-----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, IRQY0dvygzWXFgtoBED+qK5QhWbZu8S5n1ieQx2EShMxQgjYT4OQPRBkXsg36fFz ljNjCL0L1oaNjoLsEBGJNg== 0000018540-96-000043.txt : 19960329 0000018540-96-000043.hdr.sgml : 19960329 ACCESSION NUMBER: 0000018540-96-000043 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 33 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 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: 1934 Act SEC FILE NUMBER: 001-03146 FILM NUMBER: 96539972 BUSINESS ADDRESS: STREET 1: 428 TRAVIS ST CITY: SHREVEPORT STATE: LA ZIP: 71156 BUSINESS PHONE: 3182222141 10-K405 1 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 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 Common Stock, $3.50 Par Value New York Stock West Corporation Exchange, Inc. Chicago Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: Central Power and Cumulative Preferred Light Company Stock, $100 Par Value Public Service Cumulative Preferred Company of Oklahoma Stock, $100 Par Value Southwestern Cumulative Preferred Electric Power Stock, $100 Par Value Company West Texas Utilities Cumulative Preferred Company Stock, $100 Par Value Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K[X]. Aggregate market value of the Common Stock of Central and South West Corporation at February 29, 1996 held by non-affiliates was approximately $5.8 billion. Number of shares of Common Stock outstanding at February 29, 1996:208,656,924. 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 Proxy Statement of Central and South West Corporation dated March 7, 1996 are 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. i TABLE OF CONTENTS PAGE GLOSSARY OF TERMS........................................ ii PART I ITEM 1. BUSINESS General......................................... 1-1 Domestic Utility Operations..................... 1-2 United Kingdom Utility Operations............... 1-27 Non-Utility Operations.......................... 1-29 Other Information............................... 1-33 ITEM 2. PROPERTIES...................................... 1-35 ITEM 3. LEGAL PROCEEDINGS............................... 1-35 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 1-35 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................. 2-1 ITEM 6. SELECTED FINANCIAL DATA......................... 2-1 Central Power and Light Company................. 2-69 Public Service Company of Oklahoma.............. 2-95 Southwestern Electric Power Company............. 2-115 West Texas Utilities Company.................... 2-136 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 2-2 Central Power and Light Company................. 2-70 Public Service Company of Oklahoma.............. 2-96 Southwestern Electric Power Company............. 2-116 West Texas Utilities Company.................... 2-137 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..... 2-2 Central Power and Light Company................. 2-81 Public Service Company of Oklahoma.............. 2-103 Southwestern Electric Power Company............. 2-124 West Texas Utilities Company.................... 2-146 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 2-158 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS..................................... 3-1 ITEM 11. EXECUTIVE COMPENSATION.......................... 3-8 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 3-14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.. 3-17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................. 4-1 ii GLOSSARY OF TERMS The following abbreviations or acronyms used in this Form 10-K are defined below: Abbreviation or Acronym Definition 1996 Offering................... Stock Public offering of 15,525,000 shares of CSW Common ADPCE........................... Arkansas Department of Pollution Control and Ecology AFUDC........................... Allowance for funds used during construction ALJ............................. Administrative Law Judge AMAX............................ AMAX Coal Company ANI............................. American Nuclear Insurance APBO............................ Accumulated Postretirement Benefit Obligation Arkansas Commission............. Arkansas Public Service Commission Ash Creek....................... Ash Creek Mining Company, Tulsa, Oklahoma Austin.......................... City of Austin, Texas Bankruptcy Court................ United States Bankruptcy Court for the Western District of Texas, Austin Division, before which the El Paso bankruptcy reorganization proceeding, Case No. 92-10148-FM, was pending Bcf............................. Billion cubic feet BREMCO.......................... Bossier Rural Electric Membership Corporation Btu............................. British thermal unit Burlington Northern............. Burlington Northern Railroad Company Cajun........................... Cajun Electric Power Cooperative, Inc. CEO............................. Chief Executive Officer CERCLA.......................... Comprehensive Environmental Response, Compensation and Liability Act of 1980 Cimmaron........................ Cimmaron Chemical Company Cities.......................... Several cities in CPL's service territory Clean Air Act................... Clean Air Act Amendments of 1990 COO............................. Chief Operating Officer Court of Appeals................ Court of Appeals, Third District of Texas, Austin, Texas CPL............................. Central Power and Light Company, Corpus Christi, Texas CPL 1995 Agreement.............. Settlement Agreement filed by CPL with the Texas Commission to settle certain CPL regulatory matters CSF............................. Customer Supplied Fuel Program CSW............................. Central and South West Corporation, Dallas, Texas CSW Common...................... CSW common stock, $3.50 par value per share CSW Communications.............. CSW Communications, Inc., Austin, Texas CSW Credit...................... CSW Credit, Inc., Dallas, Texas CSW Credit Agreement............ Credit $850 million senior credit agreement entered into by CSW with a consortium of banks to partially fund the SEEBOARD acquisition CSW Energy...................... CSW Energy, Inc., Dallas, Texas CSW International............... CSW International, Inc., Dallas, Texas CSW Investments................. CSW Investments, an unlimited company organized in the United Kingdom which is wholly owned, indirectly though subsidiaries, by CSW International CSW Investments Credit Facility. 1.0 billion pounds senior credit facility arranged by CSW Investments with a consortium of banks to partially fund the SEEBOARD acquisition CSW Leasing..................... CSW Leasing, Inc., Dallas, Texas CSW System...................... CSW and its subsidiaries (excluding SEEBOARD Group) CSW Services.................... Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW Suit........................ Suit filed by CSW against El Paso in the Bankruptcy Court CSW (UK)........................ CSW (UK) plc., a public limited company organized in the United Kingdom which is wholly owned by CSW Investments CWIP............................ Construction work in progress DeSoto.......................... Parish of DeSoto, State of Louisiana pollution control revenue bond issuing authority DGES............................ Director General of Electricity Supply DOE............................. United States Department of Energy El Paso......................... El Paso Electric Company El Paso Suit.................... Suit filed by El Paso against CSW in state district court in El Paso, Texas Electric Operating Companies.... CPL, PSO, SWEPCO and WTU EMF............................. Electric and magnetic fields Energy Policy Act............... National Energy Policy Act of 1992 EnerShop........................ EnerShopSM, Inc., Dallas, Texas EPA............................. United States Environmental Protection Agency EPS............................. Earnings per share iii GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Form 10-K are defined below: ERCOT........................... Electric Reliability Council of Texas ERISA........................... Employee Retirement Income Security Act of 1974, as amended EWG............................. Exempt Wholesale Generators FASB............................ Financial Accounting Standards Board FCC............................. Federal Communications Commission FERC............................ Federal Energy Regulatory Commission FMB............................. First Mortgage Bond FUSER........................... Fuel Supply Electricity Rider Guadalupe....................... Guadalupe-Blanco River Authority pollution control revenue bond issuing authority GSU............................. Gulf States Utilities Company HLP............................. Houston Lighting & Power Company, the Project Manager of STP Holding Company Act............. Public Utility Holding Company Act of 1935, as amended HVdc............................ High-voltage direct-current IPP............................. Independent Power Producer ITC............................. Investment tax credit KV.............................. Kilovolt KW.............................. Kilowatt KWH............................. Kilowatt-hour Lone Star....................... Lone Star Gas Company 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 Mcf............................. 1,000 cubic feet MCPC............................ Mid-Continent Power Company, Inc. MD&A............................ Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ............................ Mississippi Department of Environmental Quality Merger.......................... The proposed merger whereby El Paso would have become a wholly owned subsidiary of CSW Merger Agreement................ Agreement and Plan of Merger between El Paso and CSW, dated as of May 3, 1993, as amended MGP............................. Manufactured gas plant or coal gasification plant Mirror CWIP..................... Mirror construction work in progress Mississippi Power............... Mississippi Power Company MMbtu........................... Million Btu MMcf/d.......................... Million cubic feet of gas per day Modified Plan................... Modified Third Amended Plan of Reorganization for the proposed merger with El Paso MTN............................. Medium-term note MW.............................. Megawatt MWH............................. Megawatt-hour Named Executive Officers........ The CEO and the four most highly compensated executive officers, as defined by regulation National Grid................... National Grid Group plc NEIL............................ Nuclear Electric Insurance Limited NOPR............................ Notice of Proposed Rule Making Notes........................... Notes to Financial Statements NRC............................. Nuclear Regulatory Commission Nueces.......................... Nueces County Navigation District pollution control revenue bond issuing authority 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 OMPA............................ Oklahoma Municipal Power Authority OPEBs........................... Other Postretirement Employee Benefits Operating Companies............. CPL, PSO, SWEPCO, WTU, and Transok OPUC............................ Office of Public Utility Counsel of Texas PCB............................. Polychlorinated biphenyl PCRB............................ Pollution Control Revenue Bond PFD............................. Proposal for Decision PowerShare...................... CSW's PowerShareSM Dividend Reinvestment and Stock Purchase Plan Project Manager................. HLP, the Project Manager for STP PRP............................. Potentially responsible party PSO............................. Public Service Company of Oklahoma, Tulsa, Oklahoma iv GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in this Form 10-K are defined below: PURA............................ Public Utility Regulatory Act of the State of Texas RCRA............................ Federal Resource Conservation and Recovery Act of 1976 Red River....................... Red River Authority of Texas pollution control revenue bond issuing authority RESCTA.......................... Rural Electric Supplier Certified Territory Act Sabine.......................... Sabine River Authority of Texas pollution control revenue bond issuing authority San Antonio..................... City of San Antonio, Texas SAR............................. Stock appreciation right SEEBOARD........................ SEEBOARD plc., Crawley, West Sussex, United Kingdom SEEBOARD Group.................. Consolidated SEEBOARD, CSW (UK) and CSW Investments converted to U.S. Generally Accepted Accounting Principles SEC............................. Securities and Exchange Commission SERP............................ Special Executive Retirement Plan SFAS............................ Statement of Financial Accounting Standards 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 Postretirement Benefits Other than Pensions SFAS No. 109.................... Accounting for Income Taxes SFAS No. 112.................... Employers' Accounting for Postemployment Benefits SFAS No. 121.................... Accounting for the Impairment of Long-Lived Assets SFAS No. 123.................... Accounting for Stock-Based Compensation Siloam Springs.................. City of Siloam Springs, Arkansas pollution control revenue bond issuing authority Southern Pacific................ Southern Pacific Transportation Company Staff........................... The Staff of the Texas Commission STP............................. South Texas Project nuclear electric generating station STP Unit 1 Order................ October 1990 Texas Commission STP Unit 1 Final Order STP Unit 2 Order................ December 1990 Texas Commission STP Unit 2 Final Order Supreme Court................... Supreme Court of Texas SWEPCO.......................... Southwestern Electric Power Company, Shreveport, Louisiana Tender Offer.................... CSW (UK)'s approximately $2.12 billion tender offer in the United Kingdom for all the outstanding share capital of SEEBOARD Texas Commission................ Public Utility Commission of Texas Tex-La.......................... Tex-La Electric Cooperative of Texas, Inc. TEX/CON......................... TEX/CON Oil and Gas Company Titus County.................... Titus County Fresh Water Supply District No. 1 pollution control revenue bond issuing authority TNRCC........................... Texas Natural Resource Conservation Commission Transok......................... Transok, Inc. and subsidiaries, Tulsa, Oklahoma TSCA............................ Toxic Substance Control Act of 1976 TU.............................. Texas Utilities Electric Company UK RPI.......................... United Kingdom Retail Price Index Union Pacific................... Union Pacific Railroad Company Westinghouse.................... Westinghouse Electric Corporation WTU............................. West Texas Utilities Company, Abilene, Texas WTU Stipulation and Agreement... Stipulation and Agreement to settle certain WTU regulatory matters 1-1 PART I ITEM 1. BUSINESS. GENERAL 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 Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, CSW Communications and EnerShop. In addition, CSW owns 80% of the outstanding shares of common stock of CSW Leasing. On January 10, 1996, CSW's tender offer of approximately $2.12 billion in the United Kingdom for all of the outstanding share capital of SEEBOARD was declared wholly unconditional. Through February 29, 1996, CSW (UK) had acquired shares representing, or had received valid acceptances in respect of, approximately 92.3% of the outstanding share capital of SEEBOARD. CSW (UK) expects to acquire the remaining 7.7% of the outstanding SEEBOARD share capital by the end of the second quarter of 1996. SEEBOARD is a regional electricity company in the United Kingdom headquartered in Crawley, West Sussex, with approximately two million customers and a distribution territory in southeast England that covers approximately 3,000 square miles, extending from the outlying areas of London to the English Channel. In addition to the distribution and supply of electricity, SEEBOARD is involved in gas supply, electricity generation, electrical contracting and retailing. See UNITED KINGDOM UTILITY OPERATIONS below, ITEM 7-MD&A and ITEM 8-NOTE 13. UNAUDITED PRO FORMA INFORMATION. The Electric Operating Companies are public utility companies engaged in generating, purchasing, transmitting, distributing and selling electricity. Information concerning the incorporation of each of the Electric Operating Companies is presented in the following table. State of Year of Registrant Incorporation Incorporation CPL Texas 1945 PSO Oklahoma 1913 SWEPCO Delaware 1912 WTU Texas 1927 The Electric Operating Companies serve approximately 1.7 million customers in one of the largest service territories in the United States covering approximately 152,000 square miles in portions of Texas, Oklahoma, Louisiana and Arkansas. 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. The Electric Operating Companies' customer base includes a mix of residential, commercial and diversified industrial customers. Transok is an intrastate natural gas pipeline and gas marketing company that gathers, processes and stores natural gas for, and transports and markets natural gas to the Electric Operating Companies, principally PSO, as well as other customers. CSW is committed to expanding its electric utility business through strategic domestic and international acquisitions and through marketing initiatives within these territories. Acquisitions of utility assets must meet defined criteria, including the potential to lower costs, increase long-term efficiency and competitiveness and provide an acceptable rate of return and benefit to CSW. CSW believes that the SEEBOARD acquisition meets these criteria. 1-2 CSW continues to seek opportunities to expand its non-utility business in areas related to its core electric utility business. Through CSW Energy, which develops and operates independent power and cogeneration projects, CSW has completed four gas-fired cogeneration plants. CSW International was formed to invest internationally either alone or with local or other partners. CSW International will also continue CSW's efforts in Mexico and will seek to expand into other countries in Latin America, Europe and Asia that meet CSW's investment criteria. CSW Communications provides communication services to the Electric Operating Companies and non-affiliates, including enhancement of services through fiber optic and other telecommunications technologies. EnerShop was formed in 1995 to provide commercial, industrial, institutional and governmental customers with energy management services designed to control cost, enhance productivity and improve convenience, safety and comfort. 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. CSW Credit purchases accounts receivable of the Operating Companies and non-affiliated utilities and CSW Leasing invests in leveraged leases. 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 certain assets or any interest in any business and accounting practices and other matters. See Regulation below, and ITEM 7-MD&A for additional information regarding the Holding Company Act. In 1995, the Operating Companies and SEEBOARD contributed the following percentages to aggregate operating revenues, operating income and net income for CSW Common. SEEBOARD Total CPL PSO SWEPCO WTU Group (1) Electic Transok Other Total Operating Revenues 29% 18% 22% 8% 6% 83% 16% 1% 100% Operating Income 44% 16% 24% 10% 2% 96% 6% (2%) 100% Net Income for CSW Common 48% 20% 28% 9% 2% 107% 6% (13%) 100% (1) Represents the SEEBOARD Group's 27.6% and 76.45% interest in SEEBOARD's earnings for November and December 1995, respectively. See ITEM 8-NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The relative contributions of the Operating Companies and SEEBOARD to the aggregate operating revenues, operating income and net income for CSW Common 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. DOMESTIC UTILITY OPERATIONS General Information concerning the service territories of the Electric Operating Companies at December 31, 1995, is set forth in the following table. 1-3 Company and Largest Approximate Rural Cities Estimated Square Retail Electric Served Population Miles Customers Municipalities Cooperatives CPL 2,065,000 44,000 614,000 1 4 Corpus Christi, Texas 271,000 Laredo, Texas 150,000 McAllen, Texas 101,000 PSO 1,031,000 30,000 473,000 2 2 Tulsa, Oklahoma 563,000 Lawton, Oklahoma 90,000 Bartlesville, Oklahoma 44,000 SWEPCO 870,000 25,000 409,000 3 8 Shreveport/ Bossier City, Louisiana 285,000 Longview, Texas 99,000 Texarkana, Texas and Arkansas 76,000 WTU 413,000 53,000 187,000 2 13 Abilene, Texas 112,000 San Angelo, Texas 90,000 CSW 4,379,000 152,000 1,683,000 8 27 In 1995, approximately 61% of the Electric Operating Companies' electric revenues were earned in Texas, 24% in Oklahoma, 9% in Louisiana and 6% in Arkansas. CPL The economic base of CPL's service territory includes manufacturing, mining, agricultural, transportation and public utilities sectors. Major contributing activities to these sectors include oil and gas extraction, food processing, apparel, metal refining, chemical and petroleum refining, plastics and machinery equipment. In 1995, excluding the effects of the provisions for rate refunds, industrial customers accounted for approximately 22% of CPL's total operating revenues. 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. PSO The economic base of PSO's service territory includes mining, 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 and aircraft components. SWEPCO 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 includes several military installations, colleges and universities. WTU 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 1-4 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 and gypsum products. The territory also includes several military installations and state correctional institutions. 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 level in the future. As competition in the industry increases, the 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 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. The 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. For additional information regarding competition and industry challenges, see ITEM 7-MD&A. PURA 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. On December 21, 1995, a preliminary order was issued by the Texas Commission that expanded the scope of the CPL rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1, 1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) current value of CPL's generating assets as compared to estimates of market value of such assets under alternative future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. For additional information regarding PURA and the CPL rate review, see ITEM 7-MD&A. Electric Service Areas in Texas In Texas, electric service areas are approved by the Texas Commission. A given tract in a utility's overall service area may be singly certificated to a utility, to one of several competing electric cooperatives or to one of the competing municipal electric systems, or it may be dually or triply certificated to these entities. These certificated areas have changed only slightly since the formation of the Texas Commission in 1976. CPL is generally singly certificated to serve inside most municipalities, and cooperatives are singly certificated to serve much of the rural areas. The suburban areas are mostly dually certificated. Since 1990, in dually certificated areas, CPL's rates have been higher than some competitors for some customers, especially small commercial and industrial customers. However, most business has been retained and some new business acquired, primarily because of service reliability and other customer service advantages. The availability of low cost natural gas and other alternative fuels, including those used in cogeneration facilities, have resulted in some losses of sales. Although there have been some losses, electricity is still the fuel of choice for most air conditioning installations. Renewable energy such as solar and wind is not now a feasible economic choice for customers of CPL in most instances. CPL believes that its rates, the quality and reliability of its service and the relatively inelastic demand for electricity for certain end uses should allow it to continue to compete in current retail markets. 1-5 CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or the CSW System. As the wholesale and retail electricity markets become more competitive, however, the principal factor determining success is likely to be price and, to a lessor extent, reliability, availability of capacity and customer service. See ITEM 7-MD&A for additional discussion of competitive issues facing the utility industry. Regulation The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act. The Holding Company Act generally limits 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. The Electric Operating Companies have been classified as public utilities under the Federal Power Act and accordingly the FERC has jurisdiction in certain respects over their electric utility facilities and operations, wholesale rates, and in certain other matters. The Electric Operating Companies are subject to the jurisdiction of various state commissions as to rates, accounting matters, standards of service and, in some cases, issuance of securities, certification of facilities and extensions and division of service territory. Nuclear Regulation - CPL Ownership of an interest in a nuclear generating unit exposes CPL and, indirectly, CSW to regulation not common to a fossil 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 a discussion of NRC regulation and other considerations arising from the ownership of nuclear assets, see NUCLEAR - CPL, below. Environmental Regulation For a discussion of regulation related to the various environmental agencies that impact the CSW Electric Operating Companies, see Environmental Matters below. Rates The retail rates of the Electric Operating Companies are subject to regulation by the state utility commissions in the states in which they operate. As discussed above the wholesale rates of the Electric Operating Companies are subject to regulation by the FERC. In addition, SWEPCO has agreements, which have been approved by the FERC, with all of its wholesale customers under which rates are based upon an agreed cost of service formula. These rates are adjusted periodically to reflect the actual cost of providing service. 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 jurisdiction to the Texas Commission. The Texas Commission has appellate jurisdiction over rates set by incorporated municipalities. 1-6 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. Fuel Recovery The recovery of fuel costs from retail customers by the Electric Operating Companies is subject to regulation by the state utility commissions in the states in which they operate. All of the 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 effective in 1993 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 will be 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 four percent 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 unreasonably incurred in a reconciliation proceeding are not recoverable from retail customers. Oklahoma Fuel Recovery - PSO All KWH sales to PSO's retail customers, except for sales pursuant to FUSER and CSF, were made under rates which include a fuel cost adjustment clause. Oklahoma law requires that an examination of PSO's retail fuel cost adjustment clause be performed annually by the Oklahoma Commission. The fuel cost adjustment is computed for each month on the basis of the average cost of fuel consumed in the month. The amount of any difference in such cost over or under a base rate is applied on a KWH basis and reflected in adjustments to customers' bills during the second month subsequent to the month in which the difference occurred. The FUSER program, for qualified commercial and industrial customers, and the CSF program, for qualified wholesale customers, were developed to allow program participants to purchase natural gas directly from suppliers, at negotiated prices, to be delivered to and burned in PSO's gas-fired power plants, resulting in reduced prices because of the low cost spot gas fuel provided. Under these programs, participants could deliver sufficient quantities of natural gas to meet 70% of their generation requirements with the remaining 30% met with electricity generated by PSO's coal-fired plants. The FUSER and CSF programs resulted in lower electric costs to all classes of PSO's customers. The FUSER program was canceled effective October 1, 1993 because changing market and supply conditions eliminated the economic viability of the program. 1-7 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 for each billing month on a basis which permits SWEPCO to recover the level of fuel cost experienced two months earlier. Recoverability of Fuel The inability of any 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. Nuclear - CPL CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. In addition, HLP, the Project Manager, 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. Nuclear Decommissioning 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 from the trust fund. See ITEM 8-NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for further information related to nuclear decommissioning. CPL Deferred Accounting CPL was granted deferred accounting treatment for certain STP Unit 1 and 2 costs by Texas Commission orders. These orders allowed CPL to defer post-in-service operating and maintenance costs, including taxes and depreciation, and carrying costs until these costs were reflected in retail rates. Deferred accounting had an immediate positive effect on net income in the years allowed, but cash earnings were not increased until rates went into effect reflecting STP in service. See ITEM 8-NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for additional information related to deferred accounting at STP. 1-8 Nuclear Insurance See ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for further information related to nuclear insurance for STP. Operating Data Facilities, Plants and Properties At December 31, 1995, the Electric Operating Companies owned the following electric generating plants, or portions thereof in the case of jointly owned plants, substantially all of which were steam electric units. Net Dependable Summer Rating Principal Fuel Capability Plant Name and Location Source (a) (MW) (b) CPL La Palma, San Benito, Texas Gas 205 (c) Victoria, Victoria, Texas Gas 432 (c) Nueces Bay, Corpus Christi, Texas Gas 529 (c) Lon C. Hill, Corpus Christi, Texas Gas 550 Laredo, Laredo, Texas Gas 177 J. L. Bates, Mission, Texas Gas 182 E.S. Joslin, Point Comfort, Texas Gas 249 Barney M. Davis, Corpus Christi, Texas Gas 695 Coleto Creek, Goliad, Texas Coal 632 Oklaunion, Vernon, Texas (b) Coal 53 STP, Bay City, Texas (b) Nuclear 630 Eagle Pass, Eagle Pass, Texas Hydro 6 4,340 PSO Tulsa, Tulsa, Oklahoma Gas 165 (c) Oil 8 Riverside, Jenks, Oklahoma Gas 916 Oil 3 Northeastern, Oologah, Oklahoma Gas 637 Coal 883 Oil 4 Southwestern, Washita, Oklahoma Gas 475 Oil 2 Comanche, Lawton, Oklahoma Gas 273 Oil 4 Weleetka, Weleetka, Oklahoma Gas 151 Oil 4 Oklaunion, Vernon, Texas (b) Coal 106 3,631 SWEPCO Arsenal Hill, Shreveport, Louisiana Gas 110 Lieberman, Mooringsport, Louisiana Gas 276 Knox Lee, Cherokee Lake, Texas Gas 497 Wilkes, Jefferson, Texas Gas 875 Lone Star, Daingerfield, Texas Gas 50 Welsh, Cason, Texas Coal 1,584 Flint Creek, Gentry, Arkansas (b) Coal 240 Henry W. Pirkey, Hallsville, Texas(b) Lignite 559 Dolet Hills, Mansfield, Louisiana (b) Lignite 262 4,453 1-9 Net Dependable Summer Rating Principal Fuel Capability Plant Name and Location Source (a) (MW) (b) WTU Paint Creek, Haskell, Texas Gas 237 Rio Pecos, Girvin, Texas Gas 137 San Angelo, San Angelo, Texas Gas 125 Fort Phantom, Abilene, Texas Gas (d) 362 Oak Creek, Bronte, Texas Gas 87 Abilene, Abilene, Texas Gas 12 Lake Pauline, Quanah, Texas Gas 46 Ft. Stockton, Ft. Stockton, Texas Gas 5 Vernon, Vernon, Texas Oil 9 Oklaunion, Vernon, Texas (b) Coal 370 Presidio, Presidio, Texas Oil 2 1,392 Total, excluding plant in storage 13,816 Plant in storage 392 CSW Total 14,208 (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 reduction of approximately 5% to 15% in capability. PSO and WTU have 25 MW and 11 MW, respectively, of facilities primarily designed to burn oil. (b) Data reflects only CSW System's 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 units in storage, consisting of 34 MW at Nueces Bay, 60 MW at Victoria, and 48 MW at La Palma for CPL and 250 MW at Tulsa for PSO. (d) Although both Fort Phantom units burn primarily gas, Unit 1 is designed to burn fuel oil for extended periods of time before maintenance is required and Unit 2 is designed to burn fuel oil on a continuous basis. All of the generating plants described above are located on land owned by the Electric Operating Companies or, in the case of jointly owned plants, jointly with other participants. The 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 Electric Operating Companies believe to be satisfactory, but without examination of underlying land titles) have been obtained. The principal plants and properties of the Electric Operating Companies are subject to the liens of the first mortgage indentures under which the Electric Operating Companies' bonds are issued. Construction Expenditures The Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated demands upon the system. See ITEM 7-MD&A for additional information related to construction expenditures. 1-10 Peak Loads and System Capabilities of the Electric Operating Companies The following tables set forth for the last three years (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 by the Electric Operating Companies and net purchases and sales. CSW 1995 1994 1993 Net system capability (MW) 14,168 (2) 13,549 (2) 13,163 (1)(2) Maximum coincident system demand (MW) 12,314 11,434 11,464 Percentage increase (decrease) in peak demand over prior period 7.7% (0.3)% 8.1% Generation at time of peak (MW) 12,053 11,353 10,624 Percent of peak demand generated 97.9% 99.3% 92.7% Net purchases (sales) at time of peak (MW) 261 81 840 Percent of net purchases (sales) at time of peak 2.1% 0.7% 7.3% Date of maximum coincident system demand July 28 June 27 August 18 (1) Does not include 630 MW of STP capability that was not available at the 1993 peak due to the outage described in ITEM 7- MD&A. (2) Does not include 446 MW of system capability in storage in 1995 as described above in Facilities, Plants and Properties, 881 MW of system capability in storage in 1994 and 719 MW of system capability in storage in 1993. CPL 1995 1994 1993 Net system capability (MW) 4,200 (2) 3,969 (2) 3,850(1)(2) Maximum coincident system demand (MW) 3,862 3,732 3,518 Percentage increase (decrease) in peak demand over prior period 3.5% 6.1% 5.1% Generation at time of peak (MW) 3,846 3,074 2,943 Percent of peak demand generated 99.6% 82.4% 83.7% Net purchases (sales) at time of peak (MW) 16 658 575 Percent of net purchases (sales) at time of peak 0.4% 17.6% 16.3% Date of maximum coincident system demand July 26 August 18 August 25 (1) Does not include 630 MW of STP capability that was not available at the 1993 peak due to the outage described in ITEM 7- MD&A. (2) Does not include 142 MW of system capability in storage in 1995 as described above in Facilities, Plants and Properties and 310 MW of system capability in storage in 1994 and 1993. PSO 1995 1994 1993 Net system capability (MW) 3,759 (1) 3,664 (1) 3,649 (1) Maximum coincident system demand (MW) 3,292 3,167 3,147 Percentage increase (decrease) in peak demand over prior period 3.9% 0.6% 4.6% Generation at time of peak (MW) 3,025 2,645 2,609 Percent of peak demand generated 91.9% 83.5% 82.9% Net purchases (sales) at time of peak (MW) 267 522 538 Percent of net purchases (sales) at time of peak 8.1% 16.5% 17.1% Date of maximum coincident system demand August 28 June 27 August 18 (1) Does not include 250 MW of system capability in storage in 1995 as described above in Facilities, Plants and Properties, 247 MW of system capability in storage in 1994 and 409 MW of system capability in storage in 1993. 1-11 SWEPCO 1995 1994 1993 Net system capability (MW) 4,783 (1) 4,464 (2) 4,436 Maximum coincident system demand (MW) 3,932 3,526 3,651 Percentage increase (decrease) in peak demand over prior period 11.5% (3.4%) 12.8% Generation at time of peak (MW) 4,022 3,987 3,559 Percent of peak demand generated 102.3% 113.1% 97.5% Net purchases (sales) at time of peak (MW) (90) (461) 92 Percent of net purchases (sales) at time of peak (2.3%) (13.1%) 2.5% Date of maximum coincident system demand July 28 June 27 August 18 (1) Does not include 54 MW of capability in 1995 that was not available at the peak due to fuel procurement issues. (2) Does not include 324 MW of capability in 1994 that was unavailable due to inefficiencies as a result of slag build-ups and fuel procurement issues. WTU 1995 1994 1993 Net system capability (MW) 1,426 1,459 1,384 Maximum coincident system demand (MW) 1,435 1,262 1,201 Percentage increase (decrease) in peak demand over prior period 13.7% 5.1% 7.4% Generation at time of peak (MW) 1,167 1,401 1,223 Percent of peak demand generated 81.3% 111.0% 101.8% Net purchases (sales) at time of peak (MW) 268 (139) (22) Percent of net purchases (sales) at time of peak 18.7% (11.0%) (1.8%) Date of maximum coincident system demand July 28 June 27 August 11 1-12 Electric Operating Statistics Central And South West Corporation and Subsidiary Companies (excludes the SEEBOARD Group) 1995 1994 1993 Kilowatt-hour sales (millions) Residential 16,872 16,368 15,903 Commercial 13,755 13,463 12,966 Industrial 19,321 18,869 18,205 Other retail 1,518 1,501 1,434 Sales to retail customers 51,466 50,201 48,508 Sales for resale 8,468 7,133 5,852 Total 59,934 57,334 54,360 Number of electric customers at end of period (thousands) Residential 1,437 1,417 1,396 Commercial 209 205 201 Industrial 24 24 24 Other 13 15 12 Total 1,683 1,661 1,633 Residential sales averages KWH per customer 11,840 11,665 11,541 Revenue per customer (a), (b) $799 $824 $842 Revenue per KWH (a), (b) 6.75cents 7.06cents 7.29cents Revenue per KWH on total sales (a), (b) 4.81cents 5.35cents 5.62cents Fuel cost data (a) Average Btu per net KWH 10,193 10,344 10,391 Cost per million Btu $1.58 $1.82 $2.11 Cost per KWH generated 1.61cents 1.88cents 2.19cents Cost as a percentage of revenue (b) 35.0% 36.7% 38.7% (a) These statistics reflect the outage at STP in 1993 and early 1994, and the impact of CSF in 1995 and FUSER and CSF in 1993. For additional information about FUSER and CSF, see Fuel Recovery above and Fuel Supply below (b) These statistics reflect the refunds and fuel disallowance that occurred as a result of both the CPL 1995 Agreement and the WTU Stipulation and Agreement. For additional information, see ITEM 7-MD&A. 1-13 Operating Statistics Central Power and Light Company 1995 1994 1993 Kilowatt-hour sales (millions) Residential 6,223 5,954 5,612 Commercial 4,656 4,523 4,278 Industrial 7,250 6,910 6,406 Other retail 465 457 435 Sales to retail customers 18,594 17,844 16,731 Sales for resale 1,680 1,286 913 Total 20,274 19,130 17,644 Number of electric customers at end of period Residential 526,909 516,355 504,893 Commercial 77,743 76,739 74,767 Industrial (a) 5,731 5,864 6,156 Other 3,561 3,577 3,538 Total 613,944 602,535 589,354 Residential sales averages KWH per customer 11,985 11,729 11,298 Revenue per customer (b), (c) $896 $935 $955 Revenue per KWH (b), (c) 7.48cents 7.97cents 8.45cents Revenue per KWH on total sales (b), (c) 5.29cents 6.37cents 6.93cents Fuel cost data (b) Average Btu per net KWH 10,175 10,289 10,296 Cost per million Btu $1.37 $1.75 $2.17 Cost per KWH generated 1.39cents 1.80cents 2.23cents Cost as a percentage of revenue (c) 26.8% 27.0% 28.6% (a) The customer decrease in 1994 was due primarily to the combining of multiple customer accounts into single accounts and a decline in customers due to economic and competitive conditions. (b) These statistics reflect the outage at STP in 1993 and early 1994. (c) These statistics reflect the refund and fuel disallowance that occurred as a result of the CPL 1995 Agreement. For additional information, see ITEM 7-MD&A. 1-14 Operating Statistics Public Service Company of Oklahoma 1995 1994 1993 Kilowatt-hour sales (millions) Residential 4,753 4,749 4,714 Commercial 4,427 4,434 4,352 Industrial 4,307 4,360 4,445 Other retail 80 89 87 Sales to retail customers 13,567 13,632 13,598 Sales for resale 1,617 1,509 563 Total 15,184 15,141 14,161 Number of electric customers at end of period Residential 412,765 409,675 406,847 Commercial 54,102 53,454 53,166 Industrial 5,205 5,156 5,087 Other 1,353 1,287 1,008 Total 473,425 469,572 466,108 Residential sales averages KWH per customer 11,563 11,640 11,637 Revenue per customer $682 $726 $731 Revenue per KWH 5.89cents 6.24cents 6.28cents Revenue per KWH on total sales (a) 4.55cents 4.89cents 5.00cents Fuel cost data (a) Average Btu per net KWH 10,151 10,231 10,220 Cost per million Btu $1.73 $1.96 $2.38 Cost per KWH generated 1.75cents 2.00cents 2.43cents Cost as a percentage of revenue 42.3% 39.5% 43.7% (a) These statistics reflect the impact of CSF in 1995 and FUSER and CSF in 1993. See Fuel Recovery above and Fuel Supply below. 1-15 Operating Statistics Southwestern Electric Power Company 1995 1994 1993 Kilowatt-hour sales (millions) Residential 4,406 4,157 4,114 Commercial 3,521 3,378 3,249 Industrial 6,531 6,357 6,122 Other retail 424 400 390 Sales to retail customers 14,882 14,292 13,875 Sales for resale 5,002 5,189 4,508 Total 19,884 19,481 18,383 Number of electric customers at end of period Residential 351,131 346,227 340,379 Commercial 49,123 48,153 46,728 Industrial 5,864 5,747 5,809 Other 2,615 2,609 2,605 Total 408,733 402,736 395,521 Residential sales averages KWH per customer 12,627 12,107 12,357 Revenue per customer $798 $776 $822 Revenue per KWH 6.32cents 6.41cents 6.65cents Revenue per KWH on total sales 4.21cents 4.24cents 4.60cents Fuel cost data Average Btu per net KWH 10,531 10,489 10,582 Cost per million Btu $1.61 $1.75 $1.94 Cost per KWH generated 1.70cents 1.84cents 2.05cents Cost as a percentage of revenue 38.3% 40.6% 42.5% 1-16 Operating Statistics West Texas Utilities Company 1995 1994 1993 Kilowatt-hour sales (millions) Residential 1,490 1,508 1,464 Commercial 1,152 1,128 1,087 Industrial 1,233 1,241 1,231 Other retail 549 556 522 Sales to retail customers 4,424 4,433 4,304 Sales for resale 2,268 2,051 2,288 Total 6,692 6,484 6,592 Number of electric customers at end of period Residential 146,235 144,966 143,453 Commercial 27,243 26,618 26,001 Industrial 7,317 7,392 7,453 Other 5,685 5,533 5,361 Total 186,480 184,509 182,268 Residential sales averages KWH per customer 10,224 10,449 10,241 Revenue per customer (a) $784 $822 $811 Revenue per KWH (a) 7.67cents 7.86cents 7.92cents Revenue per KWH on total sales (a) 4.78cents 5.29cents 5.24cents Fuel cost data Average Btu per net KWH 10,370 10,424 10,491 Cost per million Btu $1.83 $1.88 $1.91 Cost per KWH generated 1.90cents 1.96cents 2.00cents Cost as a percentage of revenue (a) 38.7% 38.3% 39.1% (a) These statistics reflect the refund and lower rates that occurred as a result of the WTU Stipulation and Agreement. See ITEM 7-MD&A. 1-17 Power Purchases and Sales Various municipalities, electric cooperatives and public power authorities are served by the Electric Operating Companies. The Electric Operating Companies exchange power on an emergency or economy basis with various neighboring systems and engage in economy interchanges with each other. In addition, they contract with certain suppliers for the purchase or sale of power on a unit capacity basis. SWEPCO - BREMCO As part of the agreement to acquire BREMCO, SWEPCO entered into a long-term purchased power contract with Cajun, BREMCO's previous full-requirements wholesale supplier. The contract covered the purchase of energy at a fixed price for 1993 and 1994, and the purchase of capacity and energy in subsequent years. See ITEM 7-MD&A for information regarding SWEPCO's pending proposal to acquire all of Cajun's non-nuclear assets. SWEPCO and WTU - Tex-La WTU sells 92 MW of power and energy to Tex-La. Tex-La has a peak requirement of approximately 120 MW. WTU will serve Tex-La until facilities are completed to connect Tex-La to SWEPCO, at which time SWEPCO will provide 85 MW and WTU will retain 35 MW of the Tex- La electric load. PSO - MCPC In 1989, PSO entered into certain long-term contracts with MCPC, a cogeneration development company located in northeastern Oklahoma. These contracts include: (i) an Interconnection and Interchange Agreement providing terms and conditions under which MCPC could connect its electric generating facilities to PSO's transmission system and providing for future transmission by PSO of specified amounts of MCPC's power to an unaffiliated utility; (ii) a Stock/Asset Purchase Agreement which allows PSO under certain conditions to acquire the stock or assets of MCPC; and (iii) an Energy Conversion Agreement which required PSO to deliver natural gas to MCPC for conversion to electrical energy to be delivered by MCPC to PSO. Under the Energy Conversion Agreement, PSO had the right to dispatch up to 60 MWH per hour of quick-start capability. See ITEM 8- NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for information regarding litigation arising out of PSO's contracts with MCPC. SWEPCO - Other Wholesale SWEPCO furnishes energy at wholesale to three municipalities and also supplies electric energy at wholesale to eight electric cooperatives operating in its territory. WTU - Other Wholesale WTU provides wholesale electricity to four electric cooperatives and one municipality for all their respective electric energy requirements. WTU also provides wholesale power to nine other electric cooperatives, one other municipal customer and one investor owned electric utility company. WTU's contractual obligations with fifteen of its wholesale customers require a five-year notice of termination, and one wholesale customer has a fourteen-year obligation. Other Operational Information System Interconnection The CSW System operates on an interstate basis to facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW North HVdc transmission interconnection. In 1992, SWEPCO and CPL entered into an agreement with HLP and TU to construct and operate an East Texas HVdc transmission interconnection to facilitate exchanges of power for the CSW System. This interconnection consists of a back- to-back HVdc converter station and 16 miles of 345 KV transmission line connecting transmission substations at SWEPCO's Welsh Power Plant and TU's Monticello Power Plant. In 1993, an application for a 1-18 Certificate of Convenience and Necessity for the transmission interconnection was approved by the Texas Commission, and in mid- 1995, the 600 MW East Texas HVdc project was completed. Transmission charges paid to TU are recorded as transmission expenses and are then recovered from customers through the fuel recovery mechanisms in Texas. CPL and WTU are members of ERCOT, which also includes TU, HLP, 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 Southwest Power Pool, which is comprised of 43 members, including 17 investor-owned utilities, 12 municipalities, 10 cooperatives, 3 state and 1 federal agency 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 Southwest Power Pool. Seasonality Sales of electricity by the Electric Operating Companies tend to increase during warmer summer months and, to a lesser extent, cooler winter months, because of higher demand for power. Franchises The Electric Operating Companies hold franchises to provide electric service in various municipalities in their service areas. These franchises have varying provisions and expiration dates including, in some cases, termination and buy-out provisions. CSW considers the Electric Operating Companies' franchises to be adequate for the conduct of their business. Fuel Supply General The CSW System's present net dependable summer rating power generation capabilities and the type of fuel used are set forth in Facilities, Plants and Properties above. Additional fuel supply data is set forth in the tables presented below. Aggregate Capability (MW) CSW CPL PSO SWEPCO WTU Natural Gas 8,455 3,019 2,617 1,808 1,011 Coal 3,868 685 989 1,824 370 Lignite 821 -- -- 821 -- Nuclear 630 630 -- -- -- Hydro and Oil 42 6 25 -- 11 13,816 4,340 3,631 4,453 1,392 Plant in Storage 392 142 250 -- -- Total 14,208 4,482 3,881 4,453 1,392 Generation Mix (as a % of MWH) CSW CPL PSO SWEPCO WTU Natural Gas 47 55 62 20 65 Coal 36 21 38 50 35 Lignite 9 -- -- 30 -- Nuclear 8 24 -- -- -- Hydro and Oil -- -- -- -- -- 100 100 100 100 100 1-19 Natural Gas The Electric Operating Companies purchase their gas from a number of suppliers operating in and around their service territories. In 1995, approximately 43% of the Electric Operating Companies' total gas purchases were made under long-term contracts and approximately 57% came from short-term contracts and spot purchases. 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 59% of CPL's total gas requirements in 1995 were purchased under long-term arrangements representing both purchase obligations and discretionary purchases, while the balance of CPL's requirements were acquired under short-term arrangements in the spot market. PSO PSO engages in a program to maintain adequate gas supplies necessary for operation. Natural gas for generation is provided by purchases under a number of long-term and spot market contracts. Approximately 49% of PSO's natural gas requirements in 1995 were provided for under firm contracts. Transok acts as an administrator with respect to purchases of natural gas supplies. Gas is transported by Transok to PSO facilities under agreements pursuant to which PSO pays Transok for actual costs incurred in providing the services as determined on an allocated cost of service basis, including a rate of return on equity applicable between affiliates as specified by the Oklahoma Commission in PSO's most recent Oklahoma price review. See ITEM 7-MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information with respect to Transok and the agreements between PSO and Transok. SWEPCO SWEPCO purchased approximately 100% of its gas requirements in 1995 pursuant to spot purchase contracts with no take-or-pay obligations. Subject to market conditions, SWEPCO plans to continue to enter into short-term contracts with various suppliers to provide gas for peaking purposes. WTU WTU has gas purchase contracts with several suppliers. The largest long-term contract, which is with Lone Star, provided approximately 11% of WTU's total gas requirements in 1995. Lone Star is obligated, except during curtailments, to have gas available for 125% of the estimated annual fuel requirements of each plant served, provided the total of all plants does not exceed 110% of the estimated annual fuel requirement. The Lone Star contract, which expires in 2000, allows WTU considerable flexibility to purchase gas from other sources. Utilizing this flexibility in 1995, WTU purchased approximately 72% of its gas requirements on the spot market from many different suppliers. The remaining 17% of WTU's 1995 gas requirements came from supplemental firm contracts with several suppliers. The contracts with suppliers vary in their terms, but generally provide for periodic or other price adjustments. Coal and Lignite The Electric Operating Companies purchase coal from a number of suppliers. In 1995, approximately 74% of the Electric Operating Companies' total coal purchases were supplied under long-term contracts with the balance procured on the spot market. The coal for the CSW System plants comes primarily from Wyoming or Colorado mines which are located between 1,000 and 1,700 rail miles from the generating plants. Proposed Railroad Merger On November 30, 1995, Union Pacific, Southern Pacific and certain other affiliates of each filed an application with the Interstate Commerce Commission to merge their rail operations. Union Pacific and Southern Pacific currently compete for portions of the coal transportation traffic to CPL's Coleto Creek Power Plant. In addition, Southern Pacific controls the destination portion of movements of coal from the Powder River Basin of Wyoming, where Union Pacific competes with Burlington Northern for the origination portion of the movements. Because of the potential elimination of such 1-20 competition and other factors, CPL may be adversely affected by this merger, if approved, unless conditions mitigating the impact are included in the merger. Oklaunion - CPL, PSO and WTU The jointly owned Oklaunion plant purchases coal under a coal supply contract with Caballo Coal Company. Approximately 99% of the total 1995 Oklaunion coal requirements for WTU, 78% for CPL and 85% for PSO were supplied under the Caballo Coal Company contract with the balance procured on the spot market. As of December 31, 1995, CPL's share of the coal inventory at Oklaunion was approximately 46,000 tons, representing approximately 83 days supply; PSO's share was approximately 78,000 tons, representing approximately 71 days supply; and WTU's share was approximately 205,000 tons, representing approximately 67 days supply. Prior to the expiration of a coal transportation contract in October 1995, all coal used at Oklaunion was transported approximately 1,100 miles to the plant by Burlington Northern. Subsequently, coal has been transported in Burlington Northern supplied rail cars pursuant to a tariff filed with the Interstate Commerce Commission, whose authority in the matter was transferred to the Surface Transportation Board of the U.S. Department of Transportation effective January 1, 1996. In a case currently pending before such board, WTU has challenged the rate filed by Burlington Northern and requested prescription of a reasonable rate by the Surface Transportation Board. Coleto Creek - CPL CPL acquired approximately 34% of the 1995 coal requirements for its Coleto Creek plant pursuant to a long-term agreement with Colowyo Coal Company, which expires in 1999. CPL's remaining purchase obligation under the Colowyo agreement is for approximately 25% of Coleto Creek's requirements. The coal is mined in northwestern Colorado and is transported approximately 1,400 miles by Denver & Rio Grande Western Railroad Company and Southern Pacific. Southern Pacific is currently the only rail carrier with access to the Coleto Creek plant. CPL owns sufficient railcars for operation of three unit trains. CPL has instituted a proceeding at the Interstate Commerce Commission, whose authority in the matter was transferred to the Surface Transportation Board of the U.S. Department of Transportation, effective January 1, 1996, requesting a reasonable rate for the 16 mile movement from Victoria, Texas, a station served by Missouri Pacific Railroad Company, to Coleto Creek. CPL has entered into an agreement with Colowyo Coal Company for most of Coleto Creek's coal requirements for 1996. Under this contract, transportation charges are paid by Colowyo Coal Company. CPL has also contracted for a test burn of coal from the Powder River Basin of Wyoming during 1996. After 1996, CPL intends to utilize Powder River Basin coal for a portion of the Coleto Creek plant requirements and intends to negotiate rail transportation agreements for such coal. Powder River Basin coal is transported approximately 1,700 miles, using either Burlington Northern or Union Pacific as the originating carrier and Southern Pacific as the destination carrier. See Proposed Railroad Merger above. At December 31, 1995, CPL had approximately 531,000 tons of coal in inventory at Coleto Creek, representing approximately 73 days supply. 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 2014. 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 rail cars and spares for operation of six unit trains. Coal is transported to Northeastern Station pursuant to a long-term contract with Burlington Northern. At December 31, 1995, PSO had approximately 438,000 tons of coal in inventory at Northeastern representing approximately 41 days supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for additional information. Welsh and Flint Creek - SWEPCO All of the long-term supply for SWEPCO's Welsh plant and its 50 percent-owned Flint Creek plant is provided under a contract with 1-21 AMAX. Coal under the AMAX contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100 miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to the plants under rail transportation contracts with Burlington Northern and the Kansas City Southern Railroad Company having expiration dates ranging between 1996 and 2007. SWEPCO owns or leases under long-term leases sufficient cars and spares for operation of twelve unit trains. SWEPCO has supplemented its railcar fleet from time to time with short-term leases. At December 31, 1995, SWEPCO had coal inventories of approximately 1,552,000 tons at Welsh, representing 68 days supply, and approximately 468,000 tons at Flint Creek, representing 68 days supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for information 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, 1995, approximately 238,000 tons of lignite were in inventory at the plant representing 22 days supply. Another 25,000 acres are jointly leased in equal portions by SWEPCO and Central Louisiana Electric Company in the Dolet Hills area of Louisiana near Dolet Hills Power Plant. The Dolet Hills Mining Venture is the contract miner for these reserves. At December 31, 1995, SWEPCO had approximately 207,000 tons of lignite in inventory at the plant representing 40 days 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 in the isotope U235 and 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 STP Management Committee, comprised of representatives of all participants in STP. 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 uranium concentrate and conversion service sufficient for the operation of both STP units through November 1997. Additional flexible contracts are in place to provide 50% of the uranium concentrate and 100% of the conversion service needed for STP from the end of 1997 through 2000. 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 2005 under a ten year no cost termination provision of the enrichment contract. The STP participants believe that other, lower cost options will be available in the future. Also, fuel fabrication services have been contracted for operation through 2005 for Unit 1 and 2006 for Unit 2. Although CPL and the other STP owners cannot predict the availability of uranium and related services, CPL and the other STP owners do not currently expect to have difficulty obtaining uranium and related services required for the remaining years of STP operation. The Energy Policy Act has provisions for the recovery of a portion of the costs associated with the decommissioning and decontamination of the gaseous diffusion plants used in the enrichment process. These costs are being recovered on the basis of enrichment services purchased by utilities from the DOE prior to October of 1992. The total annual assessment for all domestic 1-22 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 not be available until 2010. The DOE will be taking 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 System's ability to economically meet the needs of its customers, and could require the 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 material adverse effect on CSW's and/or the Electric Operating Companies' financial condition and results of operations. 1-23 Fuel Costs and Consumption Additional fuel cost data for the CSW System appears under Operating Statistics above. Average fuel costs and consumption by fuel type for 1995 are presented in the following table. 1995 Average Cost per 1995 Consumption Fuel Type MMbtu (million) Btus Mcfs Tons CPL Natural gas $1.62 118 114 Coal $1.71 41 2 Nuclear $0.51 50 Composite $1.37 PSO Natural gas $2.01 91 88 Coal $1.31 62 4 Composite $1.73 SWEPCO Natural gas $1.68 38 38 Coal $1.85 99 6 Lignite $1.19 61 5 Composite $1.61 WTU Natural gas $1.88 44 44 Coal $1.70 23 1 Composite $1.83 CSW Natural gas $1.79 Coal $1.66 Lignite $1.19 Nuclear $0.51 Composite $1.58 The registrants are unable to reliably predict the future cost of fuel. See ITEM 7-MD&A for further information concerning fuel costs. Environmental Matters The Operating Companies and CSW Energy are subject to regulation with respect to air and water quality and solid waste standards and other environmental matters by various federal, state and local authorities. These authorities have continuing jurisdiction in most cases to require modifications in the Electric Operating Companies' facilities and operations. Changes in environmental statutes or regulations could require substantial additional expenditures to modify the Electric Operating Companies' facilities and operations and could have a material adverse effect on CSW's and each of the 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. 1-24 In 1990, the United States Congress passed the Clean Air Act which places restrictions on the emission of sulfur dioxide from gas- , coal- and lignite-fired generating plants. Beginning in the year 2000, the 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 System facilities plan, CSW believes that the 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. The Clean Air Act also directs the EPA to issue regulations governing nitrogen oxide emissions and require government studies to determine what controls, if any, should be imposed on utilities to control air toxics emissions. The impact that the nitrogen oxide emission regulations and the air toxics study will have on CSW and the Electric Operating Companies cannot be determined at this time. As a result of requirements imposed by the Clean Air Act, CSW expects to spend approximately $1.7 million over a three year period from 1995 to 1997 for annual testing of, software modifications to, and maintenance of continuous emission monitoring equipment. Of this, approximately $0.5 million was spent in 1995. The expected expenditures and the 1995 expenditures for each of the Electric Operating Companies are presented in the following table. CPL PSO SWEPCO WTU (thousands) Total expected expenditures (1995-1997) $540 $329 $488 $309 Expenditures in 1995 $146 $98 $131 $86 Water Quality Water quality is subject to the jurisdiction of each of the state regulatory authorities in which the CSW System operates as well as the EPA. These authorities have jurisdiction over all wastewater discharges into state waters and also for establishing water quality standards and issuing 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 CSW System operates have received authorization from the EPA to administer the RCRA solid waste control program for their respective states. 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. 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 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 Electric Operating Companies own distribution poles treated with 1-25 creosote or related substances. The EPA currently exempts coal combustion by-products from regulation as hazardous wastes. Distribution poles treated with creosote or similar substances are not expected to exhibit characteristics that would cause them to be hazardous waste. In connection with their operations, the 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 System were reclassified as hazardous wastes, or other new laws or regulations concerning hazardous wastes or other materials were put in 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. TSCA Violation - CPL Under the TSCA, the storage, use and disposal, among other things, of PCBs are regulated. Violations of the TSCA may lead to fines and penalties. CPL was inspected by the EPA in 1992 and found to have TSCA record-keeping and other violations for PCBs. During 1995, CPL negotiated a settlement, signed a consent agreement and paid a penalty of approximately $76,000. Sol Lynn Superfund Site - CPL The Sol Lynn salvage yard was declared a Superfund site by the EPA after it was found to contain a number of contaminants including PCBs. Gulf States Utilities Company remediated the site for approximately $2 million and attempted to recover a portion of the remediation costs from alleged PRPs, including CPL. During 1995, CPL and Gulf States Utilities Company reached an agreement whereby CPL paid $50,000 as its share of the remediation costs. Rose Chemical Site - SWEPCO, WTU and CPL SWEPCO, WTU and CPL were named PRPs in the cleanup of the Rose Chemical Site, in Missouri, along with 750 other companies. A cleanup fund was established through payments by PRPs who agreed to a "buyout settlement," and the site remediation was undertaken. The site buildings were removed and the grounds cleaned to standards acceptable to the EPA. The court settlement became final in July 1994, and during 1995, SWEPCO, WTU and CPL received refunds of $225,000, $235,000 and $60,000, respectively, from the previously collected cleanup fund. PCB Storage Facilities - PSO PSO investigated and identified PCB contamination at one of its PCB storage facilities in Sand Springs, Oklahoma. PSO made proper notification to the EPA of the contamination that was caused by spills prior to the adoption of PCB spill regulations. PSO negotiated a remediation plan with the EPA. Remediation of the PCB storage site began in November 1994 and was completed in 1995 at a cost of approximately $235,000. As part of the remediation plan, however, the EPA requested PSO to sample the land surrounding the PCB storage building site. The land includes an active PSO substation and a privately owned industrial area. Testing of the PSO property conducted during 1995 revealed minor contamination, and a resulting cleanup of the substation was completed at a cost of $73,000. PSO has not been able to test the adjoining industrial area, so it has been unable to determine the extent of any PCB contamination. Compass Industries Superfund Site - PSO 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 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, as a de minimis party appears 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 a $100,000 liability for this expected settlement in 1996. Coal Mine Reclamation - PSO In August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned 1-26 subsidiary of PSO. Ash Creek recorded a $3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an additional $500,000 in 1995. Actual reclamation work commenced in September 1995, with completion expected in late 1996. Surveillance monitoring will continue for ten years after final reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. Suspected Biloxi, Mississippi MGP Site - SWEPCO In 1994, SWEPCO was notified by Mississippi Power that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO worked with Mississippi Power to investigate the extent of contamination at this site. The MDEQ approved a site investigation work plan and, in January 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of the property and adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results confirmed the contamination on the property and indicated the possibility of contamination of an adjacent property. A risk assessment has been performed to assist SWEPCO and Mississippi Power in determining remediation alternatives. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site. Suspected MGP Sites in Texarkana, Arkansas and Shreveport, Louisiana - SWEPCO SWEPCO owns a suspected former MGP site in Texarkana, Arkansas. The EPA ordered an initial investigation of this site, as well as a site in Shreveport, Louisiana, which is no longer owned by SWEPCO. The contractor who performed the investigations of these two sites recommended to the EPA that no further action be taken at this time. SWEPCO discovered that an underground storage tank was in place at the Texarkana site and that it was leaking. SWEPCO removed the tank in early 1995 and has made a request for closure from the ADPCE based on soil and ground water quality results. SWEPCO does not believe that any further action will be required for either of these sites. Suspected MGP Site in Marshall, Texas - SWEPCO SWEPCO owns a suspected former MGP site in Marshall, Texas. SWEPCO notified the TNRCC that evidence of contamination has been found at the site. Sampling was conducted at the end of 1993 and early 1994, to evaluate the extent, if any, to which contamination has impacted soil, groundwater and other conditions in the area. SWEPCO later conducted another round of groundwater sampling from the site's groundwater monitor wells. Sample results from each of the nine monitor wells indicate that there were no drinking water standards exceeded for RCRA metals. In April 1995, additional off-site soil samples were collected and were analyzed for metals concentrations to provide for statistical comparison of on-site soils metals concentrations with off-site or background levels. Metal concentrations were determined to be comparable to background levels, so SWEPCO proceeded with closure of the site with the TNRCC. Cleanup work at the site was completed for substantially less than the preliminary $2 million estimate that was accrued in 1993. EMFs Research is ongoing whether exposure to EMFs may result in adverse health effects. Although a few of the studies to date have suggested certain associations between EMFs and some types of effects, the research to date has not established a cause-and-effect relationship between EMFs and adverse health effects. 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 a party 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 Electric Operating Companies' results of operations or financial condition. 1-27 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. UNITED KINGDOM UTILITY OPERATIONS Background and Overview On November 6, 1995, CSW, indirectly through CSW (UK), announced its intention to commence the Tender Offer in the United Kingdom to acquire all of the outstanding share capital of SEEBOARD, a regional electricity company in the United Kingdom, for an aggregate adjusted purchase price of approximately $2.12 billion. Through February 29, 1996, CSW (UK) had acquired shares representing, or had received valid acceptances in respect of, approximately 92.3% of the outstanding share capital of SEEBOARD. CSW (UK) expects to acquire the remaining 7.7% of the outstanding SEEBOARD share capital by the end of the second quarter of 1996. SEEBOARD is one of the 12 regional electricity companies which came into existence as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. SEEBOARD's primary regulated businesses are the distribution and supply of electricity within its southeast England service area. SEEBOARD is also involved in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD serves an affluent suburban and rural area in the United Kingdom. SEEBOARD is also one of the lowest cost suppliers of below 100 KV customers among the United Kingdom's regional electricity companies. Distribution and Supply Businesses Service Area SEEBOARD's service area covers approximately 3,000 square miles in southeast England, extending from the outlying areas of London to the English Channel. SEEBOARD's service area 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 become increasingly important, while the industrial sector has been in decline. There has been considerable commercial development 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. Distribution Business Distribution is the core business of SEEBOARD and involves the distribution of electricity to consumers over SEEBOARD's distribution system. Electricity is transported from generating plants across the United Kingdom, typically at 400 KV or at 275 KV via the National Grid, to points within SEEBOARD's geographical area. It is then transformed to 132 KV and enters SEEBOARD's distribution system. Almost all of the electricity that enters SEEBOARD's system is received at these National Grid supply points. However, a small amount of electricity is received from power stations within SEEBOARD's geographical area. At December 31, 1995, SEEBOARD's distribution system contained approximately 7,655 miles of overhead lines and approximately 19,874 miles of underground cables. The bulk of SEEBOARD's tangible fixed assets are currently employed in the distribution business. Supply Business SEEBOARD's supply business consists of the bulk purchase of electricity and its sale to customers. The majority of electricity 1-28 sold by SEEBOARD in its supply business is purchased through a pool created in 1990 for the bulk trading of electricity. Pool prices are variable and difficult to predict. Accordingly, in an effort to control exposure to prices, SEEBOARD has a portfolio of contracts with major generators as a means of hedging price fluctuations in the pool. The physical delivery of electricity via SEEBOARD's distribution network results in a cost to the supply business and income to the distribution business. SEEBOARD currently has the sole right to supply substantially all of the consumers in its authorized area, except where demand is above 100 KW. As a part of the restructuring of the electricity industry, competition is being introduced into the market for electricity supply on a phased basis. The threshold for competitive supply was reduced from 1 MW to 100 KW effective April 1, 1994. SEEBOARD, as well as other licensed suppliers, are permitted to supply electricity to customers whose peak demand exceeds 100 KW in the areas of other regional electricity companies. 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. It is currently intended that, effective April 1, 1998, the regional electricity companies' supply businesses (including SEEBOARD's) will no longer be protected by a franchise. SEEBOARD has always been a strong supporter of extending competition in electricity whenever feasible and practicable. To date, SEEBOARD has established a profitable business in supplying customers outside of its franchise area. While SEEBOARD is currently unable to predict the impact that the transition in 1998 to full competition will have on its electricity supply business, its primary objective is one of profit and not market share. Regulation 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. The Secretary of State for Trade and Industry and the DGES are the principal regulators of SEEBOARD's business. Most of the income of the distribution business is regulated by a formula set by the DGES based upon, among other factors, the UK RPI. The formula generally sets a cap on the average price per unit distributed, with allowed annual increases based upon changes in the UK RPI plus a percentage factor set from time to time by the DGES (which was initially set at 0.75%). In August 1994, the DGES announced that SEEBOARD's allowed per unit price would be reduced by 14% effective April 1, 1995 and that increases (or, if applicable, decreases) in the allowed per unit price in subsequent years would be based upon changes in the UK RPI minus 2%. In July 1995, the DGES proposed a further revision to SEEBOARD's price controls which would further reduce the allowed per unit price by 13%, effective April 1, 1996, and restrict increases (or, if applicable, require decreases) in the allowed per unit price in each of the three subsequent years based upon changes in the UK RPI minus 3%. 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 include electricity purchase costs, transmission charges, and distribution costs, together with an allowed margin as determined by the DGES. Under the current formula, SEEBOARD is permitted annual increases (or, if applicable, decreases) in its allowed margin by an amount equal to the UK RPI minus 2%. The DGES is not scheduled to review the allowed supply charges for the regional electricity companies, including SEEBOARD, until 1998, although the DGES may reopen the review before such time under certain circumstances. 1-29 Other Businesses In addition to its distribution and supply businesses, SEEBOARD is also engaged in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD's gas supply business was established in 1993 to compete in the competitive commercial and industrial markets. In 1995, a joint venture was entered into with Amoco to take advantage of the extension of competition into the United Kingdom natural gas domestic market, and will result in the supply by SEEBOARD of natural gas throughout the United Kingdom. SEEBOARD's electricity generation business is conducted through its 37.5% interest in Medway Power Ltd's 660 MW gas fired power plant located on the Isle of Grain. SEEBOARD also provides electrical contracting services as both a primary contractor and subcontractor to a variety of industrial, commercial and domestic customers. These operations are primarily in Southeast England but include a growing national element. Finally, SEEBOARD conducts an electrical retailing business through its chain of retail electrical appliance shops and superstores. Although the retail business remains concentrated in SEEBOARD's authorized service area, a small number of superstores have been developed successfully outside of the region. Financial Information For the year ended December 31, 1995, SEEBOARD had electricity sales of approximately 18 billion KWH and, excluding exceptional items, net earnings of approximately $118 million on revenues of approximately $1.9 billion (1.00 pound=$1.58). SEEBOARD's results for the year ended December 31, 1995 are not indicative of the results that will be experienced by SEEBOARD as a subsidiary of CSW due, in part, to the debt incurred in connection with the financing of the acquisition, the purchase accounting adjustments and the other accounting adjustments made to adjust SEEBOARD's results for U.S. Generally Accepted Accounting Principles. See ITEM 7-MD&A and ITEM 8- NOTE 13. UNAUDITED PRO FORMA INFORMATION for more information regarding SEEBOARD. Environmental Regulation 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 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 results of operations or financial condition. NON-UTILITY OPERATIONS Transok Transok, is an intrastate natural gas pipeline and gas marketing company that gathers, processes and stores natural gas for, and transports and markets natural gas to, the Electric Operating Companies and other customers. Transok, which was incorporated in Oklahoma in 1955, was acquired by CSW in 1961 to supply natural gas to PSO's power stations. Transok's operations in recent years have included the marketing and transportation of natural gas for third parties, as well as the supply of gas and services to the other Electric Operating Companies and CSW Energy. Transok provides a variety of services to the Electric Operating Companies including acquiring and transporting natural gas to meet certain of their power generation needs. Transok's largest customer is PSO. The contract between PSO and Transok provides (i) for the transportation of PSO's natural gas fuel supply through Transok's pipeline system and (ii) for Transok to act as PSO's supply 1-30 administrator in acquiring natural gas and negotiating and administering supply contracts. PSO pays Transok for such services at cost, including a return on equity applicable between affiliates as specified by the Oklahoma Commission in PSO's most recent Oklahoma price review. The contract expires on January 1, 2003. Under the contract, PSO has the right to require delivery of up to 165,000 MMbtu per day of natural gas through Transok's pipeline system. PSO has the option, exercisable on or before July 1, 1997, to increase delivery of natural gas under the contract up to 255,000 MMbtu per day effective January 1, 1998. Transok's current delivery rate to PSO is approximately 98 Bcf of natural gas annually, which is projected to increase in the future. Natural Gas Transportation and Gathering Transok provides natural gas suppliers and shippers with pipeline interconnects for access to the Electric Operating Companies and other end-users throughout the United States. At December 31, 1995, Transok's pipeline system consisted of approximately 6,504 miles of gathering and transmission lines which include approximately 4,030 miles of gathering lines in Oklahoma, 276 miles in Louisiana and 214 miles in Texas. At December 31, 1995, Transok's pipeline system consisted of 205 compressors with 228,300 horsepower to provide both gathering and transmission line compression. Transok's pipeline facilities are located in the major natural gas producing basins in Oklahoma, including the Anadarko and Arkoma basins, and in the major Louisiana corridor of pipelines transporting natural gas to the northeast from the Gulf Coast and mid-continent areas. The Transok pipeline system has numerous connections with major interstate pipelines through which natural gas is transported to markets throughout the United States. In 1995, the Transok pipeline system had a throughput of 511 Bcf of natural gas. Transok transported approximately 89 Bcf of natural gas for PSO in 1995 and provided administrative services to PSO to manage its supply of natural gas. Transok has been active in the development of joint gas purchase arrangements with its other CSW affiliates as well. Transok's access to diverse natural gas markets combined with the natural gas fuel needs of the Electric Operating Companies allow for natural gas opportunities at high load factors, reducing the cost of natural gas fuel for the CSW System. Natural Gas Processing Transok also owns and operates eight natural gas processing plants, including the Cox City plant which began operations in January 1996, for the production of natural gas liquids. The plants have an aggregate capacity of 564 MMcf/d. Transok is the largest natural gas processor in Oklahoma and ranks eighteenth among natural gas liquids producers nationwide. In 1995, Transok's plants produced 344 million gallons of natural gas liquids while revenue from the sale of natural gas liquids amounted to $135 million for the year. Natural Gas Storage Transok owns and operates an underground natural gas storage reservoir in Oklahoma with an aggregate storage capacity of approximately 26 Bcf. Operational capabilities include injection into storage at a rate of 200 MMcf/d and a withdrawal rate in excess of 300 MMcf/d. The FERC has approved market-based storage rates for Transok which enables it to sell storage services to interstate customers at negotiated fees based on the value of those services in the competitive marketplace. Transok's gas storage field also allows Transok to offer peaking services, accommodate volume swings on its pipeline system and support the natural gas requirements of the Electric Operating Companies. Natural Gas Marketing In 1989, Transok began its natural gas marketing program and sold 26 Bcf to a variety of customers including local distribution companies, end-users and other pipelines. In 1995, Transok's natural gas sales volumes were 326 Bcf with a sales revenue of $529 million. Off-system sales of natural gas accounted for 164 Bcf of the natural gas sold in 1995. This increase was the result of pipeline acquisition and construction activities combined with new customers. Transok aggregates natural gas supply into various supply pools, which provide Transok with reliable sources of natural gas at market sensitive prices, allowing Transok to meet its natural gas supply needs. Transok offers various gas supply services to provide 1-31 customers with peaking and balancing alternatives utilizing Transok's gas supplies and facilities. In addition, Transok's customers have the opportunity to select various pricing options including: (i) fixed or variable pricing; (ii) indexed to New York Mercantile Exchange pricing; or (iii) cash quotes. Transok uses natural gas futures, options and basis swaps to reduce its price risk exposure arising from the purchase and sale of natural gas. Natural gas futures and options allow Transok to protect against volatility in supply costs in fulfilling fixed price contracts, meeting storage requirements and purchasing natural gas for processing operations. Natural gas futures and options also are used to protect Transok against price exposure on sales of natural gas from storage or anticipated purchases. In addition, basis swaps protect Transok against volatility in price differentials between geographic areas in matching anticipated supply and demand prices. In 1992, FERC Order 636 went into effect to deregulate the natural gas industry and increase competition. Although Transok operations were not directly affected by Order 636, Transok has developed tariff services, flexible contracts and other natural gas related services in order to meet customers' needs and take advantage of new competitive opportunities. Services for CSW Energy Transok provides natural gas fuel planning and management services for CSW Energy. Transok assists CSW Energy in developing natural gas supply and transportation strategies for CSW Energy's non- utility electric generation projects. Regulation As a subsidiary of CSW, Transok is subject to regulation under the Holding Company Act. The Holding Company Act, among other things, requires that regulated companies seek prior SEC approval before entering into certain transactions, including the acquisition or issuance of securities. Transok's pipelines are considered gathering systems or intrastate pipelines. Transok is therefore exempt from regulation by the FERC under the Natural Gas Act. However, Transok's rates for transporting gas in interstate commerce are subject to FERC regulation under the Natural Gas Policy Act of 1978. The FERC approves Transok's rates for transportation of gas in interstate commerce through Transok's pipelines in Oklahoma and Louisiana and the Texas Railroad Commission approves the rates for such transportation through pipelines in Texas. The FERC also has given Transok approval to charge market-based rates for storage of gas using Transok's storage facility in Oklahoma. While Transok is not subject to direct regulation by any state public utility commission, the costs that result from transactions with the Electric Operating Companies are subject to review by the state commissions regulating affiliates and are required to meet standards for affiliate transactions to be recoverable by the Electric Operating Companies. Transok's compressor engines and other emission sources are subject to air permit requirements, including monitoring. As a result of new requirements under the Clean Air Act, seven of Transok's facilities will be subject to additional permit requirements. The Clean Air Act may also impose additional enhanced monitoring requirements on these seven facilities. Strategic Alternatives for Transok In January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok. The alternatives for Transok, which include a possible sale, are a part of CSW's continuous strategic asset review. Although it is not presently possible to predict the terms upon which any sale of Transok would be effected, CSW does not expect that the sale of Transok to an unaffiliated third party would have a material adverse effect on the price or availability of natural gas for PSO or any of the other Electric Operating Companies. 1-32 CSW Energy CSW Energy is authorized to develop various independent power and cogeneration facilities and to own and operate such non-utility projects, subject to regulatory approval. CSW Energy's participation in projects as of the end of 1995 is presented in the following table.
Capacity Commercial (in Mw) Operation Ownership Thermal Project Location Total Sold Date Interest Host Host Utility Brush II Brush,CO 68 68 January 1994 47% Greenhouse Public Service Company of Colorado Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50% Greenhouse Public Service Company of Colorado Mulberry Polk County, FL 120 110 August 1994 50% Distilled Florida Power Corporation water/ ethanol plant Orange Polk County, FL 103 97 June 1995 50% Orange juice Florida Power Corporation processor Tampa Electric Company Phillips Sweeny Sweeny,TX 300 90* Mid 1998 50% Refinery Undetermined* Newgulf Wharton, TX 85 -- Mid 1996 100% IPP Undetermined * The Phillips Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company.
In addition to these projects, CSW Energy has another six projects totaling approximately 2,000 MW in various stages of development, mostly in affiliation with other developers. See ITEM 7- MD&A for additional discussion of the settlement of certain issues between CSW Energy and a former business partner that resulted in a new business partner for the Mulberry and Orange projects. CSW International CSW International was formed in 1994 to engage in international activities, including developing, acquiring, financing and owning EWGs and foreign utility companies. CSW International's most significant activity to date is the acquisition, indirectly through CSW (UK), of the outstanding share capital of SEEBOARD pursuant to the Tender Offer. See UNITED KINGDOM UTILITY OPERATIONS above, and ITEM 7-MD&A. CSW International also intends to continue its efforts in Mexico, with a stated goal of participating in providing Mexico's future electricity needs. Although the recent devaluation of the Mexican peso has slowed previously projected power demand, CSW International continues to believe that the geographic location of the CSW System offers opportunities to provide bulk power to Mexico. CSW International continues to seek to expand into other countries in Latin America, Europe and Asia that meet its investment criteria. CSW Credit CSW Credit was formed to purchase, without recourse, the accounts receivables from the Operating Companies. This helps provide liquidity to the Operating Companies due to the seasonal nature of the electric utility industry. CSW Credit's business has been expanded to include the purchase, without recourse, of accounts receivables for certain non-affiliated parties as well. In addition, CSW Credit's capital structure contains greater leverage than that of the Operating Companies, consequently lowering CSW's overall cost of capital. CSW Credit, as a subsidiary of CSW, is subject to the Holding Company Act. As such, CSW Credit must comply with a restriction whereby no more than 50% of the average outstanding accounts receivable balances held may be from non- affiliated parties. 1-33 CSW Communications CSW Communications was formed to provide communication services to the Operating Companies and non-affiliates. One important goal of CSW Communications is to enhance services to CSW System customers through fiber optics and other telecommunications technologies. In Laredo, Texas, a project has been undertaken to install fiber optic lines and coaxial cable to CPL residential customers. The project, a network of over 3,000 homes with approximately 700 customers currently participating, will demonstrate the energy efficiency and cost savings that result from giving customers greater choice and control over their electric service. CSW Communications offers similar energy efficiency services to other parties, including affiliates as well as non-affiliates. In the future, CSW Communications may, subject to any required regulatory approvals, seek to lease or otherwise use the remaining capacity for other services including possibly telephone service, cable television and home security systems. CSW Communications presently owns and manages a 185 mile fiber-optic line connecting the south Texas cities of Corpus Christi, Harlingen and McAllen, and anticipates the construction of another fiber-optic line, connecting Shreveport, Louisiana and Longview, Texas, to begin in mid-1996. CSW Communications filed for "exempt telecommunications company" status with the FCC on February 8, 1996, subsequent to legislation that introduced competition to telephone and other communications industries that operated within regulated environments. The filing with the FCC automatically qualifies CSW Communications as an exempt telecommunications company, pending the FCC's review of the application (which is required to be completed within 60 days). CSW believes that CSW Communications' exempt telecommunications company status will enable it to compete more effectively with other telecommunications companies. EnerShop In September 1995, EnerShop was formed to provide energy services to customers throughout the Southwest. EnerShop offers services that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis, project management, engineering design and equipment procurement and construction, third party financing and equipment leasing, savings and performance guarantees and performance monitoring. EnerShop recently secured its first major contract and has bids outstanding for several additional projects in 1996. OTHER INFORMATION Employees The number of employees at December 31, 1995, is presented in the following table. CSW Services 1,109 CPL 1,896 PSO 1,477 SWEPCO 1,747 WTU 1,063 Transok 546 CSW Energy 87 SEEBOARD 4,139 12,064 Approximately 550 employees at PSO and 750 employees at SWEPCO are covered under collective bargaining agreements with the International Brotherhood of Electrical Workers. Approximately 3,300 employees at SEEBOARD are covered by collective agreements with 1-34 several different unions. These unions include the Amalgamated Electrical and Engineering Union, GMB, Electrical Power Engineers Association, Unison and the Transport and General Workers Union. Executive Officers of CSW The following information is included in Part I pursuant to Regulation S-K, Item 401(b), Instruction 3. Age at March Name 16, 1996 Present Position E. R. Brooks 58 Chairman, President and CEO, Director Harry D. Mattison (1) 59 Executive Vice President of CSW, President and CEO of CSW Electric, Director T. V. Shockley, III 51 Executive Vice President of CSW, President and CEO of CSW Enterprises, Director Ferd. C. Meyer, Jr. 56 Senior Vice President and General Counsel Glenn D. Rosilier 48 Senior Vice President and Chief Financial Officer Frederic L. Frawley 53 Corporate Secretary and Senior Attorney Stephen J. McDonnell 45 Treasurer Wendy G. Hargus 38 Controller (1) Mr. Mattison will retire as a director and executive officer of CSW effective April 18, 1996 and April 30, 1996, respectively. Each of the executive officers of CSW is elected to hold office until the first meeting of CSW's Board of Directors after the next annual meeting of stockholders. CSW's next annual meeting of stockholders is scheduled to be held April 18, 1996. 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 more than the last five years. 1-35 ITEM 2. PROPERTIES. See ITEM 1. BUSINESS for a description of the CSW System and SEEBOARD properties. ITEM 3. LEGAL PROCEEDINGS. The registrants are party to various legal claims, actions and complaints arising in the normal course of business that 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CSW None. CPL None. PSO None. SWEPCO None. WTU None. 2-1 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. CSW COMMON STOCK INFORMATION 1995 1994 Market Price Dividends Market Price Dividends High Low Paid High Low Paid First Quarter $24 7/8 $22 3/8 43.0 cents $30 7/8 $24 1/8 42.5 cents Second Quarter 26 5/8 23 7/8 43.0 26 1/4 20 1/8 42.5 Third Quarter 26 3/8 24 1/8 43.0 23 1/4 20 7/8 42.5 Fourth Quarter 28 1/2 24 3/4 43.0 23 3/4 20 1/8 42.5 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 for CSW Common were obtained from the composite listing of all CSW Common trades as reported on Bloomberg Financial Commodities News. Dividends of 43 cents a share were paid in each quarter of 1995. All dividends paid by CSW represent taxable income to stockholders for federal income tax purposes. In January 1996, CSW's board of directors increased the quarterly dividend to 43.5 cents per share, payable on February 29, 1996, to stockholders of record on February 8, 1996. Future cash dividends will be dependent upon the policies of CSW's board of directors and CSW's earnings, financial condition and other factors. Traditionally, the CSW board of directors has declared dividends to be payable on the last business day of February, May, August, and November. On February 27, 1996, CSW sold 15,525,000 shares of CSW Common in the 1996 Stock Offering. CSW received net proceeds of approximately $398 million. These proceeds were used to repay a portion of the indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD. There were approximately 74,000 record holders of CSW's common stock as of February 29, 1996. CPL, PSO, SWEPCO AND WTU COMMON STOCK INFORMATION All of the outstanding shares of common stock of CPL, PSO, SWEPCO and WTU are owned by CSW. ITEM 6. SELECTED FINANCIAL DATA. Reference is made to the page numbers noted in the following table for the location of ITEM 6. SELECTED FINANCIAL DATA, which is included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page Number CSW CPL PSO SWEPCO WTU Selected Financial Data 2-5 2-69 2-95 2-115 2-136 CSW 2-2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Reference is made to the page numbers noted in the following table for the location of ITEM 7. MD&A which is included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page Number CSW CPL PSO SWEPCO WTU MD&A 2-6 2-70 2-96 2-116 2-137 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CSW Page Central and South West Corporation 2-4 Selected Financial Data 2-5 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-6 Consolidated Statements of Income 2-27 Consolidated Statements of Retained Earnings 2-28 Consolidated Balance Sheets 2-29 Consolidated Statements of Cash Flows 2-31 Notes to Consolidated Financial Statements 2-32 Report of Independent Public Accountants 2-66 Report of Management 2-67 CPL Central Power and Light Company 2-68 Selected Financial Data 2-69 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-70 Statements of Income 2-81 Statements of Retained Earnings 2-82 Balance Sheets 2-83 Statements of Cash Flows 2-85 Statements of Capitalization 2-86 Notes to Financial Statements 2-87 Report of Independent Public Accountants 2-92 Report of Management 2-93 CSW 2-3 PSO Public Service Company of Oklahoma 2-94 Selected Financial Data 2-95 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-96 Consolidated Statements of Income 2-103 Consolidated Statements of Retained Earnings 2-104 Consolidated Balance Sheets 2-105 Consolidated Statements of Cash Flows 2-107 Consolidated Statements of Capitalization 2-108 Notes to Consolidated Financial Statements 2-109 Report of Independent Public Accountants 2-112 Report of Management 2-113 SWEPCO Southwestern Electric Power Company 2-114 Selected Financial Data 2-115 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-116 Statements of Income 2-124 Statements of Retained Earnings 2-125 Balance Sheets 2-126 Statements of Cash Flows 2-128 Statements of Capitalization 2-129 Notes to Financial Statements 2-130 Report of Independent Public Accountants 2-133 Report of Management 2-134 WTU West Texas Utilities Company 2-135 Selected Financial Data 2-136 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-137 Statements of Income 2-146 Statements of Retained Earnings 2-147 Balance Sheets 2-148 Statements of Cash Flows 2-150 Statements of Capitalization 2-151 Notes to Financial Statements 2-152 Report of Independent Public Accountants 2-155 Report of Management 2-156 CSW 2-4 CENTRAL AND SOUTH WEST CORPORATION CSW 2-5 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. All common stock data have been adjusted to reflect the two-for-one common stock split, effected by a 100% stock dividend paid on March 6, 1992. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented. 1995 (1) 1994 1993 (2) 1992 1991 (millions, except per share and ratio data) INCOME STATEMENT DATA Revenues $3,735 $3,623 $3,687 $3,289 $3,047 Operating expenses and taxes 3,079 3,029 3,230 2,701 2,481 Operating income 656 594 457 588 566 Other income and deductions 99 111 93 82 105 Interest charges 334 293 269 266 270 Net income 421 412 327 404 401 Net income for common stock 402 394 308 382 375 EPS of common stock $2.10 $2.08 $1.63 $2.03 $1.99 Dividends paid per share of common stock $1.72 $1.70 $1.62 $1.54 $1.46 Average common shares outstanding 191.7 189.3 188.4 188.3 188.3 BALANCE SHEET DATA Assets 13,869 11,066 10,604 9,829 9,396 Common stock equity 3,178 3,052 2,930 2,927 2,834 Preferred stock Not subject to mandatory redemption 292 292 292 292 292 Subject to mandatory 34 35 58 75 97 redemption Long-term debt 3,914 2,940 2,749 2,647 2,518 Current liabilities 3,425 2,188 2,143 1,562 1,304 Capitalization ratios Common stock equity 43% 48% 49% 49% 49% Preferred stock 4 5 6 6 7 Long-term debt 53 47 45 45 44 (1) Earnings in 1995 include the SEEBOARD Group's equity earnings for November and full consolidation for December. See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (2) Earnings in 1993 were significantly affected 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. CSW 2-6 CENTRAL AND SOUTH WEST CORPORATION 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 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. Several years ago, in anticipation of increasing competition and fundamental changes in the industry, CSW's management developed the following four-part strategic plan designed to help position CSW to be competitive in this rapidly changing environment: * Enhance CSW's core electric utility business * Expand CSW's core electric utility business * Expand CSW's non-utility business * Pursue financial initiatives Since the introduction of CSW's strategic plan in 1990, CSW has undertaken key initiatives in each of these areas that are important steps in the implementation of the overall strategy. These initiatives were marked by the restructuring of CSW's core business in 1993 and 1994, the recent SEEBOARD acquisition and, although it was not consummated, the proposed acquisition of El Paso. 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 CSW System benefits from economies of scale by virtue of its size and is a reliable and relatively low-cost provider of electric power. More 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. SEEBOARD ACQUISITION On November 6, 1995, CSW, indirectly through CSW (UK), announced its intention to commence the Tender Offer in the United Kingdom to acquire all of the outstanding share capital of SEEBOARD, a regional electricity company in the United Kingdom, for an aggregate adjusted purchase price of approximately $2.12 billion. SEEBOARD is one of the 12 regional electricity companies which came into existence as a result of the restructuring and subsequent privatization of the United Kingdom electric industry in 1990. Its principal businesses are the distribution and supply of electricity in southeast England. SEEBOARD is also involved in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD serves an affluent suburban and rural area in the United Kingdom. SEEBOARD is also one of the lowest cost suppliers among the United Kingdom's regional electricity companies. Approximately 91% of SEEBOARD's customers are residential. For the year ended December 31, 1995, SEEBOARD had electricity sales of approximately 18 billion KWH and, excluding exceptional items, net CSW 2-7 earnings of approximately $118 million on revenues of approximately $1.9 billion (1.00 pound=$1.58). SEEBOARD's results for the year ended December 31, 1995 are not indicative of the results that will be experienced by SEEBOARD as a subsidiary of CSW due, in part, to the debt incurred in connection with the financing of the acquisition, the purchase accounting adjustments and the accounting adjustments made to adjust SEEBOARD's results for U.S. Generally Accepted Accounting Principles. See LIQUIDITY AND CAPITAL RESOURCES and NOTE 13. UNAUDITED PRO FORMA INFORMATION. On January 10, 1996, CSW's Tender Offer was declared wholly unconditional. Through February 29, 1996, CSW (UK) had acquired shares representing, or had received valid acceptances in respect of, approximately 92.3% of the outstanding share capital of SEEBOARD. CSW (UK) expects to acquire the remaining 7.7% of the outstanding share capital of SEEBOARD by the end of the second quarter of 1996. TERMINATION OF EL PASO MERGER In May 1993, CSW entered into a Merger Agreement pursuant to which El Paso would emerge from bankruptcy as a wholly owned subsidiary of CSW. El Paso is an electric utility company headquartered in El Paso, Texas, which filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on January 8, 1992. On June 9, 1995, CSW notified El Paso that CSW would not extend the termination date under the Merger Agreement as had been requested by El Paso and, accordingly, that it was terminating the Merger Agreement. CSW also informed El Paso on June 9, 1995 that it was withdrawing the Modified Plan for the proposed Merger with El Paso by a contemporaneous filing with the Bankruptcy Court. On June 9, 1995, following CSW's notification that it was terminating the Merger and withdrawing the Modified Plan, El Paso filed suit against CSW. On June 15, 1995, CSW filed suit against El Paso. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the legal proceedings surrounding this termination. RESTRUCTURING During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies under a new business unit called CSW Electric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in the workforce by more than 7% system-wide. The restructuring costs were initially estimated to be $97 million and were expensed in 1993. The actual costs of the restructuring, approximately $86 million, were incurred primarily during 1994. CSW has realized a number of benefits from the restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. RATES AND REGULATORY MATTERS CPL Rate Review On November 6, 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred during the period July 1, 1994 through June 30, 1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June 30, 1994 in Docket No. 13650 was consolidated with the current rate review. CSW 2-8 If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. CPL is requesting this rate review in large part as a result of the expiration of the amortization of its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991. In 1995, Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by CPL to accelerate recovery of nuclear and regulatory assets as a way to proactively address certain assets that could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21, 1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1, 1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13, 1996, intervening parties filed testimony in the revenue requirements phase of CPL's base rate case. Among the parties that filed testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20, 1996, the Staff filed testimony recommending an increase in total company base rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the specific benefits to CPL were not clearly identified. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for decommissioning STP. A comparison of the Staff's recommendation for a base rate increase, compared to CPL's claimed revenue deficiency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (millions) CPL revenue deficiency (1) $103 Return on common equity (21) CSW Services expenses (16) Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended revenue increase (2) $30 (1) The total company rate increase requested by CPL was reduced from $103 million to $78 million ($71 million allocated to the Texas retail jurisdiction) in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. CSW 2-9 The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposal for decision for consideration by the Texas Commission. Testimony filed by parties to the rate case, including the Staff, is not binding on either the ALJs or the Texas Commission. A final decision on the rate request is not anticipated from the Texas Commission prior to December 1996. Management of CSW and CPL cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's or CSW's consolidated results of operations or financial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL and CSW could experience a material adverse effect on their results of operations and financial condition. 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. On May 16, 1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CPL's fuel factors were implemented on an interim basis during the summer of 1995. 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. Hearings on the CPL 1995 Agreement were held on July 19, 1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received on October 4, 1995. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. WTU Stipulation and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No. 1 originally authorized in the Texas Commission's order in Docket No. 7289. On September 22, 1995, WTU, along with other major parties to the above described matters, filed with the Texas Commission a joint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a unified package that included: (i) a retail base rate reduction of approximately $13.5 million annually starting with WTU's October 1995 revenue month billing cycle; (ii) a $21 million retail refund which was not attributed to any specific cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction retroactive to October 1, 1994; (iii) a reduction of reduced fixed fuel factors by approximately 2%; (iv) various rate and accounting treatments including a reasonable return on equity for retail operations of 11.375%; and (v) a retail base rate freeze until October 1, 1998, subject to certain force majeure provisions. CSW 2-10 On November 9, 1995, the Texas Commission rendered a final order that implemented the joint stipulation and agreement. The WTU Stipulation and Agreement is expected to impact WTU's results of operations for the next several years, reducing annual earnings by approximately $8 million beginning in 1996. The WTU Stipulation and Agreement also eliminated several significant risks that have been the subject of regulatory proceedings relating to deferred accounting plant costs and rates and will enable WTU's rates to remain at competitive levels for the foreseeable future. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding other regulatory matters. TRANSOK In January 1996, CSW announced it was exploring strategic alternatives for Transok, CSW's wholly owned intrastate natural gas gathering, transmission, marketing and processing subsidiary. The alternatives for Transok, which include a possible sale, are a part of CSW's continuous strategic review of its business. See NON- UTILITY INITIATIVES. SOUTH TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. In addition, HLP, the Project Manager of STP, 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. From February 1993 until May 1994, STP experienced an unscheduled outage resulting from mechanical problems. The outage resulted in significant rate and regulatory proceedings involving CPL, including a base rate case and fuel reconciliation proceedings as previously discussed. Unit 1 restarted on February 25, 1994 and reached 100% power on April 8, 1994 and Unit 2 resumed operation on May 30, 1994 and reached 100% power on June 16, 1994. During the last six months of 1994, the STP units operated at capacity factors of 98.6% for Unit 1 and 99.2% for Unit 2. For a discussion of regulatory matters surrounding the STP outage, see RATES AND REGULATORY MATTERS above and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Both STP units were removed from service during 1995 for scheduled refueling outages. The fueling outages lasted 41 days for Unit 1 and 26 days for Unit 2. For the year 1995, Unit 1 and Unit 2 operated at net capacity factors of 84.9% and 90.6%, respectively. For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. LIQUIDITY AND CAPITAL RESOURCES Overview The historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. Based on projections of growth in peak demand, CSW does not anticipate that large capital expenditures for the construction of new generating capacity will be required through the end of this decade. CSW 2-11 Accordingly, future capital expenditures for the Electric Operating Companies, as well as SEEBOARD, are anticipated to be primarily for existing distribution systems. Primary sources of capital are long- term debt and preferred stock issued by the Electric Operating Companies, long-term and short-term debt and common stock issued by CSW and internally generated funds. 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. In addition, CSW, in order to strengthen its capital structure and support growth from time to time, may issue additional shares of CSW Common. Internally generated funds should meet most of the capital requirements of the Electric Operating Companies. 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. As of February 29, 1996, CSW Investments had borrowed approximately $1.0 billion to fund a portion of the SEEBOARD acquisition purchase price pursuant to a credit facility for which neither CSW nor CSW International is subject to recourse. On February 27, 1996, CSW sold 15,525,000 shares of CSW Common pursuant to the 1996 Stock Offering and received approximately $398 million in net proceeds, which it used to repay a portion of the indebtedness incurred by CSW to finance the acquisition of SEEBOARD. Productive investment of net funds from operations in excess of capital expenditures and dividend payments are necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of these funds. Subject to certain exceptions, CSW is required to obtain authorization from various regulators in order to invest in any additional business activities. See RECENT DEVELOPMENTS AND TRENDS - Holding Company Act below. SEEBOARD Acquisition Financing The aggregate adjusted purchase price to be paid for SEEBOARD in the Tender Offer is approximately $2.12 billion. As of February 29, 1996, CSW had contributed approximately $829 million of the purchase price to complete the acquisition of SEEBOARD shares in connection with the Tender Offer. CSW obtained such funds through borrowings under the $850 million CSW Credit Agreement. Borrowings under the CSW Credit Agreement are unsecured and mature on November 6, 2000, subject to prepayment by CSW at any time. On February 28, 1996, CSW used the $398 million net proceeds from the 1996 Stock Offering to repay a portion of these borrowings. CSW anticipates that the remaining amounts owed under the CSW Credit Agreement will be repaid through a combination of internally generated funds, additional sales of CSW Common (including sales through CSW's Thrift Plan and PowerShare) or strategic sales of assets, including possibly Transok. See TRANSOK, and 1996 Stock Offering, ThriftPlus Plan and PowerShare below. CSW (UK) has obtained or will obtain the remaining funds necessary to consummate the Tender Offer, approximately $1.29 billion, from capital contributions or loans to be made to CSW (UK) by its sole shareholder, CSW Investments, which has arranged the CSW Investment Credit Facility for that purpose. Neither CSW nor CSW International, the indirect parent of CSW Investments and CSW (UK), has guaranteed or is otherwise subject to recourse for amounts borrowed under the CSW Investments Credit Facility. As of February 29, 1996, CSW Investments had borrowed approximately $1.0 billion under the CSW Investments Credit Facility. CSW Investments anticipates that amounts borrowed under the CSW Investments Credit Facility will be repaid through dividends and other amounts received, indirectly through CSW (UK), from SEEBOARD. Capital Expenditures Total capital expenditures for CSW, including the Electric Operating Companies, SEEBOARD, Transok and other diversified operations (but excluding capital that may be required for acquisitions), are estimated to be approximately $636 million, $671 million and $563 million for the years 1996 through 1998. The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are CSW 2-12 based on numerous factors, including factors such as the rate of load growth, escalation of construction costs, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, nuclear, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. In addition, actual results may differ materially from the projected information due to changes in the nature and scope of CSW's diversified operations and the capital requirements that may be required to fund such operations. CSW periodically revaluates its capital spending policies and generally seeks to fund only those construction 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. CSW expects to fund the majority of its construction expenditures through internally generated funds. However, for any significant investment or acquisition, additional funds from the capital markets, including from the issuance and sale of additional CSW Common and short-term and long-term borrowings, may be required. Construction Expenditures The 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 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. Construction expenditures for the Electric Operating Companies were approximately $398 million in 1995, $492 million in 1994 and $445 million in 1993. The estimated total construction expenditures for the Electric Operating Companies for the years 1996 through 1998 are presented in the following CONSTRUCTION EXPENDITURES table. CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (millions) Generation $40 $68 $42 $150 Transmission 38 46 55 139 Distribution 168 172 174 514 Fuel 18 11 15 44 Other 68 59 57 184 $332 $356 $343 $1,031 Information in the foregoing table is a forward looking statement and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions based on numerous factors, including those factors enumerated above under Capital Expenditures. Changes in those and other factors could cause each of the Electric Operating Companies to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although CSW does not believe that the Electric Operating Companies will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite- fired generating plants for which the CSW System has invested approximately $135 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, CSW would evaluate the probability of recovery of these investments and may record appropriate reserves. CSW 2-13 Long-Term Financing As of December 31, 1995, the capitalization ratios of CSW were 43% common stock equity, 4% preferred stock and 53% long-term debt. CSW continues to be committed to maintaining financial flexibility through maintaining a strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. The 1995 capitalization ratios were significantly impacted when compared to 1994 due to the amount of indebtedness utilized to finance the SEEBOARD acquisition, a portion of which was repaid on February 28, 1996, with the $398 million net proceeds from the 1996 Stock Offering. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing. Since 1991, CSW has refinanced nearly $2.0 billion of outstanding securities and has lowered its embedded cost of debt from approximately 9.0% to 7.2% at the end of 1995. CSW's significant long-term financing activity for 1995 and 1996 through February 29, 1996 is summarized in the following table. ISSUED/UTILIZED REACQUIRED Financing Amount Financial Amount Instrument (millions) Rate Maturity Instrument (millions) Rate Maturity CPL FMB(1) $200.0 6 5/8% 2005 FMB $139.2 9 3/8% 2019 PCRB 100.6 6.1% 2028 PCRB 68.9 10 1/8% 2014 PCRB(2) 31.8 9 3/4% 2015 PCRB 40.9 floating 2015 PCRB(3) 8.4 7 1/8% 2004 PCRB(3) 34.2 6.0% 2007 PSO MTN(4) 30.0 various 2000- 2001 WTU FMB(5) 40.0 7 1/2% 2000 FMB(6) 80.0 6 3/8% 2005 FMB 53.3 9 1/4% 2019 CSW Credit Facility(7) 431.0 floating 2000 CSW Invest- ments Credit Facility(8) 1,024.7 floating 2001 (1) The balance of proceeds not used to redeem higher cost FMBs were used to repay a portion of CPL's short-term borrowings, to provide working capital and for other general corporate purposes. (2) Collateralized PCRB (secured by a FMB). (3) The additional funds required to redeem these issues were provided through internal funds and short-term borrowings. (4) Proceeds were used to repay a portion of PSO's short-term borrowings and to reimburse PSO's treasury for the scheduled maturity of $25 million FMBs on March 1, 1996. The MTNs are a series of PSO's Senior Notes. The rates on the MTNs range from 5.89% to 6.03%. (5) Proceeds were used to repay a portion of WTU's short-term borrowings and to reimburse WTU's treasury for the reacquisition of FMBs. (6) The balance of proceeds not used to redeem higher cost FMBs were used to repay a portion of WTU's short-term borrowings. (7) Represents the amount outstanding of the CSW Credit Agreement on February 29, 1996. Proceeds were used to purchase capital shares of SEEBOARD. Approximately $731 million was outstanding under the CSW Credit Agreement and is included in Long-Term Debt on the balance sheet at December 31, 1995. See SEEBOARD Acquisition Financing above. On February 28, 1996, CSW repaid $398 million under borrowings under the CSW Credit Agreement from the net proceeds of the 1996 Stock Offering. See 1996 Stock Offering, below. (8) Represents the amount outstanding of the CSW Investments Credit Facility on February 29, 1996. Proceeds were used to purchase additional capital shares under SEEBOARD in 1996. See SEEBOARD Acquisition Financing above. 1996 Stock Offering On February 27, 1996, CSW sold 15,525,000 shares of CSW Common in the 1996 Stock Offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of the indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD. CSW 2-14 Shelf Registration Statements CSW and the Electric Operating Companies may issue additional securities subject to market conditions and other factors. CPL and PSO have filed shelf registration statements with the SEC for the issuance of securities from time to time based upon market conditions. CPL has shelf registration statements on file for up to $60 million of FMBs and up to $75 million of preferred stock. PSO has a shelf registration statement on file for the sale of up to $75 million of Senior Notes, $45 million of which was remaining as of February 29, 1996. Short-Term Financing The Electric Operating Companies utilize short-term debt to meet fluctuations in working capital requirements due to the seasonal nature of electric sales and other interim capital needs. The CSW System has established a money pool to coordinate short-term borrowings by the Electric Operating Companies, Transok and CSW Services, which is funded through CSW's issuance of commercial paper. At December 31, 1995, the CSW System had two credit facilities in place aggregating $1.2 billion to back up the CSW commercial paper program. During 1995, the maximum amount of consolidated short-term debt outstanding for the CSW System was $1.65 billion in March 1995, which represented 22% of the total capitalization at December 31, 1995. The average amount of short-term debt during 1995 was $1.47 billion, of which $667 million was attributable to CSW Credit. The weighted average cost of short-term debt was 6.64% in 1995. PowerShare CSW's PowerShare plan is available to all CSW shareholders, employees, eligible retirees, utility customers and other residents of the four states where the Electric Operating Companies operate. Under this dividend reinvestment and stock purchase plan, participants are able to make optional cash payments and reinvest all or any portion of their dividends in additional CSW Common. In February 1996, CSW filed a registration statement with the SEC relating (i) to the issue and sale of an additional five million shares of CSW Common through the PowerShare plan and (ii) proposed amendments to the plan that would, among other things, make the plan available to the residents of all fifty states and the District of Columbia. During 1995 and 1994, CSW raised approximately $57 million and $50 million, respectively, in new equity through PowerShare. CSW expects to use the proceeds from sales of CSW Common made pursuant to PowerShare to reduce short-term and long-term debt and for other general corporate purposes. ThriftPlus Plan CSW's ThriftPlus plan permits eligible employees to contribute up to 12% of their annual compensation to the plan, subject to certain exceptions. Funds contributed to the plan are invested by the plan trustee, at the employee's direction, in any of five investment options, including an option consisting of CSW Common. Historically, funds allocated to the CSW Common option under the plan have been used by the trustee to purchase shares of CSW Common in the open market. In order to provide the plan with the flexibility to acquire shares of CSW Common directly from CSW rather than on the open market, CSW filed a registration statement with the SEC during 1995 with respect to the issue and sale of up to an additional five million shares of CSW Common. In the event the ThriftPlus plan trustee elects, on behalf of the plan, to purchase CSW Common directly from CSW, CSW expects to use the proceeds from such sales to reduce short-term and long-term debt and for other general corporate purposes. Internally Generated Funds Internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. The Electric Operating Companies utilize short-term debt to meet fluctuations in CSW 2-15 working capital requirements due to the seasonal nature of energy sales. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally generated funds $451 $424 $369 Capital expenditures provided by internally generated funds (1) 37% 63% 58% (1) Capital expenditures include construction and acquisition expenditures, equity investments in CSW Energy projects and amounts invested by CSW to finance the SEEBOARD acquisition. CSW Energy At December 31, 1995, CSW had loaned $66 million to CSW Energy on an interim basis for the purpose of developing and constructing independent power and cogeneration facilities. Repayment of these amounts to CSW is expected to be made through funds obtained from third party non-recourse project financing. During 1995, CSW Energy secured such financing for its Ft. Lupton and Mulberry projects and reimbursed CSW for the interim loans. In addition to the amounts already expended for the development of projects, CSW Energy has, subject to certain limitations in the case of EWG and foreign utility investments, authority from the SEC to expend up to $250 million on future projects. The following table summarizes CSW's investments and commitments in CSW Energy projects at December 31, 1995. Letters of Credit Equity and Guarantees Loans (millions) Brush $15.3 $-- $-- Orange Cogeneration 53.2 2.3 -- Ft. Lupton 44.0 58.9 36.5 Mulberry 23.6 32.3 -- Phillips Sweeny -- 3.0 4.2 Newgulf 10.5 -- -- Various developmental projects 8.1 7.1 9.5 CSW Energy through CSW Development-I, Inc., a wholly owned subsidiary of CSW Energy, entered into a fixed price contract of $14 million to construct the Mulberry thermal host. At November 2, 1995, the thermal host was substantially completed for an aggregate cost of approximately $43 million and CSW Energy reached an agreement and settlement with its business partner regarding the $29 million cost overruns for the host facility. These negotiations also resulted in a change in the business partner for the Mulberry and Orange Cogeneration projects. Under the terms of the settlement, the newly admitted partner paid to CSW Energy 50%, or $53.2 million, of the outstanding obligations of Orange Cogeneration and assumed 50%, or $2.3 million, of the letters of credit and guarantees of the project. Concurrently, CSW Energy contributed as partners capital the remaining debt of $53.2 million to Orange Cogeneration. On the same date, CSW Energy obtained its term financing for the Mulberry project. CSW Credit CSW Credit purchases, without recourse, the accounts receivable of the Operating Companies and certain non-affiliated electric companies. CSW Credit's capital structure contains greater leverage than that of the Operating Companies, consequently lowering CSW's cost of capital. CSW Credit issues commercial paper, secured by the assignment of its receivables, to meet its financing needs. CSW Credit maintains a secured revolving credit agreement which aggregated $900 million at December 31, 1995 to back up its commercial paper program. The sale of these accounts receivables provides the Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. CSW 2-16 RECENT DEVELOPMENTS AND TRENDS 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 level in the future. As competition in the industry increases, the 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 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. The 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. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of 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 extremely competitive since the enactment of the Energy Policy Act. The 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 the extent to which the Energy Policy Act will impact CSW System operations. On March 29, 1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR a requirement that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which such utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7, 1995, CSW filed comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a "power flow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional "postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. CSW 2-17 On February 9, 1996, the Electric Operating Companies filed at the FERC complete sets of open access transmission tariffs for both the companies that are members of the Southwest Power Pool as well as the companies that are members of ERCOT. These tariffs substantially reflect the pro forma tariffs attached to the FERC's March 29, 1995 NOPR. Open access and market pricing should increase marketing opportunities for the Electric Operating Companies, but may also expose them to the risk of loss of load or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need 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 industry issue which may require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have preliminary legislation introduced to investigate the issue. For example, in Oklahoma (portions of which are served by PSO), a legislative task force is examining state laws affecting retail electric companies. Issues being addressed include retail wheeling, territorial boundaries, taxes and condemnations. CSW believes that retail competition would harm the best interests of CSW's and the Electric Operating Companies' customers and 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 CSW System 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. CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or the CSW System. As the wholesale and retail 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. PURA 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 requires 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), Texas Commission Chairman Pat Wood 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 has been assigned to a separate proceeding (Project No. 15000). CSW expects this project to provide the vehicle for the Texas Commission and other interested parties to develop positions on industry restructuring before the Texas Legislature convenes in January 1997. A schedule has been developed for Project No. 15000 that includes a series of workshops and technical conferences during the first half of 1996. The schedule contemplates that the Texas Commission will develop legislative recommendations on restructuring and stranded costs during the second half of 1996. On February 7, 1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No. 14045). The pricing method tentatively 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 CSW 2-18 referred to as a vector-absolute megawatt mile which recovers the remaining 30% of ERCOT transmission costs. Although the open access tariffs filed with the FERC on February 9, 1996 do not reflect Project No. 14045 pricing, CSW anticipates filing tariffs with the FERC that do conform to the Texas Commission's rule in the second quarter of 1996. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, the Electric Operating Companies have recognized significant regulatory assets and liabilities. Management believes that the Electric Operating Companies will continue to meet the criteria for following SFAS No. 71. However, in the event the Electric Operating Companies no longer meet the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Holding Company Act 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. Pervasive regulation under the Holding Company Act may impede or delay CSW's efforts to achieve its strategic and operating objectives, including its pursuit of non- utility initiatives. During 1995, a bill was introduced in the United States Senate which, if adopted, would repeal the Holding Company Act and replace it with a new, less restrictive, holding company law administered by the FERC. CSW cannot predict if or when Holding Company Act repeal legislation will be enacted or what form such legislation will take if adopted. However, CSW intends to continue its efforts to repeal or modify the Holding Company Act in order to provide the flexibility to compete within the changing environment. Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as if it were a stand-alone company. This "stand-alone" approach treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax component of rates to the "actual tax approach." This approach reduces rates by the tax benefits of deductions which are not considered for or included in setting rates for the utility. On April 13, 1995, the Supreme Court issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated affiliates to reduce tax expense in cost of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax deductions taken by the utility for disallowed expenses when determining the utility's federal income tax liability. This decision will allow CSW, and indirectly its shareholders, to retain the tax benefits associated with disallowed expenditures. 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. CSW 2-19 Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. The 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 anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CSW's or any 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 Electric Operating Company, the estimated amount of costs allocated to the Electric Operating Company and the participation of other parties. See ITEM 1-. BUSINESS, NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. NON-UTILITY INITIATIVES As indicated above, one component of CSW's four-part strategy to meet the increasing competition and fundamental changes in the electric utility industry is to expand CSW's non-utility and energy- related business. 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. See RECENT DEVELOPMENTS AND TRENDS above. Transok Transok is an intrastate natural gas gathering, transmission, marketing and processing company that provides natural gas services to CSW System companies, predominately PSO, and to non-affiliated gas customers throughout the United States. Transok's natural gas facilities are located in Oklahoma, Louisiana and Texas. It operates gas processing plants and markets natural gas liquids produced from those plants to various markets. During 1995, a new processing plant was completed that increased Transok's processing capacity by approximately 27%. In addition, during the second quarter of 1996, two new natural gas compression units are scheduled to be completed. These units will increase Transok's west to east transport capacity by approximately 22%. In January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok. The alternatives, which include a possible sale, are a part of CSW's ongoing strategic review of its business. CSW Energy CSW Energy is authorized to develop various independent power and cogeneration facilities and to own and operate such non-utility projects, subject to regulatory approval. The table below summarizes CSW Energy's participation in projects as of the end of 1995. CSW 2-20
Capacity Commercial (in MW) Operation Ownership Thermal Project Location Total Sold Date Interest Host Host Utility Brush II Brush, CO 68 68 January 1994 47% Greenhouse Public Service Company of Colorado Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50% Greenhouse Public Service Company of Colorado Mulberry Polk County, FL 120 110 August 1994 50% Distilled Florida Power Corporation water/ ethanol plant Orange Polk County, FL 103 97 June 1995 50% Orange juice Florida Power Corporation processor Tampa Electric Company Phillips Sweeny Sweeny, TX 300 90* Mid 1998 50% Refinery Undetermined* Newgulf Wharton, TX 85 -- Mid 1996 100% IPP Undetermined *The Phillips Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company.
In addition to these projects, CSW Energy has another six projects totaling approximately 2,000 MW in various stages of development, mostly in affiliation with other developers. CSW International CSW International was formed in 1994 to engage in international activities, including developing, acquiring, financing and owning EWGs and foreign utility companies. CSW International's most significant activity to date is the acquisition, indirectly through CSW (UK), of the outstanding share capital of SEEBOARD pursuant to the Tender Offer. See SEEBOARD ACQUISITION above. CSW International also intends to continue its efforts in Mexico, with a stated goal of participating in providing Mexico's future electricity needs. Although the recent devaluation of the Mexican peso has slowed previously projected power demand, CSW International continues to believe that the geographic location of the CSW System offers opportunities to provide bulk power to Mexico. CSW International continues to seek to expand into other countries in Latin America, Europe and Asia that meet its investment criteria. CSW Communications CSW Communications was formed in 1994 to provide communication services to the Electric Operating Companies and non-affiliates. One important goal of CSW Communications is to enhance services to CSW System customers through fiber optics and other telecommunications technologies. In Laredo, Texas, a project has been undertaken to install fiber optic lines and coaxial cable to CPL customers. The project, a network of over 3,000 homes with approximately 700 customers currently participating, will demonstrate the energy efficiency and cost savings that result from giving customers greater choice and control over their electric service. CSW Communications offers similar utility management services to other parties, including affiliates as well as non- affiliates. In the future, CSW Communications may, subject to any required regulatory approvals, seek to lease or otherwise use the reserve capacity for other services including telephone service, cable television and home security systems. CSW Communications presently owns and manages a 185 mile fiber-optic line connecting the south Texas cities of Corpus Christi, Harlingen and McAllen, and anticipates the construction of another fiber-optic line, connecting Shreveport, Louisiana and Longview, Texas, to begin in mid-1996. CSW Communications filed for "exempt telecommunications company" status with the FCC on February 8, 1996, subsequent to legislation that introduced competition to telephone and other communications industries that operated within regulated environments. The filing with the FCC automatically qualifies CSW Communications as an exempt telecommunications company, pending the FCC's review of the application (which is required to be completed within 60 days). CSW believes that CSW Communications' exempt telecommunications company status will enable it to compete more effectively with other telecommunications companies. CSW 2-21 EnerShop In September 1995, EnerShop was formed to provide energy services to customers throughout the Southwest. EnerShop offers services that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis, project management, engineering design and equipment procurement and construction, third party financing and equipment leasing, savings and performance guarantees and performance monitoring. EnerShop recently secured its first major contract and has bids outstanding for several additional projects in 1996. NEW ACCOUNTING STANDARDS SFAS No. 121 In March 1995, the FASB issued SFAS No. 121 to be effective for financial statements for fiscal years beginning after December 15, 1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For the Electric Operating Companies, the lowest independently identifiable cash flow level used for this analysis is jurisdictional rates charged to customers. CSW will adopt SFAS No. 121 in the first quarter of 1996. Under the current regulatory environment, CSW does not expect the adoption of SFAS No. 121 to have a significant impact on CSW's consolidated results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, CSW is monitoring the changing conditions facing the electric utility industry. SFAS No. 123 SFAS No. 123 was issued in October 1995 with an effective date for transactions entered into after December 15, 1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No. 123, CSW will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and adopt the disclosure requirements of SFAS No. 123 in 1996. Accordingly, the adoption of SFAS No. 123 will not impact CSW's consolidated results of operations or financial condition. CSW 2-22 RESULTS OF OPERATIONS Overview of Results CSW's earnings increased to $402 million or $2.10 per share in 1995 as compared to $394 million or $2.08 per share in 1994 and $308 million or $1.63 per share in 1993. The return on average common stock equity was 13.1% in 1995 compared to 13.4% in 1994 and 10.6% in 1993. Electric operations contributed approximately 105% of total earnings in 1995 and approximately 100% of total earnings in 1994 and 1993. In 1995, corporate expenses, including $42 million of expenses related to the termination of the El Paso Merger, were offset in part by earnings at Transok, CSW Energy, SEEBOARD and CSW Credit, totaling $51 million in the aggregate. Earnings increased in 1995 compared to 1994 due primarily to higher electric revenues from customer growth and increased usage and lower operation and maintenance expenses. In addition, earnings from SEEBOARD contributed to the increase. Partially offsetting these factors were higher depreciation and interest and lower earnings from Mirror CWIP. Significant one time items impacting 1995 earnings are set forth in the SIGNIFICANT ITEMS table. Earnings increased in 1994 compared to 1993 due primarily to higher KWH sales and natural gas margins and decreased costs associated with the end of the outage at STP. In addition, CSW Energy, which had three projects become operational during 1994, contributed $2 million to earnings in 1994. These items were partially offset by increased interest and depreciation and amortization expense. In addition, earnings in 1993 were significantly affected by several items set forth in the SIGNIFICANT ITEMS table. SIGNIFICANT ITEMS (millions, after-tax) 1995 CPL 1995 Agreement $(16) Merger termination (27) Tax adjustments 30 1993 Restructuring charges $(63) Recognition of unbilled revenues 49 Early adoption of SFAS No. 112 (9) Adoption of SFAS No. 109 6 Establishment of reserves for fuel and other properties (11) Tax adjustments (18) Operating Revenues Revenues increased $112 million or 3% in 1995, after a decrease of $64 million or 2% in 1994. The variances in the different revenue categories are shown in the REVENUE VARIANCE table. CSW 2-23 REVENUE VARIANCE Increase (decrease) from prior year 1995 1994 (millions) U.S. Electric CPL 1995 Agreement $(112) $-- WTU Stipulation and Agreement (22) -- Base rates (8) 7 Fuel costs (106) (49) KWH sales 62 61 Other electric and diversified 16 2 Natural gas 74 (85) SEEBOARD 208 -- $112 $(64) Electric Revenues Electric revenues decreased $182 million or 6% in 1995 compared to 1994. The acquisition of SEEBOARD contributed $208 million in revenues for the month of December 1995 and total U.S. Electric KWH sales increased approximately 5%, with increases in sales among all customer classes. During 1995, the average number of customers increased approximately 2%. In addition to customer growth, there was increased usage during 1995 as compared to 1994. However, offsetting the increases in revenue due to SEEBOARD and increased KWH sales were customer refunds made by CPL and WTU resulting from the resolution of rate proceedings during 1995 and lower fuel costs. Electric revenues increased $10 million in 1994 as compared to 1993 due primarily to increased KWH sales offset in part by decreased fuel revenues. Base rates increased in 1994 from 1993 due to a rate increase implemented by PSO in February 1994, offset in part by a 3.2% interim rate reduction implemented by WTU during the fourth quarter of 1994. The percentage changes in U.S. ElectricUtility KWH sales from the previous year for 1995 and 1994 are presented in the U.S. ELECTRIC KWH SALES VARIANCE table. KWH sales to retail customers increased in 1995 as a result of increased customer usage and customer growth. KWH sales to retail customers in 1994 increased as a result of more favorable weather and increased residential customers. SWEPCO acquired BREMCO in July 1993, and accordingly, there were twelve months of KWH sales to these customers in 1994 compared to only six months in 1993. Weather was more favorable in 1994 than in 1993. U.S. ELECTRIC KWH SALES VARIANCE Increase from prior year 1995 1994 Residential 3.1% 2.9% Commercial 2.2 3.8 Industrial 2.4 3.6 Sales for resale 18.7 21.9 Total sales 4.5 5.5 The continued increases in industrial sales over the last two years reflect the increased marketing efforts by the Electric Operating Companies and the continued improvement in the economy throughout their service areas. Sales for resale increased in 1995 because STP was operational for the full year as compared to most of 1994, thereby eliminating the need for plants in the CSW System to produce power to replace the power normally produced at STP. In addition, during 1995, WTU began supplying a major new wholesale CSW 2-24 customer. The Electric Operating Companies have maintained relatively low competitive rates in an increasingly competitive marketplace. Efforts have increased at each of the Electric Operating Companies to attract new customers while efficiently serving all customers. Natural Gas Revenues Revenues from natural gas increased 14% to $592 million in 1995 from $518 million in 1994 due primarily to an increase in natural gas sales volumes which was partially offset by a reduction in sales prices. Also contributing to the increase in 1995 natural gas revenues were increased natural gas liquids sales volumes and prices. The 14% decrease in revenues in 1994 from $603 million in 1993 was due to a decrease in natural gas prices which was partially offset by an increase in volumes. Other Diversified Revenues Other diversified revenues increased 30% to $52 million in 1995 as compared to $40 million in 1994 due primarily to two CSW Energy projects that went into operation during the second and third quarter of 1994 and increased factoring revenues at CSW Credit. Other diversified revenues increased 38% in 1994 from $29 million in 1993 due to the reclassification of CSW Energy's operating revenues as discussed below under Other Income and Deductions. Revenues from SEEBOARD CSW's operating revenues includes $208 million of revenues from SEEBOARD for the month of December 1995. During the month of December 1995, pursuant to its effective control of SEEBOARD through its 76.45% ownership interest, CSW began full consolidation accounting for SEEBOARD in its consolidated financial statements. Operating Expenses Fuel and Purchased Power Expense During 1995, the Electric Operating Companies generated approximately 98% of their electric energy requirements. During 1994 and 1993, they generated 95% and 92%, respectively. Total fuel and purchased power expenses increased $58 million or 5% from 1994, due primarily to SEEBOARD's December 1995 power purchases. Without including such purchases, total fuel and purchased power decreased $116 million during 1995 due mainly to a decrease in natural gas prices and an increased usage of lower cost nuclear fuel. The average unit cost of fuel was $1.58 per MMbtu during 1995, compared to $1.82 in 1994 and $2.11 in 1993. Purchased power decreased $8 million during 1995 due primarily to increased generation from STP which replaced power that had been purchased during the first six months of 1994 when STP was out of service. During 1995 STP was operational for the entire year allowing the use of lower cost nuclear fuel. The decrease in fuel and purchased power expense in 1994 compared to 1993 was attributable to a decrease in fossil fuel costs and increased usage of lower cost nuclear fuel. Gas Purchased for Resale/Gas Extraction and Marketing Gas purchased for resale increased 20% in 1995 from 1994, while it decreased 27% in 1994 from 1993. The increase in 1995 was caused by higher sales volumes, which more than offset the relatively low average cost of gas which prevailed during 1995 compared to 1994. Lower gas prices caused the decrease in 1994, including a significant reduction in prices attributable to sales made on natural gas drawn from storage. Gas extraction and marketing expenses increased 11% in 1995 from 1994 and 14% in 1994 from 1993. The 1995 and 1994 increases were both due to increases in natural gas liquids purchased for resale. Other Operating and Maintenance Expenses and Taxes Other operating and maintenance expenses in 1995 increased $18 million or 2% from 1994 due primarily to the establishment of a $42 million reserve for expenses incurred in association with the terminated El Paso Merger and the inclusion of SEEBOARD's December 1995 operating and maintenance expenses, offset in part by the CSW 2-25 benefits that were realized from a cost-reduction initiative whereby CSW System employees received a portion of the operating and maintenance expense savings. In 1994, the 2% decrease in other operating and maintenance expenses from 1993 was due primarily to the absence of $29 million in maintenance expenses that were incurred during the 1993 STP outages, expenses associated with the 1993 adoption of SFAS No. 106 and reserves taken in 1993 on fuel and other properties, offset in part by the reclassification of CSW Energy's operating costs as discussed below under Other Income and Deductions. Income taxes were lower in 1995 than 1994 due to prior year adjustments, the reserve established in connection with the termination of the El Paso Merger as well as both the tax adjustments and the tax effects of the CPL 1995 Agreement and the WTU Stipulation and Agreement. In 1994, income taxes were higher than 1993 due to higher pre-tax income. Taxes other than income decreased in 1995 due to prior year adjustments but remained approximately the same in 1994 as in 1993. Restructuring Charges Restructuring charges reflect the original accrual of $97 million in 1993, which was subsequently reduced by $9 million in 1994 and $2 million in 1995. In addition, during 1995, $34 million in regulatory assets were capitalized in accordance with the CPL 1995 Agreement and the WTU Stipulation and Agreement for costs associated with the restructuring that had previously been charged to expense. Depreciation and Amortization Depreciation and amortization expense increased in 1995 and 1994 when compared to the prior year due primarily to increases in depreciable plant. Other Items Other Income and Deductions Other income and deductions decreased $12 million or 11% in 1995 compared to 1994, as a result of decreased Mirror CWIP liability amortization offset in part by approximately $11 million in previously deferred factoring income recognized as income by CPL beginning in 1995 pursuant to the CPL 1995 Agreement, increased interest income of $4 million and a $3 million gain on PSO's sale of non-utility fiber optic telecommunication property. Other income and deductions increased $18 million or 19% in 1994 compared to 1993 as a result of the reclassification of CSW Energy's operating activities offset partially by decreased Mirror CWIP liability amortization and the absence of adjustments recorded in 1993 associated with Transok's 1991 acquisition of TEX/CON. Prior to 1994, CSW Energy was in the developmental stage of its business and, as a result, its operating activities were classified in CSW's Other Income and Deductions. However, in conjunction with the completion of three projects in 1994, CSW Energy's revenues and expenses were classified as operating activities in CSW's Operating Revenues and Other Operating Expenses. The net amount of these components had negative earnings impacts classified in Other Income and Deductions in 1993. Interest Charges Interest expense on long-term debt increased 30% in 1995 from 1994 due to higher levels of debt outstanding, whereas interest expense on long-term debt in 1994 was comparable to 1993. CSW's embedded cost of long-term debt decreased to 7.2% in 1995 from 7.7% in 1994. Short-term interest expense increased in 1994 due primarily to higher short-term interest rates combined with higher general corporate borrowings. Cumulative Effect of Changes in Accounting Principles In 1993, CSW implemented SFAS No. 112, SFAS No. 109, and changed the method of accounting for unbilled revenues. These changes had a cumulative effect of increasing net income approximately $46 million. 2-26 Inflation Annual inflation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% during the three years ended December 31, 1995. Management believes that inflation, at this level, does not materially affect CSW's consolidated results of operations or financial position. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. CSW 2-27 CSW Consolidated Statements of Income Central and South West Corporation For the Years Ended December 31, 1995 1994 1993 ($ in millions, except share amounts) Operating Revenues $3,735 $3,623 $3,687 Operating Expenses and Taxes Fuel and purchased power 1,184 1,126 1,181 Gas purchased for resale 372 311 424 Gas extraction and marketing 109 98 86 Other operating 629 596 593 Restructuring charges (36) (9) 97 Maintenance 161 176 197 Depreciation and amortization 384 356 330 Taxes, other than income 171 186 191 Income taxes 105 189 131 3,079 3,029 3,230 Operating Income 656 594 457 Other Income and Deductions Mirror CWIP liability amortization 41 68 76 Other 58 43 17 99 111 93 Income Before Interest Charges 755 705 550 Interest Charges Interest on long-term debt 284 218 219 Interest on short-term debt and other 50 75 50 334 293 269 Income Before Cumulative Effect of Changes in Accounting Principles 421 412 281 Cumulative Effect of Changes in Accounting Principles -- -- 46 Net Income 421 412 327 Preferred stock dividends 19 18 19 Net Income for Common Stock $402 $394 $308 Average Common Shares Outstanding 191.7 189.3 188.4 Earnings per Share of Common Stock before Cumulative Effect of Changes in Accounting Principles $2.10 $2.08 $1.39 Cumulative Effect of Changes in Accounting Principles -- -- 0.24 Earnings per Share of Common Stock $2.10 $2.08 $1.63 Dividends Paid per Share of Common Stock $1.72 $1.70 $1.62 The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-28 CSW Consolidated Statements of Retained Earnings Central and South West Corporation For the Years Ended December 31, 1995 1994 1993 (millions) Retained Earnings at Beginning of Year $1,824 $1,753 $1,751 Net income for common stock 402 394 308 Deduct: Common stock dividends 329 322 306 Deduct: Preferred stock and other adjustments 4 1 -- Retained Earnings at End of Year $1,893 $1,824 $1,753 The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-29 CSW Consolidated Balance Sheets Central and South West Corporation As of December 31, 1995 1994 (millions) ASSETS Electric Production $5,888 $5,802 Transmission 1,484 1,377 Distribution 3,799 2,539 General 1,209 764 Construction work in progress 346 412 Nuclear fuel 165 161 Total Electric 12,891 11,055 Gas 869 798 Other diversified 18 15 13,778 11,868 Less - Accumulated depreciation 4,761 3,870 9,017 7,998 Current Assets Cash and temporary cash investments 401 108 National Grid assets held for sale 100 -- Accounts receivable 1,093 837 Materials and supplies, at average cost 188 162 Electric utility fuel inventory, substantially at average cost 129 118 Gas inventory/products for resale 13 23 Under-recovered fuel costs -- 54 Prepayments and other 115 44 2,039 1,346 Deferred Charges and Other Assets Deferred plant costs 514 516 Mirror CWIP asset 312 322 Other non-utility investments 296 394 Income tax related regulatory assets, net 253 216 Goodwill 1,074 -- Other 364 274 2,813 1,722 $13,869 $11,066 The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-30 CSW Consolidated Balance Sheets Central and South West Corporation As of December 31, 1995 1994 CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 192.9 million shares in 1995 and 190.6 million shares in 1994 $675 $667 Paid-in capital 610 561 Retained earnings 1,893 1,824 Total Common Stock Equity 3,178 3,052 Preferred stock Not subject to mandatory redemption 292 292 Subject to mandatory redemption 34 35 Long-term debt 3,914 2,940 Total Capitalization 7,418 6,319 Minority Interest 202 -- Current Liabilities Long-term debt and preferred stock due within twelve months 30 7 Short-term debt 692 910 Short-term debt - CSW Credit, Inc. 646 654 Accounts payable 595 286 Accrued taxes 228 111 Accrued interest 77 61 Provision for SEEBOARD acceptances 1,001 -- Other 156 159 3,425 2,188 Deferred Credits Income taxes 2,306 2,048 Investment tax credits 306 320 Mirror CWIP liability -- 41 Other 212 150 2,824 2,559 $13,869 $11,066 The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-31 CSW Consolidated Statements of Cash Flows Central and South West Corporation For the Years Ended December 31, 1995 1994 1993 (millions) OPERATING ACTIVITIES Net Income $421 $412 $327 Non-cash Items Included in Net Income Depreciation and amortization 425 402 366 Deferred income taxes and investment tax credits (11) 87 94 Mirror CWIP liability amortization (41) (68) (76) Restructuring charges (2) (9) 97 Cumulative effect of changes in accounting principles -- -- (46) Charges for terminated Merger 42 -- -- Regulatory assets established for previously incurred restructuring charges (34) -- -- Changes in Assets and Liabilities Accounts receivable (36) 29 (52) Unrecovered fuel costs 76 16 (63) Accounts payable (32) (27) 34 Accrued taxes 25 21 37 Accrued restructuring charges (2) (57) -- Other (32) (42) (24) 799 764 694 INVESTING ACTIVITIES Capital expenditures (474) (578) (508) Acquisitions excluding SEEBOARD (6) (21) (106) Net cash paid on SEEBOARD acquisition (415) -- -- Non-affiliated accounts receivable collections/(purchases), net 2 11 (314) CSW Energy projects (includes $2, $73 and $19 of equity investments for 1995, 1994 and 1993, respectively) 109 (115) (127) Other (28) (13) (14) (812) (716) (1,069) FINANCING ACTIVITIES Common stock sold 57 50 1 Proceeds from issuance of long-term debt 1,187 199 904 Retirement of long-term debt (8) (4) (50) Reacquisition of long-term debt (355) (27) (987) Special deposits for reacquisition of long-term debt -- -- 199 Redemption of preferred stock (1) (33) (17) Change in short-term debt (226) 153 602 Payment of dividends (348) (340) (325) 306 (2) 327 Net Change in Cash and Cash Equivalents 293 46 (48) Cash and Cash Equivalents at Beginning of Year 108 62 110 Cash and Cash Equivalents at End of Year $401 $108 $62 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $301 $280 $260 Income taxes paid $77 $93 $53 The accompanying notes to consolidated financial statements are an integral part of these statements. CSW 2-32 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 four Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of CSW's four Electric Operating Companies, CPL, PSO, SWEPCO and WTU, is the generation, transmission, and distribution of electric power and energy. These four 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 the Texas Commission. The principal business of CSW's United Kingdom electric operating subsidiary, SEEBOARD, is the distribution of electric power and energy in southeast England. SEEBOARD is subject to regulation of rates by the United Kingdom Office of Electricity Regulation. In addition to the electric utility operations, CSW has subsidiaries involved in a variety of business activities. Transok is an Oklahoma natural gas company, CSW Energy and CSW International pursue cogeneration and other energy-related ventures, CSW Credit purchases the accounts receivable of affiliates and non-affiliates, CSW Communications pursues telecommunications projects, CSW Leasing invests in leveraged leases and EnerShop offers energy-management services. 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 PSO include the accounts of its wholly owned subsidiary, Ash Creek. All significant intercompany items and transactions system have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and 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 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 fair market value based on the preliminary allocation of the purchase price CSW paid for SEEBOARD. Transok's gas plant acquisitions are stated at fair market value based on the purchase price while other gas plant is stated at original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items CSW 2-33 and capitalized interest. See SEEBOARD Acquisition below for additional information, including the allocation of purchase price to the SEEBOARD Group's fixed asset accounts. Depreciation 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 are presented in the following table. CSW CPL PSO SWEPCO WTU 1995 3.4% 2.9% 3.6% 3.2% 3.2% 1994 3.2% 3.0% 3.5% 3.2% 3.2% 1993 3.2% 3.0% 3.5% 3.2% 3.2% CPL Nuclear Decommissioning of the STP Plant 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 $85 million in 1986 dollars based on a site specific study completed in 1986. CPL is recovering these decommissioning costs through rates based on the service life of STP at a rate of $4.2 million per year. The $4.2 million annual cost of decommissioning is reflected on the income statement in other operating expense. Decommissioning costs are paid to an irrevocable external trust and as such are not reflected on CPL's balance sheet. At December 31, 1995, the trust balance was $28.0 million. In August 1995, CPL received a new decommissioning study updating the cost estimates to decommission STP that indicated that CPL's share of such costs would increase from $85 million, as stated in 1986 dollars, to $258 million, as stated in 1995 dollars. The increase in costs occurred primarily as a result of extended on-site storage of high level waste, much higher estimates of low-level waste disposal costs and increased labor costs since the prior study. These costs are expected to be incurred during the years 2027 through 2062. While this is the best estimate available at this time, these costs may change between now and when the funds are actually expended because of changes in the assumptions used to derive the estimates, including the prices of the goods and services required to accomplish the decommissioning. Additional studies will be completed periodically to update this information. Based on this projected cost to decommission STP, CPL estimates that its annual funding level should increase to $10.5 million. CPL has requested this amount as part of its cost of service in its current rate filing. Other parties to the proceeding have filed annual projections ranging from $1.4 million to $8.2 million. CPL expects to fund at the level ultimately ordered by the Texas Commission although CPL cannot predict that level. Historically, the Texas Commission has allowed full recovery of nuclear decommissioning costs. For further information on CPL's current rate filing, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. CSW 2-34 Electric Revenues and Fuel Prior to 1993, electric revenues were recorded at the time billings were made to customers on a cycle-billing basis. Electric service provided subsequent to billing dates through the end of each calendar month became part of operating revenues of the next month. To conform to general industry standards, the Electric Operating Companies changed their method of accounting to accrue for estimated unbilled revenues. The effect of this change on 1993 net income was pre-tax increase of $75 million, and an after-tax increase of $49 million, included in cumulative effect of changes in accounting principles. See the effects of this change under Accounting Changes below. CPL, SWEPCO and WTU recover 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 consumed. 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 KWHs 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 Electric Operating Companies, Transok and certain non- affiliated companies. Regulatory Assets and Liabilities For their regulated activities, each of the Electric Operating Companies follows 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 significant regulatory assets and liabilities that have been recorded by the CSW System are presented in the following table. CSW 2-35 CSW CPL PSO SWEPCO WTU (millions) (thousands) As of December 31, 1995 Regulatory Assets Deferred plant costs $514 $488,047 $-- $-- $26,092 Mirror CWIP asset 312 311,804 -- -- -- Income tax related regulatory assets, net 253 346,993 -- -- -- Deferred restructuring and rate case costs 46 28,025 -- -- 17,577 Deferred storm costs 4 -- 3,623 -- -- Demand side management costs 14 7,465 6,419 -- -- OPEBs 7 -- 4,008 2,794 -- Other 10 5,384 4,798 -- 431 Regulatory Liabilities Income tax related regulatory liabilities, net -- -- 41,820 37,363 14,464 As of December 31, 1994 Regulatory Assets Deferred plant costs $516 $488,987 $-- $-- $26,914 Mirror CWIP asset 322 321,825 -- -- -- Income tax related regulatory assets, net 216 288,444 -- -- -- Deferred storm costs 5 -- 4,798 -- -- Demand side management costs 11 5,635 5,411 -- -- OPEBs 6 -- 4,504 1,949 -- Other 11 5,989 4,945 -- -- Regulatory Liabilities Mirror CWIP liability 41 41,000 -- -- -- Income tax related regulatory liabilities, net -- -- 18,611 44,836 9,217 Deferred Plant Costs at CPL and WTU In accordance with orders of the Texas Commission, CPL and WTU deferred carrying costs, as well as operating, 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 is amortizing and recovering such costs over seven years. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further discussion of the deferred accounting proceedings. CPL Mirror CWIP 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 Mirror CWIP, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. SEEBOARD Acquisition The acquisition of SEEBOARD was accounted for as a purchase combination. A preliminary allocation of the purchase price has been performed and is reflected in the consolidated financial statements. This includes an allocation of approximately $1.0 billion to goodwill at December 31, 1995, which will increase to approximately $1.4 billion when CSW reaches its eventual 100% ownership interest in SEEBOARD. While the allocation of the purchase price may be revised at a later date, the goodwill is expected to be amortized on a straight-line basis over 40 years. SEEBOARD's results of operations are included in the consolidated CSW results in the following manner. Equity earnings representing the 27.6% CSW ownership interest in SEEBOARD during November 1995 were recorded in Other Income and Deductions. During December 1995, pursuant to its effective control of SEEBOARD through its 76.45% ownership interest, CSW began full consolidation accounting CSW 2-36 for SEEBOARD in its consolidated financial statements. At that time, CSW recorded a current liability of approximately $1.0 billion representing the obligation to purchase the controlled shares for which CSW had received acceptances but had not actually purchased. National Grid Assets Held for Sale Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK), as a shareholder of SEEBOARD, received 32,492,966 shares of National Grid common stock. At December 31, 1995, the carrying value of the National Grid assets held for sale, when converted to U.S. dollars, was approximately $100 million. On February 2, 1996, all of the shares of National Grid that CSW (UK) held were sold. On February 29, 1996, the proceeds from the sale of the National Grid shares were used to repay a portion of the CSW Investments Credit Facility. Price Risk Management Activities Transok periodically uses natural gas futures, options and basis swap contracts to manage the impact of price fluctuations on its inventory of natural gas, fuel and shrinkage requirements for its processing plants and certain fixed price purchase and sales contracts. Such contracts are designated at inception as a hedge when there is a direct relationship to the price risk associated with Transok's operations. Gains and losses on hedge contracts are deferred until the effect of the corresponding hedged transaction is recognized. For those contracts that are not designated as hedges, changes in the fair value of those contracts are recognized as gains or losses in income currently and are recorded in the balance sheet at fair value at the reporting date. Transok determines the fair value of its contracts based upon settlement prices for exchange traded contracts, market-related indexes or by obtaining quotes from brokers. Transok's trading gains and losses, either from its hedging or its speculative trading, did not have a material impact upon CSW's consolidated results of operations. Transok's open trade positions at December 31, 1995, were not material to CSW's financial position. Accounting Changes Effective January 1, 1993, the CSW System adopted SFAS No. 106, SFAS No. 112 and SFAS No. 109. In addition, the Electric Operating Companies also changed their method of accounting for unbilled revenues. See Electric Revenues and Fuel above for further information regarding the change in method of accounting for unbilled revenue. See NOTE 4. INCOME TAXES for further information regarding the adoption of SFAS No. 109 and see NOTE 5. BENEFIT PLANS for further information regarding the adoption of SFAS No. 106. In 1993, the change in accounting for unbilled revenues and the adoption of both SFAS No. 109 and SFAS No. 112 were presented as a cumulative effect of changes in accounting principles for CSW and the Electric Operating Companies as presented in the following table. CSW CPL PSO SWEPCO WTU (millions, except EPS) (thousands) Unbilled Revenues Pre-tax effect $75 $45,363 $13,758 $8,286 $8,347 Tax effect (26) (15,877) (5,321) (2,900) (2,921) Net income effect $49 $29,486 $8,437 $5,386 $5,426 EPS effect (CSW only) $0.26 CSW 2-37 CSW CPL PSO SWEPCO WTU (millions, except EPS) (thousands) SFAS No. 109 Pre-tax effect $-- $-- $-- $-- $-- Tax effect 6 -- (268) -- -- Net income effect $6 $-- $(268) $-- $-- EPS effect (CSW only) $0.03 SFAS No. 112 Pre-tax effect $(13) $(3,371) $(3,173) $(3,047) $(2,534) Tax effect 4 1,180 1,227 1,066 887 Net income effect $(9) $(2,191) $(1,946) $(1,981) $(1,647) EPS effect (CSW only) $(0.05) Total Cumulative Effect of Changes in Accounting Principles Pre-tax effect $62 $41,992 $10,585 $5,239 $5,813 Tax effect (16) (14,697) (4,362) (1,834) (2,034) Net income effect $46 $27,295 $6,223 $3,405 $3,779 EPS Effect (CSW only) $0.24 Statements of Cash Flows Cash equivalents are considered to be highly liquid debt instruments purchased with a maturity of three months or less. Accordingly, temporary cash investments are considered cash equivalents. Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1995 presentation. 2.LITIGATION AND REGULATORY PROCEEDINGS Termination of El Paso Merger In May 1993, CSW entered into a Merger Agreement pursuant to which El Paso would emerge from bankruptcy as a wholly owned subsidiary of CSW. El Paso is an electric utility company headquartered in El Paso, Texas, which filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on January 8, 1992. On June 9, 1995, CSW notified El Paso that CSW would not extend the termination date under the Merger Agreement as had been requested by El Paso and, accordingly, that it was terminating the Merger Agreement. CSW also informed El Paso on June 9, 1995, that it was withdrawing the Modified Plan for the proposed Merger with El Paso by a contemporaneous filing with the United States Bankruptcy Court for the Western District of Texas, Austin Division, before which the El Paso bankruptcy reorganization proceeding was pending. On June 9, 1995, following CSW's notification that it was terminating the Merger and withdrawing the Modified Plan, El Paso filed the El Paso Suit against CSW in state district court in El Paso, Texas, claiming breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, business disparagement, tortious interference with contract and fraud in the inducement. The El Paso Suit seeks a $25 million termination fee from CSW, certain costs related to the Modified Plan, CSW 2-38 additional unspecified damages, punitive damages, interest as permitted by law, reasonable attorneys' fees and court costs. On June 15, 1995, CSW filed the CSW Suit against El Paso in the United States Bankruptcy Court for the Western District of Texas, Austin Division, seeking a $25 million termination fee from El Paso due to El Paso's breach of the Merger Agreement, at least $3.6 million in rate case expenses incurred by CSW on behalf of El Paso related to state regulatory merger proceedings and a declaratory judgment that CSW properly terminated the Merger Agreement. CSW also removed the El Paso Suit from state district court to the United States Bankruptcy Court for the Western District of Texas, El Paso Division. The El Paso Suit was then transferred to the United States Bankruptcy Court in Austin, Texas. On August 4, 1995, El Paso filed motions with the Austin bankruptcy court to remand the El Paso Suit back to the state district court in El Paso and abstain from hearing the CSW Suit. The bankruptcy court denied El Paso's motions, and in connection therewith the judge presiding over El Paso's bankruptcy proceeding recused himself from hearing the El Paso Suit and the CSW Suit. Both lawsuits have since been assigned to another judge of the United States Bankruptcy Court for the Western District of Texas, Austin Division. On October 19, 1995, El Paso filed motions (i) to withdraw the reference of both lawsuits from the United States Bankruptcy Court for the Western District of Texas to the United States District Court for the Western District of Texas and (ii) to change venue in both lawsuits to the El Paso Division. El Paso's motion to withdraw the reference was denied on November 15, 1995, by the United States District Court for the Western District of Texas, Austin Division, and El Paso's motion for reconsideration of this ruling was denied on December 11, 1995. On January 26, 1996, El Paso filed a petition for writ of mandamus in the United States Court of Appeals for the Fifth Circuit seeking an order directing the withdrawal of the reference of both lawsuits from the Bankruptcy Court. On February 26, 1996, El Paso's motion to transfer venue was denied by the United States Bankruptcy Court for the Western District of Texas, Austin Division, and the court consolidated the El Paso Suit and the CSW Suit into one adversary proceeding. CSW is the named plaintiff in the consolidated adversary proceeding. On February 27, 1996, the Fifth Circuit Court of Appeal's denied El Paso's petition for writ of mandamus. No trial date has been set for the lawsuits. Although CSW believes that it has substantial defenses to El Paso's claims and intends to defend El Paso's claims and pursue CSW's claims vigorously, CSW cannot presently predict the outcome of the lawsuit. However, if the lawsuit is decided adversely to CSW, it could have a material adverse effect on CSW's consolidated results of operations and financial condition. CPL Rate Review On November 6, 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred during the period July 1, 1994 through June 30, 1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June 30, 1994 in Docket No. 13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. CPL is requesting this rate review in large part as a result of the expiration of the amortization of its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991. In 1995, Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by CPL to accelerate recovery of nuclear and regulatory assets as a way to proactively address certain assets that could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21, 1995, the Texas Commission expanded the scope of the rate review to address CSW 2-39 certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1, 1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13, 1996, intervening parties filed testimony in the revenue requirements phase of CPL's base rate case. Among the parties that filed testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20, 1996, the Staff filed testimony recommending an increase in total company base rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the specific benefits to CPL were not clearly identified. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for decommissioning STP. A comparison of the Staff's recommendation for a base rate increase, compared to CPL's claimed revenue deficiency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (unaudited) (millions) CPL revenue deficiency (1) $103 Return on common equity (21) CSW Services expenses (16) Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended revenue increase (2) $30 (1) The total company rate increase requested by CPL was reduced from $103 million to $78 million ($71 million allocated to the Texas retail jurisdiction) in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposal for decision for consideration by the Texas Commission. Testimony filed by parties to the rate case, including the Staff, is not binding on either the ALJs or the Texas Commission. A final decision on the rate request is not anticipated from the Texas Commission prior to December 1996. CSW 2-40 Management of CSW and CPL cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's or CSW's consolidated results of operations or financial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL and CSW could experience a material adverse effect on their results of operations and financial condition. 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. On May 16, 1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CPL's fuel factors were implemented during the summer of 1995. 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. Hearings on the CPL 1995 Agreement were held on July 19, 1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received 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. 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 CPL was granted deferred accounting treatment for certain STP Unit 1 and 2 costs by Texas Commission orders issued in October 1990 and December 1990, respectively. In 1994, the Supreme Court sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals given its prior determinations. On August 16, 1995, the Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects. CPL believes that the language of the Supreme Court's opinion suggests that the appropriateness of allowing deferred accounting may be reviewed under a financial integrity standard in the first case in which the deferred STP costs are recovered through rates. If the courts decide that subsequent review under the financial integrity standard is required, that review would be conducted in a remand of the STP Unit 1 and 2 orders. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. CSW 2-41 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 CPL will receive approval of its deferred accounting orders or will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CSW's or CPL's results of operation or financial condition. CPL Westinghouse Litigation CPL and other owners of STP were plaintiffs in a lawsuit filed in October 1990 in the District Court in Matagorda County, Texas against Westinghouse, seeking damages and other relief. The suit alleged that Westinghouse supplied STP with defective steam generator tubes that are susceptible to stress corrosion cracking. On December 8, 1995, CPL and the other owners of STP settled the lawsuit. While the court order prohibits disclosure of the terms of the settlement, CPL believes the litigation was settled on terms that provided satisfactory consideration to CPL and STP and will not have a material adverse effect on the results of operations or financial condition of CSW or CPL. CPL Civil Penalties In October 1995, the NRC notified HLP of a Notice of Violation and proposed penalties totaling $160,000 related to events that occurred at STP in May 1992. The Notice of Violation and penalties reflect the NRC's belief that certain STP employees were terminated as a result of raising safety concerns with the NRC. The Notice of Violation was the result of a Department of Labor decision and order in April 1995 and is awaiting final action by the Secretary of Labor. HLP is not required to reply to the NRC's Notice of Violation or pay the penalties pending the Secretary of Labor's final decision. The NRC indicated that the proposed civil penalties reflect minimum penalties allowed because of improvements made to the STP Employee Concerns Program since 1992. CPL's share of any penalty that is ultimately paid would be approximately 25%, reflecting its ownership interest in STP. 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, are currently pending in federal and state court in Corpus Christi, Texas. Plaintiffs' complaints seek damages for alleged property damage and health impairment as a result of operations on the site and cleanup activities. Management cannot predict the outcome of these suits. However, management believes that CPL has defenses to the plaintiffs' complaints and intends to defend the suits vigorously. Management also believes that the ultimate resolution of these matters will not have a material adverse effect on CSW's or CPL's results of operations or financial condition. PSO Gas Transportation and Fuel Management Fees An order issued by the Oklahoma Commission in 1991 required that the level of gas transportation and fuel management fees, paid to Transok by PSO, permitted for recovery through the fuel adjustment clause be reviewed in PSO's 1993 rate proceeding. This portion of the 1993 rate review was subsequently bifurcated. In March 1995, an order was issued by the Oklahoma Commission approving an agreement which allows PSO to recover approximately $28.4 million of transportation and fuel management fees in base rates using 1991 determinants and approximately $1 million through the fuel adjustment clause. The agreement also requires the phase- in of competitive bidding of natural gas transportation requirements in excess of 165 MMcf/d. PSO Gas Purchase Contracts PSO has been named defendant in complaints filed in federal and state courts of Oklahoma and Texas in 1984 through 1995 by gas suppliers alleging claims arising out of certain gas purchase contracts. The plaintiffs seek relief through the filing dates as well as attorneys' fees. In January 1996, complaints representing CSW 2-42 approximately $10 million in claims were settled. Remaining complaints currently total approximately $1 million in claimed actual damages. The settlements did not have a material effect on CSW's and PSO's consolidated results of operations or financial condition. The remaining suits are in the preliminary stages. Management cannot predict the outcome of these proceedings. However, management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. PSO PCB Cases PSO has been named a defendant in complaints filed in federal and state courts of Oklahoma in 1984, 1985, 1986, 1993 and 1996. The complaints allege, among other things, that some of the plaintiffs and the property of other plaintiffs were contaminated with PCBs and other toxic by-products following certain incidents, including transformer malfunctions, in April 1982, December 1983 and May 1984. To date, all complaints, except for claims representing approximately $13 million in alleged damages and claims filed in February 1996 for additional unspecified actual and punitive damages, have been dismissed, certain of which resulted from settlements among the parties. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Moreover, management believes that the remaining claims are covered under insurance. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. PSO Burlington Northern Transportation Contract In June 1992, PSO filed suit in the United States District Court for the Northern District of Oklahoma against Burlington Northern seeking declaratory relief under a long-term contract for the transportation of coal. In July 1992, Burlington Northern asserted counterclaims for unspecified damages against PSO alleging that PSO breached the contract. In December 1993, PSO amended its suit against Burlington Northern seeking damages and declaratory relief under federal and state antitrust laws. In December 1995, PSO and Burlington Northern reached a compromise settlement of all outstanding claims and counterclaims, and the action was dismissed with prejudice. The settlement did not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. PSO Burlington Northern Arbitration In May 1994, in an arbitration related to the Burlington Northern coal transportation contract described above, an arbitration panel made an award in favor of PSO concerning basic transportation rates under the coal transportation contract and concerning the contract mechanism for adjustment for future transportation rates. This arbitration award was then the subject of litigation in the United States District Courts for the Northern Districts of Oklahoma and Texas and the United States Court of Appeals for the Tenth Circuit. In December 1995, this litigation was settled as part of the compromise settlement of the related lawsuit described above. Under the settlement, a $16.4 million judgment by the U.S. District Court for the Northern District of Oklahoma confirming the arbitration award became final and was then released and satisfied of record. PSO Ash Creek Coal Mine Reclamation In August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an additional $500,000 in 1995. Actual reclamation work commenced in September 1995, with completion expected in late 1996. Surveillance monitoring will continue for ten years after final reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. CSW 2-43 PSO MCPC In 1989, PSO entered into certain long-term contracts with MCPC, a cogeneration development company located in northeastern Oklahoma. These contracts include: (i) an Interconnection and Interchange Agreement providing terms and conditions under which MCPC could connect its electric generating facilities to PSO's transmission system and providing for future transmission by PSO of specified amounts of MCPC's power to an unaffiliated utility; (ii) a Stock/Asset Purchase Agreement which allows PSO under certain conditions to acquire the stock or assets of MCPC; and (iii) an Energy Conversion Agreement which required PSO to deliver natural gas to MCPC for conversion to electrical energy to be delivered by MCPC to PSO. Under the Energy Conversion Agreement, PSO had the right to dispatch up to 60 MWH per hour of quick-start capability. In 1993, MCPC filed an application with the Oklahoma Commission requesting relief through the modification of the existing Energy Conversion Agreement. An emergency order was issued under MCPC's application which increased the payment made by PSO to MCPC for energy purchases and decreased the amount of firm energy MCPC was required to deliver to PSO. The emergency order was subject to a permanent ruling. In July 1993, PSO commenced a lawsuit in the District Court of Tulsa County, Oklahoma, seeking a declaratory judgment that PSO was entitled to terminate the Energy Conversion Agreement as of August 1, 1993, because of a default committed by MCPC. On March 31, 1995, PSO, MCPC and the Oklahoma Commission Staff signed a joint settlement resolving all issues pursuant to the various proceedings before the Oklahoma Commission and the District Court of Tulsa County, Oklahoma. The settlement, among other things, eliminated a requirement that MCPC deliver an annual minimum of 394,200 MWH of Assured Delivery Energy and related provisions associated with underdelivery charges. Most other provisions of the agreement between PSO and MCPC were kept intact. The Oklahoma Commission issued an order in May 1995 approving the settlement. The settlement is on terms satisfactory to PSO and will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. SWEPCO Fuel Factor Proceedings On October 6, 1995, SWEPCO filed a petition, designated as Docket No. 14819, with the Texas Commission to revise its fixed fuel factors for the recovery of fuel and purchased power costs. SWEPCO was experiencing an over-recovery of fuel costs based on application of its then current factors which became effective in July 1994. The original filing with the Texas Commission proposed decreasing SWEPCO's fixed fuel factors and refunding to customers $7.1 million of cumulative over-recoveries for the period January 1994 to June 1995. SWEPCO subsequently revised its petition to the Texas Commission, updating the cumulative fuel over-recovery to $10.4 million through September 1995. On December 20, 1995, the Texas Commission issued an order approving SWEPCO's revised fixed fuel factors and authorizing the refund of $10.8 million, including interest, to customers primarily as billing credits on January 1996 monthly bills. SWEPCO Burlington Northern Transportation Contract On January 20, 1995, a state district court in Bowie County, Texas, entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO approximately $72 million covering damages for the period from April 27, 1989 through September 26, 1994, post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals. The appeal is now pending. CSW 2-44 WTU Stipulation and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No. 1 originally authorized in the Texas Commission's Docket No. 7289. On September 22, 1995, WTU, along with other major parties to the above described matters, filed with the Texas Commission a joint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a unified package that included: (i) a retail base rate reduction of approximately $13.5 million annually starting with WTU's October 1995 revenue month billing cycle; (ii) a $21 million retail refund which was not attributed to any specific cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction to October 1, 1994; (iii) a reduction of fixed fuel factors by approximately 2%; (iv) various rate and accounting treatments including a reasonable return on equity for retail operations of 11.375%; and (v) a retail base rate freeze until October 1, 1998, subject to certain force majeure provisions. On November 9, 1995, the Texas Commission rendered a final order that implemented the joint stipulation and agreement, ending the rate proceeding and fuel reconciliation in Docket No. 13369 and the remand, designated Docket No. 13949, to the Texas Commission by the Supreme Court for the deferred accounting treatment of Oklaunion Power Station Unit No. 1 originally authorized by the Texas Commission in Docket No. 7289. The final order also set into motion the actions required to seek a remand of the appeal of Docket No. 7510 to the Texas Commission to implement a final order consistent with the WTU Stipulation and Agreement. On December 8, 1995, all parties to the appeals filed a joint motion with the Supreme Court and, on December 22, 1995, the Supreme Court approved the joint motion to withdraw and dismissed the case. The case will now go back to the Court of Appeals so that it can be remanded back to the Texas Commission. The date of this remand and final action by the Texas Commission is not known. The WTU Stipulation and Agreement is expected to impact WTU's results of operations for the next several years, reducing annual earnings by approximately $8 million beginning in 1996. Details of the items with significant earnings impact for 1995 and 1996, including certain accounting treatments, are set forth in the following table. 1995 1996 (unaudited) Pre-tax After-tax Pre-tax After-tax (millions) Refund to retail customers $(21.0) $(13.7) $-- $-- Effect of retail rate reduction (2.4) (1.6) (7.6) (4.9) 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 0.5 0.5 Capitalization and amortization of previously expensed restructuring costs 12.7 8.2 (1.9) (1.2) Accelerated amortization of deferred Oklaunion plant costs (accelerated from the remaining 31 years to 7 years) -- -- (2.9) (1.9) Other amortization (0.2) (0.1) (0.8) (0.5) Other one-time items 1.0 0.7 -- -- CSW 2-45 The WTU 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. CSW Energy Cimmaron Litigation On January 12, 1994, Cimmaron brought suit against CSW and its wholly owned subsidiary, CSW Energy, in the 125th District Court of Houston, Harris County, Texas. Cimmaron alleged that CSW and CSW Energy breached commitments to participate with Cimmaron in the failed BioTech Cogeneration project located in Colorado. CSW Energy filed a counterclaim against Cimmaron and third- party claims against the principals of Cimmaron on December 22, 1994. On January 10, 1995, Cimmaron added claims of negligence and gross negligence against the members of CSW Energy's board of directors at the time of the failed project. Effective July 27, 1995, the parties agreed upon a settlement whereby they would dismiss their respective claims. The terms of the settlement were on terms satisfactory to CSW and CSW Energy and had no material adverse impact on CSW's consolidated results of operations or financial condition. 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 consolidated results of operations or financial condition. 3.COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that CSW, including the Electric Operating Companies, SEEBOARD, Transok and other diversified operations, will spend approximately $636 million in capital expenditures during 1996. Substantial commitments have been made in connection with these programs. During 1996, each of the Electric Operating Companies expects to spend, including AFUDC, approximately the following amounts in construction expenditures: CPL-$137 million PSO-$68 million SWEPCO-$98 million WTU-$42 million Fuel Commitments To supply a portion of the fuel requirements of the CSW System, the subsidiary 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, 1995, the maximum amount SWEPCO would have to assume was $71.9 million. The maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding at December 31, 1995 was $58.7 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, SWEPCO has agreed to provide bond guarantees on mine reclamation in the amount of $70 million. Since SWEPCO uses self-bonding, the guarantee provides for SWEPCO CSW 2-46 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 $25 million. WTU Pipeline Leases WTU has entered into various commitments for the procurement of fuel. WTU has a sale/leaseback agreement with Transok, an affiliated company, for full capacity use of a natural gas pipeline to WTU's Ft. Phantom generating plant. The lease agreement also provides for full capacity use of Transok's natural gas pipelines serving WTU's San Angelo, Oak Creek and Rio Pecos generating plants. The initial terms of the agreement entered into in 1992 are for twelve years with renewable options thereafter. Other Commitments and Contingencies CPL Nuclear Insurance In connection with the licensing and operation of STP, the owners have purchased the maximum limits of nuclear liability insurance, as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1, 2002. The limit of liability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of January 1995. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling $8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchases, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 21 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same accident, insurance will reimburse CPL up to 80% of the single unit recovery. The maximum amount recoverable for a single unit outage is $86.02 million for Unit 1 and $85.96 million for Unit 2. CPL is subject to an additional assessment up to $1.6 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceeds the accumulated funds available under the policy. On August 28, 1994, CPL filed a claim under the NEIL I policy relating to the 1993 - 1994 outage at STP Units 1 and 2. NEIL has denied the claim. CPL management is currently evaluating its options regarding this claim, but cannot predict the ultimate outcome of this matter. CSW 2-47 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, 1995, leased assets of $46 million, net of accumulated amortization of $33.7 million, were included in Electric fixed assets on the balance sheet and at December 31, 1994, leased assets were $46 million, net of accumulated amortization of $30.1 million. Total charges to SWEPCO's operating expenses for expenses associated with these financing arrangements were $6.3 million, $6.8 million and $7.1 million for the years 1995, 1994 and 1993, respectively. SWEPCO Biloxi, Mississippi MGP Site In 1994, SWEPCO was notified by Mississippi Power that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO worked with Mississippi Power to investigate the extent of contamination at this site. The MDEQ approved a site investigation work plan and, in January 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of property and adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results confirmed the contamination on the property and indicated the possibility of contamination of an adjacent property. A risk assessment has been performed to assist SWEPCO and Mississippi Power in determining remediation alternatives. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site. CSW Energy Investments and Commitments CSW Energy provided construction services to the Mulberry cogeneration facility through a wholly owned subsidiary, CSW Development-I, Inc. The project achieved commercial operation in August 1994 and added 120 MW of on-line capacity of which CSW Energy owns 50%. CSW Energy's maximum potential liability under the fixed price contract is $29 million which will decrease to zero in August 1996. As of December 31, 1995, CSW had provided additional guarantees to the project totaling approximately $3.3 million. CSW Energy has entered into a purchase agreement on the Ft. Lupton project to provide $80.6 million of equity upon the occurrence of certain events. As of December 31, 1995, $44 million has been paid and CSW has provided a guarantee for $40 million. Additionally, CSW Energy has provided four letters of credit to the project totaling $18.9 million. In March 1995, CSW Energy closed permanent project financing on the Ft. Lupton facility in the amount of $208 million which allowed the project to repay its $102 million construction borrowing to CSW. The following table summarizes the investments and commitments in CSW Energy's projects at December 31, 1995. Letters of Credit Equity and Guarantees Loans (millions) Brush $15.3 $-- $-- Orange Cogeneration 53.2 2.3 -- Ft. Lupton 44.0 58.9 36.5 Mulberry 23.6 32.3 -- Phillips Sweeny -- 3.0 4.2 Newgulf 8.1 -- -- Various developmental projects 10.5 7.1 9.5 SEEBOARD Medway Commitment In April 1992, SEEBOARD entered into an agreement to provide 37.5% of the equity to Medway Power Ltd., a company formed to construct, own and operate a 660 MW gas-fired power plant on the CSW 2-48 Isle of Grain, Kent, in the United Kingdom. Through December 31, 1995, SEEBOARD has invested 11.6 million pounds or approximately $18.0 million in the project and remains committed for an additional maximum amount of 11.3 million pounds or approximately $17.5 million (1.00 pound=$1.55). In addition, SEEBOARD has entered into a commitment to purchase 50% of the Medway power plant's output for 15 years commencing in 1996. 4.INCOME TAXES CSW files a consolidated federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom Corporation income taxes. The CSW System adopted the provisions of SFAS No. 109 effective January 1, 1993. The net effect on CSW's earnings for the year ended December 31, 1993, was a one-time adjustment to increase net income by $6 million or $0.03 per share. This adjustment was recorded as a cumulative effect of change in accounting principle. The benefit was attributable to the reduction in deferred taxes associated with CSW's non-utility operations previously recorded at rates higher than current rates. For the Electric Operating Companies, there were no material effects of SFAS No. 109 on CSW's earnings. As a result of this change, CSW recognized additional accumulated deferred income taxes from its utility operations and corresponding regulatory assets and liabilities to ratepayers in amounts equal to future revenues or the reduction in future revenues required when the book versus tax differences reverse and are recovered or settled in rates. As a result of a favorable earnings history, the CSW System did not record any valuation allowance against deferred tax assets at December 31, 1995, 1994 and 1993. Total income taxes (income taxes included in Operating Expenses and Taxes as well as Other Income and Deductions) differ from the amounts computed by applying the federal statutory income tax rates to income before taxes for a number of reasons. The tax implications of the CPL 1995 Agreement and the WTU Stipulation and Agreement, whereby the flowback of unprotected excess deferred income taxes was accelerated, contributed to the difference as did adjustments that were made to eliminate tax obligations that no longer exist. These differences are presented in the INCOME TAX RATE RECONCILIATION table below. Information concerning income taxes, including total income tax expense, a reconciliation between the 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 (millions) (thousands) 1995 Included in Operating Expenses and Taxes Current $107 $51,626 $37,687 $41,852 $4,892 Deferred 12 (30,025) 2,704 6,287 1,971 Deferred ITC (1) (14) (5,789) (2,789) (4,786) (1,321) 105 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 $103 $15,941 $37,405 $42,632 $7,106 CSW 2-49 CSW CPL PSO SWEPCO WTU (millions) (thousands) 1994 Included in Operating Expenses and Taxes Current $94 $54,486 $32,083 $24,333 $10,898 Deferred 109 26,659 7,844 22,248 8,377 Deferred ITC (1) (14) (5,789) (2,789) (4,278) (1,321) 189 75,356 37,138 42,303 17,954 Included in Other Income and Deductions Current (13) (3,157) (4,129) (3,710) (2,998) Deferred (5) -- (65) -- -- (18) (3,157) (4,194) (3,710) (2,998) $171 $72,199 $32,944 $38,593 $14,956 1993 Included in Operating Expenses and Taxes Current $35 $(19,690) $15,339 $37,235 $11,379 Deferred 111 90,682 9,419 (2,481) 3,593 Deferred ITC (1) (15) (5,806) (2,791) (5,193) (1,321) 131 65,186 21,967 29,561 13,651 Included in Other Income and Deductions Current (3) 736 (1,785) (1,847) (510) Deferred (3) (162) 71 -- -- (6) 574 (1,714) (1,847) (510) Tax Effects of Cumulative Effect of Changes in Accounting Principles 14 14,697 4,362 1,834 2,034 $139 $80,457 $24,615 $29,548 $15,175 (1) ITC deferred in prior years are included in income over the lives of the related properties.
INCOME TAX RATE RECONCILIATION CSW CPL PSO SWEPCO WTU ($ in millions) ($ in thousands) 1995 Tax at statutory rates $182 35% $77,836 35% $41,732 35% $55,886 35% $14,573 35% Differences Amortization of ITC (14) (3) (5,789) (3) (2,789) (2) (4,786) (3) (1,321) (3) Mirror CWIP (11) (2) (10,843) (5) -- -- -- CPL 1995 Agreement (34) (7) (34,289) (15) -- -- -- WTU Stipulation and Agreement (7) (1) -- -- -- (6,859) (16) Prior period adjustments (22) (4) (13,462) (6) (2,949) (2) (2,783) (2) 953 2 Other 9 2 2,488 1 1,411 -- (5,685) (3) (240) (1) $103 20% $15,941 7% $37,405 31% $42,632 27% $7,106 17% 1994 Tax at statutory rates $204 35% $97,174 35% $35,442 35% $50,483 35% $18,313 35% Differences Amortization of ITC (14) (2) (5,789) (2) (2,789) (3) (4,277) (3) (1,321) (3) Mirror CWIP (20) (4) (20,293) (7) -- -- -- Prior period adjustments (2) -- (1,955) (1) (1,272) (1) (2,588) (2) -- Other 3 -- 3,062 1 1,563 2 (5,025) (3) (2,036) (3) $171 29% $72,199 26% $32,944 33% $38,593 27% $14,956 29%
CSW 2-50
CSW CPL PSO SWEPCO WTU ($ in millions) ($ in thousands) 1993 Tax at statutory rates $163 35% $88,509 35% $24,967 35% $38,998 35% $15,915 35% Differences Amortization of ITC (15) (3) (5,806) (2) (2,790) (4) (5,193) (5) (1,321) (3) Mirror CWIP (23) (5) (22,989) (9) -- -- -- Prior period adjustments 19 4 19,101 7 (355) (1) (576) (1) -- Cumulative effect of change in method of accounting for income taxes (8) (2) -- -- -- -- Other 3 1 1,642 1 2,793 5 (3,681) (2) 581 1 $139 30% $80,457 32% $24,615 35% $29,548 27% $15,175 33%
DEFERRED INCOME TAXES CSW CPL PSO SWEPCO WTU (millions) (thousands) 1995 Deferred Income Tax Liabilities Depreciable utility plant $1,679 $769,888 $277,317 $388,394 $130,490 Deferred plant costs 180 170,816 -- -- 9,132 Mirror CWIP asset 109 109,132 -- -- -- Income tax related regulatory assets 220 163,014 14,481 32,462 10,557 Other 474 69,671 24,923 23,441 25,606 2,662 1,282,521 316,721 444,297 175,785 Deferred Income Tax Assets Income tax related regulatory liability (133) (41,567) (30,657) (44,914) (15,619) Unamortized ITC (98) (53,460) (17,878) (15,868) (10,696) Alternative minimum tax carryforward (96) (21,456) -- -- -- Other (71) (36,386) (14,222) (10,906) (9,668) (398) (152,869) (62,757) (71,688) (35,983) Net Accumulated Deferred Income Taxes $2,264 $1,129,652 $253,964 $372,609 $139,802 Net Accumulated Deferred Income Taxes Noncurrent $2,306 $1,151,823 $264,353 $377,245 $145,130 Current (42) (22,171) (10,389) (4,636) (5,328) $2,264 $1,129,652 $253,964 $372,609 $139,802 CSW 2-51 CSW CPL PSO SWEPCO WTU (millions) (thousands) 1994 Deferred Income Tax Liabilities Depreciable utility plant $1,683 $755,437 $292,127 $389,016 $144,501 Deferred plant costs 181 171,145 -- -- 9,420 Mirror CWIP asset 113 112,639 -- -- -- Income tax related regulatory assets 229 169,104 15,061 33,847 10,908 Other 262 49,800 25,309 41,150 10,120 2,468 1,258,125 332,497 464,013 174,949 Deferred Income Tax Assets Income tax related regulatory liability (155) (68,149) (22,260) (50,162) (14,134) Unamortized ITC (115) (55,486) (18,957) (29,482) (11,159) Alternative minimum tax carryforward (96) (26,138) -- -- -- Other (56) (7,223) (16,811) (25,520) (6,578) (422) (156,996) (58,028) (105,164) (31,871) Net Accumulated Deferred Income Taxes $2,046 $1,101,129 $274,469 $358,849 $143,078 Net Accumulated Deferred Income Taxes Noncurrent $2,048 $1,087,317 $281,139 $365,441 $146,146 Current (2) 13,812 (6,670) (6,592) (3,068) $2,046 $1,101,129 $274,469 $358,849 $143,078 5.BENEFIT PLANS Defined Benefit Pension Plan The CSW System maintains a tax qualified, non-contributory defined benefit pension plan covering substantially all employees. Benefits are 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 System's funding policy is based on actuarially determined contributions, taking into account amounts which are deductible for income tax purposes and minimum contributions required by ERISA. Pension plan assets consist primarily of common stocks and short-term and intermediate-term fixed income investments. Information about the pension plan, including: (1) pension plan net periodic costs and contributions; (2) pension plan participation; (3) a reconciliation of the funded status of the pension plan to the amounts recognized on the balance sheets; and (4) assumptions used in accounting for the pension plan follow. NET PERIODIC PENSION PLAN COSTS AND CONTRIBUTIONS CSW CPL PSO SWEPCO WTU (millions) (thousands) 1995 Net Periodic Pension Costs Service cost $20 $4,699 $3,614 $4,220 $2,609 Interest cost on projected benefit obligation 64 14,860 11,428 13,345 8,251 Actual return on plan assets (117) (27,137) (20,869) (24,370) (15,068) Net amortization and deferral 44 10,136 7,795 9,102 5,628 $11 $2,558 $1,968 $2,297 $1,420 Pension Plan Contributions $29 $6,754 $5,195 $6,066 $3,751 CSW 2-52 CSW CPL PSO SWEPCO WTU (millions) (thousands) 1994 Net Periodic Pension Costs Service cost $22 $5,796 $5,181 $4,843 $3,082 Interest cost on projected benefit obligation 62 15,989 14,292 13,361 8,501 Actual return on plan assets (4) (1,131) (1,011) (945) (601) Net amortization and deferral (70) (17,972) (16,064) (15,018) (9,556) $10 $2,682 $2,398 $2,241 $1,426 Pension Plan Contributions $28 $7,099 $6,345 $5,932 $3,744 1993 Net Periodic Pension Costs Service cost $20 $5,228 $4,642 $4,239 $2,732 Interest cost on projected benefit obligation 56 14,878 13,209 12,063 7,776 Actual return on plan assets (68) (18,079) (16,051) (14,658) (9,448) Net amortization and deferral -- 68 60 55 35 $8 $2,095 $1,860 $1,699 $1,095 Pension Plan Contributions $32 $11,005 $6,694 $6,113 $3,940 APPROXIMATE NUMBER OF PARTICIPANTS IN PLAN DURING 1995 CSW CPL PSO SWEPCO WTU Active employees 7,700 1,900 1,400 1,700 1,100 Retirees 4,200 1,400 1,200 900 600 Terminated employees 1,300 400 400 200 200 RECONCILIATION OF FUNDED STATUS OF PLAN TO AMOUNTS RECOGNIZED ON THE CSW CONSOLIDATED BALANCE SHEETS December 31, 1995 1994 (millions) Plan assets, at fair value $897 $794 Actuarial present value of Accumulated benefit obligation for service rendered to date 745 685 Additional benefit for future salary levels 140 112 Projected benefit obligation 885 797 Plan assets in excess/(below) the projected benefit obligation 12 (3) Unrecognized net gain 64 60 Unrecognized prior service cost (8) (8) Unrecognized net obligation 14 15 Prepaid pension cost $82 $64 The vested portion of the accumulated benefit obligations at December 31, 1995 and 1994 was $678 million and $626 million, respectively. The unrecognized net obligation is being amortized over the average remaining service life of employees or 16 years. Prepaid pension cost is included in Deferred Charges and Other Assets on the consolidated balance sheet. No reconciliation of CSW 2-53 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 Electric Operating Companies individually. In addition to the amounts shown in the above table, the CSW System 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, 1995, 1994 and 1993 was $2.4 million, $1.8 million and $0.5 million, respectively. ASSUMPTIONS USED IN Long-Term Return ACCOUNTING FOR THE Discount Compensation on Plan PENSION PLAN Rate Increase Assets 1995 8.00% 5.46% 9.50% 1994 8.25% 5.46% 9.50% 1993 7.75% 5.46% 9.50% Postretirement Benefits Other Than Pensions The CSW System, including each of the Electric Operating Companies, adopted SFAS No. 106 effective January 1, 1993. The effect on the CSW System's operating expense in 1993 was an increase of $16 million, with the individual Electric Operating Companies' effects being approximately $5.9 million, $3.0 million and $1.9 million for CPL, SWEPCO and WTU, respectively. The transition obligation is being amortized over twenty years, with seventeen 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: (1) net periodic postretirement benefit costs; (2) a reconciliation of the funded status of the postretirement benefit plan to the amounts recognized on the balance sheets; and (3) assumptions used in accounting for the postretirement benefit plan follow. NET PERIODIC POSTRETIREMENT BENEFIT COSTS CSW CPL PSO SWEPCO WTU (millions) (thousands) 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 1994 Service cost $9 $2,435 $2,350 $1,965 $1,233 Interest cost on APBO 19 6,061 5,317 4,266 2,559 Actual return on plan assets (1) (285) (495) (464) (113) Amortization of transition obligation 9 2,900 2,528 1,967 1,225 Net amortization and deferral (4) (913) (917) (765) (418) $32 $10,198 $8,783 $6,969 $4,486 CSW 2-54 NET PERIODIC POSTRETIREMENT BENEFIT COSTS CSW CPL PSO SWEPCO WTU (millions) (thousands) 1993 Service cost $8 $2,257 $2,175 $1,813 $1,157 Interest cost on APBO 17 5,505 4,811 3,782 2,316 Actual return on plan assets (1) (249) (264) (230) (104) Amortization of transition obligation 9 2,900 2,528 1,967 1,225 Net amortization and deferral (2) (703) (564) (474) (296) $31 $9,710 $8,686 $6,858 $4,298 RECONCILIATION OF FUNDED STATUS OF PLAN TO AMOUNTS RECOGNIZED ON THE BALANCE SHEETS CSW CPL PSO SWEPCO WTU (millions) (thousands) 1995 APBO Retirees $175 $58,337 $49,130 $38,762 $23,880 Other fully eligible participants 13 3,026 2,974 3,622 1,837 Other active participants 57 14,676 12,697 13,205 7,829 Total 245 76,039 64,801 55,589 33,546 Plan assets at fair value (100) (27,997) (27,904) (24,424) (12,708) APBO in excess of plan assets 145 48,042 36,897 31,165 20,838 Unrecognized transition obligation (153) (49,308) (42,984) (33,436) (20,822) Unrecognized gain or (loss) 8 2,325 5,511 2,310 378 (Accrued)/Prepaid Cost $-- $1,059 $(576) $39 $394 1994 APBO Retirees $149 $49,852 $42,233 $32,938 $19,703 Other fully eligible participants 31 9,278 8,077 7,945 4,764 Other active participants 55 15,017 14,372 12,726 7,519 Total 235 74,147 64,682 53,609 31,986 Plan assets at fair value (76) (21,457) (21,649) (18,775) (9,636) APBO in excess of plan assets 159 52,690 43,033 34,834 22,350 Unrecognized transition obligation (162) (52,208) (45,512) (35,403) (22,047) Unrecognized gain or (loss) 4 577 1,903 608 91 (Accrued)/Prepaid Cost $1 $1,059 $(576) $39 $394 ASSUMPTIONS USED THROUGHOUT THE CSW SYSTEM IN THE Return Tax Rate ACCOUNTING FOR Discount on Plan for Taxable SFAS NO. 106 Rate Assets Trusts 1995 8.00% 9.50% 39.6% 1994 8.25% 9.50% 39.6% 1993 7.75% 9.00% 39.6% Health care cost trend rates Pre-65 Participants: 1995 Rate of 10.50% grading down .75% per year to an ultimate rate of 6.0% in 2001. 1994 Rate of 11.75% grading down .75% per year to an ultimate rate of 6.5% in 2001. Post-65 Participants: 1995 Rate of 10.00% grading down .75% per year to an ultimate rate of 5.5% in 2001. 1994 Rate of 11.25% grading down .75% per year to an ultimate rate of 6.0% in 2001. CSW 2-55 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 $26.0 $8.0 $7.0 $6.0 $3.6 Service and interest costs 4.0 1.0 1.0 0.9 0.5 Health and Welfare Plans The CSW System has medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment plans for substantially all active CSW System employees. The contributions for the CSW System, recorded on a pay-as-you-go basis, for the years ended December 31, 1995, 1994 and 1993 are listed in the following table. CSW CPL PSO SWEPCO WTU (millions) 1995 $27.0 $2.4 $4.6 $4.7 $1.1 1994 17.0 4.6 3.6 4.1 2.7 1993 23.0 6.1 5.0 5.4 3.5 Effective January 1993, the CSW System's method of providing health benefits was modified to include such benefits as a health maintenance organization, preferred provider options, managed prescription drug and mail-order program and a mental health and substance abuse program in addition to the self-insured indemnity plans. SEEBOARD's Employee Benefits The majority of SEEBOARD's employees joined, and received pension benefits from 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 for the employee's benefit. 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. At December 31, 1995, SEEBOARD's pension plan projected benefit obligation, reflecting CSW's 76.45% ownership interest in SEEBOARD, is approximately $676 million while the fair value of the pension plan's assets is approximately $719 million. The excess of the fair value represents a $43 million prepaid pension cost and is included in Deferred Charges and Other Assets on the consolidated balance sheets at December 31, 1995. Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority of its employees. 6.JOINTLY OWNED ELECTRIC UTILITY PLANT The Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for the joint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December CSW 2-56 31, 1995, the Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table. SWEPCO SWEPCO CPL Flint SWEPCO Dolet CSW * STP Creek Pirkey Hills Oklaunion Nuclear Coal Lignite Lignite Coal Plant Plant Plant Plant Plant ($ in millions) Plant in service $2,325 $79 $432 $226 $396 Accumulated depreciation $443 $42 $148 $69 $103 Plant capacity-MW 2,501 480 650 650 676 Participation 25.2% 50.0% 85.9% 40.2% 78.1% Share of capacity-MW 630 240 559 262 528 * 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 participation 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 $36 million, $80 million and $280 million, respectively, at December 31, 1995. Accumulated depreciation is $9 million, $27 million and $67 million for CPL, PSO and WTU, respectively. 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 CSW's or any of the Electric Operating Companies' liabilities unless the issues are redeemed prior to their maturity dates. Cash, temporary cash investments, special deposits, accounts receivable and short-term debt The fair value equals the carrying amount as stated on the balance sheets because of the short maturity of those instruments. National Grid assets held for sale The fair value and the carrying value of the 32,492,966 shares of common stock of the National Grid held for sale are both approximately $100 million. The fair value is based on the closing market price for National Grid common stock on the London Stock Exchange on December 31, 1995 (1.995 pounds per share) and an exchange rate of 1.00 pound=$1.55 (the prevailing exchange rate on December 31, 1995). Long-term debt The fair value of CSW's 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. Preferred stock subject to mandatory redemption The fair value of the Electric Operating Companies' 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 provision. 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 2-57 CARRYING VALUE AND ESTIMATED FAIR VALUE CSW CPL PSO SWEPCO WTU (millions) (thousands) Long-term debt 1995 carrying amount $3,914 $1,517,347 $379,250 $598,951 $273,245 fair value 4,090 1,583,959 396,386 627,034 286,648 1994 carrying amount 2,940 1,466,393 402,752 595,833 210,047 fair value 2,795 1,395,590 364,585 555,659 199,986 Preferred stock subject to mandatory redemption 1995 carrying amount 34 -- -- 33,628 -- fair value 35 -- -- 34,648 -- 1994 carrying amount 35 -- -- 34,828 -- fair value 32 -- -- 31,968 -- Long-term debt and preferred stock due within 12 months 1995 carrying amount 30 231 25,000 5,099 -- fair value 30 231 25,000 5,136 -- 1994 carrying amount 7 723 -- 5,270 650 fair value 7 725 -- 5,171 666 8.LONG-TERM DEBT CSW'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 1995 1994 (millions) First mortgage bonds 1996 1999 5.25% 7.50% $418 $443 2000 2004 5.25% 7.75% 876 836 2005 2009 6.20% 7.75% 527 247 2010 2014 7.50% 7.50% 112 112 2015 2019 9.15% 9.75% -- 226 2020 2024 7.25% 7.50% 295 295 2025 2029 6.875% 6.875% 80 80 Pollution control bonds 2000 2004 6.90% 7.125% 12 21 2005 2009 5.90% 6.00% 49 83 2010 2014 7.875% 10.125% 162 231 2015 2019 4.135% 7.875% 154 114 2025 2029 6.00% 6.10% 221 120 Notes and Lease Obligations 1996 2023 6.287% 9.75% 477 328 CSW Credit Agreement 2000 floating 731 -- Unamortized discount (13) (21) Unamortized cost of reacquired debt (187) (175) $3,914 $2,940 The mortgage indentures, as amended and supplemented, securing first mortgage bonds issued by the Electric Operating Companies, constitute a direct first mortgage lien on CSW 2-58 substantially all electric utility plant. The Operating Companies may offer additional first mortgage bonds, MTNs and other securities subject to market conditions and other factors. CPL CPL's $40.9 million Series 1995, GBRA, PCRBs were issued with a variable rate computed daily. The average interest rate for 1995 was 4.1%. SWEPCO SWEPCO's $50.0 million bank loan was issued with a variable rate. The weighted average interest rate for 1995 was 6.3%. CSW's year end weighted average cost of long-term debt was 7.2% for 1995, 7.7% for 1994 and 7.8% for 1993. For additional information about each of the Electric Operating Companies' long term debt, see each of their Statements of Capitalization. Annual Requirements Certain series of outstanding first mortgage bonds 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 bonds also have sinking fund requirements. At December 31, 1995, the annual sinking fund requirements and annual maturities for first mortgage bonds, pollution control bonds and SWEPCO's rail car capital lease obligations for the next five years are presented in the following table. Sinking Fund Requirements CSW CPL PSO SWEPCO WTU (millions) (thousands) 1996 $1 $640 $550 $145 $-- 1997 1 640 550 145 -- 1998 1 360 550 145 -- 1999 1 360 300 595 -- 2000 1 360 300 595 -- Annual Maturities CSW CPL PSO SWEPCO WTU (millions) (thousands) 1996 $31 $640 $25,550 $3,900 $-- 1997 204 200,640 550 2,600 -- 1998 31 28,360 550 2,400 -- 1999 194 125,360 25,300 44,000 -- 2000 188 100,360 300 48,000 40,000 Dividends The Electric Operating Companies' mortgage indentures, as amended and supplemented, contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not limit the ability of CSW to pay dividends to its shareholders. At December 31, 1995, approximately $1.5 billion of the subsidiary companies' retained earnings were available for payment of cash dividends to CSW. At December 31, 1995, the amount of retained earnings available for payment of cash dividends to CSW by the Electric Operating Companies was as follows: CPL-$744 million PSO-$150 million SWEPCO-$302 million WTU-$126 million CSW 2-59 Reacquired Long-term Debt During 1995, 1994 and 1993, the Electric Operating Companies reacquired $355 million, $27 million and $987 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 consolidated balance sheets and are being amortized over 5 to 35 years, consistent with its expected ratemaking treatment. Reference is made to MD&A for further information related to long-term debt, including new issues and reacquisitions. 9.PREFERRED STOCK The outstanding preferred stock of the Electric Operating Companies as of the end of the last two years is presented in the following table. Current Dividend Redemption Rate December 31, Price From - To 1995 1994 From - To (millions) Not subject to mandatory redemption 592,900 shares 4.00% - 5.00% $59 $59 $102.75 - $109.00 760,000 shares 7.12% - 8.72% 76 76 100.00 - 101.00 1,600,000 shares auction 160 160 100.00 Issuance expenses and unamortized redemption costs (3) (3) $292 $292 Subject to mandatory redemption 352,000 shares 6.95% $35 $36 104.64 To be redeemed within one year (1) (1) $34 $35 Total authorized shares 6,405,000 All of the outstanding preferred stock is redeemable at the option of the Electric Operating Companies upon 30 days notice at the current redemption price per share. During 1994 and 1993, the Electric Operating Companies redeemed $33 million and $17 million, respectively, of preferred stock, including redemption premiums, while in 1995, the only preferred stock redemption was SWEPCO's $1.2 million annual sinking fund requirement. 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 4.5%, 3.5% and 2.7% during 1995, 1994 and 1993, respectively. CPL retired its remaining 10.05% preferred stock during August 1994. SWEPCO The minimum annual sinking fund requirement for SWEPCO's preferred stock subject to mandatory redemption is $1.2 million for the years 1996 through 2000. This sinking fund retires 12,000 shares annually. WTU In July 1993, WTU redeemed 100,000 shares of its 7.25% Series, $100 par value, Preferred Stock, for $10 million, in accordance with mandatory and optional sinking fund provisions. The capital required for this transaction was provided by short- CSW 2-60 term borrowings from the CSW System money pool and internal sources. In July 1994, WTU redeemed the remaining 47,000 shares of its 7.25% Series, $100 par value, Preferred Stock. For additional information about each of the Electric Operating Companies' preferred stock, see each of their Statements of Capitalization. 10. SHORT-TERM FINANCING The CSW System has established a money pool to coordinate short-term borrowings by the Electric Operating Companies, Transok and CSW Services, which is funded through CSW's issuance of commercial paper. At December 31, 1995, the CSW System had two credit facilities in place aggregating $1.2 billion to back up its commercial paper program, which had $692 million outstanding at a weighted average rate of 5.85%. CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-alone basis that is secured by the assignment of its receivables. CSW Credit maintains a secured revolving credit agreement which aggregated $900 million to back up its commercial paper program which, at December 31, 1995, had $646 million outstanding at a weighted average rate of 5.83%. 11. COMMON STOCK CSW has reserved 100,000 shares of CSW Common for issuance to outside directors pursuant to the directors restricted stock plan. In addition, CSW maintains a long-term incentive plan pursuant to which CSW is authorized to issue shares of restricted common stock, stock options and/or stock appreciation rights to certain eligible employees. Under the long-term incentive plan, approximately 3.8 million shares of CSW Common were available for grant as of December 31, 1995 and approximately 1.6 million shares were reserved for issuance upon exercise of options which were outstanding at December 31, 1995. In January 1996, the compensation committee of the board of directors of CSW authorized a restricted stock grant for the executive officers of CSW. This special award was made to reward sustained, long-term corporate performance, encourage executive retention and focus on the long- term perspective. This grant vests in 25 percent increments in 1997, 1998, 1999 and 2000. The PowerShare plan is available to all CSW shareholders, employees, eligible retirees, utility customers and other residents of the four states where the Electric Operating Companies operate. Plan participants are able to make optional cash payments and reinvest all or any portion of their dividends in additional CSW Common. In February 1996, CSW filed a registration statement with the SEC relating (i) to the issue and sale of an additional five million shares of CSW Common through the PowerShare plan and (ii) proposed amendments to the plan that would, among other things, make the plan available to the residents of all fifty states and the District of Columbia. During 1995 and 1994, CSW raised approximately $57 million and $50 million, respectively, in new equity through the PowerShare plan. CSW expects to use the proceeds from sales of CSW Common made pursuant to the PowerShare plan to reduce short-term and long-term debt and for other general corporate purposes. Information concerning new CSW Common equity, primarily through PowerShare, issued during 1995 and 1994 is presented in the following table. CSW 2-61 1995 1994 Number of new shares issued (millions) 2.3 2.2 Range of stock price for new shares $22 5/8 - $28 3/8 $20 3/8 - $29 5/8 New common stock equity (millions) $57 $50 On February 27, 1996, CSW sold 15,525,000 shares of its CSW Common in the 1996 Stock Offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of the indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD. 12. BUSINESS SEGMENTS CSW's business segments include United States Electric Operations (CPL, PSO, SWEPCO, WTU), United Kingdom Electric Operations (SEEBOARD Group) and Gas Operations (Transok). Seven additional non-utility companies are included with CSW in Corporate items and Other (CSW Energy, CSW International, CSW Communications, CSW Credit, CSW Leasing, CSW Services and EnerShop). The United Kingdom Electric Operations includes the activities of SEEBOARD, as well as the purchase accounting adjustments and financing activities included in the SEEBOARD Group. See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the SEEBOARD acquisition. CSW's business segment information is presented in the following tables. 1995 1994 1993 (millions) Operating Revenues Electric Operations United States $2,883 $3,065 $3,055 United Kingdom (1) 208 -- -- Gas Operations 592 518 603 Corporate items and Other 52 40 29 $3,735 $3,623 $3,687 Operating Income Electric Operations United States $719 $728 $559 United Kingdom (1) 21 -- -- Gas Operations 52 49 25 Corporate items and Other (31) 6 4 Operating income before taxes 761 783 588 Income taxes 105 189 131 $656 $594 $457 Depreciation and Amortization Electric Operations United States $335 $316 $296 United Kingdom (1) 7 -- -- Gas Operations 31 32 29 Corporate items and Other 11 8 5 $384 $356 $330 CSW 2-62 1995 1994 1993 (millions) Identifiable Assets Electric Operations United States $9,201 $9,066 $8,927 United Kingdom (1) 2,821 -- -- Gas Operations 766 724 684 Corporate items and Other 1,081 1,276 993 $13,869 $11,066 $10,604 Capital expenditures and acquisitions Electric Operations United States $398 $493 $481 United Kingdom (1) (2) 731 -- -- Gas Operations 66 65 88 Corporate items and Other (3) 19 114 64 $1,214 $672 $633 (1) Represents equity method of accounting for November 1995 (27.6%) and full consolidation accounting for December 1995 (76.45%). (2) Represents cash that had been used as of December 31, 1995, to purchase SEEBOARD capital shares in the open market. (3) Includes CSW Energy equity investments. 13. UNAUDITED PRO FORMA INFORMATION On November 6, 1995, CSW, indirectly through CSW (UK), announced its intention to commence the Tender Offer in the United Kingdom to acquire all of the outstanding share capital of SEEBOARD, a regional electric company based in the United Kingdom, for an aggregate adjusted purchase price of approximately $2.12 billion. SEEBOARD's principal business is the distribution and supply of electricity in southeast England. SEEBOARD has its headquarters in Crawley, West Sussex. It has a distribution territory that covers approximately 3,000 square miles which extends from the outlying areas of London to the English Channel. SEEBOARD serves approximately 2 million customers. Approximately 80% of SEEBOARD's sales are to residential and commercial customers, while the remaining 20% are primarily to industrial customers. For the year ended December 31, 1995, SEEBOARD had electricity sales of approximately 18 billion KWHs and, excluding exceptional items, net earnings of $118 million on revenues of approximately $1.9 billion. SEEBOARD's results for the calendar year ended December 31, 1995 are not indicative of the results that will be experienced by SEEBOARD as a subsidiary of CSW due, in part, to the debt incurred in connection with the financing of the acquisition, the purchase accounting adjustments and the accounting adjustments made to adjust SEEBOARD's results for U.S. Generally Accepted Accounting Principles. SEEBOARD is also involved in certain activities other than electricity distribution and supply, including electrical contracting and retailing, gas supply and electricity generation. The earnings of SEEBOARD presented above have been converted into U. S. dollar amounts for illustrative purposes only at an exchange rate of 1.00 pound=$1.58, which was the prevailing rate of exchange at the close of business on November 3, 1995, the business day prior to the announcement of the Tender Offer. See MD&A for a discussion of the financing of the SEEBOARD acquisition. 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 and the twelve months ended December 31, 1994 as if the transaction had been consummated at the beginning of the periods presented. CSW 2-63 The unaudited pro forma information is based upon preliminary fair value allocations related to the purchase of SEEBOARD. The allocations are subject to revision after more detailed analyses, appraisals and evaluations are completed. 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 1.00 pound=$1.58 and 1.00 pound=$1.54 for the twelve months ended December 31, 1995 and 1994, respectively. 1995 1994 (millions, except EPS) Operating Revenues $5,404 $5,465 Operating Income 750 745 Net Income for Common Stock 445 431 EPS of Common Stock $2.15 $2.13 CSW 2-64 14. 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. 1995 QUARTER ENDED CSW CPL PSO SWEPCO WTU (millions, except EPS) (thousands) March 31, 1995 Operating Revenues $659 $127,282 $148,416 $169,240 $74,921 Operating Income 90 30,556 12,848 26,587 9,896 Net Income 44 16,362 7,449 15,525 4,233 EPS (CSW only) $0.20 June 30, 1995 Operating Revenues $920 $324,525 $161,644 $212,960 $83,049 Operating Income 170 96,518 28,370 48,878 13,186 Net Income 108 75,644 20,512 38,070 7,926 EPS (CSW only) $0.54 September 30, 1995 Operating Revenues $1,087 $358,790 $232,156 $266,268 $87,178 Operating Income 267 104,082 58,524 59,880 30,432 Net Income 203 82,238 50,682 48,473 24,021 EPS (CSW only) $1.04 December 31, 1995 Operating Revenues $1,069 $262,872 $148,607 $188,237 $74,687 Operating Income 129 51,028 12,027 27,431 5,972 Net Income 66 32,203 3,185 15,046 (1,650) EPS (CSW only) $0.32 Total 1995 Operating Revenues $3,735 $1,073,469 $690,805 $836,735 $319,835 Operating Income 656 282,184 111,769 162,776 59,486 Net Income 421 206,447 81,828 117,114 34,530 EPS (CSW only) $2.10 CSW 2-65 QUARTERLY INFORMATION - (UNAUDITED) 1994 QUARTER ENDED CSW CPL PSO SWEPCO WTU (millions, except EPS) (thousands) March 31, 1994 Operating Revenues $850 $263,229 $157,509 $190,066 $83,319 Operating Income 93 36,943 12,427 24,820 8,487 Net Income 48 24,986 4,307 14,537 3,546 EPS (CSW only) $0.23 June 30, 1994 Operating Revenues $908 $333,169 $174,631 $211,989 $83,016 Operating Income 157 75,070 23,808 36,699 12,958 Net Income 107 62,470 15,927 25,851 8,192 EPS (CSW only) $0.55 September 30, 1994 Operating Revenues $1,070 $364,044 $246,378 $245,331 $109,348 Operating Income 239 96,062 47,196 53,304 27,987 Net Income 189 82,877 40,003 41,854 23,271 EPS (CSW only) $0.97 December 31, 1994 Operating Revenues $795 $257,537 $161,978 $177,910 $67,308 Operating Income 105 48,176 14,827 31,099 5,331 Net Income 68 35,106 8,029 23,470 2,357 EPS (CSW only) $0.33 Total 1994 Operating Revenues $3,623 $1,217,979 $740,496 $825,296 $342,991 Operating Income 594 256,251 98,258 145,922 54,763 Net Income 412 205,439 68,266 105,712 37,366 EPS (CSW only) $2.08 CSW 2-66 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, 1995 and 1994, and the related consolidated statements of income, retained earnings and cash flows, for each of the three years ended December 31, 1995. 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 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 Central and South West Corporation and subsidiary companies as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings and cash flows for each of the three years ended December 31, 1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, Central and South West Corporation and subsidiary companies changed their methods of accounting for unbilled revenues, postretirement benefits other than pensions, income taxes and postemployment benefits. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the 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 28, 1996 CSW 2-67 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 the independent accounting firm, Arthur Andersen LLP, which was 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 auditors during their audit were valid and appropriate. Arthur Andersen LLP's audit report is 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, 1995. E. R. Brooks Glenn D. Rosilier Wendy G. Hargus Chairman, President and Senior Vice President and Controller Chief Executive Officer Chief Financial Officer CSW 2-68 CENTRAL POWER AND LIGHT COMPANY CPL 2-69 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. 1995 1994 1993 (1) 1992 1991 ($ thousands, except ratio data) INCOME STATEMENT DATA Revenues $1,073,469 $1,217,979 $1,223,528 $1,113,423 $1,098,730 Operating expenses and taxes 791,285 961,728 1,033,449 846,758 849,157 Operating income 282,184 256,251 190,079 266,665 249,573 Other income and deductions 56,322 70,487 78,439 83,825 100,261 Interest charges 132,059 121,299 123,388 131,979 132,628 Net income 206,447 205,439 172,425 218,511 217,206 Net income for common stock 191,978 191,635 158,422 202,441 197,362 BALANCE SHEET DATA Assets 4,881,136 4,822,699 4,781,745 4,583,660 4,458,063 Common stock equity 1,437,332 1,431,654 1,424,195 1,437,876 1,428,547 Preferred stock Not subject to mandatory redemption 250,351 250,351 250,351 250,351 250,351 Subject to mandatory redemption -- -- 22,021 28,393 35,331 Long-term debt 1,517,347 1,466,393 1,362,799 1,347,887 1,350,854 Current liabilities (2) 357,772 376,006 370,534 380,058 210,923 Capitalization ratios Common stock equity 44.9% 45.5% 46.6% 46.9% 46.6% Preferred stock 7.8 7.9 8.9 9.1 9.3 Long-term debt 47.3 46.6 44.5 44.0 44.1 Ratio of earnings to fixed charges (SEC Method) before cumulative effect of changes in accounting principles 2.63 3.24 2.69 3.23 3.18 (1) 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. Pro forma amounts, assuming that the change in accounting for unbilled revenues had been adopted retroactively, are not materially different from amounts reported for prior years and therefore have not been restated. (2) Includes net unbilled factored accounts receivable in 1994 and 1995. CPL 2-70 CENTRAL POWER AND LIGHT COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to CPL'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 in understanding, the following discussion and analysis. OVERVIEW Net income for common stock was stable in 1995 when compared to 1994 at $192 million, although CPL reported lower electric operating revenues, Mirror CWIP liability amortization and higher interest charges offset by lower operating expenses and taxes. Also impacting 1995 were the effects of the CPL 1995 Agreement. Net income for common stock for 1994 increased 21% to $192 million from $158 million in 1993. The increase was due primarily to an increase in base revenue, a decrease in restructuring costs and a decrease in maintenance expense. Such increases were partially offset by the cumulative effect of changes in accounting principles recorded in 1993. RESTRUCTURING During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including CPL) under a new business unit called CSW Electric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in the workforce by more than 7% system-wide. CPL's restructuring costs, approximately $29 million, were expensed during 1993 and incurred primarily during 1994. CPL has realized a number of benefits from the restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. RATES AND REGULATORY MATTERS CPL Rate Review On November 6, 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred during the period July 1, 1994 through June 30, 1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June 30, 1994 in Docket No. 13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. CPL is requesting this rate review in large part as a result of the expiration of the amortization of its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991. In 1995, Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by CPL to accelerate recovery of nuclear CPL 2-71 and regulatory assets as a way to proactively address certain assets that could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21, 1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1, 1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13, 1996, intervening parties filed testimony in the revenue requirements phase of CPL's base rate case. Among the parties that filed testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20, 1996, the Staff filed testimony recommending an increase in total company base rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the specific benefits to CPL were not clearly identified. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for decommissioning STP. A comparison of the Staff's recommendation for a base rate increase, compared to CPL's claimed revenue deficiency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (millions) CPL revenue deficiency (1) $103 Return on common equity (21) CSW Services expenses (16) Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended revenue increase (2) $30 (1) The total company rate increase requested by CPL was reduced from $103 million to $78 million ($71 million allocated to the Texas retail jurisdiction) in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposal for decision for consideration by the Texas Commission. Testimony filed by parties to the rate case, including CPL 2-72 the Staff, is not binding on either the ALJs or the Texas Commission. A final decision on the rate request is not anticipated from the Texas Commission prior to December 1996. Management of CPL cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's results of operations or financial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL could experience a material adverse effect on its results of operations and financial condition. 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. On May 16, 1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CPL's fuel factors were implemented on an interim basis during the summer of 1995. 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. Hearings on the CPL 1995 Agreement were held on July 19, 1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received on October 4, 1995. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of additional regulatory proceedings. SOUTH TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. In addition, HLP, the Project Manager of STP, 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. From February 1993 until May 1994, STP experienced an unscheduled outage resulting from mechanical problems. The outage resulted in significant rate and regulatory proceedings involving CPL, including a base rate case and fuel reconciliation proceedings as previously discussed. Unit 1 restarted on February 25, 1994 and reached 100% power on April 8, 1994 and Unit 2 resumed operation on May 30, 1994 and reached 100% power on June 16, 1994. During the last six months of 1994, the STP units operated at capacity factors of 98.6% for Unit 1 and 99.2% for Unit 2. For a discussion of regulatory matters surrounding the STP outage, see RATES AND REGULATORY MATTERS above and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Both STP units were removed from service during 1995 for scheduled refueling outages. The fueling outages lasted 41 days for Unit 1 and 26 days for Unit 2. For the year 1995, Unit 1 and Unit 2 operated at net capacity factors of 84.9% and 90.6%, respectively. For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. CPL 2-73 LIQUIDITY AND CAPITAL RESOURCES Overview CPL's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, if internally generated funds are not sufficient, CPL's financial condition should allow it access to the capital markets. Construction Expenditures CPL maintains 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 CPL 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. Construction expenditures, including AFUDC, for CPL were approximately $155 million in 1995, $179 million in 1994 and $180 million in 1993. CPL's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (millions) Generation $17 $ 42 $16 $75 Transmission 14 18 19 51 Distribution 69 72 74 215 Fuel 18 11 15 44 Other 19 14 13 46 $137 $157 $137 $431 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate of load growth, escalation of construction costs, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, nuclear, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause CPL to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although CPL does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which CPL has invested approximately $24 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, CPL would evaluate the probability of recovery of these investments and may record appropriate reserves. Long-Term Financing As of December 31, 1995, the capitalization ratios of CPL were 45% common stock equity, 8% preferred stock and 47% long-term debt. CPL's embedded cost of long-term debt was 7.2% at December 31, 1995. CPL continually monitors the capital markets for opportunities to lower its cost of capital through refinancing. CPL is committed to maintaining financial flexibility through a strong capital structure CPL 2-74 and favorable securities ratings in order to access the capital markets opportunistically or when required. CPL's long-term financing activity for 1995 is summarized in the following table. ISSUED REACQUIRED Financing Amount Financial Amount Instrument (millions) Rate Maturity Instrument (millions) Rate Maturity FMB(1) $200.0 6 5/8% 2005 FMB $139.2 9 3/8% 2019 PCRB 100.6 6.1% 2028 PCRB 68.9 10 1/8% 2014 PCRB(2) 31.8 9 3/4% 2015 PCRB 40.9 floating 2015 PCRB(3) 8.4 7 1/8% 2004 PCRB(3) 34.2 6.0% 2007 (1) The balance of proceeds not used to redeem higher cost FMBs were used to repay a portion of CPL's short-term borrowings, to provide working capital and for other general corporate purposes. (2) Collateralized PCRB (secured by a FMB). (3) The additional funds required to redeem these issues were provided through internal funds and short-term borrowings. Shelf Registration Statements CPL has $60 million remaining for the issuance of FMBs, and $75 million remaining for the issuance of preferred stock, under shelf registration statements filed with the SEC in 1993 and 1994, respectively. CPL may offer additional FMBs and preferred stock subject to market conditions and other factors. The proceeds of any such offerings will be used principally to redeem higher cost FMBs and preferred stock in order to lower CPL's cost of capital. Short-Term Financing CPL, together with other members of CSW System, has established a CSW System money pool to coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the CSW System's commercial paper borrowing costs. At December 31, 1995 CPL's short-term borrowing limit from the money pool was approximately $268 million. During 1995, the annual weighted average interest rate on CPL's borrowings was 6.1% and the average amount of CPL's short-term borrowings outstanding was $148 million. The maximum amount of CPL short-term borrowings outstanding during 1995 was $236 million, which was the amount outstanding at March 2, 1995. Internally Generated Funds Internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. CPL uses short-term debt to meet fluctuations in working capital requirements due to the seasonal nature of energy sales. CPL anticipates that capital requirements for the period 1996 to 1998 will be met, in large part, from internal sources. CPL also anticipates that some external financing will be required during the period, but the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally Generated Funds $100 $114 $92 Construction Expenditures Provided by Internally Generated Funds 66% 65% 52% Sales of Accounts Receivable CPL sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales provided CPL with cash immediately, thereby reducing working capital needs and revenue requirements. The average and year end amounts of accounts receivable sold were $109 million and $85 million, respectively, in 1995, as compared to $123 million and $113 million, respectively, in 1994. CPL 2-75 RECENT DEVELOPMENTS AND TRENDS Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting CPL 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 level in the future. As competition in the industry increases, CPL will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, CPL 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. CPL believes that its prices for electricity and the quality and reliability of its service currently places it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of 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 extremely competitive since the enactment of the Energy Policy Act. CPL must compete in the wholesale energy markets with other public utilities, cogenerators, qualified facilities, EWGs and others for sales of electric power. While CPL believes that the Energy Policy Act will continue to make the wholesale markets more competitive, CPL is unable to predict the extent to which the Energy Policy Act will impact its operations. On March 29, 1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which each utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7, 1995, CSW filed comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a "power flow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional "postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9, 1996, CPL filed at the FERC complete sets of open access transmission tariffs. These tariffs substantially reflect the pro forma tariffs attached to the FERC's March 29, 1995 NOPR. Open CPL 2-76 access and market pricing should increase marketing opportunities for CPL, but may also expose it to the risk of loss of load or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need 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 industry issue which may require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. CPL believes that retail competition would harm the best interests of CPL's customers and security holders unless CPL receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by CPL to meet its obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CPL intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CPL undertook to serve the public's demand for electricity. CPL is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on CPL. As the wholesale and retail 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. PURA 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 requires 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), Texas Commission Chairman Pat Wood 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 has been assigned to a separate proceeding (Project No. 15000). CPL expects this project to provide the vehicle for the Texas Commission and other interested parties to develop positions on industry restructuring before the Texas Legislature convenes in January 1997. A schedule has been developed for this project that includes a series of workshops and technical conferences during the first half of 1996. The schedule contemplates that the Texas Commission will develop legislative recommendations on restructuring and stranded costs during the second half of 1996. On February 7, 1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No. 14045). The pricing method tentatively 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. Although the open access tariffs filed with the FERC on February 9, 1996 do not reflect Project No. 14045 pricing, CPL anticipates filing tariffs with the FERC that do conform to the Texas Commission's rule in the second quarter of 1996. CPL 2-77 Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, CPL has recognized significant regulatory assets and liabilities. Management believes that CPL will continue to meet the criteria for following SFAS No. 71. However, in the event CPL no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as if it were a stand-alone company. This "stand-alone" approach treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax component of rates to the "actual tax approach." This approach reduces rates by the tax benefits of deductions which are not considered for or included in setting rates for the utility. On April 13, 1995, the Supreme Court issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated affiliates to reduce tax expense in cost of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax deductions taken by the utility for disallowed expenses when determining the utility's federal income tax liability. ENVIRONMENTAL MATTERS The operations of CPL, 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. CPL is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. CPL anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CPL'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 CPL, the estimated amount of costs allocated to CPL and the participation of other parties. See ITEM 1-BUSINESS, NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. NEW ACCOUNTING STANDARDS SFAS No. 121 In March 1995, the FASB issued SFAS No. 121 to be effective for financial statements for fiscal years beginning after December 15, 1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an CPL 2-78 asset to the carrying amount of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For CPL, the lowest independently identifiable cash flow level used for this analysis is jurisdictional rates charged to customers. CPL will adopt SFAS No. 121 in the first quarter of 1996. Under the current regulatory environment, CPL does not expect the adoption of SFAS No. 121 to have a significant impact on CPL's results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, CPL is monitoring the changing conditions facing the electric utility industry. SFAS No. 123 SFAS No. 123 was issued in October 1995 with an effective date for transactions entered into after December 15, 1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No. 123, CPL will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and adopt the disclosure requirements of SFAS No. 123 in 1996. Accordingly, the adoption of SFAS No. 123 will not impact CPL's results of operations or financial condition. RESULTS OF OPERATIONS Electric Operating Revenues Total revenues were $1.1 billion in 1995, a decrease of 12% when compared to 1994 revenues of $1.2 billion. The decline was due primarily to a one time $50 million base rate refund and a $62.3 million disallowance of under-recovered fuel costs resulting from the CPL 1995 Agreement. Also contributing to the decrease in revenue was a $66.6 million decrease in fuel revenue resulting primarily from lower average unit fuel costs and purchased power as discussed below and a wholesale fuel revenue refund. Partially offsetting the decrease in fuel revenue was a $34.4 million increase in non-fuel revenue resulting from a 6% increase in KWH sales. The increase in sales was attributable to increased usage per customer, residential and commercial customer growth and a new contract with an existing wholesale customer. Total revenues decreased $5.5 million in 1994 when compared to 1993 revenues. The 1994 decrease reflects lower fuel-related revenues of $41.5 million partially offset by higher base revenues of $35.9 million. Fuel-related revenues declined as a result of lower per unit fuel and purchased power costs. An 8% increase in KWH sales resulting from an increased number of residential and commercial customers served as well as warmer spring and summer weather also contributed to the increase in base revenues. Fuel Fuel expense decreased $40.5 million, or 12%, during 1995 as compared to 1994. The decrease in fuel expense was due primarily to a 22% decrease in the average unit cost of fuel from $1.75 per Mmbtu in 1994 to $1.37 per Mmbtu in 1995. The decrease in the average unit cost of fuel resulted from the expiration of higher priced gas contracts that were replaced with lower cost spot market natural CPL 2-79 gas, the renegotiation of a coal contract and increased usage of lower unit cost nuclear fuel. The decrease in the unit cost of fuel was partially offset by a 13% increase in generation. Fuel expense decreased $21.8 million in 1994 when compared to 1993 due primarily to a decrease in the average unit cost of fuel from $2.17 per Mmbtu in 1993 to $1.75 per Mmbtu in 1994 partially offset by a 16% increase in generation. The lower average unit cost of fuel reflects increased usage of lower unit cost nuclear fuel since STP Units 1 and 2 restarted and reached 100 percent output level in April and June of 1994, respectively, and lower unit costs of gas and coal in 1994. STP Units 1 and 2 had not operated at full capacity since February 1993 as discussed previously under SOUTH TEXAS PROJECT. Purchased Power Purchased power decreased $22.7 million and $21.7 million during 1995 and 1994, respectively, when compared to the prior year. The decrease in 1995 was due primarily to increased generation at STP, which replaced power that had been purchased during the first half of 1994 when STP was out of service, and an unscheduled outage at a fossil-fueled generating plant during the third quarter of 1994. The decrease of $21.7 million in 1994 as compared to 1993 was due primarily to the outage at STP which began in February 1993. Other Operating Other operating expenses decreased $15.8 million, or 7%, during 1995 when compared to 1994. The decrease was due primarily to a reduction in employee related costs. Other operating expenses in 1994 were relatively consistent with 1993 levels. Restructuring Charges Restructuring charges decreased $20.8 million during 1995 when compared to 1994. The decrease 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. Restructuring charges in 1993 reflect the original accrual of $29.4 million. Maintenance Maintenance expense decreased $5.3 million in 1995 when compared to 1994 as a result of postponement of previously scheduled plant maintenance and savings resulting from cost containment efforts. Maintenance expense decreased $12.8 million during 1994 as compared to 1993 due primarily to lower STP outage-related maintenance activities. Depreciation and Amortization Depreciation and amortization increased $8.9 million, or 6%, during 1995 as compared to 1994 as a result of an increase in depreciable property and the amortization of regulatory assets associated with the CPL 1995 Agreement. Depreciation and amortization increased in 1994 as compared to 1993 as a result of an increase in depreciable property and a decline in amortization credits related to power plant inventory. Taxes, Other than Income Taxes, other than income decreased $14.5 million during 1995 as compared to 1994 due primarily to lower ad valorem tax expense resulting from a true-up of prior year estimates. The $5.9 million decrease in 1994 when compared to 1993 was primarily a result of a franchise tax refund. Income Taxes Income taxes decreased $59.5 million in 1995 as compared to 1994 due primarily to the reduction of $34.3 million of deferred income taxes in accordance with the CPL 1995 Agreement, prior year tax adjustments and lower pre-tax income. Income taxes increased $10.2 million in 1994 as compared to 1993 due to higher pre-tax income. CPL 2-80 Other Income and Deductions Mirror CWIP liability amortization decreased $27.0 million and $8.0 million in 1995 and 1994, respectively, when compared to the prior year. In accordance with the original liability amortization schedule agreed upon in the settlement of its rate cases in 1990 and 1991, CPL amortized its Mirror CWIP liability in declining amounts over the years 1991 through 1995. The absence of Mirror CWIP liability amortization in 1996 will have a negative impact on CPL's net income, although its cash flow will not be impacted. Other income was higher in 1995 when compared to 1994 due primarily to the recognition of factoring income pursuant to the CPL 1995 Agreement. Interest Charges Interest on long-term debt increased $4.8 million during 1995 as compared to 1994 as a result of increased long-term debt outstanding. Interest on short-term debt and other increased $7.6 million during 1995 when compared to 1994 as a result of higher levels of short-term debt outstanding at higher interest rates and the recognition of interest expense associated with over-recovered fuel. Cumulative Effect of Changes in Accounting Principles In 1993, CPL changed its method of accounting for unbilled revenues and implemented SFAS No. 112. These accounting changes had a cumulative effect of increasing net income by $27.3 million in 1993. Inflation Annual inflation rates, as measured by the Consumer Price Index, have averaged approximately 2.8% during the three years ended December 31, 1995. CPL believes that inflation, at this level, does not materially affect its results of operation or financial condition. 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. CPL 2-81 CPL Statements of Income Central Power and Light Company For the Years Ended December 31, 1995 1994 1993 (thousands) Electric Operating Revenues Residential $465,478 $474,480 $474,426 Commercial 355,238 368,405 369,426 Industrial 256,223 271,738 281,247 Sales for resale 52,081 50,777 45,369 Other (55,551) 52,579 53,060 1,073,469 1,217,979 1,223,528 Operating Expenses and Taxes Fuel 287,979 328,460 350,268 Purchased power 19,632 42,342 64,025 Other operating 209,021 224,852 225,034 Restructuring charges (20,793) 98 29,365 Maintenance 63,201 68,537 81,352 Depreciation and amortization 150,508 141,622 131,825 Taxes, other than income 65,925 80,461 86,394 Income taxes 15,812 75,356 65,186 791,285 961,728 1,033,449 Operating Income 282,184 256,251 190,079 Other Income and Deductions Allowance for equity funds used during construction 442 1,215 1,074 Mirror CWIP liability amortization 41,000 68,000 75,702 Other 14,880 1,272 1,663 56,322 70,487 78,439 Income Before Interest Charges 338,506 326,738 268,518 Interest Charges Interest on long-term debt 116,205 111,408 112,939 Interest on short-term debt and other 19,926 12,365 11,993 Allowance for borrowed funds used during construction (4,072) (2,474) (1,544) 132,059 121,299 123,388 Income Before Cumulative Effect of Changes in Accounting Principles 206,447 205,439 145,130 Cumulative Effect of Changes in Accounting Principles -- -- 27,295 Net Income 206,447 205,439 172,425 Preferred stock dividends 14,469 13,804 14,003 Net Income for Common Stock $191,978 $191,635 $158,422 The accompanying notes to financial statements are an integral part of these statements. CPL 2-82 CPL Statements of Retained Earnings Central Power and Light Company For the Years Ended December 31, 1995 1994 1993 (thousands) Retained Earnings at Beginning of Year $857,466 $850,307 $863,988 Net income for common stock 191,978 191,635 158,422 Deduct: Common stock dividends 186,000 183,000 172,000 Preferred stock redemption costs -- 1,476 103 Retained Earnings at End of Year $863,444 $857,466 $850,307 The accompanying notes to financial statements are an integral part of these statements. CPL 2-83 CPL Balance Sheets Central Power and Light Company As of December 31, 1995 1994 (thousands) ASSETS Electric Utility Plant Production $3,110,744 $3,070,005 Transmission 486,090 451,050 Distribution 879,618 828,350 General 248,629 216,888 Construction work in progress 127,307 142,724 Nuclear fuel 165,087 161,152 5,017,475 4,870,169 Less - Accumulated depreciation 1,547,530 1,400,343 3,469,945 3,469,826 Current Assets Cash 2,883 642 Special deposits 797 668 Accounts receivable 45,186 29,865 Materials and supplies, at average cost 71,112 66,209 Fuel inventory, at average cost 26,472 22,916 Accumulated deferred income taxes 22,171 -- Under-recovered fuel costs -- 54,126 Prepayments 1,739 2,316 170,360 176,742 Deferred Charges and Other Assets Deferred STP costs 488,047 488,987 Mirror CWIP asset 311,804 321,825 Income tax related regulatory assets, net 346,993 288,444 Other 93,987 76,875 1,240,831 1,176,131 $4,881,136 $4,822,699 The accompanying notes to financial statements are an integral part of these statements. CPL 2-84 CPL Balance Sheets Central Power and Light Company As of December 31, 1995 1994 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 863,444 857,466 Total Common Stock Equity 1,437,332 1,431,354 Preferred stock 250,351 250,351 Long-term debt 1,517,347 1,466,393 Total Capitalization 3,205,030 3,148,098 Current Liabilities Long-term debt due within twelve months 231 723 Advances from affiliates 176,334 161,320 Accounts payable 49,507 84,608 Accrued taxes 61,614 59,386 Accumulated deferred income taxes -- 13,812 Accrued interest 32,742 24,681 Over-recovered fuel costs 12,586 -- Other 24,758 31,476 357,772 376,006 Deferred Credits Accumulated deferred income taxes 1,151,823 1,087,317 Investment tax credits 152,744 158,533 Mirror CWIP liability and other 13,767 52,745 1,318,334 1,298,595 $4,881,136 $4,822,699 The accompanying notes to financial statements are an integral part of these statements. CPL 2-85 CPL Statements of Cash Flows Central Power and Light Company For the Years Ended December 31, 1995 1994 1993 (thousands) OPERATING ACTIVITIES Net Income $ 206,447 $ 205,439 $ 172,425 Non-cash Items Included in Net Income Depreciation and amortization 173,711 170,971 140,223 Deferred income taxes and investment tax credits (35,815) 20,870 84,714 Mirror CWIP liability amortization (41,000) (68,000) (75,702) Restructuring charges (240) 98 29,365 Regulatory asset established for previously incurred restructuring charges (20,652) -- -- Allowance for equity funds used during construction (442) (1,215) (1,074) Cumulative effect of changes in accounting principles -- -- (27,295) Changes in Assets and Liabilities Accounts receivable (15,321) (6,015) (3,554) Fuel inventory (3,556) (5,982) 12,325 Accounts payable (35,101) (5,765) (22,386) Accrued taxes 2,228 25,617 (9,311) Over- and under-recovered fuel costs 66,712 (1,167) (57,386) Accrued restructuring charges (1,085) (20,245) -- Other deferred credits 2,022 1,444 6,295 Other 1,910 (4,575) 29,928 299,818 311,475 278,567 INVESTING ACTIVITIES Construction expenditures (150,372) (174,993) (177,120) Allowance for borrowed funds used during constriction (4,072) (2,474) (1,544) (154,444) (177,467) (178,664) FINANCING ACTIVITIES Proceeds from issuance of long-term debt 337,828 99,190 441,131 Retirement of long-term debt -- (459) (431) Reacquisition of long-term debt (295,938) (618) (573,776) Retirement of preferred stock -- (27,021) (6,578) Special deposits for reacquisition of long-term debt -- -- 145,482 Change in advances from affiliates 15,014 (9,845) 79,399 Payment of dividends (200,037) (197,048) (186,361) (143,133) (135,801) (101,134) Net Change in Cash and Cash Equivalents 2,241 (1,793) (1,231) Cash and Cash Equivalents at Beginning of Year 642 2,435 3,666 Cash and Cash Equivalents at End of Year $2,883 $642 $2,435 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $115,845 $114,980 $116,664 Income taxes paid $37,151 $28,166 $3,631 The accompanying notes to financial statements are an integral part of these statements. CPL 2-86 CPL Statements of Capitalization Central Power and Light Company As of December 31, 1995 1994 (thousands) COMMON STOCK EQUITY $1,437,332 $1,431,354 PREFERRED STOCK Cumulative $100 Par Value, Authorized 3,035,000 shares Number Current of Shares Redemption Series Outstanding Price Not Subject to Mandatory Redemption 4.00% 100,000 $105.75 10,000 10,000 4.20% 75,000 $103.75 7,500 7,500 7.12% 260,000 $101.00 26,000 26,000 8.72% 500,000 $100.00 50,000 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 (3,149) (3,149) 250,351 250,351 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 U, 9 3/4%, due July 1, 2015* (Matagorda) -- 31,765 Series Z, 9 3/8%, due December 1, 2019 -- 139,405 Series AA, 7 1/2%, due March 1, 2020* (Matagorda) 50,000 50,000 Series BB, 6%, due October 1, 1997 200,000 200,000 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 -- Installment Sales Agreements - PCRBs Series 1974A, 7 1/8%, due June 1, 2004 (Nueces) -- 8,700 Series 1977, 6%, due November 1, 2007 (Guadalupe) -- 34,235 Series 1984, 7 7/8%, due September 15, 2014 (Red River) 6,330 6,330 Series 1984, 10 1/8%, due October 15, 2014 (Matagorda) -- 68,870 Series 1986, 7 7/8%, due December 1, 2016 (Matagorda) 60,000 60,000 Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265 Series 1995, 6.10%, due July 1, 2028 (Matagorda) 100,635 -- Series 1995, variable rate, due November 1, 2015 (Guadalupe) 40,890 -- Notes Payable, 6 1/2%, due December 8, 1995 231 448 Unamortized Discount (6,115) (11,655) Unamortized Costs of Reacquired Debt (95,358) (81,947) Amount to be Redeemed Within One Year 231 (723) 1,517,347 1,466,393 TOTAL CAPITALIZATION $3,205,030 $3,148,098 *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to financial statements are an integral part of these statements. CPL 2-87 CENTRAL POWER AND LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37. 2.LITIGATION AND REGULATORY PROCEEDINGS CPL Rate Review On November 6, 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred during the period July 1, 1994 through June 30, 1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June 30, 1994 in Docket No. 13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. CPL is requesting this rate review in large part as a result of the expiration of the amortization of its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991. In 1995, Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by CPL to accelerate recovery of nuclear and regulatory assets as a way to proactively address certain assets that could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21, 1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1, 1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13, 1996, intervening parties filed testimony in the revenue requirements phase of CPL's base rate case. Among the parties that filed testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20, 1996, the Staff filed testimony recommending an increase in total company base rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the specific benefits to CPL were not clearly identified. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for decommissioning CPL 2-88 STP. A comparison of the Staff's recommendation for a base rate increase, compared to CPL's claimed revenue deficiency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (unaudited) (millions) CPL revenue deficiency (1) $103 Return on common equity (21) CSW Services expenses (16) Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended revenue increase (2) $30 (1) The total company rate increase requested by CPL was reduced from $103 million to $78 million ($71 million allocated to the Texas retail jurisdiction) in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposal for decision for consideration by the Texas Commission. Testimony filed by parties to the rate case, including the Staff, is not binding on either the ALJs or the Texas Commission. A final decision on the rate request is not anticipated from the Texas Commission prior to December 1996. CPL's management cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's results of operations or financial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL could experience a material adverse effect on its results of operations and financial condition. 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. On May 16, 1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CPL's fuel factors were implemented during the summer of 1995. 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. Hearings on the CPL 1995 Agreement were held on July 19, 1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received on October 4, 1995. Details of the items in the CPL 1995 CPL 2-89 Agreement and the total 1995 earnings impact for CPL, including certain accounting provisions, are set forth in the following table. 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 CPL was granted deferred accounting treatment for certain STP Unit 1 and 2 costs by Texas Commission orders issued in October 1990 and December 1990, respectively. In 1994, the Supreme Court sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals given its prior determinations. On August 16, 1995, the Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects. CPL believes that the language of the Supreme Court's opinion suggests that the appropriateness of allowing deferred accounting may be reviewed under a financial integrity standard in the first case in which the deferred STP costs are recovered through rates. If the courts decide that subsequent review under the financial integrity standard is required, that review would be conducted in a remand of the STP Unit 1 and 2 orders. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. If CPL's deferred accounting matters are not favorably resolved, CPL could experience a material adverse effect on its results of operations and financial condition. While CPL's management is unable to predict the ultimate outcome of these matters, management believes CPL will receive approval of its deferred accounting orders or will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CPL's results of operation or financial condition. CPL Westinghouse Litigation CPL and other owners of STP were plaintiffs in a lawsuit filed in October 1990 in the District Court in Matagorda County, Texas against Westinghouse, seeking damages and other relief. The suit alleged that Westinghouse supplied STP with defective steam generator tubes that are susceptible to stress corrosion cracking. On December 8, 1995, CPL and the other owners of STP settled the lawsuit. While the court order prohibits disclosure of the terms of the settlement, CPL believes the litigation was settled on terms that provided satisfactory consideration to CPL and STP and will not have a material adverse effect on the results of operations or financial condition of CPL. CPL Civil Penalties In October 1995, the NRC notified HLP of a Notice of Violation and proposed penalties totaling $160,000 related to events that occurred at STP in May 1992. The Notice of Violation and penalties reflect the NRC's belief that certain STP employees were terminated as a result of raising safety concerns with the NRC. The Notice of Violation was the result of a Department of Labor decision and order in April 1995 and is awaiting final action by the Secretary of Labor. HLP is not required to reply to the NRC's Notice of Violation or pay the penalties pending the CPL 2-90 Secretary of Labor's final decision. The NRC indicated that the proposed civil penalties reflect minimum penalties allowed because of improvements made to the STP Employee Concerns Program since 1992. CPL's share of any penalty that is ultimately paid would be approximately 25%, reflecting its ownership interest in STP. 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, are currently pending in federal and state court in Corpus Christi, Texas. Plaintiffs' complaints seek damages for alleged property damage and health impairment as a result of operations on the site and cleanup activities. Management cannot predict the outcome of these suits. However, management believes that CPL has defenses to the plaintiffs' complaints and intends to defend the suits vigorously. Management also believes that the ultimate resolution of these matters will not have a material adverse effect on CPL's results of operations or financial condition. Other CPL 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 CPL's results of operations or financial condition. 3.COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that CPL will spend approximately $137 million, including AFUDC, in construction expenditures during 1996. Substantial commitments have been made in connection with this capital expenditure program. Fuel Commitments To supply a portion of the fuel requirements, CPL has entered into various commitments for procurement of fuel. Other Commitments and Contingencies CPL Nuclear Insurance In connection with the licensing and operation of STP, the owners have purchased the maximum limits of nuclear liability insurance, as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1, 2002. The limit of liability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of January 1995. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling $8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. CPL 2-91 The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchases, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 21 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same accident, insurance will reimburse CPL up to 80% of the single unit recovery. The maximum amount recoverable for a single unit outage is $86.02 million for Unit 1 and $85.96 million for Unit 2. CPL is subject to an additional assessment up to $1.6 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceeds the accumulated funds available under the policy. On August 28, 1994, CPL filed a claim under the NEIL I policy relating to the 1993-1994 outage at STP Units 1 and 2. NEIL has denied the claim. CPL management is currently evaluating its options regarding this claim, but cannot predict the ultimate outcome of this matter. 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 10. 11. QUARTERLY INFORMATION See CSW's NOTE 14 on pages 2-64 and 2-65. CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. CPL 2-92 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Central Power and Light Company: We have audited the accompanying balance sheets and statements of capitalization of Central Power and Light Company (a Texas corporation and a wholly owned subsidiary of Central and South West Corporation) as of December 31, 1995 and 1994, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of CPL'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 Central Power and Light Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, CPL changed its methods of accounting for unbilled revenues, postretirement benefits other than pensions, income taxes and postemployment benefits. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental Schedule II and Exhibit 12 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state 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 28, 1996 CPL 2-93 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the financial statements of Central Power and Light 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 the independent accounting firm, Arthur Andersen LLP, which was 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 believes that representations made to the independent auditors during its audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. CPL 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 CPL 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 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 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, 1995. Robert R. Carey R. Russell Davis President and CEO - CPL Controller - CPL CPL 2-94 PUBLIC SERVICE COMPANY OF OKLAHOMA PSO 2-95 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. 1995 1994 1993 (1) 1992 1991 (thousands, except ratio data) INCOME STATEMENT DATA Revenues $690,823 $740,496 $707,536 $622,092 $650,942 Operating expenses and taxes 579,054 642,238 635,380 543,996 564,146 Operating income 111,769 98,258 72,156 78,096 86,796 Other income and deductions 3,544 2,027 1,627 (591) (1,078) Interest charges 33,485 32,019 33,287 31,943 32,489 Net income 81,828 68,266 46,719 45,562 53,229 Net income for common stock 81,012 67,450 45,903 44,746 52,413 BALANCE SHEET DATA Assets 1,480,816 1,465,114 1,420,379 1,351,201 1,308,075 Common stock equity 487,511 461,499 435,049 429,146 419,400 Preferred stock 19,826 19,826 19,826 19,826 19,826 Long-term debt 379,250 402,752 401,255 408,731 368,219 Current liabilities (2) 236,212 223,461 206,004 120,140 136,295 Capitalization ratios Common stock equity 55.0% 52.2% 50.8% 50.0% 51.9% Preferred stock 2.2 2.2 2.3 2.3 2.5 Long-term debt 42.8 45.6 46.9 47.7 45.6 Ratio of earnings to fixed charges (SEC Method) before cumulative effect of changes in accounting principles 4.32 4.03 2.78 2.95 3.33 (1) 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. Pro forma amounts, assuming that the change in accounting for unbilled revenues had been adopted retroactively, are not materially different from amounts reported for prior years and therefore have not been restated. (2) Includes net unbilled factored accounts receivable in 1994 and 1995. PSO 2-96 PUBLIC SERVICE COMPANY OF OKLAHOMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to PSO's Consolidated Financial Statements and related Notes to Consolidated Financial Statement and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential to understanding, the following discussion and analysis. OVERVIEW Net income for common stock for 1995 was $81 million, representing a 20% increase from 1994 net income for common stock of $67 million. The increase was due primarily to decreased operating and maintenance expenses and the sale of a non-utility fiber optic telecommunication property during 1995. Net income for common stock for 1994 was $67 million, a 47% increase from 1993. The increase was due primarily to increased energy sales to retail customers and sales for resale to other electric utilities due to increased market place demand and the 1993 restructuring charges of $25 million. RESTRUCTURING During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including PSO) under a new business unit called CSW Electric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in the workforce by more than 7% system-wide. PSO's restructuring costs were initially estimated to be $25 million and were expensed in 1993. The actual costs of the restructuring, approximately $24 million, were incurred primarily during 1994. PSO has realized a number of benefits from the restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. LIQUIDITY AND CAPITAL RESOURCES Overview PSO's need for capital results primarily from the construction of facilities to provide reliable electric service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, if internally generated funds are not sufficient, PSO's financial condition should allow it access to the capital markets. Construction Expenditures PSO maintains 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 PSO 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. Construction expenditures, including AFUDC, for PSO were approximately $102 million in 1995, $131 million in 1994 and $95 million in 1993. PSO's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. PSO 2-97 CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (millions) Generation $11 $15 $12 $38 Transmission 3 3 3 9 Distribution 40 39 39 118 Other 14 15 15 44 $68 $72 $69 $209 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate of load growth, escalation of construction costs, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause PSO to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although PSO does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which PSO has invested approximately $38 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, PSO would evaluate the probability of recovery of these investments and may record appropriate reserves. Long-Term Financing As of December 31, 1995, the capitalization ratios of PSO were 55% common stock equity, 2% preferred stock and 43% long-term debt. PSO's embedded cost of long-term debt was 7.5% at December 31, 1995. PSO continually monitors the capital markets for opportunities to lower its cost of capital through refinancing. PSO continues to be committed to maintaining financial flexibility by maintaining a strong capital structure and favorable securities ratings which should allow funds to be obtained from the capital markets when required. In February 1996, PSO filed a shelf registration statement with the SEC for the sale of up to $75 million of Senior Notes. In March 1996, PSO issued $30 million of MTNs, Series A under the shelf registration statement described in the preceding sentence. The proceeds were used to repay a portion of PSO's short-term borrowing and to reimburse PSO's treasury for the scheduled maturity of $25 million aggregate principal amount of FMBs on March 1, 1996. PSO may offer the remaining $45 million of Senior Notes available under its shelf registration statement from time to time subject to market conditions and other factors. The proceeds of any such offering may be used to redeem FMBs, repay short-term debt or provide working capital. Short-Term Financing PSO, together with other members of CSW System, has established a CSW System money pool to coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the CSW System's commercial paper borrowing costs. At December 31, 1995 PSO's short-term borrowing limit from the money pool was approximately $93 million. During 1995, the annual weighted average interest rate on PSO's borrowings was 6.1% and the average amount of PSO's short-term borrowings outstanding was $54 million. The PSO 2-98 maximum amount of PSO's short-term borrowings outstanding during 1995 was $90 million, which was the amount outstanding at January 25, 1995. Internally Generated Funds Internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. PSO utilizes short-term debt to meet fluctuations in working capital requirements due to the seasonal nature of energy sales. PSO anticipates that capital requirements for the period 1996 to 1998 will be met, in large part, from internal sources. PSO also anticipates that some external financing will be required during the period, but the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally Generated Funds $88 $110 $93 Construction Expenditures Provided by Internally Generated Funds 87% 85% 99% Sales of Accounts Receivable PSO sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales provide PSO with cash immediately, thereby reducing working capital needs and revenue requirements. The average and year end amounts of accounts receivable sold were $80 million and $71 million, respectively, in 1995, as compared to $91 million and $72 million, respectively, in 1994. RECENT DEVELOPMENTS AND TRENDS Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting PSO 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 level in the future. As competition in the industry increases, PSO will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, PSO 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. PSO believes that its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of 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 extremely competitive since the enactment of the Energy Policy Act. PSO must compete in the wholesale energy markets with other public utilities, cogenerators, qualified PSO 2-99 facilities, EWGs and others for sales of electric power. While PSO believes that the Energy Policy Act will continue to make the wholesale markets more competitive, PSO is unable to predict the extent to which the Energy Policy Act will impact PSO operations. On March 29, 1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR a requirement that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which such utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7, 1995, CSW filed comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a "power flow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional "postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9, 1996, PSO filed at the FERC complete sets of open access transmission tariffs for the Southwest Power Pool. These tariffs substantially reflect the pro forma tariffs attached to the FERC's March 29, 1995 NOPR. Open access and market pricing should increase marketing opportunities for PSO, but may also expose it to the risk of loss of load or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need 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 industry issue which may require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. In Oklahoma, a legislative task force is examining state laws affecting retail electric companies. Issues being addressed include retail wheeling, territorial boundaries, taxes and condemnations. PSO believes that retail competition would harm the best interests of PSO's customers and security holders unless PSO receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by PSO to meet its obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. PSO intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments PSO undertook to serve the public's demand for electricity. PSO is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on PSO. As the wholesale and retail 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. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, PSO has recognized significant regulatory assets and liabilities. Management believes that PSO will continue to meet the PSO 2-100 criteria for following SFAS No. 71. However, in the event PSO no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. ENVIRONMENTAL MATTERS The operations of PSO, 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. PSO is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. PSO anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on PSO'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 PSO, the estimated amount of costs allocated to PSO and the participation of other parties. See ITEM 1-BUSINESS and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional discussion regarding environmental matters. NEW ACCOUNTING STANDARDS SFAS No. 121 In March 1995, the FASB issued SFAS No. 121 to be effective for financial statements for fiscal years beginning after December 15, 1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For PSO, the lowest independently identifiable cash flow level used for this analysis is jurisdictional rates charged to customers. PSO will adopt SFAS No. 121 in the first quarter of 1996. Under the current regulatory environment, PSO does not expect the adoption of SFAS No. 121 to have a significant impact on PSO's consolidated results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, PSO is monitoring the changing conditions facing the electric utility industry. SFAS No. 123 SFAS No. 123 was issued in October 1995 with an effective date for transactions entered into after December 15, 1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative PSO 2-101 methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No. 123, PSO will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and adopt the disclosure requirements of SFAS No. 123 in 1996. Accordingly, the adoption of SFAS No. 123 will not impact PSO's consolidated results of operations or financial condition. RESULTS OF OPERATIONS Electric Operating Revenues Electric operating revenues decreased 7% to $690.8 million during 1995 from $740.5 million during 1994. The decrease in 1995 was due primarily to decreased fuel recovery and a decrease in weather-related retail customer demand partially offset by customer growth. Electric operating revenues for 1994 increased 5% to $740.5 million from $707.5 million during 1993. The increase in 1994 reflected an increase of approximately 8% in KWH sales resulting from increased sales for resale to other electric utilities due to increased marketplace demand, partially offset by lower unit fuel costs as described below. Additionally, 1994 was affected by increased fuel revenue as discussed below. Fuel Fuel expense was $273.5 million during 1995, which represented a 14% decrease compared to $316.5 million during 1994. The decrease was primarily attributable to a reduction in the over-recovery of fuel costs, as well as a reduction in average fuel costs from $1.96 per Mmbtu in 1994 to $1.73 per Mmbtu in 1995. The decrease in average unit fuel costs was attributable to the settlement of certain coal transportation litigation and a reduction in the spot market price of natural gas. The decrease was partially offset by a 3% increase in KWH generation. Fuel expense for 1994 increased approximately 6% to $316.5 million in 1994 from $298.9 million in 1993. Fuel expense for 1994 increased primarily as a result of the termination of the FUSER Program effective October 1993. See ITEM 1-BUSINESS for additional information relating to the FUSER program. In 1994, fuel expense was also affected by a 17% increase in KWH generation and an over- recovery of fuel costs from customers, which was previously recorded as deferred fuel, offset in part by a reduction in average unit fuel costs. The average unit fuel cost for 1994 was $1.96 per Mmbtu, a decrease of approximately 18% from 1993 levels. The decrease in per unit fuel cost reflects the reversal of prior years accruals for potential liabilities related to coal transportation, as well as lower costs for natural gas and coal. Purchased Power Purchased power expenses decreased approximately 32% to $23.6 million for 1995 from $34.9 million in 1994. Purchased power expenses for 1994 increased approximately $2.2 million or 7% when compared to 1993. Both 1995 and 1994 were impacted by the 1994 increases in purchases of economy energy. Other Operating Expenses Other operating expenses decreased 3% to $116.7 million during 1995 from $120.2 million during 1994. The decrease was due primarily to a net decrease in customer related expenses, decreased distribution meter expenses and the realization of savings from cost containment efforts. The decreases were offset in part by increases in employee related costs and additional transmission expenses associated with the completion and placement in service of a new HVdc tie in 1995. PSO 2-102 Other operating expenses in 1994 were $120.2 million, a decrease of 5% when compared to other operating expenses of $127.1 million in 1993. The decrease was due to the 1993 write-off of approximately $5 million of certain lignite properties and accrued mine reclamation expenses of approximately $3 million. Restructuring Charges Restructuring charges reflect the original accrual of $25 million in 1993 which was subsequently reduced by $0.2 million and $0.5 million in 1994 and 1995, respectively, resulting in total restructuring costs of $24.3 million. Maintenance Maintenance expenses in 1995 decreased 21% to $35.4 million from $44.9 million in 1994 as a result of the 1994 write-off of certain deferred expenses associated with the Tulsa Power Station. Also contributing to the decrease was the realization of savings from cost containment efforts. Depreciation and Amortization Depreciation and amortization expense increased $4.6 million and $4.0 million in 1995 and 1994, respectively, when compared to the prior years due primarily to increases in depreciable property. Income Taxes Income tax expense in 1995 was affected by higher pre-tax income, offset by prior year tax adjustments. Income tax expense increased approximately $15.2 million or 69% in 1994 as compared to 1993 primarily as a result of increased pre-tax income. Other Income and Deductions Other income and deductions increased $1.3 million for 1995 when compared to 1994 primarily as a result of a $2.7 million gain on the sale of non-utility fiber optic telecommunication property, offset in part by an adjustment to reallocate parent company tax benefits. Interest Charges Interest on short-term debt and other for 1995 increased 65% to $6.4 million from $3.8 million in 1994. The increase was due primarily to higher levels of short-term debt outstanding at higher interest rates. Interest on long-term debt for 1994 decreased approximately $1.8 million or 6% as a result of the refinancing in 1993 of higher cost debt. This decrease was offset in part by increases in short-term borrowings. Cumulative Effect of Changes in Accounting Principles PSO implemented a number of accounting changes in 1993. These included the adoption of SFAS No. 112 and SFAS No. 109. PSO also changed its method of accounting for unbilled revenues. These accounting changes had a cumulative effect of increasing net income approximately $6 million. Inflation Annual inflation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% during the three years ended December 31, 1995. PSO believes that inflation, at this level, does not materially affect its consolidated results of operations or financial condition. 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. PSO 2-103 PSO Consolidated Statements of Income Public Service Company of Oklahoma For the Years Ended December 31, 1995 1994 1993 (thousands) Electric Operating Revenues Residential $280,127 $296,159 $296,027 Commercial 210,875 227,488 222,598 Industrial 147,811 165,200 149,762 Sales for resale 34,273 35,458 18,248 Other 17,737 16,191 20,901 690,823 740,496 707,536 Operating Expenses and Taxes Fuel 273,533 316,470 298,905 Purchased power 23,584 34,906 32,711 Other operating 116,663 120,221 127,072 Restructuring charges (488) (197) 24,995 Maintenance 35,356 44,847 45,777 Depreciation and amortization 67,657 63,096 59,133 Taxes, other than income 25,147 25,757 24,820 Income taxes 37,602 37,138 21,967 579,054 642,238 635,380 Operating Income 111,769 98,258 72,156 Other Income and Deductions Allowance for equity funds used during construction 1,270 1,094 1,096 Other 2,274 933 531 3,544 2,027 1,627 Income Before Interest Charges 115,313 100,285 73,783 Interest Charges Interest on long-term debt 29,594 29,594 31,410 Interest on short-term debt and other 6,355 3,844 2,729 Allowance for borrowed funds used during construction (2,464) (1,419) (852) 33,485 32,019 33,287 Income Before Cumulative Effect of Changes in Accounting Principles 81,828 68,266 40,496 Cumulative Effect of Changes in Accouting Principles -- -- 6,223 Net Income 81,828 68,266 46,719 Preferred stock dividends 816 816 816 Net Income for Common Stock $81,012 $67,450 $45,903 The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-104 PSO Consolidated Statements of Retained Earnings Public Service Company of Oklahoma For the Years Ended December 31, 1995 1994 1993 (thousands) Retained Earnings at Beginning of Year $124,269 $97,819 $91,916 Net income for common stock 81,012 67,450 45,903 Deduct: Common stock dividends 55,000 41,000 40,000 Retained Earnings at End of Year $150,281 $124,269 $97,819 The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-105 PSO Consolidated Balance Sheets Public Service Company of Oklahoma As of December 31, 1995 1994 (thousands) ASSETS Electric Utility Plant Production $939,106 $902,602 Transmission 363,692 346,433 Distribution 712,483 668,346 General 182,705 150,898 Construction work in progress 56,576 96,133 2,254,562 2,164,412 Less - Accumulated depreciation 924,186 859,894 1,330,376 1,304,518 Current Assets Cash 744 5,453 Accounts receivable 17,957 21,531 Materials and supplies, at average cost 41,179 39,888 Fuel inventory, at LIFO cost 15,765 17,820 Accumulated deferred income taxes 10,389 6,670 Prepayments 2,450 7,889 88,484 99,251 Deferred Charges and Other Assets 61,956 61,345 $1,480,816 $1,465,114 The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-106 PSO Consolidated Balance Sheets Public Service Company of Oklahoma As of December 31, 1995 1994 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 150,281 124,269 Total Common Stock Equity 487,511 461,499 Preferred stock 19,826 19,826 Long-term debt 379,250 402,752 Total Capitalization 886,587 884,077 Current Liabilities Long-term debt due within 12 months 25,000 -- Advances from affiliates 70,510 55,160 Payables to affiliates 40,463 44,367 Accounts payable 23,094 59,899 Payables to customers 32,517 22,655 Accrued taxes 27,014 17,356 Accrued interest 9,025 8,867 Other 8,589 15,157 236,212 223,461 Deferred Credits Accumulated deferred income taxes 264,353 281,139 Investment tax credits 46,222 49,011 Income tax related regulatory liabilities, net 41,820 18,611 Other 5,622 8,815 358,017 357,576 $1,480,816 $1,465,114 The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-107 PSO Consolidated Statements of Cash Flows Public Service Company of Oklahoma For the Years Ended December 31, 1995 1994 1993 (thousands) OPERATING ACTIVITIES Net Income $81,828 $68,266 $46,719 Non-cash Items Included in Net Income Depreciation and amortization 73,218 67,452 65,242 Restructuring charges (400) (197) 24,995 Deferred income taxes and investment tax credits (85) 4,990 6,700 Allowance for equity funds used during construction (1,270) (1,094) (1,096) Cumulative effect of changes in accounting principles -- -- (6,223) Changes in Assets and Liabilities Accounts receivable 3,574 15,081 (17,299) Material and supplies (1,291) 1,777 2,872 Accounts payable (22,970) 26,894 (2,963) Accrued taxes 9,658 2,165 4,240 Accrued restructuring charges (646) (15,626) -- Other deferred credits (3,193) (17,153) 9,583 Other 5,465 (754) 1,322 143,888 151,801 134,092 INVESTING ACTIVITIES Construction expenditures (98,415) (128,625) (92,648) Allowance for borrowed funds used during construction (2,464) (1,419) (852) Other (7,251) (335) (6,125) (108,130) (130,379) (99,625) FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- -- 181,194 Retirement of long-term debt -- -- (10,000) Reacquisition of long-term debt -- -- (189,685) Change in advances from affiliates 15,350 23,416 26,454 Payment of dividends (55,817) (41,814) (40,816) (40,467) (18,398) (32,853) Net Change in Cash and Cash Equivalents (4,709) 3,024 1,614 Cash and Cash Equivalents at Beginning of Year 5,453 2,429 815 Cash and Cash Equivalents at End of Year $744 $5,453 $2,429 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $31,285 $31,459 $34,844 Income taxes paid $27,651 $28,910 $ 9,232 The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-108 PSO Consolidated Statements of Capitalization Public Service Company of Oklahoma As of December 31, 1995 1994 (thousands) COMMON STOCK EQUITY $487,511 $461,499 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% 97,900 $105.75 9,790 9,790 4.20% 100,000 $103.19 10,000 10,000 Premium 36 36 19,826 19,826 LONG-TERM DEBT First Mortgage Bonds Series J, 5 1/4%, due March 1, 1996 25,000 25,000 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 Installment sales agreement - PCRBs Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700 Series 1984, 7 7/8%, due September 15, 2014 (Red River) 12,660 12,660 Unamortized discount (4,415) (4,756) Unamortized costs of reacquired debt (18,695) (19,852) Amount to be redeemed within one year (25,000) -- 379,250 402,752 TOTAL CAPITALIZATION $886,587 $884,077 The accompanying notes to consolidated financial statements are an integral part of these statements. PSO 2-109 PUBLIC SERVICE COMPANY OF OKLAHOMA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37. 2.LITIGATION AND REGULATORY PROCEEDINGS PSO Gas Transportation and Fuel Management Fees An order issued by the Oklahoma Commission in 1991 required that the level of gas transportation and fuel management fees, paid to Transok by PSO, permitted for recovery through the fuel adjustment clause be reviewed in PSO's 1993 rate proceeding. This portion of the 1993 rate review was subsequently bifurcated. In March 1995, an order was issued by the Oklahoma Commission approving an agreement which allows PSO to recover approximately $28.4 million of transportation and fuel management fees in base rates using 1991 determinants and approximately $1 million through the fuel adjustment clause. The agreement also requires the phase- in of competitive bidding of natural gas transportation requirements in excess of 165 MMcf/d. PSO Gas Purchase Contracts PSO has been named defendant in complaints filed in federal and state courts of Oklahoma and Texas in 1984 through 1995 by gas suppliers alleging claims arising out of certain gas purchase contracts. The plaintiffs seek relief through the filing dates as well as attorneys' fees. In January 1996, complaints representing approximately $10 million in claims were settled. Remaining complaints currently total approximately $1 million in claimed actual damages. The settlements did not have a material effect on PSO's consolidated results of operations or financial condition. The remaining suits are in the preliminary stages. Management cannot predict the outcome of these proceedings. However, management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on PSO's consolidated results of operations or financial condition. PSO PCB Cases PSO has been named a defendant in complaints filed in federal and state courts of Oklahoma in 1984, 1985, 1986, 1993 and 1996. The complaints allege, among other things, that some of the plaintiffs and the property of other plaintiffs were contaminated with PCBs and other toxic by-products following certain incidents, including transformer malfunctions, in April 1982, December 1983 and May 1984. To date, all complaints, except for claims representing approximately $13 million in alleged damages and claims filed in February 1996 for additional unspecified actual and punitive damages, have been dismissed, certain of which resulted from settlements among the parties. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Moreover, management believes that the remaining claims are covered under insurance. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on PSO's consolidated results of operations or financial condition. PSO Burlington Northern Transportation Contract In June 1992, PSO filed suit in the United States District Court for the Northern District of Oklahoma against Burlington Northern seeking declaratory relief under a long-term contract for the transportation of coal. In July 1992, Burlington Northern asserted counterclaims for unspecified damages against PSO alleging that PSO breached the contract. In December 1993, PSO PSO 2-110 amended its suit against Burlington Northern seeking damages and declaratory relief under federal and state antitrust laws. In December 1995, PSO and Burlington Northern reached a compromise settlement of all outstanding claims and counterclaims, and the action was dismissed with prejudice. The settlement did not have a material adverse effect on PSO's consolidated results of operations or financial condition. PSO Burlington Northern Arbitration In May 1994, in an arbitration related to the Burlington Northern coal transportation contract described above, an arbitration panel made an award in favor of PSO concerning basic transportation rates under the coal transportation contract and concerning the contract mechanism for adjustment for future transportation rates. This arbitration award was then the subject of litigation in the United States District Courts for the Northern Districts of Oklahoma and Texas and the United States Court of Appeals for the Tenth Circuit. In December 1995, this litigation was settled as part of the compromise settlement of the related lawsuit described above. Under the settlement, a $16.4 million judgment by the U.S. District Court for the Northern District of Oklahoma confirming the arbitration award became final and was then released and satisfied of record. PSO Ash Creek Coal Mine Reclamation In August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an additional $500,000 in 1995. Actual reclamation work commenced in September 1995, with completion expected in late 1996. Surveillance monitoring will continue for ten years after final reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on PSO's consolidated results of operations or financial condition. PSO MCPC In 1989, PSO entered into certain long-term contracts with MCPC, a cogeneration development company located in northeastern Oklahoma. These contracts include: (i) an Interconnection and Interchange Agreement providing terms and conditions under which MCPC could connect its electric generating facilities to PSO's transmission system and providing for future transmission by PSO of specified amounts of MCPC's power to an unaffiliated utility; (ii) a Stock/Asset Purchase Agreement which allows PSO under certain conditions to acquire the stock or assets of MCPC; and (iii) an Energy Conversion Agreement which required PSO to deliver natural gas to MCPC for conversion to electrical energy to be delivered by MCPC to PSO. Under the Energy Conversion Agreement, PSO had the right to dispatch up to 60 MWH per hour of quick-start capability. In 1993, MCPC filed an application with the Oklahoma Commission requesting relief through the modification of the existing Energy Conversion Agreement. An emergency order was issued under MCPC's application which increased the payment made by PSO to MCPC for energy purchases and decreased the amount of firm energy MCPC was required to deliver to PSO. The emergency order was subject to a permanent ruling. In July 1993, PSO commenced a lawsuit in the District Court of Tulsa County, Oklahoma, seeking a declaratory judgment that PSO was entitled to terminate the Energy Conversion Agreement as of August 1, 1993, because of a default committed by MCPC. On March 31, 1995, PSO, MCPC and the Oklahoma Commission Staff signed a joint settlement resolving all issues pursuant to the various proceedings before the Oklahoma Commission and the District Court of Tulsa County, Oklahoma. The settlement, among other things, eliminated a requirement that MCPC deliver an annual minimum of 394,200 MWH of Assured Delivery Energy and related provisions associated with underdelivery charges. Most other provisions of the agreement between PSO and MCPC were kept intact. The Oklahoma Commission issued an order in May 1995 approving the settlement. The settlement is on terms satisfactory to PSO and will not have a PSO 2-111 material adverse effect on PSO's consolidated results of operations or financial condition. Other PSO 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 PSO's consolidated results of operations or financial condition. 3.COMMITMENTS AND CONTINGENT LIABILITIES It is estimated that PSO will spend approximately $68 million, including AFUDC, in capital expenditures during 1996. Substantial commitments have been made in connection with the 1996 construction program. To supply the fuel requirements of its generating plants, PSO has entered into various commitments for the procurement of fuel. 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 10. 11.QUARTERLY INFORMATION See CSW's NOTE 14 on pages 2-64 and 2-65. CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. PSO 2-112 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 company, as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings and cash flows, for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of PSO'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 Public Service Company of Oklahoma and subsidiary company as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, PSO changed its methods of accounting for unbilled revenues, postretirement benefits other than pensions, income taxes and postemployment benefits. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental Schedule II and Exhibit 12 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state 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 28, 1996 PSO 2-113 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 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 the independent accounting firm, Arthur Andersen LLP, which was 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 subsidiary believe that representations made to the independent auditors during their audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. PSO, 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 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 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. PSO and its subsidiary 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, 1995. Robert L. Zemanek R. Russell Davis President and CEO - PSO Controller - PSO PSO 2-114 SOUTHWESTERN ELECTRIC POWER COMPANY SWEPCO 2-115 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. 1995 1994 1993 (1) 1992 1991 (in thousands, except ratio data) INCOME STATEMENT DATA Revenues $836,705 $825,296 $837,192 $778,303 $760,694 Operating expenses and taxes 673,929 679,374 719,135 632,576 617,377 Operating income 162,776 145,922 118,057 145,727 143,317 Other income and deductions 4,468 8,235 5,218 669 4,433 Interest charges 50,130 48,445 44,804 51,513 51,126 Net Income 117,114 105,712 81,876 94,883 96,624 Net Income for common stock 113,870 102,351 78,514 91,438 93,159 BALANCE SHEET DATA Assets 2,116,719 2,079,207 1,968,285 1,927,320 1,851,108 Common stock equity 682,994 678,122 645,731 647,217 645,780 Preferred stock Not subject to mandatory redemption 16,032 16,032 16,032 16,032 16,033 Subject to mandatory redemption 33,628 34,828 36,028 37,228 38,416 Long-term debt 598,951 595,833 602,065 532,860 573,626 Current liabilities (2) 287,155 251,457 191,488 205,646 90,436 Capitalization ratios Common stock equity 51.3% 51.2% 49.7% 52.5% 50.7% Preferred stock 3.7 3.8 4.0 4.3 4.3 Long-term debt 45.0 45.0 46.3 43.2 45.0 Ratio of earnings to fixed charges (SEC Method) before cumulative effect of changes in accounting principles 3.80 3.70 3.27 3.39 3.51 (1) 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. Pro forma amounts, assuming that the change in accounting for unbilled revenues had been adopted retroactively, are not materially different from amounts reported for prior years and therefore have not been restated. (2) Includes net unbilled factored accounts receivable in 1994 and 1995. SWEPCO 2-116 SOUTHWESTERN ELECTRIC POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to SWEPCO'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 in understanding, the following discussion and analysis. OVERVIEW Net income for common stock increased 11% during 1995 to approximately $113.9 million from approximately $102.4 million in 1994 due primarily to an increase in non-fuel revenue. The increase in non-fuel revenue was attributable to a 4% increase in KWH sales from weather-related demand and customer growth. Net income for common stock increased 30% during 1994 to approximately $102.4 million from approximately $78.5 million in 1993, due primarily to the effects of restructuring costs recorded during 1993. RESTRUCTURING During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including SWEPCO) under a new business unit called CSW Electric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in the workforce by more than 7% system-wide. SWEPCO's restructuring costs were initially estimated to be $25 million and were expensed in 1993. The actual costs of the restructuring, approximately $20 million, were incurred primarily during 1994. SWEPCO is realizing a number of benefits from the restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. This leads to enhanced communication and efficiency, which SWEPCO believes should translate into a reduction in the rate of growth in operating and maintenance costs. LIQUIDITY AND CAPITAL RESOURCES Overview SWEPCO's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, if internally generated funds are not sufficient, SWEPCO's financial condition should allow it access to the capital markets. Construction Expenditures SWEPCO maintains 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 SWEPCO 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. Construction expenditures, including AFUDC, for SWEPCO were approximately $115 million in 1995, $153 million in 1994 and $176 million in 1993. Included in the 1993 construction expenditures is approximately $35 million in capital expenditures that were incurred for the acquisition of BREMCO, a SWEPCO 2-117 rural electric cooperative with service territory adjacent to SWEPCO's service territory in Louisiana. SWEPCO's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (millions) Generation $9 $10 $12 $31 Transmission 18 21 31 70 Distribution 46 45 44 135 Other 25 21 18 64 $98 $97 $105 $300 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate of load growth, escalation of construction costs, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause SWEPCO to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although SWEPCO does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which SWEPCO has invested approximately $34 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, SWEPCO would evaluate the probability of recovery of these investments and may record appropriate reserves. Long-Term Financing As of December 31, 1995, the capitalization ratios of SWEPCO were 51% common stock equity, 4% preferred stock and 45% long-term debt. SWEPCO's embedded cost of long-term debt was 7.5% at December 31, 1995. SWEPCO continually monitors the capital markets for opportunities to lower its cost of capital through refinancing. SWEPCO is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access the capital markets opportunistically or when required. Short-Term Financing SWEPCO, together with other members of CSW System, has established a CSW System money pool to coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the CSW System's commercial paper borrowing costs. At December 31, 1995 SWEPCO's short-term borrowing limit from the money pool was approximately $133 million. During 1995, the annual weighted average interest rate on SWEPCO's borrowings was 6.0% and the average amount of SWEPCO short-term borrowings outstanding was $79 million. The maximum amount of SWEPCO short-term borrowings outstanding during 1995 was $115 million, which was the amount outstanding at February 7, 1995. Internally Generated Funds Internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. SWEPCO utilizes short-term debt to meet fluctuations in working capital requirements due to the seasonal nature of energy sales. SWEPCO anticipates that capital requirements for the period 1996 to 1998 SWEPCO 2-118 will be met, in large part, from internal sources. SWEPCO also anticipates that some external financing will be required during the period, however the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally Generated Funds $100 $105 $149 Construction Expenditures Provided by Internally Generated Funds 96% 71% 85% Sales of Accounts Receivable SWEPCO sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales provide SWEPCO with cash immediately, thereby reducing working capital needs and revenue requirements. The average and year end amounts of accounts receivable sold were $84 million and $72 million, respectively, in 1995, as compared to $69 million and $62 million, respectively, in 1994. RECENT DEVELOPMENTS AND TRENDS Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting SWEPCO 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 level in the future. As competition in the industry increases, SWEPCO will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, SWEPCO 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. SWEPCO believes that its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of 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 extremely competitive since the enactment of the Energy Policy Act. SWEPCO must compete in the wholesale energy markets with other public utilities, cogenerators, qualified facilities, exempt wholesale generators and others for sales of electric power. While SWEPCO believes that the Energy Policy Act will continue to make the wholesale markets more competitive, SWEPCO is unable to predict the extent to which the Energy Policy Act will impact SWEPCO operations. On March 29, 1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR that each public utility that owns and controls transmission facilities in interstate commerce SWEPCO 2-119 must unbundle its services and file open access transmission tariffs under which each utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7, 1995, CSW filed comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the owner company pay for a portion, but not all, of the costs incurred by the utility of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a "power flow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional "postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9, 1996, SWEPCO filed at the FERC complete sets of open access transmission tariffs. These tariffs substantially reflect the pro forma tariffs attached to the FERC's March 29, 1995 NOPR. Open access and market pricing should increase marketing opportunities for SWEPCO, but may also expose it to the risk of loss of load or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need 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 industry issue which may require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. SWEPCO believes that retail competition would harm the best interests of SWEPCO's customers and security holders unless SWEPCO receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by SWEPCO to meet its obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. SWEPCO intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments SWEPCO undertook to serve the public's demand for electricity. SWEPCO is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on SWEPCO. As the wholesale and retail 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. Cajun Asset Purchase Proposal On March 8, 1996, SWEPCO, together with GSU and the members committee of Cajun (which represents 10 of the 12 Louisiana distribution cooperatives that are served by Cajun), submitted to Cajun's court appointed trustee in bankruptcy a joint proposal pursuant to which SWEPCO would acquire all of Cajun's non-nuclear assets, including a three-unit coal-fired plant and a two-unit natural gas-fired plant, and would serve the member co-ops through new wholesale power-supply agreements. In addition, the joint proposal would, if accepted, resolve litigation between GSU and Cajun related to the River Bend nuclear generating station, which currently is owned 30% by Cajun and 70% by GSU. The joint proposal was submitted in response to a formal bid procedure established by the trustee. It is currently anticipated that the trustee will select a lead proposal in early April, and file a plan of reorganization with the bankruptcy court on or about April 22, 1996. The timing and SWEPCO 2-120 completion of any transaction would depend, among other things, upon bankruptcy court approval of a reorganization plan and receipt by SWEPCO and CSW of all requisite regulatory approvals. 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. PURA Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1, 1995. Among other things, the amendments permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven integrated resource planning process and mandate comparable open access transmission service. In addition, one effect of the amendments is the deregulation of the wholesale bulk power market in ERCOT. However, SWEPCO, as a member of the Southwest Power Pool rather than ERCOT, will not be directly impacted by this. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, SWEPCO has recognized regulatory assets and liabilities. Management believes that SWEPCO will continue to meet the criteria for following SFAS No. 71. However, in the event that SWEPCO no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as if it were a stand-alone company. This "stand-alone" approach treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax component of rates to the "actual tax approach." This approach reduces rates by the tax benefits of deductions which are not considered for or included in setting rates for the utility. On April 13, 1995, the Supreme Court issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated affiliates to reduce tax expense in cost of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax deductions taken by the utility for disallowed expenses when determining the utility's federal income tax liability. ENVIRONMENTAL MATTERS The operations of SWEPCO, 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. SWEPCO is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. SWEPCO anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on SWEPCO's results of operations SWEPCO 2-121 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 SWEPCO, the estimated amount of costs allocated to SWEPCO and the participation of other parties. See ITEM 1-BUSINESS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. NEW ACCOUNTING STANDARDS SFAS No. 121 In March 1995, the FASB issued SFAS No. 121 to be effective for financial statements for fiscal years beginning after December 15, 1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For SWEPCO, the lowest independently identifiable cash flow level used for this analysis is jurisdictional rates charged to customers. SWEPCO will adopt SFAS No. 121 in the first quarter of 1996. Under the current regulatory environment, SWEPCO does not expect the adoption of SFAS No. 121 to have a significant impact on SWEPCO's results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, SWEPCO is monitoring the changing conditions facing the electric utility industry. SFAS No. 123 SFAS No. 123 was issued in October 1995 with an effective date for transactions entered into after December 15, 1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No. 123, SWEPCO will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and adopt the disclosure requirements of SFAS No. 123 in 1996. Accordingly, the adoption of SFAS No. 123 will not impact SWEPCO's results of operations or financial condition. RESULTS OF OPERATIONS Electric Operating Revenues Total electric operating revenues increased $11.4 million, or 1%, to $836.7 million during 1995 due primarily to a $28.3 million increase in non-fuel revenues. The increase in non-fuel revenues was attributable to a 4% increase in retail KWH sales resulting from weather-related demand and customer growth. The increase in non-fuel revenues was offset in part by a $14.8 million decrease in fuel revenue due to lower average fuel costs as discussed below. SWEPCO 2-122 Total electric operating revenues decreased $11.9 million, or 1%, during 1994 due primarily to decreased fuel revenues partially offset by a 3% increase in retail KWH sales due to customer growth and a 15% increase in lower margin sales for resale. Fuel Fuel expense was $318.5 million in 1995, a decrease of 5% when compared to 1994 fuel expense of $336.4 million. The decrease in fuel expense was due primarily to an 8% decrease in the average unit cost of fuel from $1.75 per Mmbtu in 1994 to $1.61 per Mmbtu in 1995, which was offset in part by a 3% increase in generation. The decrease in the per unit cost of fuel resulted from a decrease in the spot market price of gas. Fuel expense decreased approximately $27.2 million or 7% in 1994 when compared to 1993 due primarily to a decrease in the average unit cost of fuel from $1.94 per Mmbtu in 1993 to $1.75 per Mmbtu in 1994. The decrease in unit fuel costs was primarily due to coal contract negotiations and a decrease in the spot market price of gas. Purchased Power Purchased power expense decreased approximately $1.2 million, or 6%, during 1995 when compared to 1994 due primarily to a 36% decrease in purchases, partially offset by a firm contract for additional operating reserves and on peak capacity. Purchased power increased from $13.1 million in 1993 to $20.2 million in 1994 due primarily to a purchased power contract negotiated as a part of the 1993 purchase of BREMCO. Other Operating Other operating expenses increased approximately $2.5 million, or 2%, during 1995 when compared to 1994. The increase was due primarily to an increase in transmission expenses associated with the completion and placement in service of a new HVdc tie in 1995 and an increase in employee related costs. Restructuring Charges Restructuring charges reflect the original accrual of $25.2 million in December 1993 which was subsequently reduced by $5.0 million in 1994 and $0.6 million in 1995, resulting in total restructuring charges of $19.6 million at December 31, 1995. Maintenance Maintenance expense decreased approximately $7.4 million, or 15%, during 1994 when compared to 1993. The decrease was due primarily to decreased maintenance of distribution facilities and general plant. Depreciation and Amortization Depreciation and amortization increased $3.4 million and $5.5 million during 1995 and 1994, respectively, when compared to the prior years. The increases during both periods were due primarily to increases in depreciable plant. Taxes, Other than Income Taxes, other than income, increased approximately $1.6 million, or 4%, during 1995 when compared to 1994 due primarily to increases in ad valorem taxes. Income Taxes Income tax expense decreased approximately $1.0 million in 1995 due primarily to prior year tax adjustments partially offset by higher pre-tax income. Income tax expense increased approximately $12.7 million, or 43%, in 1994 due primarily to an increase in pre- tax income. SWEPCO 2-123 Allowance for Equity and Borrowed Funds Used During Construction AFUDC increased approximately $3.2 million and $3.5 million during 1995 and 1994, respectively, when compared to the prior year due primarily to increased CWIP balances accruing AFUDC. Also contributing to the increase in 1995 was a prior period true-up. Interest on Long-Term Debt Interest expense on long-term debt was comparable in 1995 and 1994, while it increased approximately $2.4 million, or 6%, in 1994 when compared to 1993 due primarily to an increase in average balances outstanding. Interest on Short-Term Debt and Other Interest expense on short-term debt and other increased approximately $3.1 million, or 41%, during 1995 when compared to 1994 due primarily to higher levels of short-term debt outstanding at higher short-term interest rates. Interest expense on short-term debt and other increased approximately $2.7 million in 1994 when compared to 1993 due primarily to an interest accrual pursuant to the terms of a settlement agreement approved by the Texas Commission in connection with SWEPCO's fuel reconciliation and increased interest expense associated with short-term debt. Cumulative Effect of Changes in Accounting Principles Accounting changes in 1993 included the adoption of SFAS 112. SWEPCO also changed its method of accounting for unbilled revenues. These accounting changes had a cumulative effect of increasing net income by $3.4 million. Inflation Annual inflation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% for the three-year period ending December 31, 1995. SWEPCO believes that inflation at this level does not materially affect SWEPCO's results of operations or financial condition. Under existing regulatory practice, however, 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. SWEPCO 2-124 SWEPCO Statements of Income Southwestern Electric Power Company For the Years Ended December 31, 1995 1994 1993 (thousands) Electric Operating Revenues Residential $278,319 $266,620 $273,707 Commercial 177,135 173,718 175,059 Industrial 246,182 243,518 250,912 Sales for resale 94,638 102,723 93,337 Other 40,431 38,717 44,177 836,705 825,296 837,192 Operating Expenses and Taxes Fuel 318,506 336,389 363,627 Purchased power 19,077 20,244 13,145 Other operating 121,826 119,277 118,665 Restructuring charges (578) (4,978) 25,203 Maintenance 43,320 42,782 50,164 Depreciation and amortization 83,272 79,845 74,385 Taxes, other than income 45,153 43,512 44,385 Income taxes 43,353 42,303 29,561 673,929 679,374 719,135 Operating Income 162,776 145,922 118,057 Other Income and Deductions Allowance for equity funds used during construction 4,290 3,579 1,560 Other 178 4,656 3,658 4,468 8,235 5,218 Income Before Interest Charges 167,244 154,157 123,275 Interest Charges Interest on long-term debt 44,468 43,395 40,958 Interest on short-term debt and other 10,706 7,568 4,866 Allowance for borrowed funds used during construction (5,044) (2,518) (1,020) 50,130 48,445 44,804 Income Before Cumulative Effect of Changes in Accounting Principles 117,114 105,712 78,471 Cumulative Effect of Changes in Accounting Principles -- -- 3,405 Net Income 117,114 105,712 81,876 Preferred stock dividends 3,244 3,361 3,362 Net Income for Common Stock $113,870 $102,351 $78,514 The accompanying notes to financial statements are an integral part of these statements. SWEPCO 2-125 SWEPCO Statements of Retained Earnings Southwestern Electric Power Company For the Years Ended December 31, 1995 1994 1993 (thousands) Retained Earnings at Beginning of Year $297,462 $265,071 $266,557 Net income for common stock 113,870 102,351 78,514 Gain on reacquisition of preferred stock 2 40 -- Deduct: Common stock dividends 109,000 70,000 80,000 Retained Earnings at End of Year $302,334 $297,462 $265,071 The accompanying notes to financial statements are an integral part of these statements. SWEPCO 2-126 SWEPCO Balance Sheets Southwestern Electric Power Company As of December 31, 1995 1994 (thousands) ASSETS Electric Utility Plant Production $1,410,546 $1,401,418 Transmission 435,362 385,113 Distribution 789,884 733,707 General 231,276 213,563 Construction work in progress 128,963 149,508 2,996,031 2,883,309 Less - Accumulated depreciation 1,116,375 1,026,751 1,879,656 1,856,558 Current Assets Cash and temporary cash investments 1,702 1,296 Accounts receivable 54,628 54,344 Materials and supplies, at average cost 30,097 28,109 Fuel inventory, at average cost 73,276 61,701 Accumulated deferred income taxes 4,636 6,592 Prepayments and other 14,109 13,071 178,448 165,113 Deferred Charges and Other Assets 58,615 57,536 $2,116,719 $2,079,207 The accompanying notes to financial statements are an integral part of these statements. SWEPCO 2-127 SWEPCO Balance Sheets Southwestern Electric Power Company As of December 31, 1995 1994 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 302,334 297,462 Total Common Stock Equity 682,994 678,122 Preferred stock Not subject to mandatory redemption 16,032 16,032 Subject to mandatory redemption 33,628 34,828 Long-term debt 598,951 595,833 Total Capitalization 1,331,605 1,324,815 Current Liabilities Long-term debt and preferred stock due within twelve months 5,099 5,270 Advances from affiliates 101,228 81,868 Accounts payable 34,717 38,020 Payables to affiliates 52,474 40,739 Over-recovered fuel cost 8,923 12,200 Customer deposits 11,027 13,075 Accrued taxes 30,339 12,495 Accrued interest 17,894 17,175 Other 25,454 30,615 287,155 251,457 Deferred Credits Accumulated deferred income taxes 377,245 365,441 Investment tax credits 76,237 81,023 Income tax related regulatory liabilities, net 37,363 44,836 Other 7,114 11,635 497,959 502,935 $2,116,719 $2,079,207 The accompanying notes to financial statements are an integral part of these statements. SWEPCO 2-128 SWEPCO Statements of Cash Flows Southwestern Electric Power Company For the Years Ended December 31, 1995 1994 1993 (thousands) OPERATING ACTIVITIES Net Income $117,114 $105,712 $81,876 Non-cash Items Included in Net Income Depreciation and amortization 93,624 89,646 93,120 Restructuring charges (582) (4,978) 25,203 Deferred income taxes and investment tax credits 1,501 17,970 (4,775) Cumulative effect of changes in accounting principles -- -- (3,405) Allowance for equity funds used during construction (4,290) (3,579) (1,560) Changes in Assets and Liabilities Accounts receivable (284) (29,981) (3,632) Fuel inventory (11,575) (12,214) 21,101 Accounts payable (3,303) (4) 37,087 Payables to affiliates 11,735 44,172 (45,478) Accrued taxes 17,844 (14,845) 11,561 Accrued restructuring charges (1,110) (11,694) -- Unrecovered fuel/Fuel refund due customers (3,277) 9,842 1,946 Other deferred credits (4,521) (1,662) 7,044 Other 638 (10,264) 12,010 213,514 178,121 232,098 INVESTING ACTIVITIES Construction expenditures (105,193) (146,865) (138,510) Acquisition expenditures -- -- (35,333) Allowance for borrowed funds used during construction (5,044) (2,518) (1,020) Sale of electric utility plant and other (4,393) (4,980) (4,113) (114,630) (154,363) (178,976) FINANCING ACTIVITIES Proceeds from sale of long-term debt -- -- 221,511 Reacquisition of long-term debt -- (5,475) (198,962) Redemption of preferred stock (1,200) (1,160) -- Retirement of long-term debt (3,600) (3,213) (39,835) Change in advances from affiliates 19,360 54,004 (286) Special deposits for reacquisition of long-term debt -- -- 53,500 Payment of dividends (113,038) (73,341) (83,386) (98,478) (29,185) (47,458) Net Change in Cash and Cash Equivalents 406 (5,427) 5,664 Cash and Cash Equivalents at Beginning of Year 1,296 6,723 1,059 Cash and Cash Equivalents at End of Year $1,702 $1,296 $6,723 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $46,243 $45,260 $42,271 Income taxes paid $28,079 $36,632 $21,112 The accompanying notes to financial statements are an integral part of these statements. SWEPCO 2-129 SWEPCO Statements of Capitalization Southwestern Electric Power Company As of December 31, 1995 1994 (thousands) COMMON STOCK EQUITY $682,994 $678,122 PREFERRED STOCK Cumulative $100 Par Value, Authorized 1,860,000 shares Number Current of Shares Redemption Series Outstanding Price Not Subject to Mandatory Redemption 5.00% 75,000 $109.00 7,500 7,500 4.65% 25,000 $102.75 2,500 2,500 4.28% 60,000 $103.90 6,000 6,000 Premium 32 32 16,032 16,032 Subject to Mandatory Redemption 6.95% 352,000 $104.64 35,200 36,400 Issuance Expense (372) (372) Amount to be redeemed within one year (1,200) (1,200) 33,628 34,828 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) 6,520 6,665 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 Series 1986, 8.2%, due July 1, 2014 (Sabine) 81,700 81,700 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 Bank Loan, Variable Rate, due June 15, 2000 50,000 50,000 Railcar lease obligations 13,996 17,922 Unamortized discount and premium 373 (3,745) Unamortized costs of reacquired debt (43,074) (45,974) Amount to be redeemed within one year (3,899) (4,070) 598,951 595,833 TOTAL CAPITALIZATION $1,331,605 $1,324,815 *Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs. The accompanying notes to financial statements are an integral part of these statements. SWEPCO 2-130 SOUTHWESTERN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37. 2.LITIGATION AND REGULATORY PROCEEDINGS SWEPCO Fuel Factor Proceedings On October 6, 1995, SWEPCO filed a petition, designated as Docket No. 14819, with the Texas Commission to revise its fixed fuel factors for the recovery of fuel and purchased power costs. SWEPCO was experiencing an over-recovery of fuel costs based on application of its then current factors which became effective in July 1994. The original filing with the Texas Commission proposed decreasing SWEPCO's fixed fuel factors and refunding to customers $7.1 million of cumulative over-recoveries for the period January 1994 to June 1995. SWEPCO subsequently revised its petition to the Texas Commission, updating the cumulative fuel over-recovery to $10.4 million through September 1995. On December 20, 1995, the Texas Commission issued an order approving SWEPCO's revised fixed fuel factors and authorizing the refund of $10.8 million, including interest, to customers primarily as billing credits on January 1996 monthly bills. SWEPCO Burlington Northern Transportation Contract On January 20, 1995, a state district court in Bowie County, Texas, entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO approximately $72 million covering damages for the period from April 27, 1989 through September 26, 1994, post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals. The appeal is now pending. Other SWEPCO 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 SWEPCO's results of operations or financial condition. 3.COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that SWEPCO will spend approximately $98 million, including AFUDC, in construction expenditures during 1996. Substantial commitments have been made in connection with this capital expenditure program. Fuel Commitments To supply a portion of the fuel requirements, SWEPCO has entered into various commitments for procurement of fuel. SWEPCO 2-131 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, 1995, the maximum amount SWEPCO would have to assume was $71.9 million. The maximum amount may vary as the mining contractor's need for funds fluctuates. The contractor's actual obligation outstanding at December 31, 1995 was $58.7 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, SWEPCO has agreed to provide bond guarantees on mine reclamation in the amount of $70 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 $25 million. Other Commitments and Contingencies 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, 1995, leased assets of $46 million, net of accumulated amortization of $33.7 million, were included in electric fixed assets on the balance sheet and at December 31, 1994, leased assets were $46 million, net of accumulated amortization of $30.1 million. Total charges to SWEPCO's operating expenses for expenses associated with these financing arrangements were $6.3 million, $6.8 million and $7.1 million for the years 1995, 1994 and 1993, respectively. SWEPCO Biloxi, Mississippi MGP Site In 1994, SWEPCO was notified by Mississippi Power that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO worked with Mississippi Power to investigate the extent of contamination at this site. The MDEQ approved a site investigation work plan and, in January 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of property and adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results confirmed the contamination on the property and indicated the possibility of contamination of an adjacent property. A risk assessment has been performed to assist SWEPCO and Mississippi Power in determining remediation alternatives. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site. 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. SWEPCO 2-132 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 10. 11.QUARTERLY INFORMATION See CSW's NOTE 14 on pages 2-64 and 2-65. CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. SWEPCO 2-133 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Southwestern Electric Power Company: We have audited the accompanying balance sheets and statements of capitalization of Southwestern Electric Power Company (a Delaware corporation and a wholly owned subsidiary of Central and South West Corporation) as of December 31, 1995 and 1994, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of SWEPCO'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 Southwestern Electric Power Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, SWEPCO changed its method of accounting for unbilled revenues, postretirement benefits other than pensions, income taxes and postemployment benefits. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental Schedule II and Exhibit 12 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state 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 28, 1996 SWEPCO 2-134 REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the financial statements of Southwestern Electric Power 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 the independent accounting firm, Arthur Andersen LLP, which was 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 believes that representations made to the independent auditors during its audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. SWEPCO 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 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 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 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, 1995. Richard H. Bremer R. Russell Davis President and CEO - SWEPCO Controller - SWEPCO SWEPCO 2-135 WEST TEXAS UTILITIES COMPANY WTU 2-136 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. 1995 1994 1993 (1) 1992 1991 (thousands, except ratio data) INCOME STATEMENT DATA Revenues $319,835 $342,991 $345,445 $315,370 $318,966 Operating expenses and taxes 260,349 288,228 298,869 258,068 261,041 Operating income 59,486 54,763 46,576 57,302 57,925 Other income and deductions (85) 4,360 2,016 1,165 1,671 Interest charges 24,871 21,757 22,075 23,460 23,228 Net income 34,530 37,366 30,296 35,007 36,368 Net income for common stock 34,266 36,914 29,329 33,556 34,500 BALANCE SHEET DATA Assets 815,614 771,977 754,443 744,829 734,053 Common stock equity 265,220 271,954 266,092 266,874 259,373 Preferred stock Not subject to mandatory redemption 6,291 6,291 6,291 6,291 6,291 Subject to mandatory redemption -- -- -- 9,537 14,482 Long-term debt 273,245 210,047 176,882 211,610 217,855 Current liabilities (2) 76,931 91,629 116,100 57,544 47,213 Capitalization Ratios Common stock equity 48.7% 55.7% 59.2% 54.0% 52.1% Preferred stock 1.2 1.3 1.4 3.2 4.2 Long-term debt 50.1 43.0 39.4 42.8 43.7 Ratio of earnings to fixed charges (SEC Method) before cumulative effect of changes in accounting principles 2.63 3.37 2.79 3.22 3.30 (1) Earnings in 1993 were significantly affected by restructuring charges and the $4 million cumulative effect of changes in accounting principles. Pro forma amounts, assuming that the change in accounting for unbilled revenues had been adopted retroactively, are not materially different from amounts reported for prior years and therefore have not been restated. (2) Includes net unbilled factored accounts receivable in 1994 and 1995. WTU 2-137 WEST TEXAS UTILITIES COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. OVERVIEW Net income for common stock was $34 million in 1995, which represented a 7% decrease when compared to 1994. The decrease was due primarily to increased depreciation, a prior year non-operating tax adjustment, and an increase in interest charges on long-term debt. These effects were partially offset by decreases in other operating, maintenance, and federal income tax expenses. Net income for common stock was $37 million in 1994, a 26% increase when compared to 1993. This increase was due primarily to an increase in retail base revenues and other income and a decrease in restructuring charges. RESTRUCTURING During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including WTU) under a new business unit called CSW Electric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in the workforce by more than 7% system-wide. WTU's restructuring costs were initially estimated to be $15 million and were expensed in 1993. The actual costs of the restructuring, approximately $13 million, including AFUDC, were incurred primarily during 1994. WTU has realized a number of benefits from the restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. RATES AND REGULATORY MATTERS WTU Stipulation and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No. 1 originally authorized in the Texas Commission's order in Docket No. 7289. On September 22, 1995, WTU, along with other major parties to the above described matters, filed with the Texas Commission a joint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a unified package that included: (i) a retail base rate reduction of approximately $13.5 million annually starting with WTU's October 1995 revenue month billing cycle; (ii) a $21 million retail refund which was not attributed to any specific cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction retroactive to October 1, 1994; (iii) a reduction of reduced fixed fuel factors by approximately 2%; (iv) various rate and accounting treatments including a reasonable return WTU 2-138 on equity for retail operations of 11.375%; and (v) a retail base rate freeze until October 1, 1998, subject to certain force majeure provisions. On November 9, 1995, the Texas Commission rendered a final order that implemented the joint stipulation and agreement. The WTU Stipulation and Agreement is expected to impact WTU's results of operations for the next several years, reducing annual earnings by approximately $8 million beginning in 1996. The WTU Stipulation and Agreement also eliminated several significant risks that have been the subject of regulatory proceedings relating to deferred accounting plant costs and rates and will enable WTU's rates to remain at competitive levels for the foreseeable future. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding other regulatory matters. LIQUIDITY AND CAPITAL RESOURCES Overview WTU's need for capital results primarily from the construction of facilities to provide reliable electric service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, if internally generated funds are not sufficient, WTU's financial condition and credit rating should allow it access to the capital markets. Construction Expenditures WTU maintains 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 WTU 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. Construction expenditures, including AFUDC, for WTU were approximately $45 million in 1995, $42 million in 1994 and $37 million in 1993. WTU's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (millions) Generation $4 $4 $4 $12 Transmission 6 6 6 18 Distribution 20 20 20 60 Other 12 12 13 37 $42 $42 $43 $127 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate of load growth, escalation of construction costs, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause WTU to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. WTU 2-139 Although WTU does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which WTU has invested approximately $15 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, WTU would evaluate the probability of recovery of these investments and may record appropriate reserves. Long-Term Financing As of December 31, 1995, the capitalization ratios of WTU were 49% common stock equity, 1% preferred stock and 50% long-term debt. WTU's embedded cost of long-term debt was 7.8% at December 31, 1995. WTU is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access the capital markets opportunistically or when required. WTU's long-term financing activity for 1995 is summarized in the following table. ISSUED REACQUIRED Financing Amount Financial Amount Instrument (millions) Rate Maturity Instrument (millions) Rate Maturity FMB (1) $40.0 7 1/2% 2000 FMB (2) 80.0 6 3/8% 2005 FMB $53.3 9 1/4% 2019 (1) Proceeds were used to repay a portion of WTU's short-term borrowings and to reimburse WTU's treasury for the reacquisition of FMBs. (2) The balance of proceeds not used to redeem higher cost FMBs were used to repay a portion of WTU's short-term borrowings. Short-Term Financing WTU, together with other members of the CSW System, has established a CSW System money pool to coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the CSW System's commercial paper borrowing costs. At December 31, 1995 WTU's short-term borrowing limit from the money pool was approximately $58 million. During 1995, the annual weighted average interest rate on WTU borrowings was 6.1% and the average amount of WTU short-term borrowings outstanding was $20 million. The maximum amount of WTU short-term borrowings outstanding during 1995 was $50 million, which was the amount outstanding at February 3, 1995. Internally Generated Funds Internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. WTU uses short-term debt to meet fluctuations in working capital requirements due to the seasonal nature of energy sales. During 1993 and 1994, WTU experienced several non-recurring transactions that resulted in negative internally generated funds in 1994, including the refinancing of Series G and Series H FMBs with Series S FMBs which occurred between December 1993 and February 1994. This refinancing caused an abnormally high accounts payable balance to affiliates at December 31, 1993 which was subsequently reduced by the issuance of Series S FMBs in February 1994, resulting in the appearance of a large out flow of cash from operating funds. WTU anticipates that capital requirements for the period 1996 to 1998 may be met, in large part, from internal sources. WTU also expects that some external financings will be required during the period, but the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally Generated Funds $12 ($4) $59 Construction Expenditures Provided by Internally Generated Funds 27% -- 163% WTU 2-140 Sales of Accounts Receivable WTU sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales provide WTU with cash immediately, thereby reducing working capital needs and revenue requirements. The average and year end amounts of accounts receivable sold were $33 million and $28 million, respectively, in 1995, as compared to $35 million and $18 million, respectively, in 1994. RECENT DEVELOPMENTS AND TRENDS Competition and Industry Challenges Competitive forces at work in the electric utility industry are impacting WTU 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 level in the future. As competition in the industry increases, WTU will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, WTU 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. WTU believes that its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of 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 extremely competitive since the enactment of the Energy Policy Act. WTU must compete in the wholesale energy markets with other public utilities, cogenerators, qualified facilities, EWGs and others for sales of electric power. While WTU believes that the Energy Policy Act will continue to make the wholesale markets more competitive, WTU is unable to predict the extent to which the Energy Policy Act will impact WTU operations. On March 29, 1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which each utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7, 1995, CSW filed comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a WTU 2-141 "power flow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional "postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9, 1996, WTU filed at the FERC complete sets of open access transmission tariffs. These tariffs substantially reflect the pro forma tariffs attached to the FERC's March 29, 1995 NOPR. Open access and market pricing should increase marketing opportunities for WTU, but may also expose them to the risk of loss of load or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need 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 industry issue which may require utilities to "wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. WTU believes that retail competition would harm the best interests of WTU's customers and security holders unless WTU receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by WTU to meet its obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. WTU intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments WTU undertook to serve the public's demand for electricity. WTU is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on WTU. As the wholesale and retail 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. PURA 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 requires 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), Texas Commission Chairman Pat Wood 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 has been assigned to a separate proceeding (Project No. 15000). CSW expects this project to provide the vehicle for the Texas Commission and other interested parties to develop positions on industry restructuring before the Texas Legislature convenes in January 1997. The schedule for Project No. 15000 contemplates that the Texas Commission will develop legislative recommendations on restructuring and stranded costs during the second half of 1996 and a schedule has been developed for this project that includes a series of workshops and technical conferences during the first half of 1996. On February 7, 1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No. 14045). The pricing method tentatively adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% WTU 2-142 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. Although the open access tariffs filed with the FERC on February 9, 1996 do not reflect Project No. 14045 pricing, WTU anticipates filing tariffs with the FERC that do conform to the Texas Commission's rule in the second quarter of 1996. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, WTU has recognized significant regulatory assets and liabilities. Management believes that WTU will continue to meet the criteria for following SFAS No. 71. However, in the event WTU no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as if it were a stand-alone company. This "stand-alone" approach treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax component of rates to the "actual tax approach." This approach reduces rates by the tax benefits of deductions which are not considered for or included in setting rates for the utility. On April 13, 1995, the Supreme Court issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated affiliates to reduce tax expense in cost of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax deductions taken by the utility for disallowed expenses when determining the utility's federal income tax liability. ENVIRONMENTAL MATTERS The operations of WTU, 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. WTU is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. WTU anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on its 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 WTU, the estimated amount of costs allocated to WTU and the participation of other parties. WTU 2-143 NEW ACCOUNTING STANDARDS SFAS No. 121 In March 1995, the FASB issued SFAS No. 121 to be effective for financial statements for fiscal years beginning after December 15, 1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For WTU, the lowest independently identifiable cash flow level used for this analysis is jurisdictional rates charged to customers. WTU will adopt SFAS No. 121 in the first quarter of 1996. Under the current regulatory environment, WTU does not expect the adoption of SFAS No. 121 to have a significant impact on WTU's results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, WTU is monitoring the changing conditions facing the electric utility industry. SFAS No. 123 SFAS No. 123 was issued in October 1995 with an effective date for transactions entered into after December 15, 1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No. 123, WTU will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and adopt the disclosure requirements of SFAS No. 123 in 1996. Accordingly, the adoption of SFAS No. 123 will not impact WTU's results of operations or financial condition. RESULTS OF OPERATIONS Electric Operating Revenues Electric operating revenues decreased approximately $23.2 million and $2.5 million in 1995 and 1994, respectively, when compared to the prior year. The decrease in 1995 was attributable primarily to a one-time $21 million base rate refund made pursuant to the WTU Stipulation and Agreement. Also contributing to such decrease were reductions in retail base rates made in accordance with the WTU Stipulation and Agreement and decreases in transmission equalization revenues and other miscellaneous non-KWH related revenues. These decreases were partially offset by increases in sales to a major new wholesale customer. The 1994 decrease in electric operating revenues was due primarily to a reduction in lower margin off-system sales of $8 million resulting from decreased market place demand, and was partially offset by higher on-system revenues of $6.5 million attributable to a 3% increase in retail KWH sales. Also contributing to the 1994 decrease was an interim rate reduction of approximately $5.7 million on an annual basis effective October 1, 1994. WTU 2-144 Fuel Fuel expenses were $123.7 million in 1995, which represented a decrease of 6% when compared to 1994 fuel expenses of $131.3 million. The decrease was primarily attributable to a 3% decrease in average unit fuel costs from $1.88 per Mmbtu in 1994 to $1.83 per Mmbtu in 1995 due largely to lower spot gas market prices brought about by weak demand and excess gas storage. Also contributing to the decreased fuel expense was increased plant efficiencies in 1995 which resulted in less fuel required per MWH generated. In 1994, fuel expenses decreased approximately $3.8 million or 3% when compared to 1993. The 1994 decrease in fuel expenses was primarily attributable to a 2% decrease in average unit fuel costs from $1.91 per Mmbtu in 1993 to $1.88 per Mmbtu in 1994 and a 2% decrease in generation. Purchased Power Expenses Purchased power expenses increased approximately $5.9 million during 1995 when compared with 1994, but decreased approximately $2.3 million in 1994 when compared to 1993. The 1995 increase was primarily attributable to additional energy purchases made to serve the increased load resulting from the addition of a wholesale customer and increased economy purchases. The decrease in 1994 resulted from a decrease in economy purchases. Other Operating Other operating expenses decreased approximately $2.6 million during 1995 when compared to 1994, but increased in 1994 when compared to 1993 by $4.9 million. The decrease in 1995 was primarily due to the realization of savings resulting from cost containment efforts and decreased environmental expenditures. Partially offsetting these decreases were increases in transmission expenses associated with the completion and placement in service of a new HVdc tie in 1995, increased employee related costs and increased telecommunications expenses. The 1994 increase in operating expenses reflects a reimbursement in 1993 for the settlement of a dispute relating to a coal supply contract which lowered expenses in 1993. Higher outside services for fuel related issues and other employee related expenses also contributed to the increase. Restructuring Restructuring charges reflect the original accrual of $15.2 million in 1993, which was subsequently adjusted by $2 million in 1994 and $0.4 million in 1995, and the recording of a $13.2 million regulatory asset during 1995 in accordance with the WTU Stipulation and Agreement for previously recorded costs associated with the restructuring. Maintenance Maintenance expense in 1995 decreased from 1994 by approximately $1 million or 7% due primarily to decreased production maintenance resulting from non-recurring plant overhauls in 1994 and savings resulting from cost containment efforts. Maintenance expense in 1994 increased over 1993 by approximately $1.7 million or 13% due primarily to increased production maintenance of boiler and electric plant. Depreciation and Amortization Depreciation and amortization expenses increased approximately $1.7 million and $1.2 million during 1995 and 1994, respectively, when compared to prior years due primarily to increases in depreciable property. Income Taxes Income taxes decreased approximately $12.4 million or 69% in 1995 when compared with 1994 due primarily to a reduction of $6.9 million of deferred income taxes in accordance with the WTU Stipulation and Agreement and lower pre-tax income. The increase of approximately $4.3 million or 32% in 1994 when compared with 1993 was due to higher pre-tax income. WTU 2-145 Other Income and Deductions Other income decreased approximately $4.7 million in 1995 due primarily to an adjustment to reallocate parent company tax benefits. Other income increased approximately $2.3 million in 1994 when compared to 1993 as a result of tax benefits received under WTU's tax sharing agreement with CSW. Interest on Long-Term Debt Interest on long-term debt increased approximately $2.9 million in 1995 when compared to the prior year as a result of higher levels of long-term debt outstanding. Interest on long-term debt decreased approximately $0.7 million in 1994 when compared to the prior year due to WTU's refinancing of higher cost debt with lower cost debt and decreased average balances outstanding. Cumulative Effect of Changes in Accounting Principles In 1993, WTU changed its method of accounting for unbilled revenue and implemented SFAS No. 112. These accounting changes had a cumulative effect of increasing net income by $3.8 million. Inflation Annual inflation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% for the three-year period ending December 31, 1995. WTU believes that inflation, at this level, does not materially affect its results of operations or financial condition. 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. WTU 2-146 WTU Statements of Income West Texas Utilities Company For the Years Ended December 31, 1995 1994 1993 Electric Operating Revenues (thousands) Residential $114,269 $118,525 $115,932 Commercial 66,363 66,483 65,085 Industrial 51,443 52,626 53,709 Sales for resale 73,905 67,076 72,252 Other 13,855 38,281 38,467 319,835 342,991 345,445 Operating Expenses and Taxes Fuel 123,723 131,258 135,048 Purchased power 10,998 5,144 7,411 Other operating 63,727 66,290 61,357 Restructuring charges (13,582) (2,037) 15,250 Maintenance 13,931 14,978 13,251 Depreciation and amortization 33,290 31,569 30,405 Taxes, other than income 22,720 23,072 22,496 Income taxes 5,542 17,954 13,651 260,349 288,228 298,869 Operating Income 59,486 54,763 46,576 Other Income and Deductions Allowance for equity funds used during construction 378 150 109 Other (463) 4,210 1,907 (85) 4,360 2,016 Income Before Interest Charges 59,401 59,123 48,592 Interest Charges Interest on long-term debt 21,413 18,547 19,225 Interest on short-term debt and other 4,111 3,534 2,988 Allowance for borrowed funds used during construction (653) (324) (138) 24,871 21,757 22,075 Income Before Cumulative Effect of Changes in Accounting Principles 34,530 37,366 26,517 Cumulative Effect of Changes in Accounting Principle -- -- 3,779 Net Income 34,530 37,366 30,296 Preferred stock dividends 264 452 967 Net Income for Common Stock $34,266 $36,914 $29,329 The accompanying notes to financial statements are an integral part of these statements. WTU 2-147 WTU Statements of Retained Earnings West Texas Utilities Company For the Years Ended December 31, 1995 1994 1993 (thousands) Retained Earnings at Beginning of Year $132,504 $126,642 $127,424 Net income for common stock 34,266 36,914 29,329 Deduct: Common stock dividends 41,000 31,000 30,000 Preferred stock redemption costs -- 52 111 Retained Earnings at End of Year $125,770 $132,504 $126,642 The accompanying notes to financial statements are an integral part of these statements. WTU 2-148 WTU Balance Sheets West Texas Utilities Company As of December 31, 1995 1994 (thousands) ASSETS Electric Utility Plant Production $427,547 $427,736 Transmission 199,055 194,402 Distribution 326,337 308,905 General 84,326 73,938 Construction work in progress 32,686 23,257 1,069,951 1,028,238 Less - Accumulated depreciation 389,379 364,383 680,572 663,855 Current Assets Cash 717 2,501 Accounts receivable 28,923 23,165 Materials and supplies, at average cost 16,660 16,519 Fuel inventory, at average cost 8,281 9,229 Coal inventory, at LIFO cost 5,545 6,442 Accumulated deferred income taxes 5,328 3,068 Prepayments and other 1,042 1,091 66,496 62,015 Deferred Charges and Other Assets Deferred Oklaunion costs 26,092 26,914 Restructuring costs 12,741 -- Other 29,713 19,193 68,546 46,107 $815,614 $771,977 The accompanying notes to financial statements are an integral part of these statements. WTU 2-149 WTU Balance Sheets West Texas Utilities Company As of December 31, 1995 1994 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 125,770 132,504 Total Common Stock Equity 265,220 271,954 Preferred stock Not subject to mandatory redemption 6,291 6,291 Long-term debt 273,245 210,047 Total Capitalization 544,756 488,292 Current Liabilities Long-term debt due within twelve months -- 650 Advances from affiliates 19,820 46,315 Payables to affiliates 8,244 4,547 Accounts payable 20,611 23,942 Accrued taxes 13,182 7,452 Accrued interest 6,081 4,394 Over-recovered fuel costs 4,060 1,586 Refund due customers 1,812 -- Other 3,121 2,743 76,931 91,629 Deferred Credits Accumulated deferred income taxes 145,130 146,146 Investment tax credits 30,561 31,882 Income tax related regulatory liabilities, net 14,464 9,217 Other 3,772 4,811 193,927 192,056 $815,614 $771,977 The accompanying notes to financial statements are an integral part of these statements. WTU 2-150 WTU Statements of Cash Flows West Texas Utilities Company For the Years Ended December 31, 1995 1994 1993 (thousands) OPERATING ACTIVITIES Net Income $34,530 $37,366 $30,296 Non-cash Items Included in Net Income Depreciation and amortization 34,382 33,362 31,925 Restructuring charges (367) (2,037) 15,250 Deferred income taxes and investment tax credits 650 7,056 3,159 Regulatory asset established for previously incurred restructuring charges (13,213) -- -- Cumulative effect of changes in accounting principles -- -- (3,779) Allowance for equity funds used during construction (378) (150) (109) Changes in Assets and Liabilities Accounts receivable (5,758) 1,332 (3,159) Fuel inventory 1,845 (1,010) (6) Accounts payable (4,922) 7,558 (5,775) Payables to associates 3,697 (36,564) 22,627 Accrued taxes 5,730 (7,168) 4,085 Accrued restructuring charges (204) (8,918) -- Over- and under-recovered fuel costs 2,474 1,512 (1,767) Refunds due customers 1,812 -- -- Other deferred credits (1,039) 1,053 3,767 Other (5,899) (5,388) (6,496) 53,340 28,004 90,018 INVESTING ACTIVITIES Construction expenditures (44,076) (41,504) (36,318) Allowance for borrowed funds used during construction (653) (324) (138) Disposition of plant (1,864) (1,315) 3,302 (46,593) (43,143) (33,154) FINANCING ACTIVITIES Proceeds from issuance of long-term debt 118,376 39,354 (77) Reacquisition of long-term debt (59,082) (20,731) (24,250) Redemption of preferred stock -- (4,700) (10,000) Payment of dividends (41,330) (31,520) (30,816) Change in advances from affiliates (26,495) 34,531 7,241 (8,531) 16,934 (57,902) Net Change in Cash and Cash Equivalents (1,784) 1,795 (1,038) Cash and Cash Equivalents at Beginning of Year 2,501 706 1,744 Cash and Cash Equivalents at End of Year $717 $2,501 $706 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $20,496 $18,128 $18,430 Income taxes paid $8,399 $12,720 $325 The accompanying notes to financial statements are an integral part of these statements. WTU 2-151 WTU Statements of Capitalization West Texas Utilities Company As of December 31, 1995 1994 (thousands) COMMON STOCK EQUITY $265,220 $271,954 PREFERRED STOCK Cumulative $100 Par Value, Authorized 810,000 shares Number Current of Shares Redemption Series Outstanding Price Not Subject to Mandatory Redemption 4.40% 60,000 $107.00 6,000 6,000 Premium 291 291 6,291 6,291 LONG-TERM DEBT First Mortgage Bonds Series O, 9 1/4%, due December 1, 2019 -- 55,203 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 -- Series U, 6 3/8%, due October 1, 2005 80,000 -- Installment Sales Agreements - PCRBs Series 1984, 7 7/8%, due September 15, 2014 (Red River) 44,310 44,310 Unamortized discount and premium (1,607) (1,323) Unamortized costs of reacquired debt (29,458) (27,493) Amount to be redeemed within one year -- (650) 273,245 210,047 TOTAL CAPITALIZATION $544,756 $488,292 The accompanying notes to financial statements are an integral part of these statements. WTU 2-152 WEST TEXAS UTILITIES COMPANY NOTES TO FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37. 2.LITIGATION AND REGULATORY PROCEEDINGS WTU Stipulation and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No. 1 originally authorized in the Texas Commission's Docket No. 7289. On September 22, 1995, WTU, along with other major parties to the above described matters, filed with the Texas Commission a joint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a unified package that included: (i) a retail base rate reduction of approximately $13.5 million annually starting with WTU's October 1995 revenue month billing cycle; (ii) a $21 million retail refund which was not attributed to any specific cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction to October 1, 1994; (iii) a reduction of fixed fuel factors by approximately 2%; (iv) various rate and accounting treatments including a reasonable return on equity for retail operations of 11.375%; and (v) a retail base rate freeze until October 1, 1998, subject to certain force majeure provisions. On November 9, 1995, the Texas Commission rendered a final order that implemented the joint stipulation and agreement, ending the rate proceeding and fuel reconciliation in Docket No. 13369 and the remand, designated Docket No. 13949, to the Texas Commission by the Supreme Court for the deferred accounting treatment of Oklaunion Power Station Unit No. 1 originally authorized by the Texas Commission in Docket No. 7289. The final order also set into motion the actions required to seek a remand of the appeal of Docket No. 7510 to the Texas Commission to implement a final order consistent with the WTU Stipulation and Agreement. On December 8, 1995, all parties to the appeals filed a joint motion with the Supreme Court and, on December 22, 1995, the Supreme Court approved the joint motion to withdraw and dismissed the case. The case will now go back to the Court of Appeals so that it can be remanded back to the Texas Commission. The date of this remand and final action by the Texas Commission is not known. The WTU Stipulation and Agreement is expected to impact WTU's results of operations for the next several years, reducing annual earnings by approximately $8 million beginning in 1996. Details of the items with significant earnings impact for 1995 and 1996, including certain accounting treatments, are set forth in the following table. WTU 2-153 1995 1996 (unaudited) Pre-tax After-tax Pre-tax After-tax (millions) Refund to retail customers $(21.0) $(13.7) $-- $-- Effect of retail rate reduction (2.4) (1.6) (7.6) (4.9) 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 0.5 0.5 Capitalization and amortization of previously expensed restructuring costs 12.7 8.2 (1.9) (1.2) Accelerated amortization of deferred Oklaunion plant costs (accelerated from the remaining 31 years to 7 years) -- -- (2.9) (1.9) Other amortization (0.2) (0.1) (0.8) (0.5) Other one-time items 1.0 0.7 -- -- The WTU 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 WTU 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 WTU's results of operations or financial condition. 3.COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures It is estimated that WTU will spend approximately $42 million, including AFUDC, in construction expenditures during 1996. Substantial commitments have been made in connection with this capital expenditure program. Fuel Commitments WTU has entered into various commitments for the procurement of fuel. WTU Pipeline Leases WTU has a sale/leaseback agreement with Transok, an affiliated company, for full capacity use of a natural gas pipeline to WTU's Ft. Phantom generating plant. The lease agreement also provides for full capacity use of Transok's natural gas pipelines serving WTU's San Angelo, Oak Creek and Rio Pecos generating plants. The initial terms of the agreement entered into in 1992 are for twelve years with renewable options thereafter. 4.INCOME TAXES See CSW's NOTE 4. 5.BENEFIT PLANS See CSW's NOTE 5. WTU 2-154 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 10. 11. QUARTERLY INFORMATION See CSW's NOTE 14 on pages 2-64 and 2-65. CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. WTU 2-155 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, 1995 and 1994, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of WTU'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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, WTU changed its methods of accounting for unbilled revenues, postretirement benefits other than pensions, income taxes and postemployment benefits. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental Schedule II and Exhibit 12 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state 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 28, 1996 WTU 2-156 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 the independent accounting firm, Arthur Andersen LLP, which was 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 auditors during their audit were valid and appropriate. Arthur Andersen LLP's audit report 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, 1995. Glenn Files R. Russell Davis President and CEO - WTU Controller - WTU WTU 2-157 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CSW None. CPL None. PSO None. SWEPCO None. WTU None. 3-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. CSW has filed with the SEC its Notice of Annual Meeting of Stockholders and Proxy Statement relating to its 1996 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 pages 3-5 and 8 of such Proxy Statement. (a) Directors of each of the 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 - 63 1995 President of Professional Insurance Agents, Inc., Victoria, Texas. E. R. BROOKS AGE - 58 1991 Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to 1991. Director of CSW and each of its subsidiaries. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin- Simmons University, Abilene, Texas. ROBERT R. CAREY * AGE - 58 1989 President and CEO of CPL since 1990. Director of NationsBank, Corpus Christi, Texas. *Mr. Carey will retire from all positions held at CPL effective April 30, 1996. RUBEN M. GARCIA AGE - 64 1981 President or principal of several firms engaged primarily in construction and land development in the Laredo, Texas area. DAVID L. HOOPER AGE - 40 1994 Vice President, Marketing and Business Development of CPL since 1994. Director of Marketing and Business Development of CSW Services from 1993 to 1994. Director of Marketing and Business Development of CPL from 1991 to 1993. Area manager of CPL from 1990 to 1991. HARRY D. MATTISON * AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993. COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990. * Mr. Mattison will retire from CPL's board of directors effective April 11, 1996. 3-2 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director ROBERT A. McALLEN AGE - 61 1983 Robert A. McAllen, Insurance Agency, Weslaco, Texas. PETE MORALES, JR. AGE - 55 1990 President and General Manager of Morales Feed Lots, Inc., Devine, Texas. Director of The Bank of Texas, Devine, Texas. S. LOYD NEAL, JR. AGE - 58 1990 President of Hilb, Rogal and Hamilton Company of Corpus Christi, an insurance agency, Corpus Christi, Texas. Director of Bay Area Medical Center, Corpus Christi, Texas. H. LEE RICHARDS AGE - 62 1987 Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas. MELANIE J. RICHARDSON AGE - 39 1993 Vice President, Administration of CPL since 1993. Treasurer of CPL from 1992 to 1994. Vice President, Corporate Services of CPL from 1992 to 1993. Director of Internal Audits of CPL from 1991 to 1992. Manager of Personnel Services of CPL from 1986 to 1991. J. GONZALO SANDOVAL AGE - 47 1992 Vice President, Operations and Engineering of CPL since 1993. Vice President, Regional Operations of CPL from 1992 to 1993. Vice President, Corporate Services of CPL from 1991 to 1992. General Manager of the Southern Region of CPL from 1988 to 1991. GERALD E. VAUGHN AGE - 53 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 1992-1993 and Vice President, Nuclear Services from 1990 to 1992 of Carolina Power and Light Company, Raleigh, North Carolina. 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 1996 Annual Meeting of Stockholders. CPL's 1996 Annual Meeting of Stockholders is presently scheduled to be held on April 11, 1996. 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 - 58 1991 Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to 1991. Director of CSW and each of its subsidiaries. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin- Simmons University, Abilene, Texas. 3-3 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director HARRY A. CLARKE AGE - 67 1972 General Partner and President of HAC Investments, Afton, Oklahoma. PAUL K. LACKEY, JR. AGE - 52 1992 Secretary of Health and Human Services, Executive Director of the Office of Juvenile Affairs, State of Oklahoma, beginning in 1995. Consultant, Flint Industries, Inc., a construction, electronics manufacturing, and environmental services company, Tulsa, Oklahoma. Advisory Director of Bank IV-Tulsa, Tulsa, Oklahoma. PAULA MARSHALL-CHAPMAN AGE - 42 1991 General Partner/CEO of Bama Pie Ltd., a baked goods produce company, Tulsa, Oklahoma. HARRY D. MATTISON * AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993. COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990. * Mr. Mattison will retire from PSO's board of directors effective April 16, 1996. WILLIAM R. McKAMEY AGE - 49 1993 Vice President, Marketing and Business Development of PSO since 1993. Director of Marketing and Business Development of CSW from 1992 to 1993. Director of Marketing of SWEPCO from 1990 to 1992. MARY M. POLFER AGE - 51 1991 Vice President, Administration of PSO since 1993. Vice President, Finance of PSO from 1990 to 1993. DR. ROBERT B. TAYLOR, JR. AGE - 67 1975 Retired dentist, Okmulgee, Oklahoma. ROBERT L. ZEMANEK AGE - 46 1990 President and CEO of PSO since 1992. Executive Vice President of PSO from 1990 to 1992. WALDO J. ZERGER, JR. AGE - 49 1991 Vice President, Operations and Engineering of PSO since 1994. Vice President of Division Operations of PSO from 1990 to 1994. 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 1996 Annual Meeting of Stockholders. PSO's 1996 Annual Meeting of Stockholders is presently scheduled to be held on April 16, 1996. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. 3-4 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director SWEPCO RICHARD H. BREMER AGE - 47 1989 President and CEO of SWEPCO since 1990. Director of Commercial National Bank, Shreveport, Louisiana. Director of Deposit Guaranty Corporation, Jackson, Mississippi. E. R. BROOKS AGE - 58 1991 Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to 1991. Director of CSW and each of its subsidiaries. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin- Simmons University, Abilene, Texas. JAMES E. DAVISON AGE - 58 1993 Sole Proprietor of Paul M. Davison Petroleum Products. President and Chief Executive Officer of Davison Transport, Inc. and Davison Terminal Services, Inc. Advisory Board member of Heritage Financial Group. All of the above entities are located in Ruston, Louisiana. AL P. EASON, JR. * AGE - 70 1975 President, Eason and Company, a general insurance company, Fayetteville, Arkansas. * Mr. Eason will retire from SWEPCO's board of directors effective April 10, 1996. W. J. GOOGE, JR. AGE - 53 1990 Vice President, Administration of SWEPCO since 1993. Vice President, Corporate Services of SWEPCO from 1990 to 1993. DR. FREDERICK E. JOYCE AGE - 61 1990 Physician. President of Chappell-Joyce Pathology Association, P.A., Texarkana, Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana, Texas. Director of State First National Bank and State First Financial Corporation, Texarkana, Arkansas. Director of First Commercial Corporation, Little Rock, Arkansas. MICHAEL H. MADISON AGE - 47 1992 Vice President, Operations and Engineering of SWEPCO since 1993. Vice President, Engineering and Production of SWEPCO from 1992 to 1993. Vice President, Corporate Services of WTU from 1990 to 1992. HARRY D. MATTISON * AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993. COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990. * Mr. Mattison will retire from SWEPCO's board of directors effective April 10, 1996. MARVIN R. McGREGOR AGE - 49 1990 Vice President, Marketing and Business Development of SWEPCO since 1990. 3-5 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director WILLIAM C. PEATROSS AGE - 52 1990 President of Caddo Abstract and Title Co., Inc., Director of Commercial National Bank. Both entities are located in Shreveport, Louisiana. MAXINE P. SARPY AGE - 56 1996 Vice President of the Caddo-Bossier Port Commission, Treasurer of the Association for Community Training and State President of the Auxiliary to the Louisiana Medical Association, Board Member of the National Conference of Christians and Jews. All of the above entities are located in Shreveport, Louisiana. Vice President of the Southern University Foundation Board, Baton Rouge, Louisiana. 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 1996 Annual Meeting of Stockholders. SWEPCO's 1996 Annual Meeting of Stockholders is presently scheduled to be held on April 10, 1996. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. WTU RICHARD F. BACON AGE - 69 1980 Retired President and CEO of Merchants, Inc. Companies, a freight common carrier, Abilene, Texas. C. HARWELL BARBER AGE - 69 1990 Chairman of Rita Barber, Inc., a burial clothing company, Abilene, Texas. E. R. BROOKS AGE - 58 1980 Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to 1991. Director of CSW and each of its subsidiaries. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin- Simmons University, Abilene, Texas. PAUL J. BROWER AGE - 47 1991 Vice President, Marketing and Business Development of WTU since 1991. Division Manager of PSO from 1990 to 1991. T. D. CHURCHWELL AGE - 51 1994 Executive Vice President, Operations and Engineering of WTU beginning in 1995. Executive Vice President of WTU from 1994 to 1995. Vice President, Corporate Services of CSW Services from 1991 to 1993. Central Region Manager of CPL from 1989 to 1991. 3-6 Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director GLENN FILES * AGE - 48 1991 President and CEO of WTU since 1992. Executive Vice President of WTU from 1991 to 1992. Vice President, Marketing and Business Development of CPL from 1990 to 1991. Director of First National Bank of Abilene, Texas. * Effective February 26, 1996, Mr. Files joined CSW's executive management team while retaining his responsibilities at WTU. Mr. Files will also assume an executive advisory role relating to CPL, effective April 30, 1996, pursuant to Mr. Robert R. Carey's retirement. HARRY D. MATTISON * AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993. COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990. * Mr. Mattison will retire from WTU's board of directors effective March 26, 1996. TOMMY MORRIS AGE - 61 1976 Independent insurance agent, Abilene, Texas. DIAN G. OWEN AGE - 56 1994 Chairman of Owen Healthcare, Inc., hospital services, Abilene, Texas. Director of First National Bank of Abilene, Abilene, Texas. Director of First Financial Bankshares, Inc., Abilene, Texas. JAMES M. PARKER AGE - 65 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. DENNIS M. SHARKEY AGE - 51 1994 Vice President, Administration of WTU since 1994. Vice President, Finance and Director of SWEPCO from 1990 to 1994. F. L. STEPHENS AGE - 58 1980 Chairman and CEO of Town & Country Food Stores, Inc., San Angelo, Texas. Director of Norwest Texas, Lubbock, 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 1996 Annual Meeting of Stockholders. WTU's 1996 Annual Meeting of Stockholders is presently scheduled to be held on March 26, 1996. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. 3-7 (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 CPL, PSO, SWEPCO and WTU SHIRLEY S. BRIONES AGE - 44 1994 Treasurer of CPL, PSO, SWEPCO, WTU and CSW Services since 1994. Manager, Budgets and Accounting Systems of CPL from 1992 to 1994. Supervisor of Accounting of CPL from 1990 to 1992. R. RUSSELL DAVIS AGE - 39 1994 Controller of CPL, WTU, SWEPCO and CSW Services since 1994. Controller of PSO since 1993. Assistant Controller of CSW from 1992 to 1993. Assistant Controller of CSW Services from 1991 to 1992. Business Improvement Project Manager of WTU in 1991. Manager of Financial Reporting of WTU from 1988 to 1991. CPL DAVID P. SARTIN AGE - 39 1994 Director of Planning and Analysis and Secretary of CPL since 1994. Controller of CPL from 1991 to 1994. Controller of WTU from 1989 to 1991. PSO BETSY J. POWERS AGE - 60 1989 Secretary of PSO since 1989. SWEPCO MARILYN S. KIRKLAND AGE - 48 1995 Secretary of SWEPCO since 1995. Senior executive secretary to the president since 1992. Previously a human resource representative at SWEPCO. WTU MARTHA MURRAY AGE - 50 1992 Secretary of WTU since 1992. Previously a senior secretary at WTU. 3-8 ITEM 11. EXECUTIVE COMPENSATION. Cash and Other Forms of Compensation Information required by ITEM 11 with respect to CSW is hereby incorporated by reference herein from pages 15-19 of CSW's Proxy Statement. The following table sets forth the aggregate cash and other compensation for services rendered for the fiscal years of 1995, 1994 and 1993 paid or awarded by each registrant to the CEO and each of the four most highly compensated Executive Officers, other than the CEO, whose salary and bonus exceeds $100,000, and up to two additional individuals, if any, not holding an executive officer position as of year-end but who held such a position at any time during the year, and whose compensation for the year would have placed them among the four most highly compensated executive officers. For CPL, PSO and SWEPCO only three Executive Officers meet these requirements.
Summary Compensation Table Long Term Compensation Annual Compensation Awards Payouts CSW Other CSW Securities Annual Restricted Underlying All Other Compen- Stock Options/ LTIP Compen- Name and Salary Bonus sation Award(s) SARs Payouts sation Principal Position Year ($) ($)(1) ($)(2) ($)(1)(3) (#) ($) ($)(4) CPL Robert R. Carey, 1995 306,415 44,679 9,414 -- -- -- 23,117 President and CEO 1994 293,344 -- 516 -- 15,901 -- 23,763 1993 272,893 32,943 9,548 33,608 -- -- 27,587 J. Gonzalo Sandoval, 1995 137,760 19,503 4,366 -- -- -- 6,199 Vice President, 1994 129,932 -- 989 -- 4,010 -- 5,847 Operations and 1993 120,327 7,878 4,963 7,986 -- -- 4,221 Engineering Melanie J. Richardson, 1995 130,890 21,670 1,658 -- -- -- 3,927 Vice President, 1994 122,230 -- 454 -- 4,010 -- 3,667 Administration 1993 109,228 8,399 1,598 -- -- -- 3,277 David L. Hooper, Vice 1995 128,060 15,587 2,402 -- -- -- 3,789 President, Marketing 1994 87,704 -- 51,928 -- 4,010 -- 3,365 and Business Development 1993 -- -- -- -- -- -- -- (2)(5) PSO Robert L. Zemanek, 1995 276,270 91,436 9,192 -- -- -- 23,117 President and CEO 1994 262,962 -- 2,981 -- 14,792 -- 17,472 1993 238,269 24,051 3,927 24,503 -- -- 26,835 Waldo J. Zerger, Jr., 1995 146,169 20,586 5,162 -- -- -- 6,578 Vice President, 1994 138,108 -- 2,634 -- 4,010 -- 12,847 Operations and 1993 128,866 4,988 2,571 5,052 -- -- 5,347 Engineering Mary M. Polfer, Vice 1995 142,492 19,503 5,075 -- -- -- 4,275 President, Administration 1994 135,820 -- 3,417 -- 4,010 -- 8,439 1993 127,403 4,635 3,071 4,179 -- -- 3,518 William R. McKamey, Vice 1995 128,024 19,503 3,282 -- -- -- 5,761 President, Marketing and 1994 119,900 -- 2,401 -- 4,010 -- 6,074 Business Development 1993 52,953 -- 33,903 -- -- -- 4,487 (2)(5)
3-9
Long Term Compensation Annual Compensation Awards Payouts CSW Other CSW Securities Annual Restricted Underlying All Other Compen- Stock Options/ LTIP Compen- Name and Salary Bonus sation Award(s) SARs Payouts sation Principal Position Year ($) ($)(1) ($)(2) ($)(1)(3) (#) ($) ($)(4) SWEPCO Richard H. Bremer, 1995 298,372 89,358 14,691 -- -- -- 21,706 President and CEO 1994 277,359 50,000 13,978 -- 15,901 -- 22,235 1993 263,833 36,017 13,206 36,724 -- -- 24,088 Marvin R. McGregor, 1995 145,825 23,837 3,801 -- -- -- 7,402 Vice President, Marketing 1994 133,773 -- 4,292 -- 4,010 -- 6,695 and Business Development 1993 126,620 8,196 5,769 8,319 -- -- 5,197 Michael H. Madison, Vice 1995 142,448 22,753 4,376 -- -- -- 7,250 President, Operating and 1994 131,621 -- 3,625 -- 4,010 -- 6,600 Engineering (2) 1993 126,215 7,140 30,742 7,260 -- -- 5,188 W. J. Googe, Jr., 1995 133,664 21,670 2,718 -- -- -- 6,854 Vice President, 1994 122,769 -- 2,543 -- 4,010 -- 6,213 Administration 1993 117,644 7,001 4,965 9,620 -- -- 6,632 WTU Glenn Files, President 1995 266,223 85,048 19,144 -- -- -- 23,117 and CEO (2) 1994 246,699 50,000 10,032 -- 13,758 -- 6,750 1993 223,333 24,675 39,223 25,138 -- -- 26,126 T. D. Churchwell, 1995 180,400 40,388 9,206 -- -- -- 4,500 Executive Vice President, 1994 163,329 -- 180,191 -- 6,133 -- 4,500 Operation and Engineering 1993 -- -- -- -- -- -- -- (2) (5) Dennis M. Sharkey, 1995 171,001 18,419 7,959 -- -- -- 4,500 Vice President, 1994 157,046 -- 72,927 -- 4,010 -- 4,500 Administration (2)(5) 1993 -- -- -- -- -- -- -- Paul J. Brower, Vice 1995 147,119 19,503 11,546 -- -- -- 4,413 President, Marketing and 1994 132,058 -- 5,519 -- 4,010 -- 3,962 Business Development 1993 123,133 7,231 673 7,351 -- -- 3,366 Donald A. Welch, Vice 1995 91,034 17,336 20,011 -- -- -- 4,071 President Division 1994 136,962 -- 5,003 -- 4,010 -- 6,163 Operations and 1993 129,650 7,178 1,628 7,290 -- -- 5,339 Engineering (2)(5)
(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. CPL In 1994, Mr. Hooper was reimbursed $49,485 for relocation expenses. PSO In 1993, Mr. McKamey was reimbursed $24,641 for relocation expenses. SWEPCO In 1993, Mr. Madison was reimbursed $14,848 for relocation expenses. 3-10 WTU In 1995, Mr. Welch received $13,133 in compensation related to the sale of restricted stock. In 1994, Mr. Churchwell and Mr. Sharkey were reimbursed $21,052 and $43,816, respectively, for relocation expenses. Mr. Churchwell was reimbursed $73,490 for loss on the sale of his home, due to structural problems. In 1993, Mr. Files was reimbursed $8,482 for spouse travel expenses. (3) CPL, PSO, SWEPCO and WTU Grants of restricted stock are administered by the Executive Compensation Committee of CSW's 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 20% of the stock vesting on the first, second and third anniversary dates of the award and 40% vesting on the fourth such anniversary date. Upon vesting, shares of CSW Common 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 the end of 1995, the aggregate restricted stock holdings of each of the Named Executive Officers are presented in the following table. Restricted Market Name Stock Held Value at at December December 31, 1995 31, 1995 CPL Robert R. Carey 1,417 $39,499 J. Gonzalo Sandoval 158 4,404 Melanie J. Richardson -- -- David L. Hooper -- -- PSO Robert L. Zemanek 680 18,955 Waldo J. Zerger, Jr. 289 8,056 Mary M. Polfer 302 8,418 William R. McKamey -- -- SWEPCO Richard H. Bremer 1,550 43,206 Marvin R. McGregor 325 9,059 Michael H. Madison 300 8,363 W. Jerry Googe, Jr. 296 8,251 WTU Glenn Files 733 20,432 T. D. Churchwell 301 8,390 Dennis M. Sharkey 340 9,478 Paul J. Brower 237 6,606 Donald A. Welch -- -- (4) CPL, PSO, SWEPCO and WTU Amounts shown in this column consist of (i) the annual employer matching payments to CSW's Thrift Plus Plan, (ii) premiums paid per participant for personal liability insurance and (iii) average amounts of premiums paid per participant 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 the participant's name for up to three charitable organizations of 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 $16,367 per participant for 1995 and $17,013 per participant for 1994 and 1993. During 1995, Messrs. Bremer, Carey, Files and 3-11 Zemanek participated. During 1994, Messrs. Carey and Bremer participated. Messrs. Files and Zemanek also participated in the plan in 1994, but coverage was provided by CSW. During 1993, Messrs. Bremer, Carey, Files, and Zemanek participated. (5) CSW System Affiliations. CPL Mr. Hooper was employed by CSW Services during 1993 and a portion of 1994. PSO Mr. McKamey was employed by CSW during a portion of 1993. WTU Mr. Churchwell was employed by CSW Services during 1993. Mr. Sharkey was employed by SWEPCO during 1993, and Mr. Welch resigned in August of 1995. Option/SAR Grants No stock options or stock appreciation rights were granted in 1995. The stock option plans are administered by the Executive Compensation Committee of the CSW Board of Directors, which has the authority to determine the individuals to whom and the terms upon which option and SAR grants shall be made. Option/SAR Exercises and Year-End Value Table Information regarding option/SAR exercises during 1995 and unexercised options/SARs at December 31, 1995 for the Named Executive Officers is presented in the following table. Number of CSW Securities Value of Underlying In-the- Unexercised Money/SARs at Shares Options/SARs Year-End Acquired Value at Year-End ($)Exercisable/ on Exercise Realized (#) Exercisable/ Unexercisable Name (#) ($) Unexercisable (1) CPL Robert R. Carey -- -- 19,231/10,601 11,912/32,460 J. Gonzalo Sandoval -- -- 4,252/2,674 --/8,188 Melanie J. Richardson -- -- 2,643/2,674 1,804/8,188 David L. Hooper -- -- 2,848/2,674 1,445/8,188 PSO Robert L. Zemanek -- -- 15,568/9,862 --/30,197 Waldo J. Zerger, Jr. -- -- 4,471,2,674 --/8,188 Mary M. Polfer -- -- 4,252/2,674 --/8,188 William R. McKamey -- -- 3,322/2,674 615/8,188 SWEPCO Richard H. Bremer -- -- 17,731/10,601 --/32,460 Marvin R. McGregor -- -- 4,471/2,674 --/8,188 Michael H. Madison -- -- 4,471/2,674 --/8,188 W. Jerry Googe, Jr. -- -- 4,252/2,674 --/8,188 WTU Glenn Files -- -- 14,481/9,172 --/28,085 T. D. Churchwell -- -- 5,179/4,089 772/12,521 Dennis M. Sharkey -- -- 10,652/2,674 73,688/8,188 Paul J. Brower -- -- 4,470/2,675 --/8,191 Donald A. Welch -- -- 16,458/2,675 76,380/8,191 3-12 (1) Calculated based upon the difference between the closing price of CSW Common on the New York Stock Exchange on December 31, 1995 ($27.875 per share) and the exercise price per share of the outstanding options (ranging from $16.125 to $29.625 per share). Long-term Incentive Plan Awards in 1995 Information concerning awards made to the Named Executive Officers during 1995 under the LTIP is set forth in the following table. Performance Number of or Other Estimated Future Payouts CSW Shares, Period Until Payouts under Non-Stock Units or Maturation Price Based Plans Other Rights or Payout Threshold Target Maximum Name (#) (1) ($) ($) ($) CPL Robert R. Carey -- 2 years -- 146,437 219,656 J. Gonzalo Sandoval -- 2 years -- 31,580 47,370 Melanie J. Richardson -- 2 years -- 31,580 47,370 David L. Hooper -- 2 years -- 31,580 47,370 PSO Robert L. Zemanek -- 2 years -- 136,223 204,335 Waldo J. Zerger, Jr. -- 2 years -- 31,580 47,370 Mary M. Polfer -- 2 years -- 31,580 47,370 William R. McKamey -- 2 years -- 31,580 47,370 SWEPCO Richard H. Bremer -- 2 years -- 146,437 219,656 Marvin R. McGregor -- 2 years -- 31,580 47,370 Michael H. Madison -- 2 years -- 31,580 47,370 W. Jerry Googe, Jr. -- 2 years -- 31,580 47,370 WTU Glenn Files -- 2 years -- 126,723 190,085 T. D. Churchwell -- 2 years -- 63,258 94,887 Dennis M. Sharkey -- 2 years -- 31,580 47,370 Paul J. Brower -- 2 years -- 31,580 47,370 Donald A. Welch -- -- -- -- -- Payouts of the awards are contingent upon CSW achieving a specified level of total stockholder return, relative to a peer group of utility companies, for the three-year period, or cycle, and exceeding a certain defined minimum threshold. Total stockholder return is calculated by dividing (i) the sum of (a) the cumulative amount of dividends per share for the three-year period, assuming full dividend reinvestment, and (b) the change in share price over the three-year period, by (ii) the share price at the beginning of the three-year period. If CSW's total stockholder return for a cycle falls in one of the top three quartiles of similarly- calculated total stockholder returns achieved at companies in the peer group of utility companies, CSW will make a payout to participants for the three-year cycle then ending. First, second and third quartile performance will result in payouts of 150 percent, 100 percent and 50 percent of target, respectively. Performance in the fourth quartile yields no payout under the LTIP. 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. In March 1995, the committee reviewed total stockholder return results and because they were below the threshold for a payout, no awards were granted. The Executive Compensation Committee is scheduled to evaluate the 1993 to 1995 cycle performance under the LTIP in March 1996. The LTIP 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 (i) all options and SARs become fully exercisable and (ii) all restrictions, terms and conditions 3-13 applicable to all restricted stock are deemed lapsed and satisfied and all performance 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 in control. The LTIP also contains provisions designed to prevent circumvention of the above acceleration provisions through coerced termination of an employee prior to a change in control. Retirement Plan Pension Plan Table 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 Executive officers are eligible to participate in the tax- qualified CSW Pension Plan like other employees of the registrants. Certain executive officers, including the Named Executive Officers, are also eligible to participate in the SERP, a non-qualified ERISA excess benefit plan. Such pension benefits depend upon years of credited service, age at retirement and amount of covered compensation earned by a participant. The annual normal retirement benefits payable under the pension and the SERP are based on 1.67 percent of "Average Compensation" times the number of years of credited service (reduced by (i) no more than 50 percent of a participant's age 62 or later Social Security benefit and (ii) certain other offset benefits). "Average Compensation" is the covered compensation for the plans and equals the average annual compensation, reported as salary in the Summary Compensation Table, during the 36 consecutive months of highest pay during the 120 months prior to retirement. The combined benefit levels in the table above, which include both the pension and SERP benefits, are based on retirement at age 65, the years of credited service shown, continued existence of the plans without substantial change and payment in the form of a single life annuity. Respective years of credited service and ages, as of December 31, 1995, for the Named Executive Officers are presented in the following table. Named Executive Officer Years of Credited Service Age CPL Robert R. Carey 28 58 J. Gonzalo Sandoval 22 46 Melanie J. Richardson 14 39 David L. Hooper 16 39 PSO Robert L. Zemanek 23 46 Waldo J. Zerger, Jr. 25 49 Mary M. Polfer 5 51 William R. McKamey 25 49 3-14 Named Executive Officer Years of Credited Service Age SWEPCO Richard H. Bremer 18 47 Marvin R. McGregor 26 49 Michael H. Madison 24 47 W. Jerry Googe, Jr. 30 53 WTU Glenn Files 24 48 T. D. Churchwell 17 51 Dennis M. Sharkey 17 51 Paul J. Brower 19 46 Donald A. Welch 30 56 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 5 Annual directors' fees $6,000 $6,000 $6,600 $6,000 Compensation Committee Interlocks and Insider Participation No person serving during 1995 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 1995. No person serving during 1995 as an executive officer of the 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 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 page 5-6 of CSW's Proxy Statement. CPL, PSO, SWEPCO and WTU All of the outstanding shares of common stock of each of the 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 par value PSO 9,013,000 $15 par value SWEPCO 7,536,640 $18 par value WTU 5,488,560 $25 par value 3-15 Security Ownership of Management The following tables show securities beneficially owned as of December 31, 1995, by each director, the CEO and the four other most highly compensated executive officers, and as a group, all directors and Executive Officers of each of the Electric Operating Companies. Share amounts shown in this table include options exercisable within 60 days after year-end, restricted stock, shares of CSW Common credited to CSW Thrift Plus accounts and all other shares of CSW Common beneficially owned by the listed persons. Each of the Electric Operating Companies has one or more series of preferred stock outstanding. As of December 31, 1995, none of the individuals listed in the following tables owned any shares of preferred stock of any Electric Operating Company. CPL's Beneficial Ownership as of December 31, 1995 CSW Common Underlying CSW Restricted Immediately Name Common (1) Stock (2)(3) Exercisable Options (3) John F. Brimberry -- -- -- E. R. Brooks 86,887 2,572 41,455 Robert R. Carey 27,224 1,417 19,231 Ruben M. Garcia -- -- -- David L. Hooper 4,102 -- -- Harry D. Mattison 49,580 1,654 26,429 Robert A. McAllen -- -- -- Pete Morales, Jr. -- -- -- S. Loyd Neal, Jr. 1,572 -- -- H. Lee Richards 1,700 -- -- Melanie J. Richardson 3,583 -- 2,643 J. Gonzalo Sandoval 14,942 158 4,252 Gerald E. Vaughn 3,924 -- 1,336 All of the above and other officers as a group 200,045 5,801 102,125 (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. PSO's Beneficial Ownership as of December 31, 1995 CSW Common Underlying CSW Restricted Immediately Name Common (1) Stock (2)(3) Exercisable Options (3) E. R. Brooks 86,887 2,572 41,455 Harry A. Clarke -- -- -- Paul K. Lackey, Jr. -- -- -- Paula Marshall-Chapman -- -- -- Harry D. Mattison 49,580 1,654 26,429 William R. McKamey 10,739 -- 3,322 Mary M. Polfer 6,063 302 4,252 Dr. Robert B. Taylor, Jr. -- -- -- Robert L. Zemanek 19,122 680 15,568 Waldo J. Zerger, Jr. 13,101 289 4,471 All of the above and other officers as a group 194,589 5,497 99,241 (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. 3-16 SWEPCO's Beneficial Ownership as of December 31, 1995 CSW Common Underlying CSW Restricted Immediately Name Common (1) Stock (2)(3) Exercisable Options (3) Richard H. Bremer 38,984 1,550 17,731 E. R. Brooks 86,887 2,572 41,455 James E. Davison -- -- -- Al P. Eason, Jr. 2,000 -- -- W. J. Googe, Jr. 7,716 296 4,252 Dr. Frederick E. Joyce 2,000 -- -- Michael H. Madison 6,975 300 4,471 Harry D. Mattison 49,580 1,654 26,429 Marvin R. McGregor 7,006 325 4,471 William C. Peatross 380 -- -- Maxine P. Sarpy -- -- -- All of the above and other officers as a group 204,060 6,697 100,629 (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. WTU Beneficial Ownership as of December 31, 1995 CSW Common Underlying CSW Restricted Immediately Name Common (1) Stock (2)(3) Exercisable Options (3) Richard F. Bacon 345 -- -- C. Harwell Barber 12,292 -- -- E. R. Brooks 86,887 2,572 41,455 Paul J. Brower 6,443 237 4,470 T. D. Churchwell 6,734 301 5,179 Glenn Files 22,218 733 14,481 Harry D. Mattison 49,580 1,654 26,429 Tommy Morris 2,000 -- -- Dian G. Owen 50 -- -- James M. Parker 1,700 -- -- Dennis M. Sharkey 19,583 340 10,652 F. L. Stephens 1,707 -- -- Donald A. Welch 10,280 -- 4,470 All of the above and other officers as a group 224,615 5,837 108,956 (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. 3-17 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CSW The information required by ITEM 13 is incorporated herein by reference from page 7 of CSW's Proxy Statement. CPL, PSO, SWEPCO and WTU None. 4-1 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) Financial Statement Schedules. Report of Independent Public Accountants as to Schedules for CSW, CPL, PSO, SWEPCO and WTU are included in the Report of Independent Public Accountants for each registrant. Financial Statement Schedules for CSW, CPL, PSO, SWEPCO and WTU are listed in (d) Index to the Financial Statement Schedules below. (3) 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, reporting CPL's intent to file a rate review request, dated September 27, 1995 (filed in the fourth quarter). Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting CSW's and its partner's bid to acquire Norweb, dated September 28, 1995 (filed in the fourth quarter). Item 5. Other Events, reporting the termination of CSW's and its partner's bid to acquire Norweb, dated October 12, 1995. Item 2. Acquisition or Disposition of Assets and Item 7. Financial Statements and Exhibits, reporting CSW's acquisition of SEEBOARD and financial information related to the acquisition, dated January 10, 1996. Item 5. Other Events, updating recent developments in connection with CSW's common stock offering, dated January 30, 1996. Item 5. Other Events, reporting information related to CPL's rate review, dated February 13, 1996. Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, reporting information related to CSW's common stock offering, dated February 22, 1996. 4-2 CPL Item 5. Other Events, reporting CPL's intent to file a rate review request, dated September 27, 1995 (filed in the fourth quarter). Item 5. Other Events, providing unaudited financial information for the quarter and year ended September 30, 1995, in connection with a debt offering by CPL, dated October 19, 1995. Item 5. Other Events, reporting information related to CPL's rate review, dated February 13, 1996. PSO Item 5. Other Events, providing unaudited financial information for the year ended December 31, 1995 in connection with a debt offering by PSO, dated February 23, 1996. Item 5. Other Events, and Item 7. Financial statements, pro forma financial information and exhibits, reporting information related to a PSO debt offering, dated March 4, 1996. SWEPCO No reports were filed on Form 8-K during the quarter ended December 31, 1995. WTU Item 5. Other Events, providing unaudited financial information for the quarter ended and year ended September 30, 1995, in connection with a debt offering by WTU, dated October 19, 1995. 4-3 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 27, 1996. 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: Wendy G. Hargus 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 27, 1996. 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 President and CEO and Director (Principal Executive Officer) Glenn D. Rosilier Chief Financial Officer (Principal Financial Officer) Wendy G. Hargus Controller (Principal Accounting Officer) *Glenn Biggs Director *Molly Shi Boren Director *Donald M. Carlton Director *Thomas H. Cruikshank Director *T. J. Ellis Director *Joe H. Foy Director *Robert Lawless Director *Harry D. Mattison Executive Vice President and Director *James L. Powell Director *T. V. Shockley, III Executive Vice President and Director *J. C. Templeton Director *Lloyd D. Ward Director *Wendy G. Hargus, by signing her 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: Wendy G. Hargus Attorney-in-Fact 4-4 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 27, 1996. 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 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title Robert R. Carey President and CEO and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *John F. Brimberry Director *E. R. Brooks Director *Ruben M. Garcia Director *David L. Hooper Director *Harry D. Mattison Director *Robert A. McAllen Director *Pete Morales, Jr. Director *S. Loyd Neal, Jr. Director *H. Lee Richards Director *Melanie J. Richardson Director *J. Gonzalo Sandoval 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 4-5 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 27, 1996. 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 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title Robert L. Zemanek President and CEO and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *Harry A. Clark Director *Paul K. Lackey, Jr. Director *Paula Marshall-Chapman Director *Harry D. Mattison Director *William R. McKamey Director *Mary M. Polfer Director *Dr. Robert B. Taylor, Jr. Director *Waldo J. Zerger, 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 4-6 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 27, 1996. 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 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title Richard H. Bremer President and CEO and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *E. R. Brooks Director *James E. Davison Director *Al P. Eason, Jr. Director *W. J. Googe, Jr. Director *Dr. Frederick E. Joyce Director *Michael H. Madison Director *Harry D. Mattison Director *Marvin R. McGregor 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 4-7 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 27, 1996. 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 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Title Glenn Files President and CEO and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer) *Richard F. Bacon Director *C. Harwell Barber Director *E. R. Brooks Director *Paul J. Brower Director *T. D. Churchwell Director *Harry D. Mattison Director *Tommy Morris Director *Dian G. Owen Director *James M. Parker Director *Dennis M. Sharkey 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 4-8 (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 1 Agreement and Plan of Merger Among El Paso Electric Company, Central and South West Corporation and CSW Sub, Inc. Dated as of May 3, 1993 as Amended May 18, 1993 (incorporated herein by reference to Exhibit 2.1 to CSW's Form 8-K dated December 29, 1993, File No. 1-1443). 2 Second Amendment Dated as of August 26, 1993 to Agreement and Plan of Merger Among El Paso Electric Company, Central and South West Corporation and CSW Sub, Inc. Dated as of May 3, 1993 as amended on May 18,1993 (incorporated herein by reference to Exhibit 2.2 to CSW's Form 8-K dated December 29, 1993, File No. 1-1443). 3 Third Amendment Dated as of December 1, 1993 to Agreement and Plan of Merger Among El Paso Electric Company, Central and South West Corporation and CSW Sub, Inc. Dated as of May 3, 1993 as amended on May 18, 1993 and August 26, 1993 (incorporated herein by reference to Exhibit 2.3 to CSW's Form 8-K dated December 29, 1993, File No. 1-1443). 4 Modified Third Amended Plan of Reorganization of El Paso Electric Company Providing for the Acquisition of El Paso Electric Company by Central and South West Corporation as corrected December 6, 1993, and confirmed by the Bankruptcy Court (incorporated herein by reference to Exhibit 2.4 to CSW's Form 8-K dated December 29, 1993, File No. 1-1443). 5 Order and Judgment Confirming El Paso Electric Company's Third Amended Plan of Reorganization, as Modified, Under Chapter 11 of the United States Bankruptcy Code and Granting Related Relief (incorporated herein by reference to Exhibit 2.5 to CSW's Form 8-K dated December 29, 1993, File No. 1-1443). (3) Articles of Incorporation and By-Laws. CSW 1 Second Restated Certificate of Incorporation of CSW, as amended (incorporated herein by reference to Exhibit 3 (a) to CSW's 1990 Form 10-K, File No. 1-1443). 2 Bylaws of CSW, as amended (incorporated herein by reference to Exhibit 3 (b) to CSW's 1990 Form 10-K, File No. 1-1443). CPL 1 Restated Articles of Incorporation, as amended, of CPL (incorporated herein by reference to Exhibit 4(a) to CPL's Registration Statement No. 33-4897, Exhibits 5 and 7 to Form U-1, File No. 70-7171, Exhibits 5, 8.1, 8.2 and 19 to Form U-1, File No. 70-7472 and CPL's Form 10-Q for the quarterly period ended September 30, 1992, ITEM 6, Exhibit 1). 2 Bylaws of CPL, as amended (incorporated herein by reference to Exhibit 3(b) 2 to CPL's 1994 Form 10-K, File No. 0-346). 4-9 PSO 1 Restated Certificate of Incorporation of PSO (incorporated herein by reference to Exhibit 3 to PSO's 1987 Form 10-K, File No. 0-343). 2 Bylaws of PSO, as amended (incorporated herein by reference to Exhibit 3(c) 2 to PSO's 1994 Form 10-K, File No. 0-343). SWEPCO 1 Restated Certificate of Incorporation, as amended, of SWEPCO (incorporated herein by reference to Exhibit 3 to SWEPCO's 1980 Form 10-K, File No. 1-3146, Exhibit 2 to Form U-1 File No. 70-6819, Exhibit 3 to Form U-1, File No. 70- 6924 and Exhibit 4 to Form U-1 File No. 70-7360). 2 Bylaws of SWEPCO, as amended (incorporated herein by reference to Exhibit 3(d) 2 to SWEPCO's 1994 Form 10-K, File No. 1-3146). WTU 1 Restated Articles of Incorporation, as amended, of WTU (incorporated herein by reference to Exhibit 3(e) 1 to WTU's 1994 Form 10-K, File No. 0-340). 2 Bylaws of WTU, as amended (incorporated herein by reference to Exhibit 3(e) 2 to WTU's 1994 Form 10-K, File No. 0-340). (4) Instruments defining the rights of security holder, including indentures. CPL Indenture of Mortgage or Deed of Trust dated 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), and the Supplemental Indentures of CPL dated September 1, 1978 (incorporated herein by reference to Exhibit 2.02 in File No. 2-62271) and December 15, 1984, July 1, 1985, May 1, 1986 and November 1, 1987 (incorporated herein by reference to Exhibit 17 to Form U-1, File No. 70-7003, Exhibit 4 (b) in File No. 2-98944, Exhibit 4 to Form U-1, File No. 70-7236 and Exhibit 4 to Form U-1, File No. 70-7249) and June 1, 1988, December 1, 1989, March 1, 1990, October 1, 1992, December 1, 1992, February 1, 1993, April 1, 1993, May 1, 1994 and July 1, 1995 (incorporated herein by reference to Exhibit 2 to Form U-1, File No. 70-7520, Exhibit 3 to Form U-1, File No. 70-7721, Exhibit 10 to Form U-1, File No. 70- 7725 and Exhibit 10 (a), 10 (b), 10 (c), 10 (d), 10(e) and 10(f), respectively, to Form U-1, File No. 70-8053). PSO 1 Indenture dated July 1, 1945, as amended, of PSO (incorporated herein by reference to Exhibit 5.03 in Registration No. 2-60712), the Supplemental Indenture of PSO dated June 1, 1979 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-64432), the Supplemental Indenture of PSO dated December 1, 1979 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-65871), the Supplemental Indenture of PSO dated March 1, 1983 (incorporated herein by reference to Exhibit 2 to Form U-1, File No. 70-6822), the Supplemental Indenture of PSO dated May 1, 1986 (incorporated herein by reference to Exhibit 3 to Form U-1, File No. 70-7234), the Supplemental Indenture of PSO dated July 1, 1992 (incorporated herein by reference to Exhibit 4 (b) to Form S-3, File No. 33-48650), the Supplemental Indenture of PSO dated December 1, 1992 (incorporated herein by reference to Exhibit 4 (c) to Form S-3, File No. 33-49143), the Supplemental Indenture of PSO dated April 1, 1993 (incorporated herein by reference to Exhibit 4 (b) to Form S-3, File No. 33-49575), Supplemental Indenture of PSO dated June 1, 1993 (incorporated herein by reference to Exhibit 4 (b) to PSO's 1993 Form 10-K, File No. 0-343) and Supplemental Indenture dated as of February 1, 1996 (incorporated herein by reference to Exhibit 4.03 to PSO's Form 8-K dated March 4, 1996, File No. 0-343). 4-10 2 Indenture dated as of February 1, 1996 of PSO (incorporated herein by reference to Exhibit 4.01 to PSO's Form 8-K dated March 4, 1996, File No. 0-343) and First Supplemental Indenture dated as of February 1, 1996 of PSO (incorporated herein by reference to Exhibit 4.02 to PSO's Form 8-K dated March 4, 1996, File No. 0-343). SWEPCO 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), the Supplemental Indenture dated August 1, 1978 incorporated herein by reference to Exhibit 2.02 in Registration No. 2-61943), the Supplemental Indenture dated January 1, 1980 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-66033), the Supplemental Indenture dated April 1, 1981 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2- 71126), the Supplemental Indenture dated May 1, 1982 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-77165), the Supplemental Indenture dated August 1, 1985 (incorporated herein by reference to Exhibit 4 to Form U-1, File No. 70-7121), the Supplemental Indenture dated May 1, 1986 (incorporated herein by reference to Exhibit 3 to Form U-1 File No. 70-7233), the Supplemental Indenture dated November 1, 1989 (incorporated herein by reference to Exhibit 3 to Form U-1, File No. 70- 7676), the Supplemental Indenture dated June 1, 1992 (incorporated herein by reference to Exhibit 10 to Form U- 1, File No. 70-7934), the Supplemental Indenture dated September 1, 1992 (incorporated herein by reference to Exhibit 10 (b) to Form U-1, File No. 72-8041), the Supplemental Indenture dated July 1, 1993 (incorporated herein by reference to Exhibit 10 (c) to Form U-1, File No. 70-8041) and the Supplemental Indenture dated October 1, 1993 (incorporated herein by reference to Exhibit 10 (a) to Form U-1, File No. 70-8239). WTU Indenture dated August 1, 1943, as amended through July 1, 1973 (incorporated herein by reference to Exhibit 5.05 in File No. 2-60712), Supplemental Indenture dated May 1, 1979 (incorporated herein by reference to Exhibit No. 2.02 in File No. 2-63931), Supplemental Indenture dated November 15, 1981 (incorporated herein by reference to Exhibit No. 4.02 in File No. 2-74408), Supplemental Indenture dated November 1, 1983 (incorporated herein by reference to Exhibit 12 to Form U-1, File No. 70-6820), Supplemental Indenture dated April 15, 1985 (incorporated herein by reference to Amended Exhibit 13 to Form U-1, File No. 70-6925), Supplemental Indenture dated August 1, 1985 (incorporated herein by reference to Exhibit 4 (b) in File No. 2-98843), Supplemental Indenture dated May 1, 1986 (incorporated herein by reference to Exhibit 4 to Form U-1, File No. 70-7237), Supplemental Indenture dated December 1, 1989 (incorporated herein by reference to Exhibit 3 to Form U-1, in File No. 70-7719), Supplemental Indenture dated June 1, 1992 (incorporated herein by reference to Exhibit 10 to Form U-1, File No. 70-7936), Supplemental Indenture dated October 1, 1992 (incorporated herein by reference to Exhibit 10 to Form U-1, File No. 70-8057), Supplemental Indenture dated February 1, 1994 (incorporated herein by reference to Exhibit 10 Form U-1, File No. 70-8265), Supplemental Indenture dated March 1, 1995 (incorporated herein by reference to Exhibit 10(b) to Form U-1, File No. 70-8057) and Supplemental Indenture dated October 1, 1995 (incorporated herein by reference to Exhibit 10(c) to Form U-1, File No. 70-8057). (10) Material contracts. CSW + 1 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). + 2 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). + 3 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). 4-11 4 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). 5 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). + 6 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). * 7 Amended and Restated Credit Agreement dated as of January 18, 1996 among Central and South West Corporation and the banks listed therein. * 8 Facility Agreement dated as of November 5, 1995 among CSW Investments, CSW (UK) plc and the banks listed therein. (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, 1995. * 2 PSO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1995. * 3 SWEPCO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1995. * 4 WTU's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1995. * (21) Subsidiaries of the registrant (CSW). (23) Consent of experts and counsel. CSW, CPL, PSO and WTU * 1 CSW's Consent of Independent Public Accountants. * 2 CPL's Consent of Independent Public Accountants. * 3 PSO's Consent of Independent Public Accountants. * 4 WTU'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. 4-12 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. WTU * 14 Power of Attorney. * 15 Power of Attorney. * 16 Power of Attorney. (27) Financial Data Schedules. CSW, CPL, PSO, SWEPCO and WTU * 1 CSW's Financial Data Schedule * 2 CPL's Financial Data Schedule * 3 PSO's Financial Data Schedule * 4 SWEPCO's Financial Data Schedule * 5 WTU's Financial Data Schedule 4-13 (d) Index to Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts. CSW, CPL, PSO, SWEPCO and WTU 1 CSW's Schedule II - Valuation and Qualifying Accounts 2 CPL's Schedule II - Valuation and Qualifying Accounts 3 PSO's Schedule II - Valuation and Qualifying Accounts 4 SWEPCO's Schedule II - Valuation and Qualifying Accounts 5 WTU's Schedule II - Valuation and Qualifying Accounts 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. 4-14 Schedule II-1 Central And South West Corporation And Subsidiary Companies Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance at Charged to Charged Balance Beginning Costs and to other at End Description of Year Expenses Account(b) Deductions(c) of Year (millions) 1995 Accrued Restructuring Charges $4 $(2)(a) -- $(2) -- 1994 Accrued Restructuring Charges $97 $(9) (a) $(27) $57 $4 1993 Accrued Restructuring Charges $-- $97 $-- $-- $97 (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No. 112 follow: (millions) SFAS No. 87 $(31) SFAS No. 112 4 Total $(27) (c) Payments of accrued restructuring charges. 4-15 Schedule II-2 Central Power and Light Company Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance Charged Charged at to Costs to Balance Beginning and Other at End Description of Year Expenses Accounts(b) Deductions (c) of Year (thousands) 1995 Accrued Restructuring Charges $1,325 ($141) (a) $-- $1,184 $-- 1994 Accrued Restructuring Charges $29,365 $98 (a) $(7,893) $20,245 $1,325 1993 Accrued Restructuring Charges $-- $29,365 $-- $-- $29,365 (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No. 112 follow: (thousands) SFAS No. 87 $(9,099) SFAS No. 112 1,206 Total $(7,893) (c) Payments of accrued restructuring charges. 4-16 Schedule II-3 Public Service Company of Oklahoma Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance Charged at to Costs Charged Balance Beginning and to Other at End Description of Year Expenses Accounts(b) Deductions(c) of Year (thousands) 1995 Accrued Restructuring Charges $1,046 ($488)(a) $-- $558 $-- 1994 Accrued Restructuring Charges $24,995 $(197)(a) $(8,126) $15,626 $1,046 1993 Accrued Restructuring Charges $-- $24,995 $-- $-- $24,995 (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No. 112 follow: (thousands) SFAS No. 87 $(9,880) SFAS No. 112 1,754 Total $(8,126) (c) Payments of accrued restructuring charges. 4-17 Schedule II-4 Southwestern Electric Power Company Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance Charged to Charged at Costs to Balance Beginning and Other at End Description of Year Expenses Accounts(b) Deductions (c) of Year (thousands) 1995 Accrued Restructuring Charges $1,110 ($578) (a) $-- $532 $-- 1994 Accrued Restructuring Charges $25,203 $(4,978) (a) $(7,421) $11,694 $1,110 1993 Accrued Restructuring Charges $-- $25,203 $-- $-- $25,203 (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No. 112 follow: (thousands) SFAS No. 87 $(8,016) SFAS No. 112 595 Total $(7,421) (c) Payments of accrued restructuring charges. 4-18 Schedule II-5 West Texas Utilities Company Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Charged Balance to Charged at Costs to Balance Beginning and Other at End Description of Year Expense Accounts (b) Deductions (c) of Year (thousands) 1995 Accrued Restructuring Charges $571 ($369)(a) $-- $202 $-- 1994 Accrued Restructuring Charges $15,250 $(2,037)(a) $(3,724) $8,918 $571 1993 Accrued Restructuring Charges $-- $15,250 $-- $-- $15,250 (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No. 112 follow: (thousands) SFAS No. 87 $(3,992) SFAS No. 112 268 Total $(3,724) (c) Payments of accrued restructuring charges. EX-10.7 2 EXECUTION COPY $850,000,000 FIVE-YEAR CREDIT AGREEMENT dated as of November 6, 1995, as amended and restated as of January 18, 1996, among Central and South West Corporation, The Banks Listed Herein and Union Bank of Switzerland, as Agent Citibank, N.A. Credit Suisse Union Bank of Switzerland Arrangers Credit Suisse Syndication Agent Citibank, N.A. Documentation Agent TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS 1.1. Definitions 1 1.2. Accounting Terms and Determinations 15 1.3. Types of Borrowings 15 ARTICLE 2 THE CREDITS 2.1. Commitments 16 2.2. Term Loans 16 2.3. Notice of Committed Borrowing 16 2.4. Money Market Borrowings 17 2.5. Notice to Banks; Funding of Loans 21 2.6. Notes 22 2.7. Maturity of Loans 22 2.8. Interest Rates 22 2.9. Fees 27 2.10. Optional Termination or Reduction of Commitments 27 2.11. Method of Electing Interest Rates 27 2.12. Scheduled Termination of Commitments 29 2.13. Optional Prepayments 29 2.14. General Provisions as to Payments 30 2.15. Funding Losses 30 2.16. Computation of Interest and Fees 31 2.17. Regulation D Compensation 31 ARTICLE 3 CONDITIONS 3.1. Effective Date 32 3.2. Borrowings 33 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1. Corporate Existence and Power 34 4.2. Corporate and Governmental Authorization; No Contravention 35 4.3. Binding Effect 35 4.4. Financial Information 35 4.5. Litigation 36 4.6. Compliance with ERISA 36 4.7. Environmental Matters 37 4.8. Taxes 37 4.9. Subsidiaries 38 4.10. Full Disclosure 38 4.11. No Defaults 38 ARTICLE 5 COVENANTS 5.1. Information 38 5.2. Payment of Obligations 40 5.3. Maintenance of Property; Insurance 40 5.4. Conduct of Business and Maintenance of Existence 40 5.5. Compliance with Laws 41 5.6. Inspection of Property, Books and Records 41 5.7. Use of Proceeds 41 5.8. Negative Pledge 42 5.9. Transactions with Affiliates 44 5.10. Sale of Material Subsidiaries 44 5.11. Prohibition of Fundamental Changes. 44 5.12. Minimum Consolidated Net Worth 44 5.13. Syndication 45 ARTICLE 6 DEFAULTS 6.1. Events of Default 45 6.2. Notice of Default 48 ARTICLE 7 THE AGENT 7.1. Appointment and Authorization 48 7.2. Agent and Affiliates 48 7.3. Action by Agent 48 7.4. Consultation with Experts 48 7.5. Liability of Agent 48 7.6. Indemnification 49 7.7. Credit Decision 49 7.8. Successor Agent 49 7.9. Agent's Fee 50 7.10. Arrangers, etc. 50 ARTICLE 8 CHANGE IN CIRCUMSTANCES 8.1. Basis for Determining Interest Rate Inadequate or Unfair 50 8.2. Illegality 51 8.3. Increased Cost and Reduced Return 52 8.4. Taxes 53 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans 55 8.6. Replacement of Bank 56 ARTICLE 9 MISCELLANEOUS 9.1. Notices 58 9.2. No Waivers 59 9.3. Expenses; Indemnification 59 9.4. Sharing of Set-Offs 60 9.5. Amendments and Waivers 60 9.6. Successors and Assigns 61 9.7. Collateral 62 9.8. Governing Law; Submission to Jurisdiction 63 9.9. Counterparts; Integration; Effectiveness 63 9.10. WAIVER OF JURY TRIAL 63 EXHIBIT A - Note EXHIBIT B - Money Market Quote Request EXHIBIT C - Invitation for Money Market Quotes EXHIBIT D - Money Market Quote EXHIBIT E - Opinion of Special Counsel for the Borrower EXHIBIT F - Opinion of Special Counsel for the Agent and the Arrangers EXHIBIT G - Assignment and Assumption Agreement 1 AGREEMENT dated as of November 6, 1995, as amended and restated as of January 18, 1996, among CENTRAL AND SOUTH WEST CORPORATION, the BANKS listed on the signature pages hereof and UNION BANK OF SWITZERLAND, as Agent. The parties hereto are party to a Credit Agreement dated as of November 6, 1995, as amended by Amendment No. 1 thereto dated as of November 21, 1995 (as so amended, the "Original Credit Agreement"). Pursuant to the Original Credit Agreement, the Banks (such term and each other capitalized term used but not defined in this introductory statement having the meaning assigned to it in Section 1.1) have made term loans to the Borrower in an aggregate principal amount outstanding on the Effective Date equal to $731,000,000 (the "Term Loans"). The proceeds of the Term Loans have been used by the Borrower, directly or indirectly, to acquire ordinary shares of Bidco, and such proceeds have been used by Bidco to acquire ordinary shares of the Target and to pay costs and expenses related thereto. The Borrower has requested that the Original Credit Agreement be amended and restated to, among other things, (a) convert the Term Loans to revolving credit loans that may be prepaid and reborrowed in accordance with the terms hereof, (b) convert the undrawn Commitment (as defined in the Original Credit Agreement) to a revolving credit commitment, (c) allow the proceeds of Loans to be used by the Borrower for general corporate purposes, including financing of the Acquisition and payment of costs and expenses related thereto, and (d) make certain other changes to the Original Credit Agreement to effectuate the foregoing. The Banks and the Agent are willing so to amend and restate the Original Credit Agreement. Accordingly, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates 2 pursuant to Section 2.4. "Acquisition" means the acquisition by Bidco of ordinary shares of the Target. "Adjusted CD Rate" has the meaning set forth in Section 2.8(b). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of the Borrower or any of its Subsidiaries. "Agent" means Union Bank of Switzerland, in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Arrangers" means Citibank, N.A., Credit Suisse and Union Bank of Switzerland, in their respective capacities as arrangers of the credit facility hereunder. "Assessment Rate" has the meaning set forth in Section 2.8(b). "Assignee" has the meaning set forth in Section 9.6(c). "Bank" means each bank listed on the signature pages hereof, each Replacement Bank which becomes a Bank pursuant to Section 8.6, each Assignee which becomes a Bank pursuant 3 to Section 9.6(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Bidco" means CSW (UK) plc, a limited company incorporated in England and Wales. "Borrower" means Central and South West Corporation, a Delaware corporation, and its successors. "Borrower's 1994 Form 10-K" means the Borrower's annual report on Form 10-K for 1994, as filed with the Commission pursuant to the Securities Exchange Act of 1934. "Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1995, as filed with the Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" has the meaning set forth in Section 1.3. "CD Base Rate" has the meaning set forth in Section 2.8(b). "CD Loan" means (i) a Loan which bears interest at a CD Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a CD Loan immediately before it became overdue. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. 4 "CD Rate" means a rate of interest determined pursuant to Section 2.8(b) on the basis of an Adjusted CD Rate. "CD Reference Banks" means the principal New York offices of Citibank, N.A., Credit Suisse and Union Bank of Switzerland. "Commission" means the Securities and Exchange Commission, or any entity succeeding to its responsibilities under the Public Utility Holding Company Act of 1935, as amended. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.10. "Committed Loan" means a loan made by a Bank pursuant to Section 2.1, provided that, if any such loan or loans (a portion thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Confidential Information Memorandum" has the meaning set forth in Section 5.13. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Net Worth" means at any date the consolidated common stock equity of the Borrower and its Consolidated Subsidiaries determined as of such date. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for 5 purposes of Section 5.8 and the definition of Material Debt, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, forward purchase, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Documentation Agent" means Citibank, N.A., in its capacity as documentation agent of the credit facility hereunder. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. 6 "Domestic Reserve Percentage" has the meaning set forth in Section 2.8(b). "Effective Date" means the date this amendment and restatement of the Original Credit Agreement becomes effective in accordance with Sections 3.1 and 9.9. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof, in each case as in effect and applicable to the Borrower and its Subsidiaries at the time the representation in Section 4.7 is made or compliance with Section 5.5 is determined. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means (i) a Committed Loan which 7 bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a Euro-Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.8(c) on the basis of a London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal London offices of Citibank, N.A., Credit Suisse and Union Bank of Switzerland. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.17. "Event of Default" has the meaning set forth in Section 6.1. "Facility Agreement" means the Facility Agreement dated November 5, 1995, between Bidco, the Arrangers and Original Banks named therein and Credit Suisse, as Facility and Security Agent, as amended, supplemented or otherwise modified from time to time. "Facility Fee Rate" means a rate per annum determined in accordance with the Pricing Schedule. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Union Bank of Switzerland on such day on such transactions as determined by the Agent. "Fixed Rate Loans" means CD Loans, Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans 8 bearing interest at the Base Rate pursuant to Section 8.1) or any combination of the foregoing. "Group of Loans" means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time, (ii) all Euro-Dollar Loans having the same Interest Period at such time or (iii) all CD Loans having the same Interest Period at such time, provided that, if a Committed Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 9.3(b). "Interest Period" means: 1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; provided that: 9 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (2) with respect to each CD Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro- Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (3) with respect to each Money Market LIBOR Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.4; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last 10 Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (4) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.4; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.4. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan, a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans, Euro- Dollar Loans or Money Market Loans or any combination thereof. "London Interbank Offered Rate" has the meaning set 11 forth in Section 2.8(c). "Material Debt" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $25,000,000. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $25,000,000. "Material Subsidiary" means each Subsidiary which is a "public utility company" within the meaning of Section 2(a)(5) of the Public Utility Holding Company Act of 1935. "Money Market Absolute Rate" has the meaning set forth in Section 2.4(d)(ii)(D). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.1). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.4(d)(ii)(C). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.4. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of 12 Section 4001(a)(3) of ERISA (i) to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five-year period and (ii) which is covered by Title IV of ERISA. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.3) or a Notice of Money Market Borrowing (as defined in Section 2.4(f)). "Notice of Interest Rate Election" has the meaning set forth in Section 2.11. "Offer" has the meaning set forth in the Facility Agreement. "Original Credit Agreement" has the meaning set forth in the Introductory Statement. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person 13 which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means the rate of interest publicly announced by Union Bank of Switzerland in New York City from time to time as its Prime Rate. "Quarterly Date" means March 31, June 30, September 30 and December 31. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Replacement Bank" has the meaning set forth in Section 8.6. "Required Banks" means at any time Banks having more than 50% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing more than 50% of the aggregate unpaid principal amount of the Loans. "Revolving Credit Period" means the period from and including the Effective Date to but excluding the Termination Date. "SEC Authorization Date" means December 31, 1997, the outside maturity date for bank borrowings by the Borrower specified by the Commission in its order adopted pursuant to the Public Utility Holding Company Act of 1935, as amended (Release No. 35-26156; International Series Release No. 743; 70-8423), as such order may be amended from time to time, or such later outside maturity date as may be established for such purpose by order of the Commission, a copy of which order shall be furnished promptly to the Agent. "Stage 1" means the period from and including the Effective Date to and including the earlier of (i) May 3, 1996, and (ii) the earliest to occur of (a) the date on which all the ordinary shares of the Target have been 14 acquired by Bidco and all options to acquire such ordinary shares have been cancelled, (b) the date on which the Offer lapses or is abandoned by Bidco and (c) any earlier date specified by the Borrower by notice to the Agent in accordance with Section 9.1. "Stage 2" means the period from but excluding the last day of Stage 1 to but excluding the Termination Date. "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Syndication Agent" means Credit Suisse, in its capacity as syndication agent of the credit facility hereunder. "Target" means SEEBOARD plc, a public limited company incorporated in England and Wales. "Termination Date" means the earlier of (i) November 6, 2000, and (ii) the SEC Authorization Date, or, if any such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Term Loan" has the meaning set forth in the Introductory Statement. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. 15 SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on the same date, all of which Loans are of the same type (subject to Article 8) and, except in the case of Base Rate Loans, have the same initial Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Fixed Rate Borrowing" is a Euro-Dollar Borrowing, a CD Borrowing or a Money Market Borrowing (excluding any such Borrowing consisting of Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.1), and a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.4 in which the Bank participants are determined on the basis of their bids in accordance therewith). Borrowings may also be classified as "Stage 1 Borrowings" or "Stage 2 Borrowings" on the basis of whether they are to be made during Stage 1 or Stage 2. 16 ARTICLE 2 THE CREDITS SECTION 2.1. Commitments. During the Revolving Credit Period, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.2(a)(ii) or 3.2(b)(ii), as the case may be) and shall be made from the several Banks ratably in proportion to their respective Commitments; provided, however, that the failure of any Bank to make any Loan shall not relieve any other Bank of its obligation to lend hereunder (it being understood, however, that no Bank shall be responsible for the failure of any other Bank to make any Loan required to be made by such other Bank). Within the foregoing limits, the Borrower may borrow under this Section, prepay Loans to the extent permitted by Section 2.13 and reborrow at any time during the Revolving Credit Period under this Section. SECTION 2.2. Term Loans. On the Effective Date, each Term Loan shall be deemed to be a Loan hereunder, with the same Interest Period and interest rate as when made under the Original Credit Agreement. SECTION 2.3. Notice of Committed Borrowing. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than 12:00 Noon (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro- Dollar Business Day before each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing; (ii) the aggregate amount of such Borrowing; 17 (iii) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate, a CD Rate or a Euro-Dollar Rate; (iv) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period; and (v) in the case of a Stage 1 Borrowing, whether the proceeds thereof will be used, directly or indirectly, to finance the Acquisition or to pay costs and expenses related thereto. SECTION 2.4. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.1, the Borrower may, as set forth in this Section, request the Banks during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000, 18 (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within three Euro-Dollar Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.1 not later than (x) 4:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. 19 Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted (which aggregate limitation may be allocated by the Borrower among such offers as the Borrower may elect), (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Unless the Borrower and the Agent shall otherwise agree, any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); 20 (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: 21 (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger multiple of $1,000,000; (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, for the applicable Interest Period; and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.5. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 2:00 p.m. (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.1. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. 22 (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and, to the extent such Bank has failed to do so within three Domestic Business Days of demand therefor by the Agent, the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount (together with interest thereon), for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.8 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. If the Borrower shall repay to the Agent such corresponding amount, such Bank's Loan included in such Borrowing shall be deemed not to have been made. This subsection (c) shall not limit any right of the Borrower pursuant to Section 8.6. SECTION 2.6. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. Prior to the syndication referred to in Section 5.13, the Loans of each Bank shall be evidenced by the Note issued to such Bank under the Original Credit Agreement. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. 23 (c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.7. Maturity of Loans. (a) Each Committed Loan shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date. (b) Each Money Market Loan included in any Money Market Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. SECTION 2.8. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and, with respect to the principal amount of any Base Rate Loan converted to a CD Loan or a Euro-Dollar Loan, on each date a Base Rate Loan is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate 24 Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the rate applicable to Base Rate Loans for such day and (ii) the sum of the CD Margin plus the Adjusted CD Rate applicable to such Loan at the date such payment was due. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate __________ * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect 25 of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at 26 which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.1 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day) and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Loan at the date such payment was due. (e) Subject to Section 8.1, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.8(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.4. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.4. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished 27 by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.1 shall apply. SECTION 2.9. Fees. (a) Commitment Fee. The Borrower shall pay to the Agent for the account of the Banks ratably a commitment fee of 0.30% per annum on the daily aggregate amount of the undrawn Commitments during Stage 1. (b) Facility Fee. The Borrower shall pay to the Agent for the account of the Banks ratably a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule) on the daily aggregate amount of the Commitments, whether used or unused, during Stage 2 (or, if the Commitments shall have terminated in their entirety during Stage 2, on the daily aggregate outstanding principal amount of the Loans). (c) Accrued fees under this Section shall be payable quarterly in arrears on each Quarterly Date and on the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.10. Optional Termination or Reduction of Commitments. During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or a larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. SECTION 2.11. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may elect to convert such Loans to Base Rate Loans or Euro-Dollar Loans 28 or elect to continue such Loans as CD Loans for an additional Interest Period, subject to Section 2.15 in the case of any such conversion or continuation effective on any day other than the last day of the then current Interest Period applicable to such Loans; and (iii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or CD Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, subject to Section 2.15 in the case of any such conversion or continuation effective on any day other than the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be converted to Domestic Loans of the other type or are CD Rate Loans to be continued as CD Rate Loans for an additional Interest Period, in which case such notice shall be delivered to the Agent not later than 10:30 A.M. (New York City time) on the second Domestic Business Day before such conversion or continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $25,000,000 (or, if such remaining portion is comprised of Base Rate Loans, $10,000,000) or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if the Loans being 29 converted are to be Fixed Rate Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv) if such Loans are to be continued as CD Loans or Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. (d) An election by the Borrower to change or continue the rate of interest applicable to any Group of Loans pursuant to this Section shall not constitute a "Borrowing" subject to the provisions of Section 3.2. SECTION 2.12. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date. SECTION 2.13. Optional Prepayments. (a) Subject in the case of any Fixed Rate Borrowing to Section 2.15, the Borrower may, upon at least one Domestic Business Day's notice to the Agent, prepay any Group of Domestic Loans (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.1) or upon at least three Euro-Dollar Business Days' notice to the Agent, prepay any Group of Euro- Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the Banks included in such Group. (b) Except as provided in subsection (a) above, the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof without the prior written consent of the Bank making such Loan. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if 30 any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.14. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 2:00 p.m. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.1. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans or Money Market LIBOR Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Absolute Rate Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.15. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted (pursuant to Article 2, 6 31 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.8(d), or if the Borrower fails to borrow, convert or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.5(a), 2.11(c) or 2.13(c) the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow, convert or prepay, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.16. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.17. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro- Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro- Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least four Euro-Dollar Business Days after the giving of such notice and (y) shall 31 furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). ARTICLE 3 CONDITIONS SECTION 3.1. Effective Date. The effectiveness of the amendment and restatement of the Original Credit Agreement in the form hereof shall be subject to the satisfaction of each of the following conditions: (a) the Agent shall have received an opinion of Vinson & Elkins L.L.P., special counsel for the Borrower, substantially in the form of Exhibit E hereto; (b) the Agent shall have received an opinion of Cravath, Swaine & Moore, special counsel for the Agent and the Arrangers, substantially in the form of Exhibit F hereto; and (c) the Agent shall have received (i) a copy of the certificate of incorporation, including all amendments thereto, of the Borrower, certified as of a recent date by the Secretary of State of the State of Delaware, and a certificate as to the good standing of the Borrower as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower dated the Effective Date and certifying (A) that 33 attached thereto is a true and complete copy of the by-laws of the Borrower, as in effect on the date of such certificate and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Borrower, authorizing the execution, delivery and performance by the Borrower of this Agreement and the Notes and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect as of the date of such certificate, (C) that the certificate of incorporation of the Borrower has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above and (D) as to the incumbency and specimen signature of each officer executing this Agreement, any Note or any other document delivered in connection herewith on behalf of the Borrower; and (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above. SECTION 3.2. Borrowings. (a) The obligation of any Bank to make a Loan on the occasion of any Stage 1 Borrowing, the proceeds of which are to be used, directly or indirectly, to finance the Acquisition or to pay costs and expenses related thereto, is subject to the satisfaction of the following conditions: (i) the Agent shall have received a Notice of Borrowing as required by Section 2.3 or 2.4, as the case may be; (ii) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (iii) the fact that, immediately before and after such Borrowing, no Default described in clause (f) or (g) of Section 6.1 shall have occurred and be continuing; and (iv) the fact that the representations and warranties of the Borrower contained in Sections 4.1, 4.2 and 4.3 shall be true in all material respects on and as of the date of such Borrowing. Each Borrowing hereunder of the type described in this Section 3.2(a) shall be deemed to be a representation and 34 warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (ii), (iii) and (iv) of this Section 3.2(a). (b) The obligation of any Bank to make a Loan on the occasion of any Borrowing other than a Stage 1 Borrowing of the type described in Section 3.2(a) is subject to the satisfaction of the following conditions: (i) the Agent shall have received a Notice of Borrowing as required by Section 2.3 or 2.4, as the case may be; (ii) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (iii) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (iv) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true in all material respects on and as of the date of such Borrowing. Each Borrowing hereunder of the type described in this Section 3.2(b) shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (ii), (iii) and (iv) of this Section 3.2(b). ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 35 SECTION 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the corporate powers of the Borrower, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official, except for the order of the Commission contemplated by the definition of SEC Authorization Date, which, as of the date of each Borrowing, has been obtained and is in full force and effect with respect to the Borrowings to be made on such date, and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement or instrument governing Debt of the Borrower or any of its Subsidiaries or of any material agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any material asset of the Borrower or any of its Subsidiaries. SECTION 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Agreement and the Notes is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. SECTION 4.4. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1994 and the related consolidated statements of income and cash flows for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower's 1994 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. 36 (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1995 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such three-month period (subject to normal year-end adjustments). (c) Since September 30, 1995 there has been no material adverse change in the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.5. Litigation. (a) Except for the matters disclosed in the Borrower's 1994 Form 10-K, the Borrower's Latest Form 10-Q and the Borrower's current report on Form 8- K dated September 6, 1995 (the "Disclosed Matters"), there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. (b) Since the date of the latest filing with the Commission referred to in Section 4.5(a), there has been no development in the Disclosed Matters which is likely to materially and adversely affect the ability of the Borrower to perform its obligation under this Agreement and the Notes. SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the 37 Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.7. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates liabilities and costs arising under or imposed by Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by Environmental Law, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees). On the basis of this review, the Borrower has no reason to conclude that such liabilities and costs arising under, including the costs of compliance with, Environmental Laws, are likely to have a material adverse effect on the business, financial condition or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.8. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary, other than taxes which are not delinquent, and other than those contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. 38 SECTION 4.9. Subsidiaries. Each of the Borrower's corporate Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.10. Full Disclosure. All information (taken as a whole) heretofore furnished in writing by the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Agent or any Bank (including, without limitation, all information used in the preparation of, or which forms part of, the Confidential Information Memorandum) will be, to the knowledge of the Borrower, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed, either in reports on Form 10-K, Form 10-Q or Form 8-K (or their equivalents) filed with the Commission or otherwise in writing to the Banks, any and all facts known to the Borrower which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, financial condition or results of operations of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. SECTION 4.11. No Defaults. On the Effective Date, no Default or Event of Default exists under this Agreement. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.1. Information. The Borrower will deliver to the Agent: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the annual report of the Borrower and its Subsidiaries filed with the Commission on Form 10-K for such year; 39 (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, the quarterly report of the Borrower and its Subsidiaries filed with the Commission on Form 10-Q for such quarter; (c) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (e) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Form 8-K (or its equivalent) which the Borrower shall have filed with the Commission; (f) if and when any member of the ERISA Group (i) gives notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given notice of any such reportable event, a copy of the notice of such reportable event given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Section 4201, 4203 or 4204 of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated under Section 4241, 4245 or 4041A of ERISA, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or 40 makes any amendment to any Plan which has resulted or which may reasonably be expected to result in the imposition of a lien or the posting of a bond or other security under Section 401(a)(29) or 412(n) of the Internal Revenue Code, or Section 302(f) or 307 of ERISA, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (g) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with and to the extent required by generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts, against at least such risks and with no greater than such risk retention as are customarily maintained, insured against or retained, as the case may be, in the same general area by companies of established repute engaged in the same or a similar business; and will furnish to the Agent, upon reasonable request from the Agent, information presented in reasonable detail as to the insurance so carried. SECTION 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their 41 respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.4 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the transfer of assets, rights, privileges, licenses, franchises or businesses from one Subsidiary to another Subsidiary or (iii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.5 Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity or fact of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.7. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes, including the acquisition, directly or indirectly, of ordinary shares or subordinated debt of Bidco (the proceeds of such ordinary shares or subordinated debt of Bidco to be used by Bidco solely (i) to acquire ordinary shares of the Target, either in the open market, pursuant to the Offer or otherwise and (ii) to pay 42 costs and expenses relating to the Offer). None of the proceeds of the Loans made under this Agreement will be used, directly or indirectly, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System of the United States, including without limitation Regulation U. After giving effect to the consummation of the Offer and the financing thereof, "margin stocks" (as defined in Regulation U) will not constitute more than 25% of the assets of the Borrower and its Subsidiaries on a consolidated basis. SECTION 5.8. Negative Pledge. The Borrower will not create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing obligations in an aggregate amount not exceeding $25,000,000; (b) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset; provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (c) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower and not created in contemplation of such event; (d) any Lien existing on any asset prior to the acquisition thereof by the Borrower and not created in contemplation of such acquisition; (e) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (f) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $25,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; 43 (g) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; (h) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or that are being contested in good faith and by appropriate proceedings if, unless the amount thereof is not material with respect to it or its financial condition, adequate reserves with respect thereto are maintained on the books of the Borrower in accordance with generally accepted accounting principles; (i) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 6.1(i) hereof; (j) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (k) deposits to secure the performance of bids, trade contracts (other than for Debt), leases, statutory obligations, surety bonds, appeal bonds with respect to judgments not exceeding $25,000,000, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (l) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of property or minor imperfections in title thereto that, in the aggregate, are not material in amount, and that do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower; and (m) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 5% of Consolidated Net Worth. 44 SECTION 5.9. Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate except on an arms-length basis on terms at least as favorable to the Borrower or such Subsidiary than could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section shall not prohibit any such Person from declaring or paying any lawful dividend or other payment ratably in respect of all of its capital stock of the relevant class so long as, after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.10. Sale of Material Subsidiaries. The Borrower will not and will not permit any Subsidiary to, at any time, sell or otherwise transfer, directly or indirectly, any capital stock of or other equity interest in any Material Subsidiary if, after giving effect thereto, such Material Subsidiary would no longer be a Subsidiary. SECTION 5.11. Prohibition of Fundamental Changes. The Borrower shall not: (a) enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); or (b) convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its business or property. Notwithstanding the foregoing provisions of this Section 5.11, the Borrower may merge or consolidate with any other Person if the Borrower is the surviving corporation or the surviving corporation assumes the liabilities of the Borrower by operation of law or otherwise. SECTION 5.12. Minimum Consolidated Net Worth. The Borrower shall not permit its Consolidated Net Worth to be less than $2,000,000,000 at any time. 45 SECTION 5.13. Syndication. The Borrower acknowledges that the Arrangers intend promptly to commence to syndicate their Commitments or Loans in accordance with the provisions of Section 9.6. The Borrower agrees actively to assist the Arrangers in achieving a syndication that is satisfactory to them and to the Borrower. Such assistance shall include but not be limited to (i) the preparation with the Arrangers of a Confidential Information Memorandum and other marketing materials (collectively, the "Confidential Information Memorandum") and (ii) direct contact, including the hosting of one or more bank meetings, between senior management of the Borrower and its Subsidiaries (including, after consummation of the Offer, the Target) on the one hand, and potential Assignees and Participants on the other hand. ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within five days of the due date thereof any interest, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform its obligations under Section 5.1(c), 5.7, 5.10, 5.11 or 5.12; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) any event or condition shall occur which results in the acceleration of any Material Debt; 46 (f) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (g) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (h) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $25,000,000; 47 (i) judgments or orders for the payment of money in excess of $25,000,000 shall be rendered against the Borrower or any Subsidiary and such judgments or orders shall continue unsatisfied and unstayed for a period of 30 days; or (j) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower; or, during any period of 12 consecutive calendar months, individuals (i) who were directors of the Borrower on the first day of such period, (ii) whose election or nomination to the board of directors of the Borrower was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said board or (iii) whose election or nomination to said board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said board, shall cease to constitute a majority of said board; then, and in every such event, the Agent shall (i) except as provided below in this Section 6.1, if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding more than 50% of the aggregate unpaid principal amount of the Loans, by notice to the Borrower declare the Loans (together with accrued interest thereon) to be, and the Loans (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that (A) in the case of any of the Events of Default specified in clause 6.1(f) or 6.1(g) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Loans (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower and (B) except as described in the immediately preceding clause (A), during Stage 1 the Agent and the Banks shall not be entitled to terminate the Commitments without the consent of the Borrower. 48 SECTION 6.2. Notice of Default. The Agent shall give notice to the Borrower under Section 6.1(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENT SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.2. Agent and Affiliates. Union Bank of Switzerland shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Union Bank of Switzerland and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent. SECTION 7.3. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.4. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.5. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to 49 ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment or, if the Commitments have terminated, the outstanding principal amount of its Loans, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. SECTION 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent, any Arranger or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent, any Arranger or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.8. Successor Agent. The Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent subject to the approval of the Borrower. If no successor Agent shall have been so appointed and approved, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of 50 the United States and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. Any retiring Agent shall refund any unearned portion of its administrative agency fee. SECTION 7.9. Agent's Fee. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. SECTION 7.10. Arrangers, etc. Nothing in this Agreement shall impose on any Arranger, the Syndication Agent or the Documentation Agent, in its capacity as such, any duties or obligations whatsoever. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any CD Loan, Euro-Dollar Loan or Money Market LIBOR Loan: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of CD Loans or Euro-Dollar Loans, Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent will not, together with any increased costs reimbursable by the Borrower hereunder, adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, 51 the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro- Dollar Loans, as the case may be, or to continue or convert outstanding Loans as or into CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.2. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Loans into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest 52 Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. SECTION 8.3. Increased Cost and Reduced Return. (a) If on or after (x) the Effective Date, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement for which such Bank is entitled to compensation for the relevant Interest Period under Section 2.17), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or 53 regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections (a) and (b) of this Section 8.3, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 90 days prior to the date on which such Bank notifies the Agent and the Borrower that it proposes to demand such compensation and identifies to the Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such statute, regulation or other such basis, such Bank did not know that such amount would arise or accrue. SECTION 8.4. Taxes. (a) For the purposes of this Section 8.4, the following terms have the following meanings: 54 "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all penalties and interest with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located, in which its Applicable Lending Office is located or in which it would be subject to tax due to some connection other than that created by this Agreement and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies and all penalties and interest with respect thereto, which arise from the making of any payment pursuant to this Agreement or under any Note or from the execution or delivery of this Agreement or any Note. (b) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes on amounts payable under this Section) paid by such Bank or the Agent (as the case may be). This indemnification shall be paid within 15 days after such Bank or the Agent (as the case may be) makes appropriate demand therefor. 55 (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower and the Agent with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower or the Agent with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(b) or (c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps (at the expense of such Bank) as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section, then such Bank will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank in its sole judgment. SECTION 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make, or convert outstanding Loans to, Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the 56 provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) CD Loans or Euro-Dollar Loans, as the case may be, shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks); and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be converted into a CD Loan or Euro-Dollar Loan, as the case may be, on the first day of the next succeeding Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the other Banks. SECTION 8.6. Replacement of Bank. (a) In the event that: (i) any Bank requests compensation pursuant to Section 8.3 or 8.4 hereof; (ii) the obligation of any Bank to make Euro-Dollar Loans or to continue, or to convert Base Rate Loans into, Euro- Dollar Loans shall be suspended pursuant to Section 8.2 hereof; (iii) any Bank becomes insolvent or fails to make any Committed Loan in response to a timely Notice of Committed Borrowing where the Required Banks have made the respective Committed Loans to be made by them in response to such notice; or (iv) any Bank fails or refuses to agree to a request by the Borrower to amend or waive, or to grant any consent under, any provision of the Agreement under circumstances when such amendment, waiver or consent has been approved by 57 the Required Banks, such amendment, waiver or consent requires the approval of all of the Banks to be effective and such failure or refusal is evidenced by (x) written objection by such Bank to any such request made to it by the Agent in writing describing such amendment, waiver or requested consent in principle, (y) failure by such Bank to respond in writing to any such request so made to it on or before the 15th Domestic Business Day after it receives such request, or (z) failure by such Bank to execute and deliver definitive documentation furnished to it by the Agent to effectuate any such amendment, waiver or consent on or before the 15th Domestic Business Day after it receives such documentation; then, so long as such condition exists, the Borrower may either: (1) designate another financial institution (such financial institution being herein called a "Replacement Bank") acceptable to the Agent (which acceptance will not be unreasonably withheld) and which is not an Affiliate of the Borrower, to assume such Bank's Commitment hereunder and to purchase the Loans of such Bank and such Bank's rights under this Agreement and the Note held by such Bank, all without recourse to or representation or warranty by, or expense to such Bank, for a purchase price equal to the outstanding principal amount of the Loans payable to such Bank plus any accrued but unpaid interest on such Loans and accrued but unpaid fees owing to such Bank plus any amounts payable to such Bank under Section 2.15 hereof calculated as if such purchase constituted a prepayment of Loans plus any other amounts payable to such Bank under this Agreement, and upon such assumption, purchase and substitution, and subject to the execution and delivery to the Agent by the Replacement Bank of documentation satisfactory to the Agent (pursuant to which such Replacement Bank shall assume the obligations of such original Bank under this Agreement), the Replacement Bank shall succeed to the rights and obligations of such Bank hereunder; or 58 (2) with the prior written consent of the Required Banks, pay to such Bank the outstanding principal amount of the Loans payable to such Bank plus any accrued but unpaid interest on such Loans and accrued but unpaid fees owing to such Bank plus any amounts payable to such Bank under Section 2.15 hereof calculated as if such purchase constituted a prepayment of Loans. In the event that the Borrower exercises its rights under the preceding sentence, the Bank against which such rights are exercised shall no longer be a party hereto or have any rights or obligations hereunder; provided that the obligations of the Borrower to such Bank under Article 8 and Section 9.3 hereof with respect to events occurring or obligations arising before or as a result of such replacement shall survive such exercise. (b) If the Borrower exercises its rights under clause (2) of Section 8.6(a) hereof, the Borrower may, not later than 180 days after such exercise, designate a Replacement Bank acceptable to the Agent (which acceptance will not be unreasonably withheld) and which is not an Affiliate of the Borrower, to assume a Commitment or, if the Commitments have terminated, to make a Loan or Loans hereunder in an amount not greater than the Commitment or Loans, as the case may be, of the Bank against which such rights were exercised and, subject to the execution and delivery to the Agent by the Replacement Bank of documentation satisfactory to the Agent the Replacement Bank shall become party to this Agreement as a Bank. ARTICLE 9 MISCELLANEOUS SECTION 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (a) in the case of the Borrower or the Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (b) in the case of any Bank, at its address, 59 facsimile number or telex number set forth in its Administrative Questionnaire or (c) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first-class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent under Article 2 or Article 8 shall not be effective until received. SECTION 9.2. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent and each Arranger, including reasonable fees and disbursements of Cravath, Swaine & Moore, special counsel for the Agent and the Arrangers, in connection with the preparation of the Original Credit Agreement and this Agreement, the syndication contemplated by Section 5.13, any waiver or consent hereunder or any amendment hereof or any Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by the Agent and each Bank, including (without duplication) the reasonable fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without 60 limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to the Commitments, the Loans or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct. SECTION 9.4. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan, or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan, or any fees hereunder or for the 61 scheduled termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), or (iv) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $15,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially 62 the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Agent, which shall not be unreasonably withheld; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.7. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in 63 Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.8. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.9. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it constituting delivery of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 64 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CENTRAL AND SOUTH WEST CORPORATION, By /s/ Stephen J. McDonnell Name: Stephen J. McDonnell Title: Treasurer Address: 1616 Woodall Rodgers Freeway Dallas, TX 75202 Facsimile: 214-777-1223 Commitments $283,333,333 CITIBANK, N.A., By /s/ Sandip Sen Name: Sandip Sen Title: Vice President Address: 399 Park Avenue New York, NY 10043 Facsimile: 212-793-6130 $283,333,333 CREDIT SUISSE, By /s/ Marilou Palenzuela Name: Marilou Palenzuela Title: Member of Senior Management Address: 633 West Fifth Street Los Angeles, CA 90071 Facsimile: 914-955-8245 By /s/ Maria N. Gaspara Name: Maria N. Gaspara Title: Associate 65 $283,333,334 UNION BANK OF SWITZERLAND, By /s/ Michael F. Donohue, Jr. Name: Michael F. Donohue, Jr. Title: Managing Director Address: 299 Park Avenue New York, NY 10171 Facsimile: 212-821-3383 By /s/ Bruce T. Richards Name: Bruce T. Richards Title: Managing Director _________________________ Total Commitments $850,000,000 UNION BANK OF SWITZERLAND, as Agent, By /s/ Michael F. Donohue, Jr. Name: Michael F. Donohue, Jr. Title: Managing Director Address: 299 Park Avenue New York, NY 10171 Facsimile: 212-821-3383 By /s/ Bruce T. Richards Name: Bruce T. Richards Title: Managing Director 1 PRICING SCHEDULE Each of "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" means, for any date during Stage 1 or Stage 2, as the case may be, the rates set forth below in the row opposite such term and in the column corresponding to the "Pricing Level" that applies at such date: Stage 1 (in basis points per annum) LEVEL I LEVEL II LEVEL III Euro-Dollar 30.00 35.00 50.00 Margin CD Margin 42.50 47.50 62.50 Stage 2 (in basis points per annum) Level I Level II Level III Facility Fee 10.00 12.50 17.50 Rate Euro-Dollar 20.00 22.50 32.50 Margin CD Margin 32.50 35.00 45.00 For purposes of this Schedule, the following terms have the following meanings: "D&P" means Duff & Phelps Credit Rating Co. or any successor thereto. "Level I Pricing" applies at any date if, at such date, the Borrower's commercial paper ratings achieve at least two of the following three ratings thresholds: (x) A-1 or higher by S&P, (y) P-1 or higher by Moody's or (z) D-1 or higher by D&P. "Level II Pricing" applies at any date if, at such date, (i) the Borrower's commercial paper ratings achieve at least two of the following three ratings thresholds: 2 (x) A-2 or higher by S&P, (y) P-2 or higher by Moody's or (z) D-2 or higher by D&P and (ii) Level I Pricing does not apply. "Level III Pricing" applies at any date if, at such date, no other Pricing Level applies. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "Pricing Level" refers to the determination of which of Level I, Level II or Level III Pricing applies at any date. "S&P" means Standard & Poor's Rating Services or any successor thereto. The credit ratings to be utilized for purposes of this Schedule are those assigned to the unsecured commercial paper of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 1 Exhibits A - Note NOTE $[ ] New York, New York ___________ __, 199_ For value received, Central and South West Corporation, a Delaware corporation (the "Borrower"), promises to pay to the order of ______________________ (the "Bank"), for the account of its Applicable Lending Office, the lesser of (i) $[ ] and (ii) the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Union Bank of Switzerland, New York, New York. All Loans made by the Bank, the respective types thereof and all prepayments and repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of November 6, 1995, as amended 2 and restated as of January 18, 1996, among Central and South West Corporation, the banks listed on the signature pages thereof and Union Bank of Switzerland, as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. Central and South West Corporation By____________________ Name: Title: 3 LOANS AND PAYMENTS OF PRINCIPAL __________________________________________________________________________ Amount Type Amount of of of Principal Notation Date Loan Loan Repaid Made By __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 1 EXHIBIT B - Money Market Quote Request Form of Money Market Quote Request [Date] To: Union Bank of Switzerland (the "Agent") From: Central and South West Corporation Re: Credit Agreement dated as of November 6, 1995, as amended and restated as of January 18, 1996 (the "Credit Agreement"), among Central and South West Corporation, the Banks party thereto and the Agent We hereby give notice pursuant to Section 2.4 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount1 Interest Period2 $ - ---------------- 1 Amount must be $10,000,000 or a larger multiple of $1,000,000. 2 Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. 2 Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Terms used herein have the meanings assigned to them in the Credit Agreement. Central and South West Corporation By________________________ Name: Title: EXHIBIT C - Invitation for Money Market Quotes Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to Central and South West Corporation (the "Borrower") Pursuant to Section 2.4 of the Credit Agreement dated as of November 6, 1995, as amended and restated as of January 18, 1996, among Central and South West Corporation (the "Borrower"), the Banks party thereto and the undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [4:00 P.M.] [9:30 A.M.] (New York City time) on [date]. UNION BANK OF SWITZERLAND, As Agent By______________________ Authorized Officer 1 EXHIBIT D - Money Market Quote Form of Money Market Quote To: Union Bank of Switzerland, as Agent Re: Money Market Quote to Central and South West Corporation (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: _____________________________ 3. Date of Borrowing: ____________________* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** __________ (notes continued on following page) * As specified in the related Invitation. ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate 2 limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement dated as of November 6, 1995, as amended and restated as of January 18, 1996, among the Borrower, the Banks party thereto and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated:_______________ By:__________________________ Authorized Officer __________ (notes continued from previous page) *** Not less than one month or not less than 7 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). EXHIBIT E - Opinion of Special Counsel for the Borrower OPINION OF VINSON & ELKINS L.L.P. ________________, 199_ To the Banks and the Agent Referred to Below c/o Union Bank of Switzerland as Agent 299 Park Avenue New York, New York 10017 Dear Sirs: We have acted as special counsel to Central and South West Corporation (the "Borrower") in connection with the Credit Agreement (the "Credit Agreement") dated as of November 6, 1995, as amended and restated as of January 18, 1996, between the Borrower, the banks listed on the signature pages thereof and Union Bank of Switzerland, as Agent. Except as otherwise provided herein, terms defined in the Credit Agreement are used herein as defined therein. This opinion is being delivered pursuant to Section 3.1(a) of the Credit Agreement. In rendering the opinions expressed below, we have examined the following agreements, instruments and other documents: (a) the Credit Agreement; (b) the promissory notes executed and delivered by the Borrower under the Original Credit Agreement (the "Notes"); and (c) such records of the Borrower and such other documents as we have deemed necessary as a basis for the opinions expressed below. 2 In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon statements of governmental officials and upon representations made in or pursuant to the Credit Agreement and certificates of appropriate representatives of the Borrower. In rendering the opinions expressed below, we have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the Borrower): (i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid and binding and enforceable obligations of, all of the parties to such documents; (ii) all signatories to such documents have been duly authorized; and (iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform such documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that: 1. The Borrower is a corporation validly existing and in good standing under the laws of the State of Delaware and has all corporate powers required to carry on its business described in its Annual Report on Form 10-K for the year ended December 31, 1994 (the "10-K"). 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes, and the borrowings by the Borrower under the Credit Agreement, are 3 within the corporate powers of the Borrower, have been duly authorized by all necessary corporate action on the part of the Borrower and require no action by or in respect of, or filing with, any governmental or regulatory authority or agency of the United States of America or the State of New York, except for the order of the Commission adopted pursuant to the Public Utility Holding Company Act of 1935, as amended (the "Act") (Release No. 35-26156; International Series Release No. 743; 70-8423) as amended by order of the Commission (Release No. 35-26383) (jointly called the "Order") which has been obtained and is in full force and effect, and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement or instrument governing Material Debt of the Borrower or of any material agreement, judgment, injunction, order, decree or other material instrument binding upon the Borrower or result in the creation or imposition of any Lien on any asset of the Borrower. 3. The Credit Agreement and the Notes constitute the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Agreement and the Notes is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 9.3 of the Credit Agreement may be limited by laws limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct. 4 (B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. (C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than the State of New York) that limit the interest, fees or other charges such Bank may impose and (ii) the second sentence of Section 9.8 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to any of the Credit Documents. (D) We express no opinion as to the enforceability of the following provisions set forth in the Credit Agreement: (i) provisions purporting to waive rights to notice, jury trial, or other rights or benefits that cannot be waived under applicable law; (ii) provisions providing that remedies are cumulative; and (iii) provisions that decisions by a party are conclusive. (E) With respect to our opinions expressed in paragraph 2 above, we have not undertaken any special examination of the files of the Borrower or any public records of judgments, injunctions, orders or decrees applicable to the Borrower. We have, with your permission, limited our review of (i) material agreements and material instruments to those agreements and instruments listed as material in the exhibit index in the 10-K and (ii) any Material Debt of the Borrower, judgments, injunctions, orders and decrees binding on the Borrower to those identified as such in the Certificate of an officer of the Borrower attached hereto. We express no opinion as to compliance with accounting or financial covenants or requirements contained in any of 5 the aforesaid orders, decrees, Material Debt, material agreements or instruments. (F) In connection with the opinions expressed in paragraph 2 above, we note that the authority under the Order for recourse borrowings and investment by the Borrower and its subsidiaries in exempt wholesale generators (as defined in Section 32(e) of the Act) and foreign utility companies (as defined in Section 33(a) of the Act) is limited to 50% of the Borrower's "consolidated retained earnings" as determined in accordance with Rule 53(a)(1)(ii). The foregoing opinions are limited to matters involving the federal laws of the United States, the Delaware General Corporation Law and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction. At the request of our client, this opinion letter is, pursuant to Section 3.1(a) of the Credit Agreement, provided to you by us in our capacity as counsel to the Borrower and may not be relied upon by any other Person (except that any Person that becomes a party to the Credit Agreement as a Bank after the date hereof may rely upon this opinion as if it were addressed to such Person as of the date hereof) or for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Very truly yours, 1 EXHIBIT F - Opinion of Special Counsel for the Agent and the Arrangers OPINION OF CRAVATH, SWAINE & MOORE ______________, 1995 Central and South West Corporation $850,000,000 Credit Agreement dated as of November 6, 1995, as amended and restated as of January 18, 1996 Ladies and Gentlemen: We have acted as special counsel to Union Bank of Switzerland, in its capacity as administrative agent (the "Agent"), and Citibank, N.A., Credit Suisse and Union Bank of Switzerland, in their respective capacities as Arrangers, in connection with the preparation, execution and delivery of the Credit Agreement dated as of November 6, 1995, as amended and restated as of January 18, 1996 (the "Credit Agreement"), among Central and South West Corporation (the "Borrower"), the Banks named therein (the "Banks") and the Agent. In that connection, we have examined executed counterpart copies of the Credit Agreement and executed copies of the Notes issued under the Original Credit Agreement (as defined in the Credit Agreement). In rendering our opinion, we have with your consent assumed (i) the due authorization, execution and delivery of the Credit Agreement by each party thereto and (ii) the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as copies. 2 Based upon the foregoing, we are of opinion that the Credit Agreement and the Notes constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws affecting creditors' rights generally from time to time in effect and to general equitable principles (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether such enforceability is considered in a proceeding in equity or at law. In addition, (i) we note that insofar as provisions contained in the Credit Agreement provide for indemnification, the enforcement thereof may be limited by public policy considerations, (ii) we express no opinion as to the last sentence of Section 9.4 of the Credit Agreement and (iii) we express no opinion as to the effect of the law of any jurisdiction other than the State of New York wherein any Bank may be located or wherein enforcement of the Credit Agreement or any Note may be sought that limits rates of interest legally chargeable or collectable. We are admitted to practice only in the State of New York and express no opinion as to matters governed by any laws other than the laws of the State of New York and the Federal laws of the United States of America. This opinion is being delivered to you pursuant to Section 3.1(b) of the Credit Agreement, and may not be relied upon by any other person without our prior written consent, except that any person that becomes a party to the Credit Agreement as a Bank after the date hereof may rely upon this opinion as if it were addressed to such person as of the date hereof. Very truly yours, The Agent and the Banks Referred to Above In care of Union Bank of Switzerland as Agent 299 Park Avenue New York, New York 10017 1 120A EXHIBIT G - Assignment and Assumption Agreement ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among (the "Assignor"), (the "Assignee"), CENTRAL AND SOUTH WEST CORPORATION (the "Borrower") and UNION BANK OF SWITZERLAND, as Agent (the "Agent"). WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Credit Agreement dated as of November 6, 1995, as amended and restated as of January 18, 1996, among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; 2 NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. Section 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, [the Borrower and the Agent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. Section 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.(1) It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and - ---------------- (1) Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 3 such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. [Section 4. Consent of the Borrower and the Agent. This Agreement is conditioned upon the consent of the Borrower and the Agent pursuant to Section 9.6(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of this consent. Pursuant to Section 9.6(c), the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein.] Section 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. Section 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. 4 By_________________________ Name: Title: By__________________________ Name: Title: CENTRAL AND SOUTH WEST CORPORATION By__________________________ Name: Title: UNION BANK OF SWITZERLAND By__________________________ Name: Title: EX-10.8 3 FACILITY AGREEMENT Dated 5th November, 1995 1,100,000,000 pounds TERM LOAN FACILITIES 150,000,000 pounds REVOLVING CREDIT FACILITY Between CSW INVESTMENTS CSW (UK) PLC as Borrowers and Guarantors CITIBANK INTERNATIONAL PLC CREDIT SUISSE UNION BANK OF SWITZERLAND as Arrangers CITIBANK, N.A. CREDIT SUISSE UNION BANK OF SWITZERLAND as Original Banks CREDIT SUISSE as Facility Agent and Security Agent ALLEN & OVERY London Ref. B3:47631.5 CONTENTS Clause Page 1. Interpretation 1 2. Facilities and Related Matters 21 3. Purpose and Responsibility 24 4. Conditions Precendent 25 5. Advances 26 6. The Bill Facility 27 7. Cancellation of Commitments 31 8. Repayment 32 9. Prepayment 32 10. Interest Periods 33 11. Interest 35 12. Payments 36 13. Taxes 38 14. Market Disruption 40 15. Increased Costs 42 16. Illegality 44 17. Mitigation 45 18. Guarantee 46 19. Additional Borrowers 49 20. Representations and Warranties 49 21. Undertakings 53 22. Financial Ratios 68 23. Default 69 24. Indemnities 76 25. Agents, Arrangers and Banks 78 26. Fees, Expenses and Stamp Taxes 83 27. Waivers, Remedies Cumulative 85 28. Notices 85 29. Assignments, Transfers and Substitutions 86 30. Set-Off and Redistribution 90 31. Governing Law and Jurisdiction 91 32. Confidentiality 92 33. Miscellaneous 93 Schedules A. Notice Details for Borrower and Agents 94 B. Banks' Commitments and Notice Details 97 C. Forms of Request 98 D. Substitution Certificate 101 E. Calculation of Additional Cost 104 F. Accession Agreement 106 G. Documentary Conditions Precedent 109 H. Form of Bill 110 I. Form of Power of Attorney 111 Signatories 113 THIS FACILITY AGREEMENT is dated the 5th November, 1995 and made BETWEEN:- (1) CSW INVESTMENTS a company incorporated in England and Wales (No. 3123865) ( the "Company"); (2) CSW (UK) PLC a company incorporated in England and Wales (No. 3123442) ("Bidco"); (3) CITIBANK INTERNATIONAL PLC, CREDIT SUISSE and UNION BANK OF SWITZERLAND as Arrangers (in this capacity the "Arrangers"); (4) CITIBANK, N.A., CREDIT SUISSE and UNION BANK OF SWITZERLAND as original lenders (in this capacity the "Original Banks"); (5) CREDIT SUISSE as facility agent for the Banks (in this capacity the "Facility Agent"); and (6) CREDIT SUISSE as security agent and trustee for the Banks (in this capacity the "Security Agent"). WHEREAS pursuant to arrangements made by the Arrangers and upon and subject to the terms of this Agreement, the Original Banks (as defined above) have agreed to make available term loan facilities aggregating 1,100,000,000 pounds to the Company and a revolving credit and bills acceptance facility of 150,000,000 pounds to the Borrowers. IT IS AGREED as follows:- 1. INTERPRETATION 1.1 Defined Terms In this Agreement:- "Accession Agreement" means an agreement substantially in the form of Schedule F made pursuant to Clause 19; "Accounting Date" means each 30th June, 30th September, 31st December and 31st March, falling after the date of this Agreement (or, where contemplated by Clauses 21.2(a)(vii) and 22.2, up to one year prior to the date of this Agreement), save as any such date may be adjusted forwards or backwards with the agreement of the Facility Agent to avoid an Accounting Date falling on a day which is not a Business Day and/or to ensure that all Accounting Dates fall on the same day of the relevant weeks. "Accounting Period" means any period of approximately three months or one year ending on an Accounting Date for which Accounts are required to be prepared for the purposes of this Agreement, including pro forma Accounting Periods as contemplated in Clauses 21.2(a)(vii) and 22.2. "Accounts" means from time to time:- (a) the latest audited consolidated annual accounts of the Group; 2 (b) the latest unaudited consolidated quarterly accounts of the Group; and (c) any other audited or unaudited consolidated or unconsolidated accounts (if any) of the Group or any member thereof (including without limitation, the pro forma accounts referred to in Clause 21.2(a)(vii)), delivered or required to be delivered to the Facility Agent pursuant to this Agreement (together with any letter applicable thereto delivered to the Facility Agent pursuant to Clause 21.2(e)), or such of the foregoing as the context requires. "Act" means the Electricity Act 1989 and, unless the contract otherwise requires, all subordinate legislation made pursuant thereto. "Additional Borrower" means the Target upon it becoming, and any other entity which becomes, party to this Agreement as a Borrower pursuant to an Accession Agreement. "Additional Cost" in relation to each Advance or overdue amount means, for the Interest Period relating to that Advance or overdue amount, the cost as calculated by the Facility Agent in accordance with Schedule E imputed to each Bank participating in such Advance or overdue amount of compliance with the Mandatory Liquid Assets requirements of the Bank of England during that Interest Period, expressed as a percentage rate per annum. "Adjusted Capital and Reserves" means the amount (including any share premium) for the time being paid up or credited as paid up on the issued share capital of the Company; plus the outstanding amount of any Subordinated Debt; plus the amount standing to the credit (or, as the case may be, minus the amount standing to the debit) of the capital and revenue reserves of the Group; plus any amount standing to the credit or minus any amount standing to the debit of the consolidated profit and loss account of the Group; plus the amount of goodwill arising upon and in respect of the acquisition of the Shares pursuant to the Offer; minus any distribution declared or made by the Company or any of its Subsidiaries (other than to another member of the Group) out of profits included within reserves to the extent that those reserves have not already been reduced on account thereof; minus amounts attributable to the interests (if any) of outside holders of issued share capital in any member of the Group other than the Company itself; and for the purposes of the foregoing, no item shall be effectively deducted or added more than once, all items shall be calculated on a consolidated basis and (subject only as may be required in order to reflect the express inclusion or exclusion of items as specified in this definition) in accordance with the Applicable Accounting Principles and, where the calculation is being made as at the end of any Accounting Period shall be determined from the balance sheet forming part of the Accounts for that Accounting Period. 3 "Advance" means the principal amount of each borrowing under this Agreement from the Tranche 1 Commitments (a "Tranche 1 Advance") or the Tranche 2 Commitments (a "Tranche 2 Advance") or the Tranche 3 Commitments (a "Tranche 3 Advance") or, in each case, the principal amount of such borrowing outstanding from time to time. "Affiliate" means, in relation to a body corporate, any of its Holding Companies or Subsidiaries or any other Subsidiary of any of its Holding Companies. "Agent" means:- (a) when designated "Facility", Credit Suisse or any of its successors pursuant to Clause 25.14; (b) when designated "Security", Credit Suisse or any of its successors pursuant to Clause 25.14 and any corresponding provision of any Security Document; and (c) without any such designation, the Facility Agent or the Security Agent, as the context requires. "Announcement Date" means the date on which the Press Release is issued. "Applicable Accounting Principles" means accounting principles and practices, which at the date hereof are generally accepted in the United Kingdom and approved by the Institute of Chartered Accountants of England and Wales and which are consistent with the accounting principles and practices applied in the preparation of the Base Financial Statements, and any variation to such accounting principles and practices which is not material or, if material, has been agreed in writing by the Majority Banks. "Applicable Taxes" has the meaning given to it in Clause 13.1. "Auditors" means a firm of independent public accountants of international standing recognised and authorised by the Institute of Chartered Accountants of England and Wales which is appointed by the Company to audit the consolidated annual accounts of the Company. "Authorised Signatory" in relation to any Obligor and any communication to be made or document to be executed or certified by that Obligor means, at any time, any person:- (a) who is at such time duly authorised by a resolution of the board of directors of that Obligor or by virtue of his appointment by that Obligor to a particular office to make that communication or to execute or certify that document on behalf of that Obligor and in respect of whom the Facility Agent has received a certificate of a director or the secretary of that Obligor setting out the name and signature of that person and confirming that person's authority so to act; and (b) in respect of whom no notice has been received by the Facility Agent from that Obligor to the effect that that person is no longer an Authorised Signatory for that Obligor. "Available Facility Amount" at any time in respect of the Tranche 3 Facility means the amount of the Tranche 3 Commitments, less the amount of the outstanding Tranche 3 4 Utilisations at such time taking into account any Tranche 3 Utilisations scheduled to be made, repaid or prepaid by assuming that the same occurs when due. "Availability Period" means the period from opening of business in London on the date of this Agreement to:- (a) when designated "Tranche 1/2", close of business in London on whichever is the earlier of (i) the date 180 days after the Announcement Date, (ii) the date falling three months after the Unconditional Date, and (iii) the date 200 days after the date hereof; (b) when designated "Tranche 3", close of business in London on whichever is the earlier of (i) (if no Tranche 1 Advance and no Tranche 2 Advance is drawn at all) the expiry of the Tranche 1/2 Availability Period, and (ii) the fifth anniversary of the Unconditional Date; or in either case such later date as all the Banks may agree in writing on or after the date hereof. "Bank" means each of the following:- (a) each bank whose name is set out in Schedule B; (b) each bank to which rights and/or obligations under this Agreement are assigned or transferred pursuant to Clause 29 or which assumes rights and obligations pursuant to a Substitution Certificate; and (c) any successor or successors in title to any of the foregoing, provided that upon (i) termination in full of all the Commitments of any Bank, and (ii) irrevocable payment in full of all amounts which may be or become payable to such Bank under the Finance Documents, such Bank shall not be regarded as being a Bank for the purposes of determining whether any provision of any of the Finance Documents requiring consultation with or the consent or approval of or instructions from the Banks or any of them or the Majority Banks has been complied with. "Base Financial Statements" means the audited annual consolidated accounts of the Target for and as at the end of the financial year of the Target ended 31st March, 1995. "Bill" means a Sterling bill of exchange issued pursuant to the terms of this Agreement substantially in the form of Schedule H. "Borrower" means the Company, Bidco and each Additional Borrower. "Borrowing" means any indebtedness for, or for interest or other charges relating to, or otherwise in respect of or pursuant to:- (a) moneys borrowed or raised, including, without limitation, monies raised by the sale of receivables or other financial assets on terms (and to the extent) that recourse may be had to the vendor in the event of non-payment of such receivables or financial assets when due and monies raised under acceptance credit facilities and through the issue of bonds, notes, 5 debentures, bills, loan stocks and other debt securities (including any debt security convertible, but not at the relevant time converted, into share capital), provided that the Subordinated Debt (if any) shall not constitute a Borrowing; (b) the acquisition cost of assets or services to the extent payable on deferred payment terms after the time of acquisition or possession thereof by the party liable (whether or not evidenced by any bond, note, debenture, loan stock or other debt security), excluding (i) retentions which are normal in the trade concerned and not entered into primarily as a means of raising finance, (ii) any payment relating to construction works or the acquisition of fixed assets which will become payable only upon fulfilment of conditions relating to or comprising completion or commissioning of certain stages in such works or in the supply programme or the granting of any planning permission for such works or fixed assets and which has not yet become payable by reason of the non-fulfilment of any such condition, and (iii) any such cost payable on deferred payment terms which are normal in the business concerned and not entered into primarily as a means of raising finance, and which do not involve any deferral of payment of any sum for more than six months; (c) moneys received in consideration for the supply of goods and/or services to the extent received more than six months before the due date for such supply (but excluding any liability in respect of bona fide advance payments and deposits received from customers in the ordinary course of trade); (d) instalments under conditional sale agreements entered into primarily as a method of raising finance; (e) payments under leases (whether in respect of land, machinery, equipment or otherwise) and payments under hire purchase agreements and similar agreements and instruments, in each case where such leases, agreements or instruments are treated as finance leases in accordance with the Applicable Accounting Principles; (f) (i) any guarantee, indemnity, letter of credit or other legally binding instrument to assure payment of, or against loss in respect of non-payment of, any of the indebtedness specified in this definition and any counter-indemnity in respect of any thereof; and/or (ii) any legally binding agreement or other instrument entered into in connection with any of the indebtedness specified in this definition requiring, or giving any person the right (contingently or otherwise) to require, that any other person invest in, make advances to, purchase assets of or maintain the solvency or financial condition of any other person; (g) any interest rate and/or currency swap, and any other interest or currency protection, hedging or financial futures transaction or arrangement; (h) transactions which involve or have the commercial effect of the borrowing of commodities as part of an arrangement for or in substitution for the raising of finance, the value of indebtedness concerned for this purpose being the sum which must be paid and/or the value in money terms of the commodities which must be delivered by the "borrower" to, or to the order of, the "lender"; 6 provided that in computing an amount of Borrowings of any person or persons for the purposes of the definition of Consolidated Net Total Borrowings in Clause 1.1 or for the purposes of Clause 21.4(a) double counting shall be avoided and:- (i) any interest, dividends, commission, fees or other like financing charges, and any item falling within paragraph (g), shall be excluded, save in each case to the extent capitalised or more than 15 days overdue for payment; (ii) in respect of any bonds, notes, debentures, loan stocks and/or other debt securities issued at a discount or redeemable at a premium and constituting a Borrowing, the issue price thereof, together with any applicable discount or premium recognised or required by the Applicable Accounting Principles to be recognised at the time of calculation (other than amounts required by the Applicable Accounting Principles to be accounted for as interest) in Accounts of the relevant person (were any then to be prepared), shall be included; (iii) in respect of paragraphs (d) and (e) (but in the case of paragraph (d), only where no interest or similar charge is charged), only the principal amount thereof as determined by the Applicable Accounting Principles or (in the case of paragraph (e)) the capitalised value (as so determined) of any items falling thereunder shall be included; (iv) any item falling within paragraph (f) which is in respect of any sum excluded by item (i) or (iii) of this proviso shall be excluded; and (v) any item falling within paragraph (f)(ii) shall be included only to the extent that the same has been or (in accordance with the Applicable Accounting Principles) ought to be given a value in the latest or next Accounts, or in any notes to those Accounts. "Business Day" means a day (not being a Saturday or Sunday) on which banks and foreign exchange markets are open for business in London. "CSW" means Central and South West Corporation and/or any wholly owned Subsidiary or wholly-owned Subsidiaries thereof. "Chief Financial Officer" means the finance director of the Company from time to time or in his absence his deputy (being an Authorised Signatory of the Company). "Code" means The City Code on Takeovers and Mergers. "Commitment" in relation to a Bank means an amount appearing and designated as such against that Bank's name in Schedule B or in the Substitution Certificate or other document by which it became party to or acquired rights under this Agreement (being a "Tranche 1 Commitment" or a "Tranche 2 Commitment" or a "Tranche 3 Commitment" as therein indicated), in each case as reduced or increased by substitution or transfer pursuant to Clause 29 and any Substitution Certificates to which such Bank is party, and to the extent not cancelled, reduced or terminated under this Agreement. "Consolidated EBITDA" for any period comprising an annual Accounting Period of the Company or four consecutive quarterly Accounting Periods (including, where contemplated 7 by Clauses 21.2(a)(vii) and 22.2, pro forma Accounting Periods) of the Company (taken together as one period) means the profit of the Group for such period: before deducting all depreciation and other amortisation (including, without limitation, amortisation of goodwill arising from and upon the acquisition of the Shares and amortisation of Offer Costs in accordance with Financial Reporting Standard 4 issued by the Accounting Standards Board); before taking into account all Extraordinary Items (whether positive or negative) but after taking into account all Exceptional Items (whether positive or negative); before deducting advanced corporation tax, mainstream corporation tax and their equivalents in any relevant jurisdiction; before taking into account Consolidated Total Interest Payable for such period; before deducting any Offer Costs; after deducting any gain over book value arising in favour of the Group on the sale, lease or other disposal of any asset (other than on the sale of trading stock) during such period and any gain arising on revaluation of any asset during such period, in each case to the extent that it would otherwise be taken into account, whether as an Exceptional Item or otherwise; and for the purposes of the foregoing no item shall be effectively deducted or credited more than once in this calculation, all items shall be determined on a consolidated basis and (subject only as may be required in order to reflect the express inclusion or exclusion of items as specified in this definition) in accordance with the Applicable Accounting Principles and as determined from the consolidated Accounts of the Group for such annual Accounting Period or for the relevant Accounting Periods falling within such period. "Consolidated Net Total Borrowings" at any time means the aggregate at that time of the Borrowings of the members of the Group from sources external to the Group (giving effect to the proviso to the definition of Borrowings in Clause 1.1.), plus (to the extent not otherwise included) the amount of any actual or contingent liability of any member of the Group (a) for Borrowings at that time of any person in which any member of the Group has an ownership interest or (b) to provide funds by loan, subscription for share capital or otherwise to any person in which any member of the Group has an ownership interest; less the cash in hand and cash equivalents of the members of the Group at that time; less the aggregate amount of any premium over face value arising with respect to certain bonds issued by the Target prior to the date hereof, calculated on a consolidated basis and (subject only as may be required in order to reflect the express inclusion or exclusion of items as specified herein and/or in the definition of Borrowings in Clause 1.1) in accordance with the Applicable Accounting Principles and, where the calculation is being made as at the end of any Accounting Period for which a consolidated balance sheet of the Group 8 has been delivered to the Facility Agent, as shown in that balance sheet. "Consolidated Total Interest Payable" for any period comprising an annual Accounting Period of the Company or four consecutive quarterly Accounting Periods (including, where contemplated by Clauses 21.2(a)(vii) and 22.2, pro forma Accounting Periods) of the Company (taken together as one period) means the Interest accrued during such period as an obligation of any member or members of the Group (whether or not paid or capitalised during or deferred for payment after such period) adjusted to take account of any amount constituting Interest receivable by any members of the Group under interest rate and/or currency hedging agreements or instruments under which all parties are in compliance with their payment and other material obligations, all determined on a consolidated basis and (subject only as may be required in order to reflect the express inclusion or exclusion of items as specified in this definition) in accordance with the Applicable Accounting Principles and as shown in the consolidated Accounts of the Group for such annual Accounting Period or for the Accounting Periods falling within such period. "Dangerous Substance" means any radioactive emissions, noise, any natural or artificial substance (whether in the form of a solid, liquid, gas or vapour) the generation, transportation, storage, treatment, use or disposal of which (whether alone or in combination with any other substance) including (without limitation) any controlled, special, hazardous, toxic, radioactive or dangerous substance or waste, gives rise to a risk of causing harm to man or any other living organism or damaging the Environment or public health or welfare. "Default" means (a) any Event of Default or (b) any event which, with the giving of notice and/or the expiry of any cure period and/or fulfilment of any other condition (apart from the mere occurrence of such event) stated in any Finance Document would be or become an Event of Default, provided that any such event which by reason of express provisions in any Finance Document requires the satisfaction of a condition as to materiality before it may become an Event of Default shall not be a Default unless that condition is satisfied. "Director General" means the person appointed from time to time by the Secretary of State to hold office as the Director General of Electricity Supply for the purpose of the Act. "EBDR" means the rate, as determined by the Facility Agent at or about 11.00 a.m. on the Utilisation Date for a Utilisation by way of a Bill, at which Eligible Bills of an equivalent tenor to such Bill can be discounted in the London discount market at or about that time. "Eligible Bill" means a Sterling Bill of exchange eligible for rediscounting at the Bank of England. "Encumbrance" means any standard security, assignation in security, bond and floating charge, mortgage, pledge, lien, charge, assignment for the purpose of providing security, hypothecation, right in security, security interest or trust arrangement for the purpose of providing security, and any other security agreement or other arrangement having the effect of providing security (including, without limitation, the deposit of monies or property with a person with the primary intention of affording such person a right of set- off or lien). "Environment" means all, or any of, the following media, the air (including, without limitation, the air within buildings and the air within other natural or man-made structures above or below ground), water (including, without 9 limitation, ground and surface water) and land (including, without limitation, surface and sub-surface soil). "Environmental Claim" means any claim by any person: (a) in respect of any loss or liability suffered or incurred by that person as a result of or in connection with any violation of Environmental Law; or (b) that arises as a result of or in connection with Environmental Contamination and that could give rise to any remedy or penalty (whether interim or final) that may be enforced or assessed by private or public legal action or administrative order or proceedings, including without limitation, any such claim arising from injury to persons, property or natural resources. "Environmental Contamination" means each of the following and their consequences: (a) any release, emission, leakage or spillage of any Dangerous Substance at or from any site owned, occupied or used by any member of the Group into any part of the Environment; or (b) any accident, fire, explosion or sudden event at any site owned, occupied or used by any member of the Group which is directly or indirectly caused by or attributable to any Dangerous Substance; or (c) any other pollution of the Environment. "Environmental Law" means all applicable laws (including, without limitation, common law), regulations, directing codes of practice, circulars, guidance notices and the like having legal effect (whether in the United Kingdom or elsewhere) concerning pollution or the protection of human health, the Environment, the conditions of the work place or the generation, transportation, storage, treatment or disposal of Dangerous Substances. "Environmental Licence" means any permit, licence, authorisation, consent or other approval required by any Environmental Law. "Event of Default" means, subject to Clause 23.3, any of the events specified in Clause 23.1. "Exceptional Items" has the meaning given to it in Financial Reporting Standard 3 issued by the Accounting Standards Board (as in force at the date hereof), but shall exclude any items falling within the definition of Extraordinary Items. "Extraordinary Items" has the meaning given to it in Financial Reporting Standard 3 issued by the Accounting Standards Board but in addition shall include those items listed in paragraph 20 thereof. "Facility" means: (a) when designated "Tranche 1", the term loan facility referred to in Clause 2.1(a); (b) when designated "Tranche 2", the term loan facility referred to in Clause 2.1(b); 10 (c) when designated "Tranche 3", the revolving credit and bill acceptance facility referred to in Clause 2.1(c); (d) without any such designation, the Tranche 1 Facility, the Tranche 2 Facility or the Tranche 3 Facility, as the context requires. "Facility Office" in relation to a Bank means:- (a) the office of that Bank in the United Kingdom whose address appears under its name in Schedule B or is specified for this purpose in the schedule to the Substitution Certificate or in any other document by which such Bank became party to or acquired rights under this Agreement; and/or (b) any (and each) other office in the United Kingdom notified by that Bank to the Facility Agent in accordance with Clause 29.6 as the office through which that Bank will participate in the Facilities or any of them. "Finance Documents" means this Agreement, the Security Documents, any Bill, the Intercreditor Agreement and any other document designated as such by the Facility Agent and the Company together. "Finance Party" means each Arranger, each Bank, the Security Agent and the Facility Agent (together the "Finance Parties"). "Grid Shares" means shares in the capital of The National Grid Holding plc beneficially owned by the Target at the date hereof. "Group" means the Company and its Subsidiaries from time to time. "Guarantor" means each of the Company and Bidco. "Holding Company" means, in relation to a body corporate, any other body corporate of which it is a Subsidiary. "Information Memorandum" means an information memorandum relating to the Group as, when and if agreed between the Company and the Arrangers for use in the syndication of the Facilities. "Intercreditor Agreement" means an agreement in the agreed form made or to be made between the Company, the Finance Parties and the creditors from time to time for any Subordinated Debt. "Interest" means: (a) interest and amounts in the nature of interest accrued (including, without limitation, the interest elements of finance leases); (b) prepayment penalties or premiums incurred in repaying or prepaying any Borrowing; 11 (c) discount fees and acceptance fees payable or deducted in respect of any Borrowing (including all fees payable in connection with any letter of credit, guarantee or acceptance); and (d) any other costs, expenses and deductions of the like effect (including, without limitation, the interest element of finance leases) and any net payment (or, if appropriate in the context, receipt) under any interest rate hedging agreement or instrument, taking into account any premiums payable for the same and the interest element of any net payment (plus or minus any accrued exchange gains or losses) under any currency hedging instrument or arrangement and dividends. For the avoidance of doubt, "Interest" includes commitment, utilisation and non-utilisation fees (including, without limitation, those payable hereunder) but excludes agent's and front-end, management, arrangement and participation fees with respect to any Borrowing (including, without limitation, those payable hereunder) and any up-front premium or front-end fee payable pursuant to any interest rate hedging agreement or instrument. "Interest Date" means, in relation to any Advance or any overdue amount, the last day of an Interest Period relating thereto. "Interest Period" means, in relation to any Advance or Bill, each (or the) period determined in accordance with Clause 10 or Clause 6.2(e) respectively, and, in relation to any overdue amount, each period determined in accordance with Clause 11.3. "LIBOR" in relation to any Advance for any Interest Period relating thereto, means the arithmetic mean (rounded upward, if necessary, to four decimal places) of the respective rates, as supplied to the Facility Agent at its request, quoted by the Reference Banks to leading banks in the ordinary course of business in the London Interbank Market at or about 11.00 a.m. on the first day of such Interest Period for the offering of deposits in the currency of such Advance for the same period as such Interest Period, provided that if any of the Reference Banks shall be unable or otherwise fails so to supply such offered rate by 1.00 p.m. on the required date, "LIBOR" for the relevant Interest Period shall be determined, on the basis of the quotations of the remaining Reference Banks. "Licence" means a public electricity supply licence held by a member of the Group and issued pursuant to Section 6(1) of the Act, as modified or supplemented from time to time. "Licenceholder" means at any time a member of the Group which then holds a Licence. "Licence Undertaking" means any and each undertaking or assurance given in connection with the Offer by any one or more of CSW, the Company, Bidco or the Target or any Affiliate of any of them to the Director General or the Secretary of State concerning the management and/or ownership of and/or other matters concerning the Target once it has become a Subsidiary of the Company. "Majority Banks" means at any time: (a) whilst no Advance or Bill is outstanding, a Bank or Banks the aggregate amount of whose Commitments at the relevant time represents by value more than sixty-six and two-thirds per cent. (66 2/3%) of the aggregate Commitments at such time; 12 (b) if an Advance or Bill is then outstanding, a Bank or Banks the aggregate of whose participations in the Advances and aggregate potential liability under Bills outstanding at such time represents by value more than sixty-six and two-thirds per cent. (66 2/3%) of the aggregate of all the Advances and all the Outstanding Liability Amounts of all Bills outstanding at such time; provided that whilst the Original Banks are the only Banks, the term "Majority Banks" shall mean all of the Banks together. "Margin" means a rate per annum determined by reference to columns 1 and 3 of the table below (when used for the purpose of determining any rate of interest to apply hereunder to any Tranche 1 Advance or to any amount payable in respect of a Tranche 1 Advance or calculated by reference to any Tranche 1 Commitment or which in the reasonable opinion of the Facility Agent, whose opinion shall be conclusive in the absence of manifest error, is otherwise referable to a Tranche 1 Advance or any one or more of the Tranche 1 Commitments) or by reference to columns 1 and 2 of the table below (for any other purpose): (1) (2) (3) Ratio set out in Margin (p.a.) Margin (p.a.) Clause 22.1 (a) (a) Greater than 65:100 1.00% 0.75% (b) Equal to or less than 0.75% 0.50% 65:100 but greater than 60:100 (c) Equal to or less than 0.50% 0.375% 60:100 but greater than 55:100 (d) Equal to or less than 0.325% 0.25% 55:100 For this purpose the ratio set out in Clause 22.1(a) shall be determined by reference to (a) where the Company considers that such ratio has changed (in each case on one occasion only) sufficiently as a result of the prepayment of outstanding Tranche 1 Advances consequent on the sale of Grid Shares and/or the sale of receivables and application of the proceeds in reduction of Borrowings that the Margin should be reduced in accordance with the foregoing table, a certificate of the Company in a form satisfactory to the Facility Agent, acting reasonably, confirming the relevant occurrence and setting out the calculation of the resulting ratio, and/or (b) the Accounts for each quarterly and/or annual Accounting Period delivered to the Facility Agent pursuant to Clause 21.2(a)(i) or Clause 21.2(a)(ii) and the supporting report and/or certificate referred to in Clause 21.2(a)(iii) or (iv) (as appropriate). The Margin being determined shall be that set out in the relevant column opposite the relevant ratio level and shall have effect from (and including) (in the case of a determination as provided in (a) above) the date of delivery of the certificate therein referred to (including with respect to the determination of rates of interest for Interest Periods then current) or (in the case of a determination as provided in (b) above) the Accounting Date as at and for the Accounting Period ended on which such Accounts have been prepared (but only with respect to the determination of rates of interest for Interest Periods commencing after that Accounting Date and then only where the relevant interest has not fallen due for payment prior to the date of delivery of such Accounts 13 and report and/or certificate), in each case until (but excluding) the effective date for any subsequent change in the Margin in accordance with this definition. Notwithstanding the foregoing: (a) for the period from the date hereof to (but excluding) the effective date for any change in the Margin in accordance with this definition , the applicable Margin shall be that stated in the relevant column in line (a); and (b) where any such Accounts or report and/or certificate for any such Accounting Period have not been delivered to the Facility Agent on or before the last day for the delivery of such Accounts in compliance with Clause 21.2(a), the applicable Margin shall be that stated in the relevant column in line (a) (if any Tranche 1 Advances are then outstanding or if the Margin was at that level on such last day) or in line (b) (in any other case), until (but excluding) the effective date for any subsequent determination of the Margin in accordance with this definition; and (c) if at the time when the Margin would otherwise decrease in accordance with the foregoing a Default exists of which notice has been given by the Facility Agent to the Company (whether pursuant to Clause 23.2(a) or otherwise) such decrease shall not take effect for any purpose before the date when such Default is cured (and the Facility Agent is notified of that fact by the Company in writing) or waived by a Waiver Letter which makes reference to this paragraph of this definition. "Material Adverse Effect" means any effect which is or is reasonably likely: (a) to be materially adverse to (i) the ability of the Company, Bidco or the Target to perform its payment obligations under any of the Finance Documents, or (ii) the financial condition of the Group taken as a whole; and/or (b) to result in modification of the Licence in any manner which in the reasonable opinion of the Majority Banks would have (whether immediately or over time but prior to the Tranche 2/3 Repayment Date) a Material Adverse Effect as described in paragraph (a) above; and/or (c) result in the termination of the Licence without a new public electricity supply licence being issued simultaneously to the Company or a wholly-owned Subsidiary pursuant to Section 6(1) of the Act whose terms are not materially less favourable than those of the Licence. "Maturity Date" means the last day of the Interest Period relative to a Bill. "Obligor" means each Borrower and each Guarantor. "Offer" means the offers for the Shares to be made by CS First Boston Limited on behalf of Bidco substantially on the terms and conditions referred to in the Press Release, as the same may be amended, varied or waived in compliance with Clause 21.10. "Offer Costs" means all banking, brokerage, accounting, legal, public relations and other fees and commissions, out- of-pocket costs and expenses and stamp, registration, transfer and similar taxes incurred by or on behalf of the Company or any Subsidiary thereof (including any member of 14 the Target Group which becomes such a Subsidiary pursuant to the Offer) in connection with the negotiation, preparation and execution of this Agreement or otherwise in connection with the Offer. "Offer Document" means the document in the agreed form to be delivered to the shareholders of the Target containing the formal Offer. "Offer Termination Date" means the earliest date (as notified by Bidco to the Facility Agent in writing) on which all of the following have occurred: (a) all payments in respect of acceptances of the cash alternative in the Offer have been made in full, (b) no further such acceptances are possible, and (c) all procedures pursuant to section 428 et seq. Companies Act 1985 which are capable of being implemented have been completed and all payments pursuant thereto to shareholders in the Target have been made in full. "Option Schemes" means the Target's savings related employee share schemes and executive share option schemes as in effect at the Unconditional Date. "Optionholders" means holders for the time being of options issued under any of the Option Schemes. "Outstanding Liability Amount" means in relation to an outstanding Bill, the full face amount thereof. "Panel" means The Panel on Takeovers and Mergers. "Pooling and Settlement Agreement" means an agreement dated 30th March, 1990 made by the Target with the National Grid Company plc and others setting out the rules and procedures for the operation of an electricity trading pool and of a settlement system and, while the same has effect, the "Initial Settlement Agreement" also dated 30th March, 1990 and made between the same parties, as amended from time to time. "Power of Attorney" means a Power of Attorney issued by a Borrower to the Facility Agent substantially in the form set out in Schedule I. "Press Release" means the agreed form of press release by which the Offer is announced. "Principal Subsidiary" means each member of the Group (a) which is a Licenceholder, or (b) whose pre-tax profits represent at least ten per cent. of the consolidated pre-tax profits of the Group, or (c) the book value of whose gross assets represents at least ten per cent. of the consolidated gross assets of the Group, and for this purpose: (i) in the case of a company which itself has Subsidiaries, the calculation shall be made by using the consolidated pre-tax profits or gross assets, as the case may be, of it and its Subsidiaries; (ii) all calculations of consolidated pre-tax profits or gross assets shall be made by reference to: (A) the latest accounts of the relevant company (or, as the case may be, a consolidation of the accounts of it and its Subsidiaries) used for the purpose of the then latest unaudited quarterly or 15 audited annual consolidated Accounts of the Group delivered to the Facility Agent under Clause 21.2; and (B) those unaudited quarterly or audited annual consolidated Accounts (as the case may be) of the Group; and shall be made in accordance with the Applicable Accounting Principles; (c) the Target (once it becomes a Subsidiary of the Company) shall be deemed to be a Principal Subsidiary until it is shown to the Facility Agent's reasonable satisfaction not to be a Principal Subsidiary under paragraph (b) above; (d) any member of the Group which is not a Principal Subsidiary to which any Principal Subsidiary transfers in any annual Accounting Period any fixed assets in any transaction or series of transactions (related or not) with an aggregate book value or market value in excess of 25,000,000 pounds shall be deemed to be a Principal Subsidiary (and the Principal Subsidiary from which the assets were transferred shall be deemed to continue to be a Principal Subsidiary) unless and until it is shown (in each such case) to the Facility Agent's reasonable satisfaction not to be a Principal Subsidiary under paragraph (b) above; (e) in the event of any dispute as to whether a Subsidiary is or is not at any time a Principal Subsidiary the question shall be referred to the Auditors for determination according to the foregoing provisions of this definition (acting as experts at the cost of the Company) and their decision shall be conclusive and binding on the parties hereto in the absence of manifest error. "Project Finance Subsidiary" means any Subsidiary of the Company (other than a Licenceholder): (a) which is a company whose principal assets and business are constituted by the ownership, acquisition, development and/or operation of an asset whether directly or indirectly; (b) none of whose Borrowings in respect of the financing of such ownership, acquisition, development and/or operation of an asset benefits from any recourse whatsoever to any member of the Group (other than the Subsidiary itself or another Project Finance Subsidiary) in respect of the repayment thereof, except as expressly referred to in paragraph (b)(iii) of the definition of Project Finance Indebtedness in this Clause 1.1; and (c) which has been designated as such by the Company by written notice to the Facility Agent, provided that the Company may give written notice to the Facility Agent at any time that any Project Finance Subsidiary is no longer a Project Finance Subsidiary, whereupon it shall cease to be a Project Finance Subsidiary. "Project Finance Indebtedness" means any Borrowing which finances the acquisition, development, ownership and/or operation of an asset: (a) which is incurred by a Project Finance Subsidiary; or 16 (b) in respect of which the person or persons to whom such Borrowing is or may be owed by the relevant debtor (whether or not a member of the Group) has or have no recourse whatsoever to any member of the Group (other than to a Project Finance Subsidiary) for the repayment thereof other than: (i) recourse to such debtor for amounts limited to the cash flow or net cash flow (other than historic cash flow or historic net cash flow) from such asset; and/or (ii) recourse to such debtor for the purpose only of enabling amounts to be claimed in respect of such Borrowing in an enforcement of any Encumbrance given by such debtor over such asset or the income, cash flow or other proceeds deriving therefrom (or given by any shareholder or the like in the debtor over its shares or like interest in the capital of the debtor) to secure such Borrowing, provided that (I) the extent of such recourse to such debtor is limited solely to the amount of any recoveries made on any such enforcement, and (II) such person or persons are not entitled, by virtue of any right or claim arising out of in connection with such Borrowing, to commence proceedings for the winding up or dissolution of the debtor or to appoint or procure the appointment of any receiver, trustee or similar person or officer in respect of the borrower or any of its assets (save only for the assets the subject of such Encumbrance); and/or (iii) recourse to such debtor generally, or directly or indirectly to a member of the Group, under any form of assurance, undertaking or support, which recourse is limited to a claim for damages (other than liquidated damages and damages required to be calculated in a specified way) for breach of an obligation (not being a payment obligation or an obligation to procure payment by another or an indemnity in respect thereof or any obligation to comply or to procure compliance by another with any financial ratios or other tests of financial condition) by the person against whom such recourse is available. "Recognised Bank" means at any time: (a) a bank which is recognised by the Inland Revenue as carrying on a bona fide banking business in the United Kingdom for the purposes of Section 349 of the Income and Corporation Taxes Act 1988 (or any statutory re- enactment or modification thereof, in substantially the same form and content as at the date hereof) and which brings into account as a trading receipt of that business all payments of interest received by it hereunder; or (b) if at any time Section 349 of the Income and Corporation Taxes Act 1988 (or a statutory re-enactment or modification thereof, in substantially the same form and context as at the date hereof) shall not at any time continue in full force and effect or shall be modified with the result that a bank or certain banks shall cease to be so recognised, a bank carrying on a bona fide banking business in the United Kingdom which brings into account as a trading receipt of that business all payments of interest received by it hereunder. 17 "Reference Banks" means the principal London offices of Citibank, N.A., Credit Suisse and Union Bank of Switzerland and/or of such other Banks (if any) as may become Reference Banks pursuant to Clause 29.5. "Repayment Date" means each of (a) the date 364 days after the date on which the first Tranche 1 Advance shall be made hereunder (the "Tranche 1 Repayment Date"), and (b) the fifth anniversary of the Unconditional Date (the "Tranche 2/3 Repayment Date"). "Request" means a request, substantially in the form of Schedule C Part I or Part II (as appropriate), made by a Borrower to the Facility Agent for an Advance to be made or for a Bill to be accepted under this Agreement. "Reservations" means the principle that equitable remedies are remedies which may be granted or refused at the discretion of the court, the limitation of enforcement by laws relating to bankruptcy, insolvency, liquidation, reorganisation, court schemes, moratoria, administration and other laws generally affecting the rights of creditors, the time barring of claims under the Limitation Acts, the possibility that following the judgement in the case of In re Charge Card Services Limited (1986) it may not be possible for a bank to obtain a charge to secure obligations owed to it over monies deposited with it, the possibility that an undertaking to assume liability for or to indemnify a person against non-payment of UK stamp duty may be void, defences of set-off or counterclaim and similar principles, rights and defences under the laws of any foreign jurisdictions in which relevant obligations may have to be performed. "Same Day Funds" means freely transferable funds denominated in Sterling settled for same day value through the Clearing House Automated Payment System or through such other clearing system as the Facility Agent shall notify to the Company and the Banks as being customary for the settlement of Sterling transactions of the type contemplated by this Agreement. "Secretary of State" means the Secretary of State as referred to in the Act. "Security Documents" means the Debenture of even date herewith executed by both the Company and Bidco, together with such other documents (if any) as may be required to be entered into by the Company and/or Bidco pursuant to the terms thereof. "Shares" means existing unconditionally allotted or issued and fully paid shares in the Target and any further shares in the Target which are unconditionally allotted or issued before the date on which the Offer ceases to be open for acceptances (or such earlier date as the Company and the Banks may, subject to the Code agree) upon the exercise of any options granted under the Option Schemes or otherwise. "Sterling" and "pound" means the lawful currency for the time being of the United Kingdom. "Subordinated Debt" means separate unsecured loans to the Company from CSW and/or any other person permitted pursuant to Clause 21.6(c) which (a) have a maturity date falling after the Tranche 2/3 Repayment Date, (b) are not capable of acceleration whilst any amount may be or become payable by any Obligor hereunder or any of the Commitments remain in effect, (c) are subordinated (as regards priority of payment, ranking, rights of enforcement and all other 18 rights) as to principal, interest and all other amounts payable on or in respect thereof and any and all claims (including for damages) related thereto to all amounts which may be or become payable by the Company under the Finance Documents on the terms set out in the Intercreditor Agreement. "Subscription Agreement" means the subscription agreement made or to be made between the Company and CSW in the agreed form pursuant to which CSW agrees to subscribe for shares in the capital of the Company and/or Subordinated Debt of the Company. "Subsidiary" means (a) a subsidiary as defined in Section 736 of the Companies Act 1985 as amended, and (b) a subsidiary undertaking as defined in Section 258 of the Companies Act 1985 as amended, or, in either case, any statutory re-enactment or replacement thereof, provided that an entity falling only within paragraph (b) shall come within the definition of "Subsidiary" only (i) if it is a Licenceholder (in which case it shall be a Subsidiary for all purposes of this Agreement) and/or (ii) for the purposes of Clauses 21.4, 21.6(a) and 22 (and the defined terms used in those Clauses) and all Accounts and other financial information to be delivered pursuant to Clause 21.2. "Substitution Certificate" has the meaning ascribed to it in Clause 29.4 (together the "Substitution Certificates"), and references to "substitutes" shall be construed as references to persons becoming party to this Agreement pursuant to Substitution Certificates. "Target" means SEEBOARD plc. "Target Group" means Target and all those companies which immediately prior to the first Utilisation Date are Subsidiaries of Target and will remain so immediately thereafter. "Taxes" means all income and other taxes and levies, imposts, duties, charges, deductions and withholdings in the nature or on account of tax together with interest thereon and penalties with respect thereto, if any, and any payments made on or in respect thereof, and "Tax" and "Taxation" shall be construed accordingly. "Transaction Documents" means the Finance Documents, the Subscription Agreement, the Licence and any and each Licence Undertaking. "Unconditional Date" means the date upon which the Offer becomes or is declared unconditional in all respects without any breach of Clause 21.10. "Utilisation" means a utilisation of a Facility under this Agreement, being, when designated "Tranche 1", a utilisation of the Tranche 1 Facility by way of Advance, when designated "Tranche 2", a utilisation of the Tranche 2 Facility by way of Advance, and when designated "Tranche 3", a utilisation of the Tranche 3 Facility by way of Advance or Bill. "Utilisation Date" means in relation to each Advance or Bill, the date specified as such in the relative Request therefor or, on and after the making and/or issue thereof pursuant to such Request, the date on which it was made and/or issued. "Waiver Letter" means any letter or other document setting out the terms (if any) upon which (a) compliance with any provision of any Finance Document is waived, or (b) any 19 amendment to or variation of or departure from the terms of any Finance Document is approved, or (c) any consent or approval required or requested to be given is given, in each case by the Facility Agent with the agreement of the Majority Banks or if so required by the terms of this Agreement or any other Finance Document, all of the Banks. 1.2 Construction In this Agreement, save where the context otherwise requires:- (a) references to documents being in the "agreed form" means documents either (i) in a form previously agreed in writing by or on behalf of the Facility Agent and the Company, or (ii) in form and substance satisfactory to the Original Banks and initialled by or on behalf of the Company and the Facility Agent on or prior to the date hereof for the purposes of identification, or (iii) in a form substantially as set out in any Schedule to any Finance Document, or (iv) (if not falling within (i) to (iii) above) in form and substance satisfactory to the Original Banks acting reasonably; (b) references to "assets" shall include revenues and the right thereto and property and rights of every kind, present, future and contingent and whether tangible or intangible (including uncalled share capital) references to "shares" shall include stock; (c) the expressions "hereof", "herein", "hereunder" and similar expressions shall be construed as references to this Agreement as a whole (including all Schedules) and shall not be limited to the particular clause or provision in which the relevant expression appears, and references to "this Agreement" and all like indications shall include references to this Agreement as supplemented by the Accession Agreements, the Substitution Certificates, the Waiver Letters and any other agreement or instrument supplementing or amending this Agreement; (d) references to "indebtedness" shall be construed so as to include any obligation or liability (whether present or future, actual or contingent) for the payment, repayment or redemption of any obligation expressed by reference to monetary value or quantity or value of commodities (whether such obligation is performable by the payment of money or in some other way); (e) references to a "person" shall be construed as a reference to any person, firm, company, corporation, government, state or agency of a state or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing; (f) references to any of the Transaction Documents and any other agreement or instrument shall be construed as a reference to the same as amended, varied, supplemented or novated from time to time (including, where relevant, by any Accession Agreement and/or Substitution Certificate); (g) unless otherwise specified, references to Clauses and Schedules are references to, respectively, clauses of and schedules to this Agreement; (h) words importing the singular shall include the plural and vice versa; 20 (i) references (by whatever term, including by name) to the Company, Bidco, the Target, each Obligor, the Arranger, each Bank, each Reference Bank, the Facility Agent, the Security Agent, CSW or the parties to this Agreement shall, where relevant and subject as otherwise provided in this Agreement, be deemed to be references to or to include, as appropriate, their respective successors, replacements and assigns, transferees and substitutes permitted by the terms of the relevant Finance Documents; (j) reference to a time of day is, unless otherwise stated, a reference to London time and references to a "month" are references to a period starting on a particular day in a calendar month and ending on the numerically corresponding day in the next calendar month provided that if a period starts on the last day in a calendar month or if there is no numerically corresponding day in the month in which the relevant period ends, that period shall, save as otherwise provided in this Agreement, end on the last day in such later month (and references to "months" shall be construed accordingly). (k) the contents page of, and headings in, this Agreement are for convenience only and shall be ignored in construing this Agreement; (l) all references to statutes and other legislation include all re-enactments and amendments of those statutes and that legislation; (m) an outstanding Bill is "repaid" or "prepaid" by providing (in accordance with the terms hereof) cash cover therefor in the same currency as that in which such Bill is denominated in an amount determined in accordance with Clause 6.13, by reducing the Outstanding Liability Amount of such Bill or by cancelling such Bill and returning the original to the Facility Agent on behalf of the Banks which accepted the same (as appropriate) or providing other evidence (in form and substance satisfactory to the Facility Agent) that no further liability exists thereunder for any Bank; references to Utilisations being prepaid are to be construed accordingly insofar as those Utilisations involve Bills; (n) an amount "outstanding" at any time under or in respect of a Bill (or the "principal amount" thereof at any time) is the Outstanding Liability Amount of such Bill and a "drawing" under the Tranche 3 Facility includes the acceptance of a Bill by a Bank and each provision of this Agreement which contains reference to the concepts contained in this paragraph (n) shall be construed accordingly; (o) any reference to "certificate", "certification" (or any like term) in relation to an amount shall be a reference to a certificate containing such detail as is reasonably necessary in order to determine how such amount was calculated; and (p) any reference to a document being "certified" means a document certified by an Authorised Signatory of the party providing the document, or by lawyers acting on his behalf, as being genuine and in full force and effect and, if a copy, a true and complete copy of the original. 21 2. FACILITIES AND RELATED MATTERS 2.1 Facilities Subject to the terms of this Agreement, and in reliance upon the representations and warranties set out in Clause 20.1 as repeated from time to time pursuant to Clause 20.2, the Banks grant to the relevant Borrowers the following facilities: (a) Tranche 1 Facility: a term loan facility whereby, subject as aforesaid, the Banks, when requested by the Company pursuant to a Request, will make Tranche 1 Advances denominated in Sterling to the Company during the Tranche 1/2 Availability Period in an aggregate principal amount not exceeding the aggregate Tranche 1 Commitments; (b) Tranche 2 Facility: a term loan facility whereby, subject as aforesaid, the Banks, when requested by the Company pursuant to a Request, will make Tranche 2 Advances denominated in Sterling to the Company during the Tranche 1/2 Availability Period in an aggregate principal amount not exceeding the aggregate Tranche 2 Commitments; and (c) Tranche 3 Facility: a revolving credit facility whereby, subject as aforesaid, the Banks, when requested by a Borrower or the Company pursuant to a Request, during the Tranche 3 Availability Period will make to the Borrower specified in or giving such Request Tranche 3 Advances denominated in Sterling or accept Bills denominated in Sterling drawn by such Borrower, up to an aggregate amount at any one time outstanding with respect to all the Borrowers and all Utilisations taken together equal to the aggregate Tranche 3 Commitments. 2.2 Limitations Subject to the terms of this Agreement unless otherwise agreed by the Facility Agent and the Banks: (a) no Utilisation of any Facility may be made before the Unconditional Date; (b) Tranche 1 Utilisations and Tranche 2 Utilisations may be made only by the Company; (c) Tranche 1 Utilisations may not be made unless a member of the Group owns Grid Shares at the relevant Utilisation Date, and may not be made on or after the later of 31st January, 1996 and the date 30 days after the date on which shares in The National Grid Holding plc are first listed on The Stock Exchange or (if no such listing has occurred) are first able to be freely disposed of by holders thereof; (d) the aggregate of the outstanding Tranche 3 Utilisations at any time may not exceed the Tranche 3 Commitments then in effect; and (e) no Tranche 3 Utilisation may be made before there has been (or unless there is on the same day occurring) a drawing of the Tranche 1 or Tranche 2 Commitments. 22 2.3 Nature of the Banks' rights and obligations hereunder (a) Banks' Commitments: No Bank is obliged to participate in the making of any Utilisation (i) in the case of a Tranche 1 Advance, in an amount exceeding its undrawn Tranche 1 Commitment, (ii) in the case of a Tranche 2 Advance, in an amount exceeding its undrawn Tranche 2 Commitment, and (iii) in the case of a Tranche 3 Utilisation, if to do so would cause the aggregate of the amounts of (A) its participations in the Tranche 3 Advances outstanding under this Agreement, and (B) the Outstanding Liability Amounts in respect of all outstanding Bills accepted by such Bank, to exceed its Tranche 3 Commitment. (b) Obligations several: The obligations of each Bank under this Agreement are several. The failure of a Bank to carry out its obligations under this Agreement shall not relieve any other party of its obligations under any Finance Document. No Bank shall be responsible for the obligations of any other Bank under this Agreement. (c) Agents not responsible: The Facility Agent and the Security Agent, in their capacities as such, shall not be responsible for the non-performance by any Bank of its obligations under this Agreement. (d) Rights several: The obligations of each Obligor to the Finance Parties under the Finance Documents are owed to each of them as separate and independent obligations. Each Finance Party may, except as otherwise stated herein, separately enforce its rights hereunder without joining in any other Finance Party. 2.4 Nature of Borrowers' rights and obligations hereunder (a) Rights and Obligations: The obligations of the Borrowers under this Agreement in their capacities as such shall be separate and independent and not joint and several, and the Company and not the other Borrowers shall be liable for:- (i) payment of all amounts becoming due under Clause 15 to the extent that such amounts are not referable to Utilisations made by or to monies received or receivable from a particular Borrower or are not otherwise in the reasonable opinion of the Facility Agent referable to a particular Borrower; and (ii) payment of all amounts due under Clause 24, to the extent that in the reasonable opinion of the Facility Agent such amounts are not referable to a particular Borrower. (b) Facility Agent's determination: The written determination of the Facility Agent acting reasonably with regard to any matter which, according to Clause 2.4(a), is to be determined according to its reasonable opinion shall be conclusive save in the case of manifest error. No person shall have any recourse to the Facility Agent in relation to any such determination if it proves to be the case that its opinion was incorrect unless the Facility Agent was negligent or fraudulent in making any such determination. (c) Company as Obligors' Agent: Any and each Obligor (other than the Company) by and upon its execution of an Accession Agreement, irrevocably appoints the Company to act on its behalf as its agent in relation to the Finance Documents and irrevocably authorises the Company on its behalf to give all notices and instructions (including Requests) to execute on its behalf any Accession Agreement and to make such agreements capable of being given or made by such Obligor 23 notwithstanding that they may affect such Obligor, without further reference to or the consent of such Obligor and such Obligor shall be bound thereby as though such Obligor itself had given such notices and instructions (including, without limitation, any Requests) or executed or made such agreements. (d) Company's acts binding: Every act, omission, agreement, undertaking, settlement, waiver, notice or other communication given or made by the Company under this Agreement, or in connection with this Agreement (whether or not known to any other Obligor and whether occurring before or after such other Obligor became an Obligor under this Agreement) shall be binding for all purposes on all the Obligors as if the Obligors had expressly concurred with the same. In the event of any conflict between any notices or other communications of the Company and any other Obligor, those of the Company shall prevail. 2.5 Issues Relative to the Offer (a) Each of the Facility Agent and the Banks acknowledges that issues ("Issues") involving the possibility of amendment to the Offer or waiver of or determination of satisfaction (or otherwise) as to conditions to the Offer are likely to arise which will require to be determined at short notice if the efficient conduct of the Offer is not to be impeded. (b) Each of the Company, Bidco, the Facility Agent and the Banks acknowledges that, depending on the Issue involved, the agreement of the Banks or Majority Banks may be required before an Issue can be addressed in the manner in which the Company or Bidco wishes to address it whilst complying with the provisions of Clause 21.10 and other provisions of this Agreement. (c) The Facility Agent has identified to the Company and Bidco the names and contact details of certain persons to whom Issues should be referred for the purpose of initiating the process by which any agreement of the Banks or Majority Banks required in relation thereto may be sought. Each of the Banks has identified to the Facility Agent the names and contact details of certain persons to whom the Facility Agent should in turn refer such Issues for a determination as to whether such Bank will give or withhold its agreement where the agreement of the Banks or Majority Banks is required. (d) The Facility Agent undertakes to the Company and Bidco that it will use its reasonable endeavours to ensure the availability of appropriate personnel at all times to deal promptly on its behalf with any referral to the Facility Agent and the Banks of any Issues in relation to which any agreement of the Banks or Majority Banks is required and with the obtaining of the decision of the Banks or Majority Banks (as appropriate) as to whether or not to give such agreement, and that it will use its reasonable endeavours to ensure that each request for any such agreement is dealt with and responded to by it and the Banks within the time horizon communicated to it by the Company or Bidco. (e) Each Bank undertakes to each of the Facility Agent and the Company and Bidco that it will use its reasonable endeavours to ensure the availability of appropriate personnel at all times to deal promptly on its behalf with any referral to it by the Facility Agent of any Issue in relation to which its agreement is requested in order that its decision as to whether to give or withhold such agreement may be communicated promptly to the Facility Agent, and that it will use its reasonable endeavours to ensure that each such request is dealt with and responded to within the time horizon communicated to it by the Facility Agent. 24 (f) In addition to the undertakings of the Facility Agent and the Banks contained in paragraphs (d) and (e) above, the Facility Agent and each Bank acknowledges that (i) during the final phase of the Offer period and when notified by the Company or Bidco, authorised Bank personnel will have to be available on a 24 hour basis to consider Issues, and (ii) failure by any Bank to give a prompt response in relation to any Issue during such final phase could jeopardise the success of the Offer. Accordingly each Bank agrees that (so far as practicable, and taking into account the materiality of any particular Issue) it will establish an appropriate internal approval process to enable it to provide such a response. 3. PURPOSE AND RESPONSIBILITY 3.1 Purpose (a) The proceeds of each Advance shall be applied only in or towards financing the following: (i) in the case of Tranche 1 Advances and Tranche 2 Advances, payment of Offer Costs by the Company and/or subscription in cash for shares in Bidco (or making loans to Bidco subordinated to the obligations of Bidco under the Finance Documents on terms satisfactory to the Majority Banks) the proceeds of which will be used by Bidco to finance (A) the acquisition by Bidco of Shares pursuant to the Offer, (B) payments by Bidco to the Optionholders under proposals with respect to the Option Schemes put to them in connection with the Offer, (C) payment of Offer Costs by Bidco and/or (D) the refinancing of Borrowings by the Target from third parties; and (ii) in the case of Tranche 3 Advances, (A) the general working capital requirements of the Borrowers and their Subsidiaries, (B) subject to the proviso set out below, any of the purposes described in paragraph (ii) above, and (C) other general corporate purposes of the Borrowers and their Subsidiaries permitted under the terms of this Agreement, provided always that no more than 50,000,000 pounds may be drawn and outstanding on any day as Tranche 3 Utilisations where the proceeds have been applied directly or indirectly towards financing any of the purposes set out in sub-paragraphs (A), (B) or (C) of paragraph (i) above. (b) Each Borrower undertakes that the proceeds of each Utilisation by it shall be used only for the purposes permitted for such Utilisations by Clause 3.1, and that no Utilisation in any event shall be used in any way which would be illegal under, or would cause the invalidity or unenforceability (in each case in whole or in part) of any Finance Document under, any applicable law (including, without limitation, section 151 of the Companies Act 1985). 3.2 Responsibility Without prejudice to the foregoing and the remaining provisions of this Agreement, none of the Finance Parties shall be bound to enquire as to the use or application of the proceeds of any Utilisation, nor shall any of them be responsible for or for the consequences of such use or application. 25 4. CONDITIONS PRECEDENT 4.1 Conditions precedent to first Utilisation The obligations of each Finance Party to the Company and each Borrower under this Agreement with respect to the making of any Utilisations hereunder are subject to the conditions precedent that on or before the date of the first Utilisation hereunder: (a) Documents: the Facility Agent shall have received all of the documents listed in Schedule G in the agreed form and each of the documents referred to in Schedule G as being certified shall be certified by or on behalf of the relevant Obligor as being a true and complete copy, and in full force and effect as at the date such document is required to be delivered; (b) Equity: the Original Banks shall be satisfied, and shall have received such evidence as they may reasonably require, that CSW has subscribed in full in cash in the amount heretofore agreed in writing between the Company and the Facility Agent for ordinary shares and/or Subordinated Debt of the Company, and that such shares have been issued to, and are unconditionally owned by CSW and have been registered in its or their names in the books of the Company; and (c) Offer: the Offer shall have become or been declared unconditional in all respects without Bidco having declared the Offer or permitted the Offer to become unconditional in circumstances where any provision of Clause 21.10 (other than paragraphs (a)(ii) and/or (iii)) is breached thereby. 4.2 Further Conditions Precedent The obligations of each Finance Party with respect to the making of any Utilisation are subject to the further conditions precedent that both at the date of the Request for and at the Utilisation Date for such Utilisation: (a) no breach of Clause 21.10 (other than paragraphs (a)(ii) and/or (iii)) shall have occurred and be continuing which has not been waived by a Waiver Letter; and (b) all of the representations and warranties in Clause 20.1(a), (b), (c), (d), (f)(i) and (ii), (j), (n) and (p) are and will be correct (as if then made) immediately before the Unconditional Date, ignoring any references to Subsidiaries (other than Bidco), Principal Subsidiaries (other than Bidco), the Target and their respective businesses and assets. 4.3 Further Conditions Precedent The obligations of the Finance Parties in respect of each Utilisation (other than a Tranche 1 Advance, a Tranche 2 Advance or a Tranche 3 Advance the proceeds of which in each case are to be applied directly in financing, or in refinancing a Tranche 3 Advance the proceeds of which were applied in financing or refinancing, the payment of special dividends as referred to in Clause 3.1(a)(i) and/or the acquisition of Shares pursuant to the Offer and/or pursuant to procedures implemented under section 428 et seq. Companies Act 1985 directly or indirectly as described in Clause 3.1(a)(ii) or (iii)) are subject to the further conditions precedent that both at the date of the Request for and at the Utilisation Date for such Utilisation:- 26 (a) in respect of each Utilisation by the drawing of a Tranche 3 Advance by a Borrower to the extent that it does not exceed a Tranche 3 Advance made to such Borrower which is repaid on the date of such Utilisation by such Borrower (a "Rollover Utilisation"), no Event of Default shall have occurred and be continuing which has been declared pursuant to Clause 23.2 and not waived; and (b) (other than in respect of a Rollover Utilisation) (i) no Default shall have occurred and be continuing or would result from the making of such Utilisation which has not been waived pursuant to a Waiver Letter, and (ii) the representations and warranties in Clause 20.1 to be repeated on those dates are correct in all material respects and will be correct in all material respects immediately after the making of such Utilisation. 4.4 Additional Borrower The obligations of each Finance Party to each Additional Borrower under this Agreement with respect to the making of the first Utilisation by such Additional Borrower under this Agreement are further subject to the condition precedent that the Facility Agent shall have received in respect of the Additional Borrower and the Accession Agreement to which it is a party certified copies of all of the documents listed in Schedule G paragraphs 1, 5, 6, 7 and 8 in form and substance reasonably satisfactory to the Facility Agent. 5. ADVANCES 5.1 Delivery of Request Subject to the terms of this Agreement, the Company (in the case of the Tranche 1 Facility or the Tranche 2 Facility) or any Borrower (in the case of the Tranche 3 Facility) may request an Advance by delivering to the Facility Agent by facsimile transmission (provided that the original is received by the Facility Agent prior to 10.00 a.m. on the proposed Utilisation Date) or letter, prior to 10.00 a.m. on the second Business Day before the proposed Utilisation Date (or in any such case at such later time and/or date as may be agreed by the Facility Agent in writing), a duly completed Request. 5.2 Form of Request Each Request shall specify: (a) the Borrower in relation thereto (being, in the case of a Tranche 1 Advance, and a Tranche 2 Advance the Company and in the case of a Tranche 3 Advance to be applied in financing the acquisition of Shares pursuant to the Offer and/or pursuant to procedures implemented under section 428 et seq. Companies Act 1985 or the payment of Offer Costs, Bidco or the Company and, in the case of any other Tranche 3 Advance, any Borrower); (b) the Tranche designation for the requested Advance; (c) the proposed Utilisation Date, which shall be a Business Day falling during the applicable Availability Period and complying with any other applicable provisions of this Agreement; (d) the amount of the proposed Advance (the "Requested Amount") which shall be (i) in the case of any Tranche 1 Advance or Tranche 2 Advance, an amount not less than 40,000,000 pounds or such other amount as the Facility Agent may agree and (ii) in the case of a Tranche 3 Advance, 27 an amount not less than 10,000,000 pounds, provided always that no Requested Amount for a Tranche 3 Advance may exceed the then Available Facility Amount; (e) the duration of its (or, in the case of a Tranche 1 Advance or Tranche 2 Advance, its first) Interest Period, in the manner required by and subject to the terms of Clause 10; and (f) unless previously notified to the Facility Agent in writing and not revoked) the details of the bank and account to which the proceeds of the proposed Advance are to be made available. Subject to the terms of this Agreement, each Request shall be irrevocable and the Borrower named in the same shall be bound to borrow an Advance in accordance with such Request. The Facility Agent shall promptly notify each Bank of each Request. 5.3 Participations in Advances Subject to the terms of this Agreement each Bank shall, on the date specified in any Request for an Advance, make available to the Facility Agent in Sterling for the account of the relevant Borrower the amount of its participation in that Advance in the proportion (applied to the Requested Amount) which its Commitment bearing the same Tranche designation as such Advance bears to the aggregate amount of the Commitments having such designation. All such amounts shall be made available to the Facility Agent in accordance with Clause 12.1 for disbursement to or to the order of the relevant Borrower in accordance with the provisions of this Agreement. 6. THE BILL FACILITY 6.1 Delivery of Bill Request Subject to the terms of this Agreement, the Company or any Borrower directly may request a Utilisation of the Tranche 3 Facility by acceptance of Bills by delivering to the Facility Agent by facsimile transmission (provided that the original is received by the Facility Agent prior to 10.00 a.m. on the proposed Utilisation Date) or letter, prior to 10.00 a.m. on the second Business Day before the proposed Utilisation Date (or in any such case at such later time and/or date as may be agreed in a Waiver Letter), a duly completed Request. 6.2 Form of Bill Request Each Request for a Utilisation by acceptance of Bills shall specify: (a) the Borrower in relation thereto; (b) the proposed Utilisation Date, which shall be a Business Day falling during the Tranche 3 Availability Period; (c) the amount of the proposed Utilisation (the "Requested Amount") which shall be a minimum amount of 10,000,000 pounds and an integral multiple of 1,000,000 pounds, provided that the Requested Amount may not exceed the then Available Facility Amount; 28 (d) the purpose for which the Bills are requested; (e) the duration of the Interest Period for the Bills (being a period of between 7 and 183 days (inclusive) ending on or prior to the Tranche 2/3 Repayment Date; (f) (unless previously notified to the Facility Agent in writing and not revoked) the details of the bank and account to which the proceeds of the discounting of such Bills are to be made available. Subject to the terms of this Agreement, each such Request shall be irrevocable and the Borrower named in the same shall be bound to make a drawing by the acceptance of Bills in accordance with such Request. The Facility Agent shall promptly notify each Bank of each such Request. 6.3 Power of Attorney The Company shall procure that a Power of Attorney duly executed by any Borrower which is to make a Utilisation of the Tranche 3 Facility by acceptance of Bills shall be given to the Facility Agent at the same time as (or before) any Request for such Utilisation unless there is already in effect at that time an existing Power of Attorney executed by such Borrower. 6.4 Amount of Bills to be accepted by each Bank Subject to the terms of this Agreement, including without limitation Clause 6.7, the aggregate principal amount of the Bills to be accepted by a Bank will be the proportion of the Requested Amount which its Tranche 3 Commitment bears to the aggregate Tranche 3 Commitments on the proposed Utilisation Date. 6.5 Notification of the Banks The Facility Agent shall, not later than 1.00 p.m. one Business Day prior to the Utilisation Date, notify each Bank of the details of the requested Bills and of the aggregate principal amount of the Bills to be accepted by it. 6.6 Acceptance of Bills (a) The Facility Agent shall, not later than 10.30 a.m. on the Utilisation Date, deliver to each Bank Bills completed in accordance with Clause 6.9. (b) Each Bank shall accept the Bills delivered to it in accordance with paragraph (a) above. (c) The Facility Agent shall, not later than 11.30 a.m. on the Utilisation Date, notify the relevant Borrower and each Bank (except a Bank to which Clause 6.7 applies) of the applicable EBDR. (d) Subject to the terms of this Agreement, each Bank shall pay to the Facility Agent for value on the Utilisation Date for the relevant Borrower an amount equal to: (i) the amount which the Bank would have received as the proceeds of discounting if it had discounted the Bills accepted by it at the applicable EBDR; less (ii) acceptance commission calculated at the rate of the then applicable Margin on the aggregate principal amount of those Bills for the Interest Period relative thereto. 29 6.7 Advances as an alternative (a) If it would be contrary to any law or regulation for a Bank to accept any Bills or a Bank is not eligible to accept and discount Bills in the London Discount Market, then it may notify the Facility Agent accordingly by no later than 3.00 p.m. one Business Day prior to the proposed Utilisation Date. (b) If a Bank notifies the agent in accordance with paragraph (a) above, then, subject to the terms of this Agreement, that Bank shall instead make a Tranche 3 Advance in accordance with Clause 5 in Sterling on the relevant Utilisation Date in a principal amount equal to the aggregate principal amount of the Bills which it would otherwise have been obliged to accept pursuant to this Clause 6 and for an Interest Period equal to the Interest Period of those Bills. 6.8 Acceptance Commission Acceptance commission on any Bill shall be calculated on the basis of a year of 365 days and for the actual number of days in the relevant Interest Period. 6.9 Holding and completion of Bills (a) The Company and each Borrower shall ensure that the Facility Agent has a sufficient stock of Bills before delivering any Request for Bills. The Facility Agent shall, subject to the terms of this Agreement, hold such Bills to the order of the Borrower in whose favour they are drawn. (b) Each Bill shall: (i) be drawn in its own favour by and be signed by the relevant Borrower and endorsed by it in blank; (ii) be undated; (iii) have the Maturity Date and the face amount left blank; and (iv) be claused in a manner which complies with the Bank of England's requirements for Eligible Bills at that time. (c) Subject to the terms of this Agreement, the Facility Agent shall: (i) date each Bill with the relevant Utilisation Date; (ii) insert in each Bill the name of the Bank on which it is drawn, its face amount and its Maturity Date; and (iii) deliver the requisite number of completed Bills to the relevant Banks for acceptance in accordance with this Agreement. (d) If the Power of Attorney given to the Facility Agent by the relevant Borrower is in effect on the relevant Utilisation Date and no notice of revocation thereof has been received by the Agent and the Agent has not notified that Borrower in writing at least two Business Days prior to such proposed Utilisation Date that it will no longer exercise the powers given to it under the Power of Attorney, the Facility Agent, for and on behalf of the relevant Borrower, shall draw, endorse and deliver Bills complying with the requirements of paragraph (b) above to implement the relevant drawing in satisfaction of that Borrower's obligations thereunder. 30 Having executed the Bills in accordance with the Power of Attorney, the Facility Agent will hold the Bills and shall only release the Bills in accordance with the terms of this Agreement. (e) The Facility Agent shall be liable to the relevant Borrower for any loss or liability incurred by that Borrower as a result of any loss, theft, fraudulent usage or other misapplication of any Bill only to the extent that such loss or liability was incurred directly as a result of the Facility Agent failing to take reasonable care to safeguard the Bills. 6.10 Discounting of Bills Each Bank will arrange for each Bill accepted by it to be discounted on its behalf by a bank carrying on a bona fide banking business or a person bona fide carrying on the business of a discount house, in the United Kingdom in each case (which may include the Bank discounting the Bill itself). 6.11 Information relating to Bills Each Borrower, promptly on request by a Finance Party, shall supply to the Facility Agent for that Finance Party any information relating to any Bill (including the underlying trade transaction for that Bill) as that Finance Party may reasonably require or which may be required by the Bank of England or any other fiscal or monetary authority in the United Kingdom. 6.12 Eligible Bills Each Borrower shall ensure that each Bill drawn by it and accepted by a Bank is, assuming that the relevant Bank is a bank whose acceptances are then being treated as eligible acceptances by the Bank of England, eligible for rediscounting at the Bank of England. 6.13 Cash Cover (a) If any Borrower shall prepay any Bill pursuant to any of Clauses 9.2, 13.6, 14.5, 15.2 or 16 by providing cash cover therefor, the amount to be so provided shall be the face amount of that Bill discounted on the basis of such normal commercial rates prevailing at the time of prepayment for Sterling deposits of an amount equal to such face amount for the period from the date of prepayment to the Maturity Date of such Bill as the Facility Agent (after consultation with the Company and the relevant Bank) shall reasonably determine. (b) If any Borrower shall be required to provide cash cover for any Bill pursuant to Clause 23.2(e), the amount to be so provided and deposited with the Facility Agent shall be the face amount of such Bill, and the Facility Agent, promptly upon receipt, shall in turn deposit an amount equal to the amount so received by it for the period from the date of payment to the Maturity Date for such Bill at the then prevailing market rates for like deposits. Upon receipt of interest on such deposit, the Facility Agent shall pay an amount equal thereto to the Company (after deduction of any applicable tax) by way of interest on the cash cover deposited with it, unless a Default is then continuing in which event such amount shall be applied in payment of any overdue amount or, if none, added to the cash cover deposited with the Facility Agent. 31 7. CANCELLATION OF COMMITMENTS 7.1 Tranche 1 Commitments Any part of the Tranche 1 Commitments not borrowed hereunder before the expiry of the Tranche 1/2 Availability Period shall be cancelled automatically at close of business in London on such expiry. 7.2 Tranche 2 Commitments Any part of the Tranche 2 Commitments not borrowed hereunder before the expiry of the Tranche 1/2 Availability Period shall be cancelled automatically at the close of business in London on such expiry. 7.3 Tranche 3 Commitments The Tranche 3 Commitments shall be cancelled at close of business in London on the last day of the Tranche 3 Availability Period. 7.4 Voluntary Cancellation The Company may, on giving not less than three Business Days' prior written notice to the Facility Agent (which shall promptly give notice of the same to the Banks) at any time cancel or reduce the Tranche 1 Commitments, the Tranche 2 Commitments or the Tranche 3 Commitments in whole or in part (but, if in part, by a minimum of and in whole multiples of 10,000,000 pounds in each case and so that such reduction shall be applied pro rata to all the Tranche 1 Commitments, Tranche 2 Commitments or Tranche 3 Commitments (as the case may be)) without incurring any penalty or other cost, provided that such cancellation or reduction may only be effected to the extent of the amount of the Tranche 1 Commitments, Tranche 2 Commitments or Tranche 3 Commitments (as the case may be) undrawn on the date therefor taking into account any repayment or prepayment of any Utilisation due to be made on that date. Any such notice by the Company shall be irrevocable and shall specify the date upon which the reduction is to become effective and the amount of the reduction. 7.5 Reduction consequent on Repayment or Prepayment (a) Subject to Clause 7.5(b), the Tranche 1 Commitments shall be reduced and cancelled (such reduction being applied pro rata as between the Tranche 1 Commitments of all of the Banks), by the amount of any repayment or prepayment of any Tranche 1 Advance made pursuant to any provision of this Agreement. Subject as aforesaid, the Tranche 2 Commitments shall be reduced and cancelled (such reduction being applied pro rata as between the Tranche 2 Commitments of all the Banks) by the amount of any repayment or prepayment of any Tranche 2 Advance made pursuant to any provision of this Agreement. (b) Each Bank's Tranche 1 Commitment shall be reduced and cancelled by the amount of any prepayment of that Bank's participation in any Tranche 1 Advance made pursuant to any of Clauses 13.6, 14.5, 15.2 or 16. Each Bank's Tranche 2 Commitment shall be reduced and cancelled by the amount of any prepayment of that Bank's participation in any Tranche 2 Advance made pursuant to any of Clauses 13.6, 14.5, 15.2 or 16. 32 7.6 Limitations Save as expressly provided in this Agreement any amount of the Commitments cancelled or otherwise extinguished under this Agreement may not be reinstated. Save as expressly provided in this Agreement none of the Commitments may be reduced or cancelled under this Agreement. 8. REPAYMENT 8.1 Repayment of the Tranche 1 Advances The Company, subject to the application of Clause 9, shall repay the Tranche 1 Advances in full on the Tranche 1 Repayment Date. 8.2 Repayment of the Tranche 2 Advances The Company, subject to the application of Clause 9, shall repay the Tranche 2 Advances in full on the Tranche 2/3 Repayment Date. 8.3 Repayment of the Tranche 3 Utilisations (a) Each Borrower shall repay the full amount of each Tranche 3 Advance made to it on the last day of the Interest Period relating to that Tranche 3 Advance, provided always that each Tranche 3 Advance then outstanding shall be repaid in full on the Tranche 2/3 Repayment Date. (b) Each Borrower shall pay an amount equal to the face amount of each Bill on its Maturity Date to the Facility Agent for the Bank which accepted such Bill, provided always that each Bill then outstanding shall be repaid in full on the Tranche 2/3 Repayment Date. 9. PREPAYMENT 9.1 Prohibition No Borrower may prepay all or any part of any Utilisation except as expressly provided in this Agreement. 9.2 Voluntary Prepayment (a) Subject to Clause 9.2(b), the Company, on giving not less than three Business Days' prior written notice to the Facility Agent (which shall promptly give notice of the same to the Banks) specifying, inter alia, the amount and date for prepayment and identifying the Utilisation concerned, may procure that any Utilisation is prepaid at any time in whole or in part by the Borrower by which it was made, provided that any prepayment shall be (if in part) in the case of a Tranche 1 Advance or a Tranche 2 Advance of an amount which is at least 10,000,000 pounds or, in the case of a Tranche 3 Utilisation, of an amount which is a minimum (and, if more, a whole multiple) of 1,000,000 pounds. (b) Any such prepayment and any prepayment pursuant to Clause 9.3 shall be applied pro rata against the participations of the Banks in the Utilisation prepaid. 33 9.3 Mandatory Prepayment The Company and Bidco shall procure that the Net Proceeds of sales of Grid Shares by any member of the Group to any person who is not a member of the Group shall be applied in or towards prepayment of Tranche 1 Advances promptly after receipt of such Net Proceeds by the relevant member of the Group, provided that such Net Proceeds may be deposited in an interest bearing account with the Facility Agent with irrevocable instructions being given to the Facility Agent in a form satisfactory to it to apply such Net Proceeds on the next Interest Date(s) relative to the Tranche 1 Advances in or towards prepayment of the Tranche 1 Advances. For this purpose "Net Proceeds" means the consideration received by any member or members of the Group in respect of the disposal from the Group to any third party of the Grid Shares concerned, after deduction of all amounts for or on account of Taxes applicable to, or to any gain (including any deemed gain) resulting from, the disposal and all costs, fees, expenses and the like properly incurred by members of the Group in arranging and effecting that disposal. 9.4 Bills (a) If and to the extent that any prepayment of Tranche 3 Utilisations made or required to be made under any provision of this Agreement could be satisfied by a prepayment of Tranche 3 Advances, then Tranche 3 Advances rather than Bills shall be prepaid. (b) For the avoidance of doubt, Clauses 1.2(m) and 6.13 describe the manner in which a Utilisation by Bill may be prepaid for the purposes of this Agreement, and any prepayment of such a Utilisation shall be effected in that manner. 9.5 General provisions relating to prepayment (a) Any notice of prepayment given under this Agreement shall be irrevocable, and the Company or the Borrower named in such notice shall be bound to prepay (or, in the case of the Company, to procure prepayment) in accordance with such notice. (b) Amounts repaid and prepaid in respect of any Tranche 1 Advance or Tranche 2 Advance under any provision of this Agreement may not be reborrowed hereunder. (c) Amounts repaid or prepaid pursuant to Clause 8.3 or 9.2 in respect of Tranche 3 Utilisations may, prior to the Tranche 2/3 Repayment Date but subject to the terms of this Agreement, be redrawn as Tranche 3 Utilisations. Any amounts repaid or prepaid in respect of Tranche 3 Utilisations under any other provision of this Agreement may not be redrawn. (d) Any prepayment of any Advance under any provision of this Agreement shall be made together with interest accrued on the amount prepaid, but (subject to clause 24.2(c)), without premium or penalty. 10. INTEREST PERIODS 10.1 Selection and agreement The relevant Borrower shall give notice to the Facility Agent not later than 10.00 a.m. on the second Business Day prior to the commencement of each (or the) Interest Period relative to any Advance made hereunder (or in the Request therefor in the case of the first Interest Period relative to any Tranche 1 Advance or Tranche 2 Advance or the Interest Period in the case of any Tranche 3 Advance) 34 specifying the duration of such Interest Period, which in the case of any Tranche 1 Advance or Tranche 2 Advance shall be of one, three or six months and in the case of any Tranche 3 Advance shall be of one, two, three or six months, or in each case such other duration as may be agreed by the Facility Agent after consultation with the Reference Banks or as may be required in order to comply with Clause 10.3 (provided that if such duration is over six months then the Facility Agent may only agree with the unanimous consent of the Banks participating in such Advance). If the relevant Borrower fails to specify the duration of an Interest Period for any Advance the duration of that Interest Period shall be three months subject as otherwise required in order to comply with any other provision of this Agreement. 10.2 Splitting The relevant Borrower may, in any notice given pursuant to Clause 10.1 (or in any Request therefor) split any Tranche 1 Advance or Tranche 2 Advance into any number of separate Tranche 1 Advances or Tranche 2 Advances, respectively (each having an Interest Period of a different duration, separately designated in such notice or Request), provided that each such separate Advance must be of a minimum amount of 100,000,000 pounds. Each Advance resulting from any such splitting shall continue as a separate Advance unless and until consolidated with another Advance having the same Tranche designation. 10.3 Restrictions on selection (a) Each Borrower shall use its reasonable endeavours (i) to ensure the selection by it of the duration of Interest Periods pursuant to Clause 10.1 so that the Tranche 1 Repayment Date will also be an Interest Date relative to all outstanding Tranche 1 Advances and that the Tranche 2/3 Repayment Date will also be an Interest Date relative to all outstanding Tranche 2 Advances and Tranche 3 Advances, (ii) in relation to the Tranche 1 Advances and Tranche 2 Advances, to ensure the selection by it of the duration of Interest Periods pursuant to Clause 10.1 so that Tranche 1 Advances and Tranche 2 Advances are aggregated and consolidated pursuant to Clause 10.4 into Tranche 1 Advances and Tranche 2 Advances respectively of not less than 100,000,000 pounds each and (iii) to select the duration of Interest Periods pursuant to Clause 10.1 so as to ensure that no Advance shall have an Interest Period expiring after the Repayment Date relative thereto. (b) If it appears to the Facility Agent in good faith that the requirements of paragraph (a) above will not be met by a Borrower's selection of any Interest Period, the Facility Agent, on behalf of and after consultation with that Borrower, may select a different duration for such Interest Period (which shall prevail over that selected by that Borrower) in order to facilitate the meeting of such requirements. 10.4 Duration and Consolidation (a) The first (or the) Interest Period relative to each Advance shall commence on its Utilisation Date and end on the last day of the period selected or provided for in accordance with this Clause. Any subsequent Interest Periods in relation to a Tranche 1 Advance or Tranche 2 Advance shall commence on the expiry of the immediately preceding Interest Period relating thereto and end on the last day of the period so selected or provided therefor. If any Interest Period for any Advance would otherwise end on a day which is not a Business Day, such Interest Period shall end instead on the next Business Day. 35 (b) If any Interest Period relating to any Tranche 1 or Tranche 2 Advance expires on an Interest Date relative to (respectively) another Tranche 1 Advance or Tranche 2 Advance (as the case may be), then, with effect from such Interest Date, such Tranche 1 Advances or Tranche 2 Advances (as the case may be), subject to Clauses 10.1, 10.2 and 10.3, shall be aggregated and consolidated to form (respectively) a single Tranche 1 Advance or Tranche 2 Advance. 10.5 Notification The Facility Agent will notify the relevant Banks and the Company and (if different) the relevant Borrower of the duration of each Interest Period relating to each Advance promptly after ascertaining the same. 11. INTEREST 11.1 Rate The rate of interest applicable to each Advance for each (or the) Interest Period relative to it shall be the rate per annum determined by the Facility Agent to be the aggregate of:- (a) the Margin; (b) LIBOR relative to such Advance for such Interest Period; and (c) the Additional Cost, if any, relative to such Advance from time to time during such Interest Period. 11.2 Due dates Save as otherwise provided herein, interest accrued on each Advance for each Interest Period relative thereto shall be paid by the Borrower in respect of such Advance in Sterling in arrear on the last day of such Interest Period and also, in the case of an Interest Period of a duration exceeding six months, on the last day of each consecutive period of six months from the first day of such Interest Period. 11.3 Default interest If any Obligor fails to pay any amount payable by it under this Agreement on the due date therefor, such Obligor, on demand by the Facility Agent from time to time, shall pay interest on such overdue amount (including overdue default interest) in the currency in which such overdue amount is for the time being denominated from the due date up to the date of actual payment, both before and after judgement, at a rate determined by the Facility Agent to be one per cent. (1%) per annum above that which would be payable if such overdue amount constituted, during the period of non-payment thereof, an Advance made to such Obligor in the same currency as the overdue amount for successive Interest Periods of such duration of up to three months as the Facility Agent, after consultation with the Company to the extent practicable in the circumstances, may designate from time to time. Such rate shall be determined or redetermined on the first Business Day of each such Interest Period. In calculating the amount of default interest due from the Guarantor in respect of any overdue amount due from any Borrower, the amount of default interest accrued due from such Borrower and the amount of overdue default interest accrued due from the Guarantor shall not be double counted. 36 11.4 Bank basis Interest shall accrue from day to day, and be computed on the basis of a year of 365 days for the actual number of days elapsed. 11.5 Determination conclusive; notification Each determination of a rate of interest by the Facility Agent under this Agreement shall, in the absence of manifest error, be conclusive and shall be promptly notified to the Company, the relevant Borrower and the Banks. 12. PAYMENTS 12.1 Funds, place and currency Unless otherwise agreed between the Banks, the Facility Agent and the Company, all payments to be made to the Facility Agent by any Obligor under any Finance Document or by any Bank under this Agreement shall be made on the due date to the Facility Agent at The Royal Bank of Scotland plc, sort code 16-00-34, for credit to Account Number 10000643 or to such other account at such bank or office as the Facility Agent shall designate by not less than three Business Days' notice to the Company or such Bank (as the case may be). 12.2 Application Each payment received by the Facility Agent for the account of another person pursuant to Clause 12.1 shall:- (a) in the case of a payment received for the account of any Borrower, be made available by the Facility Agent to that Borrower by application, on the date and in the funds of receipt:- (i) first, in or towards payment of any amounts then due and payable (and unpaid) by that Borrower under this Agreement; and (ii) second, in payment to such account as that Borrower shall have properly designated for the purpose in the relevant Request or otherwise in writing; and (b) in the case of any other payment, be made available by the Facility Agent to the person for whose account the payment was received (in the case of a Bank, for the account of its Facility Office) on the date and in the currency and funds of receipt to such account of the person with the office or bank in the country of the currency concerned as that person shall have previously notified to the Facility Agent for the purposes of this Agreement. The Facility Agent (or the Security Agent in the case of monies received pursuant to the Security Documents) shall promptly distribute monies received for the account of the Banks among the Banks pro rata to their respective entitlements and in the funds and currency of receipt, provided that the Facility Agent or Security Agent (as the case may be) may deduct therefrom any amount due to the Facility Agent pursuant to Clause 12.4 or 30.2. 37 12.3 Currency Any amount payable under this Agreement, unless otherwise provided, shall be payable in Sterling. 12.4 Recovery of payments Unless the Facility Agent shall have received notice from a Bank or a Borrower not later than 11.00 a.m. on the Business Day prior to the date upon which such Bank or a Borrower (the "Party Liable") is to pay an amount to the Facility Agent for transfer to any Borrower or any Bank respectively (the "Payee") that the Party Liable does not intend to make that amount available to the Facility Agent on the due date, the Facility Agent may assume that the Party Liable has paid that amount to the Facility Agent on that date in accordance with this Agreement. In reliance upon that assumption, the Facility Agent may (but shall not be obliged to) make available to the Payee(s) a corresponding sum. If that amount is not in fact so made available to the Facility Agent, the Payee(s) shall forthwith on demand repay that sum to the Facility Agent together with interest on such sum until its repayment at a rate determined by the Facility Agent to reflect its cost of funds incurred in making available the corresponding amount to that Payee(s) (any such determination to be conclusive in the absence of manifest error). The Facility Agent may make a demand on a Borrower as Payee only if and to the extent that the Facility Agent has demanded the appropriate funds from the relevant Bank and those funds have not been paid by that Bank forthwith after the demand. The provisions of this Clause are without prejudice to any rights the Facility Agent and the Payee may have against the Party Liable. 12.5 Non-Business Days Whenever any payment under any Finance Document shall become due on a day which is not a Business Day, the due date for that payment shall be extended to the next Business Day. During any such extension of the due date for payment of any principal, interest shall be payable on such principal at the rate payable on the original due date. 12.6 Appropriations Other than in the case of prepayment to a specific Bank permitted by the terms of this Agreement, in the case of a partial payment by any Obligor of amounts due and payable under any Finance Document, the Facility Agent or, as the case may be, the Security Agent may appropriate such payment towards such of the amounts due and payable by such Obligor under this Agreement as the Facility Agent or, as the case may be, the Security Agent may with the approval of the Majority Banks decide (subject to the requirement that such payment shall be appropriated first towards those overdue amounts which attract the higher Margin), and each part of any payment so appropriated towards a particular amount due and payable under any Finance Document shall be treated as received by the Facility Agent or, as the case may be, the Security Agent for the account of the Banks to whom such particular amount is due, in each case pro rata to the respective amounts thereof due to each of them from such Obligor. Any such appropriation shall override any appropriation made by any Obligor. 38 12.7 Certifications Save as otherwise provided herein, any certification or determination of a rate or amount or other matter as referred to herein and made by the Facility Agent or a Bank, as the case may be, shall be prima facie evidence of the same. 13. TAXES 13.1 Applicable Taxes As used in this Agreement, "Applicable Taxes" means all Taxes imposed by or in the jurisdiction in which the relevant Obligor is resident or any other country through or out of which the relevant payment is made or by any federation or organisation of which that country may be a member or by or through any taxation authority of that country, federation or organisation on any payment by any Obligor or any Finance Party to any Finance Party, under any Finance Document, other than Taxes imposed on that payment which would not have been imposed on that payment if the Finance Party to which or for whose account that payment was made was a Recognised Bank. 13.2 No Set-Off or Deductions All payments to be made by any Obligor under any of the Finance Documents shall be made:- (a) without set-off or counterclaim; and (b) free and clear of all and without deduction for or on account of any Applicable Taxes, except to the extent that such Obligor is compelled by law to make payment subject to the Applicable Taxes. 13.3 Gross-up If any Applicable Taxes or amounts in respect thereof must be deducted from any payment by an Obligor under any Finance Document or any other deductions must be made from any amounts paid by any Obligor (or from any corresponding payment by any Finance Party to any other Finance Party under or pursuant to the terms of any Finance Document), or any such payment shall otherwise be required to be made subject to any Applicable Tax, such Obligor shall pay such additional amounts as may be necessary to ensure that each Finance Party receives a net amount after deduction for and payment of all Applicable Taxes equal to the full amount which it would have received had payment not been made subject to the Applicable Tax. All Applicable Taxes required to be deducted from any payment by any Obligor under any Finance Document shall be deducted and paid when due by such Obligor to the applicable Tax authorities. Each Finance Party shall notify each Obligor through the Facility Agent of the application of this Clause 13.3 to any payment then due or to become due to it under any Finance Document promptly upon its becoming aware of the same. 13.4 Tax Receipts As soon as reasonably practicable after each payment by any Obligor of any Applicable Tax (or any Tax which would be an Applicable Tax save for the exceptions contained in Clauses 13.1(a) or (b)) on any payment by it under any Finance Document, such Obligor shall deliver to the Facility 39 Agent for the relevant payee Finance Party or other party to this Agreement evidence reasonably satisfactory to the payee (including copies of relevant Tax receipts received by such Obligor, which such Obligor shall use its reasonable endeavours to obtain) that the relevant Tax has been duly remitted to the appropriate authority. 13.5 Tax Saving (a) In the event that, following the imposition of any Applicable Tax on any payment by any Obligor (or any corresponding payment by any Finance Party to any other Finance Party under this Agreement) in consequence of which such Obligor is required under Clause 13.3 to pay such Applicable Tax or to pay any additional amount in respect of it, any Finance Party shall in its sole opinion and based on its own interpretation of any relevant laws or regulations (but acting in good faith) receive or be granted a credit against or remission for or deduction from or in respect of any Applicable Tax payable by it, or shall obtain any other relief in respect of Applicable Tax on its profits or income, which in such Finance Party's opinion in good faith is both reasonably identifiable and quantifiable by it without requiring such Finance Party or its professional advisers to expend a material amount of time or incur a material cost in so identifying or quantifying (any of the foregoing, to the extent so reasonably identifiable and quantifiable, being referred to as a "saving"), such Finance Party shall, to the extent that it can do so without prejudice to the retention of the relevant saving and subject to such Obligor's obligation to repay the amount to such Finance Party if the relevant saving is subsequently disallowed or cancelled (which repayment shall be made promptly on receipt of notice by such Finance Party of such disallowance or cancellation), reimburse such Obligor promptly after receipt of such saving by such Finance Party with such amount as such Finance Party shall in its sole opinion but in good faith have concluded to be the amount or value of the relevant saving. (b) Nothing contained in this Agreement shall interfere with the right of any Finance Party to arrange its Tax and other affairs in whatever manner it thinks fit and, in particular, no Finance Party shall be under any obligation to claim relief from Tax on its corporate profits, or from any similar Tax liability, in respect of the Applicable Tax, or to claim relief in priority to any other claims, reliefs, credits or deductions available to it or to disclose details of its Tax affairs. No Finance Party shall be required to disclose any confidential information relating to the organisation of its affairs. (c) Each Finance Party will notify the relevant Obligor promptly of the receipt by such Finance Party of any saving and of such Finance Party's opinion as to the amount or value of that saving. 13.6 Right to Prepay In the event that any such Applicable Tax is required to be deducted from any payment to be made by any Borrower to any Finance Party under this Agreement (or on any corresponding payment by the Finance Party to any other Finance Party under this Agreement) and, in consequence, any Borrower is or would be obliged under Clause 13.3 to pay any additional amounts to such Finance Party in respect of the Applicable Tax, such Borrower may prepay the whole (but not part) of the then outstanding amount of such Finance Party's participation in the Utilisations made by it, together with all interest and other charges accrued on those participations and all other amounts payable to such Finance Party under the Finance Documents, on giving not less than 40 ten Business Days' prior written notice to such Finance Party (through the Facility Agent). 13.7 Recognised Bank Each Finance Party confirms to the Company that it is a Recognised Bank and agrees to notify the Company promptly if it becomes aware that (a) it is no longer a Recognised Bank, or (b) Clause 13.3 may for any other reason apply in respect of payments made to it or to the Facility Agent for its account. 14. MARKET DISRUPTION 14.1 Disruption events If, in relation to any Advance or proposed Advance and any (or the) Interest Period relative thereto:- (a) no (or where there is more than one Reference Bank, only one) Reference Bank supplies an interest rate to the Facility Agent as required by the definition of LIBOR after the Facility Agent has requested such a rate from the Reference Banks; or (b) the Facility Agent shall have received notification from a Bank or Banks whose participations in such Advance constitute at least fifty per cent. (50%) by value of such Advance that by reason of circumstances affecting the London Interbank Market: (i) deposits in Sterling for the same period as such Interest Period will not be readily available to them in the London Interbank Market in sufficient amounts in the ordinary course of business to fund their respective participations in such Advance for such Interest Period; or (ii) whilst such deposits are so available, the cost of such deposits exceeds LIBOR as determined in relation to such Advance for such Interest Period, the Facility Agent shall promptly give written notice of such determination or notification to the relevant Borrower, the Company (if different) and each of the Banks. 14.2 Effect The giving of any notice by the Facility Agent pursuant to Clause 14.1(a) or 14.1(b) shall not relieve any Bank of any obligation it may have under this Agreement to advance, on the relative Utilisation Date, its participation in any Advance (including any Advance for which a Request was given prior to such notice by the Facility Agent). 14.3 Negotiation and Substitute Basis During the period of 15 days after the giving of any notice by the Facility Agent pursuant to Clause 14.1, the Facility Agent (in consultation with the Banks) shall negotiate with the relevant Borrower and the Company in good faith with a view to ascertaining whether a substitute basis (a "Substitute Basis") may be agreed for the making of further Advances and/or the maintaining of any existing Advances to which such notice by the Facility Agent related for the current Interest Period relative to those Advances. If a Substitute Basis is agreed by all the Banks, the relevant 41 Borrower and the Company it shall apply in accordance with its terms from the commencement of such Interest Period. The Facility Agent shall not agree any Substitute Basis on behalf of any Bank without the prior consent of that Bank. 14.4 Cost of Funds If a Substitute Basis is not so agreed by the relevant Borrower, the Company and all the Banks by the end of the 15 day period, each Bank's participation in each then existing Advance to which the notice by the Facility Agent related shall bear interest during the current Interest Period relative thereto at the rate certified by such Bank to be its cost of funds (from such sources as it may reasonably select out of those sources then available to it) for such Interest Period in relation to such Advance, plus the applicable Margin. 14.5 Right to Prepay Where Clause 14.4 applies the relevant Borrower, upon giving not less than five Business Days' prior written notice (through the Facility Agent) to any Bank , may prepay the whole (but not part) of the participation of that Bank in all (but not some only of) the existing Advances to which the notice by the Facility Agent related and, if so specified in the notice, in all (but not some only of) the other outstanding Utilisations of that Borrower, together with all interest accrued on those Advances and all other amounts payable under this Agreement in connection with the Utilisations prepaid. 14.6 Review of Substitute Basis So long as any Substitute Basis is in force or Clause 14.4 shall apply in relation to any Advance, the Facility Agent, in consultation with the relevant Borrower, the Company and each Reference Bank shall from time to time, but not less often than monthly, review whether or not the circumstances referred to in Clause 14.1 still prevail with a view to returning to the normal interest provisions of this Agreement. 14.7 Bills (a) If, in relation to any Bills: (i) the Facility Agent determines that adequate and fair means do not exist for ascertaining the applicable EBDR; or (ii) the Facility Agent determines that the Bills do not comply with the then current Bank of England regulations for Sterling bankers' acceptances (save in consequence of the Bank on which they are drawn not being a bank whose acceptances are eligible for discounting at the Bank of England according to the Bank of England's eligibility criteria in force at the date hereof), the Agent shall promptly notify the relevant Borrower and each of the Banks of that fact and that this Clause 14.7 is in operation. (b) After any notification under paragraph (a) above: (i) the relevant Bills shall not be accepted; 42 (ii) in the case of sub-paragraph (a)(i) above, no further Requests for Utilisations by way of Bills may be delivered until the Facility Agent notifies the Company that it is once again able to determine EBDR; and (iii) any Request given by or on behalf of any Borrower pursuant to clause 6.1 prior to such notification for Bills not yet accepted shall be treated as if it were instead a request for an Advance made pursuant to clause 5.1 specifying an Interest Period of one month (provided that period does not extend beyond the Tranche 3 Availability Period) of an amount equal to the principal amount of the requested Bills, provided that for the purposes of Clause 11.1 (Interest Rate), if necessary, LIBOR may be determined by the Facility Agent at or about 1.00 p.m. on the applicable Utilisation Date. 15. INCREASED COSTS 15.1 Increased Costs Subject to Clause 15.3, if the result of:- (a) any change after the date hereof in or the introduction after the date hereof of, or any change after the date hereof in the interpretation, administration or application by any competent court, authority or organisation in the relevant jurisdiction of, any law, regulation or treaty or in or of any official directive or official request from, or the rules of, any governmental, fiscal, monetary or regulatory (including self-regulatory) authority, organisation or agency (whether or not having the force of law but, if not having the force of law, being a regulation, treaty, official directive, official request or rule which it is the practice of banks in the relevant jurisdiction to comply with) after the date hereof which affects banks or financial institutions of the same type as any Finance Party in that jurisdiction; or (b) compliance by any Finance Party (or any Holding Company of such Finance Party) with any such change or introduction; including, in each case without limitation, those relating to Taxation, reserves, special deposit, cash ratio, liquidity or capital adequacy requirements or other forms of banking, fiscal, monetary or regulatory controls, is that:- (i) any Finance Party (or any Holding Company of such Finance Party) incurs an increased cost as a result of its (or such Finance Party's) having entered into, and/or performing and/or maintaining and/or funding its (or such Finance Party's) obligations under, any Finance Document; or (ii) any Finance Party (or any Holding Company of such Finance Party) incurs an increased cost in making, funding or maintaining all or any advances comprised in a class of advances or acceptances formed by or including its (or such Finance Party's) participation in some or all of the Utilisations made or to be made under this Agreement; or (iii) any amount receivable by any Finance Party under any Finance Document is reduced (save to the extent matched by a reduction in the cost of providing the Facilities) or the effective rate of return to any 43 Finance Party (or any Holding Company of such Finance Party) under any Finance Document or on its (or such Holding Company's) capital employed for the purposes of this Agreement is reduced; or (iv) any Bank (or any Holding Company of such Finance Party) makes any payment or forgoes any interest or other return on or calculated by reference to any amount received or receivable by it (or by such Bank) from any Obligor or the Facility Agent or the Security Agent or any other Bank under any Finance Document; and such increased cost (or the relevant proportion thereof), reduction, payment, forgone interest or other return is not compensated for by any other provision of this Agreement (including, without limitation, by any Additional Cost payable pursuant to Clause 11.1(c)), then and in each such case:- (A) such Finance Party shall notify the Company through the Facility Agent in writing of that event promptly upon its becoming aware of the event including, in reasonable detail, particulars of the event; (B) subject as provided below and to Clause 2.4(a), within five Business Days after receipt by any Borrower (directly or through the Company) of a written demand from time to time by such Finance Party through the Facility Agent accompanied by a certificate of such Finance Party specifying the amount of compensation claimed and setting out the calculation of the amount in reasonable detail, such Borrower shall pay to the Facility Agent for the account of such Finance Party (or, as the case may be, Holding Company of such Finance Party) such amount as shall compensate such Finance Party (or such Holding Company) for such increased cost (or, in the case of (i) or (ii) above, the portion of such increased cost as is attributable to its making, funding or maintaining Advances and/or accepting and paying Bills or maintaining its obligation, if any, to participate in Utilisations under this Agreement), reduction, payment or forgone interest or other return. Nothing in this Clause shall oblige any Finance Party (or any Holding Company of such Finance Party) or the Facility Agent or the Security Agent to disclose any confidential information relating to the organisation of its affairs. Notwithstanding the foregoing, any claim by any Bank pursuant to this Clause 15.1 in respect of any period more than 90 days before such Bank gave notice pursuant to paragraph (A) above of the relevant event shall be disallowed. 15.2 Right to Prepay Where Clause 15.1 applies the relevant Borrower, upon giving not less than five Business Days' notice to that Finance Party (being a Bank) may prepay the whole (but not part only) of that Finance Party's participation in all (and not some only of) the outstanding Advances and Bills made or issued to or for the account of that Borrower, together with all interest and other charges on or in respect thereof, and all other amounts payable by it under the Finance Documents to such Finance Party, provided always that any such notice by such Borrower is given whilst circumstances exist entitling such Finance Party to claim compensation under this Clause 15. 44 15.3 Exceptions Clause 15.1 shall not apply so as to oblige the Company or any other Borrower to compensate any Finance Party for Applicable Taxes (to the extent that the provisions of Clause 13.3 fully and effectively compensate therefor) or for any Taxes which would have been Applicable Taxes save only for any failure by the relevant Finance Party to satisfy the exception to Clause 13.1 or for any increased cost, reduction, payment or forgone interest or other return:- (a) resulting from any change in or the introduction of, or any change in the interpretation or application of, any law, regulation, treaty, directive, request or rules relating to, or any change in the rate of, Taxation on the overall net income of such Bank imposed in the jurisdiction in which such Finance Party's principal office for the time being is situate or on the overall net income of such Finance Party's Facility Office imposed in the jurisdiction in which that office is situate; or (b) resulting from the implementation by the applicable authorities having jurisdiction over such Finance Party and/or its Facility Office of the matters set out in the statement of the Basle Committee on Banking Regulation and Supervisory Practices dated July, 1988 and entitled "International Convergence of Capital Measurement and Capital Standards", to the extent, at the rates and according to the timetable provided for therein; or (c) attributable to such Finance Party after the date of this Agreement entering into a commitment to lend to a third party which is, at the time that commitment is entered into, in breach of any law, regulation, treaty, directive, request or rule relating thereto as aforesaid. 16. ILLEGALITY If any change after the date hereof in or the introduction after the date hereof of any law, regulation, treaty or (whether or not having the force of law but, if not having the force of law, being one with which it is the practice of banks in the relevant jurisdiction to comply) official directive or rule of any governmental, fiscal, monetary or regulatory (including self regulatory) authority, organisation or agency, having jurisdiction (together "Laws"), or any change after the date hereof in the interpretation, administration or application of Laws by a competent court or the relevant authority, organisation or agency or compliance by any Finance Party with any such change or introduction of Laws or change in interpretation, administration or application of Laws, shall make it (or make it apparent that it is) unlawful or a breach of Laws for any Finance Party to make available or fund or maintain the Utilisations or any part of the Utilisations under this Agreement or to give effect to its obligations and exercise its rights as contemplated by this Agreement, that Finance Party may, by notice to the Obligors' Agent through the Facility Agent, declare that to the extent necessary to avoid any such illegality or breach of Laws its obligations to the Company and the other Borrowers under the Finance Documents shall be terminated forthwith or, if later, on the latest date to which the obligations may remain in effect without causing the Finance Party to be in breach of Laws, whereupon:- (a) Prepay: each Borrower will forthwith, or by such later date as shall be immediately prior to the illegality or breach in question taking effect, prepay such part of such Finance Party's participation in the Utilisations made by such Borrower together with all interest and other charges accrued thereon to the date of the prepayment and all other amounts payable to such 45 Finance Party under the Finance Documents as shall be necessary to avoid any such illegality or breach by such Finance Party of any Laws; and (b) Commitments: to the extent necessary to avoid any such illegality or breach of Laws such Finance Party's Commitments shall be cancelled and reduced to nil. 17. MITIGATION 17.1 Mitigation If circumstances arise in respect of any Finance Party which would, or upon the giving of notice would, result in the operation of Clause 13, 14, 15 or 16 to the detriment of any Borrower:- (a) such Finance Party shall promptly upon becoming aware of the same notify the Company and, upon the written request of such Borrower, shall enter into discussions with the Company and such Borrower with a view to determining what mitigating action might be taken by such Finance Party, including discussion of the possibility of a change in its Facility Office or transfer of its participation in the Facilities and its Commitments to another bank; and (b) at the request of the Company, the Facility Agent will enter into discussions with the Company with a view to determining what mitigating action might be taken by the Facility Agent with respect to the administration of this Agreement by the Facility Agent; Without limiting or reducing the obligations of the Obligors (or any of them) under Clauses 13, 14, 15 or 16, the relevant Finance Party, shall upon the written request of the Company take such reasonable steps as may be practical and open to it to mitigate or remove the effects of such circumstances including, without limitation, a change in its Facility Office or transfer of its participation in the Facilities and its Commitments to another bank (or termination of its Commitments and prepayment of its participation in the Utilisations coupled with the assumption by another bank of a like participation and Commitment) reasonably acceptable to or nominated by the relevant Borrower and the Company or the restructuring of its participation in this Agreement in a manner which will avoid the circumstances in question and on terms acceptable to the Facility Agent, such Finance Party and the relevant Borrower and the Company, provided that nothing in this Clause shall oblige any Finance Party or the Facility Agent to take any such step if, in the opinion of such Finance Party or the Facility Agent (such opinion being conclusive), as the case may be, any such step might reasonably be expected to have an adverse effect upon its business, operations or financial condition or the management of its Tax affairs or its return in relation to its participation in the Utilisations or cause it to incur any material costs or expenses. 17.2 Costs and Expenses Any costs and expenses reasonably incurred by any Finance Party pursuant to this Clause 17 shall be paid by the relevant Borrowers within five Business Days after receipt of a written demand specifying the same in reasonable detail. 46 18. GUARANTEE 18.1 Guarantee In consideration of the Finance Parties entering into this Agreement and/or becoming party to this Agreement pursuant to a Substitution Certificate or otherwise and/or participating or agreeing to participate in any Utilisation, each Guarantor hereby irrevocably and unconditionally and jointly and severally:- (a) guarantees to each Finance Party, as principal obligor and not merely as surety (or similar in any applicable jurisdiction), prompt performance by each other Obligor of all its payment obligations under the Finance Documents and the payment of all sums payable now or in the future to such Finance Party by each other Obligor under or in connection with the Finance Documents when and as the same shall become due; (b) undertakes with each Finance Party that, if and whenever any other Obligor does not pay any amount when due from it under or in connection with any Finance Document, such Guarantor will on demand pay such amount as if such Guarantor instead of such other Obligor were expressed to be the primary obligor, together with interest on that sum at the rate per annum from time to time payable by that other Obligor on that sum from the date when that sum becomes payable by such Guarantor under this Agreement until payment of that sum in full; and (c) indemnifies each Finance Party on demand against any loss or liability suffered by it under any Finance Document as a result of any obligation guaranteed by such Guarantor being or becoming unenforceable, invalid or illegal. 18.2 Continuing Guarantee This guarantee is a continuing guarantee and shall extend to the ultimate balance of all sums payable by the Obligors or any of them under the Finance Documents. 18.3 Reinstatement Where any discharge (whether in respect of the obligations of any Obligor, any security for such obligations or otherwise) is made in whole or in part or any arrangement is made on the faith of any payment, security or other disposition which is avoided or must be repaid on insolvency, administration, liquidation or otherwise without limitation, the liability of each Guarantor under this guarantee shall continue as if there had been no such discharge or arrangement. Each Finance Party shall be entitled to concede or compromise any claim that any such payment, security or other disposition is liable to avoidance or repayment. 18.4 Waiver of Defences Except to the extent that such Guarantor is specifically released in writing or its obligations are specifically waived in a Waiver Letter, the obligations of each Guarantor under this Agreement shall not be affected by any circumstance, act, omission, matter or thing which but for this provision might operate to release or otherwise exonerate such Guarantor from its obligations hereunder in whole or in part, including without limitation and whether or not known to any Obligor or any Finance Party:- 47 (a) any time, indulgence or waiver granted to or composition with any other Obligor or any other person; or (b) the taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect or take up or enforce any rights or remedies against any security or any other Obligor or any other person or any non- presentment or non-observance of any formality or other requirements in respect of any instruments or any failure to obtain the full value of any security; or (c) any legal limitation, disability, incapacity, lack of power, authority or legal personality of, or dissolution or change in the members or status of, or other circumstance relating to any other Obligor or any other person; or (d) any variation (however fundamental and whether or not involving any increase in the liability of any other Obligor thereunder) or replacement of any Finance Document or any other document or security (including without limitation any Substitute Basis agreed pursuant to Clause 14 and any agreement contemplated by this Agreement) so that references to such Finance Document or other document or security in this guarantee shall include each such variation or replacement; or (e) any unenforceability, illegality, invalidity or frustration of any obligations of any other Obligor or any other person under any Finance Document or any other document or security, or any failure of any other Obligor or proposed Additional Obligor to become bound by the terms of any other Finance Document, in each case whether through any want of power or authority or otherwise; or (f) any postponement, discharge, reduction, non-provability or other similar circumstance affecting any obligation of any other Obligor under a Finance Document resulting from any insolvency, liquidation or dissolution proceedings or from any law, regulation or order, to the intent that such Guarantor's obligations under this Agreement shall remain in full force and this guarantee be construed accordingly as if there were no such circumstance, act, omission, matter or thing. 18.5 Immediate Recourse Each Guarantor waives any right it may have of first requiring any Finance Party to proceed against or enforce any other rights or security of or claim payment from or file any proof or claim in any insolvency, administration, winding up, bankruptcy or liquidation proceedings relating to, any other Obligor or any other person before claiming from such Guarantor under this Agreement. 18.6 Preservation of Rights Until all amounts which may be or become payable by any and all Obligors under or in connection with the Finance Documents have been irrevocably paid and discharged in full (whether by any Borrower or Guarantor or otherwise), after a claim has been made pursuant to this guarantee each Finance Party may:- 48 (a) refrain from applying or enforcing any other security, monies or rights held or received by such Finance Party, as the case may be, in respect of (or capable of being applied in respect of) such amounts or apply and enforce the same in such manner and order as such Finance Party sees fit (whether against such amounts or otherwise) and no Guarantor shall be entitled to the benefit of the same; and (b) hold in a suspense account (with liability to pay interest on the monies held therein at the rate payable to its corporate customers for deposits in the same currency on like terms and in like amounts) any monies received from any Guarantor or on account of any Guarantor's liability under this Agreement. 18.7 Non-competition Until all amounts which may be or become payable by any and all Obligors under or in connection with the Finance Documents have been irrevocably paid in full (whether by any Borrower or Guarantor or otherwise), no Guarantor shall, after a claim has been made on it pursuant to this guarantee:- (a) be subrogated to any rights, security or monies held, received or receivable by any Finance Party or be entitled to any right of contribution or indemnity in respect of any payment made or monies received on account of any Obligor's liability under any Finance Document and, to the extent that any Guarantor is so subrogated or entitled by law, such Guarantor hereby (to the fullest extent permitted by law) waives and agrees not to exercise those rights or security or that right of contribution or indemnity; (b) be entitled or claim to rank as a creditor in the insolvency, administration, winding-up, bankruptcy or liquidation of any Obligor in competition with any Finance Party unless otherwise required by the Facility Agent or by law (in which case the proceeds, if any, of any claim in respect of any rights, security or monies of any Finance Party to which such Guarantor was subrogated, filed by such Guarantor with a receiver or other similar official, will be paid by such Guarantor to the Facility Agent to be applied in accordance with the provisions of the Finance Documents); or (c) be entitled to receive, claim or have the benefit of any payment, distribution or security from or on account of any Obligor or exercise any right of set-off as against any Obligor (and, without prejudice to the foregoing, each Guarantor shall forthwith pay to the Facility Agent for the Finance Parties an amount equal to any such set-off in fact exercised by it and forthwith pay or transfer, as the case may be, to the Finance Parties any such payment or distribution or benefit of security in fact received by it). 18.8 Additional Security This guarantee shall be in addition to and shall not in any way be prejudiced by any other security (including, without limitation, the Security Documents) now or hereafter held by any Finance Party as security for or capable of being applied against the obligations of any Obligor. 18.9 Certificate A certificate of the Facility Agent as to any amount due from any Borrower under this Agreement shall, in the absence of manifest error, be prima facie evidence of such amount as against each Guarantor. 49 19. ADDITIONAL BORROWERS (a) If any Subsidiary of the Company wishes to become a Borrower under this Agreement it and the Company shall each so notify the Facility Agent (which shall in turn notify the Banks and the Security Agent). (b) If all the Banks confirm to the Facility Agent in writing that they are in principle prepared to accept that Subsidiary (and the Banks hereby so confirm with respect to the Target once the Offer has become or been declared unconditional in all respects and the Target has become a Subsidiary of the Company) as a Borrower hereunder (subject to such limitations as they may advise in the case of any Subsidiary other than the Target), the Facility Agent shall so notify the Banks and shall prepare and deliver to the Company an Accession Agreement (appropriately completed and subject to such limitations as are imposed). (c) Upon receipt by the Facility Agent of the Accession Agreement, signed on behalf of the Company for itself and the existing Obligors, and by the proposed Additional Borrower, the Facility Agent shall execute the same for itself and on behalf of the Finance Parties and the Banks and shall as promptly as practicable give notice of such execution to all of the parties to the Accession Agreement. Upon execution of such Accession Agreement as aforesaid, it shall take effect in accordance with, but subject to, the terms hereof and thereof. 20. REPRESENTATIONS AND WARRANTIES 20.1 Representations and Warranties Each Obligor (or in the case of Clause 20.1(l), the Company and Bidco only) represents and warrants to each of the Finance Parties that:- (a) Status: It is (and each of its Principal Subsidiaries is) a company, duly incorporated and validly existing under the laws of the place of its incorporation and has the power to own its property and assets and carry on its business as it is now being and will be conducted. No Event of Default falling within any of paragraphs (f) to (l) inclusive of Clause 23.1 has occurred with respect to it or any of its Principal Subsidiaries or any of its (or their) assets. (b) Powers and authority: It has the power to enter into and perform the Finance Documents and any other Transaction Documents to which it is a party and the transactions to be implemented pursuant thereto and has taken all necessary action to authorise the entry into and performance of those documents and transactions. (c) Legal validity: Subject to the Reservations, this Agreement constitutes, and any and each other Transaction Document to which it is or will become a party (when executed by it or on its behalf) will constitute, its legal, valid and binding obligations and (without limiting the generality of the foregoing) any Security Document to which it is a party creates the security interests which that Security Document purports to create or, as the case may be, accurately evidences a security interest which has been validly created (except that no warranty is given as to whether any such security interest is fixed or floating). To the best of its knowledge and belief after reasonable enquiry all such Transaction Documents (other than the Finance Documents) have been duly authorised and approved by the other parties thereto and constitute, subject to the Reservations, the legal, valid and binding obligations of those parties. 50 (d) Non-conflict: The entry into and performance by it of this Agreement and any and each other Transaction Document to which it is a party and the transactions to be implemented pursuant to those documents do not and will not conflict with: (i) any law or regulation or any official or judicial order applicable to it or any Licence or any Licence Undertaking, (ii) its memorandum or articles of association, statutes, by-laws or other constitutional or governing documents or any of its resolutions (having current effect), or (iii) any agreement or instrument to which it or any Subsidiary of it is a party or which is binding upon any of them or on its assets or those of any such Subsidiary in such a manner or to such an extent as to have a Material Adverse Effect or in a manner or to an extent which is reasonably likely to result in any material liability on the part of any of the Finance Parties to any third party by reason of any such conflict, nor will it result in the creation or imposition of any Encumbrance on any of its assets or those of any Principal Subsidiary (save, in the case of the Company and Bidco, for any Encumbrance created pursuant to the Security Documents). (e) No Default: (i) No Event of Default has occurred and is continuing which has not been waived, and (ii) no event has occurred and is continuing which has not been waived and which constitutes or which, with the giving of notice, expiry of any cure period, determination of materiality or satisfaction of any other condition in each case provided for in any such agreement or document (other than the mere occurrence of such event), is reasonably likely to constitute a default under or in respect of any other agreement or document to which it or any Subsidiary of it is a party in such a manner or to such an extent as to have a Material Adverse Effect. (f) Consents: Any and all authorisations, approvals, consents, licences, exemptions, filings, registrations and other matters required on the part of any Obligor or the Target pursuant to any law or the terms of the Licence or any Licence Undertaking for or in consequence of (i) the Offer, and/or (ii) the entry into and performance by it of and/or the validity of any of the Finance Documents and the Transaction Documents to which it is a party or the transactions to be implemented pursuant thereto and/or (iii) the continued carrying on of the business of the Target and the Group in the ordinary course, have been obtained or effected or will be obtained or effected prior to the date required by law to the extent that failure to do so would have a Material Adverse Effect, save (in the case of (ii)) for the filing in the United Kingdom of the prescribed particulars of the Security Documents pursuant to Section 395 of the Companies Act 1985 (as amended), the registration of the transfers of the shares which are the subject of mortgages and other Encumbrances created by the Security Documents and other filings and registrations necessary in connection with the enforcement of the Security Documents. (g) Accounts: (i) Its Accounts most recently delivered to the Facility Agent under Clause 21.2(a) have been prepared, save as disclosed in notes to or accompanying those Accounts, in accordance with 51 the provisions of Clause 21.2(d) and (in the case of audited annual Accounts) present a true and fair view of or (in the case of unaudited Accounts) fairly present its and (if consolidated Accounts) its Subsidiaries' financial position as at the Accounting Date to which the same were prepared and/or (as appropriate) the results of operations and (in the case of annual Accounts) changes in financial position during the Accounting Period ending on the relevant Accounting Date, subject, in the case of quarterly and monthly Accounts, to normal year end adjustments and to the lack of notes thereto. (ii) Each of the information, reports and documents delivered to the Facility Agent under Clause 21.2(b) was true and accurate in all material respects as of the date thereof and did not omit any material information required to be included therein. (h) Litigation: No litigation, arbitration or administrative or regulatory proceedings or investigations for which process or initiation claims have been served on it or any of its Subsidiaries and, to its knowledge, no litigation, arbitration, administrative or regulatory proceedings involving it or any of its Subsidiaries are pending or threatened, which are reasonably likely to be determined adversely to it or to such Subsidiary, and which, if so adversely determined, would have a Material Adverse Effect. (i) Tax liabilities: No claims are being or are reasonably likely to be asserted against it or any of its Subsidiaries with respect to Taxes which are reasonably likely to be determined adversely to it or to such Subsidiary and which, if so adversely determined, would have a Material Adverse Effect. It and each of its Subsidiaries is not materially overdue in the filing of any Tax returns required to be filed and it and any of its Subsidiaries has paid all Taxes shown to be due on any Tax returns required to be filed by it or on any assessments made against it (other than any being contested in good faith by appropriate process in respect of which adequate reserves are being maintained) non-payment, or a claim for payment, of which would in each such case have a Material Adverse Effect. (j) Encumbrances: No Encumbrance exists over its or any of its Subsidiaries' assets which would cause a breach of Clause 21.3(a) of this Agreement. (k) Information Memorandum: (This representation and warranty is given only upon issue and approval by the Company in writing of an Information Memorandum.) All material factual information contained in the Information Memorandum was true (or, in the case of information provided by any person other than the Company or Bidco its or their advisors, was true to the best of its knowledge and belief in all material respects at the date (if any) ascribed thereto in the Information Memorandum or (if none) at the date of the relevant component of the Information Memorandum. Any and all expressions of opinion or intention and any forecasts and projections contained in the Information Memorandum were arrived at after careful consideration, were fair and were based on reasonable grounds, and the Information Memorandum, taken as a whole, as of its date was not misleading in any material respect and did not omit to disclose any matter failure to disclose which would result in any material information contained in the Information Memorandum being misleading in any material respect in the context of this Agreement. 52 (l) Acquired Assets: All of the Shares which are acquired by it pursuant to the Offer will be beneficially owned by Bidco and Bidco will be entitled forthwith (but subject to registration in the shareholders' register of the Target of the transfer of those Shares, which registration will be completed as soon as reasonably practicable) to become the legal registered owner of such Shares free from all Encumbrances, claims and competing interests whatsoever save as expressly permitted or created under this Agreement and the other Finance Documents. (m) Ownership of assets: Save to the extent disposed of without breaching the terms of any of the Finance Documents, it and each of its Subsidiaries has good title to or valid leases or licences of or is otherwise entitled to use all material assets necessary properly to conduct its business the absence of which would have a Material Adverse Effect. (n) Documents: (i) The documents delivered to the Facility Agent by or on behalf of any Obligor pursuant to Clause 4.1 and any other provision of the Finance Documents were genuine and in the case of copy documents, were true, complete and accurate copies in all material respects, of originals which had not been amended, varied, supplemented or superseded in any way which would be likely to affect materially and adversely the interests of the Banks under the Finance Documents, save as consented to pursuant to a Waiver Letter. (ii) The Press Release and Offer Document and any other documents relating to the Offer furnished to the Facility Agent, contain all the material terms of the Offer. The Offer Document corresponds to the terms of the Press Release in all material respects. The Articles of Association of the Company, the Subscription Agreement and the Intercreditor Agreement contain all the material terms of the agreements and arrangements between CSW and the Company (and between CSW and any other member of the Group) relating to the Company. (o) Environmental Matters: (i) It and its Subsidiaries have obtained any and all requisite Environmental Licences required for the carrying on of its business as currently conducted and have at all times complied in all material respects with (A) the terms and conditions of such Environmental Licences and (B) all other applicable Environmental Law which in each case, if not complied with, would have a Material Adverse Effect, and there are to its knowledge no circumstances which may prevent or interfere with such compliance in the future; (ii) so far as it is aware (after due enquiry) no Dangerous Substance has been used, disposed of, generated, stored, transported, dumped, released, deposited, buried or emitted at, on, from or under any site or premises (whether or not owned, leased, occupied or controlled by any Obligor or any of its Subsidiaries and including any offsite waste management or disposal location utilised by any Obligor or any such Subsidiary) in circumstances where this would be likely to result 53 in the imposition of a liability on any Obligor which would have a Material Adverse Effect; (iii) so far as it is aware (after due enquiry) there is no Environmental Claim (whether in respect of any site previously or currently owned or occupied by any member of the Group or otherwise) pending or threatened, and there are no past or present acts, omissions, events or circumstances that would be likely to form the basis of any Environmental Claim (whether in respect of any site previously or currently owned or occupied by any member of the Group or otherwise), against that Obligor which in each case is reasonably likely to be determined against that Obligor and which if so decided would have a Material Adverse Effect. (p) The Company: At the first Utilisation Date, save as arises under the Transaction Documents and/or in consequence of acceptances of the Offer and save also for Offer Costs, neither the Company nor Bidco had any material commitments or indebtedness. (q) Licence: (i) The Licence is in full force and effect, there exist no material breaches of the terms of the Licence or any Licence Undertakings and there are no circumstances in existence which would entitle the Director General or the Secretary of State to seek to revoke the Licence; (ii) There are no Licence Undertakings, other than those copies of which have been delivered to the Facility Agent pursuant to Clause 4.1. 20.2 Repetition The representations and warranties set out in Clause 20.1 shall survive the execution of this Agreement and the making of each Utilisation hereunder and shall be made on the date hereof and be deemed to be repeated on the date of delivery of each Request hereunder and on each Utilisation Date and on each Interest Date, with reference to the facts and circumstances then subsisting, as if made at each such time, provided that: (a) the representation and warranty set out in Clause 20.1(k) shall be made only on the date of issue and approval by the Company or Bidco in writing of any Information Memorandum; and (b) the representations and warranties set out in Clauses 20.1 (e), (h), (i), (l), (n)(ii), (p) and (q) shall not be repeated after the first Utilisation Date. 21. UNDERTAKINGS 21.1 Duration The undertakings in this Clause 21 shall remain in force from and after the date of this Agreement and so long as any amount is or may be outstanding under this Agreement or any Commitment is in force. 21.2 Information and Accounting Standards 54 (a) Accounts: The Company shall furnish or procure that there shall be furnished to the Facility Agent in sufficient copies for each of the Banks: (i) as soon as practicable (and in any event within 120 days) after the end of each annual Accounting Period: (I) the audited consolidated accounts of the Group for such Accounting Period (II) the audited accounts of each Principal Subsidiary for such Accounting Period, in each case comprising at least an audited (in the case of the Company and Bidco, consolidated) balance sheet and profit and loss account and cash flow statement for such Accounting Period; (ii) as soon as practicable (and in any event within 60 days) after the end of each quarterly Accounting Period commencing with the first quarterly Accounting Period to commence after the Unconditional Date (other than the final quarterly Accounting Period in any annual Accounting Period), the unaudited consolidated accounts of the Group for such Accounting Period approved by the board of directors of the Company showing at least the detailed information necessary to determine the Company's compliance with its obligations under Clause 22.1, and in each case comprising at least a consolidated balance sheet, profit and loss account and cash flow statement for such Accounting Period, including a written report by the Chief Financial Officer on the main operating and financial issues arising during such Accounting Period (if any); (iii) at the same time as the Accounts for any annual Accounting Period are delivered (or, if not delivered, required to be delivered) pursuant to paragraph (i) above: (I) a report of the Auditors (A) setting out in reasonable detail computations establishing, as at the date of such Accounts, whether each of the financial ratios set out in Clause 22.1 were complied with, and (B) stating that the Auditors did not in the course of their audit discover any breach of the obligations set out in Clause 22.1 or, if they did, describing the same; and (II) a certificate signed by two Authorised Signatories of the Company (one of whom shall be the Chief Financial Officer), stating that as at the date of such certificate no Default has occurred and is then continuing which has not previously been waived pursuant to a Waiver Letter or providing details of any such Default and of the remedial action proposed to be taken; (iv) at the same time as the Accounts for any quarterly Accounting Period are delivered (or, if not delivered, required to be delivered) pursuant to paragraph (ii) above a certificate, signed by two Authorised Signatories of the Company (one of which shall be the Chief Financial Officer): (I) setting out in reasonable detail computations establishing, as at the date of such Accounts, whether each of the financial ratios set out in Clause 22.1 was complied with; and 55 (II) stating that as at the date of such certificate no Default has occurred and is then continuing which has not been previously waived pursuant to a Waiver Letter or providing details of any such Default and of the remedial action proposed to be taken. (v) at the same time as delivered to the Director General pursuant to Condition 2 of Part II of any Licence held by any member of the Group, copies of the accounting statements delivered to the Director General pursuant thereto. (vi) as soon as practicable after the Unconditional Date (and in any event no later than the date of delivery, or, if not delivered, the last date for delivery, of Accounts pursuant to Clause 21.2(a)(ii) for the first full quarterly Accounting Period commencing after the Unconditional Date) consolidated unaudited accounts of the Company and its Subsidiaries prepared on a pro forma basis for the three consecutive quarterly Accounting Periods last commencing (on a pro forma basis as described below) before the Unconditional Date, showing at least the detailed information necessary to determine the Company's compliance with its obligations under Clause 22.1 and comprising at least a consolidated balance sheet, profit and loss account and cash flow statement for such Accounting Periods and all prepared as if: (A) the Unconditional Date had occurred on the first day of the first of those three pro forma Accounting Periods (and as if the Company had then been in existence); (B) all Utilisations had been made on dates falling at the same intervals after the Unconditional Date taken to have occurred as aforesaid as was the case relative to the actual Unconditional Date (but nevertheless applying the actual interest rates determined and applicable hereunder); and (C) any disposal of the Grid Shares by any member of the Group (in the case of a disposal by the Target, only if it occurs whilst the Target is a member of the Group) and the consequent prepayment of the Tranche 1 Advances had occurred on the dates following the same number of days after the Unconditional Date taken to have occurred as aforesaid as was the case relative to the actual Unconditional Date. If Grid Shares are disposed of as aforesaid after the preparation of such pro-forma accounts, the Company shall promptly prepare and deliver revised pro-forma accounts as aforesaid so as to include such disposal and the consequent prepayment of the Tranche 1 Advances in the manner described above. (b) Notifications: The Company shall furnish or procure that there shall be furnished to the Facility Agent in sufficient copies for each of the Banks:- (i) promptly, all notices, reports or other documents despatched by the Company to its shareholders (in their capacity as shareholders convening or concerning shareholders meetings or to which they are entitled by statute or under the Company's Articles of Association) generally (or any class of them); 56 (ii) promptly after becoming aware of the same being instituted or threatened, details of any litigation, arbitration or administrative proceedings involving it or any of its Subsidiaries which, if adversely determined, would have a Material Adverse Effect or which would involve liability or potential liability or alleged liability in excess of 10,000,000 pounds or its equivalent in other currencies or which involves the Director General, the Secretary of State, any Licence held by any member of the Group or any Licence Undertaking; (iii) promptly, such further information regarding its financial condition, business and assets and that of the Group and/or any member thereof (including any requested amplification or explanation of any item in any Accounts, forecasts, projections or other material provided by any Obligor hereunder) as the Facility Agent or the Majority Banks through the Facility Agent may reasonably request from time to time; (iv) promptly, upon being notified of the same, details of all transfers of shares in the share capital of any Obligor, and details of any issue or transfer of shares in the capital of any member of the Group made after the date hereof to any person who is not a member of the Group; (v) written details of any Default forthwith upon becoming aware of the same, and of all remedial steps being taken and proposed to be taken in respect of that Default; (vi) during the period from the date of issue and approval by the Company to the earlier of (A) the date six months thereafter, and (B) the close of syndication of the Facilities as determined and confirmed to the Company by the Facility Agent, the Company will notify the Facility Agent in reasonable detail of any matters (whether occurring prior to or after the date of approval and issue of the Information Memorandum) which cause the Information Memorandum when read without knowledge of such matters to be inaccurate or misleading in any material respect; and (vii) promptly upon being aware that any modifications to the Licence are being proposed by the Director General or the Target and/or that any Licence Undertaking is being requested by the Director General or the Secretary of State, reasonable details thereof, to be updated from time to time to reflect any changes. (c) Audit and Accounting Dates: The Company will ensure that:- (i) the annual Accounts to be delivered to the Facility Agent pursuant to Clause 21.2(a)(i)(I) are audited by the Auditors; (ii) the Company shall at all times have duly appointed Auditors or, in the event of resignation of the Auditors, shall appoint replacement Auditors within a reasonable time; (iii) each financial year and each quarterly Accounting Period of the Group shall end on an Accounting Date; (iv) each of its financial years and each financial year of each Subsidiary shall end on 31st March, and no member of the Group will change its financial year end (other than to 31st March) without the prior written consent of the Facility Agent. 57 (d) Accounting Standards: The Company will ensure that all Accounts shall be prepared in accordance with the Applicable Accounting Principles and (except in the case of annual audited Accounts provided pursuant to Clause 21.2(a)(i)(I)) in substantially the same format and with substantially the same headings and other characterisations as in the Base Financial Statements, or shall indicate in notes to or a letter accompanying such Accounts any material departures from the Applicable Accounting Principles and/or such format, headings and characterisations.. (e) Accounts Letter: Where any Accounts have been prepared in any respect so as to depart materially from the Applicable Accounting Principles and/or the format, headings and characterisations as applied and/or set out in the Base Financial Statement, the Company shall provide or procure that there is provided to the Facility Agent a written explanation of such departure which the Facility Agent shall forward to the Banks. If the Majority Banks and the Company agree, such departure shall become part of the Applicable Accounting Principles. If the Majority Banks and the Company do not so agree, such departure shall not become part of the Applicable Accounting Principles and the Majority Banks may require that the Company furnish to the Facility Agent for the Banks a statement that such departure has not altered any of the numerical information required for the purpose of establishing whether or not the Company is in compliance with its obligations under Clause 22.1 or (if it has) setting out the effects of such alteration in reasonable detail. 21.3 Security Value (a) Negative Pledge: No Obligor will, and each Obligor will procure that no other member of the Group will, create or permit to subsist any Encumbrance on the whole or any part of its respective present or future business, assets or undertaking, except for the following:- (i) Encumbrances constituted or evidenced by the Security Documents; (ii) Encumbrances expressly permitted by a Waiver Letter, provided that, except to the extent permitted by any of the following exceptions, the principal amount of the indebtedness secured by such Encumbrances shall not at any time be increased beyond the amount so permitted, save as permitted by a further Waiver Letter; (iii) Encumbrances arising by operation of law (or by agreement to the same effect) in the ordinary course of business and not as a result of any default or omission on the part of any member of the Group, including without limitation (but subject as aforesaid) (A) any rights of set-off with respect to demand or time deposits with financial institutions and bankers' liens with respect to property held by financial institutions, save in each case where such arrangements are deliberately established for the purpose of affording security to the bank or financial institution concerned and (B) Encumbrances with respect to Taxes; (iv) Encumbrances over goods and documents of title to goods (and related insurances) arising in the ordinary course of letter of credit transactions entered into in the ordinary course of trade; (v) Encumbrances over assets (other than the Shares) acquired by members of the Group and existing at the date of their acquisition but not created in contemplation of their acquisition, provided that (A) 58 the principal amount secured by any such Encumbrances shall not be increased beyond the amount secured thereby at the date of such acquisition and (B) such Encumbrances are released and discharged within six months after such acquisition; (vi) Encumbrances over credit balances on bank accounts of members of the Group created in order to facilitate the operation of such bank accounts and other bank accounts of such members of the Group with the same bank on a net balance basis with credit balances and debit balances on the various accounts being netted off for interest purposes; (vii) any Encumbrance created under or in connection with or arising out of any pooling settlement, arrangements or agreements (including, but without limitation, the Pooling and Settlement Agreement) of the electricity generation, supply and distribution industry or any transactions or arrangements entered into in a form usual in such industry in connection with the management of risks relating thereto; (viii) any Encumbrance created by a Project Finance Subsidiary over an asset and/or the income, cash flow or other proceeds deriving from an asset owned by it which secures only Project Finance Indebtedness of that Project Finance Subsidiary incurred for the purpose of financing the acquisition, development, ownership and operation of that asset; (ix) any Encumbrance created over (and giving the creditor recourse only to) the shares in the capital of a Project Finance Subsidiary securing only Project Finance Indebtedness of that Project Finance Subsidiary; or (x) Encumbrances (other than over the Shares) not otherwise permitted pursuant to paragraphs (i)-(ix) (inclusive) above together securing indebtedness in an aggregate principal amount not exceeding 50,000,000 pounds (or its equivalent in other currencies). (b) Transactions similar to security: No Obligor will, and each Obligor will procure that no member of the Group will, save as permitted by a Waiver Letter: (i) sell or otherwise dispose of any of its assets on terms where such asset may be leased to or re-acquired by any member of the Group; or (ii) purchase any asset on terms providing for a retention of title by the vendor or on conditional sale terms or on terms having a like substantive effect to any of the foregoing, except for assets purchased in the ordinary course of business. (c) Disposals: No Obligor will, and each Obligor will procure that no member of the Group will, save as permitted by a Waiver Letter either in a single transaction or in a series of transactions whether related or not and whether voluntarily or involuntarily, sell, transfer, lease or otherwise dispose of: (i) any shares in any member of the Group except for any disposal to the Company and the disposal of shares in a member of the Group holding only some or all of the businesses and assets to whose disposal the Original Banks have consented pursuant to paragraph (ii)(H) below; 59 (ii) all or any substantial part of its respective assets or undertaking (not being an asset referred to in paragraph (i) above), other than: (A) disposals of trading assets in the ordinary course of trading on arm's length terms; (B) disposals of assets (other than any interest in real property) where the net proceeds of such disposal will be applied with reasonable promptness in or towards acquiring other assets, in the reasonable opinion of the person effecting the disposal, comparable or superior as to type, value and quality; (C) disposals of plant and equipment or other like assets, not required for the efficient operation of its business substantially as currently conducted, on arm's length terms; (D) transfers of cash in the ordinary course of its business unless otherwise prohibited by the terms of the Finance Documents; (E) the disposal of investments on arm's length terms for cash or in exchange for other such investments; (F) disposals of assets by a member of the Group to the Company or another member of the Group in which the Company owns directly or indirectly a corresponding percentage of the ownership interest; (G) the disposal of Grid Shares for cash on arm's length terms; (H) any disposals to which the Original Banks have consented in writing on or prior to the date hereof; and (I) the disposal of receivables on arm's length terms. All disposals (save where indicated) shall be made only for cash consideration and on arm's length terms. If any member of the Group shall be or, as a result of the Target becoming a member of the Group whilst owning Grid Shares, shall become the owner of any Grid Shares, the Company and Bidco shall procure that those Grid Shares are sold to a person or persons who are not members of the Group for cash consideration and on arm's length terms by not later than the later of 31st January, 1996 and the date 30 days after the date on which shares in The National Grid Holding plc are first listed on The Stock Exchange or (if no such listing has occurred) are first able to be freely disposed of by holders thereof. (d) Pari passu ranking: Each Obligor undertakes that its obligations under this Agreement rank and will at all times rank at least pari passu in right and priority of payment and in point of security (save by reason of and to the extent of the security afforded thereto by the Security Documents) with all its other present and future unsecured and unsubordinated obligations, other than obligations applicable generally to companies incorporated in its jurisdiction of incorporation which have priority by operation of law (including, without prejudice to the 60 generality of the foregoing, in respect of employees' remuneration, Taxes and like obligations). 21.4 Liabilities (a) Borrowings: (i) The Company will procure that the aggregate Borrowings of the Target and its Subsidiaries taken together on a consolidated basis (including the amount of any Borrowings thereof permitted pursuant to Clause 21.4(b) and (c) and giving effect to the proviso to the definition of Borrowings in Clause 1.1) plus (to the extent not otherwise included in Borrowings of the Target and/or its Subsidiaries) the amount of any actual or contingent liability of the Target and/or its Subsidiaries (1) for Borrowings at that time of any person in which the Target or any of its Subsidiaries has an ownership interest, or (2) to provide funds by loan, subscription for share capital or otherwise to any person in which the Target or any of its Subsidiaries has an ownership interest, will not exceed the sum of the following: (A) the outstanding principal amount from time to time of any Tranche 3 Utilisations made by such companies; (B) the principal amount of all Borrowings of such companies outstanding at the Unconditional Date save to the extent refinanced by Tranche 3 Utilisations made by such companies and excluding all Borrowings outstanding at the Unconditional Date under the 400,000,000 pounds revolving credit facility available to the Target under an Agreement dated 26th July, 1995; (C) the outstanding principal amount from time to time of all Borrowings of such companies for which the only creditor is the Company or Bidco; (D) Project Finance Indebtedness of the Target and/or its Subsidiaries outstanding from time to time; and (E) 50,000,000 pounds or such higher amount (if any) as may be permitted by a Waiver Letter. (ii) The Company will procure that the members of the Group do not incur Borrowings of such amounts as result in the Company failing to be in compliance with Clause 22.1. (b) Third party guarantees: No Obligor will, and each Obligor will procure that no other member of the Group will, incur or permit to be outstanding, save as permitted by a Waiver Letter, any Borrowing falling within the provisions of paragraph (f) of the definition of that term in Clause 1.1, other than any such Borrowing (A) arising under the Finance Documents, or (B) arising out of the endorsement of negotiable instruments for the purpose and in the ordinary course of carrying on the relevant entity's trade (if and to the extent that the same would fall within the definition of Borrowings in Clause 1.1), or (C) arising out of guarantees and indemnities by members of the Group in favour of a bank to facilitate the operation of bank accounts of members of the Group which are maintained with such bank on a net balance basis, or (D) arising out of guarantees and indemnities given by members of the Group (other than the Company) in respect of Borrowings of other members of the Group where the obligation guaranteed or indemnified is permitted under the terms of this Agreement, or (E) any 61 guarantee, indemnity or similar assurance against financial loss given under or in connection with any pooling and settlement arrangements or agreements (including, but without limitation, the Pooling and Settlement Agreement) of the electricity generation, supply and distribution industry or in connection with any transactions or arrangements entered into in a form usual in such industry in connection with the management of risk relating thereto (if and to the extent that the same would fall within the definition of Borrowings in Clause 1.1). (c) Treasury Transactions: No Obligor will, and each Obligor will ensure that none of its Subsidiaries will, save as permitted by a Waiver Letter, enter into any interest rate swap, cap, ceiling, collar or floor or any currency swap, futures, foreign exchange or commodity contract or option (whether over the counter or exchange traded) or any similar treasury transaction, other than spot foreign exchange contracts entered into in the ordinary course of business, and transactions for the hedging of actual or projected interest rate, currency and/or commodity and/or electricity price exposures arising in the ordinary course of the trading activities of such member of the Group and for hedging against a drop in the price of Grid Shares. 21.5 Loans out: No Obligor will, and each Obligor will procure that no member of the Group will, be the creditor in respect of any Borrowings, save for:- (a) any Borrowing approved pursuant to a Waiver Letter; (b) any Borrowing under paragraph (b) of the definition of "Borrowing" in Clause 1.1 where trade credit is extended by any member of the Group on normal commercial terms and in the ordinary course of its business on substantially the same terms (or terms more favourable to it) and in similar circumstances as for trade credit extended prior to the date hereof by the Target; (c) loans made by one member of the Group to another member of the Group the proceeds of which are used by the latter member of the Group in the ordinary course of its business carried on in compliance with the terms of this Agreement; (d) Borrowings not otherwise permitted pursuant to paragraphs (a) - (c) above in an aggregate amount for the Group as a whole at any time outstanding not exceeding 5,000,000 pounds. 21.6 Dividends, Share Capital and Subordinated Debt (a) Dividends The Company will not, save as permitted by a Waiver Letter, declare, make or pay any dividend (or interest on any unpaid dividend), charge, fee or other distribution (whether in cash or in kind) on or in respect of its share capital (or any class of its share capital) or distribute any dividend or share premiums reserves or pay interest or other charges on Subordinated Debt (together "Dividends"), provided that the Company may pay in cash Dividends if (and only if) each of the following conditions are met: (i) no material Default has occurred and is continuing which has not been waived pursuant to a Waiver Letter at the time or would occur or be continuing immediately 62 after the payment or declaration of the Dividend (whether or not caused by such payment or declaration); (ii) not more than 75% of the profit before tax of the Group for any annual Accounting Period shall be distributed by the Company by way of Dividends and/or repayment of Subordinated Debt (aggregated together) (the "Annual Distribution Entitlement"), provided that the Annual Distribution Entitlement in respect of any annual Accounting Period shall remain available (subject as provided in this Clause 21.6(a)) for distribution until (but not beyond) the date eighteen months after the end of the annual Accounting Period in respect of which it has arisen, and if not distributed by that date, shall only be distributed with the consent of the Majority Banks; (iii) the ratio of Consolidated Net Total Borrowings to the aggregate of Adjusted Capital and Reserves and Consolidated Net Total Borrowings is, and will be immediately after payment of the Dividends and/or repayment of the Subordinated Debt, not more than 55:100. (b) Certification of Payment Amounts Where any payment of Dividends or repayment of Subordinated Debt is proposed to be made by the Company the Company shall prior to making such payment provide to the Facility Agent not less than 10 Business Days before the proposed date for payment a certificate signed by two Authorised Signatories of the Company (one of whom shall be the Chief Financial Officer) in a form reasonably satisfactory to the Facility Agent showing (i) the date and amount of such proposed payment and (ii) such calculations in reasonable detail as are necessary to show that Clauses 21.6(a)(ii) and 22.1(a) are and immediately after the making of such payment will be complied with. (c) Share Capital and Subordinated Debt The Company will not, and (in the case of paragraph (ii)) no Obligor will, and each Obligor will procure that no other member of the Group will, save as permitted by a Waiver Letter: (i) redeem, repurchase, defease, retire, return or repay any of its share capital or Subordinated Debt, or resolve to do so, save, in the case of Subordinated Debt, (A) out of the proceeds of a further issue of share capital or Subordinated Debt permitted pursuant to paragraph (ii) below, or (B) to the extent that such redemption, repurchase, defeasance, retirement, return or repayment would be permitted pursuant to Clause 21.6(a) and (b) were it to comprise instead the payment of Dividends in the same amount; or (ii) save (in the case of the Company) as contemplated by the Subscription Agreement, issue any new share capital or Subordinated Debt or grant any option to any person to subscribe for any shares in its capital other than (save in the case of the Company) to another member of the Group, provided that the Company may issue (A) to CSW and/or (provided that no Event of Default under Clause 23.1(n) is then in existence or will result) any other person share capital of a type substantially similar to the shares to be issued by it to CSW pursuant to the Subscription Agreement, which is subscribed for in full in cash at the time of issue, and/or (B) to CSW and/or any person who holds at least 5% of the issued share capital of the Company without 63 an Event of Default under Clause 23.1(n) existing or resulting from such ownership and is or has become party to the Intercreditor Agreement, Subordinated Debt which is subscribed for in full in cash. 21.7 Environmental matters Each Obligor will and will procure that each member of the Group will: (a) obtain all requisite Environmental Licences and comply in all material respects with (i) the terms and conditions of all Environmental Licences applicable to it and (ii) all other applicable Environmental Law in each case where failure to do so would have a Material Adverse Effect; (b) promptly upon receipt of the same, notify the Facility Agent and the Security Agent of any claim, notice or other communication served on it in respect of any alleged breach of or corrective or remedial obligation or liability under any Environmental Law which would, if substantiated, have a Material Adverse Effect. 21.8 Insurance Each Obligor will, and will procure that each member of the Group will, insure and keep insured all its property and assets (including those taken on lease) of an insurable nature and which are customarily insured (either generally or by companies carrying on a similar business) against loss or damage by fire and other risks normally insured against by persons carrying on the same class of business as that carried on by it in a similar location and in a sum or sums and with deductibles and other terms consistent with prudent market practice for companies carrying on a similar business in a similar location. Each Obligor will, and will procure that each member of the Group will, with reasonable promptness after becoming aware of the relevant requirement effect and maintain all insurances required by any applicable law or by the Licence. 21.9 General Undertakings (a) Change of business: No Obligor will, and each Obligor will procure that no other member of the Group will, save as permitted by a Waiver Letter, make or threaten to make any substantial change in the nature of its respective business as compared to that conducted at the date hereof or carry on any other business which, in either case, results in any material change in the nature of the business carried on by the Group as a whole compared to that conducted at the date hereof. (b) Mergers: Neither the Company nor the Target nor any other Obligor will, and each Obligor will procure that no other member of the Group will, save as permitted by a Waiver Letter, enter into any merger or consolidation, provided that members of the Group other than the Company, Bidco, the Target and any Obligor may merge or consolidate with other such members of the Group. (c) Holding Company: Save as permitted by a Waiver Letter, neither the Company nor Bidco shall carry on any business (other than the holding of shares in and the provision of administrative services to members of the Group) or acquire any assets other than Cash, investments which are cash equivalents as that term is defined for the purposes of 64 Financial Reporting Standard 1 "Cash Flow Statements" issued by the Accounting Standards Board or shares which (i) in the case of the Company, are shares in Bidco , or (ii) in the case of Bidco are Shares, acquired in the Target by Bidco pursuant to the Offer or are Grid Shares, or (iii) in the case of the Company and/or Bidco are shares are in companies which are already members of the Group, and in the case of (i), (ii) and (iii) are or become on acquisition mortgaged, pledged or otherwise charged to the Security Agent pursuant to the Security Documents. (d) Administration and winding-up orders etc.: No Obligor will, and each Obligor will procure that no other member of the Group will, save as permitted by a Waiver Letter, make or join in making any application to any court for an administration, winding-up, receivership or other similar order to be made in relation to any member of the Group, other than in respect of a solvent winding-up or dissolution of a member of the Group which is not an Obligor where such application or the granting of any such application would not have a Material Adverse Effect. (e) Arm's-length terms: No Obligor will, and each Obligor will procure that no other member of the Group will, enter into any material transaction with any person (including, without limitation, CSW or any of its Affiliates or associated companies) otherwise than on arms length terms, save as permitted by a Waiver Letter, and save for (i) loans made by one member of the Group to another member of the Group which are permitted by Clause 21.5(c), (ii) disposals by one member of the Group to another member of the Group permitted by Clause 21.3(c), (iii) transactions entered into on terms more favourable to a member of the Group than would have been the case had the transaction been entered into on arms length terms, and (iv) transactions (including the issue of Subordinated Debt as and to the extent permitted hereunder) expressly permitted by this Agreement. (f) Amendments to documents: No Obligor will, and each Obligor will procure that no other member of the Group, save as permitted by a Waiver Letter, will or will agree to amend, supplement, supersede or waive any term of the Transaction Documents, if on or prior to the first Utilisation Date, without the prior written consent of the Majority Banks, and thereafter in any way which would be likely materially and adversely to affect the interests of the Banks under the Finance Documents. (g) Constitutional Documents: No Obligor will, and each Obligor will procure that no other member of the Group will, save as permitted by a Waiver Letter or as required by law, amend or seek or agree to amend or replace the memorandum or articles of association or other constitutional documents or by-laws of any member of the Group in any way which would be likely materially and adversely to affect the interests of the Banks under the Finance Documents, provided that if any such undertaking would not be enforceable (having regard to the rule in Russell v. Northern Bank Development Corporation Limited & Ors) against any Obligor it shall not be given by that Obligor. (h) Compliance with laws: Each Obligor will, and will procure that each other member of the Group will, comply in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, whether domestic or foreign, having jurisdiction over it or any of its assets, failure to comply with which would have a Material Adverse Effect. (i) Consents: Each Obligor will, and will procure that each other member of the Group will, obtain, promptly renew from time to time and maintain in full force and effect, and if so requested promptly furnish certified copies to the Facility Agent of all such material authorisations, 65 approvals, consents, licences and exemptions as may be required under any applicable law or regulation or under the Licence or any Licence Undertaking: (i) to enable each Obligor to perform its respective material obligations under the Finance Documents to which it is a party or required for the validity or enforceability of such Finance Documents or of any security provided for thereby; and/or (ii) to carry on its business as it is being conducted from time to time where failure to obtain, renew or maintain any such authorisation, approval, consent, licence or exemption or non-compliance with the terms of the same would have a Material Adverse Effect. (j) Pension Schemes: The Company will if requested by the Facility Agent deliver to the Facility Agent at such time as those reports are prepared in order to comply with then current statutory or auditing requirements actuarial reports in relation to the pension schemes for the time being operated by members of the Group, and will ensure that all such pension schemes are fully funded based on reasonable actuarial assumptions applicable in the United Kingdom. (k) Syndication: The Company shall ensure that all members of the Group will provide assistance to the Facility Agent and the Arrangers in the preparation of the information memorandum for syndication of the Facilities and comply with all reasonable requests for information from potential syndicate members made through the Facility Agent or the Arrangers. (l) Revocation or Modification of Licence: The Company and Bidco will procure that the Target, once it has become a Subsidiary of the Company, and any and each other Licence holder shall comply in all respects with the terms of its Licence and shall not consent, without the prior written consent of the Majority Banks, to any revocation of its Licence or to any material modification to the terms thereof if such modification, in the reasonable opinion of the Majority Banks, would have (whether immediately or in the course of time prior to the Tranche 2/3 Repayment Date) a Material Adverse Effect. (m) Licence Undertakings: The Company and Bidco will consult with the Original Banks with regard to the terms of any Licence Undertaking which it or any Holding Company of it or CSW or the Target may be required to give to the Director General or the Secretary of State in connection with the Offer and will not give and will procure that such Holding Company, CSW and (once it has become a Subsidiary of Bidco) the Target will not give any such Licence Undertaking without the prior consent of the Majority Banks (such consent not to be unreasonably withheld). 21.10 The Offer (a) Each of the Company and Bidco undertakes that: (i) without the prior agreement of the Majority Banks, (the agreement of the Majority Banks being conclusively evidenced by a written notice from the Facility Agent to the Company) neither the Company (in the case of (G) only) nor Bidco will: (A) amend or vary any material term or condition of the Offer; 66 (B) do or permit to be done (otherwise than on the instructions of the Panel and otherwise than permitting the Offer to become or declaring the Offer unconditional without any breach of this Clause 21.10 (other than paragraph (a)(ii) and/or (iii) and otherwise than as permitted pursuant to Clause 21.10(b) or (c)) anything which would cause the Panel to regard any material term or condition of the Offer as having been waived, withdrawn or (in the case of the Judgment Conditions (as defined below)) satisfied; (C) subject to paragraph (b) below, waive, withdraw or agree or decide not to enforce any material term or condition of the Offer; (D) subject to paragraph (c) below, declare or accept or treat as satisfied any Judgment Condition; (E) declare, decide or accept any percentage below 50 per cent. plus one Share for the purposes of any of the conditions set out in paragraph A of Appendix 1 to the Press Release; (F) take or permit to be taken any step as a result of which the offer price stated in the Offer is, or may be required to be, increased beyond the level agreed between Bidco and the Banks from time to time; (G) issue any press release or other publicity which makes reference to the Facilities or to some or all of the Finance Parties unless the publicity is required by law or by the Code (in which case the Company or Bidco shall notify the Facility Agent and the Banks thereof as soon as practicable upon becoming aware of the requirement). (ii) in all material respects relevant in the context of the Offer, it will comply with the Code (subject to any waivers granted by the Panel), the Financial Services Act 1986, the Companies Act 1985 and all other applicable statutes, laws and regulations. (iii) it will keep the Facility Agent informed as to the status of and progress with respect to the Offer and in particular will from time to time and promptly upon request, give to the Facility Agent for the Banks reasonable details as to (A) the current level of acceptances of the Offer, and (B) such other matters relevant to the Offer as the Facility Agent may reasonably request. The Company or Bidco will also promptly deliver to the Facility Agent a copy of every certificate delivered by the receiving agents to Bidco and/or its advisers pursuant to the Code. (b) (i) If Bidco is not aware and has not been informed by a Finance Party in writing of a circumstance or event which is or could reasonably be construed to be covered by a material term or condition to the Offer which, if not waived, would entitle Bidco (with the Panel's consent, if needed) to lapse the Offer, Bidco, by waiving, withdrawing or agreeing or deciding not to enforce that term or condition shall not breach Clause 21.10(a)(i)(C), provided that in any case involving the following conditions (as set out in Appendix 1 to the Press Release) Bidco has first taken the action provided for below: 67 (A) in the case of conditions (D) and (E), Bidco has made enquiry of the Director General as to the subject matter thereof, has requested an urgent response and has allowed a reasonable time for that response to be given; (B) in the case of conditions (F) and (G), Bidco has sought and received appropriate advice from its legal advisers to the effect that such condition has been satisfied in all material respects in so far as requirements under English law are concerned; (C) in the case of conditions (E), (F), (H), (I), (J), (K), (L) and (M) where (but only where) the Offer is at the relevant time recommended by the Board of Directors of the Target, Bidco has made enquiry of the Board of Directors of the Target as to whether there were in existence any circumstances or have occurred any events which would cause any such condition not to be met, has requested an urgent response and has allowed a reasonable time for that response to be given; (D) In the case of conditions (B) and (C),: no action shall be required for the purpose of this paragraph (b)(i). (ii) If Bidco becomes aware (whether through notice from any Finance Party or otherwise) of a circumstance or event which is or could reasonably be construed to be covered by a condition of the Offer which, if not waived, would entitle Bidco (with the Panel's consent, if needed) to lapse the Offer, Bidco shall notify the Facility Agent and the following shall apply: (A) if Bidco wishes to waive, withdraw or agree or decide not to enforce the condition and the Majority Banks agree, Bidco may do so; (B) if the Majority Banks do not so agree and state that in their opinion such circumstance or event would materially and adversely affect the ability of Bidco to comply with its material obligations under the Finance Documents, Bidco will request the Panel to agree that the Offer may lapse as a result of non-satisfaction of that condition or of the conditions as to acceptances (as set out in paragraph A of Appendix 1 to the Press Release) and that such lapsing will not give rise to a breach of the Code. If the Panel does not so agree, then Bidco may, without the Banks' agreement, waive, withdraw or agree or decide not to enforce such condition. (c) (i) In relation to each of conditions (B) and (C) (as set out Appendix 1 to the Press Release), Bidco shall disclose to the Facility Agent any and all conditions attaching to, respectively, the announcement by the UK Office of Fair Trading (in the case of condition (B)) or the indication by the Director General (in the case of condition (C). (ii) In relation to condition (D) Bidco shall disclose to the Facility Agent the terms of all undertakings and assurances sought by the Director General as referred to therein and proposed to be given. (iii) In relation to conditions (H), (I), (J), (K), (L) and (M), if Bidco becomes aware (whether through notice from any Finance Party or otherwise) of a circumstance or event which is or could reasonably be construed to 68 be covered by such condition (ignoring for this purpose the last sentence of paragraph (d) below) and which could reasonably be expected materially and adversely to affect the ability of Bidco to comply with its material obligations under the Finance Documents, Bidco shall notify the Facility Agent. (iv) In relation to each Judgment Condition, Bidco shall give advance notice to the Facility Agent of its intention to be satisfied with respect to that Judgment Condition, and (where paragraphs (i), (ii) or (iii) have application in relation to such Judgment Condition) of the reasons for such intention to be satisfied; (v) If, in relation to a Judgment Condition, Bidco notifies the Facility Agent of its intention to be satisfied with respect to that Judgment Condition, and the Majority Banks do not promptly notify Bidco that it should not be so satisfied on grounds that the circumstances (which shall be specified in such notice) in relation to that Judgment Condition are such as in their opinion materially and adversely to affect the ability of Bidco to comply with its material obligations under the Finance Documents, Bidco may declare or accept or treat as satisfied such Judgment Condition. If the Majority Banks do so notify Bidco as aforesaid, the Majority Banks may then request Bidco to (and Bidco in such circumstances will) request the Panel to agree that the Offer may lapse as a result of non-satisfaction of that Judgment Condition or of the conditions as to acceptances (as set out in paragraph A of Appendix 1 to the Press Release) and that such lapsing will not give rise to a breach of the Code. If the Panel does not so agree, then Bidco may, without the Banks' agreement, be and declare itself to be satisfied as to such Judgment Condition. (d) As used in this Clause 21.10 "Judgment Condition" means a material term or condition of the Offer which refers to Bidco being satisfied, or making a determination, as to any matter. For the purposes of this Clause 21.10, each of conditions (H), (I), (J), (K), (L) and (M) as set out Appendix 1 to the Press Release shall be deemed to include a requirement that Bidco be satisfied as to the existence or non-existence (as the case may be) of circumstances or events which would cause such condition to be met or not to be met (as the case may be). 22. FINANCIAL RATIOS 22.1 Financial Ratios The Company will procure that, save as agreed pursuant to a Waiver Letter:- (a) Adjusted Capital and Reserves to Consolidated Net Total Borrowings: The ratio of Consolidated Net Total Borrowings to the aggregate of Adjusted Capital and Reserves and Consolidated Net Total Borrowings shall not be more than 75:100 at any time on or before the Grid Disposal Date or 65:100 at any time after the Grid Disposal Date; and (b) Consolidated EBITDA to Consolidated Total Interest Payable: Consolidated EBITDA for any period comprising an annual Accounting Period of the Company or four consecutive quarterly Accounting Periods of the Company (taken 69 together as one period) shall not be less than 1.65 times Consolidated Total Interest Payable for such period in the case of any such period ending on or before the commencement of the first quarterly Accounting Period to commence after the Grid Disposal Date or 2.25 times Consolidated Total Interest Payable for such period in the case of any such period ending on or after the expiry of the first quarterly Accounting Period to commence after the Grid Disposal Date. In this Clause 22.1, "Grid Disposal Date" means whichever is the earlier of (i) the Unconditional Date (if on that date none of the Company, Bidco or the Target own any Grid Shares) or (otherwise) the date on which all Grid Shares owned by members of the Group are sold, and (ii) (if the date in (i) above is not the Unconditional Date) the later of 31st January, 1996 and the date 30 days after the date on which shares in The National Grid Holding plc are first listed on The Stock Exchange or (if no such listing has occurred) are first able to be freely disposed of by holders thereof. 22.2 Initial Consolidated EBITDA/Consolidated Total Interest Payable Tests The first test of the covenant set out in Clause 22.1(b) shall be made in respect of a period ending on the expiry of the quarterly Accounting Period commencing on, or (if none) on the expiry of the first quarterly Accounting Period commencing after, the Unconditional Date. The first three tests of such covenant shall be made in respect of periods which shall include such number of pro forma Accounting Periods commencing before the Unconditional Date as shall be required in order that each test is made for a period comprising four quarterly Accounting Periods and on the basis of pro forma Accounts for those pro forma Accounting Periods delivered to the Facility Agent pursuant to Clause 21.2(a)(vi) and Accounts delivered to the Facility Agent pursuant to Clause 21.2(a)(ii). 23. DEFAULT 23.1 Events of default Each of the events set out below is an Event of Default (whether or not caused by any reason outside the control of any or all of the Obligors or of any other person):- (a) Non-payment: any Obligor does not pay on the due date any amount payable by it under any Finance Document at the place, in the currency and in the funds expressed to be payable, provided that this sub-clause shall not apply to unpaid amounts which are paid in full within five days of the due date; or (b) Breach of Obligation: (i) any Obligor fails to comply with any provision of Clause 22 (Financial Undertakings); or (ii) any Obligor fails to comply with any other provision of this Agreement (irrespective of whether or not such provision is valid and enforceable against such Obligor) and/or any other provision of any other Finance Document and, if such failure is in the reasonable opinion of the Majority Banks capable of remedy within such period, such Obligor shall have failed to remedy such failure within 21 days after the earlier of 70 the relevant Obligor becoming aware of such default and receipt by the relevant Obligor of written notice from the Facility Agent to such Obligor requiring the failure to be remedied; or (iii) any Obligor shall do any of the things prohibited in Clauses 21.6(a) (Dividends) or 21.6(c) (Share Capital), or any of the things prohibited in Clause 21.9(g) (Constitutional Documents) shall be done to or by any Obligor, whether or not (having regarding to the rule in Russell v. Northern Bank Development Corporation Limited & Ors.) such undertaking is enforceable against that Obligor, and the thing, if remediable in the reasonable opinion of the Majority Banks, shall not have been remedied within 21 days after the earlier of the relevant Obligor becoming aware thereof and receipt by the relevant Obligors of written notice from the Facility Agent to such Obligor requiring the thing to be remedied; or (c) Misrepresentation/Breach of Warranty: any representation, warranty or statement made or repeated by or on behalf of any Obligor, in any Finance Document or in any certificate or statement delivered by or on behalf of any Obligor or other member of the Group under or in connection with any Finance Document, is incorrect or misleading in any respect which in the reasonable opinion of the Majority Banks is material when made or deemed to be made or repeated by reference to the facts and circumstances then subsisting and, if the circumstances causing such misrepresentation are in the reasonable opinion of the Majority Banks capable of remedy within such period, such Obligor shall have failed to remedy such circumstances within 21 days after the earlier of the relevant Obligor becoming aware of such misrepresentation and receipt by the relevant Obligor of written notice from the Facility Agent to such Obligor requiring the circumstances causing such misrepresentation to be remedied; or (d) Invalidity: any of the Finance Documents shall cease to be in full force and effect in any material respect or shall cease to (or be alleged by any Obligor not to) constitute the legal, valid and binding obligation of any Obligor party to it or, in the case of any Security Document, fail to (or be alleged by any Obligor not to) provide effective security in favour of the Security Agent and the Banks over the assets over which security is intended to be given by that Security Document, in each case in a manner and to an extent reasonably considered by the Majority Banks to be materially adverse to the interests of the Banks under the Finance Documents or it shall be unlawful for any Obligor to perform any of its material obligations under any of the Finance Documents, provided that where the relevant Finance Documents are re-executed in the same form in all material respects and none of the circumstances described in this paragraph apply in respect of those Finance Documents as so re-executed and the interests of the Banks under the Finance Documents are not continuing to be materially and adversely affected as a result of any of the foregoing circumstances having occurred, the relevant Event of Default under this paragraph shall be treated as having been cured; or (e) Cross-acceleration: (i) any Borrowings of any one or more members of the Group (taken together if more than one) aggregating 25,000,000 pounds (or the equivalent in other currencies) or more at any one time outstanding become due and payable or due for redemption before their normal maturity date or 71 are placed on demand, in each such case by reason of the occurrence of an event of default (howsoever characterised) or any event having the same effect, or any such Borrowings which are payable on demand shall be demanded other than where the Borrowings or the demand therefor is being contested in good faith and the Facility Agent is reasonably satisfied that the relevant member of the Group has available sufficient reserves to pay such Borrowings); or (ii) any such Borrowings aggregating 25,000,000 pounds (or the equivalent in other currencies) or more, or any sum or sums payable in respect of any such Borrowings, are not paid when due (or, in the case of demand facilities, within 3 Business Days of their due date) (whether falling due by demand, at scheduled maturity or otherwise) or within any applicable grace period provided for in the original document evidencing or constituting those Borrowings; or (iii) (if funds aggregating 25,000,000 pounds (or the equivalent thereof in other currencies) are outstanding in respect thereof) any commitment for or underwriting of any facility for Borrowings of any member of the Group is cancelled or suspended by the provider of that facility by reason of the occurrence of an event of default (howsoever characterised); or (iv) any Encumbrances over assets of any one or more members of the Group (taken together if more than one) securing an aggregate of 25,000,000 pounds (or its equivalent in other currencies) or more become enforceable and steps are taken to enforce the same; provided that if the Borrowings concerned are Project Finance Indebtedness (and in relation to paragraph (iv) above any such Encumbrance extends only over the shares in or assets of a Project Finance Subsidiary securing only Project Finance Indebtedness), the foregoing events or circumstances shall not constitute Events of Default; or (f) Liquidation: any order is made or resolution passed or any legal proceedings are initiated or are consented to by any Obligor or any petition shall be presented or legal proceedings commenced by any person (and not, where that person is unconnected with that member of the Group save for being a creditor of such member, discharged or stayed within twenty-one days in the case of both legal proceedings and such petition) for the suspension of payments generally or for any process giving protection against creditors or for the dissolution, termination of existence, liquidation, winding up, bankruptcy or other like process of the Company, Bidco or any Principal Subsidiary (other than a solvent liquidation, dissolution or winding up of a member of the Group (not being an Obligor)); or (g) Moratorium: a moratorium in respect of all or any debts of the Company, Bidco or the Company, Bidco or any Principal Subsidiary or a composition or an arrangement with creditors generally of the Company, Bidco or any Principal Subsidiary or any other arrangement whereby its affairs and/or assets are submitted to the control of or are protected from its creditors is applied for, ordered or declared; or (h) Administrator: an application is made for the appointment of an administrator (as such term is used in the Insolvency Act 1986) or similar official in relation to the Company, Bidco or any Principal 72 Subsidiary or an effective resolution is passed by the directors or shareholders of the Company, Bidco or any Principal Subsidiary for such an application to be made or an administrator or administrative receiver is appointed in respect of the Company, Bidco or any Principal Subsidiary; or (i) Receiver: a liquidator or provisional liquidator (save as excepted in paragraph (f) above) or, a trustee, receiver, administrative receiver, manager (being a person acting on behalf of all or any creditors) or similar officer is appointed in respect of the Company, Bidco or any Principal Subsidiary or in respect of (or takes possession of) all or any part of its assets with a value in excess of 25,000,000 pounds (or the equivalent in other currencies); or (j) Insolvency: the Company, Bidco or any Principal Subsidiary is declared or deemed pursuant to any applicable legislation to be insolvent or is or is deemed pursuant to any applicable legislation to be unable, or admits in writing its inability, to pay its debts as they fall due or stops or threatens to stop payment of its debts generally or becomes insolvent within the terms of any applicable law excluding Section 123(1)(a) of the Insolvency Act, 1986; or (k) Distress: any distress, execution, attachment, registration or other process affects the Company, Bidco or any Principal Subsidiary having an aggregate value of 25,000,000 pounds save where (i) the relevant member is, in good faith, contesting the distress, execution, attachment, sequestration or other process by appropriate proceedings diligently pursued and (ii) the Majority Banks acting reasonably are satisfied that the ability of any Obligor to comply with its obligations under the Finance Documents will not be materially and adversely affected whilst such distress, execution, attachment, diligence or other process is being so contested; or (l) Analogous Proceedings: there occurs, in relation to the Company, Bidco or any Principal Subsidiary in any country or territory in which it is incorporated or carries on business or to the jurisdiction of whose courts it or any part of its assets is subject, any event which, in the reasonable opinion of the Majority Banks, corresponds in that country or territory with any of the events mentioned in paragraphs (f) to (k) (inclusive) above, or the Company, Bidco or any Principal Subsidiary otherwise becomes subject, in any of those countries or territories, to any law or proceedings relating to insolvency, bankruptcy, liquidation, reorganisation or dissolution having a similar effect to the events mentioned in paragraphs (f) to (k) (inclusive) above; or (m) Cessation: the Company, Bidco or any Principal Subsidiary ceases to carry on all or a substantial part of its business (save in consequence of any reorganisation, reconstruction or amalgamation permitted under this Agreement or approved pursuant to a Waiver Letter and save as may result from any disposal of assets permitted by the terms of this Agreement or any solvent liquidation, dissolution or winding-up of any of the Group (not being an Obligor) which would not have a Material Adverse Effect); or (n) Control: without the prior written consent of the Majority Banks, any single person or group of persons acting in concert (as defined in the City Code on Takeovers and Mergers) acquires control (as defined in Section 416 of the Income and Corporation Taxes Act 1988) of the Company or Bidco or the Target (unless such person or group of persons shall be CSW) or CSW shall cease to own directly or indirectly for its own 73 account a majority of all classes of the share capital of the Company or Bidco or Target (once it has become a Subsidiary of the Company) shall cease to be Subsidiaries of CSW; or (o) Proceedings: there is current or pending at the Unconditional Date or there shall occur thereafter any litigation, arbitration, administrative, regulatory or other proceedings or enquiry (including without limitation, any such by the Office of Fair Trading, the Monopolies and Mergers Commission, the Department of Trade and Industry, or any equivalent body in any other jurisdiction or the European Commission or any division of any thereof or authority deriving power from any thereof) concerning or arising in consequence of any of the Transaction Documents and/or the implementation of any matter or transaction provided for in the Transaction Documents or otherwise concerning or involving any member of the Group and the same has a Material Adverse Effect; or (p) Expropriation: the authority or ability of the Company, Bidco or the Target to conduct its business is wholly or substantially curtailed by any seizure, expropriation, intervention, renationalisation or other action by or on behalf of any governmental, regulatory or other authority; or (q) Revocation and Modification of Licence: without the prior consent of the Majority Banks, any Licence (or any replacement Licence as contemplated in paragraph (i) below) is: (i) revoked or surrendered other than in circumstances which permit the Company or another member of the Group to carry on the electricity distribution and supply business of the Target substantially as is envisaged at the date of this Agreement either without a Licence (as a result of a change to the Act) or with a new Licence whose terms are not materially less favourable than those of the Licence in force prior to such revocation or surrender; or (ii) modified in any manner which in the reasonable opinion of the Majority Banks would have (whether immediately or over time) a Material Adverse Effect; or (r) Compliance with Act: the Target fails to comply with a final order (within the meaning of Section 25 of the Electricity Act) or with a provisional order (within the meaning of that section) which has been confirmed under that section (and not since been revoked); or (s) Pooling and Settlement Agreement: any notice requiring the Target to cease to be a party to the Pooling and Settlement Agreement is given to the Target under Clauses 60.1.3 or 60.2.2 of the Pooling and Settlement Agreement; or (t) Intercreditor Agreement and Subordinated Creditors: (i) any creditor for any Subordinated Debt fails to comply with any of the material provisions of, or its material obligations under, the Intercreditor Agreement; or 74 (ii) any warranty made by any creditor for any Subordinated Debt in the Intercreditor Agreement is incorrect when made; or (iii) the Intercreditor Agreement is not or ceases to be binding on or enforceable against any creditor for any Subordinated Debt by reason of any act or omission by the Company or such creditor; and in each such case in the reasonable opinion of the Majority Banks the interests of the Banks under the Finance Documents or any of them shall be materially prejudiced thereby. 23.2 Sanctions Subject, where applicable, to Clause 23.3, upon the occurrence of an Event of Default and at any time thereafter while the same is continuing and has not been waived pursuant to a Waiver Letter, the Facility Agent may, and shall if so directed by the Majority Banks, by notice to the Company:- (a) declare that an Event of Default has occurred; and/or (b) declare that the Total Commitments shall be cancelled or reduced forthwith to the level specified by the Facility Agent, whereupon the same shall be so cancelled and all fees payable in relation to the amount of the Total Commitments so cancelled or reduced shall become immediately due and payable, provided that until all the Shares have been acquired pursuant to the Offer and/or the procedure set out in Section 428 et seq. Companies Act, 1985 or the Offer Termination Date has occurred this power shall not be exercised so as to result in (i) the maximum aggregate amount from time to time remaining to be paid (on the assumption that all outstanding Shares will be acquired) to accepting shareholders pursuant to the Offer and/or pursuant to procedures implemented or to be implemented under Section 428 et seq. Companies Act 1985, less (ii) the amount (if any) by which the aggregate amount subscribed to the Company by CSW in cash for share capital and Subordinated Debt from time to time exceeds the amount which has actually been paid to accepting shareholders pursuant to the Offer from time to time, exceeding (iii) the amount of the undrawn Commitments the proceeds of drawings of which are capable in accordance with Clause 3.1 of being applied in payment to accepting shareholders in the Target pursuant to the Offer; and/or (c) declare that some or all of the Utilisations to some or all of the Borrowers (as specified in such notice), together with all interest, commissions and other charges accrued with respect to those Utilisations and all other amounts payable by some or all of the Borrowers (as specified in such notice) or any of them under the Finance Documents from time to time, shall thenceforth be repayable on demand being made by the Facility Agent (and in the event of any such demand those Utilisations, such interest, commissions and other charges and such other amounts shall be immediately due and payable); and/or (d) declare some or all of the Utilisations by some or all of the Borrowers (as specified in such notice) immediately due and repayable, whereupon they shall become immediately due for payment or repayment together with all interest, commissions and other 75 charges accrued on those with respect to those Utilisations and all other amounts payable by those Borrowers under the Finance Documents; and/or (e) declare that some or all of the Borrowers shall forthwith pay or procure the payment to the Facility Agent of a sufficient sum to cover the Outstanding Liability Amounts under outstanding Bills constituting Utilisations by those Borrowers (as specified in such notice), whereupon the same shall become immediately due and payable and, once paid, shall be held by the Facility Agent in an interest bearing account for application in reimbursing the Banks, as the case may be, forthwith for all payments made or to be made under such outstanding Bills, provided that any sum remaining after settling such payments shall be applied first in settlement of any other amounts then due and payable to any Facility Agent and/or the Banks under the Finance Documents and, subject to that, any balances shall be promptly repaid to the relevant Borrowers or other person entitled to the balance. 23.3 Clean up Period If during the period of three months from the Unconditional Date any event or circumstance which (but for this Clause 23.3) would constitute a Default (the "Potential Event of Default") shall exist which consists of, or is a direct consequence of any event or circumstance which occurred in relation to the Target or any of its Subsidiaries (or its or any of their business, assets or liabilities) on or before the Unconditional Date, then the following shall apply: (a) the Company or Bidco or the Target shall notify the Facility Agent of that fact by fax promptly after becoming aware thereof, giving a reasonable description of: (i) the Potential Event of Default and its causes; and (ii) the remedial action in relation to that Potential Event of Default which the Company and/or Bidco and/or the Target propose to take; (b) that Potential Event of Default shall not constitute a Default, and the Facility Agent shall not with respect to that Potential Event of Default (but, for the avoidance of doubt, not so as to restrict the Facility Agent's rights to take such action with respect to any other Event of Default which is not a Potential Event of Default) be entitled to take any of the actions set out in Clause 23.2, until (assuming that the Potential Event of Default is then continuing) the earlier of: (i) the date three months after the Unconditional Date; or (ii) the Facility Agent confirming in writing to the Company and Bidco that in the reasonable opinion of the Facility Agent it is likely that a Material Adverse Effect would result from such Potential Event of Default or from the effects thereof or from the continued inaction by the Facility Agent as regards the exercise of rights under this Agreement; or (iii) a Material Adverse Effect actually occurring. Provided that (A) the foregoing shall not apply with respect to any Potential Event of Default under any of the following Clauses 23.1(a), (b)(i) (insofar as it relates to Clause 22.1(b)), (b)(iii), (d), (f), (g), (h), (i), (n), (p), (q), 76 (r) or (s), in each case irrespective of whether or not that Potential Event of Default occurred in consequence of any event or circumstance which occurred before the Unconditional Date, and (B) any Potential Event of Default shall nevertheless constitute a Default for the purposes of Clause 4.3, save (in the case only of a Potential Event of Default consisting of a Default arising under Clause 23.1 (b)(ii), (c) or (e)) where it is demonstrated to the reasonable satisfaction of the Majority Banks that such Potential Event of Default is likely to be cured within three months after the Unconditional Date without any Material Adverse Effect occurring, and (C) where the Potential Event of Default consists of a breach of Clause 22.1(a), the date referred to in paragraph (i) above shall be taken as the earlier of the date when the Company has issued further share capital or incurred further Subordinated Debt as referred to in Clause 21.6(d)(i) and the expiry of the period referred to in the first lines of Clause 21.6(d). 24. INDEMNITIES 24.1 Currency Indemnity (a) If any amount payable by any Obligor under or in connection with any Finance Document is received by any Finance Party in a currency (the "Payment Currency") other than that agreed to be payable under that Finance Document (the "Agreed Currency"), whether as a result of any judgement or order or the enforcement of the same, the liquidation of such Obligor or otherwise and the amount produced by converting the Payment Currency so received into the Agreed Currency at market rates prevailing at or about the time of receipt of the Payment Currency is less than the amount of the Agreed Currency due under that Finance Document, then the Obligors shall, as an independent and additional obligation, indemnify each Finance Party for the deficiency and any loss sustained as a result. (b) The above indemnities shall constitute separate and independent obligations of each of the Obligors from their other obligations under the Finance Documents and shall apply irrespective of any indulgence granted by any Finance Party. The Obligors shall pay the reasonable costs of making any conversion from the Payment Currency to the Agreed Currency. (c) Each Obligor waives any right it may have in any jurisdiction to pay any amount under this Agreement in a currency other than that in which it is expressed to be payable under that Finance Document. 24.2 Other indemnities The Obligors shall indemnify each Finance Party against any losses (excluding loss of the applicable Margin save in the case of paragraphs (a) and (b) below), charges or expenses which such Finance Party may sustain or incur as a consequence of:- (a) the occurrence of any Default; or (b) the operation of Clause 23.2; or (c) any repayment or prepayment of an Advance or payment of an overdue amount being made otherwise than on its Interest Date; or 77 (d) (other than by reason of default by any Finance Party) any Utilisation not being made (or not being made in full) to any Borrower after a Request has been given pursuant to Clause 5 or Clause 6 (as the case may be), including but not limited to any losses, charges or expenses on account of funds acquired, contracted for or utilised to fund any amount payable under this Agreement, any amount repaid or prepaid or any Utilisation (as the case may be). A certificate of such Finance Party as to the amount of any such loss or expense shall be prima facie evidence in the absence of manifest error. 24.3 Indemnity Relating to Facilities (a) The Company agrees to indemnify each Finance Party and each of their respective directors, officers and employees against any and all claims, damages, liabilities, costs and expenses (including legal fees) which may be incurred by or asserted against such Finance Party or their respective directors, officers and employees in connection with or arising out of any such proceedings, actions or enquiry by any regulatory authority of a type referred to in Clause 23.1(o) (ignoring the provision as to materiality contained therein) or any litigation or other proceedings connected with the Offer. It is agreed that: (i) Each Finance Party shall notify the Company in reasonable detail of any potential claim by it or its directors, officers or employees on the Company under this Clause 24.3 promptly upon its becoming aware of that potential claim; and (ii) If the Company wishes any Finance Party to enter into any negotiations with a view to settlement of any dispute with any third party likely to give rise to any claims, damages, liability, costs and expenses for which a claim may be made under this Agreement, it shall notify that Finance Party accordingly, which Finance Party will then enter into such negotiations in good faith on a without prejudice basis but shall not be bound so to settle; and (iii) Any payments required to be made by reason of this indemnity shall be in addition to any other amounts provided for in this Agreement or agreed to be paid in respect of the Facilities. (b) Each Finance Party shall give promptly to the Company such details and copies of legal opinions and process served concerning (or concerning the circumstances giving rise to) any claims, damages, liabilities, costs and expenses which may form the basis of any claim by it on the Company hereunder, as the Company may reasonably request. (c) At the request of the Company, from time to time, each Finance Party will discuss with the Company and will give careful consideration in good faith to the views of the Company concerning the appointment of professional advisers in connection with any such claims, damages, liabilities, costs and expenses (and in connection with the circumstances giving rise thereto and any proceedings current, pending or threatened relating thereto) and the conduct of any proceedings, and will use reasonable endeavours to procure that (once appointed) all professional advisers acting for it in relation thereto shall do likewise and that where possible and where such Finance Party does not reasonably consider that it is against such Finance Party's best interest, one firm of professional advisers only is appointed to represent all of the Finance Parties. 78 (d) Notwithstanding the foregoing provisions of this Clause 24.3, no Finance Party shall be required to disclose to the Company or any other Obligor any matter with regard to which it is under a duty of non-disclosure. All information which may be disclosed by any Finance Party pursuant to this Clause 24.3 shall be disclosed on the same conditions as to confidentiality, as are set out in Clause 32. 25. AGENTS, ARRANGERS AND BANKS 25.1 Appointment Each Bank hereby appoints the Facility Agent and the Security Agent to act as its agent hereunder and with respect to the Finance Documents and irrevocably authorises the Facility Agent on such Bank's behalf to: (a) enter into any Accession Agreement or Security Agreement (whereupon and by which act such Bank shall become bound thereby); and (b) perform such duties and exercise such rights and powers under the Finance Documents as are specifically delegated to such Agent by the terms thereof, together with such rights and powers as are reasonably incidental thereto. Each Agent shall have only those duties and powers which are expressly specified in the Finance Documents. Each Agent's duties under the Finance Documents each are intended to be of a mechanical and administrative nature. 25.2 Majority Banks' Directions In the exercise of any right or power granted and as to any matter not expressly provided for by the Finance Documents, each Agent shall act in accordance with the instructions of the Majority Banks or as this Agreement may require and shall be fully protected in so doing. Any such instructions shall be binding on all the Banks. Subject to Clauses 25.7 and 25.16, in the absence of any such instructions and/or any relevant requirement contained in any Finance Document, each Agent may act or refrain from acting with respect to such right or power and as to any such matter as it shall see fit. 25.3 Relationship (a) The relationship between each Bank and each Agent is that of principal and agent. Nothing herein (other than in relation to the Security Agent and the Security Documents as to which the Security Agent shall be a trustee for the Banks) shall constitute the Facility Agent a trustee or (save, with regard to any Bank, as necessarily results from its agency relationship with that Bank) fiduciary for any Bank, any Obligor or any other person. (b) No Agent shall be liable to any Obligor for any breach by any Bank of this Agreement or be liable to any Bank for any breach by any Obligor of any Finance Document. 79 25.4 Delegation Without prejudice to its obligations hereunder, each Agent may act under the Finance Documents through its personnel and through agents selected by it with reasonable care (who shall be entitled to the same protections as those given to the Agents under this Clause 25). 25.5 Documentation Neither any Agent or any of the Arrangers nor any of its officers, employees or agents shall be responsible to any Bank or to each other for:- (a) the execution, genuineness, validity, enforceability or sufficiency of any Finance Document or any other document in connection therewith; or (b) the collectibility of amounts payable thereunder; or (c) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document or other document in connection therewith. 25.6 Default No Agent shall be required to ascertain or inquire as to the performance or observance by any Obligor of the terms of any Finance Document or any other document in connection therewith. No Agent shall be deemed to have knowledge of the occurrence of any Default unless that Agent has received notice from a party hereto describing such Default and stating that such notice is a "Notice of Default". If any Agent receives such a notice of default or officers of any Agent engaged in the performance of that Agent's functions under the Finance Documents otherwise acquire actual knowledge that a Default has occurred, that Agent shall give notice thereof promptly to the Banks. Each Agent shall take or refrain from taking such action with respect to such Default as shall be directed by the Majority Banks, provided that nothing herein contained shall oblige any Agent to institute any legal action or proceedings on behalf of any Bank. Until any Agent shall have received such directions, it may (but shall not be obliged to) take or refrain from taking such action with respect to such Default as it shall see fit. 25.7 Exoneration Neither Agent nor any of its officers, employees or agents shall be liable to any Bank for any action taken or omitted under or in connection with any Finance Document unless caused by its or their negligence or wilful misconduct. 25.8 Reliance Each Agent may rely on any communication or document reasonably believed by it to be genuine and correct and may rely on any statement made by a director or employee of any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify. Each Agent may engage, pay for and rely on legal or other professional advisers selected by it and shall be protected in so relying. 80 25.9 Credit approval Each of the Banks severally represents and warrants to each Agent and each of the Arrangers that it has made its own independent investigation and assessment of the financial condition and affairs of each Obligor and their related entities and other parties considered by it to be relevant in connection with its participation in this Agreement and has not relied exclusively on any information, including the Information Memorandum provided to such Bank by any Agent or any Arranger in connection herewith. Each Bank represents, warrants and undertakes to each Agent and each Arranger that it shall continue to make its own independent appraisal of the creditworthiness of the Obligors and other parties considered by it to be relevant in connection with the Finance Documents and their related entities while any amount is or may be outstanding under the Finance Documents. 25.10 Information (a) The Facility Agent shall promptly furnish each Bank with a copy of any documents received by it under Clause 21.2. If so requested by any Bank, the Facility Agent shall furnish to such Bank (at the expense of the Company) a copy of any of the documents listed in Schedule G delivered on or prior to Closing. (b) The Facility Agent shall, without any liability on its part in the event of any failure to do so except in the case of its negligence or wilful default, send to the Banks (at the expense of the Company) any document (or a summary of the material details of such document) received by it from any Obligor pursuant to this Agreement which contains any information which the Facility Agent considers to be of direct and material interest and significance to the Banks and their interests under this Agreement and which can lawfully be distributed by the Facility Agent without incurring any liability to any person whatsoever. (c) Save as provided in paragraph (a) above neither Agent nor any Arranger shall have any duty either initially or on a continuing basis to provide any Bank with any credit or other information with respect to the financial condition or affairs of any Obligor or any of their related entities whether coming into its possession or that of any related entities of the Facility Agent or any Arranger before the entry into of this Agreement or at any time thereafter. (d) Unless specifically requested to do so by a Bank, neither Agent shall have any duty to request any certificates or other documents from any Obligor under any of the Finance Documents. (e) No Agent need disclose any information relating to any Obligor or any of their related entities or any other person if such disclosure would or might in the reasonable opinion of the Facility Agent constitute a breach of any law or regulation or be otherwise actionable at the suit of any person. 25.11 The Facility Agent and the Arrangers individually (a) Each Agent and each Arranger shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Facility Agent or an Arranger. (b) Each Agent and each Arranger may accept deposits from, lend money to and generally engage in any kind of banking, trust, advisory or other business whatsoever with any Obligor and their related entities and accept and retain any fees payable by any Obligors or any related entities for its own 81 account in connection herewith and/or therewith without liability to account therefor to any Bank or any Arranger. 25.12 Indemnity Each Bank agrees to indemnify each Agent on demand (to the extent not reimbursed by any Obligor and without prejudice to the liability of any Obligor under any Finance Document) for any and all liabilities, losses, damages, penalties, actions, judgements, costs, expenses or disbursements of any kind whatsoever which may be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of its acting as an Agent under any of the Finance Documents or performing its duties thereunder or any action taken or omitted by any Agent thereunder (including, without limitation, the charges and expenses referred to in Clause 26.5 and all stamp Taxes on or in connection with any of the Finance Documents but excluding payment of its agency fee pursuant to Clause 26.3 and the normal administrative costs and expenses incidental to the performance of its agency duties hereunder save to the extent increased in consequence of a Default). Such indemnification by each Bank shall be pro rata to its Commitments. Notwithstanding the foregoing, no Bank shall be liable for any portion of the foregoing resulting from any Agent's negligence or wilful misconduct. 25.13 Legal restrictions Each Agent may refrain from doing anything which would or might in its reasonable opinion (a) be contrary to the law of any applicable jurisdiction or any applicable official directive or regulation or (b) render it liable to any person, and may do anything which in its reasonable opinion (acting on legal advice) is necessary to comply with any such law or directive. 25.14 Resignation Each Agent may (after consultation with the Company) resign by giving notice thereof to the Banks and the Company and may be removed by the Majority Banks giving notice to that effect to such Agent and the Company. In that event the Majority Banks, with the consent of the Company where the relevant Agent has so resigned (such consent not to be unreasonably withheld or delayed and the Company shall be deemed to have consented if it has not given notice refusing consent within 14 days of any request for consent) and in any event after consultation with the Company to the extent practicable, may appoint a successor for the relevant Agent which shall be a reputable and experienced bank, incorporated in or having a branch in England and acting through such branch. If the Majority Banks have not, within 30 days after such notice of resignation or removal, so appointed a successor Agent which shall have accepted such appointment, the retiring Agent, after consultation with the Company, shall have the right to appoint a successor Agent which shall be a reputable and experienced Bank incorporated or having a branch in England and acting through such branch. The resignation or removal of the retiring Agent and the appointment of any successor Agent or Security Agent shall both become effective upon the successor Facility Agent or Security Agent notifying all the parties hereto in writing that it accepts such appointment, whereupon the successor Facility Agent or Security Agent shall succeed to the position of the retiring Facility Agent or Security Agent and the terms "Facility Agent" and "Security Agent" in all of the Finance Documents shall include such successor Agent where appropriate. This Clause 25 shall continue to benefit a retiring Agent in respect of any action taken or omitted by it hereunder while it was an Agent. 82 25.15 Assignments Each Agent may treat each Bank named as a party hereto as continuing to be such a party, as entitled to payments hereunder and as acting hereunder through its Facility Office until it has received notice from such Bank to the contrary. 25.16 Amendments (a) If authorised by the Majority Banks, the Facility Agent or (in the case of the Security Documents) the Security Agent may (except where any other authority is required for the same by the express provisions of this Agreement) grant waivers or consents or (with the agreement of the Company) vary the terms of the Finance Documents. Any such waiver, consent or variation so authorised and effected by the Facility Agent or, as the case may be, the Security Agent shall be binding on all the Banks and the Facility Agent or, as the case may be, the Security Agent shall be under no liability whatsoever in respect of any such waiver, consent or variation, provided always that, except with the prior written consent of all the Banks and the Company, nothing in this Clause 25.16(a) shall authorise:- (i) the extension of any Availability Period; or (ii) any variation of the definition of "Majority Banks" in Clause 1.1; or (iii) any extension of the date for, or alteration in the amount or currency of, or waiver of any payment of principal, interest, Margin, fee, commission or any other amount payable under any of the Finance Documents; or (iv) any change to any Bank's Commitment; or (v) any variation of Clauses 12.2, 13, 30.2, 32 or this Clause 25.16; or (vi) any variation of any provision wherein (before such variation) it is provided that certain things may not be done without or may be done with the consent or approval of all the Banks. (b) If authorised by the Majority Banks, the Security Agent may grant any waiver or consent in relation to, or variation of the material provisions of, any Security Document (but not, for the avoidance of doubt, so as to release any security). Subject as otherwise provided for in this Agreement, any release of the security provided by any Security Document over the Shares requires the consent of all the Banks,. 25.17 Security Agent as Trustee (a) The Security Agent in its capacity as Trustee or otherwise shall not be liable for any failure, omission, or defect in perfecting the security constituted by any Security Document or any security created thereby including, without limitation, any failure to register the same in accordance with the provisions of any of the documents of title of the relevant Obligor to any of the property thereby charged. 83 (b) The Security Agent in its capacity as Trustee or otherwise may accept without enquiry such title as any Obligor may have to the property over which security is intended to be created by any Security Document. (c) Save where the Security Agent holds a legal mortgage over or over an interest in, real property or shares, the Security Agent in its capacity as Trustee or otherwise shall not be under any obligation to hold any title deeds, Security Documents or any other documents in connection with the property charged by any Security Document or any other such security in its own possession or to take any steps to protect or preserve the same. The Security Agent may permit the relevant Obligor to retain all such title deeds and other documents in its possession. (d) Save as otherwise provided in the Security Documents, all moneys which under the trusts herein or therein contained are received by the Security Agent in its capacity as Trustee or otherwise may be invested in the name of or under the control of the Security Agent in any investment for the time being authorised by English law for the investment by trustees of trust money or in any other investments which may be selected by the Security Agent with the consent of the Majority Banks. Additionally, the same may be placed on deposit in the name of or under the control of the Security Agent at such bank or institution (including any Agent) and upon such terms as the Security Agent may think fit. Any and all such monies and all interest thereon shall be paid over to the Facility Agent forthwith upon demand by the Facility Agent. (e) Each Bank hereby confirms its approval of the Finance Documents and any security created or to be created pursuant thereto and hereby authorises, empowers and directs the Security Agent (by itself or by such person(s) as it may nominate) to execute and enforce the same as trustee or as otherwise provided (and whether or not expressly in the Banks' names) on its behalf. 26. FEES, EXPENSES AND STAMP TAXES 26.1 Commitment Fee (a) The Company will pay (or will procure that there is paid) to the Facility Agent for distribution among the Banks pro rata to the aggregate of their respective Tranche 1 Commitments, Tranche 2 Commitments and Tranche 3 Commitments, as the case may be, a commitment fee computed at the rate of (i) zero point one zero per cent. (0.10%) per annum on the daily undrawn balance of the Tranche 1 Commitments, the Tranche 2 Commitments and the Tranche 3 Commitments during the period from and including the date hereof until the earlier of the Unconditional Date and the expiry of the applicable Availability Period, (ii) zero point three seven five per cent. (0.375%) per annum on the daily undrawn balance of the Tranche 1 Commitments, the Tranche 2 Commitments and the Tranche 3 Commitments during the period from and including the Unconditional Date until the earlier of the first Utilisation Date and the expiry of the applicable Availability Period, and (iii) 50% of the applicable Margin (being that chargeable from time to time in relation to calculations involving the relevant Commitments) from and including the first Utilisation Date. (b) Accrued commitment fee shall be payable quarterly in arrears and also on the date on which the Tranche 1 Commitments or the Tranche 2 Commitments or the Tranche 3 Commitments, as the case may be, shall terminate. Commitment fee shall accrue from day to day and be calculated on the basis of a year of 365 days and for the actual number of days elapsed. The Company shall supply to the Facility Agent promptly on 84 request such information as is necessary to calculate the amount of commitment fee payable from time to time. 26.2 Arrangement and Underwriting Fees On the dates stated in such letter, the Company shall pay to the Facility Agent for the account of the Arrangers an arrangement fee and an underwriting fee in the amount stated in a letter dated on or before the date hereof from the Facility Agent to the Company, counter-signed by or on behalf of the Company. 26.3 Agency Fees The Company shall pay to each of the Facility Agent and the Security Agent for its own account for use by it as it sees fit agency fees in the amounts, and on the dates as specified in letters dated on or before the date hereof from the Facility Agent to the Company, counter-signed by the Company. 26.4 Initial and Documentation expenses (a) On or before the date of the first Utilisation if demanded before such date and otherwise promptly on demand by the Facility Agent, the Company shall reimburse the Facility Agent for the reasonable out-of-pocket charges and expenses (including, but not limited to, the fees and expenses of legal advisers) incurred by it or the Arrangers in connection with the negotiation, preparation, printing and execution of the Finance Documents (including any thereof which may be executed at any time after the date of this Agreement), together in all cases with all value added and similar Taxes applicable. (b) The Company shall reimburse the Facility Agent within 30 days of demand for the reasonable out of pocket charges and expenses (including, but not limited to, the fees and expenses of legal advisers) incurred by it or the Arrangers in connection with the syndication by the Original Banks of the Finance Documents and the Commitments and Utilisations thereunder and the execution of any further Finance Documents from time to time, together with all value added tax and similar Taxes applicable to the same. (c) Where this Agreement provides that any document or other information is to be copied or provided by the Facility Agent to all or any of the Banks or the Security Agent (including, without limitation, as contemplated in Clause 25.10(a) or (b)) the Company will promptly on demand reimburse the Facility Agent for the reasonable out-of- pocket charges and expenses incurred by it in so copying or providing such document or other information, together with all value added and similar Taxes applicable to the same. 26.5 Expenses of Administration, Enforcement, Waiver and Amendment The Company (or the relevant Borrower where in the reasonable opinion of the Facility Agent such amounts are referable to a particular Borrower) shall reimburse each of the Finance Parties promptly on demand for the out-of-pocket charges and expenses (including the fees and expenses of legal advisers and notaries and the fees and expenses of any accountants or other professional advisers (a) incurred by any of them in connection with the enforcement of, or the preservation of any rights under, any of the Finance Documents, (b) reasonably incurred by any of them in connection with any waiver or consent which may at any time be sought by any Obligor under or in relation to any of the Finance Documents, and (c) reasonably incurred by any of them in connection with any variation of or supplement to 85 any of the Finance Documents (other than any Substitution Certificate or a variation or supplement requested by a Finance Party), together, in each case, with all value added and similar Taxes applicable to the same. While any Default is continuing and has not been waived the Company (or the relevant Borrower, as the case may be) shall promptly on demand pay each of the Facility Agent and the Security Agent for the reasonable cost of the management time properly charged by the Facility Agent or, as the case may be, the Security Agent in connection with any additional administration of the Finance Documents arising in consequence of such Default. 26.6 Stamp Taxes The Company shall pay or indemnify the Finance Parties against any and all stamp, registration and similar Taxes (excluding such Taxes as are imposed by a jurisdiction other than the United Kingdom) which may be or become payable in connection with the entry into, performance or enforcement against any of the Obligors of any of the Finance Documents. 27. WAIVERS, REMEDIES CUMULATIVE 27.1 Waivers No failure to exercise and no delay in exercising any right, power or privilege under any Finance Document by any of the Finance Parties shall operate as a waiver of the same, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise of the same, or the exercise of any other right, power or privilege. No waiver by any of the Finance Parties shall be effective unless it is in writing. 27.2 Remedies Cumulative The rights and remedies of each of the Finance Parties in this Agreement may be exercised as often as necessary and are cumulative and not exclusive of any rights or remedies provided by law. 28. NOTICES 28.1 Address Except as otherwise stated in this Agreement, all notices or other communications hereunder to any party hereto shall be made by letter or by facsimile transmission and shall be deemed to be duly given or made when delivered (in the case of letter or facsimile transmission) to such party addressed to it at its address or telex number or facsimile number specified in the relevant Part of Schedule A or Schedule B, or at such other address or telex number or facsimile number as such party may after the date of this Agreement specify for such purpose to the others by notice. 28.2 Non-working days A notice or other communication received on a non-working day or after 5.00 p.m. on a working day in the place of receipt shall be deemed to be served on the next following working day in such place. 86 29. ASSIGNMENTS, TRANSFERS AND SUBSTITUTIONS 29.1 Successors This Agreement shall be binding upon and ensure to the benefit of the Obligors, the Banks, the Facility Agent, the Security Agent and their respective successors and permitted assigns. 29.2 Assignments and Transfers by Obligors Save as expressly provided in this Agreement, no Obligor may assign or transfer all or any part of its rights or obligations under this Agreement without the prior written consent of all the Banks. 29.3 Assignments and Transfers by Banks (a) Subject to Clause 29.10 any Bank may at any time assign or otherwise transfer all or any part of its rights or obligations under this Agreement and the other Finance Documents to another bank with the consent of the Company (such consent not to be unreasonably withheld and not to be required for assignments or transfers from a Bank to another Bank or to an Affiliate of any Bank), provided that such bank is then a Recognised Bank, that if it is a bank having its principal place of business in the U.S.A. it is a bank as defined in section 3(a)(6) of the Securities Exchange Act 1934 of the U.S.A. and that in the case of a transfer of obligations the transferee shall have confirmed to the Facility Agent and the Company, prior to the transfer taking effect, that it undertakes to be bound by the terms of the Finance Documents as a Bank under those documents (such confirmation to be in form and substance satisfactory to the Facility Agent and the Company). On any such transfer of obligations being made the original Bank shall be relieved of its obligations to the extent of the transfer of such obligations . (b) A proportion of the assignor's rights and obligations under and arising out of the other Finance Documents equal to the proportion of the assignor's rights under this Agreement being transferred or assigned, shall automatically be assigned or transferred, as appropriate, to the assignee or transferee at the same time as the rights under this Agreement. 29.4 Substitution Certificates (a) Subject to Clause 29.10 if any Bank (the "Existing Bank") wishes to transfer all or any part of its rights, benefits and/or obligations under the Finance Documents to another bank (the "New Bank") then, as an alternative to Clause 29.3, provided that the New Bank is then a Recognised Bank and that if it is a bank having its principal place of business in the U.S.A. it is a bank as defined in section 3(a)(6) of the Securities Exchange Act 1934 of the U.S.A., the Existing Bank may, with the consent of the Company (such consent not to be unreasonably withheld and not to be required for assignments or transfers from a Bank to another Bank or to an Affiliate of any Bank) effect a substitution in respect thereof involving the New Bank in respect of all of its rights, benefits and/or obligations by the delivery to the Facility Agent and acceptance by it of a duly completed certificate executed by the Existing Bank and the New Bank in substantially the form of Schedule D (a "Substitution Certificate"). (b) Upon delivery to the Facility Agent of any Substitution Certificate and acceptance of the same by the Facility Agent (which delivery and acceptance shall be evidenced exclusively and conclusively by the Agent's countersignature thereon pursuant to paragraph (d) below):- 87 (i) the respective rights of the Existing Bank and the Obligors (or the relevant Obligors) against each other under the Finance Documents with respect to all or the relevant part of the Existing Bank's relevant Commitment and/or relevant Advances (all as specified in the schedule to such Substitution Certificate), shall be terminated and each shall be released from all further obligations to the other under the Finance Documents with respect to the same, (all such rights and obligations to be so terminated or released being referred to as "Discharged Rights and Obligations"); (ii) the relevant Obligors and the New Bank and (through the Facility Agent) the other parties to the Finance Documents shall each acquire rights against each other and assume obligations towards each other which differ from the Discharged Rights and Obligations only (subject as provided in Clause 29.7) insofar as the Obligors, the New Bank and such other parties have assumed and/or acquired the same in place of the Obligors, the Existing Bank and such other parties respectively; (iii) the Facility Agent, the Security Agent, the New Bank and the other Banks as well as the other parties to the Finance Documents shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had such New Bank been an original party to this Agreement as a Bank with the Discharged Rights and Obligations acquired or assumed by it in consequence of such Substitution Certificate; (iv) the New Bank shall become by the execution by the Facility Agent of such Substitution Certificate bound by the terms of the Intercreditor Agreement as if it were an original party thereto as a Senior Creditor and shall acquire the same rights and assume the same obligations towards the other parties to the Intercreditor Agreement as would have been acquired and assumed had the New Bank been an original party to the Intercreditor Agreement as a Senior Creditor; and (v) a proportion of the Existing Bank's rights and obligations under all of the Finance Documents, equal to the proportion of the Existing Bank's rights under this Agreement being assumed by the New Bank, shall automatically and simultaneously be assumed by the New Bank. (c) Discharged Rights and Obligations shall not include, and there shall be no termination or release pursuant to this Clause 29.4 of, any rights or obligations arising pursuant to Clauses 13 or 15.1 in respect of the period or in respect of payments made hereunder during the period prior to the effective date of the relevant Substitution Certificate (as stated in that certificate). (d) Each Obligor, the Banks and the Security Agent hereby irrevocably appoint the Facility Agent to receive and countersign each Substitution Certificate as agent on its behalf and, to the extent relevant, the provisions of Clause 25 shall apply mutatis mutandis with respect to such appointment. The Facility Agent shall be entitled (but not obliged) to decline to accept and/or countersign any proposed Substitution Certificate entered into in breach of Clause 29.9. (e) The New Bank party to any Substitution Certificate shall pay to the Facility Agent an administration fee of 500 pounds on or before the effective date for that Substitution Certificate (as specified therein). 88 (f) Without prejudice to any provision of Clause 25, each New Bank shall, by its execution of a Substitution Certificate, accept that neither the Existing Bank party to that certificate nor the Facility Agent, the other Banks, the Arrangers or the Security Agent is in any way responsible for or makes any representation or warranty as to (i) the accuracy and/or completeness of any information supplied to such New Bank in connection with the Finance Documents, (ii) the creditworthiness, condition, affairs, status or nature of the Obligors or the observance by any of them of any of their obligations under any Finance Document, (iii) the legality, validity, effectiveness, adequacy or enforceability of any Finance Document or (iv) the tax status of any payments to be made to or for the account of such New Bank by any Obligors or the Facility Agent or the Security Agent under any Finance Document and save, in the case of the Facility Agent or the Security Agent, as otherwise expressly provided herein, none of such parties shall be or be deemed to be the agent or trustee of such New Bank in connection with this Agreement. (g) Each New Bank shall, by its execution of a Substitution Certificate, be taken to confirm that it is a financial institution whose ordinary business is or includes participation in syndicated facilities of this type and that it has made its own independent investigation and assessment of the financial condition and affairs of each Obligor and their related entities and other parties considered by it to be relevant in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Existing Bank or the Facility Agent or the Security Agent or the Arrangers in connection with any Finance Document. No other party shall be required to investigate the truth or otherwise of such confirmation and all parties to this Agreement shall be entitled fully to rely on that confirmation for the purposes of this Agreement. (h) The Facility Agent shall be entitled to rely on any Substitution Certificate delivered to it pursuant to the provisions of this Agreement which is complete and regular on its face as regards its contents and appears to be signed on behalf of the Existing Bank and the New Bank named as party to this Agreement, and the Facility Agent shall have no liability or responsibility to any party as a consequence of placing reliance on and acting in accordance with and counter-signing that Substitution Certificate. (i) The Facility Agent shall notify the Company promptly of the receipt and execution on its behalf by the Facility Agent of any Substitution Certificate and shall deliver a copy of it to the Company. 29.5 Reference Banks The Facility Agent may (subject to the Company giving its consent thereto, such consent not to be unreasonably withheld) nominate additional Banks or Affiliates thereof to become Reference Banks and such Banks or Affiliates shall become Reference Banks upon their indicating to the Facility Agent that they are prepared to act as such. The Facility Agent will give the Company written notice of such Banks or Affiliates having become Reference Banks as soon as practical thereafter. If a Reference Bank (or the Bank of which a Reference Bank is an Affiliate, in the case of any Reference Bank which is not itself a Bank) transfers the whole of its rights and obligations under this Agreement as a Bank or ceases to be one of the Banks, the Facility Agent, subject to agreement by the Company (such agreement not to be unreasonably withheld or delayed) will appoint another Bank to replace such Bank or Affiliate as a Reference Bank. 89 29.6 Change of Facility Office Each Bank shall participate in this Agreement through its Facility Office(s), but any Bank may change its Facility Office with respect to any Utilisation from time to time, on giving not less than four Business Days' prior notice to the Facility Agent, to any other location in the United Kingdom. 29.7 Increased Costs and Illegality (a) Subject as provided in paragraph (b) below, if any assignment, transfer or substitution of or with respect to all or any part of the rights or obligations of a Bank under this Agreement pursuant to Clause 29.3 or 29.4 or any change in Facility Office pursuant to Clause 29.6 is made which results (or would but for this Clause result) at the time thereof in amounts becoming payable under Clauses 13 or 15.1, then the assignee, transferee, New Bank or Bank acting through its new Facility Office shall be entitled to receive such amounts only to the extent that the assignor, transferor, Existing Bank or Bank acting through its original Facility Office would have been so entitled had there been no such assignment, transfer, substitution or change in Facility Office. No such assignment, transfer, substitution or change in Facility Office shall be made if the assignee, transferee or substitute or such Bank (in the case of a change in Facility Office) would be entitled immediately afterwards to give notice under Clause 16. (b) The provisions of the first sentence of paragraph (a) above shall not apply in relation to any assignment, transfer or substitution of or with respect to the rights or obligations of the Original Banks, provided that the same is effected by the Original Banks within six months from the date of this Agreement. However, the Original Banks will use reasonable endeavours (to the extent not materially prejudicial to their ability successfully to syndicate the Facilities within six months of the Unconditional Date) to avoid making any assignment, transfer or substitution to or in favour of any assignee, transferee or New Bank having an entitlement at the time of such assignment, transfer or novation to receive amounts payable under Clauses 15 or 16.1 in amounts greater than would have been payable by the Obligors hereunder at that time in the absence of such assignment, transfer or substitution. 29.8 Sub-participations Any Bank shall be entitled freely to enter into any sub- participation or other arrangement with any third party relating to the Finance Documents which does not transfer to that third party any obligation and/or any legal or equitable interest in any of the rights arising under this Agreement. 29.9 Timing Each Bank undertakes to the Facility Agent that it will not effect any assignment or transfer pursuant to Clause 29.3 and will not enter into any Substitution Certificate pursuant to Clause 29.4 on or within five Business Days before the due date for any payment to be made under any of the Finance Documents where it would have the effect of altering the amount to be paid by the Facility Agent to such Bank consequent on the receipt by the Facility Agent of such payment under the Finance Documents. 90 29.10 Restriction Notwithstanding anything to the contrary contained in this Agreement, unless otherwise agreed by the Majority Banks in any particular case, each Bank may only effect an assignment or transfer of, or substitution with respect to, outstanding Utilisations and/or Commitments where the assignment, transfer or substitution relates to all Utilisations in which it participates and/or all its Commitments pro rata as between such Utilisations and/or such Commitments. 30. SET-OFF AND REDISTRIBUTION 30.1 Set-off Each Bank may (but shall not be obliged to) set off against any obligation of any Obligor due and payable by it to or for the account of such Bank under this Agreement and not paid on the due date any moneys held by such Bank for the account of such Obligor at any office of such Bank anywhere and in any currency, whether or not matured. Such Bank may effect such currency exchanges as are appropriate to implement the set-off and any usual charges and all applicable Taxes in relation to such currency exchanges shall be paid by such Obligor. Any Bank which has set off shall give prompt notice of that fact to the relevant Obligor. 30.2 Redistribution (a) If at any time the proportion which any Bank (the "receiving Bank") has received or recovered (whether by set-off or otherwise) on account of any sum due from any Borrower or any Guarantor under this Agreement is greater (the amount of the excess being herein referred to as the "excess amount") than the proportion received or recovered by the Bank receiving or recovering the smallest proportion (which shall include a nil receipt) in relation to the sum then due to the latter Bank from the relevant Borrower or the Guarantors under this Agreement, then the receiving Bank shall promptly notify the Facility Agent thereof and:- (i) the receiving Bank shall promptly and in any event within ten days of receipt or recovery of the excess amount pay to the Facility Agent an amount equal to the excess amount; (ii) the excess amount shall be treated as having been paid to or recovered by the receiving Bank for the account of the Facility Agent for payment to the Banks as provided in paragraph (iii) below, and the obligations of the relevant Borrower and the Guarantors to the receiving Bank shall only be reduced or discharged by the receipt or recovery by the receiving Bank of such excess amount to the extent of the receiving Bank's entitlement to payment by the Facility Agent pursuant to paragraph (iii) below; and (iii) the parties to this Agreement shall treat such payment as if it were a payment by the relevant Borrower or the Guarantors to the Facility Agent on account of a sum owed to the Banks and shall pay the same to the Banks (including the receiving Bank) pro rata to their respective entitlements in such sum; provided that where a receiving Bank is subsequently required to repay to any Obligor any amount received or recovered by it and dealt with under paragraphs (i), (ii) and (iii) above, each Bank shall promptly repay to the Facility Agent for the receiving Bank the portion of such amount distributed to it, together with interest on it at a 91 rate sufficient to reimburse the receiving Bank for any interest which it has been required to pay to such Obligor in respect of such portion of such amount. (b) Where a receiving Bank has recovered any amount as a consequence of the satisfaction or enforcement of a judgement obtained in any legal action or proceedings to which it is a party, this Clause 30.2 shall not apply so as to benefit any other Bank which (being entitled so to do) did not join with the receiving Bank in such action or proceedings, unless the receiving Bank did not give prior notice of its involvement in such action or proceedings to the Facility Agent for disclosure to the other Banks. (c) Each Bank shall promptly give notice to the Facility Agent of:- (i) the institution by such Bank of any legal action or proceedings under this Agreement or in connection with this Agreement prior to such institution; and (ii) the receipt or recovery by such Bank of any amount received or recovered by it otherwise than through the Facility Agent. Upon receipt of any such notice, the Facility Agent will as soon as practicable thereafter notify all the other Banks. 30.3 Loss Sharing Without prejudice to the foregoing provisions of this Clause 30, if it transpires for any reason that after enforcement in full of the Finance Documents any of the liabilities of any of the Obligors under the Finance Documents remain undischarged and for any reason any resulting losses are not being borne by the Banks pro rata to the amount which their respective aggregate Commitments bore to the aggregate of all the Commitments on the date on which an Enforcement Event occurred, the Banks shall make such payments inter se as shall be required to ensure that after taking into account such payments such losses are borne by the Banks pro rata. For this purpose, "Enforcement Event" means the Facility Agent first exercising any of its rights under Clause 23.2(b), (d) or (e) or, having exercised its rights under Clause 23.2(c), first making demand with respect to some or all of the Advances. Any assignment, transfer or substitution by a Bank pursuant to Clause 29 (whether occurring before or after an Enforcement Event) shall also be effective to assign, transfer or effect a substitution pursuant to that Clause with respect to the rights of such Bank under this Clause 30.3. 31. GOVERNING LAW AND JURISDICTION 31.1 Governing Law This Agreement shall be governed by and construed in accordance with English law. 31.2 Courts of England (a) For the benefit of each of the Finance Parties, each Obligor hereby irrevocably agrees that the High Courts of Justice in London, and all appellate courts therefrom have jurisdiction to settle any disputes which may arise out of or in connection with any of the Finance Documents and that any suit, action or proceedings (together "Proceedings") in connection with any Finance Document may be brought in the High Courts of Justice in London and all appellate courts 92 therefrom and accordingly submits to the jurisdiction of the High Courts of Justice in London and all appellate courts therefrom. (b) Each Obligor hereby irrevocably and unconditionally agrees that nothing in any of the Finance Documents shall affect the right to serve process in any manner permitted by law. 31.3 No limitation Nothing in this Clause 31 shall limit the right of any of the Finance Parties to take Proceedings against any Obligor in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdiction preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not. 32. CONFIDENTIALITY Each Finance Party hereby severally undertakes to each Obligor that it will keep confidential and that it will not make use of for any purposes (otherwise than for the purposes of the Finance Documents and otherwise than in the context of an addition to its general experience, knowledge or expertise), any of the Transaction Documents or other documents relating to this Agreement and all of the information distributed on behalf of the Obligors or any of them during syndication or contained in, received under or obtained in the course of discussions relating to the Information Memorandum and/or the Transaction Documents, other than any such document or information which has become generally available to banks through no breach by it of this Clause, provided that each Finance Party shall be entitled to make disclosure of the same:- (a) to its auditors, accountants, legal counsel and tax advisers and to any other professional advisers appointed to act in connection with the administration of the Finance Documents or the enforcement of, or realisation of any security provided under, any of the Finance Documents; (b) (whether or not the relevant assignment, transfer, substitution, sub-participation or other arrangement is made) to any proposed assignee, transferee or substitute of, or proposed party to any proposed sub- participation (or party to any actual sub- participation) or other arrangement with, any Bank permitted pursuant to this Agreement, provided that before any such disclosure such assignee, transferee, substitute or other party expressly undertakes to the Company and the Facility Agent in writing to be bound by this Clause 32 irrespective of whether such assignment, transfer, substitution or other arrangement shall proceed; (c) to any other third party where the relevant Obligor has previously agreed in writing that disclosure may be made to that third party; (d) to any banking or other regulatory or examining authorities (whether governmental or otherwise) where such disclosure is requested by them; (e) pursuant to subpoena or other legal process, or in connection with any action, suit or proceeding relating to any of the Finance Documents; (f) pursuant to any law or regulation having the force of law; and 93 (g) to CSW and to any member of the Group. The provisions of this Clause 32 shall supersede any undertakings with respect to confidentiality previously given by any Finance Party in favour of any Obligor. 33. MISCELLANEOUS 33.1 Severability (a) If any provision of any Finance Document is prohibited or unenforceable in any jurisdiction, such prohibition or unenforceability shall not invalidate the remaining provisions of such Finance Document or affect the validity or enforceability of such provision in any other jurisdiction. (b) If any of the undertakings given in Clause 21.6(a) (Dividends), 21.6(c) (Share Capital and Subordinated Debt) or 21.9(g) (Constitutional Documents) are not enforceable against any Obligor the obligation on each other Obligor to procure compliance with such undertaking shall remain enforceable. 33.2 Certifications Where any person gives any certificates on behalf of any of the parties to the Finance Documents pursuant to any provision hereof and such certificate proves to be incorrect, the individual shall incur no personal liability in consequence of such certificate being so incorrect save where such individual acted fraudulently, recklessly or negligently in giving such certificate (in which case any liability of such individual shall be determined in accordance with applicable law). 33.3 Accounts as Evidence Accounts maintained by the Facility Agent or each Bank in connection herewith shall constitute prima facie evidence of sums owing to such Bank under this Agreement. 33.4 Press Announcements The Company and the Facility Agent shall agree the form of all press announcements issued in respect of the Finance Documents. 33.5 Counterparts This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF the parties to this Agreement have caused this Agreement to be duly executed on the date first written above. 94 SCHEDULE A PART I BORROWERS CSW INVESTMENTS State of Incorporation: England and Wales Registered Office: 65 Fleet Street London EC4Y 1HS Registered No: 3123865 Address for Notices: c/o Central and South Western Corporation PO Box 660164 Dallas Texas 75266-0164 USA Attention: Treasurer Fax: 001 214 7771223 CSW (UK) PLC State of Incorporation England and Wales Registered Office: 65 Fleet Street London EC4Y 1HS Registered No: 3123442 Address for Notices: c/o Central and South Western Corporation PO Box 660164 Dallas Texas 75266-0164 USA Attention: Treasurer Fax: 001 214 7771223 95 PART II GUARANTORS CSW INVESTMENTS State of Incorporation: England and Wales Registered Office: 65 Fleet Street London EC4Y 1HS Registered No: 3123865 Address for Notices: c/o Central and South Western Corporation PO Box 660164 Dallas Texas 75266-0164 USA Attention: Treasurer Fax: 001 214 777 1223 CSW (UK) PLC State of Incorporation: England and Wales Registered Office: 65 Fleet Street London EC4Y 1HS Registered No: 3123442 Address for Notices: c/o Central and South Western Corporation PO Box 660164 Dallas Texas 75266-0164 USA Attention: Treasurer Fax: 001 214 777 1223 96 PART III Facility Agent and Security Agent Credit Suisse, 5 Cabot Square London E14 4QR England Address for notices: as above Attention: Geoff Ireland/John Chrisford Tel: 0171-888-8000 Fax: 0171-888-8398 97 SCHEDULE B Bank, Facility Office Tranche 1 Tranche 2 Tranche 3 and Notice Details Commitment Commitment Commitment pounds pounds pounds CITIBANK, N.A. 83,333,333.33 283,333,333.33 50,000,000 P.O. Box 242 336 Strand London WC2R 1HB England Address for notices: as above Attention: Loans Administration Tel: 0171-500-4242 Fax: 0171-500-4482 CREDIT SUISSE 83,333,333.34 283,333,333.34 50,000,000 5 Cabot Square London E14 4QR England Address for notices: as above Attention: Client Services Unit Tel: 0171-888-8000 Fax: 0171-888-8398 UNION BANK OF SWITZERLAND 83,333,333.33 283,333,333.33 50,000,000 P.O. Box 428 100 Liverpool Street London EC2M 2RH England Address for notices: as above Attention: Credit Administration Tel: 0171 901 1777/4770 Fax: 0171 901 3903/1903 250,000,000 850,000,000 150,000,000 pounds pounds pounds 98 SCHEDULE C FORMS OF REQUEST PART I (ADVANCE) To: Credit Suisse 5 Cabot Square London E14 4QR Attention: [ ] From: [Company or Borrower] Date: [ ] REQUEST (ADVANCE) Facility Agreement dated 5th November, 1995 Dear Sirs, [On behalf of] [As] the Borrower named below, we hereby give you notice pursuant to Clause 5.1 of the above Facility Agreement that we require an Advance to be made to the Borrower named below under the Facility Agreement, as follows (a) Borrower: [ ] (b) Utilisation Date: [ ] (c) Requested Amount: [ ] (d) Interest Period: [ ] (e) Tranche Designation: [ ] Payment instructions with respect to the proceeds of the Advance to be made in relation to this Request are as follows, subject always to Clause 12.2 of the Facility Agreement: [ ]. + [We confirm that acceptances of the Offer in respect of an aggregate of at least [ ] Shares have been received and that Bidco or its advisers are due to pay a sum of at least pounds [ ] to accepting shareholders in the Target within the next five Business Days. We further confirm that the proceeds of the Advance hereby requested will be applied in accordance with the relevant part of Clause 3.1. OR + Include only in Request for Tranche 2 Advances save where the proceeds of those Advances are to be used for an alternative purpose permitted by Clause 3.1, in which case the purpose should be stated in the Request. 99 Purpose: Terms used in this Request and defined in the Facility Agreement have the same meaning in this Request as in the Facility Agreement. We confirm that all of the conditions precedent to the obligations of the Banks with respect to the making of the proposed Advance provided for in Clause 4 of the Facility Agreement are satisfied or have been waived pursuant to a Waiver Letter. Yours faithfully [Authorised Signatory] [for and on behalf of [ ] 100 PART II (BILLS) To: Credit Suisse 5 Cabot Square London E14 4QR From: [Company or Borrower] Date: [ ] REQUEST (BILL) Facility Agreement dated 5th November, 1995 Dear Sirs, [On behalf of] [As] the Borrower named below, we hereby give you notice pursuant to Clause 6.1 of the above Facility Agreement of the following proposed utilisation of the bill facility under the Tranche 3 Facility: (a) Borrower: [ ] (b) Utilisation Date: [ ] (c) Requested Amount: [ ] (d) Purpose: [ ] (e) Interest Period: [7 to 183 days' duration] Payment instructions with respect to the proceeds of the Utilisation to be made in relation to this Request are as follows, subject always to Clause 12.2 of the Facility Agreement: [ ]. Terms used in this Request and defined in the Facility Agreement have the same meaning in this Request as in the Facility Agreement. We confirm that all of the conditions precedent to the obligations of the Banks with respect to the making of the proposed Utilisation provided for in Clause 4 of the Facility Agreement are satisfied or have been waived pursuant to a Waiver Letter no Default has occurred and is continuing or would result from the proposed Utilisation. Yours faithfully [Authorised Signatory] for and on behalf of 101 SCHEDULE D SUBSTITUTION CERTIFICATE To: CREDIT SUISSE (the "Facility Agent") for itself and on behalf of the other parties to the Facility Agreement and Intercreditor Agreement referred to below. This Certificate ("Substitution Certificate") relates to a Facility Agreement (together with and as supplemented and amended by all Accession Agreements, Substitution Certificates and other agreements from time to time entered into in relation to it, the "Facility Agreement") dated 5th November, 1995 made between CSW Investments as the Company, CSW (UK) plc as Bidco, the Arrangers and the Banks (all as defined in the Facility Agreement), and Credit Suisse as Facility Agent and Security Agent for the Banks in respect of term loan facilities of up to 1,100,000,000 pounds and a revolving credit facility of up to 150,000,000 pounds, and to the Intercreditor Agreement referred to in the Facility Agreement. Terms defined in the Facility Agreement shall, unless otherwise defined herein, have the same meanings herein as in the Facility Agreement. 1. [Existing Bank] (the "Existing Bank"):- (a) confirms that the details appearing in the Schedule hereto under the headings "Existing Bank's Commitments (Portion Substituted)" and "Existing Bank's Participations in Utilisations (Portion Substituted)" are accurate; and (b) requests [ ] (the "New Bank") to accept and procure the substitution pursuant to Clause 29.4 of the Facility Agreement of the Existing Bank by the New Bank in respect of the portion of its relevant Commitment(s) specified under the heading "Existing Bank's Commitments (Portion Substituted)" in the Schedule hereto and/or in respect of the Utilisations referred to under the heading "Existing Banks' Participations in Utilisations (Portion Substituted)" by counter-signing the copy of this Substitution Certificate executed by the Existing Bank and delivering the same to the Facility Agent. 2. The New Bank hereby requests the Obligors, the Arranger, the Banks, the Facility Agent and the Security Agent and the other parties to the Intercreditor Agreement to accept this duly executed Substitution Certificate as being delivered pursuant to and for the purposes of Clause 29.4 of the Facility Agreement and Clause 18 of the Intercreditor Agreement so as to take effect in accordance with its terms under such Clauses on [insert date of substitution]. 3. The New Bank hereby (a) confirms receipt of a copy of the Finance Documents as at the date hereof and all such other documents and information as it has required in connection herewith, (b) accepts and confirms the application of the provisions of Clause 29.4 of the Facility Agreement and Clause 18 of the Intercreditor Agreement as they apply in connection herewith and the transactions and matters to occur in consequence hereof, and (c) confirms the correctness of the details specified with respect to it in the schedule hereto. 102 4. The New Bank hereby undertakes to counter-indemnify the Existing Bank for the New Bank's pro rata share of all amounts payable by the Existing Bank under the Bills in respect of which any liability is intended to be transferred hereunder, which Bills are identified in the Schedule. 5. The New Bank confirms that: (a) it has received a copy of the Finance Documents together with such other documents and information as it has required in connection with this transaction; (b) it has not relied and will not hereafter rely on the Existing Bank to check or enquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such documents or information; (c) it has made its own independent investigation and assessment of the financial affairs of each Obligor and their related entities and the other parties considered by it to be relevant in connection with this transaction and agrees that it has not relied and will not rely on the Existing Bank, the Arrangers, the Facility Agent, the Security Agent or the Banks to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of any member of the Group or any other party to the Finance Documents (save as otherwise expressly provided therein); (d) it has power and authority to become a party to the Finance Documents and has taken all necessary action to authorise execution of this Substitution Certificate and has obtained all necessary approvals and consents to the assumption of its obligations under the Facility Agreement and the Intercreditor Agreement; and (e) it is a Recognised Bank. 6. The New Bank hereby undertakes with the Existing Bank and each of the other parties to the Facility Agreement and the Intercreditor Agreement that it will perform in accordance with its terms all those obligations which by the terms of the Facility Agreement and the Intercreditor Agreement will be assumed by it thereunder after delivery of the executed copies of this Substitution Certificate to the Facility Agent and countersignature thereof by the Facility Agent, and the New Bank hereby undertakes to be bound by the provisions of the Facility Agreement and the Intercreditor Agreement as if the New Bank were an original party thereto. 7. The Existing Bank hereby gives notice that nothing herein or in any Finance Document (or any other document relating thereto) shall oblige the Existing Bank (i) to accept a re- transfer from or novation by the New Bank of the whole or any part of its rights, benefits and/or obligations under the Finance Documents or (ii) to support any losses directly or indirectly sustained or incurred by the New Bank for any reason whatsoever including, without limitation, the non- performance by any Obligor or any other party to the Finance Documents (or any document relating thereto) of their obligations under any such document. The New Bank hereby acknowledges the absence of any such obligation as is referred to in paragraphs (i) and (ii) above. 8. This Substitution Certificate shall be governed by and construed in accordance with English law. 9. This Substitution Certificate may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 103 Schedule to Substitution Certificate Existing Bank's Commitments (Portion Substituted) Tranche 1 Commitment: Tranche 2 Commitment: Tranche 3 Commitment: Existing Bank's Participations in Utilisations (Portion Substituted) Tranch Amount Amount hereby Type of Utilisation Next of Existing Substituted Utilisation Date Interest Bank's participation Payment Date Details of Bills: Existing Bank: New Bank: [Name] [Name] By: By: Date: Date: Facility Office: Address for Notices: Attention: Telex: Fax: CREDIT SUISSE for itself and as Facility Agent and for and on behalf of the Obligors, the Arrangers, the Banks and the Security Agent and each of the parties to the Intercreditor Agreement By: By: Date: 104 SCHEDULE E CALCULATION OF ADDITIONAL COST (1) The Additional Cost relative to each Advance where (and to the extent that) Banks making such Advance are subject to the Mandatory Liquid Asset requirements of the Bank of England, will be, subject as hereinafter provided, for the Interest Period relating to such Advance (or, if longer than three months, for each consecutive period of three months within such Interest Period and for any balance of such Interest Period) (which Interest Period if not longer than three months and each other such period is herein referred to as a "Relevant Period") the percentage rate (or the arithmetic average of the percentage rates where there is more than one Reference Bank supplying the same) supplied by the Reference Banks (or such of them as supply it to the Facility Agent) arrived at by applying the following formula in relation to each Reference Bank:- Additional Cost = BY + L(Y-X) + S(Y-Z) % per annum 100-(B + S) Where:- B = The percentage of such Reference Bank's eligible liabilities then required to be held on a non-interest-bearing deposit account with the Bank of England pursuant to the cash ratio requirements of the Bank of England. Y = The rate at which Sterling deposits in an amount approximately equal to the principal amount of such Advance are offered by such Reference Bank to leading banks in the London Interbank Market at or about 11.00 a.m. on the Utilisation Date relative to such Advance (or the first day of the relevant Interest Period) for a period comparable to the Relevant Period in relation to such Advance. L = The average percentage of eligible liabilities which the Bank of England from time to time requires each Reference Bank to maintain as secured money with members of the London Discount Market Association and/or as secured call money with those money brokers and gilt-edged market makers recognised by the Bank of England. X = The rate at which secured Sterling deposits in an amount approximately equal to the principal amount of such Advance may be placed by such Reference Bank with members of the London Discount Market Association and/or as secured call money with money brokers and gilt-edged market makers at or about 11.00 a.m. on such Utilisation Date (or the first day of the relevant Interest Period) for a period comparable to the Relevant Period in relation to such Advance. S = The percentage of such Reference Bank's eligible liabilities then required to be placed as a special deposit with the Bank of England. 105 Z = The percentage interest rate per annum allowed by the Bank of England on special deposits. For the purposes of this paragraph "eligible liabilities" and "special deposits" shall bear the meanings ascribed to them from time to time by the Bank of England. (2) In the application of the above formula, B, Y, L, X, S and Z will be included in the formula as figures and not as percentages, e.g. if B = 0.5% and Y = 15%, BY will be calculated as 0.5 x 15 and not as 0.5% x 15%. (3) The Additional Cost computed by the Facility Agent in accordance with this schedule shall be rounded upward, if necessary, to four decimal places. (4) The calculation in respect of the Additional Cost for each Advance denominated in Sterling will be made by the Facility Agent on the first day of each Relevant Period. (5) Calculations will be made on the basis of a year of 365 days and the actual number of days elapsed. (6) If no Reference Bank furnishes the appropriate information for the purposes of this Schedule, the Additional Cost shall be determined by the Facility Agent on the basis of such other information and quotations as the Facility Agent shall reasonably determine to be appropriate. (7) In the event of a change in circumstances (including the imposition of alternative or additional official requirements, excluding capital adequacy requirements) which renders the above formula inappropriate in the reasonable opinion of the Facility Agent, the Facility Agent shall promptly notify the Company and the Banks thereof and (after consultation with the Reference Banks and the Company) shall notify the Borrowers of the manner in which the Additional Cost shall thereafter be determined (which manner shall be determined in a bona fide manner and provide a fair assessment of the Additional Cost) and the Obligors and the Banks shall be bound thereby. 106 SCHEDULE F ACCESSION AGREEMENT THIS ACCESSION AGREEMENT is dated the day of , 19 and made BETWEEN [ ] (the "Additional Borrower") (1), (the "Company" and an "Existing Borrower" and a "Guarantor") (2), CSW (UK) PLC ("Bidco") and an "Existing Borrower" and a "Guarantor") (3) [ ] (each also an "Existing Borrower") (4), and CREDIT SUISSE in its capacities as Arranger, Facility Agent and Security Agent under the Facility Agreement referred to in Recital (A) hereof and on behalf of the other Arrangers and the Banks parties to and defined as such in such Facility Agreement and on behalf of each of the parties to the Intercreditor Agreement (5) other than the Obligors. WHEREAS: (A) By and upon and subject to the terms of a facility agreement (the "Facility Agreement", which term includes any supplements and amendments thereto which may at any time be made in relation thereto and also any Substitution Certificates and Accession Agreements) dated 5th November, 1995 made between the Company and Bidco as Borrowers and Guarantors as therein defined, the Arrangers, the several banks parties thereto as Banks, Credit Suisse as Facility Agent and Security Agent, term loan facilities and a revolving credit facility were made available to certain of the Borrowers (as defined in the Facility Agreement). (B) Each of the entities expressed to be party hereto (other than the Additional Borrower), whether directly or through signature hereof by the Facility Agent or the Company on its behalf, is a party to the Facility Agreement and the Intercreditor Agreement either by having been an original party thereto or pursuant to an Accession Agreement or a Substitution Certificate to which it is party or otherwise. (C) The Additional Borrower wishes to become party to the Facility Agreement as a Borrower pursuant to the procedure established in Clause 19 of the Facility Agreement and a party to the Intercreditor Agreement pursuant to the procedure established in Clause 18 of the Intercreditor Agreement, by the execution of this Accession Agreement. NOW IT IS HEREBY AGREED as follows:- 1. Definitions Terms used herein which are defined in or to which a meaning or construction is assigned by or in the Facility Agreement shall, unless otherwise defined herein, have the same meaning and construction herein as therein. 2. Agreements, Confirmations and Representations (a) The Additional Borrower hereby:- (i) confirms that it has received a copy of the Facility Agreement and the Intercreditor Agreement, together with such other documents and information as it has required in connection herewith and therewith; 107 (ii) agrees to become, with effect from the date of this Accession Agreement a Borrower under the Facility Agreement and an Obligor under the Intercreditor Agreement and agrees to be bound in such capacity with effect from such date by the terms of the Facility Agreement and the Intercreditor Agreement and undertakes accordingly to perform its obligations as a Borrower or, as the case may be, Obligor thereunder; (iii) confirms the accuracy of the information set out under its name at the end of this Accession Agreement; (iv) represents and warrants as a Borrower to the Arranger, the Banks, the Security Agent and the Facility Agent in the terms of Clause 20.1 (other than paragraphs [(k), (l), (m), and (o)(ii),] of the Facility Agreement by reference to the facts and circumstances existing at the date hereof; and (v) confirms that it has not relied on any of the Finance Parties, to assess or inform it as to the legality, validity, effect or enforceability of the Facility Agreement or the Intercreditor Agreement or any other document referred to therein or the accuracy or completeness of any such information as is referred to in paragraph (i) above or the creditworthiness, affairs, condition or status of any of the parties to the Facility Agreement or the Intercreditor Agreement, or any such other document. (b) The Existing Borrower(s), the Guarantors and the Finance Parties and the parties to the Intercreditor Agreement hereby agree amongst themselves and with the Additional Borrower that the Additional Borrower shall become party to the Facility Agreement and the Intercreditor Agreement with effect from the date of this Accession Agreement. 3. Law This Accession Agreement shall be governed by and construed in accordance with English law. IN WITNESS WHEREOF the parties hereto have caused this Accession Agreement to be duly executed on the date first written above. Additional Borrower: Company: CSW INVESTMENTS for itself and as agent for and on behalf of the Existing Borrowers and the Guarantors By: 108 Facility Agent: CREDIT SUISSE for itself and as Facility Agent and for and on behalf of the Arrangers, the Banks and the Security Agent and all parties to the Intercreditor Agreement other than the Obligors By: 109 SCHEDULE G DOCUMENTARY CONDITIONS PRECEDENT 1. A certified copy of the memorandum and articles of association (if any), statutes or by-laws and of each other constitutional or governing document of each Obligor. 2. A certified copy or originals of all other Transaction Documents. 3. The fee letter(s) referred to in Clause 26.2 and 26.3 duly executed by the Company. 4. At least two originals of (a) the Security Documents, duly executed by each relevant Obligor, and (b) (if Subordinated Debt is to be subscribed) the Intercreditor Agreement, duly executed by all parties other than the Finance Parties. 5. A certified copy of a resolution of the Directors of each Obligor approving the transactions and matters contemplated by this Agreement and the other Finance Documents to which it is a party and authorising an Authorised Signatory of such Obligor to execute respectively on their behalf all the Finance Documents to which they are party and in the case of documents to be executed under seal or as a deed, authorising the execution thereof as a deed or the affixation of the seal and the witnessing thereof by the appropriate officers in accordance with the relevant Obligor's articles of association, statutes, by-laws or other constitutional documents. 6. A copy of (and of all applications for) any and all approvals, consents, licences, exemptions and other requirements of governmental and other authorities required for the entering into or performance of the Finance Documents and any other Transaction Document. 7. A specimen, of the signature of each person (each being an Authorised Signatory) authorised to execute any of the Finance Documents on behalf of any Obligor and/or to sign all notices, certificates and other documents or communications to be delivered by such Obligor thereunder. 8. An opinion, addressed to the Facility Agent and the Banks, of English legal advisers to the Facility Agent and the Banks as to such matters relating to the Obligors and their obligations under the Finance Documents as the Facility Agent may reasonably require. 9. The Offer Document, reflecting the text of the Press Release. 10. The Press Release. 11. A copy of any and each Licence Undertaking. 12. A copy of any amendments to be made to the Licence consequent on the acquisition of the Shares by the Company. 110 SCHEDULE H Form of Bill Face of Bill No. for pounds ................... Commitment pounds .......... 19..... To On ................................... 19.... pay against this Bill of Exchange to our order the sum of .................................................... for value received against [ ]. For and on behalf of .................... Authorised Signatory Reverse of Bill For and on behalf of .................... Authorised Signatory 111 SCHEDULE I Form of Power of Attorney THIS POWER OF ATTORNEY is made as a deed the day of 199[ ] by [ ] (registered number [ ]) (the "Borrower") for the purposes of a Facility Agreement dated 5th November, 1995 (the "Facility Agreement") made between (inter alios) the Borrower, the Arrangers, the Banks and Credit Suisse as Facility Agent and Security Agent. 1. Terms defined in the Facility Agreement have their defined meanings when used in this Deed. 2. The Borrower hereby appoints Credit Suisse to be the attorney of the Borrower, on behalf of the Borrower, to draw, endorse and deliver, in accordance with the following provisions of this Deed, any Bills which the Borrower is obliged under Clause 6 of the Facility Agreement to ensure that the Facility Agent receives as a result of any Utilisations of the Tranche 3 Facility by the Borrower by way of Bills. 3. The powers conferred on Credit Suisse under paragraph 2 of this Deed shall be exerciseable jointly by any two persons (whether or not directors) who are for the time being authorised signatories of Credit Suisse. 4. In exercising those powers, such authorised signatories shall: (i) act as the agents of Credit Suisse in its capacity as the Borrower's attorney under this Deed; and (ii) sign on behalf of Credit Suisse and the Borrower as follows: "For and on behalf of [ ] by Credit Suisse as Attorney. .................... Authorised Signatory" 5. Any authorised signatory of Credit Suisse may make such arrangements as are customary for facilities of this type for the Bills drawn and endorsed under this Deed to be delivered in accordance with the Facility Agreement. 6. Any Bills drawn, endorsed and delivered in accordance with this Deed shall be binding upon the Borrower for all purposes and the Borrower hereby agrees to ratify any action taken by or on behalf of Credit Suisse in accordance with the terms of this Deed. 7. This Deed shall remain in full force and effect and may be acted upon until the receipt by Credit Suisse of a notice in writing which is signed by a director or the secretary of the Borrower, is addressed to Geoff Ireland or John Chrisford of Credit Suisse, is left at (not posted to) the offices of Credit Suisse and expressly revokes this Deed. 112 8. Notwithstanding the foregoing such revocation shall not take effect with respect to any Bills in relation to which a Drawdown Notice has been issued prior to the time of receipt by Credit Suisse of the notice of revocation referred to in paragraph 7 above and in relation to which the powers of Credit Suisse contained in this Deed shall remain in full force and effect. 9. This Deed shall be governed by English law. IN WITNESS whereof the Borrower has executed this Deed on the date first before written. Executed as a deed by ) [ ] ) acting by ) and ) .......................... director .......................... director/secretary 113 SIGNATORIES TO FACILITY AGREEMENT The Company CSW INVESTMENTS By: S. MCDONNELL Bidco CSW (UK) PLC By: S. MCDONNELL The Arrangers CITIBANK INTERNATIONAL PLC By: E. ROBINSON CREDIT SUISSE By: S. JACKSON By: R. SMITH-MORGAN UNION BANK OF SWITZERLAND By: B. MILLS By: P. COSTELLO The Original Banks CITIBANK, N.A. By: S. ZAMAN CREDIT SUISSE By: S. JACKSON By: R. SMITH-MORGAN UNION BANK OF SWITZERLAND By: B. MILLS By: P. COSTELLO The Facility Agent and the Security Agent CREDIT SUISSE By: S. JACKSON By: R. SMITH-MORGAN EX-12.1 4 Exhibit 12.1 Central Power and Light Company Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios) Operating income $282,184 $256,251 $190,079 $266,665 $249,573 Adjustments: Income taxes 51,755 51,329 (18,954) 34,726 42,869 Provision for deferred income taxes (30,025) 26,659 90,520 48,610 36,821 Deferred investment tax credits (5,789) (5,789) (5,806) (5,837) (5,831) Other income and deductions 14,880 1,272 1,663 890 2,522 Allowance for borrowed and equity funds used during construction 4,514 3,689 2,618 1,171 2,124 Mirror CWIP amortization 41,000 68,000 75,702 82,527 96,671 Earnings $358,519 $401,411 $335,822 $428,752 $424,749 Fixed charges: Interest on long- term debt $116,205 $111,408 $112,939 $125,476 $124,987 Interest on short- term debt and other 19,926 12,365 11,993 7,266 8,697 Fixed charges $136,131 $123,773 $124,932 $132,742 $133,684 Ratio of earnings to fixed charges 2.63 3.24 2.69 3.23 3.18 EX-12.2 5 Exhibit 12.2 Public Service Company of Oklahoma Consolidated Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios) Operating income $111,769 $98,258 $72,156 $78,096 $86,796 Adjustments: Income taxes 37,490 27,954 13,554 (835) 18,321 Provision for deferred income taxes 2,704 7,779 9,537 21,157 10,133 Deferred investment tax credits (2,789) (2,789) (2,838) (2,711) (2,925) Other income and deductions 2,274 933 531 (940) (1,667) Allowance for borrowed and equity funds used during construction 3,734 2,513 1,948 740 1,931 Interest portion of financing leases -- -- 17 37 34 Earnings $155,182 $134,648 $94,905 $95,544 $112,623 Fixed charges: Interest on long- term debt $29,594 $29,594 $31,410 $30,688 $30,545 Interest on short- term debt and other 6,355 3,844 2,729 1,646 3,286 Interest portion of financing leases -- -- 17 37 34 Fixed charges $35,949 $33,438 $34,156 $32,371 $33,865 Ratio of earnings to fixed charges 4.32 4.03 2.78 2.95 3.33 EX-12.3 6 Exhibit 12.3 Southwestern Electric Power Company Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios) Operating income $162,776 $145,922 $118,057 $145,727 $143,317 Adjustments: Income taxes 41,131 20,622 37,108 31,478 39,785 Provision for deferred income taxes 6,287 22,248 (648) 10,258 5,566 Deferred investment tax credits (4,786) (4,278) (5,193) (6,864) (4,938) Other income and deductions 178 4,656 3,658 537 3,883 Allowance for borrowed and equity funds used during construction 9,334 6,097 2,580 182 978 Interest portion of financing leases 1,896 2,562 2,534 2,783 2,946 Earnings $216,816 $197,829 $158,096 $184,101 $191,537 Fixed charges: Interest on long- term debt $44,468 $43,395 $40,958 $47,490 $48,382 Interest on short- term debt and other 10,706 7,568 4,866 4,073 3,172 Interest portion of financing leases 1,896 2,562 2,534 2,783 2,946 Fixed charges $57,070 $53,525 $48,358 $54,346 $54,500 Ratio of earnings to fixed charges 3.80 3.70 3.27 3.39 3.51 EX-12.4 7 Exhibit 12.4 West Texas Utilities Company Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios) Operating income $59,486 $54,763 $46,576 $57,302 $57,925 Adjustments: Income taxes 6,456 7,900 10,869 12,387 13,283 Provision for deferred income taxes 1,971 8,377 3,593 6,426 5,216 Deferred investment tax credits (1,321) (1,321) (1,321) (1,515) (1,349) Other income and deductions (463) 4,210 1,907 1,114 1,603 Allowance for borrowed and equity funds used during construction 1,030 474 247 156 146 Earnings $67,159 $74,403 $61,871 $75,870 $76,824 Fixed charges: Interest on long- term debt $21,413 $18,547 $19,225 $21,368 $21,339 Interest on short- term debt and other 4,110 3,534 2,988 2,197 1,967 Fixed charges $25,523 $22,081 $22,213 $23,565 $23,306 Ratio of earnings to fixed charges 2.63 3.37 2.79 3.22 3.30 EX-21 8 Exhibit 21 Central And South West Corporation Subsidiaries Of The Registrant As Of December 31, 1995 Company Name Business Conducted Under Same Name State or Jurisdiction of Incorporation Central Power and Light Company Texas 539 North Carancahua Street Corpus Christi, Texas 78401-2802 Public Service Company of Oklahoma Oklahoma 212 East 6th Street Tulsa, Oklahoma 74119-1212 Southwestern Electric Power Company Delaware 428 Travis Street Shreveport, Louisiana 71156-0001 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 Transok, Inc. Oklahoma 110 West 7th Street Tulsa, Oklahoma 74119-1044 Central and South West Services, Inc. Texas 2 West Second Street Tulsa, Oklahoma 74103-3102 and 1616 Woodall Rodgers Freeway Dallas, Texas 75202-1234 CSW 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 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 9 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 reports dated February 28, 1996, included in, and incorporated by reference 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 27, 1996 EX-23.2 10 Exhibit 23.2 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 reports dated February 28, 1996, included in, and incorporated by reference 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 27, 1996 EX-23.3 11 Exhibit 23.3 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 reports dated February 28, 1996, included in, and incorporated by reference 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 27, 1996 EX-23.4 12 Exhibit 23.4 Consent of Independent Public Accountants To the Stockholders and Board of Directors of West Texas Utilities Company: As independent public accountants, we hereby consent to the incorporation of our reports dated February 28, 1996, included in, and incorporated by reference in this Form 10-K, into West Texas Utilities Company's previously filed registration statement on Form S- 3 (File No. 33-60801). Arthur Andersen LLP Dallas, Texas March 27, 1996 EX-24.1 13 EXHIBIT 24.1 POWER OF ATTORNEY The undersigned, as President and Chief Executive Officer of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints Glenn D. Rosilier and Wendy G. Hargus 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 1995 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 18th day of January, 1996. E. R. Brooks President & Chief Executive Officer Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 EX-24.2 14 EXHIBIT 24.2 POWER OF ATTORNEY The undersigned, as Senior Vice President and Chief Financial Officer of Central and South West Corporation (the "Corporation"), hereby makes, constitutes and appoints E. R. Brooks and Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Glenn D. Rosilier Senior Vice President and Chief Financial Officer Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3,1998 EX-24.3 15 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, her 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 1995 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 18th day of January, 1996. Wendy G. Hargus Controller Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 EX-24.4 16 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Glenn Biggs Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Molly Shi Boren Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Donald M. Carlton Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Thomas H. Cruikshank Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Joe H. Foy Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Robert W. Lawless Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Harry D. Mattison Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. James L. Powell Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Thomas V. Shockley, III Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. J. C. Templeton Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. Lloyd D. Ward Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 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 Wendy G. Hargus, 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 1995 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 18th day of January, 1996. T. J. Ellis Subscribed and sworn to before me this 18th day of January, 1996. Frederic L. Frawley Notary Public My Commission Expires: December 3, 1998 EX-24.5 17 EXHIBIT 24.5 POWER OF ATTORNEY The undersigned, as President and Chief Executive Officer of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorneys-in-fact and agents, 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 1995 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 attorneys-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. Robert R. Carey Subscribed and sworn to before me this 19th day of January, 1996 by Robert R. Carey. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EX-24.6 18 EXHIBIT 24.6 POWER OF ATTORNEY The undersigned, as Controller of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorney-in-fact, and agent, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorney-in-fact and agent, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. R. Russell Davis Subscribed and sworn to before me this 19th day of January, 1996 by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-97 EX-24.7 19 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. John F. Brimberry Director Subscribed and sworn to before me this 19th day of January, 1996 by John F. Brimberry. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 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 23rd day of January, 1996. E. R. Brooks Director Subscribed and sworn to before me this 23rd day of January, 1996 by E. R. Brooks. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 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 24th day of January, 1996. Ruben M. Garcia Director Subscribed and sworn to before me this 24th day of January, 1996 by Ruben M. Garcia. Phyllis A. Pego Notary Public My Commission Expires: 12-9-97 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. David L. Hooper Director Subscribed and sworn to before me this 19th day of January, 1996 by David L. Hooper. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. Harry D. Mattison Director Subscribed and sworn to before me this 19th day of January, 1996 by Harry D. Mattison. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. Robert A. McAllen Director Subscribed and sworn to before me this 19th day of January, 1996 by Robert A. McAllen. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. Pete J. Morales, Jr. Director Subscribed and sworn to before me this 19th day of January, 1996 by Pete J. Morales, Jr. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. S. Loyd Neal, Jr. Director Subscribed and sworn to before me this 19th day of January, 1996 by S. Loyd Neal, Jr. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. H. Lee Richards Director Subscribed and sworn to before me this 22nd day of January, 1996 by H. Lee Richards. Marilyn M. Wilkins Notary Public My Commission Expires: 10-29-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. Melanie J. Richardson Director Subscribed and sworn to before me this 19th day of January, 1996 by Melanie J. Richardson. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. J. Gonzalo Sandoval Director Subscribed and sworn to before me this 19th day of January, 1996 by J. Gonzalo Sandoval. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EXHIBIT 24.7 POWER OF ATTORNEY The undersigned, as a director of Central Power and Light Company (the "Company"), hereby makes, constitutes and appoints Robert R. Carey 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 19th day of January, 1996. Gerald E. Vaughn Director Subscribed and sworn to before me this 19th day of January, 1996 by Gerald E. Vaughn. Alice G. Crisp Notary Public My Commission Expires: 8-3-98 EX-24.8 20 EXHIBIT 24.8 POWER OF ATTORNEY The undersigned, as President and Chief Executive Officer of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorneys-in-fact and agents, 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 1995 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 attorneys-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 16th day of January, 1996. Robert L. Zemanek Subscribed and sworn to before me this 16th day of January, 1996 by Robert L. Zemanek. Lina P. Holm Notary Public My Commission Expires: January 28, 1999 EX-24.9 21 EXHIBIT 24.9 POWER OF ATTORNEY The undersigned, as Controller of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints Robert L. Zemanek 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 1995 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 16th day of January, 1996. R. Russell Davis Subscribed and sworn to before me this 16th day of January, 1996 by R. Russell Davis. Lina P. Holm Notary Public My Commission Expires: January 28, 1999 EX-24.10 22 EXHIBIT 24.10 POWER OF ATTORNEY The undersigned, as a director of Public Service Company of Oklahoma (the "Company"), hereby makes, constitutes and appoints Robert L. Zemanek 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 1995 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 16th day of January, 1996. Harry A. Clarke Subscribed and sworn to before me this 16th day of January, 1996 by Harry A. Clarke. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. Harry D. Mattison Subscribed and sworn to before me this 16th day of January, 1996 by Harry D. Mattison. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. E. R. Brooks Subscribed and sworn to before me this 16th day of January, 1996 by E. R. Brooks. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. Robert B. Taylor, Jr. Subscribed and sworn to before me this 16th day of January, 1996 by Robert B. Taylor, Jr. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. Paul K. Lackey, Jr. Subscribed and sworn to before me this 16th day of January, 1996 by Paul K. Lackey, Jr. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 and any and all amendments thereto, to be filed under the Securities Exchange Act of 1934, as amended, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys-in-fact, and agents, and each of them, full power and authority of substitution and revocation in the premises and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as the undersigned might or could do in person and hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue of this Power of Attorney. IN WITNESS WHEREOF, I have hereunto executed this Power of Attorney this 26th day of January, 1996. Paula Marshall-Chapman Subscribed and sworn to before me this 26th day of January, 1996 by Paula Marshall-Chapman. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. William R. McKamey Subscribed and sworn to before me this 16th day of January, 1996 by William R. McKamey. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. Mary M. Polfer Subscribed and sworn to before me this 16th day of January, 1996 by Mary M. Polfer. Lina P. Holm Notary Public My Commission Expires: January 28, 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 Robert L. Zemanek 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 1995 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 16th day of January, 1996. Waldo Zerger, Jr. Subscribed and sworn to before me this 16th day of January, 1996 by Waldo Zerger, Jr. Lina P. Holm Notary Public My Commission Expires: January 28, 1999 EX-24.11 23 EXHIBIT 24.11 POWER OF ATTORNEY The undersigned, as President and Chief Executive Officer of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorneys-in-fact and agents, 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 1995 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 attorneys-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 24th day of January, 1996. Richard H. Bremer Subscribed and sworn to before me this 24th day of January, 1996 by Richard H. Bremer. Judith W. Culver Notary Public Commission is for Life EX-24.12 24 EXHIBIT 24.12 POWER OF ATTORNEY The undersigned, as Controller of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Richard H. Bremer 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 1995 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 24th day of January, 1996. R. Russell Davis Subscribed and sworn to before me this 24th day of January, 1996 by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-97 EX-24.13 25 EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Richard H. Bremer 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 1995 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 31st day of January, 1996. E. R. Brooks Director Subscribed and sworn to before me this 31st day of January, 1996 by E. R. Brooks. L. J. Jimmerson Notary Public My Commission Expires: May 11, 1996 EXHIBIT 24.13 POWER OF ATTORNEY The undersigned, as a director of Southwestern Electric Power Company (the "Company"), hereby makes, constitutes and appoints Richard H. Bremer 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 1995 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 24th day of January, 1996. James E. Davison Director Subscribed and sworn to before me this 24th day of January, 1996 by James E. Davison. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. Al P. Eason, Jr. Director Subscribed and sworn to before me this 24th day of January, 1996 by Al P. Eason, Jr. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. W. J. Googe, Jr. Director Subscribed and sworn to before me this 24th day of January, 1996 by W. J. Googe, Jr. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. Dr. Frederick E. Joyce Director Subscribed and sworn to before me this 24th day of January, 1996 by Dr. Frederick E. Joyce. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. Michael H. Madison Director Subscribed and sworn to before me this 24th day of January, 1996 by Michael H. Madison. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. Harry D. Mattison Director Subscribed and sworn to before me this 24th day of January, 1996 by Harry D. Mattison. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. Marvin R. McGregor Director Subscribed and sworn to before me this 24th day of January, 1996 by Marvin R. McGregor. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. William C. Peatross Director Subscribed and sworn to before me this 24th day of January, 1996 by William C. Peatross. Judith W. Culver Notary Public My Commission Expires: My 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 Richard H. Bremer 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 1995 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 24th day of January, 1996. Maxine P. Sarpy Director Subscribed and sworn to before me this 24th day of January, 1996 by Maxine P. Sarpy. Judith W. Culver Notary Public My Commission Expires: My commission is for Life EX-24.14 26 EXHIBIT 24.14 POWER OF ATTORNEY The undersigned, as President and Chief Executive Officer of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints R. Russell Davis his true and lawful attorneys-in-fact and agents, 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 1995 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 attorneys-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 23rd day of January, 1996. Glenn Files Subscribed and sworn to before me this 23rd day of January, 1996 by Glenn Files. Martha Murray Notary Public My Commission Expires: 11-19-96 EX-24.15 27 EXHIBIT 24.15 POWER OF ATTORNEY The undersigned, as Controller of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. R. Russell Davis Subscribed and sworn to before me this 23rd day of January, 1996 by R. Russell Davis. Kit Hill Notary Public My Commission Expires: 6-14-97 EX-24.16 28 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Richard Bacon Director Subscribed and sworn to before me this 23rd day of January, 1996 by Richard Bacon. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Harwell Barber Director Subscribed and sworn to before me this 23rd day of January, 1996 by Harwell Barber. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Paul J. Brower Director Subscribed and sworn to before me this 23rd day of January, 1996 by Paul J. Brower. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. T. D. Churchwell Director Subscribed and sworn to before me this 23rd day of January, 1996 by T. D. Churchwell. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Harry D. Mattison Director Subscribed and sworn to before me this 23rd day of January, 1996 by Harry Mattison. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Tommy Morris Director Subscribed and sworn to before me this 23rd day of January, 1996 by Tommy Morris. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Dian G. Owen Director Subscribed and sworn to before me this 23rd day of January, 1996 by Dian G. Owen. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. James Parker Director Subscribed and sworn to before me this 23rd day of January, 1996 by James Parker. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. F. L. Stephens Director Subscribed and sworn to before me this 23rd day of January, 1996 by F. L. Stephens. Martha Murray Notary Public My Commission Expires: 11-19-96 EXHIBIT 24.16 POWER OF ATTORNEY The undersigned, as a director of West Texas Utilities Company (the "Company"), hereby makes, constitutes and appoints Glenn Files 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 1995 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 23rd day of January, 1996. Dennis M. Sharkey Director Subscribed and sworn to before me this 23rd day of January, 1996 by Dennis M. Sharkey. Martha Murray Notary Public My Commission Expires: 11-19-96 EX-27.1 29
UT 001 CENTRAL AND SOUTH WEST CORPORATION 1,000,000 YEAR YEAR YEAR DEC-31-1995 DEC-31-1994 DEC-31-1993 DEC-31-1995 DEC-31-1994 DEC-31-1993 PER-BOOK PER-BOOK PER-BOOK 8,269 7,295 0 748 703 0 2,039 1,346 0 514 516 0 2,299 1,206 0 13,869 11,066 0 675 667 0 610 561 0 1,893 1,824 0 3,178 3,052 0 34 35 0 292 292 0 3,854 2,876 0 0 0 0 50 50 0 1,338 1,564 0 25 2 0 1 1 0 10 14 0 4 4 0 5,083 3,176 0 13,869 11,066 0 3,735 3,623 3,687 105 189 131 2,974 2,840 3,099 3,079 3,029 3,230 656 594 457 99 111 139 755 705 596 334 293 269 421 412 327 19 18 19 402 394 308 329 322 306 212 204 217 799 764 694 2.10 2.08 1.63 2.10 2.08 1.63
EX-27.2 30
UT 003 CENTRAL POWER AND LIGHT COMPANY 1,000 YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 3,469,945 1,531 170,360 1,187,719 51,581 4,881,136 168,888 405,000 863,444 1,437,332 0 250,351 1,517,347 0 0 0 231 0 0 74 1,675,801 4,881,136 1,073,469 15,812 775,473 791,285 282,184 56,322 338,506 132,059 206,447 14,469 191,978 186,000 116,205 299,818 1.00 1.00
EX-27.3 31
UT 004 PUBLIC SERVICE COMPANY OF OKLAHOMA 1,000 YEAR YEAR YEAR DEC-31-1995 DEC-31-1994 DEC-31-1993 DEC-31-1995 DEC-31-1994 DEC-31-1993 PER-BOOK PER-BOOK PER-BOOK 1,330,376 1,304,518 0 6,498 8,694 0 88,484 99,251 0 16,449 18,411 0 39,009 34,240 0 1,480,816 1,465,114 0 157,230 157,230 0 180,000 180,000 0 150,281 124,269 0 487,511 461,499 0 0 0 0 19,826 19,826 0 379,250 402,752 0 70,510 55,160 0 0 0 0 0 0 0 25,000 0 0 0 0 0 0 0 0 0 0 0 498,719 525,877 0 1,480,816 1,465,114 0 690,823 740,496 707,536 37,602 37,138 21,967 541,452 605,100 613,413 579,054 642,238 635,380 111,769 98,258 72,156 3,544 2,027 7,850 115,313 100,285 80,006 33,485 32,019 33,287 81,828 68,266 46,719 816 816 816 81,012 67,450 45,903 55,000 41,000 40,000 29,594 29,594 31,410 143,888 151,801 134,092 .42 .36 .24 .42 .36 .24
EX-27.4 32
UT 0000092487 SOUTHWESTERN ELECTRIC POWER COMPANY 1,000 YEAR YEAR YEAR DEC-31-1995 DEC-31-1994 DEC-31-1993 DEC-31-1995 DEC-31-1994 DEC-31-1993 PER-BOOK PER-BOOK PER-BOOK 1,879,656 1,856,558 0 3,467 3,452 0 178,448 165,113 0 16,906 33,219 0 38,242 20,865 0 2,116,719 2,079,207 0 135,660 135,660 0 245,000 245,000 0 302,334 297,462 0 682,994 678,122 0 33,628 34,828 0 16,032 16,032 0 538,709 531,836 0 0 0 0 50,000 50,000 0 0 0 0 145 145 0 1,200 1,200 0 10,242 13,997 0 3,754 3,925 0 780,015 749,122 0 2,116,719 2,079,207 0 836,705 825,296 837,192 43,353 42,303 29,561 630,576 637,071 689,574 673,929 679,374 719,135 162,776 145,922 118,057 4,468 8,235 8,623 167,244 154,157 126,680 50,130 48,445 44,804 117,114 105,712 81,876 3,244 3,361 3,362 113,870 102,351 78,514 109,000 70,000 80,000 44,468 43,395 40,958 213,514 178,121 232,098 .59 .54 .42 .59 .54 .42
EX-27.5 33
UT 006 WEST TEXAS UTILITIES COMPANY 1,000 YEAR YEAR DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 PER-BOOK PER-BOOK 680,572 663,855 872 982 66,496 62,015 26,092 26,914 41,582 18,211 815,614 771,977 137,214 137,214 2,236 2,236 125,770 132,504 265,220 271,594 0 0 6,291 6,291 273,245 210,047 19,820 46,315 0 0 0 0 0 650 0 0 0 0 0 0 251,038 236,720 815,614 771,977 319,835 342,991 5,542 17,954 254,807 270,274 260,349 288,228 59,486 54,763 (85) 4,360 59,401 59,123 24,871 21,757 34,530 37,366 264 452 34,266 36,914 41,000 31,000 21,413 18,547 53,340 28,004 .18 .19 .18 .19
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