute a quorum for the transaction of business at any meeting thereof, but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn SINE DIE. A majority vote of those present at a meeting of a committee at which a quorum is present shall be decisive of all questions before the meeting. SECTION 3. In the absence or disqualification of any member of a committee, the remaining member or members present at a meeting and not disqualified from voting, whether or not constituting a quorum, may appoint another Director to act at such meeting in the place of such absent or disqualified member. SECTION 4. Notice to a Director of any committee meeting may be waived in writing by such Director, either before or after the meeting, and shall be deemed to have been waived by his attendance at the meeting. SECTION 5. The Board of Directors may delegate to the Chairman authority to establish Committees, designate their powers, and appoint committee members and chairmen. ARTICLE V OFFICERS SECTION 1. There shall be elected by the Board of Directors at its first meeting after the election of Directors in each year, a Chairman, a President, a Secretary, a Controller, a Treasurer, and a General Counsel. There may be elected by the Board one or more Vice Chairmen and Vice Presidents, including Executive Vice Presidents, as the Board may decide upon; a Chief Financial Officer; and one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Controllers or Assistant Treasurers. The Board may also provide for and elect or appoint, at any time such other officers and prescribe for each of them such duties as in its judgment may be desirable for the conduct of the business and affairs of the Corporation. The Board shall approve the compensation of the chief executive, the operating, the administrative, and the financial and legal officers of the Corporation. The Chairman and the Chief Executive Officer shall be, and any other officers may, but shall not be required to be, Directors of the Corporation. Any two or more offices, except those of Chief Executive Officer and Secretary, may be held by the same person. All officers shall hold their respective offices until the first meeting of the Board of Directors after the next succeeding annual election of Directors and until their respective successors shall have been elected and qualified, or until their earlier resignation or removal. Any officer may be removed from office by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby. Such removal, however, shall be without prejudice to the contract rights, if any, of the persons so removed. Election of an officer shall not of itself create contract rights. SECTION 2. The Chairman shall be the chief executive officer of the Corporation and shall have general authority over all its affairs and over all its other officers, agents and employees. The Chairman shall, when present, preside at all meetings of the stockholders and of the Board of Directors, and may attend any meeting of any committee of the Board whether or not a member, except that attendance at an audit committee meeting may be only upon invitation of that committee. The Chairman shall sign all papers and documents as may be necessary or appropriate and shall have such other powers and duties as usually devolve upon the chief executive officer of a corporation, and such further powers and duties as may be prescribed by the Board of Directors. The Chairman shall have authority to appoint, remove or discharge any agent or employee or any officer not elected or appointed by the Board of Directors and, when the Board is not in session, to suspend the authority of any officer elected or appointed by the Board, subject to the pleasure of the Board at its next meeting. SECTION 3. Any officer not required by these bylaws to be elected under Section 1 above, including but not limited to Vice Chairmen, Vice President and a Chief Financial Officer, shall have such specific powers and duties, and such authority over the affairs of the Corporation, as may be prescribed by the Board or the Chairman. Said officers shall report to the Chairman or such other officer as the Board or Chairman may designate. SECTION 4. The General Counsel shall be responsible for the supervision of the legal affairs of the Corporation and in connection therewith shall have such specific powers and duties as shall be delegated by the Chairman. The General Counsel shall report to the Chairman. SECTION 5. The Controller shall be responsible for the installation and supervision of all accounting records of the Corporation, preparation and interpretation of the financial statements and reports of the Corporation, maintenance of appropriate and adequate records of authorized appropriations, determination that all sums expended pursuant to such appropriations are properly accounted for, and shall ascertain that all financial transactions are properly executed and recorded, and shall have such specific powers and duties as shall be delegated by the Chairman or the Chief Financial Officer, if any. The Controller may be required to give bond to the Corporation for the faithful discharge of his or her duties in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Controller shall report to the Chairman or such other officer as the Board may designate. SECTION 6. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, shall keep a true and faithful record thereof, and shall have the custody and care of the corporate seal, records, minute books and stock books of the Corporation. Except as may be otherwise required by law, the Secretary shall sign and issue all notices required for meetings of stockholders and of the Board of Directors. Whenever requested by the requisite number of stockholders or Directors, the Secretary shall give notice, in the name of the stockholders or Directors making the request, of a meeting of the stockholders or of the Board of Directors, as the case may be. He or she shall sign all documents and papers to which his or her signature may be necessary or appropriate, shall affix and attest the seal of the Corporation to all instruments requiring the seal, and shall have such other powers and duties as are commonly incidental to the office of the secretary of a corporation or as may be prescribed by the Board of Directors, the Chairman or the General Counsel. He or she shall report to the General Counsel. SECTION 7. The Treasurer shall have charge of and be responsible for the collection, receipt, custody and disbursement of the funds of the Corporation, and shall deposit its funds in the name of the Corporation in such banks, trust companies or other depositories as the Board of Directors may direct. Such funds shall be subject to withdrawal only upon checks or drafts signed or authenticated in such manner as may be designated from time to time by resolution of the Board of Directors. The Treasurer shall have the custody of such books and papers as in the practical business operations of the Corporation shall be convenient or as shall be placed in his custody by order of the Board of Directors. The Treasurer shall have such other powers and duties as are commonly incidental to the office of treasurer of a corporation or as may be prescribed by the Board of Directors, the Chairman or the Vice Chairmen or the Chief Financial Officer, if any. Securities owned by the Corporation shall be in the custody of the Treasurer or of such other officers, agents or depositories as may be designated by the Board of Directors. The Treasurer may be required to give bond to the Corporation for the faithful discharge of his or her duties in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Treasurer shall report to the Chairman or such other officer as the Board may designate. SECTION 8. In case of the absence or disability of any officer hereinabove provided, the next succeeding senior officer shall exercise the powers and duties of such absent or disabled officer. ARTICLE VI INDEMNIFICATION Each person who is or was or had agreed to become a Director or officer of the Corporation, or each such person who is or was serving or had agreed to serve at the request of the Board of Directors or an officer of the Corporation as an employee or agent of the Corporation or as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified (including, without limitation, the advancement of expenses and payment of all loss, liability and expenses) by the Corporation to the full extent permitted by the General Corporation Law of the State of Delaware or any other applicable laws as presently in effect or as may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said laws permitted the Corporation to provide prior to such amendment); provided however, that no person shall be indemnified for amounts paid in settlement unless the terms and conditions of such settlement have been consented to by the Corporation and provided further, that no indemnification for employees or agents of the Corporation (other than Directors and officers) will be made without the express authorization of the Corporation's Board of Directors. ARTICLE VII MISCELLANEOUS SECTION 1. No debts shall be contracted by or on behalf of the Corporation, except for current expenses incurred in the ordinary course of business, unless authorized or approved by the Board of Directors, or by the Chairman, the Vice Chairman, if any, the President or Vice President when acting pursuant to authority or approval granted by the Board. SECTION 2. Any and all shares of stock of any corporation owned by the Corporation and any and all voting trust certificates owned by the Corporation calling for or representing shares of stock of any corporation may be voted at any meeting of the stockholders of such corporation or at any meeting of the holders of such certificates, as the case may be, by the Chairman, the Vice Chairman, if any, the President or any Vice President and the Secretary or any Assistant Secretary, in person or by proxy, upon any question which may be presented at such meeting, and such officers may, on behalf of the Corporation, waive any notice required to be given of the calling of such meeting and consent to the holding of such meeting without notice or to the taking of action without a meeting; provided, however, that if any question to be voted upon relates to business of a special or extraordinary nature which has not previously been approved by the Board of Directors of the Corporation, such officers shall vote or act only in accordance with authorization by the Board of Directors. SECTION 3. The fiscal year of the Corporation shall be the calendar year. ARTICLE VIII AMENDMENT OF BYLAWS These Bylaws may be altered, amended or repealed by the Board of Directors at any regular or special meeting of the Board, or by the stockholders, as provided by law. EX-10.1 4 EXHIBIT 10.1 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and E. R. BROOKS ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is \ November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 30TH day of DECEMBER, 1996. "EXECUTIVE" E. R. BROOKS "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: T. V. SHOCKLEY, III NAME: THOMAS V. SHOCKLEY, III TITLE: EXECUTIVE VICE PRESIDENT EX-10.2 5 EXHIBIT 10.2 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and THOMAS V. SHOCKLEY, III ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the _____ day of _____________, 1996. "EXECUTIVE" T. V. SHOCKLEY, III "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: TITLE: EX-10.3 6 EXHIBIT 10.3 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and FERD C. MEYER, JR. ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of NOVEMBER, 1996. "EXECUTIVE" FERD C. MEYER "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.4 7 EXHIBIT 10.4 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and GLENN D. ROSILIER ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" GLENN D. ROSILIER "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.5 8 EXHIBIT 10.5 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and VENITA MCCELLON-ALLEN ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 19TH day of NOVEMBER, 1996. "EXECUTIVE" VENITA MCCELLON-ALLEN "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.6 9 EXHIBIT 10.6 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and THOMAS M. HAGAN ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 19TH day of NOVEMBER, 1996. "EXECUTIVE" THOMAS HAGAN "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.7 10 EXHIBIT 10.7 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and GLENN FILES ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 4 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" GLENN FILES "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.8 11 EXHIBIT 10.8 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and ROBERT L. ZEMANEK ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 3 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" R. L. ZEMANEK "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.9 12 EXHIBIT 10.9 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and RICHARD H. BREMER ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 3 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 27TH day of NOVEMBER, 1996. "EXECUTIVE" RICHARD H. BREMER "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.10 13 EXHIBIT 10.10 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and RICHARD P. VERRET ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 3 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" R. P. VERRET "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.11 14 EXHIBIT 10.11 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and T. J. ELLIS ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "FIRST EMPLOYMENT DATE" shall mean September 1, 1958 being the date from which Executive's employment rights with Central and South West Corporation shall be deemed to commence. (i) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (i)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (j) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (k) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (l) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (m) "SEVERANCE AMOUNT" shall mean an amount equal to 3 times Executive's Compensation. (n) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (o) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (p) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (q) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 5TH day of DECEMBER, 1996. "EXECUTIVE" T. J. ELLIS "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.12 15 EXHIBIT 10.12 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and MICHAEL D. SMITH ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 2 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" MICHAEL D. SMITH "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.13 16 EXHIBIT 10.13 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and Pete Churchwell ("Executive"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "Board") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. Definitions. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "Involuntary Termination" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 2 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "Voluntary Termination" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" T. D. CHURCHWELL "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.14 17 EXHIBIT 10.14 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and BRUCE EVANS ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 2 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" BRUCE EVANS "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.15 18 EXHIBIT 10.15 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and TERRY D. DENNIS ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (h)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 3 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" TERRY DENNIS "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-10.16 19 EXHIBIT 10.16 CHANGE IN CONTROL AGREEMENT AGREEMENT between CENTRAL AND SOUTH WEST CORPORATION (the "Company"), and FLOYD NICKERSON ("EXECUTIVE"), W I T N E S S E T H: WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his/her continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "CHANGE IN DUTIES" shall mean the occurrence, within three years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the duties or responsibilities of Executive from those applicable to him/her immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's total remuneration (including salary, bonus, qualified retirement benefits, nonqualified retirement benefits, welfare benefits and any other employee benefits) from that provided to him/her immediately prior to the date on which a Change of Control occurs; (iii) A change in the location of Executive's principal place of employment by the Company by more than 35 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or (iv) A failure by the Company to provide directors and officers liability insurance covering Executive comparable to that provided to him/her immediately prior to the date on which a Change of Control occurs. (b) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 25% or more of the outstanding shares of the Company's voting stock (based upon voting power); or (ii) A period of twenty-four consecutive months during which two-thirds of the individuals who are directors of the Company at the beginning of such period cease to be directors of the Company for any reason; or (iii) The Closing of any merger, acquisition, or consolidation following which the shareholders of the Company own less than 75% of the surviving entity; or (iv) The Closing of a sale or disposition (other than to a subsidiary) of more than 85% of the Company's assets. (c) "CLOSING" shall mean a meeting at which all documents necessary to consummate a transaction are executed and delivered; provided that a transaction shall not be considered Closed for purposes of this Agreement until all conditions precedent to the consummation of the transaction, including but not limited to, all required regulatory approvals, have been fulfilled. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of (i) or (ii), where: (i) equals the Executive's annual salary plus Target Bonus immediately prior to the date on which a Change of Control occurs; and (ii) equals the Executive's annual salary plus Target Bonus at the time of his Covered Termination. (f) "COVERED TERMINATION" shall mean an Involuntary Termination within three years after the date upon which a Change of Control occurs or a Voluntary Termination during the thirteenth month after the date upon which a Change of Control occurs. (g) "DCP" shall mean the Central and South West Corporation Executive Deferred Compensation Plan, as amended from time to time. (h) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (e)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; (iii) provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (i) "PENSION PLAN" shall mean the Central and South West System Pension Plan, as amended from time to time. (j) "RETIREMENT" shall mean Executive's termination of employment on or after the date he reaches age sixty-five. (k) "SERP" shall mean the Central and South West System Special Executive Retirement Plan, as amended from time to time. (l) "SEVERANCE AMOUNT" shall mean an amount equal to 2 times Executive's Compensation. (m) "TARGET BONUS" shall mean Executive's target incentive opportunity under the Central and South West Corporation Annual Incentive Plan in effect for the year with respect to which such award is being determined, if any, or for the last year in which such a plan was in effect, expressed as a dollar amount based upon Executive's annual salary for the year of such determination. (n) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful and continued failure to perform his duties, (iii) willful engagement in conduct which is materially injurous to the Company or its subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor involving moral turpitude. (o) "VOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which results from a resignation by Executive; provided, however, the term "VOLUNTARY TERMINATION" shall not include an Involuntary Termination, a Termination for Cause, or any termination as a result of death, disability under circumstances entitling Executive to benefits under the Company's long-term disability plan, or Retirement. (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental and life insurance coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to a Covered Termination, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's unreduced projected supplemental monthly benefit at age sixty-two under the SERP if Executive has attained age fifty-five or older as of the date of his Covered Termination, or to Executive's accrued supplemental monthly benefit under the SERP, plus three years of Credited Service (as such term is defined in the SERP) if Executive has not attained age fifty-five as of the date of his Covered Termination. (c) A lump sum cash payment Actuarially Equivalent (as such term is defined in the Pension Plan) to Executive's projected normal retirement benefit under the DCP. (d) If Executive is not eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall be entitled to continue the Welfare Benefit Coverages for himself/herself and, where applicable, his eligible dependents for up to thirty-six months following the date of his Covered Termination. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). If Executive is eligible for retiree medical coverage as of the date of his Covered Termination, Executive shall receive earned retiree benefits as long as Executive continues to pay the required premiums for such benefits. Notwithstanding the foregoing, if any of the Welfare Benefit Coverages cannot be continued during a period when Executive is not an employee of the Company, the Company shall pay to Executive a lump sum cash payment in amount equal to the economic value of such benefit. (e) Executive shall be entitled to receive reimbursements for out-placement services in connection with obtaining new employment incurred within twelve months of the date of his Covered Termination, up to a maximum amount equal to 15% of his annual salary as of the date of his Covered Termination. (f) Executive shall have the option to purchase his company vehicle for an amount equal to its depreciated book value as of the date of his Covered Termination. (g) If Executive relocates his primary residence in connection with obtaining new employment and such relocation occurs within thirty-six months of the date of his Covered Termination, upon providing documentation of such relocation acceptable to the Company, Executive shall be entitled to receive a lump sum cash payment in an amount equal to 25% of his annual salary on the date of his Covered Termination. (h) The Company shall cause the SERP and DCP to be amended to reflect the severance benefits payable pursuant to this Paragraph. Further, any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified retirement plans and shall be subject to any required tax withholding. (i) Notwithstanding anything to the contrary in this Agreement, upon a Change of Control, Executive shall be entitled to receive the benefits provided under the Central and South West Corporation 1992 Long-Term Incentive Plan or any subsequent similar plan that may be implemented in the future. (j) Executive shall be entitled to continued access, for the remainder of the calendar year in which a Covered Termination occurs, to the financial planning services available to executive employees of the Company at the time of the Change of Control upon which such Covered Termination is based. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3 hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in the Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is November 1, 1996. The term of this Agreement shall be for a period of three years after such effective date. Further, beginning on the day immediately following such effective date and continuing on each subsequent day, the term of this Agreement shall be extended automatically one day, so that at no time shall the term of this Agreement be less than three years, until such time as the Company shall give written notice to Executive that no such automatic extension shall occur and then this Agreement shall terminate as of the last day of the applicable three-year term. (b) INDEMNIFICATION. If Executive shall obtain an money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agree (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him/her should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Mellon Bank (or any successor thereto) at its principal office in Pittsburgh, PA, and shall change when and as any such change in such prime or base rate shall be announced by such bank. Notwithstanding the foregoing, in lieu of litigation to enforce or interpret any provision of this Agreement, Executive may request by written notice to the Company that any controversy regarding the enforcement or interpretation of any provision contained herein be submitted to arbitration pursuant to the labor arbitration rules of the American Arbitration Association. The Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such arbitration and hereby agrees to pay in full all such fees and disbursements. If any controversy regarding this Agreement is submitted to arbitration, Executive and the Company agree that the arbitrator's decision shall be final and legally binding on both parties. The arbitration provisions of this Paragraph shall be governed by the provisions of the Federal Arbitration Act. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him/her or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to sign an agreement not to compete with the Company or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3 hereof, the obtaining of any other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Dallas, Dallas County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, unless such requirement is waived by the Board in its sole discretion, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. The Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 20TH day of DECEMBER, 1996. "EXECUTIVE" FLOYD NICKERSON "COMPANY" CENTRAL AND SOUTH WEST CORPORATION BY: E. R. BROOKS NAME: E. R. BROOKS TITLE: CHAIRMAN, PRESIDENT AND CEO EX-12.1 20 EXHIBIT 12.1
EXHIBIT 12.1 Central Power and Light Company Ratio of Earnings to Fixed Charges For Years Ended December 31, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (thousands, except ratios) Operating income $251,367 $285,647 $282,184 $256,251 $190,079 Adjustments: Income taxes 39,329 47,227 51,755 51,329 (18,954) Provision for deferred income taxes 34,484 51,476 (30,025) 26,659 90,520 Deferred investment tax credits (4,819) (5,553) (5,789) (5,789) (5,806) Charges for investments and plant development costs, net of tax (1,281) (15,569) -- -- -- Other income and deductions 7,834 3,997 14,880 1,272 1,663 Allowance for borrowed and equity funds used during construction 3,778 1,845 4,514 3,689 2,618 Mirror CWIP amortization -- -- 41,000 68,000 75,702 -------- -------- -------- -------- -------- Earnings $330,692 $369,070 $358,519 $401,411 $335,822 ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $105,081 $110,375 $116,205 $111,408 $112,939 Interest on short-term debt and other 20,613 18,494 19,926 12,365 11,993 Distributions on Trust Preferred Securities 7,533 -- -- -- -- -------- -------- -------- -------- -------- Fixed charges $133,227 $128,869 $136,131 $123,773 $124,932 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.48 2.86 2.63 3.24 2.69(1) (1) The ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of change in accounting principles.
EX-12.2 21 EXHIBIT 12.2
EXHIBIT 12.2 Public Service Company of Oklahoma Consolidated Ratio of Earnings to Fixed Charges For Years Ended December 31, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (thousands, except ratios) Operating income $81,776 $101,737 $111,769 $98,258 $72,156 Adjustments: Income taxes 12,313 25,257 37,490 27,954 13,554 Provision for deferred income taxes 8,448 (1,328) 2,704 7,779 9,537 Deferred investment tax credits (2,278) (2,784) (2,789) (2,789) (2,838) Charges for investments and plant development costs, net of tax (75) (35,708) -- -- -- Other income and deductions 729 (95) 2,274 933 531 Allowance for borrowed and equity funds used during construction 2,317 1,722 3,734 2,513 1,948 Interest portion of financing leases -- -- -- 17 -------- -------- -------- -------- -------- Earnings $103,230 $88,801 $155,182 $134,648 $94,905 ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $30,474 $30,555 $29,594 $29,594 $31,410 Interest on short-term debt and other 4,100 5,623 6,355 3,844 2,729 Distributions on Trust Preferred Securities 3,967 -- -- -- -- Interest portion of financing leases -- -- -- -- 17 -------- -------- -------- -------- -------- Fixed charges $38,541 $36,178 $35,949 $33,438 $34,156 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.68 2.45 4.32 4.03 2.78(1) (1) The ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of changes in accounting principles.
EX-12.3 22 EXHIBIT 12.3
EXHIBIT 12.3 Southwestern Electric Power Company Ratio of Earnings to Fixed Charges For Years Ended December 31, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (thousands, except ratios) Operating income $139,409 $138,083 $162,776 $145,922 $118,057 Adjustments: Income taxes 44,396 32,931 41,131 20,623 37,108 Provision for deferred income taxes (2,244) 2,849 6,287 22,248 (648) Deferred investment tax credits (4,662) (4,730) (4,786) (4,278) (5,193) Charges for investments and plant development costs, net of tax (483) (21,815) -- -- -- Other income and deductions 3,578 312 178 4,656 3,658 Allowance for borrowed and equity funds used during construction 2,156 2,423 9,334 6,097 2,580 Interest portion of financing leases 1,194 1,514 1,896 2,562 2,534 -------- -------- -------- -------- -------- Earnings $183,344 $151,567 $216,816 $197,830 $158,096 ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $40,440 $44,066 $44,468 $43,395 $ 40,958 Distributions on Trust Preferred Securities 5,582 -- -- -- -- Interest on short-term debt and other 5,736 8,381 10,706 7,568 4,866 Interest portion of financing leases 1,194 1,514 1,896 2,562 2,534 -------- -------- -------- -------- -------- Fixed charges $52,952 $53,961 $57,070 $53,525 $ 48,358 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 3.46 2.81 3.80 3.70 3.27(1) (1) The ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of change in accounting principles.
EX-12 23 EXHIBIT 12.4
EXHIBIT 12.4 West Texas Utilities Company Ratio of Earnings to Fixed Charges For Years Ended December 31 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (thousands, except ratios) Operating income $44,567 $51,734 $59,486 $54,763 $46,576 Adjustments: Income taxes 11,294 6,547 6,456 7,900 10,869 Provision for deferred income taxes (954) 5,718 1,971 8,377 3,593 Deferred investment tax credits (1,321) (1,321) (1,321) (1,321) (1,321) Charges for investments and plant development costs, net of tax -- (10,946) -- -- -- Other income and deductions 1,237 601 (463) 4,210 1,907 Allowance for borrowed and equity funds used during construction 920 1,276 1,031 474 247 -------- -------- -------- -------- -------- Earnings $55,743 $53,609 $67,160 $74,403 $61,871 ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt 20,352 $21,169 $21,413 $18,547 $19,225 Interest on short-term debt and other 4,911 4,925 4,111 3,534 2,988 -------- -------- -------- -------- -------- Fixed charges $25,263 $26,094 $25,524 $22,081 $22,213 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.21 2.05 2.63 3.37 2.79(1) (1) The ratio of earnings to fixed charges for 1993 was calculated before cumulative effect of change in accounting principles.
EX-13 24 EXHIBIT 13 EX-13 25 EXHIBIT 13 CSW =============================================================================== Central and South West Corporation ------------------------------------------------------------------------------- 1997 FINANCIAL REPORT TABLE OF CONTENTS Management's Discussion and Analysis of Financial Condition and Results of Operations 1 Consolidated Statements of Income 30 Consolidated Statements of Stockholders' Equity 31 Consolidated Balance Sheets 32 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35 Report of Independent Public Accountants 66 Report of Management 69 Glossary of Terms 70 FORWARD LOOKING INFORMATION This report made by CSW and its subsidiaries contains forward looking statements within the meaning of Section 21E of the Exchange Act. Although CSW and each of its subsidiaries believe that, in making any such statements, their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to: the impact of general economic changes in the U.S. and in countries in which CSW either currently has made or in the future may make investments; the impact of deregulation on the U.S. electric utility business; increased competition and electric utility industry restructuring in the U.S.; the impact of the AEP Merger or other merger and acquisition activity; federal and state regulatory developments and changes in law which may have a substantial adverse impact on the value of CSW System assets; timing and adequacy of rate relief; adverse changes in electric load and customer growth; climatic changes or unexpected changes in weather patterns; changing fuel prices, generating plant and distribution facility performance; decommissioning costs associated with nuclear generating facilities; uncertainties in foreign operations and foreign laws affecting CSW's investments in those countries; the effects of retail competition in the natural gas and electricity distribution and supply businesses in the United Kingdom; and the timing and success of efforts to develop domestic and international power projects. In the non-utility area, the aforementioned factors would also apply, and, in addition, would include, but are not limited to: the ability to compete effectively in new areas, including telecommunications, power marketing and brokering, and other energy related services, as well as evolving federal and state regulatory legislation and policies that may adversely affect those industries generally or the CSW System's business in areas in which it operates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. OVERVIEW The electric utility industry is changing rapidly as it is becoming more competitive. In anticipation of increasing competition and fundamental changes in the industry, CSW's management is implementing a strategic plan designed to help position CSW to be competitive in this rapidly changing environment and is developing an emerging global energy business. CSW has undertaken key initiatives in the implementation of this overall strategy and is determining new directions for the corporation's future. One of these new directions is the proposed merger between AEP and CSW that was announced in December 1997. CSW would become a subsidiary of AEP in the proposed merger. The proposed merger would join two companies which are low cost providers of electricity and would achieve greater economies of scale than either company could achieve on its own. In 1997, CSW International doubled its investment in a Brazilian electric distribution utility and made other investments in Latin America. CSW continues to pursue the acquisition of the non-nuclear generating assets of Cajun, a Louisiana member electric cooperative. C3 Communications' joint venture limited partnership, ChoiceCom, has entered the local telephone markets in the Texas cities of Austin, Corpus Christi and San Antonio and plans to enter the markets of Dallas and Houston offering a variety of telecommunications services. These events are discussed below and elsewhere in this report. CSW believes that, compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). The CSW System benefits from economies of scale by virtue of its size and is a reliable and relatively low-cost provider of electric power. Specifically, CSW seeks competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additional information. LIQUIDITY AND CAPITAL RESOURCES Overview of Operating, Investing and Financing Activities Net cash provided by operating activities decreased $149 million during 1997 compared to 1996. The decrease was primarily attributable to the December 1997 payment of $88 million on the first installment of the windfall profits tax imposed on SEEBOARD in the United Kingdom. In addition, increased factored accounts receivable purchases at CSW Credit, federal and state income tax payments for the gain on CSW's 1996 sale of Transok which totaled approximately $122 million (after being offset in part by the utilization of Alternative Minimum Tax credits that CSW had previously generated), and a $35 million payment related to the settlement of litigation between CSW and El Paso all contributed to the decrease. Offsetting part of the decrease, the U.S. Electric Operating Companies realized greater fuel recovery during 1997 compared to 1996. 1 Net cash used in investing activities was $904 million in 1997 compared to $1.3 billion in 1996. There were no acquisition expenditures during 1997 while $1.4 billion in SEEBOARD acquisition expenditures were made during 1996. However, during 1996, CSW received $690 million in cash on the sale of Transok and $99 million on the sale of the National Grid shares. During 1997, while CSW's total construction expenditures decreased $14 million compared to 1996, a combined total of approximately $294 million was invested by CSW Energy and CSW International in 1997 on several projects compared to $124 million in 1996. In addition, during 1997, CSW Energy made its final payment on the Ft. Lupton cogeneration project which was more than offset by the reduction of CSW Energy's equity investment in the Orange cogeneration project when permanent external financing was obtained on the project. Net cash flows from financing activities decreased substantially during 1997 compared to 1996. During 1996, CSW incurred substantial debt to finance the acquisition of SEEBOARD. In addition, CSW sold approximately 15.5 million shares of common stock and received net proceeds of approximately $398 million in a primary public offering in 1996, the proceeds of which were subsequently used to repay a portion of the debt incurred in connection with the SEEBOARD acquisition. CSW Energy also issued $200 million in Senior Notes during 1996. During 1997, CSW made changes in its common stock plans and stopped issuing original shares through these plans. Consequently, $20 million in new common stock was issued pursuant to these plans in 1997 compared to $79 million in 1996. CPL's $200 million Series BB, 6% FMBs also matured in 1997. However, offsetting a portion of the decrease, the business trusts of CPL, PSO and SWEPCO received cash proceeds of approximately $323 million from the issuance of Trust Preferred Securities during 1997. These proceeds were used primarily to redeem preferred stock and repay short-term debt of the companies. The non-cash impacts of exchange rate differences on the translation of foreign currency denominated assets and liabilities were recorded on a separate line on the cash flow statement in accordance with accounting guidelines. Internally Generated Funds Internally generated funds, which consist of cash flows from operating activities less common and preferred stock dividends, should meet most of the capital requirements of the CSW System. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non-utility businesses through acquisitions or otherwise, may require additional capital from external sources. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. Productive investment of net funds from operations in excess of capital expenditures and dividend payments is necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of these funds. CSW's internally generated funds totaled $343 million, $499 million and $451 million for 1997, 1996 and 1995, respectively. Capital Expenditures The CSW System's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers, and the historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. However, current projected capital expenditures are expected to be primarily for existing distribution systems and for various non-utility investments. The U.S. Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the U.S. Electric Operating Companies for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. CSW regularly evaluates its capital spending policies and generally seeks to fund only those projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with this strategy, 2 the CSW System is likely to continue to make additional investments in energy-related and non-utility businesses and will continue to search for electric utility companies or other electric utility properties to acquire. Primary sources of capital for these expenditures are long-term debt, trust preferred securities and preferred stock issued by the U.S. Electric Operating Companies, long-term and short-term debt issued by CSW, as well as internally generated funds. Historically, the issuance of common stock by CSW has also been a source of capital. CSW Energy and CSW International typically use various forms of non-recourse project financing to provide a portion of the capital required for their respective projects as well as utilizing long-term debt for other investments. Although CSW and each of the U.S. Electric Operating Companies expect to fund the majority of their respective capital expenditures for their existing utility systems through internally generated funds, for any significant investment or acquisition, additional funds from the capital markets may be required. For a description of certain restrictions on CSW's ability to raise capital from external sources, including through the issuance of common stock, see PROPOSED AEP MERGER. The historical and estimated capital expenditures for the CSW System are shown in the table below. The amounts include construction expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and CSW's other diversified operations, construction expenditures and net equity investments. It does not include the $2.1 billion used to acquire SEEBOARD during 1995 and 1996. The majority of the capital expenditures for the U.S. Electric Operating Companies for 1995 through 1997 were spent on distribution facilities. It is anticipated that the majority of the estimated capital expenditures for 1998 through 2000 will be for distribution facilities as well. For a description of certain restrictions on CSW's ability to make capital expenditures, including through the issuance of common stock, see PROPOSED AEP MERGER (The table and statements below contain forward looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). Estimated 1995 1996 1997 1998 1999 2000 -------------------------- ------------------------- (millions including AFUDC) Capital Expenditures $495 $644 $760 $569 $586 $595 Estimated Capital Expenditures for 1998-2000 do not include expenditures for acquisition-type investments. Although CSW does not believe that the U.S. Electric Operating Companies will require substantial additions of generating capacity over the next several years, the U.S. Electric system's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases. Refer to Integrated Resource Plan for additional information regarding the U.S. Electric System's capacity needs. Inflation Annual inflation rates, as measured by the U.S. Consumer Price Index, have averaged approximately 2.4% during the three years ended December 31, 1997. CSW believes that inflation, at this level, does not materially affect CSW's results of operations or financial position. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. Financial Structure, Shelf Registrations and Credit Ratings As of December 31, 1997, the capitalization ratios of CSW were 45% common stock equity, 2% preferred stock, 4% Trust Preferred Securities and 49% long-term debt. CSW is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing activities. CSW's estimated embedded cost of long-term debt for 1997 was 7.2%. 3 CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, to fund its LTIP, stock option plan, PowerShare plan and ThriftPlus plan. Following the issuance of the CPL 1997 Original Rate Order and the decline in the market price of CSW Common, which CSW believes was attributable in part to the CPL 1997 Original Rate Order, the determination was made that it was appropriate for CSW to begin funding these plans through open market purchases, effective April 1, 1997. Prior to that time, CSW had issued $20 million in new common stock in 1997. CPL has shelf registration statements on file for the issuance of up to $60 million of FMBs and up to $75 million of preferred stock, and PSO has a shelf registration statement on file for the issuance of up to $35 million of Senior Notes. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. The current securities ratings for CSW and each of the U. S. Electric Operating Companies is presented in the following table, including the securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I. Moody's Duff & Phelps Standard & Poor's ------------------------------------------ CPL First mortgage bonds A3 A A Senior unsecured Baa1 A- A- Preferred stock baa1 BBB+ A- Trust preferred (CPL Capital I) baa1 BBB+ A- Junior subordinated deferrable interest debentures Baa2 -- -- PSO First mortgage bonds A1 AA- AA- Senior unsecured A2 A+ A Preferred stock a3 A+ A Trust preferred (PSO Capital I) a2 A+ A Junior subordinated deferrable interest debentures A3 -- -- SWEPCO First mortgage bonds Aa3 AA AA- Senior unsecured A1 AA- A Preferred stock a1 AA- A Trust preferred (SWEPCO Capital I) aa3 AA- A Junior subordinated deferrable interest debentures A2 -- -- WTU First mortgage bonds A2 A+ A Senior unsecured A3 -- A- Preferred stock a3 A A- CSW Commercial paper P-2 D-2 A-2 These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating. Long-Term Financing On April 24, 1997, PSO's business trust, PSO Capital I, sold to underwriters in a negotiated offering $75 million, 8.00% Series A, Trust Originated Preferred Securities due April 30, 2037. The proceeds from the sale of these securities were used by PSO to repay short-term debt, to reimburse PSO's treasury for the cost of reacquiring approximately $14.5 million of 4.00% Series and 4.24% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 2, 1997. PSO Capital I is treated as a subsidiary of PSO whose only assets are the approximately $77.3 million principal subordinated debentures issued by PSO. 4 In addition to PSO's obligation under the subordinated debentures, PSO has also agreed to a security obligation which represents a full and unconditional guarantee of PSO Capital I's trust obligations. On April 30, 1997, SWEPCO's business trust, SWEPCO Capital I, sold to underwriters in a negotiated offering $110 million, 7.875% Series A, Trust Preferred Securities due April 30, 2037. The proceeds from the sale of these securities were used by SWEPCO to repay short-term debt, to reimburse SWEPCO's treasury for the cost of reacquiring approximately $15.5 million of 4.28% Series, 4.65% Series, 5.00% Series and 6.95% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 8, 1997. SWEPCO Capital I is treated as a subsidiary of SWEPCO whose only assets are the approximately $113.4 million principal subordinated debentures issued by SWEPCO. In addition to SWEPCO's obligation under the subordinated debentures, SWEPCO has also agreed to a security obligation which represents a full and unconditional guarantee of SWEPCO Capital I's trust obligations. On May 8, 1997, CPL's business trust, CPL Capital I, sold to underwriters in a negotiated offering $150 million, 8.00% Series A, Cumulative Quarterly Income Preferred Securities due April 30, 2037. The proceeds from the sale of these securities were used by CPL to repay short-term debt, to reimburse CPL's treasury for the cost of reacquiring approximately $87.5 million of 4.00% Series, 4.20% Series, 7.12% Series and 8.72% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 14, 1997. CPL Capital I is treated as a subsidiary of CPL whose only assets are the approximately $154.6 million principal subordinated debentures issued by CPL. In addition to CPL's obligation under the subordinated debentures, CPL has also agreed to a security obligation which represents a full and unconditional guarantee of CPL Capital I's trust obligations. In March 1997, an affiliate of Orange Cogeneration Limited Partnership, an entity that is 50% indirectly owned by CSW Energy and accounted for by the equity method of accounting, issued $110 million, 8.175% Senior Secured Bonds, due 2022. The bonds are unconditionally guaranteed by Orange Cogeneration Limited Partnership. Concurrently, $53.2 million was distributed to CSW Energy representing its equity investment in the Orange Cogeneration project. Short-Term Financing and Accounts Receivable Factoring The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a system money pool to coordinate short-term borrowings for certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW also incurs borrowings for other subsidiaries that are not included in the money pool. As of December 31, 1997, CSW had a revolving credit facility totaling $1.4 billion to back up its commercial paper program. At December 31, 1997 CSW had $721 million outstanding in short-term borrowings. The maximum amount of short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $725 million during December 1997. CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated electric companies. The sale of accounts receivable provides the U.S. Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. In addition, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, so CSW's cost of capital is lowered. CSW Credit issues commercial paper to meet its financing needs. At December 31, 1997, CSW Credit had a $900 million revolving credit agreement, secured by the assignment of its receivables, to back up its commercial paper program, which had $637 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield of 5.6%, was $890 million during September 1997. 5 CSW has recently made several finance-related filings with the SEC under the Holding Company Act which, if approved, would increase CSW's financial flexibility. In the first filing, CSW requested authority to repurchase up to ten percent of its outstanding common stock as of June 30, 1997, from its stock and employee benefit plans (pursuant to the terms and conditions of such plans) from time to time through December 31, 2002, and to utilize its short-term borrowing program, including funds borrowed through its commercial paper program, to finance its repurchase in the open market of up to twenty percent of its outstanding common stock as of June 30, 1997. No decision regarding this application has been made by the SEC. Such authority would increase CSW's flexibility to adjust its capital structure. The second filing requests authority through December 31, 2002 for CSW, the U.S. Electric Operating Companies and CSW Services to finance ongoing business, repay short-term debt and finance the potential repurchase of outstanding securities. CSW has requested authority to issue common stock, while the U.S. Electric Operating Companies and CSW Services have requested authority to issue common stock, preferred stock and debt. Such authority would give CSW the flexibility to take advantage of favorable market conditions for routine financings. The SEC issued an order on December 30, 1997 granting the requested authority. The third filing requests an increase in the authorized short-term borrowing capacity for CSW and certain of its subsidiaries. The SEC has not issued an order with respect to this application. For a description of certain restrictions on CSW's ability to repurchase common stock and to raise capital from external sources, see PROPOSED AEP MERGER. CSW Energy and CSW International In October 1996, CSW Energy issued $200 million, 6.875% Senior Notes due 2001. The proceeds from the notes were for the acquisition, development and construction of electric generation assets in the United States and to make affiliate loans to CSW International. CSW Energy has authority from the SEC to expend up to $250 million for general development activities related to qualifying facilities and independent power facilities. CSW Energy may seek specific authority to spend additional amounts on certain projects subject to limitations contained in the AEP merger agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy projects at December 31, 1997. In January 1997, CSW received authority from the SEC under the Holding Company Act to spend an amount up to 100% of consolidated retained earnings on EWG or FUCO investments. This represents an increase in authority previously granted under the Holding Company Act. However, the amount of any such expenditures is subject to the terms of the AEP merger agreement. As of December 31, 1997, CSW had invested an amount equal to 49% of consolidated retained earnings, as defined by rule 53 of the Holding Company Act, on EWG and FUCO investments. For a description of certain restrictions on the ability of CSW and its subsidiaries to make capital expenditures in respect of qualifying facilities and independent power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER. RECENT DEVELOPMENTS AND TRENDS CSW Strategic Responses CSW has, from time to time considered, and expects to consider in the future, various strategies designed to enhance CSW's competitive position and to increase its ability to anticipate and adapt to changes in the electric utility industry. These strategies may include business combinations with other companies, internal restructurings involving the complete or partial separation of CSW's generation, transmission and distribution businesses, acquisitions or dispositions of assets or lines of business, and additions to or reductions of franchised service territories. CSW may from time to time engage in discussions, either internally or with third parties, regarding one or more of these potential strategies. Those discussions may be subject to confidentiality agreements and CSW's policy is generally not to comment on such activities. No assurances can be given that any potential transaction of the type described above may actually occur, or, if one does occur, the ultimate effect thereof on 6 CSW's results or operations, financial condition or competitive position (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). AEP Merger In December 1997, AEP and CSW announced that their boards of directors approved a definitive merger agreement. If the merger is completed, the combined company will be a diversified electric utility serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On January 19, 1998, CSW announced a corporate realignment to more effectively position itself for competition and to better align itself with AEP related to the proposed merger of the two companies. The transaction must receive regulatory approval from federal and state authorities and must satisfy a number of other conditions, some of which, such as CSW and AEP shareholder approval, may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated, and if it is, the timing of such consummation or the effect of any regulatory conditions that may be imposed on such consummation. See PROPOSED AEP MERGER. Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail levels in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. In the United Kingdom, the franchised electricity supply business is scheduled to open to full competition on a phased-in basis on September 1, 1998. As a result, SEEBOARD will be able to seek customers while risking the loss of existing customers to other competitors. As a whole, the CSW U.S. Electric System believes that, overall, its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the energy marketplace (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several current issues impacting the CSW System. Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to: (i) who will bear the costs of prudent utility investments or past commitments incurred under traditional cost-of-service regulation that will be uneconomic in a competitive environment, sometimes referred to as stranded costs; (ii) whether all customers have access to the benefits of competition; (iii) how, and by whom, the rules of competition will be established; (iv) what the impact of deregulation will be on conservation, environmental protection and other regulator-imposed programs; and (v) how transmission system reliability will be ensured. The degree of risk to CSW associated with various federal and state restructuring proposals aimed at resolving any or all of these issues will vary depending on many factors, including the proposals' competitive position and treatment of stranded utility investment resulting from such requirements. Although CSW believes it is in a position to compete effectively in a deregulated, more competitive marketplace, if stranded costs are not recovered from customers, then CSW may be required by existing accounting standards to recognize potentially significant losses from unrecovered stranded costs, especially with respect to STP (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See Regulatory Accounting for additional information. 7 At the federal level, several bills were introduced in Congress during the 1997 legislative session which provided for restructuring and/or deregulating the electric utility industry. However, no such bills were enacted into law. In 1998, the United States Senate has progressed further in its consideration of comprehensive energy restructuring legislation than the United States House of Representatives. However, in the United States Senate, differences must be resolved between those who favor legislation to repeal the Holding Company Act and those who support repeal only in the context of comprehensive legislation. Prospects for repeal of the Holding Company Act in 1998 are unclear. While a majority of the states, including the four states in which the U.S. Electric Operating Companies operate, have considered deregulation that requires some form of retail competition, several states have enacted actual legislation mandating retail competition including Oklahoma in which PSO operates. CSW cannot predict when and if it will be subject to one or more of these legislative initiatives, nor can it predict the scope or effect of such legislation on its results of operations or financial condition. For additional information related to such state initiatives, see Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas. Wholesale Electric Competition in the United States The Energy Policy Act, which was enacted in 1992, significantly altered the way in which electric utilities compete. The Energy Policy Act created exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to own EWGs. EWGs are a relatively new category of non-utility wholesale power producers that are free from most federal and state regulation, including restrictions under the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been increasingly competitive since enactment of the Energy Policy Act. The U.S. Electric Operating Companies must compete in the wholesale energy markets with other public utilities, cogenerators, qualifying facilities, EWGs and others for sales of electric power. While CSW believes that the Energy Policy Act will continue to make the wholesale markets more competitive, CSW is unable to predict whether the Energy Policy Act will adversely impact the U.S. Electric Operating Companies. FERC Orders 888 and 889 The FERC issued Order No. 888 in 1996, which is the final comparable open access transmission service rule. The provisions of FERC Order No. 888 provide for comparable transmission service between utilities and their transmission customers by requiring utilities to take transmission service under their open access tariffs for wholesale sales and purchases and by requiring utilities to rely on the same transmission information that their transmission customers rely on to make wholesale purchases and sales. In addition, the Texas Commission adopted a rule governing transmission access and pricing for ERCOT in 1996. The pricing method adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a distance-sensitive component which recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began recording transmission revenues and expenses in accordance with the Texas Commission's rule on January 1, 1997. FERC Order No. 888 requires holding companies to offer single system transmission rates. The transmission rates of the U. S. Electric Operating Companies are under the exclusive jurisdiction of the FERC while the transmission rates of most of the transmitting utilities in ERCOT are under the exclusive jurisdiction of the Texas Commission. Because the two commissions have different approaches to defining and implementing comparable open access transmission service, Order No. 888 granted the U. S. Electric Operating 8 Companies an exemption permitting them an opportunity to propose a solution that provides comparability to all wholesale users. On November 1, 1996, the U. S. Electric Operating Companies filed a system-wide tariff to comply with Order No. 888 and, on December 31, 1996, the FERC accepted for filing the system-wide tariff which became effective on January 1, 1997, subject to refund and to the issuance of further orders. On December 10, 1997 the FERC issued an order regarding the U. S. Electric Operating Companies' proposed system-wide tariff filed on November 1, 1996. The FERC's order accepted the proposed tariff subject to several modifications, including revisions to provide for system-wide transmission service under a single system rate. The U. S. Electric Operating Companies filed the required compliance tariff on February 9, 1998 and are waiting for FERC's acceptance of the revised tariff. In 1996, the FERC issued Order No. 889 requiring transmitting utilities to establish and operate an OASIS for the dissemination of information regarding available transfer capability for their respective transmission systems. The OASIS is an on-line information system that provides the same information about the utility's transmission system to all transmission customers. The U.S. Electric Operating Companies utilize, and participate in the OASIS systems for ERCOT and SPP. Order No. 889 also created standards of conduct requiring utilities to conduct any wholesale power sales business separately from their transmission operations. The standards of conduct are designed to ensure that utilities and their affiliates, as sellers of power, do not have preferential access to information about wholesale transmission prices and availability. Retail Electric Competition in the United States Increased competition in the utility industry has resulted in increased pressure to stabilize or reduce rates. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. Incentive rate and performance-based plans encourage efficiencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major legislative initiative which would require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Most states either have introduced legislation or are investigating the issue, and several states have already passed legislation which mandates retail choice by a certain date. CSW believes that retail competition would not be in the best interests of CSW's security holders unless CSW receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by the U.S. Electric Operating Companies to meet their obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CSW intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CSW undertook to serve the public's demand for electricity. For additional information related to retail wheeling in the United States, see Holding Company Act and Legislative Update and Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas. Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas Several initiatives regarding restructuring the electric utility industry have recently been undertaken in the four states in which the U.S. Electric Operating Companies operate. Legislation was enacted in Oklahoma while legislative activity in Texas, Louisiana and Arkansas stopped short of any such definitive action. In April 1997, the Oklahoma Legislature enacted legislation dealing with industry restructuring in Oklahoma, which provides for retail competition by July 1, 2002. The legislation directs the Oklahoma Commission to study all relevant issues relating to restructuring and develop a framework for a restructured industry. The legislation divides the study of restructuring issues by the Oklahoma Commission into four parts: (i) independent system operator issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues. At the end of each of these studies, the Oklahoma Commission must provide reports along with legislative recommendations. The legislation directs the Oklahoma Tax Commission to study the impact of electric utility restructuring on state tax revenues and the existing tax structure, consider the establishment of 9 a uniform consumption tax, and report to the Oklahoma Legislature by December 31, 1998. The legislation prohibits the establishment of retail competition until a uniform tax policy is established. The legislation also creates a Joint Electric Utility Task Force, a 14-member panel composed of an equal number of representatives from the Oklahoma United States House of Representatives and the Oklahoma Senate. The duties of this task force include the oversight and direction of the studies by the Oklahoma Commission and the Oklahoma Tax Commission. Management is unable to predict the outcome of these studies or their ultimate impact on CSW's results of operations and financial. In March 1997, the Arkansas Legislature passed a resolution directing interim legislative committees to study competition in the electric power industry in Arkansas. The study began in October 1997, and the committees will continue to hold hearings throughout 1998. Also, the Arkansas Commission has initiated a series of generic restructuring dockets. The Arkansas Commission will provide a report to the Arkansas Legislature by October 1998. In Louisiana, a special legislative committee created by the Louisiana Senate is studying the impact of retail competition on the state of Louisiana. The committee is scheduled to issue a report before the next regular session of the Louisiana Legislature. The Louisiana Commission has also opened a proceeding to study restructuring and retail competition. In Texas, the Texas Lieutenant Governor appointed a Senate interim committee to study retail competition and restructuring. The committee is holding a series of hearings and is scheduled to issue a report by September 1998. Management cannot predict the outcome of the studies in Arkansas, Louisiana and Texas or their ultimate impact on CSW's results of operations and financial condition. Industry Restructuring in Texas Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1, 1995. Among other things, the amendments deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven integrated resource planning process and mandate comparable open access transmission service. PURA also required that the Texas Commission adopt a rule on comparable open transmission access by March 1, 1996. In conjunction with this rulemaking proceeding (Project No. 14045), the chairman of the Texas Commission issued a proposal on September 6, 1995, for the purpose of maximizing competition in the ERCOT wholesale bulk power market. The proposal calls for the functional unbundling of integrated utilities where distribution entities could purchase their power requirements from any generator or set of generators in ERCOT. Those generators which are currently regulated would be deregulated after provisions are in place to recover stranded costs. The proposal was assigned a separate proceeding (Project No. 15000), and after a series of workshops and technical conferences conducted during 1996, the Texas Commission submitted a final Scope of Competition report to the Texas Legislature in January 1997. The final report contains numerous recommendations to the Texas Legislature including requests for additional regulatory authority or clarification of existing authority including to certificate electric service resellers, the authority to adopt consumer protection and universal service standards, the authority to determine and allocate stranded costs to all customers, the authority to promote unbundling, the authority to allow alternative forms of regulation, increased authority to address mergers, authority to correct market power abuses, authority over the ERCOT ISO and authority to permit alternative methods for fuel cost recovery. In addition, the final report offers the Texas Legislature four restructuring options. Option 1 maintains the regulatory status quo; Option 2 would permit utilities to voluntarily offer retail access; Option 3 would provide for full wholesale competition; and Option 4 would provide for full retail competition. The report's final recommendation is for the Texas Legislature to direct the Texas Commission to prepare for full retail competition using a careful and deliberate approach on a timetable to be established by the Texas Legislature, but with no retail access before the year 2000. The Texas legislature considered but did not pass any of these proposals in the 1997 legislative session. On February 7, 1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No. 14045). The pricing method adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a distance-sensitive 10 component referred to as a vector-absolute megawatt mile which recovers the remaining 30% of ERCOT transmission costs. The open access tariffs filed with the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However, on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC Order 888 that conform to the Texas Commission's rule. See FERC Orders 888 and 889 for additional information regarding the transmission pricing rules prescribed by FERC. By statute the Texas Commission was required to submit a report to the 1997 Texas Legislature on "methods or procedures for quantifying the magnitude of stranded investment, procedures for allocating costs, and the acceptable methods of recovering stranded costs." The Texas Commission initiated Project No. 15001 to collect information to prepare the required report. In response to the Texas Commission's order in Project 15001, CPL, SWEPCO, and WTU each filed information on estimates of potential stranded costs. While the filings for CPL included estimates of significant potential stranded costs, no significant potential stranded costs were identified in the filings for SWEPCO or WTU. In January 1998, the Texas Commission requested updated information on CPL's stranded costs for a report that the Texas Commission is preparing for the Senate interim committee on restructuring. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the potential impact of potential stranded costs relating to CPL. The Texas Commission's Project 15002, "Scope of Competition Report," is a report that the Texas Commission is required to present to the Texas Legislature in each odd-numbered year detailing the scope of competition in the electric markets and the impact of competition and industry restructuring on customers. In addition, the report is required to include the Texas Commission's recommendations to the Texas Legislature for further legislation. In June 1996, CPL, SWEPCO and WTU each filed information for the Texas Commission's report. Texas Independent System Operator Plan In June 1996, CSW, including CPL and WTU, and more than 20 other parties, including other investor-owned utilities, municipal power companies, electric cooperatives, independent power producers and power marketers, filed plans to create an ISO to manage the ERCOT power grid. The filing marks a major step towards implementing the Texas Commission's overall strategy to create the competitive wholesale electric market that was mandated by the Texas Legislature in 1995. The Texas Commission approved the ISO in August 1996. Such approval made Texas the first state in the nation to adopt a plan for a regional ISO and a regional competitive wholesale bulk power market. Integrated Resource Plan In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a joint integrated resource plan outlining the companies' future electric needs over a 10-year forecast horizon and the manner in which the companies propose to meet those needs. In July 1997 the Texas Commission issued an Interim Order on the Preliminary Plan which adopted a settlement agreement that had been reached with all the parties in the case. The Interim Order approved the load forecast and individual resource needs for each of the companies, as well as the request for proposal documents to be used to procure future resource needs. The Interim Order also approved the targeted purchase goal amounts for renewable and energy efficiency programs, which will result in renewable and energy efficiency programs being included in the companies' resource mix. The targeted purchase goals were developed in response to customer input obtained through the deliberative polling process conducted at each operating company in the summer of 1996. A separate phase of the Integrated Resource Plan was created to address the value of interruptible resources at CPL. That phase is expected to be completed in March 1998. The Interim Order also required that a green pricing tariff be filed which would allow customers who are interested in acquiring a greater portion of their personal consumption from environmentally beneficial generation to exercise that choice. A green pricing tariff was approved for use in San Angelo, Texas in October 1996. A system-wide filing is expected in mid-1998. 11 Holding Company Act and Legislative Update The Holding Company Act generally has been construed to limit the operations of a registered holding company to a single integrated public utility system, plus such additional businesses as are functionally related to such system. Among other things, the Holding Company Act requires CSW and its subsidiaries to seek prior SEC approval before effecting mergers and acquisitions or pursuing other types of non-utility initiatives. Such pervasive regulation may impede or delay CSW's efforts to achieve its strategic and operating objectives. Consequently, CSW continues to support efforts to repeal or modify this legislation. In 1995, the SEC issued a report to the United States Congress advocating repeal of the Holding Company Act, either on a conditional and transitional basis or immediate and outright repeal. The basis for the SEC's recommendation for repeal is that the Holding Company Act is anachronistic and duplicative of other federal and state regulatory regimes that have developed over the past sixty years. Following the SEC's report, there were several bills introduced in both the United States Senate and House of Representatives in 1996 which would have repealed the Holding Company Act on a conditional and transitional basis and transferred its oversight functions to the FERC and the states. Another bill was introduced into the United States House of Representatives that, in addition to repealing the Holding Company Act, would have repealed PURPA, which among other things, requires investor owned utilities to purchase power at their avoided cost from qualifying facilities. Although none of these bills were enacted into law, they may suggest the form of future legislation. In January 1997, a bill was introduced in the United States Senate providing for comprehensive electric utility industry restructuring and for retail choice by December 2003, repeal of the Holding Company Act one year after the bill is enacted, as well as repeal of the requirement that electric utilities purchase power at their avoided cost from qualifying facilities under PURPA. Under this bill, many of the oversight functions performed by the SEC under the Holding Company Act would be shifted to the FERC and the states. In addition, a bill was reintroduced in the United States House of Representatives providing for choice of electricity suppliers at the retail level by the year 2000. Under this bill, which is substantially similar to the United States Senate bill, the application of the Holding Company Act to a particular holding company system would be eliminated after each state served by the electric utility companies in that system made a determination that retail competition existed in that state. No legislation was enacted in 1997. In February 1997, the SEC adopted Rule 58 allowing a holding company registered under the Holding Company Act or any of its subsidiaries, to acquire, without prior SEC approval, the securities of any energy-related company subject to certain limits. Under the new rule, investment in energy-related company securities without prior SEC approval is limited to the greater of (i) $50 million and (ii) 15% of the consolidated capitalization of the registered holding company as reported on its most recent Form 10-Q or Form 10-K as filed with the SEC. Rule 58 does not exempt the acquisition by a registered holding company of the securities of an electric utility company or a gas utility company, which remains subject to the SEC's prior approval as does the issuance of securities for the purpose of making such exempt investments. In 1998, the United States Senate has progressed further in its consideration of comprehensive energy restructuring legislation than the United States House of Representatives. However, in the United States Senate, differences must be resolved between those who favor legislation to repeal the Holding Company Act and those who support repeal only in the context of comprehensive legislation. Prospects for repeal of the Holding Company Act in 1998 are unclear. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, the U.S. Electric Operating Companies have recognized significant regulatory assets and liabilities. Management believes that the U.S. Electric Operating Companies currently meet the criteria for following SFAS No. 71. However, in the event the U.S. Electric Operating Companies or some portion of their business no longer meets the criteria for following SFAS No. 71 due to deregulation or for other reasons, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a 12 continuing regulated segment of the business. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PSO Union Negotiations As previously reported, PSO and its Local Union 1002 of the IBEW have been engaged in contract renewal negotiations. The underlying agreement expired in September 1996 and, to date, the parties have been unable to reach an agreement. In December 1996, PSO implemented portions of its final proposal after declaring an impasse. The principal issue of disagreement involves PSO's need for flexibility in a deregulated environment. In April 1997, Oklahoma's governor signed into law an electric industry restructuring bill. The new law mandates the implementation of retail competition to begin on July 1, 2002. PSO believes that the new law also broke the impasse in the contract negotiations and has resumed negotiations with the union. At this time, PSO cannot predict the outcome of this matter. However, PSO believes that, even in the event of a strike, its operations would continue without a significant disruption and that a strike would not have a material adverse effect on CSW's results of operations or financial condition (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). Impact of Competition and Industry Restructuring Initiatives CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry in the United States, and in the United Kingdom or on the CSW System. As the electricity markets become more competitive, however, theprincipal factor determining success is likely to be price, and to a lesser extent reliability, availability of capacity, and customer service. CSW cannot predict the form or effect of any federal or state electric utility restructuring initiatives at this time. Federal and/or state electric utility restructuring may cause impairment of significant recorded assets, material reductions of profit margins, and/or increased costs of capital. No assurance can be made that such events would not have a material adverse effect on CSW's results of operations, financial condition or competitive position (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). RATES AND REGULATORY MATTERS CPL Rate Review - Docket No. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million, and in May 1996, CPL placed a $70 million base rate increase into effect under bond, subject to refund based on the receipt of the CPL 1997 Original Rate Order of the Texas Commission. On March 31, 1997, the Texas Commission issued a rate order in CPL's rate review, Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested the reconsideration of numerous provisions of the order. Motions for rehearing were also filed by other parties to the rate proceeding. In response to the motions for rehearing, in June 1997, the Texas Commission made several modifications to the CPL 1997 Original Rate Order and also agreed to rehear on remand several other issues. CPL restored its rates in July 1997, with two exceptions, to levels existing prior to the May 1996 implementation of bonded rates. On August 21, 1997, after reconsidering the issues on remand, the Texas Commission voted to issue a revised final order and on September 10, 1997, CPL received a revised final order. CPL filed its second motion for rehearing on September 30, 1997. The second motion for rehearing again requested reconsideration of numerous issues in the rate case. On October 16, 1997, the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowers the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission 13 also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates will be reduced by an additional $13 million in mid-1998 and another $13 million in mid-1999. There are numerous contributing factors to the difference between the $71 million retail base rate increase originally requested by CPL and the $19 million retail base rate reduction included in the CPL 1997 Final Order. The CPL 1997 Final Order decreased CPL's requested return on equity of 12.25% on its retail rate base to a 10.9% return on equity for all non-ECOM invested capital, which results in a $30 million decrease in CPL's rate request. The CPL 1997 Final Order provides for the disallowance of approximately $18 million of affiliate transactions. In addition, the CPL 1997 Final Order denied CPL's request to use straight line amortization for CPL's deferred accounting costs. Instead, the CPL 1997 Final Order requires CPL to continue to use the mortgage amortization method to amortize its deferred accounting costs, resulting in a reduction of $14 million from CPL's rate request. The CPL 1997 Final Order also decreased depreciation by $17.4 million from CPL's rate request. Another major provision of the CPL 1997 Final Order was the Texas Commission's categorization of $800 million of CPL's investment in STP as ECOM. The term ECOM has been used to refer to the amount of costs that potentially would become "stranded" if retail competition were mandated and prices were set in the market, rather than the price being determined by current regulatory standards of reasonable and necessary cost of providing service. The CPL 1997 Final Order reduced CPL's equity return on the ECOM portion of CPL's investment in STP to 7.96%, compared to the 10.9% return on common equity approved for all other invested capital, resulting in a $15.9 million decrease in CPL's rate request. At the same time, the CPL 1997 Final Order accelerated the recovery of the $800 million designated as ECOM to 20 years from the remaining 32-year life of STP. 14 The following table contains details of the estimate of the financial impact of the CPL 1997 Final Order. 1997 1998 1999 --------------------------------- (millions) Decrease in revenue $(24.2) $(28.7) $(41.9) Items included in decrease in revenue with an offsetting effect on expense: Recovery of STP (ECOM) 20.0 20.0 20.0 Change in depreciation (11.3) (11.3) (11.3) Decommissioning 4.3 4.3 4.3 Other 6.8 2.1 2.1 --------- --------- --------- 19.8 15.1 15.1 --------- --------- --------- Change in current year (44.0) (43.8) (57.0) income before tax Federal income taxes 14.8 14.8 19.3 --------- --------- --------- Current year impact on net (29.2) (29.0) (37.7) income --------- --------- --------- 1996 effect (18.9) -- -- --------- --------- --------- Estimated impact on net income $(48.1) $(29.0) $(37.7) --------- --------- --------- CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of disallowed affiliate transactions from CSW Services. As part of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology, currently scheduled to begin in May 1998. A hearing has been set for the temporary injunction on April 3, 1998. Management is unable to predict how the final resolution of these issues will ultimately affect CSW's results of operations and financial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had recorded approximately $1.3 billion of regulatory-related assets at December 31, 1997. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, including the CPL 1997 Final Order, CPL no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets would be required. In addition, CSW could experience, depending on the timing and amount of any write-off, a material adverse effect on its results of operations and financial condition. The foregoing discussion of CPL Rate Review - Docket No. 14965 constitutes forward looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order. PSO 1997 Rate Settlement Agreement In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings. In accordance with the established schedule, PSO subsequently filed financial data, cost of service and rate design testimony supporting both its current rates and an increase in annual depreciation expense of $26 million. In July 1997, the Oklahoma Commission staff and other intervenors to the proceeding filed their revenue requirements testimony. In its filing, the Oklahoma Commission staff recommended a rate reduction of $76.8 million for PSO. On October 15, 1997, PSO reached a stipulated agreement with parties to settle the rate inquiry that was pending before the Oklahoma Commission. On October 23, 1997, the Oklahoma Commission issued a final order approving the agreement. The following table represents the financial impact of the PSO 1997 15 Rate Settlement Agreement on PSO's 1997 results of operations and also an estimate of its ongoing annual impact on net income in successive years. 1997 Ongoing Annual Impact Impact ----------- ------------ (millions) Decrease in revenue Refund to customers $(29.0) $-- Change in rates (2.5) (35.9) ----------- ------------ (31.5) (35.9) ----------- ------------ Changes in expenses (offsetting impact included in revenues) Depreciation (6.3) (10.9) Rate case deferred costs 2.2 -- Income tax (10.2) (8.8) ----------- ------------ (14.3) (19.7) ----------- ------------ (17.2) (16.2) Write-off of deferred assets, net of tax (10.2) -- ----------- ------------ $(27.4) $(16.2) ----------- ------------ The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing material adverse effect on its results of operations because of the rate decrease. However, it also reduced significant risks for PSO related to this regulatory proceeding and will enable PSO's rates to remain competitive for the foreseeable future. The foregoing discussion of PSO 1997 Rate Settlement Agreement constitutes forward looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the PSO 1997 Rate Settlement Agreement. SWEPCO Louisiana Rate Review In December 1997, the Louisiana Commission announced it would review SWEPCO's rates and service. In 1993, the Louisiana Commission issued an order initiating a review of the rates of all investor-owned utilities in the state. Since that time, each of the other investor-owned utilities in Louisiana have been reviewed. SWEPCO's last rate activity was an $8.2 million rate decrease, initiated by SWEPCO and approved for its small and large industrial customers in January 1988. Prior to that, SWEPCO's last rate increase was in 1985. The Louisiana Commission has requested bids from consultants to perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of service. The Louisiana Commission plans to select consultants during the second quarter of 1998 and a timeline for the review will be determined shortly thereafter. Management cannot predict the outcome of this review. SEEBOARD Recent Regulatory Actions Following the phased-in opening of the United Kingdom domestic and small business electricity market to competition in September 1998, customers will be able to choose their electricity supplier. SEEBOARD will compete for customers in its own area as well as throughout the rest of the United Kingdom. The DGES has allowed some of the system development costs associated with the introduction of competition to be recovered by the regional electricity companies through a charge to all customers over the next five years. The DGES has also announced price restraints which set a maximum amount that existing electricity supply companies can charge their domestic and small business customers over the first two years following the introduction of competition, taking into account its view of future electricity purchase costs. For SEEBOARD, this proposal reduces prices in real terms by 6% for the regulatory year ending March 31, 1999 and a further 3% for the following regulatory year ending March 31, 2000. 16 Other Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding fuel proceedings at CPL, SWEPCO and WTU. PROPOSED AEP MERGER On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28.1 billion ($16.5 billion in equity; $11.6 billion in debt and preferred stock). CSW expects the combination to be accounted for as a pooling of interests. The transaction must satisfy many conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated. This combination is expected to create one of the nation's preeminent diversified electric utilities serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. Both companies have low-cost generation and offer their customers in every state prices below the national average. Over the last two years, both CSW and AEP have ranked among the top five electric utilities in customer satisfaction in the ACSI. Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. AEP will issue approximately $6.6 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. Both companies anticipate continuing their current dividend policies until the close of the transaction. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW or its subsidiaries. The companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two workforces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to minimize the need for employee separations. Organizational and staffing recommendations will be made by transition teams of employees from both companies. The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger CSW and its subsidiaries are restricted from (i) issuing shares of common stock other than pursuant to employee benefit plans, (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW 17 and its subsidiaries to make investments and expenditures in amounts previously budgeted. The merger is conditioned, among other things, upon the approval of CSW stockholders and several state and federal regulatory agencies. AEP shareholders must authorize additional common stock and approve a new common stock issuance to be used in the exchange for CSW common stock. The companies anticipate that regulatory approvals can be obtained in 12 to 18 months from the date of announcement. See NOTE 16. PROPOSED AEP MERGER. 18 OTHER MERGER AND ACQUISITION ACTIVITIES Settlement of Litigation Related to Termination of El Paso Merger In July 1997, CSW and El Paso reached a settlement agreement that resolved all of the pending litigation resulting from the termination of the proposed merger. Under the terms of the settlement agreement, CSW and El Paso agreed to dismiss all pending claims in the litigation and give a mutual release from any potential claims related to the El Paso Merger Agreement or the pending litigation, and CSW paid $35 million to El Paso, various of its creditor groups under its plan of reorganization, and its attorneys. CSW recorded a charge of $25 million in the first quarter of 1997 following the court's interim order and recorded an additional charge of $10 million in the second quarter of 1997 to fully recognize the $35 million settlement amount. The bankruptcy court vacated the interim order and approved the settlement agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. SWEPCO Cajun Asset Purchase Proposal On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets, for $940.5 million in cash, subject to adjustment pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, the Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. The SWEPCO Plan filed March 18, 1998 replaces plans filed previously by SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April 19, 1996. Two competing plans of reorganization for the non-nuclear assets of Cajun have been filed with the bankruptcy court, each with different purchase prices, rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy case are now scheduled through April 1998. Consummation of the SWEPCO Plan is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their board approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external borrowings and internally generated funds with approximately 70% of the external borrowings funded with non-recourse debt. There can be no assurance that the SWEPCO Plan will be confirmed by the bankruptcy court or, if it is confirmed, that it will be approved by federal and state regulators. For additional information regarding the SWEPCO Cajun asset purchase proposal see NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. OTHER INITIATIVES As described in OVERVIEW, a vital part of CSW's future strategy involves initiatives that are outside of the traditional United States electric utility industry due to increasing competition and fundamental changes in this industry. In addition, lower anticipated growth rates in CSW's core United States electric utility business combined with the aforementioned industry factors have resulted in CSW pursuing other initiatives. These initiatives have taken a variety of forms; however, they are all consistent with the overall plan for CSW to develop a global energy business. CSW has restrictions on the amounts it may spend under the AEP merger agreement. While CSW believes that such initiatives are necessary to maintain its competitiveness and to supplement its growth in the future, the Holding Company Act may impede or delay its ability to successfully pursue such initiatives (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See RECENT DEVELOPMENTS AND TRENDS. 19 CSW Energy and CSW International CSW Energy presently owns interests in six operating power projects totaling 978 MW which are located in Colorado, Florida and Texas. In addition to these projects, CSW Energy has other projects in various stages of development. In August 1997, an affiliate of CSW Energy sold 50% of its 100% interest in the Sweeny Cogeneration project. CSW Energy provided the $56.5 million non-recourse financing for the sale which is expected to be repaid from project distributions or proceeds from sale, as defined in the sales agreements. Construction of the 330 MW electricity generating facility was completed in early 1998 with a commercial operation date of February 1, 1998. CSW Energy did not recognize a gain or loss on this transaction. CSW International was organized to pursue investment opportunities in EWGs and FUCOs. CSW International currently holds investments in the United Kingdom, Mexico and Latin America. CSW International acquired a minority interest in Vale, a Brazilian electric utility company, for an initial investment of approximately $40 million in December 1996. In 1997, CSW International made additional equity investments of approximately $150 million in Latin America. The $190 million used to make the equity investments was funded through loans to CSW International by CSW Energy. CSW Energy obtained the funds from its $200 million Senior Note issuance in October 1996. CSW International continues to seek to expand into other countries in Latin America, Europe, and Asia that meet its investment criteria and the investment criteria contained in the AEP merger agreement. C3 Communications C3 Communications has two active business units; its Utility Automation Division and a telecommunications partnership, ChoiceCom. C3 Communications' Utility Automation Division performs consulting, implementation and integration of utility meter automation products and services for traditional utility companies and, as competition markets open, in states like California, for energy service providers. C3 Communications offers clients innovative meter-based competitive data services including automated meter reading; hourly, daily and monthly delivery of consumption data; advanced load profiling data; aggregation reports for customers with multiple accounts and operational services like outage and tamper detection and real-time-pricing and time-of use data. ChoiceCom offers telecommunications services including local telephone service, long distance and long-haul data transmission services. ChoiceCom began offering local telephone service in August, 1997, in Austin, Corpus Christi and San Antonio, Texas with an emphasis on the business customer. ChoiceCom also installed state-of-the-art Lucent 5ESS(R) switches in those three cities. In January 1998, ChoiceCom began offering telephone service in Dallas and Houston with plans to install Lucent 5ESS(R) switches in both cities by the end of the year. With the addition of Dallas and Houston, ChoiceCom's expected 5-year capital budget has increased to $210 million from $104 million. The partnership has grown to about 150 employees during its first year of operation. In November 1997, the parties amended the ChoiceCom Limited Partnership Agreement to provide that CSW hold 100% of the economic interest in ChoiceCom and 60% of the voting interest. ICG Communications, Inc. holds the remaining 40% voting interest in ChoiceCom, and has an option to acquire a 50% economic interest in ChoiceCom. In the event that its option terminates without being exercised, ICG Communications, Inc. will be bound by a non-compete agreement in CSW's service territory. EnerShop EnerShop currently provides energy services to customers in Texas which help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis; project management; engineering design, equipment procurement and construction; and performance monitoring. 20 Other Ventures CSW Energy Services will spearhead CSW's competitive efforts in the retail electricity markets of states outside of CSW's historical service territories. CSW Energy Services will seek to secure electricity supply business in the markets which soon will have retail competition, and will enable CSW to extend its business reach and name recognition beyond CSW's traditional customer base. In March 1998, CSW Energy Services signed its first major supply contract in California. The CSW Services Business Ventures group pursues energy projects related to the business activities of the U.S. Electric Operating Companies. Projects for these groups include staffing services for electric utility nuclear power plants, energy management systems, electric substation automation software and electric vehicles. In June 1997, the FERC approved the request of CSW Power Marketing to sell power and energy at market-based rates in the wholesale market. CSW has temporarily suspended this initiative in light of the AEP Merger since AEP is already pursuing this initiative. SOUTH TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. HL&P owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit 2 was placed in service in June 1989. STP Unit 1 and Unit 2 were removed from service during 1997 for scheduled refueling outages which lasted 24 days and 18 days, respectively. For the year 1997, Unit 1 and Unit 2 operated at net capacity factors of 90.1% and 91.0%, respectively. In September 1997, STPNOC was formed to replace HL&P as the STP Project Manager. Each of the four STP co-owners are represented on the STPNOC board of directors. The CPL representative has been elected as the initial chairman of the board of directors. On October 1, 1997, all HL&P employees assigned to STP were transferred from HL&P to STPNOC. On November 17, 1997, HL&P was removed as STP Project Manager, and STPNOC became the operator of the plant. CSW believes the formation of STPNOC is in its best interest. The establishment of STPNOC provides the following advantages: (i) allows the management and work force to focus exclusively on the safe, reliable and efficient operation of the STP units; (ii) removes most of the possibility of disputes between the four owners over the operation of the facility; (iii) removes dissension concerning the potential liability of HL&P who was acting as the project manager; and (iv) allows the management of the facility to tailor a total compensation package for the STP work force which best suits that work force and its needs. In addition, the formation and operation of STPNOC is expected to result in a decrease in costs allocable to CPL related to its investment in STP (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. ENVIRONMENTAL MATTERS The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial 21 actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. The U.S. Electric Operating Companies are subject to various pending claims alleging that they are PRPs under federal or state remedial laws for investigating and cleaning up contaminated property. CSW believes that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CSW's results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by the U.S. Electric Operating Company, the estimated amount of costs allocated to the U.S. Electric Operating Company and the participation of other parties (The foregoing statements constitute forward looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission levels for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. At the Kyoto Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating companies could be affected if this treaty is approved by the United States Congress in its present form. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant. RISK MANAGEMENT In October 1997, CSW's board of directors adopted a risk management resolution authorizing CSW to engage in currency, interest rate and energy spot and forward transactions and related derivative transactions on behalf of CSW with foreign and domestic parties as deemed appropriate by executive officers of CSW. The risk management program is necessary to meet the growing demands of CSW's customers for competitive prices and price stability, to enable CSW to compete in a deregulated power industry, to manage the risks associated with domestic and foreign investments and to take advantage of strategic investment opportunities. The U.S. Electric Operating Companies experience commodity price exposures related to the purchase of fuel supplies for the generation of electricity and for the purchase of power and energy from other generation sources. Contracts that provide for the future delivery of these commodities can be considered forward contracts which contain pricing and/or volume terms designed to stabilize the cost of the commodity. Consequently, the U.S. Electric Operating Companies manage their price exposure for the benefit of customers by balancing their commodity purchases through a combination of long-term and short-term (spot-market) agreements. In addition, SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the 22 bulk trading of electricity between generators and suppliers. At December 31, 1997, the gross value of such contracts for differences amounted to not more than 80% of any year's expected power purchases. CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound since its purchase of SEEBOARD in 1995. CSW has utilized certain risk management tools to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. At the end of 1997, CSW had positions in two cross currency swap contracts. The following table presents information relating to these contracts. The market value represents the foreign exchange/interest rate terms inherent in the cross currency swaps at current market pricing. CSW expects to hold these contracts to maturity. At current exchange rates, this liability is included in long-term debt on the balance sheet at a carrying value of approximately $425 million. Expected Expected Cash Inflows Cash Outflows Contract Maturity Date (Maturity Value) (Market Value) ----------------------------------------------------------------------------- Cross currency swap August 1, 2001 $200 million $216.5 million Cross currency swap August 1, 2006 $200 million $226.8 million OTHER MATTERS Year 2000 In 1996, a system-wide program to prepare CSW's computer systems and applications for the year 2000 was initiated. CSW expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. Testing and conversion is expected to cost between $20 million and $21 million over the next two years including both domestic and foreign operations. A significant portion of these costs is likely to be covered through the redeployment of existing resources. The major applications which pose the greatest risk for CSW if implementation is not successful are the transmission and distribution automation system; the time in use, demand and recorder metering system for commercial and industrial customers; and the power billing system. The potential problems related to these systems are electric service interruptions to customers, interrupted revenue data gathering and poor customer relations resulting from delayed billing, respectively. Costs related to the year 2000 program will be expensed as incurred. Adoption of Rights Plan In September 1997, CSW's board of directors adopted a Rights Plan, subject to SEC approval under the Holding Company Act. SEC approval was received in December 1997, and on December 22, 1997, CSW executed the Rights Plan which had been modified to permit the AEP Merger. The Rights Plan was initially adopted and ultimately executed as part of the fiduciary responsibility of CSW's board of directors and was not adopted because of any takeover offer or threat. The intent of the Rights Plan is to assure fair and equal treatment for all of CSW's stockholders in the event of a hostile takeover attempt and to encourage a potential acquirer to negotiate with CSW's board of directors before attempting a takeover to assure a fair price for all stockholders. On January 6, 1998, CSW made a dividend distribution of one right for each outstanding share of its common stock. Each right initially entitles the holder to buy one-tenth of one share of CSW Common for $50. Prior to the date upon which the rights become exercisable under the Rights Plan, CSW's outstanding stock certificates will represent both the shares of common stock and the rights, and the rights will trade only together with the shares. 23 Under the Rights Plan, a "triggering event" would occur ten days after a person or group acquires or announces a tender or exchange offer to acquire fifteen percent or more of CSW's outstanding common stock. Upon such a "triggering event," the rights would become exercisable and trade independently of CSW's common stock. After a person or group acquires fifteen percent or more of CSW's outstanding common stock, each right (except those held by such acquiring person or group, whose rights would become void), entitles the holder to purchase, at the exercise price, CSW common shares having a current market value of two times the exercise price. If CSW was acquired in a merger or other business combination, each right would entitle the holder to purchase, at the exercise price, common stock of the acquirer having a current market value of two times the exercise price. In either case, after a triggering event occurs but before an acquiring person becomes the owner of at least fifty percent of CSW's outstanding common stock, CSW's board of directors may direct the exchange of one share of CSW's common stock for each right then outstanding and not exercised. The Rights Plan exempts the AEP Merger transaction. Therefore, neither the execution of the AEP merger agreement nor consummation of the AEP Merger caused, or will cause a "triggering event" or the rights to become exercisable. See PROPOSED AEP MERGER for additional information on the proposed merger. CSW's board of directors may redeem the rights for a price of one cent per right prior to the earlier of the rights becoming exercisable or the expiration of the Rights Plan. The rights will expire ten years from the effective date unless they are earlier redeemed or exchanged by CSW. NEW ACCOUNTING STANDARDS SFAS No. 125 SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities using a financial-components approach that focuses on control. An entity recognizes assets it controls and derecognizes assets when control has been surrendered and liabilities when they have been extinguished. A transfer of assets in which control of the asset is surrendered is recorded as a sale. Control of an asset is surrendered only when and if certain conditions are met. Likewise, a liability is only extinguished under certain distinct conditions. CSW adopted SFAS No. 125 effective January 1, 1997. Adoption of this standard has not had a material adverse effect on CSW's results of operations or financial condition. SFAS No. 128 On March 3, 1997, the FASB issued SFAS No. 128, effective for financial statements for periods ending after December 15, 1997. SFAS No. 128 will simplify the computation of earnings per share for many companies by eliminating calculation provisions which were required by the prior earnings per share standard, Accounting Principles Board Opinion No. 15. CSW adopted SFAS No. 128 effective December 31, 1997. Adoption of SFAS No. 128 did not have a material effect on its calculation of earnings per share. SFAS No. 130 This statement is effective for fiscal years beginning after December 15, 1997. The statement adds the requirement to present comprehensive income and all of its components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Though effective at the beginning of 1998, comprehensive income is not required to be disclosed in interim statements in the year adopted. CSW will adopt this statement beginning with 1998 year-end financial statements. 24 SFAS No. 131 This statement is effective for fiscal years beginning after December 15, 1997, and requires that certain information about operating segments be presented in complete sets of financial statements. It also requires the presentation of information regarding products and services, geographic areas in which the entity operates, and concentrations of major customers. The objective of this statement is to provide information about the different types of business activities in which an entity engages and the different economic environments in which it operates to help users of financial statements better understand an entity's performance and prospects for future cash flows and make more informed judgments about the enterprise as a whole. An operating segment is a component of an enterprise that earns revenues and incurs expenses, whose results are regularly reviewed by the chief decision maker, and for which discrete financial information is available. Separate information is required to be presented for any segment that is 10 percent or more of reported income, profit or loss, or assets of the combined entity. CSW will adopt this statement beginning with 1998 year-end financial statements. RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 CSW's earnings decreased to $153 million in 1997 from $429 million in 1996. CSW's return on average common stock equity was 4.2% in 1997 compared to 12.1% in 1996. The primary reason for the lower earnings and return on average common stock equity was the accrual of the one-time United Kingdom windfall profits tax. The impact of CSW's final settlement of litigation with El Paso contributed to the decline in earnings as well. Also contributing to the decrease in earnings was the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on CSW's final settlement of litigation with El Paso, the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the windfall profits tax. Further reducing earnings for 1997 were certain asset write-offs predominately at the U.S. Electric Operating Companies. Partially offsetting the lower earnings was the gain on the reacquisition of a portion of the U.S. Electric Operating Companies' preferred stock and an adjustment to deferred tax balances of $15 million resulting from a 2% reduction in the United Kingdom corporation tax rate. Further offsetting the decline in earnings was an increase in non-fuel electric revenues. Significant items impacting 1997 earnings are listed below (in millions). Earnings Impact --------- United Kingdom Windfall Profits Tax $(176) CPL 1997 Final Order (48) Asset Write-offs and Reserves (48) PSO 1997 Rate Settlement Agreement (27) Settlement of Litigation with El Paso (23) Gain on the Reacquisition of Preferred Stock 10 United Kingdom Deferred Tax Adjustment 15 In addition, several items that occurred in 1996 were not present in 1997. Prior to the sale of Transok in 1996, CSW realized $12 million of earnings from Transok's operations. As a result of the sale, CSW also recorded an after-tax gain of approximately $120 million in 1996. However, the U.S. Electric Operating Companies and CSW Energy recorded charges totaling $102 million, after-tax, for certain investments in the second quarter of 1996 which decreased earnings. See 25 NOTE 14. DISCONTINUED OPERATIONS for additional information concerning the effects of the sale of Transok. Operating revenues increased $113 million in 1997 compared to 1996. The revenue variances are shown in the following table. 1997 REVENUE VARIANCES Increase (decrease) from prior year, millions U.S. Electric CPL and WTU Transmission Revenues $56 KWH Sales, Growth and Usage 41 Fuel Revenue 23 CPL 1996 Fuel Agreement 18 Sales for Resale 12 CPL 1997 Final Order (45) KWH Sales, Weather-Related (37) PSO 1997 Rate Settlement Agreement (32) Other Electric 37 -------- 73 United Kingdom 22 Other Diversified 18 -------- $113 -------- U.S. Electric revenues increased $73 million, or 2%, in 1997 compared to 1996. Retail MWH sales increased 2.5% with increases in all customer classes. U.S. Electric revenues increased primarily due to higher MWH sales resulting from increased customer usage and new transmission access revenues at CPL and WTU in accordance with FERC Order No. 888 and the Texas Commission's rule regarding transmission access and pricing. The new transmission revenues had no material effect on earnings because they were almost completely offset by a corresponding amount of transmission expense. Revenues increased due in part to the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel Agreement. An increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. Partially offsetting the revenue increase was a decrease in weather-related demand due to milder weather in the first nine months of 1997. Further offsetting the increase in U.S. Electric revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million, or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate movement between the British pound and the U.S. dollar, partially offset by a reduction in the fossil fuel levy collected on behalf of the United Kingdom. Other diversified revenues increased $18 million, or 31%, in 1997 compared to 1996 due primarily to increased revenues from CSW International, C3 Communications, CSW Credit and EnerShop. During 1997 and 1996 the U.S. Electric Operating Companies generated 93% of their electric energy requirements. U.S. Electric fuel expense increased $26 million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also contributing to the increase was the absence in 1997 of a one-time reduction to fuel expense of approximately $9 million recorded in the first quarter of 1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these increases in fuel expense was the effect of lower-cost coal. United Kingdom cost of sales decreased approximately $40 million to $1.3 billion in 1997 compared to 1996 due primarily to a reduction in the fossil fuel levy collected on behalf of the United Kingdom government, which was partially offset by the effect of the exchange rate movement between the British pound and the U.S. dollar. Other operating expense increased $196 million to $981 million in 1997 compared to 1996 due in part to the absence in 1997 of a $27 million pension adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased 26 pension expense. The effect of the exchange rate movement between the British pound and U.S. dollar also contributed to the increase in other operating expense of SEEBOARD U.S.A. In addition, approximately $56 million in new transmission access expense was recorded at CPL and WTU in 1997 related to FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also increasing other operating expense were asset write-offs of approximately $57 million including certain regulatory assets, capitalized demand side management assets and obsolete inventories. In addition, the settlement of litigation with El Paso increased other operating expense $35 million. Further contributing to the increase in other operating expense was the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Partially offsetting these increases were the absence in 1997 of expenses recorded in 1996 related to inventory write-offs of $10 million and CPL rate case adjustments of $15 million. Further offsetting the increases were charges in 1996 associated with restructuring costs. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan. Depreciation and amortization expense increased $33 million, or 7%, in 1997 due primarily to the implementation of depreciation and amortization in accordance with the CPL 1997 Final Order. As a result of that order, the increase in depreciation due to the accelerated recovery of ECOM property was offset in part by the implementation of lower depreciation rates. Taxes other than income increased $17 million, or 10%, in 1997 compared to 1996 due primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas franchise tax refund and true-up in 1996. Income tax expense decreased $73 million to $151 million in 1997 due primarily to lower pre-tax income and a $15 million adjustment to deferred income tax balances resulting from a 2% reduction in the United Kingdom corporation tax rate. Other income and deductions increased to a gain of $32 million in 1997 from a loss of $61 million in 1996 due primarily to the absence in 1997 of charges for certain investments recorded in the second quarter of 1996 of approximately $84 million, after tax, at the U.S. Electric Operating Companies and $18 million at CSW Energy. Long-term interest expense increased $8 million, or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter 1996 debt issuance by CSW Energy. Short-term and other interest expense decreased $8 million to $86 million in 1997 when compared to 1996 due primarily to lower levels of short-term borrowings. Distributions on newly-issued Trust Preferred Securities increased interest and other charges by $17 million in 1997, which was partially offset by lower dividend requirements resulting from the related preferred stock reacquisitions at the U.S. Electric Operating Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on the new securities. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 CSW's earnings increased to $429 million in 1996 compared to $402 million in 1995. Although earnings increased, earnings per share decreased from $2.10 in 1995 to $2.07 in 1996 due to the issuance of additional shares of common stock during 1996. The return on average common stock equity was 12.1% in 1996 compared to 13.1% in 1995. U.S. Electric operations contributed approximately 57% of total earnings in 1996 and approximately 105% of total earnings in 1995. The lower percent for U.S. Electric operations is mostly attributed to the gain on the sale of Transok, higher earnings from SEEBOARD U.S.A. and the recording of charges at each of the U.S. Electric Operating Companies for certain investments. SEEBOARD U.S.A. contributed 24% of total earnings in 1996 as compared to 2% in 1995, reflecting a full year of earnings in 1996 compared to only a partial quarter in 1995. Earnings increased in 1996 compared to 1995 due primarily to the gain from the sale of Transok, the additional earnings from SEEBOARD U.S.A., the absence of charges in 1996 related to the termination of the proposed El Paso Merger in 27 June 1995 and the effect of the CPL 1995 Agreement. Also contributing to the increase were higher non-fuel electric revenues resulting from increased usage, customer growth and weather-related demand. Partially offsetting these increases in earnings were the recording of charges by the U.S. Electric Operating Companies in June 1996 associated with certain investments, write-offs of certain equity investments and other project development costs for CSW Energy, restructuring charges, the effect of the CPL 1996 Fuel Agreement, the asset reserves for the pending CPL rate case and the absence in 1996 of favorable tax adjustments made in 1995. Additional information related to the reserves recorded in June 1996 is discussed below. For further discussion of CPL's regulatory activities, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Increased depreciation and amortization, increased other operating expense, increased interest expense and the loss of Mirror CWIP earnings also reduced the increase in earnings. Significant items impacting 1996 earnings are listed below (in millions). Earnings Impact -------- Gain on the Sale of Transok $120 Charges for Certain Investments (104) CPL Pending Rate Case Write-offs (8) CPL 1996 Fuel Agreement (7) Revenues increased approximately $2.0 billion or 64% in 1996 when compared to 1995. The revenue variances are shown in the following table. 1996 REVENUE VARIANCES Increase (decrease) from prior year, millions U.S. Electric Fuel Revenues $181 CPL 1995 Agreement 112 KWH Sales, Growth and Usage 83 KWH Sales, Weather-Related 21 WTU 1995 Stipulation and Agreement 21 Other Electric (35) CPL 1996 Fuel Agreement (18) -------- 365 United Kingdom 1,640 Other Diversified 7 -------- $2,012 -------- U.S. Electric revenues increased $365 million or 13% in 1996 compared to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales among all retail customer classes. Customer growth, increased usage and weather-related demand contributed to the increased revenues along with higher fuel revenues as discussed below. Also contributing to the increase was the absence in 1996 of reserves for refunds recorded in 1995 in accordance with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. KWH sales to retail customers increased in 1996 as a result of customer growth, increased customer usage and weather-related demand. CSW's operating revenues also include approximately $1.8 billion from a full year of revenues from SEEBOARD U.S.A. for 1996 compared to $208 million of revenues for a partial quarter of operations in 1995. Other diversified revenues increased 13% to $59 million in 1996 as compared to $52 million in 1995 due primarily to increased revenues from CSW Energy projects, increased factoring revenues at CSW Credit and new revenues from C3 Communications and EnerShop. During 1996 and 1995 the U.S. Electric Operating Companies generated 93% and 95%, respectively, of their electric energy requirements. U.S. Electric fuel expense increased 15% to approximately $1.1 billion in 1996 at the U.S. Electric 28 Operating Companies due primarily to an increase in the average unit cost of fuel to $1.81 per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting higher natural gas prices. Partially offsetting this increase was a reduction in the delivered cost of coal at the U.S. Electric Operating Companies resulting from lower coal transportation costs and lower spot market coal prices. U.S. Electric purchased power increased $36 million to $77 million in 1996 due primarily to increased economy energy purchases at a higher cost per MWH. CSW's operating expenses include $1.3 billion for cost of sales from a full year of United Kingdom operations in 1996 compared to $158 million recorded in United Kingdom cost of sales for a partial quarter of operations in 1995. Other operating expenses in 1996 increased $228 million, or 41%, from 1995 due primarily to the addition in 1996 of a full year of operating expenses from SEEBOARD U.S.A. as well as the absence in 1996 of reduced expenses in 1995 related to $28 million of regulatory assets established for previously expensed restructuring charges and the reversal of rate case costs pursuant to the CPL 1995 Agreement. Also contributing to the increase was the recognition in 1995 of a $13 million regulatory asset for previously recorded restructuring charges in accordance with the WTU 1995 Stipulation and Agreement. Another factor contributing to increased other operating expense was a CSW restructuring charge recorded in 1996. A $42 million reserve for deferred merger and acquisition costs was recorded in 1995 from the terminated El Paso merger. Maintenance expense decreased $5 million to $150 million in 1996 from $155 million in 1995 due primarily to a $10 million decrease in maintenance expense at CPL resulting from lower production and distribution maintenance costs. Partially offsetting this decrease was a $7 million increase in maintenance expense due to a write-down of production and distribution inventories at the U.S. Electric Operating Companies in 1996. Depreciation and amortization increased 31% to $464 million in 1996 from $353 million in 1995 due primarily to the addition of depreciable fixed assets and the goodwill amortization related to the purchase of SEEBOARD, as well as increases in depreciable fixed assets at the U.S. Electric Operating Companies. Also contributing to the increase were the amortization of the regulatory assets established in 1995 associated with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement along with accelerated amortization of deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and Agreement. Taxes, other than income increased 10% to $178 million in 1996 from $162 million in 1995. The increase was due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates recorded in 1995. Also contributing to the increase were higher ad valorem and state franchise taxes at SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher state assessed value in Louisiana and the addition of the HVdc tie in Texas. The state franchise taxes increased due mainly to higher federal taxable income associated with Texas franchise tax. Income taxes increased $132 million to $224 million during 1996 compared to 1995. During 1995, income taxes were lower primarily due to adjustments relating to prior year taxes, as well as the tax effect from both the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. Income taxes of $46 million were recorded for SEEBOARD U.S.A. from a full year of operations in 1996 compared to $6 million for a partial quarter of operations in 1995. 29 Other income and deductions decreased $160 million in 1996 when compared to 1995 due primarily to charges recorded in June 1996 associated with certain investments for plant sites, engineering studies and lignite reserves for the U.S. Electric Operating Companies. See the table below for additional detail on these charges. Other income and deductions was also lower as a result of certain write-offs recorded by CSW Energy. In addition, CPL's Mirror CWIP liability, which has now been fully amortized, contributed $41 million to income in 1995. Pre-tax effect on Income tax Net Income income benefit Effect ----------------------------------- (thousands) CPL $(21,509) $5,940 $(15,569) PSO (51,109) 15,401 (35,708) SWEPCO (29,700) 7,885 (21,815) WTU (14,949) 4,003 (10,946) ----------------------------------- $(117,267) $33,229 $(84,038) ----------------------------------- Interest on long-term debt increased $102 million or 46% during 1996 compared to 1995 due to higher levels of long-term debt outstanding related to the SEEBOARD acquisition. CSW's 1996 embedded cost of long-term debt was unchanged from 1995 at 7.2%. Interest on short-term debt decreased $7 million or 7% in 1996 compared to 1995 due to lower interest rates and lower levels of short-term debt outstanding. CSW used a portion of the proceeds from the sale of Transok to reduce short-term debt. The $120 million gain on the sale of Transok as well as Transok's 1996 operations are shown separately in discontinued operations. Transok's earnings for the first five months of 1996 were $12 million compared to $25 million from a full year of operations for 1995. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information, including comparative statements of income, related to the sale of Transok. 30 CSW CONSOLIDATED STATEMENTS OF INCOME CENTRAL AND SOUTH WEST CORPORATION - ------------------------------------------------------------------------ For the Years Ended December 31, ---------------------------- 1997 1996 1995 ------- ------- ------ ($ in millions, except share amounts) Operating Revenues U.S. Electric $3,321 $3,248 $2,883 United Kingdom 1,870 1,848 208 Other diversified 77 59 52 ------- ------- ------ 5,268 5,155 3,143 ------- ------- ------ Operating Expenses and Taxes U.S. Electric fuel 1,177 1,151 1,004 U.S. Electric purchased power 89 77 41 United Kingdom cost of sales 1,291 1,331 158 Other operating 981 785 557 Maintenance 152 150 155 Depreciation and amortization 497 464 353 Taxes, other than income 195 178 162 Income taxes 151 224 92 ------- ------- ------ 4,533 4,360 2,522 ------- ------- ------ Operating Income 735 795 621 ------- ------- ------ Other Income and Deductions Mirror CWIP liability amortization -- -- 41 U.S. Electric charges for investments and plant development costs (3) (117) -- Other 29 16 56 Non-operating income taxes 6 40 2 ------- ------- ------ 32 (61) 99 ------- ------- ------ Income Before Interest and Other Charges 767 734 720 ------- ------- ------ Interest and Other Charges Interest on long-term debt 333 325 223 Distributions on Trust Preferred Securities 17 -- -- Interest on short-term debt and other 86 94 101 Preferred dividend requirements of subsidiaries 12 18 19 Gain on reacquired preferred stock (10) -- -- ------- ------- ------ 438 437 343 ------- ------- ------ Income from Continuing Operations 329 297 377 ------- ------- ------ Discontinued Operations Income from discontinued operations, net of tax of $6 for 1996 and $13 for 1995 -- 12 25 Gain on the sale of discontinued operations, net of tax of $72 -- 120 -- ------- ------- ------ -- 132 25 ------- ------- ------ Income Before Extraordinary Item 329 429 402 Extraordinary Item - United Kingdom windfall profits tax (176) -- -- ------- ------- ------ Net Income for Common Stock $153 $429 $402 ======= ======= ====== Average Common Shares Outstanding 212.1 207.5 191.7 Basic and Diluted EPS from Continuing Operations $1.55 $1.43 $1.97 Basic and Diluted EPS from Discontinued Operations -- 0.64 0.13 ------- ------- ------ Basic and Diluted EPS before Extraordinary Item 1.55 2.07 2.10 Basic and Diluted EPS from Extraordinary Item (0.83) -- -- ------- ------- ------ Basic and Diluted EPS $0.72 $2.07 $2.10 ======= ======= ====== Dividends Paid per Share of Common Stock $1.74 $1.74 $1.72 ======= ======= ====== The accompanying notes to consolidated financial statements are an integral part of these statements. 31 CSW CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CENTRAL AND SOUTH WEST CORPORATION - --------------------------------------------------------------------------- For the Years Ended December 31, -------------------------- 1997 1996 1995 ------- ------ ------ (millions) Common Stock at Beginning of Year $740 $675 $667 Sale of Common Stock 3 65 8 ------- ------ ------ Common Stock at End of Year 743 740 675 ------- ------ ------ Paid-in Capital at Beginning of Year 1,022 610 561 Sale of Common Stock 17 412 49 ------- ------ ------ Paid-in Capital at End of Year 1,039 1,022 610 ------- ------ ------ Retained Earnings at Beginning of Year 1,963 1,893 1,824 Net income for common stock 153 429 402 Deduct: Common stock dividends 369 358 329 Deduct: Other 1 1 4 ------- ------ ------ Retained Earnings at End of Year 1,746 1,963 1,893 ------- ------ ------ Foreign Currency Translation and Other at Beginning of Year 77 -- -- Net Change (49) 77 -- ------- ------ ------ Foreign Currency Translation and Other at End of Year 28 77 -- ------- ------ ------ ------- ------ ------ Total Stockholders' Equity $3,556 $3,802 $3,178 ======= ====== ====== The accompanying notes to consolidated financial statements are an integral part of these statements. 32 CSW CONSOLIDATED BALANCE SHEETS CENTRAL AND SOUTH WEST CORPORATION - --------------------------------------------------------------------------- As of December 31, ----------------- 1997 1996 ------- ------- (millions) ASSETS Fixed Assets Electric Production $5,824 $5,830 Transmission 1,558 1,538 Distribution 4,453 4,237 General 1,381 1,318 Construction work in progress 184 230 Nuclear fuel 196 184 ------- ------- 13,596 13,337 Other diversified 250 84 ------- ------- 13,846 13,421 Less - Accumulated depreciation and amortization 5,218 4,940 ------- ------- 8,628 8,481 ------- ------- Current Assets Cash and temporary cash investments 75 254 Accounts receivable 916 837 Materials and supplies, at average cost 172 185 Electric utility fuel inventory 65 102 Under-recovered fuel costs 84 46 Prepayments and other 78 85 ------- ------- 1,390 1,509 ------- ------- Deferred Charges and Other Assets Deferred plant costs 503 509 Mirror CWIP asset 285 299 Other non-utility investments 448 371 Securities available for sale 103 -- Income tax related regulatory assets, net 329 236 Goodwill 1,428 1,525 Other 337 402 ------- ------- 3,433 3,342 ------- ------- $13,451 $13,332 ======= ======= The accompanying notes to consolidated financial statements are an integral part of these statements. 33 CSW CONSOLIDATED BALANCE SHEETS CENTRAL AND SOUTH WEST CORPORATION - ---------------------------------------------------------------------- As of December 31, ---------------------- 1997 1996 -------- -------- CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 212.2 million shares in 1997 and 211.5 million shares in 1996 $ 743 $ 740 Paid-in capital 1,039 1,022 Retained earnings 1,746 1,963 Foreign currency translation and other 28 77 -------- -------- 3,556 45% 3,802 47% -------- --- --------- --- Preferred Stock Not subject to mandatory redemption 176 292 Subject to mandatory redemption 26 33 -------- --------- 202 2% 325 4% Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 335 4% -- --% Long-term debt 3,898 49% 4,024 49% -------- --- --------- --- Total Capitalization 7,991 100% 8,151 100% -------- --- --------- --- Current Liabilities Long-term debt and preferred stock due within twelve months 32 204 Short-term debt 721 364 Short-term debt - CSW Credit, Inc. 636 579 Loan notes 56 76 Accounts payable 558 630 Accrued taxes 171 324 Accrued interest 87 82 Other 238 166 -------- -------- 2,499 2,425 -------- -------- Deferred Credits Accumulated deferred income taxes 2,432 2,272 Investment tax credits 278 291 Other 251 193 -------- -------- 2,961 2,756 -------- -------- $ 13,451 $ 13,332 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. 34 CSW CONSOLIDATED STATEMENTS OF CASH FLOWS CENTRAL AND SOUTH WEST CORPORATION - ----------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------- 1997 1996 1995 ------- ------- ------ (millions) OPERATING ACTIVITIES Net income for common stock $153 $429 $402 Non-cash Items and Adjustments Depreciation and amortization 529 521 425 Deferred income taxes and investment tax credits 110 62 (11) Preferred stock dividends 12 18 19 Gain on reacquired preferred stock (10) -- -- Mirror CWIP liability amortization -- -- (41) Charges for investments and assets 53 147 -- Gain on sale of subsidiary -- (192) -- Changes in Assets and Liabilities Accounts receivable (140) (86) (36) Accounts payable 45 23 (32) Accrued taxes (153) (14) 25 Fuel recovery (37) (89) 76 Other 164 56 (28) ------- ------- ----- 726 875 799 ------- ------- ----- INVESTING ACTIVITIES Construction expenditures (507) (521) (474) Acquisitions expenditures -- (1,394) (421) CSW Energy/CSW International projects (382) (124) 109 Sale of National Grid assets -- 99 -- Cash proceeds from sale of subsidiary -- 690 -- Other (15) (36) (26) ------- ------- ----- (904) (1,286) (812) ------- ------- ----- FINANCING ACTIVITIES Common stock sold 20 477 57 Proceeds from issuance of long-term debt -- 437 456 SEEBOARD acquisition financing -- 350 731 Reacquisition/Maturity of long-term debt (253) (239) (363) Redemption of preferred stock (114) (1) (1) Trust Preferred Securites Sold 323 -- -- Other financing activities (3) 67 -- Change in short-term debt 414 (395) (226) Payment of dividends (383) (376) (348) ------- ------- ----- 4 320 306 ------- ------- ----- Effect of exchange rate changes on cash and cash equivalents (5) (56) -- ------- ------- ----- Net Change in Cash and Cash Equivalents (179) (147) 293 Cash and Cash Equivalents at Beginning of Year 254 401 108 ======= ======= ===== Cash and Cash Equivalents at End of Year $75 $254 $401 ======= ======= ===== SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $396 $356 $301 ======= ======= ===== Income taxes paid $301 $196 $77 ======= ======= ===== The accompanying notes to consolidated financial statements are an integral part of these statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations CSW is a registered holding company under the Holding Company Act subject to regulation by the SEC. CSW's U.S. Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of CSW's U.S. Electric Operating Companies is the generation, transmission, and distribution of electric power and energy. These companies are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Texas Commission. The principal business of CSW's United Kingdom electric operating subsidiary, SEEBOARD, is the distribution and supply of electric power and energy in Southeast England. SEEBOARD is subject to rate regulation by the DGES. In addition to electric utility operations, CSW has subsidiaries involved in a variety of business activities. CSW Energy and CSW International pursue cogeneration and other energy-related ventures; CSW Credit factors the accounts receivable of affiliated and non-affiliated companies; C3 Communications pursues telecommunications projects; CSW Leasing has investments in leveraged leases; EnerShop offers energy-management services and CSW Energy Services will pursue retail energy markets outside of CSW's traditional service territory. The more significant accounting policies of the CSW System are summarized below. Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities along with disclosure of contingent liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fixed Assets and Depreciation U.S. Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used during construction. SEEBOARD's fixed assets are stated at their original fair market value which existed on the date of acquisition plus the original cost of property acquired or constructed since the acquisition, less disposals. Provisions for depreciation of plant are computed using the straight-line method, generally at individual rates applied to the various classes of depreciable property. CSW's annual average consolidated composite rates were 3.4% for the years 1995-1997. CPL Nuclear Decommissioning of STP At the end of STP's service life, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur 36 as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its pre-plant state. CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalations for expected inflation to the expected time of decommissioning, and is net of expected earnings on the trust fund. CPL's portion of the costs of decommissioning STP were estimated to be $258 million in 1995 dollars based on a site specific study completed in 1995. CPL is recovering these decommissioning costs through rates based on the service life of STP at a rate of $8.2 million per year. The $8.2 million annual cost of decommissioning is reflected on the income statement in other operating expense. Due to the fact that the funds are deposited with a trustee under the terms of an irrevocable trust and because of the ongoing nature of the FASB project, as described below, management believes it inappropriate to reflect the trust assets on CSW's financial statements. At December 31, 1997, the trust balance was $45.7 million. The FASB is currently reviewing the utility industry's accounting treatment of nuclear and certain other plant decommissioning costs. An exposure draft regarding this matter was issued in February 1996. In November 1997 the FASB abandoned all previous decisions on the scope of this project and began a new project related to decommissioning and other environmental remediation costs. It is not known at this time when any new pronouncement would result from this project. Electric Revenues and Fuel The U.S. Electric Operating Companies record revenues based upon cycle-billings. Electric service provided subsequent to billing dates through the end of each calendar month are accrued for by estimating unbilled revenues in accordance with industry standards. CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of base rates whereby over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers after Texas Commission approval. The cost of fuel is charged to expense as incurred, with resulting fuel over-recoveries and under-recoveries recorded as regulatory assets and liabilities. PSO recovers fuel costs in Oklahoma and SWEPCO recovers fuel costs in Arkansas and Louisiana through automatic fuel recovery mechanisms. The application of these mechanisms varies by jurisdiction. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information about fuel recovery. CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale customers through formula rates. CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In addition to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including spent fuel disposal fees assessed on the basis of net MWHs sold from STP and DOE special assessment fees for decontamination and decommissioning of the enrichment facilities on the basis of prior usage of enrichment services. Accounts Receivable CSW Credit, as a wholly owned subsidiary of CSW, purchases, without recourse, the billed and unbilled accounts receivable of the U.S. Electric Operating Companies, certain non-affiliated public utility companies and, prior to its sale by CSW in June 1996, Transok. 37 Regulatory Assets and Liabilities For their regulated activities, the U.S. Electric Operating Companies follow SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent probable future revenue to the company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory assets are currently being recovered in rates or are probable of being recovered in rates. The unamortized asset balances are included in the table below. 1997 1996 -------- --------- As of December 31, (millions) Regulatory Assets Deferred plant costs (1) $503 $509 Mirror CWIP asset 285 299 Income tax related regulatory assets, net 329 236 Deferred restructuring and rate case costs (2) 36 46 Deferred storm costs (3) -- 2 OPEBs 3 3 Demand side management costs 10 15 Under-recovered fuel costs (4) 84 47 Loss on reacquired debt 166 180 Fuel settlement (5) 16 17 Other 8 13 -------- --------- $1,440 $1,367 Regulatory Liabilities Refunds due customers $64 $43 Other 1 2 -------- --------- $65 $45 -------- --------- (1) $19 in 1997 and $22 in 1996 earning no return, amortized through 2002 (2) $24 in 1997 and $31 in 1996 earning no return, amortized by the end of 2000; $12 in 1997 and $15 in 1996 earning no return, amortized through 2002 (3) Item earning no return, amortized by the end of 1997 (4) $15 in 1997 and $3 in 1996 earning no return, amortized over 12 month period, recalculated semiannually (5) Item earning no return, amortized by the end of 2006 In accordance with orders of the Texas Commission, CPL and WTU deferred carrying costs, as well as operating costs, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began commercial operation until the date the plants were included in rate base. CPL is amortizing and recovering these deferred costs through rates over the life of the plant. WTU began amortizing and recovering such costs over a seven year period beginning January 1, 1996. In accordance with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which is being amortized over the life of STP. For further information regarding the deferred plant costs at CPL and WTU, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and MD&A-RECENT DEVELOPMENTS AND TRENDS, Regulatory Accounting. SEEBOARD Acquisition The acquisition of SEEBOARD was accounted for as a purchase combination. An allocation of the purchase price has been performed and is reflected in the consolidated financial statements. The goodwill is being amortized on a straight-line basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31, 1997 was $1.4 billion. CSW continually evaluates whether circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. 38 National Grid Assets Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK) plc, as a shareholder of SEEBOARD, received approximately 32.5 million shares of National Grid common stock. On February 2, 1996, all of these shares were sold for approximately $99 million. Foreign Currency Translation The financial statements of SEEBOARD U.S.A., which are included in CSW's consolidated financial statements, have been translated from British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are translated at the exchange rate at the end of the period and all income statement items are translated at the average exchange rate for the applicable period. At December 31, 1997 the current exchange rate was approximately (pound)1.00=$1.65, and the average exchange rate for the twelve month period ended December 31, 1997 was approximately (pound)1.00=$1.58. At December 31, 1996 the current exchange rate was approximately (pound)1.00=$1.71, and the average exchange rate for the twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56. The average exchange rate for the twelve month period ended December 31, 1995 was approximately (pound)1.00=$1.58. All resulting translation adjustments are recorded directly to Foreign currency translation and other on CSW's Consolidated Balance Sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The non-cash impact of the changes in exchange rates on cash and cash equivalents, resulting from the translation of items at the different exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in Effect of exchange rate changes on cash and cash equivalents. Statements of Cash Flows Cash equivalents are considered to be highly liquid instruments with a maturity of three months or less. Accordingly, temporary cash investments are considered cash equivalents. Risk Management CSW has been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound since its purchase of SEEBOARD in 1995. CSW has utilized certain risk management tools, including cross currency swaps, foreign currency futures and foreign currency options, to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. CSW accounts for these transactions as hedge transactions and any gains or losses associated with the risk management tools are recognized in the financial statements at the time the hedge transactions are settled. CSW believes its credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT and NOTE 7. FINANCIAL INSTRUMENTS for additional information. Securities Available for Sale CSW accounts for its investments in equity securities in accordance with SFAS No. 115. The investments have been designated as available for sale, and as a result are stated at fair value. Unrealized holding gains and losses, net of related taxes, are included within Foreign currency translation and other on CSW's Consolidated Balance Sheets. Information related to these Securities available for sale as of December 31, 1997 is presented in the following table. 39 Original Unrealized Cost Holding Gains/(Losses) Fair Value ----------------------------------------------- (millions) Securities available for sale $110 $5 $(12) $103 Accounting Change Effective January 1, 1997, CPL and WTU began utilizing the LIFO method for the valuation of all fossil fuel inventories. Previously, CPL had used the weighted average cost method and WTU had used the LIFO method for coal and the weighted average cost method for other fuel inventories. PSO utilizes the LIFO method. SWEPCO continues to utilize the weighted average cost method pending approval of the Arkansas Commission to utilize the LIFO method. The change in accounting did not affect the results of operations due to the regulatory treatment of such costs. Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1997 presentation. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information related to the classification of Transok activities. 2. LITIGATION AND REGULATORY PROCEEDINGS Settlement of Litigation Related to Termination of El Paso Merger In May 1993, CSW entered into a merger agreement pursuant to which El Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. In June 1995, following its notification that CSW was terminating the El Paso Merger Agreement, El Paso filed suit against CSW seeking a $25 million termination fee from CSW, as well as, unspecified damages for various contract and tort claims. Subsequently, CSW filed suit against El Paso seeking a $25 million termination fee from El Paso and recovery of certain rate case expenses incurred by CSW on behalf of El Paso. 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. On April 11, 1997, the court issued an interim order in which it ruled that CSW owed El Paso a $25 million termination fee and reserved judgment on certain disputed interest. In July 1997, CSW and El Paso reached a settlement agreement that resolved all of the pending litigation. Under the terms of the settlement agreement, CSW and El Paso dismissed all pending claims in the litigation and CSW paid $35 million to El Paso, various of its creditor groups under its plan of reorganization, and its attorneys. CSW recorded a charge of $25 million in the first quarter of 1997 following the court's interim order and recorded an additional charge of $10 million in the second quarter of 1997 to fully recognize the $35 million settlement amount. The bankruptcy court vacated the interim order and approved the settlement agreement. Litigation Related to the Rights Plan and AEP Merger Two lawsuits have been filed in Delaware state court seeking to enjoin the AEP Merger. CSW and each of its directors have been named as defendants in both cases. The first suit alleges that the Rights Plan, approved by the CSW Board of Directors on September 27, 1997 and which became effective after SEC approval under the Holding Company Act on December 19, 1997, constitutes a "poison pill" precluding acquisition offers and resulting in a heightened fiduciary duty on the part of the CSW Board of Directors to pursue an auction-type sales process to obtain the best value for CSW stockholders. The second suit alleges that the AEP Merger is unfair to CSW stockholders in that it does not recognize the underlying intrinsic value of CSW's assets and its future profitability. The second suit also seeks an auction-type sale process. CSW believes that both suits are without merit and intends to defend them vigorously. 40 CPL Rate Review - Docket No. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million, and in May 1996, CPL placed a $70 million base rate increase into effect under bond, subject to refund based on the receipt of a final order of the Texas Commission. On March 31, 1997, the Texas Commission issued the CPL 1997 Original Rate Order in CPL's rate review, Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested the reconsideration of numerous provisions of the order. Motions for rehearing were also filed by other parties to the rate proceeding. In response to the motions for rehearing, in June 1997, the Texas Commission made several modifications to the CPL 1997 Original Rate Order and also agreed to rehear on remand several other issues. CPL restored its rates in July 1997, with two exceptions, to levels existing prior to the May 1996 implementation of bonded rates. On August 21, 1997, after reconsidering the issues on remand, the Texas Commission voted to issue a revised final order and on September 10, 1997, CPL received a revised final order. CPL filed its second motion for rehearing on September 30, 1997. The second motion for rehearing again requested reconsideration of numerous issues in the rate case. On October 16, 1997 the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowers the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates will be reduced by an additional $13 million in mid-1998 and another $13 million in mid-1999. The CPL 1997 Original Rate Order established a separate docket, Docket No. 17280, to consider the recoverability of $20 million of rate case expenses incurred in the current rate case and in two prior dockets. CPL reached a settlement with all parties to resolve Docket No. 17280 which provides for CPL to recover $14 million out of the total $20 million of rate case expenses originally requested. Approximately $8 million of the rate case expenses will be recovered as an offset to the refund in the rate case, and the remaining $6 million of expenses will be surcharged to customers over three years. CPL expensed the $6 million in foregone rate case expenses during the first quarter of 1997. CPL implemented bonded rates subject to refund in May 1996. On July 17, 1997, CPL restored its rates, with two exceptions, to levels existing prior to the implementation of the bonded rates. The two exceptions are for industrial interruptible rates and customer service charges for which the Texas Commission approved the increases requested by CPL. On October 31, 1997, CPL filed with the Texas Commission a proposed methodology for issuing an interim refund to customers in December 1997. A second refund was made in March 1998. The different components that were all incorporated into the December 1997 refund made to customers, a breakdown of the December 1997 refund, as well as the March 1998 refund, including interest, is shown below (millions). December 1997 Amount collected from customers under bond $81.7 Surcharge for rate case expenses (13.3) Surcharge for fuel cost under-recovery (23.6) --------- Net refund to customers $44.8 --------- March 1998 (estimated) Remaining refund available $59.0 Anticipated surcharge for fuel cost under-recovery (34.3) --------- Net refund to customers $24.7 --------- The following table details the financial impact of the CPL 1997 Final Order as compared to the rates existing prior to CPL placing bonded rates into effect. Although the entire impact has been recorded in CSW's 1997 results of operations, the financial impact on its results of operations for 1996 and for the year 1997 is shown below. 41 1996 Retroactive 1997 Only Impact Impact ---------- ---------- (millions) Decrease in revenue $(20.7) $(24.2) ---------- ---------- Items included in decrease in revenue with offsetting effect on expense: Accelerated recovery of STP (ECOM) 13.3 20.0 Change in depreciation (7.5) (11.3) Decommissioning 1.9 4.3 Other -- 6.8 ---------- ---------- 7.7 19.8 ---------- ---------- Change in current year income before (28.4) (44.0) tax Federal income taxes 9.5 14.8 ---------- ---------- Impact on net income - all recorded in 1997 $(18.9) $(29.2) ---------- ---------- CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of disallowed affiliate transactions from CSW Services. As part of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission from implementing the "Glide Path" rate reduction methodology, currently scheduled to begin in May 1998. A hearing has been set for the temporary injunction on April 3, 1998. Management is unable to predict how the final resolution of these issues will ultimately affect CSW's results of operations and financial condition. See MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No. 14965 for additional discussion of the CPL 1997 Final Order, including the estimated ongoing financial impact of the final order and information regarding the difference between the rates originally requested by CPL and those ordered by the Texas Commission. CPL 1995 Agreement On April 5, 1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million. In addition, CPL refunded approximately $30 million in over-recovered fuel costs through April 1995. Furthermore, CPL did not charge customers for $62.25 million in replacement power costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests filed prior to September 28, 1995. CPL also reduced its fuel factors, effective in July 1995, by approximately $55 million on an annual basis due to projections of lower fuel costs. The Texas Commission approved the CPL 1995 Agreement on October 4, 1995. Details of the items in the CPL 1995 Agreement and the total 1995 earnings impact, including certain accounting provisions, are set forth in the following table. 42 Pre-tax After-tax ------------------ (millions) Base rate refund $(50.0) $(32.5) Fuel disallowance (62.3) (40.5) Wholesale fuel refund (3.2) (2.1) Current flowback of excess deferred federal income taxes 34.3 34.3 Capitalization of previously expensed restructuring and rate case costs 27.6 17.9 Recognition of factoring income 16.1 10.5 Amortization, interest and other (6.6) (4.4) CPL Deferred Accounting By orders issued in 1989 and 1990, the Texas Commission authorized CPL to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial operation dates of those units and the effective date of rates reflecting the operation of those units. Upon appeal of the 1989 CPL order, and a related order involving another utility, the Supreme Court of Texas in 1994 sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals. On August 16, 1995, the Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects. By orders issued in October 1990 and December 1990, the Texas Commission quantified the STP Unit 1 and Unit 2 deferred accounting costs and authorized the inclusion of the amortization of the costs and associated return in CPL's retail rates. These Texas Commission orders were appealed to the Travis County District Court where the appeals are still pending. Language in the Supreme Court of Texas' opinion in the appeal of the deferred accounting authorization case suggests that the appropriateness of including deferred accounting costs in rates charged to customers is dependent on a finding in the first case in which the deferred STP costs are recovered through rates that the deferral was actually necessary to preserve the utility's financial integrity. If in the appeals of the October 1990 and December 1990 rate orders, the courts decide that subsequent review under the financial integrity standard is required and was not made in those orders, such rate orders would be remanded to the Texas Commission for the purpose of entering findings applying the financial integrity standard. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. If CPL's deferred accounting matters are not favorably resolved, CSW 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 either that CPL will receive approval of its deferred accounting amounts or that CPL will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CSW's results of operation or financial condition. CPL Fuel Proceeding In January 1998, CPL filed a request with the Texas Commission to recover approximately $41.4 million in uncollected fuel and purchased power costs and related interest from its retail customers and to increase the fuel factors used to recover fuel costs incurred to provide service in the future. The fuel surcharge will be subtracted from the remaining base rate refund totaling approximately $59.0 million that was ordered by the Texas Commission in CPL's recent general rate case, Docket No. 14965. This net refund is being issued as a one-time adjustment to customers' March 1998 bills. In the same filing with the Texas Commission, CPL also requested permission to increase its fixed fuel factors by approximately $23.4 million effective with March 1998 bills. The primary cause of CPL's current fuel cost under-recovery and the need to increase its current fuel factors is the unanticipated increase in the price of natural gas. 43 In February 1998, stipulations were reached on both the fuel factor and surcharge. The fuel factor increase is being reduced to $15.4 million, and the fuel surcharge including interest is being reduced to $34.3 million. The reductions are not a disallowance and will be considered as part of CPL's fuel reconciliation filing to be made in December 1998. CPL Nuclear Insurance Claims In 1994, CPL filed a claim under its NEIL I policy relating to the 1993-1994 outage at STP Units 1 and 2. NEIL denied CPL's claim in 1995. CPL filed an action in April 1996 against both NEIL and Johnson & Higgins of Texas, Inc., the former insurance broker for STP, seeking recovery under the policy and other relief. Subsequently, CPL and NEIL agreed to dismiss all litigation between them concerning CPL's claim for NEIL coverage, and they agreed to submit their disputes over coverage to a non-binding, neutral evaluation process. Hearings were held by the neutral evaluator in February 1997 and April 1997. On April 22, 1997, the neutral evaluator made the recommendation that CPL's claim was not covered by its NEIL I policy. CPL abided by this recommendation. CPL Industrial Road and Industrial Metals Site Three suits naming CPL and others as defendants relating to a third-party owned and operated site in Corpus Christi, Texas formerly used for commercial reclamation of used electrical transformers, lead acid batteries and other scrap metals, were pending in federal and state court in Corpus Christi, Texas. The plaintiffs' complaints sought damages for alleged property damage and health impairment as a result of operations on the site and cleanup activities. During 1997, these suits were settled with no material adverse effect on CSW's results of operation or financial condition. CPL Municipal Franchise Fee Litigation In May 1996, the city of San Juan, Texas filed a purported class action in Hidalgo County, Texas District Court on behalf of all cities served by CPL based upon CPL's alleged underpayment of municipal franchise fees. The plaintiff's petition asserts various contract and tort claims against CPL as well as certain audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed a counterclaim for any overpayment of franchise fees it may have made as well as its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement asserting that the Texas Commission has primary jurisdiction over the claims. In May 1996 and December 1996, respectively, the cities of Pharr, Texas and San Benito, Texas filed individual suits making claims virtually identical to those claimed by the city of San Juan. In January, 1997, CPL filed an original petition at the Texas Commission requesting the Texas Commission to declare its jurisdiction over CPL's collection and payment of municipal franchise fees. In April 1997, the Texas Commission issued a declaratory order in which it declined to assert jurisdiction over the claims of the City of San Juan. CPL appealed the Texas Commission's decision to the Travis County, Texas District Court. After the Texas Commission's order, the Hidalgo County court overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County court entered an order certifying the case as a class action. CPL appealed this order to the Corpus Christi Court of Appeals. In February 1998, the court of appeals' affirmed the trial court's order certifying the class. CPL appealed the court of appeals ruling to the Texas Supreme Court. Although CPL believes that it has substantial defenses to the cities' claims and intends to defend itself against the cities' claims and pursue its counterclaims vigorously, management cannot predict the outcome of these lawsuits. 44 CPL and WTU Texas Utilities Complaint (Docket No. 17285) A Proposal for Decision was received in February 1998 in a joint CPL/WTU complaint at the Texas Commission that since January 1, 1997, Texas Utilities was effectively double charging for transmission service within the Electric Reliability Council of Texas. The Proposal recommends approval of a CPL/WTU proposed offset of $15.5 million annually of payments to Texas Utilities under FERC-approved transmission service agreements against amounts that CPL and WTU would otherwise owe Texas Utilities pursuant to Texas Commission rules for transmission service in ERCOT. The Texas Commission will consider the Proposal in April 1998. PSO Rate Review In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings. In accordance with the established schedule, PSO subsequently filed financial data, cost of service and rate design testimony supporting both its current rates and an increase in annual depreciation expense of $26 million. In July 1997, the Oklahoma Commission staff and other intervenors to the proceeding filed their revenue requirements testimony. In its filing, the Oklahoma Commission staff recommended a rate reduction of $76.8 million for PSO. On October 15, 1997, PSO reached a stipulated agreement with parties to settle the rate inquiry that was pending before the Oklahoma Commission. On October 23, 1997, the Oklahoma Commission issued a final order approving the agreement. The PSO 1997 Rate Settlement Agreement calls for PSO to lower its retail base rates beginning with the December 1997 billing cycle by approximately $35.9 million annually, or a 5.3 percent decrease below the current level of retail rates. Part of the rate reduction includes a reduction in annual depreciation expense of approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement resulted in PSO making a one-time $29 million refund to customers in December 1997. The PSO 1997 Rate Settlement Agreement also calls for PSO to eliminate or amortize before its next rate filing approximately $41 million in certain deferred assets, approximately $26 million of which had been expensed in 1996. The remaining $15 million of deferred assets, which included approximately $9 million of costs incurred for customer energy management incentive programs, were written off in 1997. The following table represents the financial impact of the PSO 1997 Rate Settlement Agreement on CSW's 1997 results of operations. 1997 Impact ---------- (millions) Decrease in revenues Refund to customers $(29.0) Change in rates (2.5) ---------- (31.5) ---------- Changes in expenses (offsetting impact included in revenues) Depreciation (6.3) Rate case deferred costs 2.2 Income tax (10.2) ---------- (14.3) ---------- (17.2) Write-off of deferred assets, net of (10.2) tax ---------- $(27.4) ---------- The PSO 1997 Rate Settlement Agreement resulted in an adverse effect on CSW's results of operations for 1997 that will have a continuing impact because of the rate decrease. However, it reduced significant risks for PSO related to this regulatory proceeding and should allow PSO's rates to remain competitive for the foreseeable future. 45 See MD&A - RATES AND REGULATORY MATTERS, PSO 1997 Rate Settlement Agreement for additional discussion of the PSO 1997 Rate Settlement Agreement, including the estimated ongoing financial impact of the agreement. PSO PCB Cases PSO has been named a defendant in petitions filed in state court in Oklahoma in February and August, 1996. The petitions allege that the plaintiffs suffered personal injury and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April, 1982 at the Page Belcher Federal Building in Tulsa. Each of the plaintiffs seeks actual and punitive damages in excess of $10,000. As previously reported, other claims arising from this incident have been settled and the suits dismissed. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Management believes that the remaining claims are covered by insurance. Management also believes that the ultimate resolution of the remaining lawsuits will not have a material adverse effect on CSW's results of operations or financial condition. PSO Sand Springs/Grandfield, Oklahoma Sites In 1989, PSO found PCB contamination in a Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to comply with provisions of the Toxic Substances Control Act. The EPA alleged improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual cleanup at the site. The complaint also alleged failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims in the suit by March 1998. The settlement did not have a material adverse effect on CSW's results of operations or financial condition. SWEPCO Fuel Proceeding In April 1997, SWEPCO filed with the Texas Commission an application concerning fuel cost under-recoveries and a possible fuel surcharge. The application included a motion to either abate the requested interim surcharge and consolidate the surcharge with a filed fuel reconciliation as discussed below, or alternatively, implement an interim surcharge in the months of July 1997 through June 1998. The Texas Commission's Office of Policy Development, on behalf of the Texas Commission, approved the consolidation. In addition, the Texas Commission has waived the requirement for SWEPCO to file biannual surcharge requests while this proceeding is pending, and has deferred the implementation of any surcharge and interest until after final disposition. In May 1997, SWEPCO filed with the Texas Commission an application to reconcile fuel costs and implement a 12 month surcharge of fuel cost under-recoveries. Because of the uncertainty as to when a surcharge may commence, SWEPCO did not establish in its filing a proposed surcharge period or a total surcharge amount which would reflect interest through the entire surcharge period. However, SWEPCO indicated that it had an under-recovered Texas jurisdictional fuel cost balance of approximately $16.8 million, including interest through December 1996. Included in the $16.8 million balance are fuel related litigation expenses of $5.0 million and an interest return of $2.0 million on the unamortized balance of a fuel contract termination payment. On December 8, 1997, SWEPCO and the other parties to the above consolidated proceedings before the Texas Commission filed a settlement on all issues except for one issue which will be decided by the Texas Commission. The outstanding issue concerns transmission equalization payments and whether they should be included in fuel or base revenues. The settlement is subject to approval by the Texas Commission. Of the $16.8 million in under-recovered fuel costs as of December 31, 1996, the settlement would result in a decrease of the under-recovered fuel costs, and the resulting surcharge recovery, by approximately $6.0 million. This disallowance will not result in an increase to fuel expense since the $5.0 million of litigation expense and the interest return of $2.0 million included in the requested surcharge amount were previously expensed. However, should SWEPCO not prevail on the outstanding issue, SWEPCO would be required to reduce earnings by approximately $1.8 million. The settlement also provides that SWEPCO's fuel and fuel-related 46 expenses during the reconciliation period were reasonable and necessary and would allow them to be reconciled as eligible fuel. Also, the settlement provides that SWEPCO's actions in litigating and renegotiating certain fuel contracts, together with the prices, terms and conditions of the renegotiated contracts were prudent. The $6.0 million reduction is not associated with any particular activity or issue within the fuel proceedings. Management cannot predict whether approval of the settlement will be granted by the Texas Commission. SWEPCO Burlington Northern Transportation Contract In January 1995, a state district court in Bowie County, Texas entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power stations. The court awarded SWEPCO approximately $72 million that would benefit customers, if collected, representing damages for the period from April 27, 1989 through September 26, 1994, as well as post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals and, in April 1996, that court reversed the judgment of the state district court. In October 1996, SWEPCO filed an application with the Supreme Court of Texas to grant a writ of error to review and reverse the judgment of the Texarkana, Texas Court of Appeals. In June 1997, the Supreme Court of Texas granted SWEPCO's application for writ of error. Oral argument was held before the Supreme Court of Texas in October 1997. On March 13, 1998, the Supreme Court of Texas affirmed the judgment of the court of appeals. SWEPCO Lignite Mining Agreement Litigation SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1 and jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement with the DHMV, a partnership for the mining and delivery of lignite from a portion of these reserves. On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its partners in the United States District Court for the Western District of Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining agreement, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed an answer denying the allegations in the suit and filed a counterclaim asserting various contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have denied the allegations in the counterclaims. SWEPCO intends to vigorously prosecute the claims against DHMV and defend against the counterclaims which DHMV has asserted. Although management cannot predict the ultimate outcome of this matter, management believes that the resolution of this matter will not have a material adverse effect on CSW's results of operations or financial condition. WTU Fuel Proceedings In March 1997, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $4.2 million, or 4.2%, on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $13.3 million, including accumulated interest, over a twelve month period to collect its under-recovered fuel costs. WTU requested authority to implement the revised fuel factors with its May 1997 billings and to commence the surcharge with its June 1997 billings. On April 14, 1997, an agreement in principle was reached among the parties to settle this docket. Under the proposed settlement, WTU agreed not to increase the fuel factors and to implement the $13.3 million surcharge over the period from June 1997 through February 1999. The Texas Commission approved the settlement in May 1997. On December 31, 1997, WTU filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. WTU did not seek a surcharge of the reconciled balance in the December 31, 1997 filing. 47 During the reconciliation period of July 1, 1994 through June 30, 1997 WTU incurred approximately $418 million in eligible fuel and fuel-related expenses to generate and purchase electricity. The Texas jurisdictional allocation of such fuel and fuel-related expenses is approximately $292 million. In March 1998, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $6.8 million, including accumulated interest, over a six month period to collect its under-recovered fuel costs. WTU requested authority to implement the revised fuel factors and to commence the surcharge with its June 1998 billings. WTU 1995 Stipulation and Agreement The WTU 1995 Stipulation and Agreement which was approved by the Texas Commission in October 1996 has affected WTU's results of operations for 1996 and 1997. Details of the items with significant earnings impact for 1995, including certain accounting treatments, are set forth in the following table. Pre-ta After-tax ---------------- (millions) Refund to retail customers $(21.0)$(13.7) Effect of retail rate reduction (2.4) (1.6) Current flowback of property related excess deferred federal income taxes 6.9 6.9 Five year flowback of non-property related excess deferred federal income taxes 0.1 0.1 Capitalization and amortization of previously expensed restructuring costs 12.7 8.2 Other amortization (0.2) (0.1) Other one-time items 1.0 0.7 The WTU 1995 Stipulation and Agreement also eliminated several significant risks that have been the subject of regulatory proceedings relating to deferred accounting and rates and will enable WTU's rates to remain at competitive levels for the foreseeable future. Other CSW is party to various other legal claims, actions and complaints arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on CSW's results of operations or financial condition. 3. COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that CSW, including the U.S. Electric Operating Companies, SEEBOARD and other diversified operations, will spend approximately $569 million in capital expenditures (but excluding capital that may be required for acquisitions) during 1998. Substantial commitments have been made in connection with these programs. Fuel and Related Commitments To supply a portion of their fuel requirements, the U.S. Electric Operating Companies have entered into various commitments for the procurement of fuel. 48 SWEPCO Henry W. Pirkey Power Plant In connection with the South Hallsville lignite mining contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining contractor. As of December 31, 1997, the maximum amount SWEPCO believes it could potentially assume is $67 million. However, the maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding at December 31, 1997 was $59 million. SWEPCO South Hallsville Lignite Mine As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining at the South Hallsville lignite mine and expansion into the Marshall South Lignite Project area, SWEPCO has agreed to provide guarantees of mine reclamation in the amount of $85 million. Since SWEPCO uses self-bonding, the guarantee provides for SWEPCO to commit to use its resources to complete the reclamation in the event the work is not completed by the third party miner. The current cost to reclaim the mine is estimated to be approximately $36 million. Other Commitments and Contingencies CPL Nuclear Insurance In connection with the licensing and operation of STP, the owners have purchased nuclear property and liability insurance coverage as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1, 2002. The limit of liability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of December 1997. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling $8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchased, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 23 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same accident, such insurance will reimburse CPL up to 80% of the recovery. The maximum amount recoverable for a single unit outage is $118.6 million for both Unit 1 and 2. CPL is subject to an additional assessment up to $1.8 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. CPL renewed its current NEIL I Business Interruption and/or Extra Expense policy September 15, 1997. 49 For further information relating to litigation associated with CPL nuclear insurance claims, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. SWEPCO Cajun Asset Purchase Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is currently operating under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. On March 18, 1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related non-nuclear assets, for $940.5 million in cash, subject to adjustment pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for SWEPCO and the Cajun member cooperatives to enter into long-term power supply agreements which will provide the Cajun member cooperatives with rate plan options and market access provisions designed to ensure the long-term competitiveness of the cooperatives. Eight cooperatives and CLECO, successor to Teche Electric Cooperative, already have agreed to purchase power from SWEPCO if SWEPCO's plan is confirmed by the bankruptcy court. Entergy Texas is no longer a co-plan proponent with SWEPCO and the Cajun Members Committee, as it had been under SWEPCO plans filed prior to the January 15, 1998 plan. SWEPCO continues to work with Entergy Texas to resolve its objection to the plan. The SWEPCO Plan filed March 18, 1998 replaces plans filed previously by SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April 19, 1996. Two competing plans of reorganization for the non-nuclear assets of Cajun have been filed with the bankruptcy court, each with different purchase prices, rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy case are now scheduled through April 1998. Consummation of the SWEPCO Plan is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their board approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external borrowings and internally generated funds with approximately 70% of the external borrowings funded with non-recourse debt. There can be no assurance that the SWEPCO Plan will be confirmed by the bankruptcy court or, if it is confirmed, that it will be approved by federal and state regulators. SWEPCO Rental and Lease Commitments SWEPCO has entered into various financing arrangements primarily with respect to coal transportation and related equipment, which are treated as operating leases for rate-making purposes. At December 31, 1997, leased assets of $45.7 million, less accumulated amortization of $39.0 million, were included in Electric Utility Plant on the Consolidated Balance Sheets and at December 31, 1996, leased assets were $46.0 million, less accumulated amortization of $36.9 million. SWEPCO Biloxi, Mississippi MGP Site SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as on the subsequent sampling of the site. The sampling results indicated contamination at the property as well as the possibility of contamination of an adjacent property. A risk assessment was submitted to the MDEQ, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to a residential 50 scenario is appropriate since this site has been industrial/commercial for more than 100 years, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. The MDEQ has not agreed to a non-residential future land use scenario and has requested further testing. Following the additional testing and resolution of whether cleanup must meet a residential usage scenario or a commercial/industrial scenario, a feasibility study will be conducted to more definitively evaluate remedial strategies for the property. The feasibility study process will require public input prior to a final decision being made. At the present time, SWEPCO has not had any further substantive discussions with MDEQ regarding the ultimate resolution of this issue. Therefore, a final range of cleanup costs is not yet determinable. SWEPCO has incurred approximately $200,000 to date for its portion of the cleanup of this site, and based on its preliminary estimates, anticipates that an additional $2 million may be incurred. Accordingly, SWEPCO has accrued $2 million for the cleanup of the site. SWEPCO Voda Petroleum Superfund Site In April 1996, SWEPCO received correspondence from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records review to compile documentation relating to SWEPCO's past use of the Voda Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost approximately $2 million and to take approximately twelve months to complete. An option for over 30 PRPs to conduct the cleanup in lieu of EPA conducting the cleanup is under consideration. Any liability associated with this project is not expected to have a material adverse effect on CSW's results of operations or financial condition. CSW Energy Loans and Commitments CSW Energy has agreed to provide construction financing and other credit support up to $235 million for the 330 MW Phillips Sweeny project. CSW Energy obtained the funds for this project through CSW's short-term borrowing program. Construction of this plant began in September 1996 and commenced commercial operations in February 1998. At December 31, 1997, CSW Energy had provided $163 million, including development, construction and financing, of the total estimated $189 million in project costs. CSW Energy expects to obtain permanent project financing in the second quarter of 1998 at which time the project will return a significant portion of the investment and the short-term borrowings will be repaid. In addition, CSW has provided letters of credit and guarantees on behalf of other independent power projects totaling approximately $27 million. CSW International Enertek Project In July 1996, CSW International announced a joint venture with Alpek, through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. CSW International and Alpek each will have 50% ownership in the project, Enertek, which will cost approximately $75 million. CSW International has agreed to provide construction financing for the project of which $62 million had been funded at December 31, 1997. The Enertek project began operations in the first quarter of 1998. 4. INCOME TAXES CSW files a consolidated United States federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes United States federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the amounts computed by applying the United States federal statutory income tax rate to income before taxes for a number of reasons which are presented in the INCOME 51 TAX RATE RECONCILIATION table below. Information concerning income taxes, including total income tax expense, the reconciliation between the United States federal statutory tax rate and the effective tax rate and significant components of deferred income taxes follow. INCOME TAX EXPENSE 1997 1996 1995 ------------------------------ (millions) Included in Operating Expenses and Taxes Current (1) $47 $118 $105 Deferred (1) 117 120 1 Deferred ITC (2) (13) (14) (14) --------- --------- -------- 151 224 92 Included in Other Income and Deductions Current -- (1) 2 Deferred (6) (39) (4) --------- --------- -------- (6) (40) (2) Income Taxes for Discontinued Operations (includes $72 resulting from -- 78 13 the gain on the sale of Transok for 1996) --------- --------- -------- --------- --------- -------- $145 $262 $103 --------- --------- -------- (1)Approximately $30 million, $49 million and $7 million of CSW's Current Income Tax Expense was attributable to SEEBOARD U.S.A. and was recognized as United Kingdom corporation tax expense for 1997, 1996 and 1995, respectively. In addition, approximately $7 million and $19 million of CSW's Deferred Income Tax Expense in 1997 and 1996, respectively, was attributed to SEEBOARD U.S.A. (2)ITC deferred in prior years are included in income over the lives of the related properties. INCOME TAX RATE RECONCILIATION 1997 1996 1995 -------------------------- ($ in millions) Income before taxes attributable to: Domestic operations $327 $562 $506 Foreign operations 147 146 13 ------- -------- ------- Income before taxes $474 $708 $519 Tax at U.S. statutory rate $166 $248 $182 Differences Amortization of ITC (13) (14) (14) Mirror CWIP 5 5 (11) Non-deductible goodwill amortization 12 13 -- Tax credit on foreign operations dividend (3) (18) -- United Kingdom deferred income tax adjustment (16) -- -- CPL 1995 Agreement -- -- (34) WTU 1995 Stipulation and Agreement -- -- (7) Adjustments (4) 10 (22) Other (2) 18 9 ------- ------- ------- $145 $262 $103 ------- ------- ------- Effective tax rate 31% 37% 20% 52 DEFERRED INCOME TAXES (1) 1997 1996 -------------------- (millions) Deferred Income Tax Liabilities Depreciable utility plant $1,920 $1,867 Deferred plant costs 176 178 Mirror CWIP asset 100 105 Income tax related regulatory assets 211 207 Other 371 307 --------- --------- 2,778 2,664 Deferred Income Tax Assets Income tax related regulatory (123) (126) liability Unamortized ITC (100) (105) Alternative minimum tax carryforward (27) (83) Other (76) (99) --------- --------- (326) (413) --------- --------- Net Accumulated Deferred Income $2,452 $2,251 Taxes --------- --------- Net Accumulated Deferred Income Taxes Noncurrent $2,432 $2,272 Current 20 (21) --------- --------- $2,452 $2,251 --------- --------- (1)In 1996, CSW generated $33 million of excess foreign tax credits against which a full valuation allowance was established as of December 31, 1996. In 1997, the valuation reserve was reduced to $17 million due to lower levels of excess foreign tax credits. Other than excess foreign tax credits, CSW did not have other valuation allowances recorded against other deferred tax assets at December 31, 1997 and 1996 due to a favorable earnings history. 5. BENEFIT PLANS Pension Plans Prior to June 30, 1997, CSW maintained a tax qualified, non-contributory defined benefit pension plan covering substantially all CSW employees in the United States. Benefits were based on employees' years of credited service, age at retirement, and final average annual earnings with an offset for the participant's primary Social Security benefit. The CSW board of directors approved an amendment, effective July 1, 1997, which converted the present value of accrued benefits under the existing pension plan into a cash balance pension plan. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. The applicable percentage is determined by age and years of vested service the participant has with CSW as of December 31 of each year. The purpose of the plan change is to continue to provide retirement income benefits which are competitive both within the utility industry as well as with other companies within the United States. As the plan sponsor, CSW will continue to reflect the costs of the pension plan according to the provisions of SFAS No. 87 and allocate such costs to each of the participating employers. As a result of the July 1, 1997 amendment, CSW realized a savings in 1997 of approximately $20 million in pension expense and will also realize significant ongoing reductions in operating and maintenance expense because of the change. The change to the pension plan was applied retroactively to the beginning of 1997, so these savings were recognized evenly throughout 1997 with a portion being capitalized. Pension plan assets consist primarily of common stocks and short-term and intermediate-term fixed income investments. 53 The majority of SEEBOARD's employees joined a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee-administered fund that is actuarially valued every three years. SEEBOARD and its participating employees both contribute to the plan. Subsequent to July 1, 1995, new employees were no longer able to participate in that plan. Instead, two new pension plans were made available to new employees, both of which are also separate trustee-administered plans. Information about the two separate pension plans (the U.S. plan and the non-U.S. plan), including: (i) pension plan net periodic costs and contributions; (ii) pension plan participation; (iii) a reconciliation of the funded status of the pension plan to the amounts recognized on the balance sheets; and (iv) assumptions used in accounting for the pension plan follow. NET PERIODIC PENSION 1997 1996 1995 PLAN COSTS AND 1997 1997 NON- 1996 1996 NON- U.S. CONTRIBUTIONS CSW U.S. U.S. CSW U.S. U.S. PLAN PLANS PLAN PLAN PLANS PLAN PLAN ONLY ------------------------------------------------------- (millions) Net Periodic Pension Costs Service cost $34 $20 $14 $37 $23 $14 $20 Interest cost on projected benefit obligation 137 65 72 136 69 67 64 Actual return on plan assets (245) (163) (82) (184) (110) (74) (117) Net amortization and deferral 68 66 2 27 27 -- 44 --------------------- ------------------------- ------ $(6) $(12) $6 $16 $9 $7 $11 --------------------- ------------------------- ------ Pension Plan Contributions $6 $-- $6 $35 $28 $7 $29 APPROXIMATE NUMBER NON- OF PARTICIPANTS IN CSW U.S. U.S. PLANS DURING 1997 PLANS PLAN PLAN ------------------------- Active employees 10,100 7,200 2,900 Retirees 10,200 4,200 6,000 Terminated employees 6,800 2,000 4,800 RECONCILIATION OF FUNDED 1997 1996 STATUS OF PLAN TO AMOUNTS 1997 1997 NON- 1996 1996 NON- RECOGNIZED ON THE CSW CSW U.S. U.S. CSW U.S. U.S. CONSOLIDATED BALANCE SHEETS PLANS PLAN PLAN PLANS PLAN PLAN -------------------------------------------------- (millions) Actuarial present value of Accumulated benefit obligation for service rendered to date $1,860 $896 $964 $1,748 $781 $967 Additional benefit for future salary levels 94 35 59 200 141 59 ----------------------- ----------------------- Projected benefit obligation 1,954 931 1,023 1,948 922 1,026 Plan assets, at fair value 2,290 1,109 1,181 2,077 991 1,086 ------------------------- ----------------------- Plan assets in excess of the projected benefit obligation 336 178 158 129 69 60 Unrecognized net loss (86) 12 (98) 30 27 3 Unrecognized prior service cost (93) (88) (5) (12) (7) (5) Unrecognized net obligation 16 11 4 16 12 4 ------------------------- ----------------------- Prepaid pension cost $173 $113 $59 $163 $101 $62 ------------------------- ----------------------- The vested portion of the accumulated benefit obligations for the combined plans was $1.8 billion at December 31, 1997 and $1.7 billion for the combined plans at December 31, 1996. The unrecognized net obligation for the U.S. plan is 54 being amortized over the average remaining service life of employees or 15 years. Prepaid pension cost is included in Deferred Charges and Other Assets on the balance sheets. In addition to the amounts shown in the above table, CSW has a non-qualified excess benefit plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code through the qualified plan. CSW's net periodic cost for this non-qualified plan for the years ended December 31, 1997, 1996 and 1995 was $3.7 million, $4.8 million and $2.4 million, respectively. ASSUMPTIONS USED IN Long-Term ACCOUNTING FOR THE Compensation PENSION PLAN Plan Return on Discount Rate Increase Assets ------------------------------------ 1997 U.S. Plan 7.50% 5.46% 9.00% Non-U.S. Plan 6.75% 4.75% 7.25% 1996 U.S. Plan 8.00% 5.46% 9.50% Non-U.S. Plan 7.75% 5.75% 8.25% 1995 U.S. Plan 8.00% 5.46% 9.50% Postretirement Benefits Other Than Pensions (U.S. Companies Only) CSW, including each of the U.S. Electric Operating Companies, adopted SFAS No. 106 effective January 1, 1993. The transition obligation established at adoption is being amortized over twenty years, with fifteen years remaining. Prior to 1993, these benefits were accounted for on a pay-as-you-go basis. Pursuant to an order by the Oklahoma Commission, PSO established a regulatory asset of approximately $5 million in 1993 for the difference between the pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is recovering the amortization of this regulatory asset over a ten year period. Information about the non-pension postretirement benefit plan, including: (i) net periodic postretirement benefit costs; (ii) a reconciliation of the funded status of the postretirement benefit plan to the amounts recognized on the balance sheets; and (iii) assumptions used in accounting for the postretirement benefit plan follow. NET PERIODIC POSTRETIREMENT BENEFIT COSTS 1997 1996 1995 ------------------------------ (millions) Service cost $ 8 $8 $8 Interest cost on APBO 18 19 18 Actual return on plan assets (22) (7) (8) Amortization of transition obligation 9 9 9 Net amortization and deferral 11 (2) 2 -------- -------- --------- $24 $27 $29 -------- -------- --------- 55 RECONCILIATION OF FUNDED STATUS OF PLAN TO AMOUNTS RECOGNIZED ON THE BALANCE SHEETS 1997 1996 ------------------- (millions) APBO Retirees $158 $163 Other fully eligible participants 24 18 Other active participants 59 55 -------- -------- Total 241 236 Plan assets at fair value (159) (123) -------- -------- APBO in excess of plan assets 82 113 Unrecognized transition obligation (135) (144) Unrecognized gain 53 32 -------- -------- Accrued Cost $-- $1 -------- -------- ASSUMPTIONS USED IN THE Return on Tax Rate ACCOUNTING FOR SFAS NO. 106 Discount Plan for Rate Assets Taxable Trusts ------------------------------------- 1997 7.50% 9.00% 39.6% 1996 8.00% 9.50% 39.6% 1995 8.00% 9.50% 39.6% Health care cost trend rates 1997 Average Rate of 7.0% grading down .50% per year to an ultimate average rate of 5.00% in 2001. 1996 Average Rate of 9.0% grading down .75% per year to an ultimate average rate of 5.25% in 2001. 1995 Average Rate of 10.25% grading down .75% per year to an ultimate average rate of 5.75% in 2001. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the APBO by approximately $25.2 million and the aggregate of the service and interest costs components on net postretirement benefits by approximately $3.6 million. Health and Welfare Plans CSW provides medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment insurance plans for substantially all active CSW System employees in the United States. The total contributions, recorded on a pay-as-you-go basis, for the years ended December 31, 1997, 1996, and 1995 were $35.6 million, $28.4 million and $27.0 million, respectively. Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority of its employees. 6. JOINTLY OWNED ELECTRIC UTILITY PLANT The U.S. Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for the joint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December 31, 1997, the U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table. CPL SWEPCO SWEPCO SWEPCO CSW(1) STP Flint Creek Pirkey Dolet Hills Oklaunion Nuclear Coal Lignite Lignite Coal Plant Plant Plant Plant Plant ---------------------------------------------------------- ($ in millions) Plant in service $2,336 $80 $437 $230 $398 Accumulated $517 $47 $176 $84 $122 depreciation Plant capacity-MW 2,501 528 675 650 676 Participation 25.2% 50.0% 85.9% 40.2% 78.1% Share of capacity-MW 630 264 580 262 528 56 7. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the following fair values of each class of financial instruments for which it is practicable to estimate fair value. The fair value does not affect any of the liabilities unless the issues are redeemed prior to their maturity dates. Cash, temporary cash investments, accounts receivable, other financial instruments and short-term debt The fair value equals the carrying amount as stated on the balance sheets due to the short maturity of those instruments. Securities held for sale The fair values, which are based on quoted market prices, equal the carrying amounts as stated on the balance sheet because the accounting treatment prescribed under SFAS No. 115. Long-term debt The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities. Trust Preferred Securities The fair value of the Trust Preferred Securities are based on quoted market prices on the New York Stock Exchange. Preferred stock subject to mandatory redemption The fair value of preferred stock subject to mandatory redemption is estimated based on quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock with the same or similar remaining redemption provisions. Long-term debt and preferred stock due within 12 months The fair value of current maturities of long-term debt and preferred stock due within 12 months are estimated based on quoted market prices for the same or similar issues or on the current rates offered for long-term debt or preferred stock with the same or similar remaining redemption provisions. CARRYING VALUE AND ESTIMATED FAIR VALUE 1997 1996 ------------------- (millions) Long-term debt Carrying amount $3,898 $4,024 Fair value 4,052 4,065 Trust Preferred Securities Carrying amount 335 -- Fair value 344 -- Preferred stock subject to mandatory redemption Carrying amount 26 33 Fair value 27 34 Long-term debt and preferred stock due within 12 months Carrying amount 32 204 Fair value 32 204 57 Cross-currency swaps and SEEBOARD's electricity contracts for differences The fair value of cross currency swaps reflect third-party valuations calculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $43 million at December 31, 1997. This unrealized loss is offset by unrealized gains related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. The fair value of SEEBOARD's contracts for differences is not determinable due to the absence of a trading market. DERIVATIVE CONTRACTS NOTIONAL AMOUNTS Notional Fair AND ESTIMATED FAIR VALUES Amount Value ---------------------- (millions) CROSS CURRENCY SWAPS Maturities: 2001 and 2006 $400 $443 8. LONG-TERM DEBT The CSW System's long-term debt outstanding as of the end of the last two years is presented in the following table. Maturities Interest Rates December 31, From To From To 1997 1996 - ---------------------------------------------------------------------- (millions) Secured bonds 1998 2025 5.25% 7.75% $2,080 $2,108 Unsecured bonds 2001 2030 3.9%(1) 8.88% 1,353 1,384 Notes and Lease Obligations 1999 2003 5.54% 9.75% 641 724 Unamortized discount (10) (12) Unamortized cost of reacquired debt (166) (180) --------------------- $3,898 $4,024 --------------------- (1) Variable rate The mortgage indentures, as amended and supplemented, securing FMBs issued by the U.S. Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plant. The U.S. Electric Operating Companies may offer additional FMBs, medium-term notes and other securities subject to market conditions and other factors. CSW's year end weighted average cost of long-term debt was 7.2% for 1995-1997. Annual Requirements Certain series of outstanding FMBs have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have been, satisfied by the application of net expenditures for bondable property in an amount equal to 166-2/3% of the annual requirements. Certain series of pollution control revenue bonds also have sinking fund requirements. At December 31, 1997, the annual sinking fund requirements and annual maturities (including sinking fund requirements) for all long-term debt for the next five years are presented in the following table. 58 Sinking Fund Annual Requirements Maturities ------------- ------------ (millions) 1998 $1 $31 1999 1 195 2000 1 208 2001 1 517 2002 1 181 Dividends At December 31, 1997, approximately $1.4 billion of CSW's subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. The mortgage indentures, as amended and supplemented, at CPL and PSO contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not currently limit the ability of CSW to pay dividends to its shareholders. Reacquired Long-term Debt During 1996 and 1995, the U.S. Electric Operating Companies reacquired $205 million and $355 million of long-term debt, respectively, including reacquisition premiums, prior to maturity. The premiums and related reacquisition costs and discounts are included in long-term debt on the balance sheets and are being amortized over periods consistent with their expected ratemaking treatment. The remaining amortization periods for such items range from 2 to 33 years. No long-term debt was reacquired prior to maturity during 1997. Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further information related to long-term debt, including new issues and reacquisitions of long-term debt during 1997 as well as information related to the financing of the SEEBOARD acquisition. 9. PREFERRED STOCK The outstanding preferred stock of the U.S. Electric Operating Companies as of the end of the last two years is presented in the following table. Current Dividend Rate December 31, Redemption Price From - To 1997 1996 From - To -------------------------------------------------- (millions) Not subject to mandatory redemption 1,352,900 shares 4.00% - 8.72% $19 $135 $102.75 - $109.00 1,600,000 shares auction 160 160 $100.00 Issuance expenses/premiums (3) (3) ------------ $176 $292 ------------ Subject to mandatory redemption 340,000 shares 6.95% $27 $34 $102.32 To be redeemed within one year (1) (1) ------------ $26 $33 ------------ Total authorized shares 6,405,000 All of the outstanding preferred stock is redeemable at the option of the U.S. Electric Operating Companies upon 30 days notice at the current redemption price per share. During 1997, 1996 and 1995, SWEPCO redeemed $1.2 million annually pursuant to its annual sinking fund requirement. In addition during 1997, each of the U.S. Electric Operating Companies reacquired a significant portion of its outstanding preferred stock. As a result of differences between the dividend rates on the reacquired securities and prevailing market rates, CSW realized an overall gain of approximately $10 million on the transactions. This 59 gain is shown separately, as Gain on reacquired preferred stock, on the Consolidated Statements of Income. The following table shows the results of the tender offers of the U.S. Electric Operating Companies' preferred stock. Shares Shares Reacquired Remaining -------------------------- CPL Series 4.00% 57,952 42,048 Series 4.20% 57,524 17,476 Series 7.12% 260,000 -- Series 8.72% 500,000 -- PSO Series 4.00% 53,260 44,640 Series 4.24% 91,931 8,069 SWEPCO Series 4.28% 52,614 7,386 Series 4.65% 23,092 1,908 Series 5.00% 37,261 37,739 Series 6.95% 65,990 274,010 WTU Series 4.40% 36,325 23,675 The dividends on CPL's $160 million auction and money market preferred stocks are adjusted every 49 days, based on current market rates. The dividend rates averaged 4.3%, 4.1% and 4.5% during 1997, 1996 and 1995, respectively. The minimum annual sinking fund requirement for SWEPCO's preferred stock subject to mandatory redemption is $1.2 million for the years 1997 through 2001. This sinking fund retires 12,000 shares annually. 10. TRUST PREFERRED SECURITIES The following Trust Preferred Securities issued by the wholly-owned statutory business trusts of CPL, PSO and SWEPCO were outstanding at December 31, 1997. They are classified on the balance sheet as Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries. Amount Description of Underlying Business Trust Security Units (millions) Debentures of Registrant - ------------------------------------------------------------------------------ CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million, 8.00%, Series A PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million, 8.00%, Series A SWEPCO CapitalI 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million, 7.875%, Series A ---------- ----- 13,400,000 $335 ---------- ----- Each of the business trusts will be treated as a subsidiary of its parent company. The only assets of the business trusts are the subordinated debentures issued by their parent company as specified above. In addition to the obligations under their subordinated debentures, each of the parent companies has also agreed to a security obligation which represents a full and unconditional guarantee of its capital trust's obligation. 11. SHORT-TERM FINANCING The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinate short-term borrowings for certain 60 subsidiaries and also incurs borrowings outside the money pool for other subsidiaries. As of December 31, 1997, CSW had revolving credit facilities totaling $1.4 billion to back up its commercial paper program. At December 31, 1997, CSW had $721 million outstanding in short-term borrowings. The maximum amount of such short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.8%, was $725 million during December 1997. CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-alone basis. At December 31, 1997, CSW Credit had a $900 million revolving credit agreement that is secured by the assignment of its receivables to back up its commercial paper program which had $637 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield for the year of 5.6%, was $890 million during September 1997. 12. COMMON STOCK CSW adopted SFAS No. 128 during 1997. SFAS No. 128 requires the computation of earnings per share on both a basic as well as a diluted basis. CSW's basic earnings per share of common stock are computed by dividing net income for common stock by the average number of common shares outstanding for the respective periods. Diluted earnings per share reflect the potential dilution that could occur if all options outstanding under CSW's stock incentive plan were converted to common stock and then shared in the income for common stock. CSW's basic and diluted earnings per share were the same for the years 1995 - 1997. CSW's dividends per common share reflect per share amounts paid for each of the periods. CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, through the LTIP, a stock option plan, PowerShare and ThriftPlus. Following the issuance of the CPL 1997 Original Rate Order and the decline in the market price of CSW's common stock, which CSW believes is attributable in part to the CPL 1997 Original Rate Order, the determination was made that it was appropriate for CSW to begin funding these plans through open market purchases, effective April 1, 1997. Prior to that time, CSW had issued $20 million in new common stock in 1997. Information concerning common stock activity issued through the LTIP, the stock option plan, PowerShare and ThriftPlus is presented in the following table. 1997 1996 1995 ------------------------------------------------------- Number of new shares issued (millions) 0.8 2.9 2.3 Range of stock price for new shares $21 1/4 - $25 5/8 $24 3/8 - $28 7/8 $22 5/8 - $28 3/8 New common stock equity (millions) $20 $79 $57 During February 1996, CSW sold 15,525,000 shares of CSW Common in a primary stock offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of indebtedness incurred during the acquisition of SEEBOARD. 13. STOCK-BASED COMPENSATION PLANS CSW has a key employee incentive plan. This plan is accounted for under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined consistent with SFAS No. 123, pro forma calculations of CSW's net income for common stock and earnings per share as required by SFAS No. 123 would not have changed significantly from amounts reported. 61 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. CSW may grant options for up to 4.0 million shares of CSW Common under the stock option plan. Under the stock option plan, the option exercise price equals the stock's market price on the date of grant. The grant vests over three years, one-third on each of the three anniversary dates of the grant, and expires 10 years after the original grant date. CSW has granted 2.8 million shares through December 31, 1997. A summary of the status of CSW's stock option plan at December 31, 1997, 1996 and 1995 and the changes during the years then ended is presented in the following table.
1997 1996 1995 ----------------------------------------------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (thousands) Exercise (thousands) Exercise (thousands) Exercise Price Price Price Outstanding at beginning of year 1,412 $26 1,564 $26 1,616 $26 Granted 694 21 70 27 -- -- Exercised -- 22 (147) 24 (23) 22 Canceled (204) 28 (75) 27 (29) 27 ------ ----- ---- Outstanding at end of year 1,902 24 1,412 26 1,564 26 Exercisable at end of year 1,162 n/a 1,004 n/a 828 n/a Weighted average fair value of options $2.24 - $2.39
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997: (i) risk-free interest rate of 5.9%; (ii) expected dividend rate of 6.5%; (iii) and expected volatility of 19%. The expected life of the options granted did not materially impact the values produced. 14. BUSINESS SEGMENTS CSW's business segments at December 31, 1997 included the U.S. Electric operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric operations (SEEBOARD U.S.A.). See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the SEEBOARD acquisition. Eight additional non-utility companies are included with CSW in Corporate items and Other (CSW Energy, CSW International, C3 Communications, CSW Credit, CSW Leasing, CSW Services, EnerShop and CSW Energy Services). Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business segment information is presented in the following tables. 62 1997 1996 1995 -------- -------- -------- (millions) OPERATING REVENUES Electric Operations United States $3,321 $3,248 $2,883 United Kingdom (1) 1,870 1,848 208 Corporate items and Other 77 59 52 -------- -------- -------- $5,268 $5,155 $3,143 -------- -------- -------- OPERATING INCOME Electric Operations United States $661 $768 $719 United Kingdom (1) 255 236 21 Corporate items and Other (30) 15 (27) -------- -------- -------- Operating income before taxes 886 1,019 713 Income taxes (151) (224) (92) -------- -------- -------- $735 $795 $621 -------- -------- -------- DEPRECIATION AND AMORTIZATION Electric Operations United States $389 $362 $335 United Kingdom (1) 92 88 7 Corporate items and Other 16 14 11 -------- -------- -------- $497 $464 $353 -------- -------- -------- IDENTIFIABLE ASSETS Electric Operations United States $9,172 $9,142 $9,278 United Kingdom (1) 2,931 3,061 2,821 Corporate items and Other 1,348 1,129 1,004 -------- -------- -------- 13,451 13,332 13,103 Gas Operations (Discontinued) -- -- 766 -------- -------- -------- $13,451 $13,332 $13,869 -------- -------- -------- CAPITAL EXPENDITURES AND ACQUISITIONS Electric Operations United States $346 $356 $398 United Kingdom (1), (2) 126 1,543 731 Corporate items and Other (3) 276 109 19 -------- -------- -------- 748 2,008 1,148 Gas Operations (Discontinued) -- 23 66 -------- -------- -------- $748 $2,031 $1,214 -------- -------- -------- (1) Represents equity method of accounting for November 1995 (27.6%) and full consolidation accounting for December 1995 (76.45%). (2) Includes $1,394 million and $731 million in 1996 and 1995, respectively, used to purchase SEEBOARD. (3) Includes CSW Energy and CSW International equity investments. 63 15. TRANSOK DISCONTINUED OPERATIONS On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of operations for Transok have been reported as discontinued operations and prior periods have been restated for consistency. As a wholly owned subsidiary of CSW, Transok operated as an intrastate natural gas gathering, transmission, marketing and processing company that provided natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other gas customers throughout the United States. CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and $200 million in existing long-term debt that remained with Transok after the sale. A portion of the cash proceeds was used to repay borrowings incurred related to the SEEBOARD acquisition and the remaining proceeds were used to repay commercial paper borrowings. CSW recorded an after tax gain on the sale of Transok of approximately $120 million in 1996. Transok's operating results for 1996 and 1995 are summarized in the following table (transactions with CSW have not been eliminated). 1996 1995 ------------------- Total revenue $362 $721 Operating income before income taxes 23 52 Earnings before income taxes 18 38 Income taxes (6) (13) ------------------- Net income from discontinued operations $12 $25 ------------------- 16. PROPOSED AEP MERGER In December 1997, CSW and AEP entered into a definitive merger agreement for a tax-free, stock-for stock transaction with AEP being the surviving corporation. The transaction is subject to the approval of various state and federal regulatory agencies. The shareholders of CSW will be asked to approve the AEP Merger and the shareholders of AEP will be asked to approve the issuance of shares of AEP common stock pursuant to the AEP Merger Agreement and to amend AEP's certificate of incorporation to increase the number of authorized shares of AEP common stock from 300 million shares to 600 million shares. The proposed AEP Merger, with a targeted completion date in the first half of 1999, is expected to be accounted for as a pooling of interests. Upon completion of the AEP Merger, CSW common stockholders will receive 0.6 shares of AEP common stock for each share of CSW common stock. At that time, CSW common stockholders will own approximately 40% of the outstanding common stock of AEP. Under the AEP Merger Agreement, there will be no changes required with respect to the outstanding debt, preferred stock or Trust Preferred Securities of CSW or its subsidiaries. The transaction must satisfy many conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated. 17. EXTRAORDINARY ITEM In the general election held in the United Kingdom on May 1, 1997, the United Kingdom's Labour Party won control of the government with a considerable majority. Prior to the general election, the Labour Party had announced that, if elected, it would impose a windfall profits tax on certain industries in the United Kingdom, including the privatized utilities, to fund a variety of social 64 improvement programs. On July 2, 1997, the one-time windfall profits tax was introduced in the Labour Party's Budget and the legislation enacting the tax subsequently was passed during the third quarter of 1997. Accordingly, during the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item, (pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a one-time, windfall profits tax enacted by the United Kingdom government. The windfall profits tax is payable in two equal installments, due December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on the difference between nine times the average profits after tax for the four years following flotation in 1990, and SEEBOARD's market capitalization calculated as the number of shares issued at flotation multiplied by the flotation price per share. On December 1, 1997, SEEBOARD made the first such payment. As enacted, the windfall profits tax is not tax deductible for United Kingdom purposes. To date, no United States income tax benefit has been recognized due to the uncertainty as to the impact on the use of foreign tax credits. CSW continues to analyze the potential United States income tax benefit from the use of foreign tax credits. 18. PRO FORMA INFORMATION (UNAUDITED) CSW secured effective control of SEEBOARD in December 1995. The unaudited pro forma information is presented in response to applicable accounting rules relating to acquisition transactions. The pro forma information gives effect to the acquisition of SEEBOARD accounted for under the purchase method of accounting for the twelve months ended December 31, 1995 as if the transaction had been consummated at the beginning of the period presented. The unaudited pro forma information has been prepared in accordance with United States generally accepted accounting principles. The pro forma information in the following table is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the SEEBOARD acquisition had taken place at the beginning of the period specified, nor is it necessarily indicative of future operating results. The following pro forma information has been prepared reflecting the February 1996 issuance of CSW Common, and has been converted at an exchange rate of (pound)1.00=$1.58 for the twelve months ended December 31, 1995. 1995 ----------- (millions except EPS) Operating Revenues $5,404 Operating Income 750 Net Income for Common Stock 445 EPS of Common Stock $2.15 19. QUARTERLY INFORMATION (UNAUDITED) The following unaudited quarterly information includes, in the opinion of management, all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. 65 QUARTER ENDED 1997(1) 1996(2) - ------------------------------------------------------------------------------- (millions, except EPS) MARCH 31 Operating Revenues $1,278 $1,215 Operating Income 127 144 Income from Continuing Operations 25 43 Net Income for Common Stock 25 51 Basic and Diluted EPS from Continuing Operations $0.12 $0.22 Basic and Diluted EPS $0.12 $0.26 JUNE 30 Operating Revenues $1,184 $1,267 Operating Income 169 214 Income from Continuing Operations 83 11 Net Income for Common Stock 83 128 Basic and Diluted EPS from Continuing Operations $0.39 $0.05 Basic and Diluted EPS $0.39 $0.61 SEPTEMBER 30 Operating Revenues $1,477 $1,438 Operating Income 303 284 Income from Continuing Operations 196 190 Extraordinary Item (176) -- Net Income for Common Stock 20 190 Basic and Diluted EPS from Continuing Operations $0.93 $0.90 Basic and Diluted EPS from Extraordinary Item $(0.83) -- Basic and Diluted EPS $0.10 $0.90 DECEMBER 31 Operating Revenues $1,329 $1,235 Operating Income 136 153 Income from Continuing Operations 25 53 Net Income for Common Stock 25 60 Basic and Diluted EPS from Continuing Operations $0.11 $0.26 Basic and Diluted EPS $0.11 $0.28 TOTAL Operating Revenues $5,268 $5,155 Operating Income 735 795 Income from Continuing Operations 329 297 Extraordinary Item (176) -- Net Income for Common Stock 153 429 Basic and Diluted EPS from Continuing Operations $1.55 $1.43 Basic and Diluted EPS from Extraordinary Item $(0.83) -- Basic and Diluted EPS $0.72 $2.07 (1) The first, second and third quarters of 1997 include the effect of certain reclassifications to conform with the 1997 year end financial statement presentation. (2) In 1996, CSW EPS of Common Stock for the year do not sum to the total of the individual quarters' EPS of Common Stock due to different levels of average shares outstanding for the different periods. 66 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Central and South West Corporation: We have audited the accompanying consolidated balance sheets of Central and South West Corporation (a Delaware corporation) and subsidiary companies as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows, for each of the three years ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of CSW Finance Company (1997 - which includes CSW Investments) and CSW Investments (1996), which statements reflect total assets and total revenues of 22 percent and 35 percent in 1997 and 23 percent and 36 percent in 1996, respectively, of the consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Central and South West Corporation and subsidiary companies as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas February 16, 1998 67 AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY We have audited the consolidated balance sheets of CSW UK Finance Company and subsidiaries as of 31 December 1997 and the related consolidated statement of earnings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used in and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW UK Finance Company and subsidiaries at 31 December 1997 and the result of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 1997 to the extent summarised in Note 23 to the consolidated financial statements. KPMG Audit Plc Chartered Accountants London, England Registered Auditor 19 January 1998 68 AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS We have audited the consolidated balance sheets of CSW Investments and subsidiaries as of 31 December 1996 and the related consolidated statement of earnings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used in and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW Investments and subsidiaries at 31 December 1996 and the result of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 1996 to the extent summarised in the notes to the consolidated financial statements. KPMG Audit Plc Chartered Accountants London, England Registered Auditor 22 January 1997 69 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central and South West Corporation and subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports of independent public accountants are presented elsewhere in this report. CSW, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CSW and its subsidiaries believe that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1997. E. R. Brooks Glenn D. Rosilier Lawrence B. Connors Chairman and Executive Vice President and Controller Chief Executive Officer Chief Financial Officer 70 GLOSSARY OF TERMS The following abbreviations or acronyms used in this Financial Report are defined below: Abbreviation or Acronym Definition ACSI.......................American Customer Satisfaction Index(TM) (Survey conducted by the University of Michigan Business School and the American Society of Quality Control) AEP........................American Electric Power Company, Inc. AEP Merger.................Proposed Merger between AEP and CSW where CSW would become a wholly owned subsidiary of AEP APBO.......................Accumulated Postretirement Benefit Obligation AFUDC......................Allowance for funds used during construction Alpek......................Alpek S.A. de C.V. ANI........................American Nuclear Insurance Arkansas Commission........Arkansas Public Service Commission Btu........................British thermal unit Burlington Northern........Burlington Northern Railroad Company C3 Communications..........C3 Communications, Inc., Austin, Texas (formerly CSW Communications, Inc.) CAAA.......................Clean Air Act/Clean Air Act Amendments Cajun......................Cajun Electric Power Cooperative, Inc. CERCLA.....................Comprehensive Environmental Response, Compensation and Liability Act of 1980 ChoiceCom..................CSW/ICG ChoiceCom, L.P., a joint venture between C3 Communications and ICG Communications, Inc. CLECO......................Central Louisiana Electric Company, Inc. Court of Appeals...........Court of Appeals, Third District of Texas, Austin, Texas CPL........................Central Power and Light Company, Corpus Christi, Texas CPL 1997 Final Order.......Final orders received from the Texas Commission in CPL's rate case Docket No. 14965, including both the order received on September 10, 1997 and the revised order received on October 16, 1997 CPL 1997 Original Rate Order....................Final order issued on March 31, 1997 by the Texas Commission in CPL's rate case Docket No. 14965 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 CSW........................Central and South West Corporation, Dallas, Texas CSW Common.................CSW common stock, $3.50 par value per share CSW Credit.................CSW Credit, Inc., Dallas, Texas CSW Energy.................CSW Energy, Inc., Dallas, Texas CSW Energy Services........CSW Energy Services, Inc., Dallas, Texas CSW International..........CSW International, Inc., Dallas, Texas CSW Investments............CSW Investments, an unlimited company organized in the United Kingdom through which CSW International owns SEEBOARD CSW Leasing................CSW Leasing, Inc., Dallas, Texas CSW Power Marketing........CSW Power Marketing, Inc., Dallas, Texas CSW Services...............Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW System.................CSW and its subsidiaries CSW UK Finance Company.....CSW Finco, an unlimited company organized in the United Kingdom through which CSW International owns CSW Investments CSW U.S. Electric System...CSW and the U.S. Electric Operating Companies CWIP.......................Construction work in progress DGES.......................Director General Electricity Supply DHMV.......................Dolet Hills Mining Venture DOE........................United States Department of Energy ECOM.......................Excess cost over market El Paso....................El Paso Electric Company El Paso Merger Agreement...Agreement and Plan of Merger between El Paso and CSW, dated as of May 3, 1993, as amended Energy Policy Act..........National Energy Policy Act of 1992 EnerShop...................EnerShopSM Inc., Dallas, Texas Entergy Texas..............Entergy Texas Utilities Company EPA........................United States Environmental Protection Agency EPS........................Earnings per share of common stock ERCOT......................Electric Reliability Council of Texas 71 GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Financial Report are defined below: Abbreviation or Acronym Definition ERISA......................Employee Retirement Income Security Act of 1974, as amended Exchange Act...............Securities Exchange Act of 1934, as amended EWG........................Exempt Wholesale Generator FASB.......................Financial Accounting Standards Board FCC........................Federal Communications Commission FERC.......................Federal Energy Regulatory Commission FMB........................First mortgage bond FUCO.......................Foreign utility company as defined by the Holding Company Act Guadalupe..................Guadalupe-Blanco River Authority pollution control revenue bond issuing authority HL&P.......................Houston Lighting & Power Company Holding Company Act........Public Utility Holding Company Act of 1935, as amended HVdc.......................High-voltage direct-current IBEW.......................International Brotherhood of Electrical Workers ISO........................Independent system operator ITC........................Investment tax credit KW.........................Kilowatt LIFO.......................Last-in first-out (inventory accounting method) Louisiana Commission.......Louisiana Public Service Commission LTIP.......................Long-Term Incentive Plan MD&A.......................Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ.......................Mississippi Department of Environmental Quality MGP........................Manufactured gas plant or coal gasification plant Mirror CWIP................Mirror construction work in progress Mississippi Power..........Mississippi Power Company MMbtu......................Million Btu MW.........................Megawatt MWH........................Megawatt-hour National Grid..............National Grid Group plc NEIL.......................Nuclear Electric Insurance Limited NRC........................Nuclear Regulatory Commission OASIS......................Open access same time information system Oklahoma Commission........Corporation Commission of the State of Oklahoma Oklaunion..................Oklaunion Power Station Unit No. 1 OPEB.......................Other postretirement benefits (other than pension) PCB........................Polychlorinated biphenyl PowerShare.................CSW's PowerShareSM Dividend Reinvestment and Stock Purchase Plan PRP........................Potentially responsible party PSO........................Public Service Company of Oklahoma, Tulsa, Oklahoma PSO 1997 Rate Settlement Agreement................Joint stipulation agreement reached by PSO and other parties to settle PSO's rate inquiry PURA.......................Public Utility Regulatory Act of Texas (including amendments to the law) PURPA......................Public Utility Regulatory Policies Act of 1978 RCRA.......................Federal Resource Conservation and Recovery Act of 1976 Retirement Plan............CSW's tax-qualified Cash Balance Retirement Plan Rights Plan................Stockholders Rights Agreement between CSW and CSW Services, as Rights Agent RUS........................Rural Utilities Service of the federal government SEC........................United States Securities and Exchange Commission SEEBOARD...................SEEBOARD plc., Crawley, West Sussex, United Kingdom SEEBOARD U.S.A.............CSW's investment in SEEBOARD consolidated and converted to U.S. Generally Accepted Accounting Principles SFAS.......................Statement of Financial Accounting Standards SFAS No. 52................Foreign Currency Translation SFAS No. 71................Accounting for the Effects of Certain Types of Regulation SFAS No. 87................Employers' Accounting for Pensions SFAS No. 106...............Employers' Accounting for Postemployment Benefits SFAS No. 115...............Accounting for Certain Investments in Debt and Equity Securities SFAS No. 123...............Accounting for Stock-Based Compensation GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Financial Report are defined below: Abbreviation or Acronym Definition SFAS No. 125...............Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities SFAS No. 128...............Earnings Per Share SFAS No. 130...............Reporting Comprehensive Income SFAS No. 131...............Disclosure about Segments of an Enterprise and Related Information SPP........................Southwest Power Pool STP........................South Texas Project nuclear electric generating station STPNOC.....................STP Nuclear Operating Company, a non-profit Texas corporation, jointly owned by CPL, HL&P, City of Austin, and City of San Antonio SWEPCO.....................Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO Plan................The plan of reorganization for Cajun filed by the Members Committee and SWEPCO on January 15, 1998 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas......................Tejas Gas Corporation Texas Commission...........Public Utility Commission of Texas Transok....................Transok, Inc. and subsidiaries, Tulsa, Oklahoma Trust Preferred Securities...............Collective term for securities issued by business trusts of CPL, PSO and SWEPCO classified on the balance sheet as "Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries" Union Pacific..............Union Pacific Railroad Company U.S. Electric or U.S. Electric Operating Companies...............CPL, PSO, SWEPCO and WTU Vale.......................Empresa De Electricidade Vale Paranapanema S/A WTU........................West Texas Utilities Company, Abilene, Texas WTU 1995 Stipulation and Agreement................Stipulation and Agreement to settle certain WTU regulatory matters EX-21 26 EXHIBIT 21 EXHIBIT 21 Central And South West Corporation Subsidiaries of the Registrant As of December 31, 1997 Company Name Business Conducted State or Jurisdiction Under Same Name of Incorporation/Formation - ------------------------------------------------------------------------------- Central Power and Light Company Texas 539 North Carancahua Street Corpus Christi, Texas 78401-2802 CPL Capital I Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 Public Service Company of Oklahoma Oklahoma 212 East 6th Street Tulsa, Oklahoma 74119-1212 PSO Capital I Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 Southwestern Electric Power Company Delaware 428 Travis Street Shreveport, Louisiana 71156-0001 SWEPCO Capital I Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 West Texas Utilities Company Texas 301 Cypress Street Abilene, Texas 79601-5820 SEEBOARD, plc United Kingdom Registered Office Forest Gate, Brighton Road Crawley, West Sussex RH11 9BH Central and South West Services, Inc. Texas 2 West Second Street Tulsa, Oklahoma 74103-3102 and 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 C3 Communications, Inc. Delaware 1705 South Capital of Texas Highway - Suite 400 Austin, Texas 78746 CSW Credit, Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW Energy, Inc. Texas 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW Energy Services, Inc. Texas 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 Company Name Business Conducted State or Jurisdiction Under Same Name of Incorporation/Formation - ------------------------------------------------------------------------------- CSW International, Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW Leasing, Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 EnerShop Inc. Delaware 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 EX-23.1 27 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Independent Public Accountants To the Stockholders and Board of Directors of Central and South West Corporation: As independent public accountants, we hereby consent to the incorporation of our report dated February 16, 1998, included in this Form 10-K, into Central and South West Corporation's previously filed registration statements on Form S-8 (File Nos. 2-70746, 33-12992, 33-49301, 33-63027 and 33-64233) and on Form S-3 (File No. 33-50193 and 333-00911). Arthur Andersen LLP Dallas, Texas March 25, 1998 EX-23 28 EXHIBIT 23.2 EXHIBIT 23.2 Consent of Independent Public Accountants The Board of Directors CSW UK Finance Company: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 2-70746, 33-12992, 33-49301, 33-63027 and 33-64233) and on Form S-3 (Nos. 33-50193 and 333-00911) of Central and South West Corporation of our report dated 19 January 1998, with respect to the consolidated balance sheet of CSW UK Finance Company as of 31 December 1997, and the related consolidated statements of earnings and cashflows for the year then ended, which report appears in the 31 December 1997, annual report on Form 10-K of Central and South West Corporation. KPMG Audit Plc London, England Chartered Accountants 25 March 1998 Registered Auditors EX-23 29 EXHIBIT 23.3 EXHIBIT 23.3 Consent of Independent Public Accountants To the Stockholders and Board of Directors of Central Power and Light Company: As independent public accountants, we hereby consent to the incorporation of our report dated February 16, 1998, included in this Form 10-K, into Central Power and Light Company's previously filed registration statement on Form S-3 (File Nos. 33-49577 and 33-52759). Arthur Andersen LLP Dallas, Texas March 25, 1998 EX-23.4 30 EXHIBIT 23.4 EXHIBIT 23.4 Consent of Independent Public Accountants To the Stockholders and Board of Directors of Public Service Company of Oklahoma: As independent public accountants, we hereby consent to the incorporation of our report dated February 16, 1998, included in this Form 10-K, into Public Service Company of Oklahoma's previously filed registration statement on Form S-3 (File No. 333-00973). Arthur Andersen LLP Dallas, Texas March 25, 1998 EX-24.1 31 CSW EXHIBIT 24.1 POWER OF ATTORNEY The undersigned, as Chairman and Chief Executive Officer of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints Glenn D. Rosilier and Lawrence B. Connors and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. E. R. Brooks Chairman & Chief Executive Officer Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EX-24.2 32 CSW EXHIBIT 24.2 POWER OF ATTORNEY The undersigned, as Executive Vice President and Chief Financial Officer of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Glenn D. Rosilier Executive Vice President and Chief Financial Officer Subscribed and sworn to before me this 21st day of January, 1998. Donna M. Sigmond Notary Public My Commission Expires: 11-09-01 EX-24.3 33 CSW EXHIBIT 24.3 POWER OF ATTORNEY The undersigned, as Controller of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks and Glenn D. Rosilier, and each of them severally, his true and lawful attorney-in-fact and agents, each with full power and authority (acting alone and without the other) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Lawrence B. Connors Controller Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EX-24.4 34 CSW EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Molly Shi Boren Director Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: 7-20-1999 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Dr. Donald M. Carlton Director Subscribed and sworn to before me this 21st day of January, 1998. Carolyn Stephens Notary Public My Commission Expires: 10-25-01 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. T. J. Ellis Director Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Joe H. Foy Director Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. William R. Howell Director Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Dr. Robert W. Lawless Director Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. James L. Powell Director Subscribed and sworn to before me this 21st day of January, 1998. Kristi Broncy Notary Public My Commission Expires: 1-5-2002 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Dr. Richard L. Sandor Director Subscribed and sworn to before me this 21st day of January, 1998. Marilyn K Grace Notary Public My Commission Expires: 5/28/01 EXHIBIT 24.4 POWER OF ATTORNEY The undersigned, as a director of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks, Glenn D. Rosilier and Lawrence B. Connors, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Corporation's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 21st day of January, 1998. Thomas V. Shockley III President, Chief Operating Officer and Director Subscribed and sworn to before me this 21st day of January, 1998. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EX-24.5 35 EXHIBIT 24.5 EXHIBIT 24.5 POWER OF ATTORNEY The undersigned, as President of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. J. Gonzalo Sandoval General Manager/President and Director Subscribed and sworn to before me this 2nd day of March, 1998 by J. Gonzalo Sandoval. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EX-24.6 36 EXHIBIT 24.6 EXHIBIT 24.6 POWER OF ATTORNEY The undersigned, as Controller of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. R. Russell Davis Controller Subscribed and sworn to before me this 2nd day of March, 1998, by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-2001 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. John F. Brimberry Director Subscribed and sworn to before me this 2nd day of March, 1998 by John F. Brimberry. Martha Robinson Notary Public My Commission Expires: May 9, 2001 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. E. R. Brooks Director Subscribed and sworn to before me this 2nd day of March, 1998 by E. R. Brooks. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. Glenn Files Director Subscribed and sworn to before me this 2nd day of March, 1998 by Glenn Files. L. J. Jimmerson Notary Public My Commission Expires: May 11, 2000 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. Ruben M. Garcia Director Subscribed and sworn to before me this 2nd day of March, 1998 by Ruben M. Garcia. Phyillis A. Pego Notary Public My Commission Expires: 12-29-2001 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. Alphonso R. Jackson Director Subscribed and sworn to before me this 2nd day of March, 1998 by Robert A. McAllen. L. Charlene Camp Notary Public My Commission Expires: 4/03/99 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. Robert A. McAllen Director Subscribed and sworn to before me this 2nd day of March, 1998 by Robert A. McAllen. Oneida M. Lorenzana Notary Public My Commission Expires: 03-06-00 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. Pete J. Morales, Jr. Director Subscribed and sworn to before me this 2nd day of March, 1998 by Pete J. Morales, Jr. Lucy Nixon Notary Public My Commission Expires: 6-12-99 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. H. Lee Richards Director Subscribed and sworn to before me this 2nd day of March, 1998 by H. Lee Richards. C. J. Winter Notary Public My Commission Expires: 12-22-99 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints J. Gonzalo Sandoval and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 2nd day of March, 1998. Gerald E. Vaughn Director Subscribed and sworn to before me this 2nd day of March, 1998 by Gerald E. Vaughn. Imelda V. Perez Notary Public My Commission Expires: February 2, 2001 EX-24.8 37 EXHIBIT 24.8 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as President of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agents, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agents, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. T. D. Churchwell President and Director Subscribed and sworn to before me this 28th day of January, 1998 by T. D. Churchwell. Lina P. Holm Notary Public My Commission Expires: January 28, 1999 EX-24.9 38 EXHIBIT 24.9 EXHIBIT 24.9 POWER OF ATTORNEY The undersigned, as Controller of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. R. Russell Davis Controller Subscribed and sworn to before me this 28th day of January, 1998 by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-24.10 39 EXHIBIT 24.10 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. E. R. Brooks Director Subscribed and sworn to before me this 28th day of January, 1998 by E. R. Brooks. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. Harry A. Clarke Director Subscribed and sworn to before me this 28th day of January, 1998 by Harry A. Clarke. Lina P. Holm Notary Public My Commission Expires: January 29, 1999 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. Glenn Files Director Subscribed and sworn to before me this 28th day of January, 1998 by Glenn Files. Lina P. Holm Notary Public My Commission Expires: January 29, 1999 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. Paul K. Lackey, Jr. Director Subscribed and sworn to before me this 28th day of January, 1998 by Paul K. Lackey, Jr. Lina P. Holm Notary Public My Commission Expires: January 29, 1999 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. Paula Marshall-Chapman Director Subscribed and sworn to before me this 28th day of January, 1998 by Paula Marshall-Chapman. Barbara Masterson Notary Public My Commission Expires: March 8, 1998 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. William R. McKamey General Manager and Director Subscribed and sworn to before me this 28th day of January, 1998 by William R. McKamey. Lina P. Holm Notary Public My Commission Expires: January 29, 1999 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints T. D. Churchwell and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 28th day of January, 1998. Robert B. Taylor, Jr. Director Subscribed and sworn to before me this 28th day of January, 1998 by Robert B. Taylor, Jr. Lina P. Holm Notary Public My Commission Expires: January 29, 1999 EX-24 40 EXHIBIT 24.11 EXHIBIT 24.11 POWER OF ATTORNEY The undersigned, as President of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. Michael D. Smith President and Director Subscribed and sworn to before me this 22nd day of January, 1998 by Michael D. Smith. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EX-24 41 EXHIBIT 24.12 EXHIBIT 24.12 POWER OF ATTORNEY The undersigned, as Controller of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. R. Russell Davis Controller Subscribed and sworn to before me this 22nd day of January, 1998 by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-24.13 42 EXHIBIT 24.13 EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. E. R. Brooks Director Subscribed and sworn to before me this 22nd day of January, 1998 by E. R. Brooks. Judy A. Hall Notary Public My Commission Expires: July 20, 1999 EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. James E. Davison Director Subscribed and sworn to before me this 22nd day of January, 1998 by James E. Davison. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. Glenn Files Director Subscribed and sworn to before me this 22nd day of January, 1998 by Glenn Files. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. F. E. Joyce, M.D. Director Subscribed and sworn to before me this 22nd day of January, 1998 by Dr. Frederick E. Joyce. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. John M. Lewis Director Subscribed and sworn to before me this 22nd day of January, 1998 by James M. Lewis. Linda Carmack Catron Notary Public My Commission Expires: May 1, 2001 EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. Karen Martin General Manager and Director Subscribed and sworn to before me this 22nd day of January, 1998 by Karen Martin. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. William C. Peatross Director Subscribed and sworn to before me this 22nd day of January, 1998 by William C. Peatross. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Michael D. Smith and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 22nd day of January, 1998. Maxine P. Sarpy Director Subscribed and sworn to before me this 22nd day of January, 1998 by Maxine P. Sarpy. Judith W. Culver Notary Public My Commission Expires: Commission is for Life EX-24.14 43 EXHIBIT 24.14 EXHIBIT 24.14 POWER OF ATTORNEY The undersigned, as President of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. Paul J. Brower General Manager/President and Director Subscribed and sworn to before me this 27th day of January, 1998 by Paul J. Brower. Martha Murray Notary Public My Commission Expires: 11-19-00 EX-24.15 44 EXHIBIT 24.15 EXHIBIT 24.15 POWER OF ATTORNEY The undersigned, as Controller of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower his true and lawful attorney-in-fact and agent, with full power and authority to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. R. Russell Davis Controller Subscribed and sworn to before me this 27th day of January, 1998 by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-2001 EX-24.16 45 EXHIBIT 24.16 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. E. R. Brooks Director Subscribed and sworn to before me this 27th day of January, 1998 by E. R. Brooks. Martha Murray Notary Public My Commission Expires: 11-19-00 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. Glenn Files Director Subscribed and sworn to before me this 27th day of January, 1998 by Glenn Files. Martha Murray Notary Public My Commission Expires: 11-19-00 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. Alphonso Jackson Director Subscribed and sworn to before me this 27th day of January, 1998 by Tommy Morris. Martha Murray Notary Public My Commission Expires: 11-19-00 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. Tommy Morris Director Subscribed and sworn to before me this 27th day of January, 1998 by Tommy Morris. Martha Murray Notary Public My Commission Expires: 11-19-00 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, her true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. Dian G. Owen Director Subscribed and sworn to before me this 27th day of January, 1998 by Dian G. Owen. Martha Murray Notary Public My Commission Expires: 11-19-00 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. James Parker Director Subscribed and sworn to before me this 27th day of January, 1998 by James Parker. Martha Murray Notary Public My Commission Expires: 11-19-00 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Paul J. Brower and R. Russell Davis, and each of them severally, his true and lawful attorneys-in-fact and agents, each with full power and authority (acting alone and without the others) to execute in the name and on behalf of the undersigned, in any and all capacities, the Company's Annual Report on Form 10-K for 1997 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 27th day of January, 1998. F. L. Stephens Director Subscribed and sworn to before me this 27th day of January, 1998 by F. L. Stephens. Martha Murray Notary Public My Commission Expires: 11-19-00 EX-27 46 EXHIBIT 27.1
UT 0000092487 SOUTHWESTERN ELECTRIC POWER COMPANY 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 1,855,578 5,839 161,434 13,729 58,166 2,094,746 135,660 245,000 324,050 704,710 25,930 4,709 652,202 25,175 0 0 145 1,200 5,549 2,210 672,916 2,094,746 939,869 39,712 760,748 800,460 139,409 4,029 143,438 50,536 92,902 2,467 92,254 90,000 39,242 200,488 0.00 0.00
-----END PRIVACY-ENHANCED MESSAGE-----