UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
1-1443 CENTRAL AND SOUTH WEST CORPORATION 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
0-346 CENTRAL POWER AND LIGHT COMPANY 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300
0-343 PUBLIC SERVICE COMPANY OF OKLAHOMA 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 SOUTHWESTERN ELECTRIC POWER COMPANY 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 222-2141
0-340 WEST TEXAS UTILITIES COMPANY 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
Common Stock Outstanding at November 7, 1997 Shares
Central and South West Corporation 212,235,320
Central Power and Light Company 6,755,535
Public Service Company of Oklahoma 9,013,000
Southwestern Electric Power Company 7,536,640
West Texas Utilities Company 5,488,560
This Combined Form 10-Q is separately filed by Central and South
West Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
<PAGE> 2
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1997
PAGE
GLOSSARY OF TERMS.............................................................3
FORWARD LOOKING INFORMATION...................................................4
PART I. FINANCIAL INFORMATION................................................5
ITEM 1. FINANCIAL STATEMENTS..............................................5
Central And South West Corporation And Subsidiary Companies............10
Central Power And Light Company........................................14
Public Service Company Of Oklahoma.....................................22
Southwestern Electric Power Company....................................29
West Texas Utilities Company...........................................36
Notes To Financial Statements..........................................44
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................56
PART II - OTHER INFORMATION..................................................67
ITEM 1. LEGAL PROCEEDINGS................................................67
ITEM 5. OTHER INFORMATION................................................68
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................70
SIGNATURES...................................................................71
<PAGE> 3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are defined below:
ABBREVIATION OR ACRONYM DEFINITION
ANI....................................American Nuclear Insurance
Burlington Northern....................Burlington Northern Railroad Company
Cajun..................................Cajun Electric Power Cooperative, Inc.
CLECO..................................Central Louisiana Electric Company, Inc.
Committee of Certain Members...........The members committee of Cajun, which
currently represents 7 of the 11
Louisiana member distribution
cooperatives that are served by Cajun
Court of Appeals.......................Court of Appeals, Third District of
Texas, Austin, Texas
CPL....................................Central Power and Light Company, Corpus
Christi, Texas
CPL 1997 Final Order...................Final orders received from the Texas
Commission in CPL's rate case Docket No.
14965, including both the order received
on September 10, 1997 and the revised
order received on October 16, 1997
CPL 1996 Fuel Agreement................Fuel settlement agreement entered into by
CPL and other parties in March 1996
CPL 1997 Original Rate Order...........Final order issued on March 31, 1997 by
the Texas Commission in CPL's rate case
Docket No. 14965
CSW....................................Central and South West Corporation,
Dallas, Texas
CSW Credit.............................CSW Credit, Inc., Dallas, Texas
CSW Energy.............................CSW Energy, Inc., Dallas, Texas
CSW ESI................................CSW Energy Services, Inc., Dallas, Texas
CSW International......................CSW International, Inc., Dallas, Texas
CSW PMI................................CSW Power Marketing, Inc., Dallas, Texas
CSW Services...........................Central and South West Services, Inc.,
Dallas, Texas and Tulsa, Oklahoma
CSW System.............................CSW and its subsidiaries
CWIP...................................Construction work in progress
DGES...................................Director General Electricity Supply
DHMV...................................Dolet Hills Mining Venture
ECOM...................................Excess cost over market
El Paso................................El Paso Electric Company
El Paso Merger.........................The proposed merger whereby El Paso would
have become a wholly-owned subsidiary of
CSW
Entergy Texas..........................Entergy Texas Utilities Company
EPA....................................Environmental Protection Agency
ERCOT..................................Electric Reliability Council of Texas
Exchange Act...........................Securities Exchange Act of 1934, as
amended
FERC...................................Federal Energy Regulatory Commission
HL&P...................................Houston Lighting & Power Company
Holding Company Act....................Public Utility Holding Company Act of
1935, as amended
ITC....................................Investment tax credit
LIFO...................................Last-in First-out (inventory accounting
method)
MD&A...................................Management's Discussion and Analysis of
Financial Condition and Results of
Operations
MDEQ...................................Mississippi Department of Environmental
Quality
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 (British thermal unit)
MWH....................................Megawatt-hour
National Grid..........................National Grid Group plc
NEIL...................................Nuclear Electric Insurance Limited
OCC Staff..............................Staff of the Oklahoma Commission
Oklahoma Commission....................Corporation Commission of the State of
Oklahoma
<PAGE> 4
GLOSSARY OF TERMS (CONTINUED)
ABBREVIATION OR ACRONYM DEFINITION
Oklaunion..............................Oklaunion Power Station
PCB....................................Polychlorinated biphenyl
PRP....................................Potentially responsible party
PSO....................................Public Service Company of Oklahoma,
Tulsa, Oklahoma
PSO 1997 Rate Settlement Agreement.....Joint stipulation agreement reached by
PSO and other parties to settle PSO's
current rate inquiry
Registrant(s)..........................CSW, CPL, PSO, SWEPCO and WTU
Rights Plan............................Stockholder Rights Agreement between CSW
and CSW Services, as Rights Agent
RUS....................................Rural Utilities Service of the federal
government
SEC....................................United States Securities and Exchange
Commission
SEEBOARD...............................SEEBOARD plc., Crawley, West Sussex,
United Kingdom
SEEBOARD U.S.A.........................CSW's investment in SEEBOARD consolidated
and converted to U.S. Generally Accepted
Accounting Principles
SFAS...................................Statement of Financial Accounting
Standards
SFAS No. 52............................Foreign Currency Translation
SFAS No. 71............................Accounting for the Effects of Certain
Types of Regulation
SFAS No. 87............................Employers' Accounting for Pensions
STP....................................South Texas Project nuclear electric
generating station, jointly owned by CPL,
HL&P, City of Austin, and City of San
Antonio
STPNOC.................................South Texas Project Nuclear Operating
Company, a non-profit Texas corporation,
jointly owned by CPL, HL&P, City of
Austin, and City of San Antonio
Subsidiary obligated, mandatorily
redeemable, trust preferred
securities.........................Collective term for securities issued by
business trusts of CPL, PSO and SWEPCO
SWEPCO.................................Southwestern Electric Power Company,
Shreveport, Louisiana
SWEPCO Plan............................The plan of reorganization for Cajun
filed by the Committee of Certain
Members, SWEPCO and Entergy Texas on
October 26, 1996 with the U.S. Bankruptcy
Court for the Middle District of
Louisiana
Texas Commission.......................Public Utility Commission of Texas
Transok................................Transok, Inc. and subsidiaries, a former
wholly-owned subsidiary of CSW
U.S. Electric(s) or U.S. Electric
Operating Companies................CPL, PSO, SWEPCO and WTU
Vale...................................Empresa De Electrcidade Vale
Paranapanema S/A
WTU....................................West Texas Utilities Company, Abilene,
Texas
FORWARD LOOKING INFORMATION
This report made by CSW and its subsidiaries contains forward looking statements
within the meaning of Section 21E of the Exchange Act. Although CSW and each of
its subsidiaries believe that, in making any such statements, their expectations
are based on reasonable assumptions, any such statements may be influenced by
factors that could cause actual outcomes and results to be materially different
from those projected. Important factors that could cause actual results to
differ materially from those in the forward looking statements include, but are
not limited to: the impact of general economic changes in the U.S. and in
countries in which CSW either currently has made or in the future may make
investments; the impact of deregulation on the U.S. electric utility business;
increased competition and electric utility industry restructuring in the U.S.;
federal and state regulatory developments and changes in law which may have a
substantial adverse impact on the value of CSW System assets; timing and
adequacy of rate relief; adverse changes in electric load and customer growth;
climatic changes or unexpected changes in weather patterns; changing fuel
prices, generating plant and distribution facility performance; decommissioning
costs associated with nuclear generating facilities; uncertainties in foreign
operations and foreign laws affecting CSW's investments in those countries; the
effects of retail competition in the natural gas and electricity distribution
and supply businesses in the United Kingdom; and the timing and success of
efforts to develop domestic and international power projects. In the non-utility
area, the aforementioned factors would also apply, and, in addition, would
include, but are not limited to: the ability to compete effectively in new
areas, including telecommunications, power marketing and brokering, and other
energy related services, as well as evolving federal and state regulatory
legislation and policies that may adversely affect those industries generally or
the CSW System's business in areas in which it operates.
<PAGE> 4
CSW
CENTRAL AND SOUTH WEST CORPORATION
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 6
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1997 1996 1997 1996
------- ------ ------ ------
(millions, except per share amounts)
OPERATING REVENUES
U.S. Electric $1,054 $1,028 $2,562 $2,555
United Kingdom 401 391 1,324 1,322
Other diversified 22 19 53 43
------- ------ ------ ------
1,477 1,438 3,939 3,920
OPERATING EXPENSES AND TAXES
U.S. Electric fuel 370 347 892 885
U.S. Electric purchased power 18 20 61 60
United Kingdom cost of sales 276 274 927 961
Operating and maintenance 254 232 769 670
Provision for CPL 1997 Final Order 3 -- 18 --
El Paso Merger litigation -- -- 35 --
Depreciation and amortization 121 122 360 356
Taxes, other than income 49 49 143 138
Income taxes 83 110 135 208
------- ------ ------ ------
1,174 1,154 3,340 3,278
------- ------ ------ ------
OPERATING INCOME 303 284 599 642
------- ------ ------ ------
OTHER INCOME AND DEDUCTIONS
U.S. Electric reserves for utility
plant development costs, net of
income tax benefit of $1 for 1997
and $33 for 1996 -- -- (2) (84)
Other 10 11 29 15
------- ------ ------ ------
10 11 27 (69)
------- ------ ------ ------
INCOME BEFORE INTEREST CHARGES 313 295 626 573
------- ------ ------ ------
INTEREST AND OTHER CHARGES
Interest on long-term debt 84 80 251 240
Distributions on Subsidiary
obligated, mandatorily redeemable,
trust preferred securities 7 -- 11 --
Interest on short-term debt and
other 23 21 59 76
------- ------ ------ ------
114 101 321 316
------- ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 199 194 305 257
DISCONTINUED OPERATIONS
Income, net of income tax of $6 -- -- -- 12
Gain on the sale, net of income tax
of $71 -- -- -- 113
------- ------ ------ ------
-- -- -- 125
------- ------ ------ ------
INCOME BEFORE EXTRAORDINARY ITEM 199 194 305 382
EXTRAORDINARY ITEM-United Kingdom windfall
profits tax (176) -- (176) --
------- ------ ------ ------
NET INCOME 23 194 129 382
Less: Preferred stock dividends 3 4 10 13
Gain on reacquired preferred stock -- -- 10 --
------- ------ ------ ------
NET INCOME FOR COMMON STOCK $ 20 $ 190 $ 129 $ 369
======= ====== ====== ======
Average Common Shares Outstanding 212.2 210.3 212.1 206.3
Earnings per Share of Common Stock from
Continuing Operations 0.93 0.90 1.44 1.18
Earnings per Share of Common Stock from
Discontinued Operations -- -- -- 0.61
------- ------ ------ ------
Earnings per Share of Common Stock before
Extraordinary Item 0.93 0.90 1.44 1.79
Loss per Share of Common Stock from
Extraordinary Item (0.83) -- (0.83) --
------- ------ ------ ------
Earnings per Share of Common Stock $0.10 $0.90 $0.61 $1.79
======= ====== ====== ======
Dividends Paid per Share of Common Stock $0.435 $0.435 $1.305 $1.305
======= ====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 7
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
------------- ------------
(millions)
ASSETS
FIXED ASSETS
Electric
Production $ 5,825 $ 5,830
Transmission 1,561 1,538
Distribution 4,352 4,237
General 1,358 1,318
Construction work in progress 169 230
Nuclear fuel 195 184
------- -------
Total Electric 13,460 13,337
Other diversified 191 84
------- -------
13,651 13,421
Less - Accumulated depreciation and amortization 5,117 4,940
------- -------
8,534 8,481
------- -------
CURRENT ASSETS
Cash and temporary cash investments 390 254
Accounts receivable 1,208 837
Materials and supplies, at average cost 176 185
Electric utility fuel inventory 71 102
Under-recovered fuel costs 99 46
Prepayments and other 58 85
------- -------
2,002 1,509
------- -------
DEFERRED CHARGES AND OTHER ASSETS
Deferred plant costs 505 509
Mirror CWIP asset 289 299
Other non-utility investments 441 371
Income tax related regulatory assets, net 248 236
Goodwill 1,405 1,525
Other 379 402
------- -------
3,267 3,342
------- -------
$13,803 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 8
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
-------------- -------------
(millions)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity
Common stock: $3.50 par value
Authorized: 350.0 million shares
Issued and outstanding: 212.2 million
shares in 1997 and 211.5 million
shares in 1996 $ 743 $ 740
Paid-in capital 1,039 1,022
Retained earnings 1,815 1,963
Foreign currency translation adjustment
and other 33 77
------- -------
3,630 3,802
Preferred stock
Not subject to mandatory redemption 176 292
Subject to mandatory redemption 26 33
Subsidiary obligated, mandatorily redeemable,
trust preferred securities 323 --
Long-term debt 3,933 4,024
------- -------
8,088 8,151
------- -------
CURRENT LIABILITIES
Long-term debt and preferred stock due
within twelve months 204 204
Short-term debt 439 364
Short-term debt - CSW Credit, Inc. 849 579
Loan notes 65 76
Accounts payable 510 630
Accrued taxes 447 324
Accrued interest 129 82
Other 303 166
------- -------
2,946 2,425
------- -------
DEFERRED CREDITS
Accumulated deferred income taxes 2,235 2,272
Investment tax credits 282 291
Other 252 193
------- -------
2,769 2,756
------- -------
$13,803 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 9
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30, September 30,
-----------------------------
1997 1996
-------- ---------
OPERATING ACTIVITIES (millions)
Net Income $ 129 $ 382
Non-cash Items Included in Net Income
Depreciation and amortization 385 403
Deferred income taxes and investment
tax credits (11) 17
Utility plant and other development costs 1 141
Provision for CPL 1997 Final Order 18 --
Gain on sale of subsidiary -- (184)
Refund due customers - PSO 29
Changes in Assets and Liabilities
Accounts receivable (383) (177)
Fuel recovery (23) --
Accounts payable 5 (92)
Accrued taxes 125 109
Other 134 (122)
------- -------
409 477
------- -------
INVESTING ACTIVITIES
Construction expenditures (345) (343)
Acquisition expenditures -- (1,391)
CSW Energy/CSW International projects (187) (52)
Sale of National Grid assets -- 99
Cash proceeds from sale of subsidiary -- 690
Other -- (5)
------- -------
(532) (1,002)
------- -------
FINANCING ACTIVITIES
Common stock sold 20 451
Proceeds from issuance of long-term debt -- 238
SEEBOARD acquisition financing -- 517
Reacquisition and retirement of long-term
debt (52) (238)
Reacquisition and retirement of preferred
stock (114) --
Proceeds from issuance of Subsidiary
obligated, mandatorily redeemable,
trust preferred securities 323 --
Other financing activities 34 --
Change in short-term debt 345 (151)
Payment of dividends (290) (279)
------- -------
266 538
------- -------
Effect of exchange rate changes on cash and
cash equivalents (7) 8
Net change in cash and cash equivalents 136 21
Cash and cash equivalents - beginning of period 254 401
------- -------
Cash and cash equivalents - end of period $ 390 $ 422
======= =======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on trust preferred
securities) $ 282 $ 261
======= =======
Income taxes paid $ 247 $ 139
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 10
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Set forth below is information concerning the consolidated results of
operations of CSW for the three and nine month periods ended September 30, 1997
and September 30, 1996. For information concerning the results of operations for
each of the U.S. Electric Operating Companies, see the discussions under the
heading RESULTS OF OPERATIONS following the financial statements of each of the
U.S. Electric Operating Companies.
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased to $20 million in the third
quarter of 1997 from $190 million in 1996 due primarily to the accrual of the
one-time United Kingdom windfall profits tax of (pound)109.5 million at SEEBOARD
(or $176 million when converted at (pound)1.00=$1.61). Also contributing to the
decrease in earnings was the $16 million effect of the PSO 1997 Rate Settlement
Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 9.
EXTRAORDINARY ITEM for additional information on the PSO 1997 Rate Settlement
Agreement and the windfall profits tax, respectively. Higher interest and other
charges also contributed to the decline in earnings due primarily to the
distributions on newly issued trust preferred securities. Partially offsetting
these reductions in earnings was an adjustment to deferred tax balances of $15
million resulting from a 2% reduction in the United Kingdom Corporation Tax
rate. Increased MWH sales resulting from customer growth and usage at the U.S.
Electric Operating Companies also served to offset the decline in earnings by
approximately $10 million.
In the third quarter of 1997, the U.S. Electric Operating Companies and
SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
---------------------------------------------------
Operating Revenues 72% 27% 99% 1% 100%
Operating Income 78% 18% 96% 4% 100%
Net Income for CSW Common
before Extraordinary Item 91% 13% 104% (4)% 100%
U.S. Electric revenues increased $26 million, or 3%, in the third
quarter of 1997 compared to the same period a year ago due to several factors.
Higher MWH sales resulting from customer growth and usage at the U.S. Electric
Operating Companies increased U.S. Electric revenues by $15 million and the new
transmission access revenues at CPL and WTU increased U.S. Electric revenues by
$17 million. The impact on net income of the transmission access revenues was
almost entirely offset by a corresponding amount of transmission access expense.
Also contributing to the increase in U.S. Electric revenues were higher fuel
revenue of $19 million, as it relates to fuel expense discussed below. Partially
offsetting these increases in U.S. Electric revenues was a $26 million revenue
reduction resulting from the PSO 1997 Rate Settlement Agreement. Also partially
offsetting the increase was a revenue reduction of $2 million due to milder
weather in the third quarter of 1997. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the PSO 1997 Rate Settlement
Agreement. United Kingdom revenues increased $10 million, or 3%, in the third
quarter of 1997 compared to the third quarter of 1996 due primarily to the
effect of the exchange rate movement between the British pound and the U.S.
dollar, partially offset by a reduction in the fossil fuel levy collected on
behalf of the United Kingdom Government. Other diversified revenues increased $3
<PAGE> 11
million, or 16%, in the third quarter of 1997 compared to the same period last
year due primarily to increased revenues from CSW Credit and CSW International,
partially offset by lower revenues from CSW Energy.
U.S. Electric fuel expense increased $23 million to $370 million in the
third quarter of 1997 compared to the third quarter of 1996 due in part to a 5%
increase in generation to meet customer demand. Also contributing to the higher
fuel expense was an increase in the average cost of fuel to $1.87 per MMbtu from
$1.77 per MMbtu, reflecting higher spot market natural gas prices.
Operating and maintenance expense increased $22 million to $254 million
in the third quarter of 1997 compared to the same period last year due primarily
to $16 million in new transmission access expense recorded at CPL and WTU
related to FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing. The third quarter effect of the CPL 1997 Final
Order further increased operating and maintenance expense by approximately $6
million. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information on the CPL 1997 Final Order. Also contributing to the increase was
higher operating and maintenance expense at SEEBOARD U.S.A. due primarily to the
change in the exchange rate. Income tax expense decreased $27 million to $83
million in the third quarter of 1997 due primarily to lower pre-tax income and a
$15 million adjustment to deferred income tax balances resulting from a 2%
reduction in the United Kingdom Corporation Tax rate.
Long-term interest expense increased $4 million, or 5%, in the third
quarter of 1997 due primarily to the addition in 1997 of interest expense
resulting from a fourth quarter 1996 debt issuance by CSW Energy. Distributions
on newly-issued Subsidiary obligated, mandatorily redeemable, trust preferred
securities increased interest and other charges by $7 million in the third
quarter of 1997, the net income effect of which was partially offset by lower
dividend requirements resulting from the related preferred stock reacquisitions
at the U.S. Electric Operating Companies. See NOTE 6. LONG-TERM FINANCING for
additional information on the new securities.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased to $129 million in the first nine
months of 1997 from $369 million in the same period of 1996 due primarily to the
accrual of the one-time United Kingdom windfall profits tax of (pound)109.5
million at SEEBOARD (or $176 million when converted at (pound)1.00=$1.61). The
impact of CSW's final settlement of litigation with El Paso of $23 million,
after tax, contributed to the decline in earnings as well. Also contributing to
the decrease in earnings was the approximately $17 million effect of the PSO
1997 Rate Settlement Agreement and the $40 million effect of the CPL 1997 Final
Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information on CSW's final settlement of litigation with El Paso, the PSO 1997
Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 9.
EXTRAORDINARY ITEM for additional information on the windfall profits tax.
Partially offsetting the lower earnings was the gain of approximately $10
million on the reacquisition of a portion of the U.S. Electric Operating
Companies' preferred stock and also an adjustment to deferred tax balances of
$15 million resulting from a 2% reduction in the United Kingdom Corporation Tax
rate. Further offsetting the decline in earnings was an increase in non-fuel
electric revenues discussed below.
In addition, several items that occurred in the first nine months of
1996 were not present in the comparable period in 1997. Prior to the June 6,
1996 sale of Transok, CSW realized $12 million of earnings from Transok's
<PAGE> 12
operations and as a result of the sale, CSW also recorded an after-tax gain of
approximately $113 million in June 1996. However, the U.S. Electric Operating
Companies and CSW Energy recorded reserves and write-offs totaling $102 million,
after-tax, for certain investments and contingencies in the second quarter of
1996 which decreased earnings. See NOTE 8. DISCONTINUED OPERATIONS for
additional information concerning the effects of the sale of Transok.
In the first nine months of 1997, the U.S. Electric Operating Companies
and SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
---------------------------------------------------
Operating Revenues 65% 34% 99% 1% 100%
Operating Income 76% 24% 100% -- 100%
Net Income for CSW Common
before Extraordinary Item 94% 22% 116% (16)% 100%
U.S. Electric revenues increased $7 million in the first nine months of
1997 compared to the same period a year ago due primarily to increased MWH sales
resulting from customer growth and usage of $25 million and new transmission
access revenues at CPL and WTU of $49 million in accordance with FERC Order No.
888 and the Texas Commission's rule regarding transmission access and pricing.
The impact on net income of the transmission revenues was almost entirely offset
by a corresponding amount of transmission expense. Revenues increased due in
part to the absence in 1997 of the $14 million revenue decrease in 1996 from the
CPL 1996 Fuel Agreement. Partially offsetting the revenue increase was a
decrease in weather related demand of $44 million due to mild weather in the
first nine months of 1997. Further offsetting the increase in U.S. Electric
revenues was the revenue decrease from both the CPL 1997 Final Order of $31
million and the PSO 1997 Rate Settlement Agreement of $29 million. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for additional information on the PSO 1997
Rate Settlement Agreement and the CPL 1997 Final Order. Other diversified
revenues increased $10 million, or 23%, in the first nine months of 1997
compared to the first nine months of 1996 due primarily to increased revenues
from CSW International and CSW Credit.
U.S. Electric fuel expense increased $7 million to $892 million in the
first nine months of 1997 compared to the same period last year due in part to
an increase in natural gas fuel costs to $2.54 per MMbtu from $2.30 per MMbtu.
Also contributing to the increase was the absence in 1997 of a one-time
reduction to fuel expense of approximately $9 million in the first quarter of
1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these
increases in fuel expense was the effect of lower cost coal. United Kingdom cost
of sales decreased approximately $34 million to $927 million in the first nine
months of 1997 compared to the same period a year ago due primarily to a
reduction in the fossil fuel levy collected on behalf of the United Kingdom
government, which was partially offset by the effect of the exchange rate
movement between the British pound and the U.S. dollar.
Operating and maintenance expense increased $99 million to $769 million
in the first nine months of 1997 compared to the same period last year due in
part to the absence in 1997 of a $27 million pension adjustment recorded in the
second quarter of 1996 at SEEBOARD which decreased pension expense. The effect
of the exchange rate movement between the British pound and U.S. dollar also
contributed to the increase in operating and maintenance expense of SEEBOARD
U.S.A. In addition, approximately $47 million in new transmission access expense
was recorded at CPL and WTU in the first nine months of 1997 related to FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. Also contributing to the increase in operating and maintenance expense
was the $28 million impact of the CPL 1997 Final Order. See NOTE 2. LITIGATION
<PAGE> 13
AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final
Order. CSW also recorded $7 million of additional charges in 1997 associated
with the true-up of restructuring costs that nearly offset the cost increases
that were originally estimated and accrued in 1996. Partially offsetting the
increase in operating and maintenance expense were reduced pension expenses in
1997 resulting from changes made to the pension plan for CSW's domestic
employees. See NOTE 7. PENSION PLAN AMENDMENT for additional information related
to the changes in the pension plan. Income tax expense decreased $73 million to
$135 million in the first nine months of 1997 due primarily to lower pre-tax
income and a $15 million adjustment to deferred income tax balances resulting
from a 2% reduction in the United Kingdom Corporation Tax rate.
CPL recorded a $41 million reserve in the first quarter of 1997 related
to the CPL 1997 Original Rate Order issued by the Texas Commission. In the
second quarter of 1997, CPL reclassified into specific accounts most of the
effects of the reserve recorded in the first quarter to reflect the effects of
both the CPL 1997 Original Rate Order and the Texas Commission's June 20, 1997
modifications to the CPL 1997 Original Rate Order into specific accounts.
Approximately $18 million remains as the provision for CPL 1997 Final Order. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information.
Other income and deductions increased to $27 million in the first nine
months of 1997 from a loss of $69 million in the same period in 1996 due
primarily to the absence in 1997 of reserves for certain investments and
contingencies recorded in the second quarter of 1996 of approximately $84
million, after tax, at the U.S. Electric Operating Companies and $18 million at
CSW Energy. Long-term interest expense increased $11 million, or 5%, in the
first nine months of 1997 due primarily to interest expense resulting from a
fourth quarter 1996 debt issuance by CSW Energy. Short-term and other interest
expense decreased $17 million to $59 million in the first nine months of 1997
when compared to the same period a year ago due primarily to lower levels of
short-term borrowings. Distributions on newly-issued Subsidiary obligated,
mandatorily redeemable, trust preferred securities increased interest and other
charges by $11 million in the first nine months of 1997, the net income effect
of which was partially offset by lower dividend requirements resulting from the
related preferred stock reacquisitions at the U.S. Electric Operating Companies.
See NOTE 6. LONG-TERM FINANCING for additional information on the new
securities.
<PAGE> 14
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 15
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1997 1996 1997 1996
--------- --------- ----------- -----------
(thousands)
ELECTRIC OPERATING REVENUES $444,964 $410,899 $1,060,746 $1,026,352
OPERATING EXPENSES AND TAXES
Fuel 129,296 101,994 291,492 256,489
Purchased power 11,705 19,293 39,856 48,593
Other operating 66,489 56,480 212,413 166,242
Provision for CPL 1997 Final
Order 3,122 -- 18,160 --
Maintenance 16,985 11,080 46,418 40,190
Depreciation and amortization 39,349 43,907 117,256 126,044
Taxes, other than income 20,455 22,699 61,383 62,040
Income taxes 45,753 42,774 66,524 85,805
--------- --------- ----------- -----------
333,154 298,227 853,502 785,403
--------- --------- ----------- -----------
OPERATING INCOME 111,810 112,672 207,244 240,949
--------- --------- ----------- -----------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $779 for
1997 and $5,893 for 1996 -- -- (1,282) (15,481)
Allowance for equity funds
used during construction 849 100 1,622 100
Other 2,555 1,398 5,339 4,608
--------- --------- ----------- -----------
3,404 1,498 5,679 (10,773)
--------- --------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 115,214 114,170 212,923 230,176
--------- --------- ----------- -----------
INTEREST AND OTHER CHARGES
Interest on long-term debt 26,864 28,407 80,982 83,072
Interest on short-term debt
and other 3,783 3,355 11,994 14,485
Distributions on CPL obligated,
mandatorily redeemable, trust
preferred securities 2,985 -- 4,533 --
Allowance for borrowed funds
used during construction (644) (194) (1,770) (1,410)
--------- --------- ----------- -----------
32,988 31,568 95,739 96,147
--------- --------- ----------- -----------
NET INCOME 82,226 82,602 117,184 134,029
Less: Preferred stock
dividends 2,039 3,386 7,649 10,183
Gain on reacquired preferred
stock (284) -- 2,422 --
--------- --------- ----------- -----------
NET INCOME FOR COMMON STOCK $79,903 $79,216 $111,957 $123,846
========= ========= =========== ===========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
<PAGE> 16
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $3,109,241 $3,102,929
Transmission 512,958 505,801
Distribution 1,002,532 956,928
General 281,264 271,347
Construction work in progress 88,469 95,336
Nuclear fuel 194,864 184,229
---------- ----------
5,189,328 5,116,570
Less - Accumulated depreciation and amortization 1,796,886 1,697,552
---------- ----------
3,392,442 3,419,018
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 106,232 3,299
Advances to affiliates 24,350 --
Accounts receivable 65,528 53,038
Materials and supplies, at average cost 70,681 75,732
Fuel inventory 13,748 15,461
Under-recovered fuel costs 54,175 26,298
Prepayments and other 3,910 4,484
---------- ----------
338,624 178,312
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred STP costs 485,192 486,978
Mirror CWIP asset 288,870 298,708
Income tax related regulatory assets, net 325,878 335,226
Other 103,603 110,021
---------- ----------
1,203,543 1,230,933
---------- ----------
$4,934,609 $4,828,263
========== ==========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
<PAGE> 17
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $25 par value
Authorized shares: 12,000,000
Issued and outstanding shares: 6,755,535 $168,888 $168,888
Paid-in capital 405,000 405,000
Retained earnings 871,890 868,932
---------- ----------
1,445,778 1,442,820
Preferred stock 163,204 250,351
CPL obligated, mandatorily redeemable,
trust preferred securities 144,706 --
Long-term debt 1,328,848 1,323,054
---------- ----------
3,082,536 3,016,225
---------- ----------
CURRENT LIABILITIES
Long-term debt due within twelve months 200,000 200,000
Advances from affiliates -- 52,525
Payables to affiliates 8,510 23,995
Accounts payable 77,319 45,946
Accrued taxes 78,918 64,207
Accrued interest 34,939 31,566
Refund due customers 106,131 43,266
Provision for CPL 1997 Final Order 18,160 --
Accumulated deferred income taxes 17,384 7,310
Other 17,163 19,048
---------- ----------
558,524 487,863
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 1,134,917 1,162,051
Investment tax credits 143,673 147,191
Other 14,959 14,933
---------- ----------
1,293,549 1,324,175
---------- ----------
$4,934,609 $4,828,263
========== ==========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
<PAGE> 18
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $117,184 $134,029
Non-cash Items Included in Net Income
Depreciation and amortization 133,610 144,374
Deferred income taxes and
investment tax credits (11,230) 15,964
Provision for CPL 1997 Final Order 18,160 --
Utility plant development costs 2,061 21,374
Inventory reserve -- 487
Changes in Assets and Liabilities
Accounts receivable (12,490) 8,885
Fuel inventory 1,713 10,340
Materials and supplies 5,051 (4,744)
Accrued interest 3,373 2,977
Accounts payable 15,535 (172)
Accrued taxes 14,711 37,237
Under-recovered fuel costs (27,877) (35,313)
Refund due customers 62,865 --
Other 11,073 (5,036)
--------- ---------
333,739 330,402
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (101,164) (82,245)
Other 6,870 1,005
--------- ---------
(94,294) (81,240)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 63,967
Reacquisition and retirement of
long-term debt -- (6,371)
Special deposits for reacquisitions
of long-term debt -- (60,000)
Redemption of preferred stock (84,725) --
Proceeds from issuance of CPL obligated,
mandatorily redeemable, trust
preferred securities 144,706 --
Change in advances from affiliates (52,525) (118,279)
Payment of dividends (119,577) (125,416)
Other (41) --
--------- ---------
(112,162) (246,099)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 127,283 3,063
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,299 2,883
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $130,582 $5,946
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $82,716 $85,876
========= =========
Income taxes paid $61,510 $26,721
========= =========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
<PAGE> 19
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased $0.7 million, or 1%, from $79.2
million in the third quarter of 1996 to $79.9 million in the third quarter of
1997. Although net income for common stock was relatively stable for the two
periods, the following components fluctuated as described below.
Total electric operating revenues increased $34.1 million, or 8%, in
the third quarter of 1997 compared to the third quarter of 1996 primarily due to
increased fuel related revenue as a result of higher fuel costs, as discussed
below. Also contributing to the increase were $11.9 million of transmission
revenues as a result of the January 1997 implementation of open access tariffs
in accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing. The impact on net income of the increase in
transmission access revenues was almost entirely offset by a corresponding
increase in transmission expense.
Fuel expense increased $27.3 million, or 27%, in the third quarter of
1997 compared with the third quarter of 1996 primarily as a result of an
increase in the average unit cost of fuel from $1.68 per MMbtu in the third
quarter of 1996 to $1.90 per MMbtu in the third quarter of 1997. This increase
resulted primarily from higher spot market prices for natural gas during the
third quarter of 1997. Purchased power expense decreased 39% from $19.3 million
in the third quarter of 1996 to $11.7 million in the third quarter of 1997 due
primarily to a reduction in economy energy purchases.
Other operating expense increased 18% to $66.5 million in the third
quarter of 1997 compared to the third quarter of 1996 due to higher nuclear
operations expense, an increase in transmission operations expenses as a result
of the January 1997 implementation of open access tariffs in accordance with
FERC Order No. 888 and the Texas Commission rules regarding transmission access
and pricing, as well as the write-off of rate case and demand side management
expenditures resulting from the CPL 1997 Final Order. These increases also were
partially offset by decreased property insurance expense and decreased pension
expense. See NOTE 7. PENSION PLAN AMENDMENT for additional information related
to changes in the pension plan. Maintenance expenses increased to $17.0 million
in the third quarter of 1997 from $11.1 million in the third quarter of 1996 due
primarily to increased steam and nuclear production expense.
Depreciation and amortization expenses decreased $4.6 million, or 10%,
compared to the third quarter of 1996 due to the implementation in 1997 of lower
depreciation rates in accordance with an administrative law judge's report
issued in the current CPL rate case. Income taxes increased approximately $3.0
million to $45.8 million in the third quarter of 1997 compared to the third
quarter of 1996 resulting from higher pre-tax income.
Other income and deductions increased $1.9 million due primarily to
increased interest income from a higher level of short-term investments.
Interest and other charges increased $1.4 million or 4% in the 3rd
quarter of 1997 when compared to the same period in 1996 due primarily to the
distributions on newly-issued CPL obligated, mandatorily redeemable, trust
preferred securities partially offset by a decrease in long-term debt expense
due to refinancing activities in 1996. Preferred stock dividends decreased $1.3
<PAGE> 20
million in the third quarter of 1997 when compared to the same period in 1996 as
a result of the reacquisition of certain CPL preferred stock.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased $11.8 million, or 10%, from
$123.8 million for the first nine months of 1996 to $112.0 million for the first
nine months of 1997. The major reason for the decrease was the impact of the CPL
1997 Final Order, which decreased earnings by approximately $40 million. This
decrease was partially offset by an increase in other income and deductions due
to the absence in 1997 of a one-time charge associated with certain investments
for plant sites, engineering studies and lignite reserves of $15.5 million, net
of tax, recorded in the second quarter of 1996. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for more information related to the CPL 1997 Final Order.
Total electric operating revenues increased $34.4 million or 3% in the
first nine months of 1997 when compared to the first nine months of 1996 due
primarily to higher retail MWH sales resulting from increased customers and
demand as well as higher fuel related revenue due to higher fuel costs, as
discussed below. Other factors that contributed to the increase included a $35.5
million increase in transmission revenues as a result of the January 1997
implementation of open access tariffs in accordance with FERC Order No. 888 and
the Texas Commission rules regarding transmission access and pricing offset by a
decrease related to provisions for refunds in 1997 and 1996 associated with the
CPL rate case. The impact on net income of the increase in transmission access
revenues was almost entirely offset by a corresponding increase in transmission
expense.
Fuel expense increased $35.0 million as a result of an increase in the
average unit cost of fuel from $1.54 per MMbtu in the first nine months of 1996
to $1.76 per MMbtu in the first nine months of 1997. This increase resulted
primarily from higher spot market prices for natural gas. Also contributing to
this increase was the absence in 1997 of a one-time $8.8 million reduction in
fuel expense recorded in the first quarter of 1996 in accordance with the CPL
1996 Fuel Agreement. Purchased power expense decreased 18% from $48.6 million
for the first nine months of 1996 to $39.9 million in the first nine months of
1997 due primarily to decreased economy energy purchases.
Other operating expense increased 28% to $212.4 million in the first
nine months of 1997 due primarily to an increase in transmission operations
expenses as a result of the January 1997 implementation of open access tariffs
in accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing and the write-off of previously deferred rate
case expenses in accordance with the settlement in principle of the rate case
expense phase of CPL's Rate Review Docket 14965. These increases were offset in
part by reductions in pension expense and other employee related expenses. See
NOTE 7. PENSION PLAN AMENDMENT for additional information related to changes in
the pension plan. Maintenance expense increased $6.2 million or 15% in the first
nine months of 1997 as compared to 1996 due primarily to higher steam and
nuclear production and distribution overhead line expenses in 1997.
CPL recorded a $40.9 million reserve in the first quarter of 1997
related to the CPL 1997 Original Rate Order issued by the Texas Commission. In
the second quarter of 1997, CPL reclassified into specific accounts most of the
effects of the reserve recorded in the first quarter to reflect the effects of
both the CPL 1997 Original Rate Order and the Texas Commission's June 20, 1997
modifications to the CPL 1997 Original Rate Order into specific accounts.
Approximately $18 million remains as the provision for CPL 1997 Final Order. See
<PAGE> 21
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information.
Depreciation and amortization expenses decreased $8.8 million compared
to the first nine months of 1996 due to the implementation in 1997 of lower
depreciation rates in accordance with an administrative law judge's report
issued in connection with the current CPL rate case. Income taxes decreased
$19.3 million in the first nine months of 1997 compared with the first nine
months of 1996 resulting primarily from the income tax effect of the CPL 1997
Final Order.
Other income and deductions increased $16.5 million from a loss of
$10.8 million in 1996 to $5.7 million in 1997 due primarily to the absence in
1997 of the one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $15.5 million, net of
tax, recorded in the second quarter of 1996. Also contributing to this increase
was additional interest income in 1997 due primarily to a higher level of
short-term investments.
Interest and other charges decreased $0.4 million in the first nine
months of 1997 when compared to the same period in 1996 due primarily to a
decrease in short-term debt expense resulting from the repayment of short-term
debt outstanding as well as a decrease in long-term debt expense due to
refinancing activities in 1996. Partially offsetting this decrease were the
distributions on newly-issued CPL obligated, mandatorily redeemable, trust
preferred securities of $4.5 million. Preferred stock dividends decreased $2.5
million in the first nine months of 1997 as compared to the same period in 1996
as a result of the reacquisition of certain CPL preferred stock outstanding. CPL
also recognized a $2.4 million gain associated with the reacquisition in 1997.
<PAGE> 22
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 23
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $222,235 $250,015 $544,092 $579,021
OPERATING EXPENSES AND TAXES
Fuel 89,577 93,670 211,385 224,914
Purchased power 9,979 10,012 34,419 28,451
Other operating 28,707 30,818 86,782 88,340
Maintenance 7,732 8,777 23,088 26,487
Depreciation and amortization 20,412 19,559 60,229 57,990
Taxes, other than income 6,953 6,461 21,357 19,870
Income taxes 18,738 27,172 28,406 39,069
--------- --------- --------- ---------
182,098 196,469 465,666 485,121
--------- --------- --------- ---------
OPERATING INCOME 40,137 53,546 78,426 93,900
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Allowance for equity funds
used during construction 395 -- 652 --
Reserve for utility plant
development costs, net of
tax benefit of $48 for 1997
and $15,302 for 1996 -- -- (75) (35,552)
Other 307 38 992 237
--------- --------- --------- ---------
702 38 1,569 (35,315)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 40,839 53,584 79,995 58,585
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 7,618 7,821 22,855 22,936
Interest on short-term debt
and other 683 1,130 3,349 4,452
Distributions on PSO obligated,
mandatorily redeemable, trust
preferred securities 1,499 -- 2,467 --
Allowance for borrowed funds used
during construction (221) (376) (1,141) (1,075)
--------- --------- --------- ---------
9,579 8,575 27,530 26,313
--------- --------- --------- ---------
NET INCOME 31,260 45,009 52,465 32,272
Less: Preferred stock dividends 53 204 310 612
Gain on reacquired preferred stock (217) -- 4,227 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $30,990 $44,805 $56,382 $31,660
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
<PAGE> 24
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $907,468 $902,813
Transmission 372,572 368,280
Distribution 811,163 773,590
General 205,701 186,252
Construction work in progress 32,077 59,241
---------- ----------
2,328,981 2,290,176
Less - Accumulated depreciation and amortization 1,030,610 987,283
---------- ----------
1,298,371 1,302,893
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 40,261 1,479
Advances to affiliates 8,321 --
Accounts receivable 27,119 11,069
Materials and supplies, at average cost 33,361 34,542
Fuel inventory 14,434 14,061
Accumulated deferred income taxes -- 2,558
Prepayments and other 430 2,991
---------- ----------
123,926 66,700
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 71,257 62,004
---------- ----------
$1,493,554 $1,431,597
========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
<PAGE> 25
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
----------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $15 par value
Authorized shares: 11,000,000
Issued shares: 10,482,000
Outstanding shares: 9,013,000 $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 162,325 145,943
----------- ----------
499,555 483,173
Preferred stock 5,287 19,826
PSO obligated, mandatorily redeemable,
trust preferred securities 72,506 --
Long-term debt 421,442 420,301
----------- ----------
998,790 923,300
----------- ----------
CURRENT LIABILITIES
Advances from affiliates -- 42,867
Payables to affiliates 12,087 27,425
Accounts payable 43,910 47,604
Payables to customers 16,464 14,329
Accrued taxes 38,947 12,306
Accrued interest 10,936 9,193
Refund due customers 29,000 --
Accumulated deferred income taxes 685 --
Other 7,495 7,421
----------- ----------
159,524 161,145
----------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 242,136 251,007
Investment tax credits 42,000 43,438
Income tax related regulatory liabilities, net 43,259 46,007
Other 7,845 6,700
----------- ----------
335,240 347,152
----------- ----------
$1,493,554 $1,431,597
=========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
<PAGE> 26
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
---------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $52,465 $32,272
Non-cash Items Included in Net Income
Depreciation and amortization 64,417 62,457
Deferred income taxes and investment tax credits (9,814) (10,338)
Utility plant development costs 75 50,854
Inventory reserve -- 3,945
Refund due customers 29,000 --
Changes in Assets and Liabilities
Accounts receivable (16,050) (8,766)
Accounts payable (17,439) (19,769)
Accrued taxes 26,641 17,375
Other (473) (3,151)
--------- ---------
128,822 124,879
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (55,851) (56,830)
Other (4,734) (5,430)
--------- ---------
(60,585) (62,260)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 51,785
Retirement of long-term debt -- (25,000)
Reacquisition of long-term debt -- (13,040)
Reacquisition of preferred stock (10,312) --
Proceeds from issuance of PSO obligated, mandatorily
redeemable, trust preferred securities 72,506 --
Change in advances from affiliates (42,867) (40,725)
Payment of dividends (40,461) (35,636)
--------- ---------
(21,134) (62,616)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 47,103 3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,479 744
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $48,582 $747
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $24,501 $22,686
========= =========
Income taxes paid $22,095 $20,142
========= =========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
<PAGE> 27
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased $13.8 million in the third
quarter of 1997 to $31.0 million compared to $44.8 million in the third quarter
of 1996. The decrease resulted primarily from the impact of the PSO 1997 Rate
Settlement Agreement in September 1997. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information related to the PSO 1997 Rate Settlement
Agreement.
Electric operating revenues were $222.2 million in the third quarter of
1997, an 11% decrease from the third quarter of 1996. The decrease was due
primarily to an additional $25.9 million added to the provision for rate refund
to fully reflect the PSO 1997 Rate Settlement Agreement as well as a decrease in
fuel related revenues of $4.6 million.
Fuel expense decreased $4.1 million, or 4%, for the third quarter of
1997 compared to the third quarter of 1996 due primarily to an increase in
under-recovered fuel costs partially offset by a 3% increase in generation. The
average unit cost of fuel remained relatively stable in 1997 when compared to
the same period of 1996.
Other operating expenses decreased $2.1 million in the third quarter of
1997 to $28.7 million compared to $30.8 million in the third quarter of 1996 due
primarily to a true-up for a reduction of depreciation rates associated with the
PSO 1997 Rate Settlement Agreement, the final classification of which is pending
approval from the FERC, as well as lower pension expense. Partially offsetting
the decrease was the write-off of rate case related expenses associated with the
aforementioned agreement. See NOTE 7. PENSION PLAN AMENDMENT for additional
information related to changes in the pension plan. Maintenance expense
decreased 12% to $7.7 million in the third quarter of 1997 from $8.8 million in
the third quarter of 1996 due to the timing of maintenance projects.
Depreciation and amortization expense increased 4% to $20.4 million in
the third quarter of 1997 from $19.6 million in the third quarter of 1996
primarily as a result of increased depreciable property and software
amortization. Income taxes decreased to $18.7 million in the third quarter of
1997 compared to $27.2 million in the same period of 1996 due primarily to lower
taxable income in 1997.
Interest and other charges increased $1.0 million or 12% in the third
quarter of 1997 when compared to the same period in 1996 due primarily to the
distributions on newly issued PSO obligated, mandatorily redeemable, trust
preferred securities partially offset by a decrease in short-term interest
expense as a result of the repayment of short-term debt in 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased to $56.4 million in the first
nine months of 1997 from $31.7 million in the same period of 1996. The increase
resulted primarily from the absence in 1997 of a one-time charge for certain
investments for plant sites, engineering studies and lignite reserves of
approximately $35.6 million, net of tax, recorded in 1996 partially offset by
the impact of recording the effects of the PSO 1997 Rate Settlement Agreement in
<PAGE> 28
September 1997. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information related to the PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $544.1 million for the first nine
months of 1997, a 6% decrease from $579.0 million for the same period in 1996.
The decrease was due primarily to the establishment of a $29.0 million provision
for rate refund related to the PSO 1997 Rate Settlement Agreement as well as a
decline in residential MWH sales of 4% due to mild weather.
Fuel expense decreased $13.5 million for the first nine months of 1997
compared to the first nine months of 1996 due primarily to a decrease in the
average unit cost of fuel from $2.04 per MMbtu in the first nine months of 1996
to $1.95 per MMbtu for the same period in 1997. The decline in the average unit
cost of fuel was due primarily to utilizing lower cost coal in place of higher
cost spot market natural gas. Additionally, a 7% decrease in generation
primarily attributable to lower residential MWH sales also contributed to this
decrease. Partially offsetting the decrease in fuel expense was a decline in
under-recovered fuel costs in 1997 when compared to 1996. Purchased power
expenses increased 21% to $34.4 million for the first nine months of 1997 from
$28.5 million in the same period of 1996 as a result of increased purchases of
economy energy.
Other operating expenses were $86.8 million during the first nine
months of 1997, a 2% decrease from $88.3 million during the same period in 1996
due primarily to a true-up for a reduction of depreciation rates associated with
the PSO 1997 Rate Settlement Agreement, the final classification of which is
pending approval from the FERC, as well as lower pension expense. Partially
offsetting the decrease was the write-off of rate case related expenses
associated with the aforementioned agreement. See NOTE 7. PENSION PLAN AMENDMENT
for additional information related to changes in the pension plan. Maintenance
expense decreased 13% to $23.1 million in the first nine months of 1997 from
$26.5 million in the first nine months of 1996 primarily as a result of the 1996
write-down of production inventory. Depreciation and amortization expense
increased 4% to $60.2 million in 1997 from $58.0 million in 1996 as a result of
an increase in depreciable property. Taxes, other than income were $21.4 million
in 1997, a 7% increase from $19.9 million in 1996 as a result of higher ad
valorem tax expense in 1997. Operating income taxes were $28.4 million in the
first nine months of 1997 compared to $39.1 million in the same period of 1996
due primarily to lower taxable operating income in 1997.
Other income and deductions increased $36.9 million in the first nine
months of 1997 compared to the same period in 1996 primarily as a result of the
absence in 1997 of a one-time charge for certain investments for plant sites,
engineering studies and lignite reserves of approximately $35.6 million, net of
tax, recorded in the second quarter of 1996.
Interest and other charges increased $1.2 million or 5% in the first
nine months of 1997 when compared to the same period in 1996 due primarily to
the distributions on newly-issued PSO obligated, mandatorily redeemable, trust
preferred securities partially offset by a decrease in short-term interest
expense as a result of the repayment of short-term debt in 1997. PSO recognized
a $4.2 million gain associated with the reacquisition of certain PSO preferred
stock.
<PAGE> 29
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 30
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $291,539 $278,227 $722,146 $715,671
OPERATING EXPENSES AND TAXES
Fuel 116,294 116,612 294,876 301,530
Purchased power 7,456 4,845 17,895 20,943
Other operating 35,318 35,887 101,074 99,360
Maintenance 9,984 10,406 31,424 31,444
Depreciation and amortization 24,138 23,010 71,166 67,949
Taxes, other than income 14,339 12,746 40,432 36,158
Income taxes 22,561 20,904 39,399 38,100
--------- --------- --------- ---------
230,090 224,410 596,266 595,484
--------- --------- --------- ---------
OPERATING INCOME 61,449 53,817 125,880 120,187
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $260 for
1997 and $7,847 for 1996 -- -- (483) (21,743)
Allowance for equity funds
used during construction 413 (1) 589 325
Other 1,890 12 2,754 937
--------- --------- --------- ---------
2,303 11 2,860 (20,481)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 63,752 53,828 128,740 99,706
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 9,811 11,542 30,631 33,537
Distributions on SWEPCO
obligated, mandatorily
redeemable, trust preferred
securities 2,167 -- 3,565 --
Interest on short-term debt
and other 1,028 2,055 4,619 7,012
Allowance for borrowed funds
used during construction (202) (465) (944) (1,691)
--------- --------- --------- ---------
12,804 13,132 37,871 38,858
--------- --------- --------- ---------
NET INCOME 50,948 40,696 90,869 60,848
Less: Preferred stock dividends 589 758 1,922 2,295
Gain on reacquired preferred stock (528) -- 1,652 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $49,831 $39,938 $90,599 $58,553
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
<PAGE> 31
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $1,390,255 $1,407,134
Transmission 467,569 463,425
Distribution 859,367 844,503
General 310,101 283,878
Construction work in progress 34,769 45,374
---------- ----------
3,062,061 3,044,314
Less - Accumulated depreciation 1,209,277 1,192,356
---------- ----------
1,852,784 1,851,958
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 26,592 1,879
Advances to affiliates 5,023 --
Accounts receivable 50,994 68,140
Materials and supplies, at average cost 25,402 29,265
Fuel inventory 28,774 55,775
Under-recovered fuel costs 18,982 9,120
Prepayments and other 15,975 13,499
---------- ----------
171,742 177,678
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 85,355 69,520
---------- ----------
$2,109,881 $2,099,156
========== ==========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
<PAGE> 32
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $18 par value
Authorized shares: 7,600,000
Issued and outstanding shares: 7,536,640 $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 349,394 321,801
---------- ----------
730,054 702,461
Preferred stock
Not subject to mandatory redemption 4,709 16,032
Subject to mandatory redemption 25,930 32,464
SWEPCO obligated, mandatorily redeemable,
trust preferred securities 106,245 --
Long-term debt 547,152 597,151
---------- ----------
1,414,090 1,348,108
---------- ----------
CURRENT LIABILITIES
Long-term debt and preferred stock due within
twelve months 3,732 3,760
Advances from affiliates -- 57,495
Accounts payable 58,449 48,826
Payable to affiliates 60,292 68,708
Customer deposits 11,995 10,497
Accrued taxes 41,729 25,241
Accumulated deferred income taxes 7,726 4,162
Accrued interest 12,256 14,782
Other 12,298 27,449
---------- ----------
208,477 260,920
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 392,635 372,552
Investment tax credits 68,010 71,507
Income tax related regulatory liabilities, net 17,912 36,106
Other 8,757 9,963
---------- ----------
487,314 490,128
---------- ----------
$2,109,881 $2,099,156
========== ==========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
<PAGE> 33
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $90,869 $60,848
Non-cash Items Included in Net Income
Depreciation and amortization 74,775 75,686
Deferred income taxes and investment
tax credits 1,956 (2,417)
Utility plant development costs 743 29,590
Inventory reserve -- 1,130
Changes in Assets and Liabilities
Accounts receivable 17,146 (5,680)
Fuel inventory 27,001 9,125
Deferred charges and other assets (15,835) (24,628)
Accounts payable 10,126 8,935
Payable to affiliates (8,416) 653
Accrued taxes 16,488 17,007
Accrued interest (2,526) (5,931)
Fuel recovery (9,862) (19,000)
Other (11,599) (1,991)
--------- ---------
190,866 143,327
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (73,268) (67,837)
Other (2,990) (5,901)
--------- ---------
(76,258) (73,738)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 79,273
Reacquisition of long-term debt -- (83,334)
Retirement of long-term debt (52,278) (3,561)
Redemption of preferred stock (16,210) (1,200)
Proceeds from issuance of SWEPCO
obligated, mandatorily redeemable,
trust preferred securities 106,245 --
Change in advances from affiliates (57,495) (22,747)
Payment of dividends (65,134) (37,865)
--------- ---------
(84,872) (69,434)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 29,736 155
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,879 1,702
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $31,615 $1,857
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $39,119 $43,686
========= =========
Income taxes paid $33,507 $25,736
========= =========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
<PAGE> 34
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased $9.9 million to $49.8 million in
the third quarter of 1997 from $39.9 million in the third quarter of 1996. The
increase resulted primarily from increased MWH sales and the gain on the sale of
lignite properties in the third quarter of 1997.
Electric operating revenues increased $13.3 million to $291.5 million
for the third quarter of 1997 from $278.2 million for the third quarter of 1996.
The increase was attributable to a $9.2 million increase in retail non-fuel
revenue resulting from a 5% increase in retail MWH sales attributable to
weather-related demand and customer growth, an increase in non-fuel wholesale
sales of $3.6 million and a $0.5 million increase in fuel-related revenue.
Fuel and purchased power expense increased in the third quarter of 1997
compared to the third quarter of 1996. Fuel expense decreased $0.3 million,
resulting from an under-recovery of fuel costs in the third quarter of 1997
compared to an over-recovery of fuel costs in the third quarter of 1996, offset
in part by increases in average unit fuel costs and increased generation in
1997. Average unit fuel costs increased from $1.66 per MMbtu in 1996 to $1.70
per MMbtu in 1997 due to an increase in the spot market price of natural gas
offset in part by lower coal transportation charges as well as purchases of
lower priced spot market coal. MWH generation increased 5% during the third
quarter of 1997. Purchased power expenses increased $2.6 million in the third
quarter of 1997 compared to the third quarter of 1996 as a result of an increase
in economy energy purchases.
Depreciation and amortization expenses increased $1.1 million or 5% in
the third quarter of 1997 compared to the same period of 1996 due primarily to
increased depreciable plant. Taxes, other than income increased $1.6 million, or
12%, as a result of increased ad valorem taxes due to higher assessed values.
Income taxes increased $1.7 million due primarily to higher taxable income.
Other income and deductions increased $2.3 million for the third
quarter of 1997 compared to the same period of 1996 due primarily to the $1.1
million, net of tax, gain on the sale of lignite properties recorded in the
third quarter of 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased $32.0 million to $90.6 million
for the first nine months of 1997 compared to $58.6 million for the same period
of 1996. The increase resulted primarily from the absence in 1997 of a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of approximately $21.7 million, net of tax, recorded in the
second quarter of 1996, increased electric operating revenues and the gain on
reacquisition of preferred stock of $1.7 million recorded during 1997.
Electric operating revenues increased $6.5 million to $722.1 million
for the first nine months of 1997 from $715.7 million for the same period in
1996. The increase was due primarily to an increase in non-fuel revenue of $16.5
<PAGE> 35
million, including $9.1 million in non-fuel wholesale sales, offset in part by a
$10.0 million decrease in fuel revenue.
Fuel and purchased power expense decreased for the first nine months of
1997 compared to the same period of 1996. Fuel expense decreased $6.7 million,
or 2%, due primarily to a decrease in average unit fuel costs from $1.77 per
MMbtu in 1996 to $1.69 per MMbtu in 1997 which resulted from lower coal
transportation charges as well as purchases of lower priced spot market coal. A
decrease in natural gas generation because of its relative higher cost per MMbtu
also contributed to the lower fuel expense for the first nine months of 1997.
Purchased power expenses decreased $3.1 million, or 15%, for the first nine
months of 1997 compared to the same period in 1996 as a result of a decrease in
economy energy purchases.
Other operating expenses increased $1.7 million to $101.1 million for
the first nine months of 1997 compared to the same period in 1996. The increase
was attributable to increased transmission access expenses and increased
customer assistance expenses, offset in part by decreased pension expenses. See
NOTE 7. PENSION PLAN AMENDMENT for additional information related to changes in
the pension plan. Depreciation and amortization expenses increased $3.2 million,
or 5%, due primarily to increased depreciable plant. Taxes, other than income
increased $4.3 million to $40.4 million as a result of increased ad valorem
taxes due to higher assessed values. Income taxes increased $1.3 million due
primarily to higher taxable income.
Other income and deductions increased $23.3 million for the first nine
months of 1997 compared to the same period of 1996 due primarily to a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of approximately $21.7 million, net of tax, recorded in the
second quarter of 1996, offset in part by the $1.1 million, net of tax, gain on
the sale of lignite properties recorded in the third quarter of 1997.
Interest and other charges decreased $1.0 million in the first nine
months of 1997 when compared to the same period of 1996 due primarily to a
decrease in short-term debt interest expense of $2.4 million resulting from the
repayment of short-term debt outstanding as well as a decrease in long-term debt
interest expense of $2.9 million due to retirement of long-term debt in 1997.
Partially offsetting these decreases were the distributions on newly-issued
SWEPCO obligated, mandatorily redeemable, trust preferred securities of $3.6
million. SWEPCO also recognized a $1.7 million gain associated with the
reacquisition of preferred stock in 1997.
<PAGE> 36
WTU
WEST TEXAS UTILITIES COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE> 37
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $124,984 $113,314 $308,867 $295,690
OPERATING EXPENSES AND TAXES
Fuel 34,450 35,177 94,361 102,982
Purchased power 16,559 8,918 34,984 21,442
Other operating 20,920 16,133 64,038 50,835
Maintenance 3,239 3,007 10,393 10,698
Depreciation and amortization 10,741 10,081 31,067 29,591
Taxes, other than income 6,347 5,940 18,148 17,121
Income taxes 9,139 9,367 12,425 14,402
--------- --------- --------- ---------
101,395 88,623 265,416 247,071
--------- --------- --------- ---------
OPERATING INCOME 23,589 24,691 43,451 48,619
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $20 for 1997
and $3,988 for 1996 -- -- (38) (10,917)
Allowance for equity funds used
during construction 26 64 125 232
Other 150 140 587 629
--------- --------- --------- ---------
176 204 674 (10,056)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 23,765 24,895 44,125 38,563
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 5,088 5,815 15,264 16,407
Interest on short-term
debt and other 1,127 1,043 3,911 3,788
Allowance for borrowed
funds used during
construction (132) (183) (599) (687)
--------- --------- --------- ---------
6,083 6,675 18,576 19,508
--------- --------- --------- ---------
NET INCOME 17,682 18,220 25,549 19,055
Less: Preferred stock dividends 26 66 118 198
Gain on reacquired preferred stock (101) -- 1,082 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $17,555 $18,154 $26,513 $18,857
========= ========= ========= =========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
<PAGE> 38
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $418,036 $417,467
Transmission 207,631 200,688
Distribution 360,378 347,328
General 100,543 92,622
Construction work in progress 13,761 30,036
---------- ----------
1,100,349 1,088,141
Less - Accumulated depreciation
and amortization 432,981 414,777
---------- ----------
667,368 673,364
---------- ----------
CURRENT ASSETS
Cash 1,497 664
Accounts receivable 30,864 24,123
Materials and supplies, at average cost 15,249 15,966
Fuel inventory 14,736 16,674
Accumulated deferred income taxes -- 1,079
Under-recovered fuel costs 14,438 7,857
Prepayments and other 2,014 2,435
---------- ----------
78,798 68,798
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred Oklaunion costs 19,569 22,365
Restructuring related regulatory assets 9,438 10,854
Other 41,068 34,998
---------- ----------
70,075 68,217
---------- ----------
$816,241 $810,379
========== ==========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
<PAGE> 39
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
-------- --------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $25 par value
Authorized shares: 7,800,000
Issued and outstanding shares: 5,488,560 $137,214 $137,214
Paid-in capital 2,236 2,236
Retained earnings 131,589 123,077
-------- --------
271,039 262,527
Preferred stock 2,483 6,291
Long-term debt 277,748 275,070
-------- --------
551,270 543,888
-------- --------
CURRENT LIABILITIES
Advances from affiliates 3,330 14,833
Payables to affiliates 11,584 13,578
Accounts payable 20,005 19,669
Accrued taxes 13,566 13,463
Accrued interest 8,682 5,403
Accumulated deferred income taxes 3,137 --
Other 3,524 4,124
-------- --------
63,828 71,070
-------- --------
DEFERRED CREDITS
Accumulated deferred income taxes 144,660 144,146
Investment tax credits 28,249 29,239
Income tax related regulatory liabilities, net 16,255 16,918
Other 11,979 5,118
-------- --------
201,143 195,421
-------- --------
$816,241 $810,379
======== ========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
<PAGE> 40
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
------------------
1997 1996
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $25,549 $19,055
Non-cash Items Included in Net Income
Depreciation and amortization 32,286 30,816
Deferred income taxes and investment tax credits 3,077 (930)
Utility plant development costs 58 14,905
Inventory reserve -- 1,103
Changes in Assets and Liabilities
Accounts receivable (6,741) 7,960
Accounts payable (1,163) (2,456)
Accrued taxes 103 5,117
Fuel recovery (6,581) (7,961)
Other 9,090 (1,165)
-------- --------
55,678 66,444
-------- --------
INVESTING ACTIVITIES
Construction expenditures (21,448) (28,243)
Other (1,008) (1,290)
-------- --------
(22,456) (29,533)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 43,368
Reaquisition of long-term debt -- (45,639)
Redemption of preferred stock (2,727) --
Change in advances from affiliates (11,503) (15,668)
Payment of dividends (18,159) (19,132)
-------- --------
(32,389) (37,071)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 833 (160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 664 717
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,497 $557
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $11,773 $11,563
======== ========
Income taxes paid $9,407 $5,384
======== ========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
<PAGE> 41
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased $0.6 million to $17.6 million for
the third quarter of 1997 from net income of $18.2 million in the third quarter
of 1996. Operating revenues increased for the period, but this increase was
offset by an increase in other operating expenses, as discussed below.
Electric operating revenues increased $11.7 million, or 10%, in the
third quarter of 1997 compared to the third quarter of 1996 due primarily to a
4% increase in MWH sales. Also contributing to the increase was approximately
$4.9 million in transmission revenues as a result of the January 1997
implementation of open access tariffs in accordance with FERC Order No. 888 and
the Texas Commission rules regarding transmission access and pricing. The impact
on net income of the transmission revenues was almost entirely offset by a
corresponding increase in transmission expense.
Fuel expense decreased $0.7 million in the third quarter of 1997 when
compared to the same period of 1996. The decrease was due primarily to a 6%
decrease in MWH generation and an increase in economy energy purchases, offset
in part by an increase in average unit fuel costs. Average unit fuel costs
increased from $2.23 per MMbtu in 1996 to $2.42 per MMbtu in the same period of
1997 due to an increase in the spot market price of natural gas. Purchased power
expense increased $7.6 million, or 86%, to $16.6 million in the third quarter of
1997 when compared to the third quarter of 1996 due primarily to the Oklaunion
power plant being out of service for several days as well as increased economy
energy purchases due to higher spot market natural gas prices.
Other operating expenses increased approximately $4.8 million, or 30%,
for the third quarter of 1997 compared to the third quarter of 1996. The
increase was due primarily to a $4.2 million increase in transmission expenses
as a result of the January 1997 implementation of open access tariffs in
accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the first nine months of 1997, net income for common stock
increased to $26.5 million from $18.9 million in 1996. The increase resulted
primarily from the absence in 1997 of a one-time charge incurred in 1996
associated with certain investments for plant sites, engineering studies and
lignite reserves of approximately $10.9 million, net of tax, and the gain on
reacquisition of preferred stock of $1.1 million recognized in 1997.
Electric operating revenues increased approximately $13.2 million, or
4%, in the first nine months of 1997 compared to 1996. The increase was due
primarily to $13.9 million in additional transmission revenues as a result of
the January 1997 implementation of open access tariffs in accordance with FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. The impact on net income of the transmission revenues was largely
offset by a corresponding $12.5 million increase in transmission expense related
to these tariffs and rules. Also contributing to the increase was $2.5 million
in additional fuel revenues due to higher purchased power expenses as discussed
below.
<PAGE> 42
Fuel expense decreased $8.6 million, or 8%, for the first nine months
of 1997 compared to 1996 due primarily to lower-priced spot coal and a 20%
decrease in natural gas generation. Purchased power expenses increased
approximately $13.5 million for the first nine months of 1997 as compared to
1996, primarily as a result of additional economy purchases at a higher cost per
MWH.
Other operating expenses increased approximately $13.2 million for the
first nine months of 1997 compared to 1996 due primarily to a $12.5 million
increase in transmission expenses as a result of the January 1997 implementation
of open access tariffs in accordance with FERC Order No. 888 and the Texas
Commission rules regarding transmission access and pricing. Partially offsetting
the increase in other operating expenses was a decrease in pension expense. See
NOTE 7. PENSION PLAN AMENDMENT for additional information related to changes in
the pension plan. Income taxes decreased $2.0 million in the first nine months
of 1997 compared to the same period a year ago due primarily to lower taxable
income in 1997.
Other income and deductions increased $10.7 million for the first nine
months of 1997 compared with 1996 as a result of the absence in 1997 of a
one-time charge incurred in 1996 associated with certain investments for plant
sites, engineering studies and lignite reserves of approximately $10.9 million,
net of tax.
<PAGE> 43
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS
BY REGISTRANT
NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU
NOTE 2. LITIGATION AND REGULATORY CSW, CPL, PSO, SWEPCO, WTU
PROCEEDINGS
NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES CSW, CPL, SWEPCO
NOTE 4. COMMON STOCK AND DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU
NOTE 5. INCOME TAXES CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. LONG-TERM FINANCING CSW, CPL, PSO, SWEPCO, WTU
NOTE 7. PENSION PLAN AMENDMENT CSW, CPL, PSO, SWEPCO, WTU
NOTE 8. DISCONTINUED OPERATIONS CSW
NOTE 9. EXTRAORDINARY ITEM CSW
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF PREPARATION
The condensed financial statements of the Registrants included herein
have been prepared by each Registrant pursuant to the rules and regulations of
the SEC. Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
each Registrant believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Registrants' Combined Annual Report on Form 10-K for the
year ended December 31, 1996 and the Registrants' Combined Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997.
The unaudited financial information furnished herewith reflects all
adjustments which are, in the opinion of management of such Registrant,
necessary for a fair statement of the results of operations for the interim
periods. Information for quarterly periods is affected by seasonal variations in
sales, rate changes, timing of fuel expense recovery and other factors.
The financial statements of SEEBOARD and its related entities have been
translated from British pounds to U.S. dollars in accordance with SFAS No. 52.
SFAS No. 52 requires the translation of income statement items at average rates
and balance sheet accounts at current rates. All resulting translation
adjustments are recorded directly to Foreign currency translation adjustment on
CSW's consolidated balance sheets.
Effective January 1, 1997, CPL and WTU began utilizing the LIFO method
for the valuation of all fossil fuel inventories. Previously, CPL had used the
weighted average cost method and WTU had used the LIFO method for coal and the
weighted average cost method for other fuel inventories. PSO utilizes the LIFO
method. SWEPCO continues to utilize the weighted average cost method pending
approval of the Arkansas Public Service Commission to utilize the LIFO method.
The change in accounting did not affect the results of operations due to the
regulatory treatment of such costs.
Cash equivalents are considered to be highly liquid debt instruments
purchased with a maturity of three months or less. Accordingly, temporary cash
investments and advances to affiliates are considered cash equivalents.
Certain financial statement items for prior years have been
reclassified to conform to the 1997 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1996 and the Registrants' Combined Quarterly Reports on Form
10-Q for the periods ended March 31, 1997 and June 30, 1997 for additional
discussion of litigation and regulatory proceedings. Reference is also made to
NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, MD&A - RATES AND REGULATORY
MATTERS, CPL RATE REVIEW - DOCKET NO. 14965 and PSO 1997 RATE SETTLEMENT
<PAGE> 45
AGREEMENT and also to PART II - OTHER INFORMATION, ITEM 1. for additional
discussion of litigation and regulatory matters.
SETTLEMENT OF LITIGATION RELATED TO TERMINATION OF EL PASO MERGER
In May 1993, CSW entered into a merger agreement pursuant to which El
Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW.
In June 1995, following its notification that CSW was terminating the Merger
Agreement, El Paso filed suit against CSW seeking a $25 million termination fee
from CSW, unspecified damages for various contract and tort claims, punitive
damages, interest as permitted by law and certain other costs. Subsequently, CSW
filed suit against El Paso seeking a $25 million termination fee from El Paso
based on El Paso's alleged 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. In June 1996, CSW filed an amended complaint
seeking a first priority administrative expense claim of $50 million from El
Paso based upon El Paso's alleged breach of the Merger Agreement.
The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding and the trial was completed on January 30, 1997. On April
11, 1997, the court issued an interim order in which it ruled that CSW owed El
Paso a $25 million termination fee pursuant to the terms of the Merger
Agreement. The court reserved judgment on CSW's liability for interim interest
on the termination fee.
In July 1997, CSW and El Paso reached a settlement agreement that
resolved all of the pending litigation resulting from the termination of the
proposed merger. Under the terms of the settlement agreement, CSW and El Paso
agreed to dismiss all pending claims in the litigation and give a mutual release
from any potential claims related to the Merger Agreement or the pending
litigation, and CSW paid $35 million to El Paso, various of its creditor groups
under its plan of reorganization, and its attorneys. CSW recorded a charge of
$25 million in the first quarter of 1997 following the court's interim order and
recorded an additional charge of $10 million in the second quarter of 1997 to
fully recognize the $35 million settlement amount. The bankruptcy court vacated
the interim order and approved the settlement agreement.
CPL RATE REVIEW - DOCKET NO. 14965
As previously reported, in November 1995, CPL filed with the Texas
Commission a request to increase its retail base rates by $71 million, and in
May 1996, CPL placed a $70 million base rate increase into effect under bond,
subject to refund based on the receipt of a final order of the Texas Commission.
On March 31, 1997, the Texas Commission issued the CPL 1997 Original Rate Order
in CPL's Rate Review, Docket No. 14965. Thereafter, CPL filed a motion for
rehearing which requested the reconsideration of numerous provisions of the
order. Motions for rehearing were also filed by other parties to the rate
proceeding. In response to the motions for rehearing, in June 1997, the Texas
Commission made several modifications to the CPL 1997 Original Rate Order and
also agreed to rehear on remand several other issues. CPL restored its rates in
July 1997, with two exceptions, to levels existing prior to the May 1996
implementation of bonded rates. On August 21, 1997, after reconsidering the
issues on remand, the Texas Commission voted to issue a revised final order and
on September 10, 1997, CPL received the CPL 1997 Final Order. CPL filed its
second motion for rehearing on September 30, 1997. The second motion for
rehearing again requested reconsideration of numerous issues in the rate case.
On October 16, 1997 the Texas Commission issued its second revised final order.
This order lowers the annual retail base rates of CPL by approximately $19
million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas
Commission also included a "Glide Path" rate methodology in the CPL 1997 Final
<PAGE> 46
Order pursuant to which CPL's annual rates will be reduced by an additional $13
million in mid-1998 and another $13 million in mid-1999.
The CPL 1997 Original Rate Order established a separate docket, Docket
No. 17280, to consider the recoverability of $20 million of rate case expenses
incurred in the current rate case and in two prior dockets. CPL reached a
settlement with all parties to resolve Docket No. 17280 which provides for CPL
to recover $14 million out of the total $20 million of rate case expenses
originally requested. Approximately $8 million of the rate case expenses will be
recovered as an offset to the refund in the rate case, and the remaining $6
million of expenses will be surcharged to customers over three years. CPL
expensed the $6 million in foregone rate case expenses during the first quarter
of 1997.
As previously stated, CPL implemented bonded rates subject to refund in
May 1996. On July 17, 1997, CPL restored its rates, with two exceptions, to
levels existing prior to the implementation of the bonded rates. The two
exceptions are for industrial interruptible rates and customer service charges
for which the Texas Commission approved the increases requested by CPL. On
October 31, 1997, CPL filed with the Texas Commission a proposed methodology for
issuing an interim $41.5 million refund to customers in December 1997. A second
refund, currently estimated at $29.2 million, is proposed for March 1998.
Because of the existence of several different components that are all
incorporated into the December 1997 refund to be made to customers, a breakdown
of the December 1997 refund, as well as the estimated March 1998 refund as
currently proposed by CPL, is shown here (in millions).
December 1997
Base rate refund (with interest) $78.4
Surcharge for rate case expenses (13.3)
Surcharge for fuel cost under-recovery (23.6)
-------
Net refund to customers $41.5
-------
March 1998 (estimated)
Amount collected from customers under bond $62.7
Anticipated surcharge for fuel cost under-recovery (33.5)
-------
Net refund to customers $29.2
-------
The following table details the financial impact of the CPL 1997 Final
Order as compared to the rates existing prior to CPL placing bonded rates into
effect. Although the entire impact has been recorded in CPL's 1997 results of
operations, the breakdown between the retroactive impact as it relates to 1996
and for the nine months ended September 30, 1997 is as follows.
1996 1997 Only
Retroactive Impact
Impact To 9/30/97
------------------------
(millions)
Decrease in revenue $(15.8) $(15.1)
-------- --------
Items included in decrease in
revenue with an offsetting
effect on expense:
Accelerated recovery of STP (ECOM) 13.3 15.0
Change in depreciation (4.6) (5.5)
Decommissioning 1.9 3.2
Other -- 5.3
-------- --------
10.6 18.0
-------- --------
Change in current year income
before tax (26.4) (33.1)
Federal income taxes 8.7 10.9
-------- --------
Impact on net income - all recorded
in 1997 $(17.7) $(22.2)
-------- --------
<PAGE> 47
CPL will likely appeal the CPL 1997 Final Order to the Texas State
District Court by the end of 1997 to challenge the resolution of several issues
in the rate case after the rehearing process has concluded. The primary issues
include: (i) the classification of $800 million of invested capital in STP as
ECOM which was also assigned a lower return on equity than non-ECOM property,
(ii) the Texas Commission's use of the "Glide Path" rate reduction methodology
to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of
disallowed affiliate transactions from CSW Services. Management is unable to
predict how the final resolution of these issues will ultimately affect CSW's
and CPL's results of operations and financial condition.
See MD&A - RATES AND REGULATORY MATTERS, CPL RATE REVIEW - DOCKET NO.
14965 for additional discussion of the CPL 1997 Final Order, including the
estimated ongoing financial impact of the final order and information regarding
the difference between the rates originally requested by CPL and those ordered
by the Texas Commission.
CPL FUEL PROCEEDING
As previously reported, CPL filed with the Texas Commission an
Application for Authority to Implement an increase in fuel factors of $34.4
million, or 15.4%, on an annual basis. In addition, CPL proposed to implement a
fuel surcharge of $23.4 million, including accumulated interest, over a twelve
month period. On February 10, 1997, CPL filed a stipulation with the Texas
Commission which would surcharge customers the $23.4 million and would
coordinate the surcharge with any refund in CPL's current rate case as described
in CPL RATE REVIEW - DOCKET NO. 14965. In the stipulation, CPL's fuel factors
were increased approximately $29.4 million, or 13.2%, on an annual basis. The
Texas Commission's interim approval of the stipulated fuel factors permitted a
March 1997 implementation of the fuel factors. The CPL 1997 Original Rate Order
confirmed the stipulated fuel factors.
PSO 1997 RATE SETTLEMENT AGREEMENT
On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission and on
October 23, 1997, a final order approving the settlement was issued by the
Oklahoma Commission. The PSO 1997 Rate Settlement Agreement calls for PSO to
lower its retail base rates beginning with the December 1997 billing cycle by
approximately $35.9 million annually, or a 5.3 percent decrease below the
current level of retail rates. Part of the rate reduction includes a reduction
in annual depreciation expense of approximately $10.9 million. In addition, the
PSO 1997 Rate Settlement Agreement will result in PSO making a one-time $29
million refund to customers, which is expected to be made to customers in
December 1997.
Through the third quarter of 1997, PSO has recorded the estimated
financial impact of the PSO 1997 Rate Settlement Agreement, including
recognition of the full $29 million refund obligation. The PSO 1997 Rate
Settlement Agreement also provides that PSO completely eliminate or amortize
before its next rate filing approximately $41 million in certain deferred
assets, approximately $26 million of which had been expensed in 1996. Included
in the remaining $15 million of deferred assets are approximately $9 million of
costs incurred for customer energy management incentive programs. PSO is
continuing to analyze the implications of the PSO 1997 Rate Settlement
Agreement. For additional discussion of the PSO rate proceeding, including the
estimated financial impact of the PSO 1997 Rate Settlement Agreement, see MD&A -
RATES AND REGULATORY MATTERS, PSO 1997 RATE SETTLEMENT AGREEMENT.
SWEPCO FUEL PROCEEDING
In April 1997, SWEPCO filed with the Texas Commission an application
concerning fuel cost under-recoveries and a possible fuel surcharge which
included a motion to either abate the requested interim surcharge and
<PAGE> 48
consolidate the surcharge with a filed fuel reconciliation as discussed below,
or alternatively, implement an interim surcharge in the months of July 1997
through June 1998. The Texas Commission's Office of Policy Development, on
behalf of the Texas Commission, approved such consolidation. In addition, the
Texas Commission has waived the requirement for SWEPCO to file biannual
surcharge requests while this proceeding is pending, and has deferred the
implementation of any surcharge and interest until after final disposition.
In May 1997, SWEPCO filed with the Texas Commission an application to
reconcile fuel costs and implement a 12 month surcharge of fuel cost
under-recoveries. Because of the uncertainty as to when a surcharge may
commence, SWEPCO did not establish a proposed surcharge period or a total
surcharge amount which would reflect interest through the entire surcharge
period in its filing. In its filing, SWEPCO indicated that it had an
under-recovered Texas jurisdictional fuel cost balance of approximately $16.8
million, including interest, through December 1996. Included in the $16.8
million balance are fuel related litigation expenses of $5.0 million and an
interest return of $2.0 million on the unamortized balance of a fuel contract
termination payment.
In November 1997, SWEPCO and the other parties to the above
consolidated proceedings before the Texas Commission agreed to a settlement in
principle except for one issue which will be decided by the Texas Commission.
The settlement in principle is subject to the development of a comprehensive
settlement agreement and approval by the Texas Commission. Of the $16.8 million
in under-recovered fuel costs as of December 31, 1996, the settlement in
principle would result in a decrease of the under-recovered fuel costs, and the
resulting surcharge recovery, by approximately $6.0 million. This disallowance
will not result in an increase to fuel expense since the $5.0 million of
litigation expense and the interest return of $2.0 million included in the
requested surcharge amount were previously expensed. The settlement in principle
also finds SWEPCO's fuel and fuel-related expenses attributable to the
reconciliation period reasonable and necessary and would allow them to be
reconciled as eligible fuel. In addition, the settlement in principle finds
SWEPCO's actions in litigating and renegotiating certain fuel and fuel-related
contracts, together with the prices, terms and condition of the renegotiated
contracts, to be prudent. The $6.0 million reduction is not associated with any
particular activity or issue within the fuel proceedings. SWEPCO cannot state
with certainty that a comprehensive settlement agreement will be completed or
that approval will be granted by the Texas Commission.
WTU FUEL PROCEEDING
As previously reported, in February 1997, WTU filed with the Texas
Commission an Application for Authority to Implement an increase in fuel factors
of $4.2 million, or 4.2%, on an annual basis. Additionally, WTU proposed to
implement a fuel surcharge of $13.3 million, including accumulated interest,
over a twelve month period to collect its under-recovered fuel costs. WTU
requested authority to implement the revised fuel factors with its May 1997
billings and to commence the surcharge with its June 1997 billings. On April 14,
1997, an agreement in principle was reached among the parties to settle this
docket. Under the proposed settlement, WTU agreed not to increase the fuel
factors and to implement the $13.3 million surcharge over the period June 1997
through February 1999. The Texas Commission approved this settlement in May
1997.
CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE
As previously reported, three suits naming CPL and others as defendants
relating to a third-party owned and operated site in Corpus Christi, Texas
formerly used for commercial reclamation of used electrical transformers, lead
acid batteries and other scrap metals, were pending in federal and state court
in Corpus Christi, Texas. The plaintiffs' complaints sought damages for alleged
property damage and health impairment as a result of operations on the site and
<PAGE> 49
cleanup activities. During 1997, CPL settled these suits with no material
adverse effect on CPL's results of operation or financial condition.
PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
As previously reported, in 1989, PSO found some PCB contamination in a
Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in
1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to
comply with provisions of the Toxic Substances Control Act. The complaint has
three counts, two of which pertain to the Sand Springs facility and the third of
which deals with a substation in Grandfield, Oklahoma. The EPA alleges improper
disposal of PCBs at the Sand Springs site due to the length of time between
discovery of the contamination and the actual cleanup at the site. The complaint
at the Grandfield site alleges failure to date PCB articles at the site. The
total proposed penalty for the three counts, which has been accrued by PSO, was
$479,000. PSO settled two of the three complaints for a total amount of $7,000.
However, PSO has been unable to resolve the third count. A hearing before an EPA
administrative law judge to hear PSO's response on the single remaining count
has been scheduled for January 1998, and PSO intends to vigorously defend itself
against the allegations the EPA has asserted. Although PSO is unable to predict
the outcome of this matter, PSO believes that the resolution of this matter will
not have a material adverse effect on PSO's results of operation or financial
condition.
3. COMMITMENTS AND CONTINGENT LIABILITIES
CPL DEFERRED ACCOUNTING
By orders issued in 1989 and 1990, the Texas Commission authorized CPL
to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court of Texas in 1994 sustained deferred
accounting as an appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of CPL, but remanded CPL's case to the Court
of Appeals to consider certain substantial evidence points of error not
previously decided by the Court of Appeals. On August 16, 1995, the Court of
Appeals rendered its opinion in the remand proceeding and affirmed the Texas
Commission's order in all respects.
By orders issued in October 1990 and December 1990, the Texas
Commission quantified the STP Unit 1 and Unit 2 deferred accounting costs and
authorized the inclusion of the amortization of the costs and associated return
in CPL's retail rates. These Texas Commission orders were appealed to the Travis
County District Court, where the appeals are still pending. Language in the
opinion of the Supreme Court of Texas on the appeal of the deferred accounting
authorization case suggests that the appropriateness of including deferred
accounting costs in rates charged to customers is dependent on a finding, in the
first case in which the deferred STP costs are to be recovered through rates,
that the deferral was actually necessary to preserve the utility's financial
integrity. If, in the appeals of the October 1990 and December 1990 rate orders,
the courts decide that subsequent review under the financial integrity standard
is required and was not made in those orders, then such rate orders would be
remanded to the Texas Commission for the purpose of entering findings applying
the financial integrity standard. Pending the ultimate resolution of CPL's
deferred accounting issues, CPL is unable to predict how its deferred accounting
orders will ultimately be resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably resolved, CSW
and CPL could experience a material adverse effect on their respective results
of operations and financial condition. While CPL's management is unable to
predict the ultimate outcome of these matters, management believes either CPL
<PAGE> 50
will receive approval of its deferred accounting amounts or CPL will be
successful in renegotiation of its rate orders, so that there will be no
material adverse effect on CSW's or CPL's results of operations or financial
condition.
CPL NUCLEAR INSURANCE
In connection with the licensing and operation of STP, the owners have
purchased nuclear property and liability insurance coverage as required by law,
and have executed indemnification agreements with the Nuclear Regulatory
Commission in accordance with the financial protection requirements of the
Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory
arrangement providing limitations on nuclear liability and governmental
indemnities, is in effect until August 1, 2002. The limit of liability under the
Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per
incident, effective as of December 1996. The owners of STP are insured for their
share of this liability through a combination of private insurance amounting to
$200 million and a mandatory industry-wide program for self-insurance totaling
$8.72 billion. The maximum amount that each licensee may be assessed under the
industry-wide program of self-insurance following a nuclear incident at an
insured facility is $75.5 million per reactor, which may be adjusted for
inflation, plus a five percent charge for legal expenses, but not more than $10
million per reactor for each nuclear incident in any one year. CPL and each of
the other STP owners are subject to such assessments, which CPL and the other
owners have agreed will be allocated on the basis of their respective ownership
interests in STP. CPL has a 25.2% ownership interest in STP. For purposes of
these assessments, STP has two licensed reactors.
The owners of STP currently maintain on-site decontamination liability
and property damage insurance in the amount of $2.75 billion provided by ANI and
NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy
proceeds must be used first to pay decontamination and cleanup costs before
being used to cover direct losses to property. Under project agreements, CPL and
the other owners of STP will share the total cost of decontamination liability
and property insurance for STP, including premiums and assessments, on a pro
rata basis, according to each owner's respective ownership interest in STP.
CPL purchased, for its own account, a NEIL I Business Interruption
and/or Extra Expense policy. This insurance will reimburse CPL for extra
expenses incurred for replacement generation or purchased power as a result of a
covered accident that shuts down production at one or both of the STP Units for
more than 21 consecutive weeks. In the event of an outage of STP Units 1 and 2
and the outage is the result of the same accident, such insurance will reimburse
CPL up to 80% of the single unit recovery. The maximum amount recoverable for a
single unit outage is $118.6 million for both Units 1 and 2. CPL is subject to
an additional assessment of up to $1.8 million for the current policy year in
the event insured losses at a nuclear facility covered under the NEIL I policy
exceed the accumulated funds available under the policy.
SWEPCO BILOXI, MISSISSIPPI MANUFACTURED GAS PLANT SITE
As previously reported, SWEPCO was notified by Mississippi Power in
1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was
formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has
worked with Mississippi Power on both the investigation of the extent of
contamination on the site as well as on the subsequent sampling of the site. The
sampling results indicated contamination at the property as well as the
possibility of contamination of an adjacent property. A risk assessment was
submitted to the MDEQ, and the MDEQ requested that a future residential exposure
scenario be evaluated for comparison with commercial and industrial exposure
scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to
a residential scenario is appropriate since this site has been
industrial/commercial for more than 100 years, and Mississippi Power plans to
<PAGE> 51
continue this type of usage. Mississippi Power and SWEPCO also presented a
report to the MDEQ demonstrating that the ground water on the site was not
potable, further demonstrating that cleanup to residential standards is not
necessary.
The MDEQ has not agreed to a non-residential future land use scenario
and has requested further testing. Following the additional testing and
resolution of whether cleanup is necessary to meet a residential usage scenario
or if cleanup to a commercial/industrial scenario is appropriate, a feasibility
study will be conducted to more definitively evaluate remedial strategies for
the property. The feasibility study process will require public input prior to a
final decision being made.
At the present time, SWEPCO has not had any further substantive
discussions with MDEQ regarding the ultimate resolution of this issue.
Therefore, a final range of cleanup costs is not determinable at this time.
Based on its preliminary estimates, SWEPCO has incurred approximately $200,000
to date for its portion of the cleanup of this site and anticipates that an
additional $2 million may be required. Accordingly, SWEPCO has accrued $2
million for the cleanup of the site.
SWEPCO VODA PETROLEUM SUPERFUND SITE
As previously reported, in April 1996, SWEPCO received correspondence
from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for
the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO is
conducting a records review to compile documentation relating to SWEPCO's past
use of the Voda Petroleum site. The proposed cleanup of the site is estimated by
the EPA to cost approximately $2 million and to take approximately twelve months
to complete. An option for over 30 PRPs to conduct the cleanup in lieu of EPA
conducting the cleanup is under consideration. Any SWEPCO liability associated
with this project is not expected to have a material adverse effect on its
results of operations or financial condition.
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 September 30, 1997, the
maximum amount SWEPCO would have to assume was $60.3 million. The maximum amount
may vary as the mining contractor's need for funds fluctuates. The contractor's
actual obligation outstanding as of September 30, 1997 was $55.6 million.
SWEPCO SOUTH HALLSVILLE LIGNITE MINE
As part of the process to receive renewal of a Texas Railroad
Commission permit for lignite mining at the South Hallsville lignite mine and
expansion into the Marshall South Lignite Project area, SWEPCO has agreed to
provide guarantees of mine reclamation in the amount of $85 million. Since
SWEPCO uses self-bonding, the guarantee provides for SWEPCO to commit to use its
resources to complete the reclamation in the event the work is not completed by
the third party miner. The current cost to reclaim the mine is estimated to be
approximately $36 million.
4. COMMON STOCK AND DIVIDENDS
CSW's earnings per share of common stock are computed by dividing net
income for common stock by the average number of common shares outstanding for
the respective periods. CSW's dividends per common share reflect per share
amounts paid for each of the periods. See MD&A - LIQUIDITY AND CAPITAL
RESOURCES, CAPITAL STRUCTURE for information related to CSW's common stock.
<PAGE> 52
At September 30, 1997, approximately $1.4 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The mortgage indentures, as amended and supplemented,
at CPL and PSO contain certain restrictions on the use of their retained
earnings for cash dividends on their common stock. These restrictions do not
currently limit the ability of CSW to pay dividends to its shareholders. The
amounts of retained earnings available for dividends attributable to each the
U.S. Electric Operating Companies at September 30, 1997 is as follows.
CPL - $768 million PSO - $162 million SWEPCO - $349 million
WTU - $132 million
5. INCOME TAXES
The following tables provide a reconciliation of the differences
between total income tax expense (income taxes included in Operating Expenses
and Taxes as well as Other Income and Deductions) at the federal statutory tax
rate and the effective tax rate for the Registrants.
CSW CPL PSO SWEPCO WTU
--------------------------------------------
(millions) (thousands)
-----------------------------------
QUARTER ENDED SEPTEMBER 30, 1997
Income before taxes and extraordinary
item attributable to:
Domestic operations $269
Foreign operations 15
----
Income before taxes $284 $127,785 $49,597 $73,521 $26,620
Tax at U.S. statutory rate $99 $44,725 $17,359 $25,732 $9,317
Differences
Amortization of ITC (2) (622) (46) (1,165) (330)
Non-deductible goodwill
amortization 3 -- -- -- --
United Kingdom deferred
income tax adjustment (15) -- -- -- --
Prior period adjustments -- -- -- 150 --
Other (2) 1,455 865 (2,144) (46)
-----------------------------------------
Tax expense $83 $45,558 $18,178 $22,573 $8,941
-----------------------------------------
Effective tax rate 29% 36% 37% 31% 34%
QUARTER ENDED SEPTEMBER 30, 1996
Income before taxes attributable to:
Domestic operations $280
Foreign operations 22
---
Income before taxes $302 $125,507 $72,022 $61,634 $27,473
Tax at U.S. statutory rate $106 $43,927 $25,208 $21,572 $9,616
Differences
Amortization of ITC (4) (1,447) (696) (1,182) (330)
Non-deductible goodwill
amortization 3 -- -- -- --
Prior period adjustments (3) (3,000) -- -- --
Other 6 3,425 2,501 548 (33)
-----------------------------------------
Tax expense $108 $42,905 $27,013 $20,938 $9,253
-----------------------------------------
Effective tax rate 36% 34% 38% 34% 34%
<PAGE> 53
CSW CPL PSO SWEPCO WTU
--------------------------------------------
(millions) (thousands)
-----------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
Income before taxes and extraordinary
item attributable to:
Domestic operations $363
Foreign operations 74
---
Income before taxes $437 $180,921 $79,826 $129,107 $37,598
Tax at U.S. statutory rate $153 $63,322 $27,939 $45,187 $13,159
Differences
Amortization of ITC (9) (3,517) (1,438) (3,497) (991)
Non-deductible goodwill
amortization 9 -- -- -- --
United Kingdom deferred
income tax adjustment (15) -- -- -- --
Prior period adjustments (2) (1,720) (261) 102 (123)
Other (4) 5,651 1,121 (3,555) 7
-----------------------------------------
Tax expense $132 $63,736 $27,361 $38,237 $12,052
-----------------------------------------
Effective tax rate 30% 35% 34% 30% 32%
NINE MONTHS ENDED SEPTEMBER 30, 1996
Income before taxes attributable to:
Domestic operations $532
Foreign operations 94
---
Income before taxes $626 $212,202 $55,064 $89,925 $29,089
Tax at U.S. statutory rate $219 $74,271 $19,272 $31,474 $10,181
Differences
Amortization of ITC (11) (4,342) (2,088) (3,547) (991)
Non-deductible goodwill
amortization 9 -- -- -- --
State Income Taxes from
the Sale of Transok 7 -- -- -- --
Permanent effect of reserves
for property development
costs 9 1,390 4,382 2,330 977
Prior period adjustments -- 198 549 269 143
Other 11 6,657 677 (1,414) (276)
-----------------------------------------
Tax expense $244 $78,174 $22,792 $29,112 $10,034
-----------------------------------------
Effective tax rate 39% 37% 41% 32% 34%
6. LONG-TERM FINANCING
The following trust preferred securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at September
30, 1997. They are classified on the balance sheets as Subsidiary obligated,
mandatorily redeemable, trust preferred securities.
Amount Description of Underlying
Business Trust Security Units (millions) Debentures of Registrant
- --------------------------------------------------------------------------------
CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million,
8.00%, Series A
PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million,
8.00%, Series A
SWEPCO Capital I 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million,
7.875%, Series A
---------- ----
13,400,000 $335
---------- ----
Each of the business trusts will be treated as a subsidiary of its
parent company. The only assets of the business trusts are the subordinated
<PAGE> 54
debentures issued by their parent company as specified above. In addition to the
obligations under their subordinated debentures, each of the parent companies
has also agreed to a security obligation which represents a full and
unconditional guarantee of its capital trust's obligation.
Through the third quarter of 1997, each of the U.S. Electric Operating
Companies had reacquired a significant portion of its outstanding preferred
stock. As a result of differences between the coupon rates on the reacquired
securities and prevailing market rates, CSW realized an overall gain of
approximately $10 million on the transactions. This gain is shown separately, as
Gain on reacquired preferred stock, on the statements of income. The following
table shows the results of the tender offers of the U.S. Electric Operating
Companies' preferred stock.
Shares Shares
Reacquired Remaining
------------ -------------
CPL
Series 4.00% 57,952 42,048
Series 4.20% 57,524 17,476
Series 7.12% 260,000 --
Series 8.72% 500,000 --
PSO
Series 4.00% 53,260 44,640
Series 4.24% 91,931 8,069
SWEPCO
Series 4.28% 52,614 7,386
Series 4.65% 23,092 1,908
Series 5.00% 37,240 37,760
Series 6.95% 65,990 274,010
WTU
Series 4.40% 36,323 23,677
7. PENSION PLAN AMENDMENT
CSW maintains a tax qualified, non-contributory defined benefit pension
plan covering substantially all CSW employees in the United States. The CSW
board of directors approved an amendment, effective July 1, 1997, which converts
the existing pension plan into a cash balance pension plan. The purpose of the
plan change is to continue to provide retirement income benefits which are
competitive both within the utility industry as well as with other companies
within the United States.
As the plan sponsor, CSW will continue to reflect the costs of the
pension plan according to the provisions of SFAS No. 87 and allocate such costs
to each of the participating employers. As a result of the July 1, 1997
amendment, preliminary estimates indicate that CSW will realize a savings in
1997 of approximately $20 million in pension expense and will also realize
significant ongoing reductions in operating and maintenance expense because of
the change. The change to the pension plan was applied retroactively to the
beginning of 1997, so these savings are being recognized evenly throughout 1997
with a portion being capitalized. The projected amounts of savings attributable
to the U.S. Electric Operating Companies for 1997 are as follows.
CPL - $5.0 million PSO - $3.9 million SWEPCO - $4.5 million WTU - $2.7 million
<PAGE> 55
8. DISCONTINUED OPERATIONS
On June 6, 1996, CSW sold Transok, an intrastate natural gas pipeline
and gas marketing company that was previously a wholly owned subsidiary of CSW,
to Tejas Gas Corporation. Accordingly, the results of operations for Transok
have been reported as discontinued operations and no assets or liabilities
related to Transok are contained in CSW's Consolidated Balance Sheets. Since
Transok was sold in June 1996, CSW's results of operations do not reflect any
earnings from Transok for either the three or nine month periods ended September
30, 1997, nor do they reflect any earnings for the three month period ended
September 30, 1996. Operating results of Transok that are included in CSW's
Statements of Income for the nine month period ended September 30, 1996 are
summarized in the following table (in millions, transactions with CSW affiliates
have not been eliminated).
Total revenue $362
Operating income before income taxes 23
Earnings before income taxes 18
Income taxes (6)
----------
Net income from discontinued operations $12
----------
9. EXTRAORDINARY ITEM
In the general election held in the United Kingdom on May 1, 1997, the
United Kingdom's Labour Party won control of the government with a considerable
majority. Prior to the general election, the Labour Party had announced that, if
elected, it would impose a windfall profits tax on certain industries in the
United Kingdom, including the privatized utilities, to fund a variety of social
improvement programs. On July 2, 1997, the one-time windfall profits tax was
introduced in the Labour Party's Budget and the legislation enacting the tax
subsequently was passed during the third quarter of 1997. Accordingly, during
the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item,
(pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a
one-time, windfall profits tax enacted by the United Kingdom government.
The windfall profits tax is payable in two equal installments, due
December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on
the difference between nine times the average profits after tax for the four
years following flotation in 1990, and SEEBOARD's market capitalization
calculated as the number of shares issued at flotation multiplied by the
flotation price per share.
As enacted, the windfall profits tax is not tax deductible for United
Kingdom purposes. To date, no United States income tax benefit has been
recognized due to the uncertainty as to the impact on the use of foreign tax
credits. CSW continues to analyze the potential United States income tax benefit
from the use of foreign tax credits.
<PAGE> 56
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Registrants' Combined Annual
Report on Form 10-K for the year ended December 31, 1996 and the Registrants'
Combined Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997. Reference is also made to each Registrant's unaudited
Financial Statements and related Notes to Financial Statements included herein.
The information included therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three and nine month periods ended
September 30, 1997.
FACTORS IMPACTING CSW'S 1997 ANNUAL EARNINGS
CSW expects its 1997 net income for common stock to be substantially
lower than it has been in the past. Several factors discussed in this Combined
Form 10-Q have had a material adverse effect on CSW's 1997 results of
operations. These factors include the windfall profits tax in the United
Kingdom, the settlement of litigation related to the termination of the El Paso
Merger, the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. The
windfall profits tax and the charge for the settlement with El Paso are one-time
events. However, the new rates at both CPL and PSO will have an ongoing impact
on CSW's consolidated results of operations compared to prior periods. The
estimated after-tax impact of these items for 1997 compared to 1996 on a net
income for common stock basis is shown in the following table.
Estimated
Factors Impacting 1997 Earnings Impact
-------------------------------------------------- -----------
(millions)
United Kingdom windfall profits tax $176
Settlement of El Paso litigation 23
CPL 1997 Final Order (1996 effect) 18
CPL 1997 Final Order (1997 effect) 30
PSO 1997 Rate Settlement Agreement 17
-----------
Total estimated 1997 impact $264
1996 Net Income for Common Stock $429
Percentage of prior year 62%
This table is intended to highlight several items that will have a
material adverse impact on CSW's 1997 results of operations. For additional
information about these matters, see NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS, NOTE 9. EXTRAORDINARY ITEM and RATES AND REGULATORY MATTERS.
The foregoing discussion of FACTORS IMPACTING CSW'S 1997 ANNUAL
EARNINGS constitutes forward looking information within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such
projected information. See FORWARD LOOKING INFORMATION.
<PAGE> 57
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF CSW OPERATING, INVESTING AND FINANCING ACTIVITIES
Net cash flows from operating activities decreased to $409 million for
the nine months ended September 1997 from $477 million for the comparable period
in 1996. The decrease was attributable to increased factored accounts receivable
purchases at CSW Credit, federal and state income tax payments for the gain on
CSW's 1996 sale of Transok which totaled approximately $122 million (after being
offset in part by the utilization of Alternative Minimum Tax credits that CSW
had previously generated), and a $35 million payment related to the settlement
of litigation between CSW and El Paso.
Although construction expenditures remained comparable for the first
nine months of 1997 compared to the same period in 1996, overall net cash
outflows from investing activities decreased substantially for several reasons.
There were no acquisition expenditures during 1997 while SEEBOARD acquisition
expenditures were made during 1996. In addition, during 1996, the National Grid
shares were sold in conjunction with SEEBOARD acquisition activities and CSW
also received cash proceeds of $690 million on the 1996 sale of Transok. CSW
Energy obtained permanent external financing during March 1997 for the Orange
Cogeneration project and subsequently reduced its equity investment in the
project. For additional information related to this transaction, see LONG-TERM
FINANCING. During the first quarter of 1997, CSW Energy made its final purchase
agreement payment on the Ft. Lupton cogeneration project. In addition, because
construction of CSW Energy's Sweeny project began in mid-1996, the $102 million
in construction expenditures incurred during 1997 were much larger than
expenditures incurred during the comparable period in 1996. Likewise, CSW
International continued to provide the construction financing for its Enertek
project throughout 1997. Construction on this project, located in Altamira,
Mexico, began during the third quarter of 1996.
Net cash inflows from financing activities decreased substantially
during the first nine months of 1997 compared to same period in 1996. During
1996, CSW incurred substantial amounts of debt to finance the acquisition of
SEEBOARD. In addition, during 1996, CSW sold approximately 15.5 million shares
of common stock and received net proceeds of approximately $398 million in a
primary public offering. The proceeds were subsequently used to repay a portion
of the debt incurred in connection with the SEEBOARD acquisition. In addition,
in April 1997, CSW made changes in its common stock plans and stopped issuing
original shares through these plans. However, partially offsetting these
activities, business trusts of CPL, PSO and SWEPCO received cash proceeds of
approximately $323 million on the issuance of trust preferred securities during
1997. A portion of these proceeds was used to redeem preferred stock of these
companies. See CAPITAL STRUCTURE and NOTE 6. LONG TERM FINANCING for additional
information related to these matters.
CONSTRUCTION EXPENDITURES
CSW's construction expenditures, including allowance for funds used
during construction, totaled $352 million for the nine months ended September
30, 1997. Such expenditures for the U.S. Electric Operating Companies totaled
$105 million, $58 million, $75 million and $22 million, for CPL, PSO, SWEPCO and
WTU, respectively. Construction expenditures at the U.S. Electric Operating
Companies were primarily for improvements to existing production, transmission
and distribution facilities. The improvements are required to meet the needs of
new customers and to satisfy the changing requirements of existing customers.
CSW anticipates that all funds required for construction for the remainder of
the year will be provided from internal sources.
<PAGE> 58
CAPITAL STRUCTURE
The CSW System is committed to maintaining financial flexibility by
having a strong capital structure and favorable securities ratings which help to
assure future access to capital markets when required. At September 30, 1997,
the capitalization ratios of each of the Registrants is presented in the
following table.
Trust
Common Preferred Preferred Long
Stock Equity Stock Securities (1) Term Debt Total
-------------- ------------ --------------- ------------ ---------
CSW 45% 2% 4% 49% 100%
CPL 47% 5% 5% 43% 100%
PSO 50% 1% 7% 42% 100%
SWEPCO 51% 2% 8% 39% 100%
WTU 49% 1% --% 50% 100%
(1) classified on the balance sheets as Subsidiary (CPL, PSO, SWEPCO)
obligated, mandatorily redeemable, trust preferred securities
CSW can issue common stock, either through open market purchases or
original issue shares, through a long-term incentive plan, the PowerShare
Dividend Reinvestment and Stock Purchase Plan and the ThriftPlus plan. Following
the issuance of the CPL 1997 Original Rate Order and the decline in the market
price of CSW's common stock, which CSW believes is attributable in part to the
CPL 1997 Original Rate Order, the determination was made that it was appropriate
for CSW to begin funding these plans through open market purchases, effective
April 1, 1997.
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. CSW has established a
system money pool to coordinate short-term borrowings for certain of its
subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW
also incurs borrowings for other subsidiaries that are not included in the money
pool. As of September 30, 1997, CSW had revolving credit facilities totaling
$800 million to back up its commercial paper program.
CSW has recently made several finance-related filings with the SEC
under the Holding Company Act which, if approved, are expected to increase CSW's
financial flexibility and to permit CSW to respond promptly to competitive
pressures and take advantage of favorable market conditions. In the first of
these filings, CSW has requested authority to repurchase up to ten percent of
its outstanding common stock as of June 30, 1997, from its stock and employee
benefit plans (pursuant to the terms and conditions of such plans) from time to
time through December 31, 2002, and to utilize its short-term borrowing program,
including funds borrowed through its commercial paper program, to finance its
repurchase in the open market of up to twenty percent of its outstanding common
stock as of June 30, 1997. No decision regarding this application has been made
by the SEC. Although such authority would increase CSW's flexibility to adjust
its capital structure, CSW currently has no plans to repurchase any of its
common stock.
The second filing requests authority through December 31, 2002 for CSW,
the U.S. Electric Operating Companies and CSW Services to finance ongoing
business, repay short-term debt and finance the potential repurchase of
outstanding securities. CSW has requested authority to issue common stock, while
the U.S. Electric Operating Companies and CSW Services have requested authority
to issue common stock, preferred stock and debt. Such authority would give CSW
the flexibility to take advantage of favorable market conditions for routine
financings. The SEC has not yet issued an order with respect to this
<PAGE> 59
application. The third filing requests an increase in the authorized short-term
borrowing limitation of CSW and certain of its subsidiaries. The SEC has not
issued an order with respect to this application.
OTHER FINANCING ISSUES
Several legal and regulatory developments, which have been disclosed
elsewhere in this Combined Form 10-Q, will require cash payments by CSW's
subsidiaries through December 1998. The PSO Rate Settlement Agreement requires
PSO to refund $29 million to customers in December 1997. The windfall profits
tax, enacted by the United Kingdom government, is payable by SEEBOARD in two
equal installments of approximately (pound)55 million each (or $88 million when
converted at (pound)1.00=$1.61), due December 1, 1997 and December 1, 1998.
Based upon the CPL 1997 Final Order, CPL filed with the Texas Commission a
proposed methodology for issuing an interim $41.5 million refund to customers in
December 1997. A second refund, currently estimated at $29.2 million, is
proposed in March 1998. In addition, on October 1, 1997, CPL retired at maturity
$200 million of its Series BB, 6% first mortgage bonds. A combination of cash
from operations and short-term debt are expected to be used to fund these cash
requirements. CSW may also consider other options to meet these cash needs.
RATES AND REGULATORY MATTERS
CPL RATE REVIEW - DOCKET NO. 14965
As previously reported, in November 1995, CPL filed with the Texas
Commission a request to increase its retail base rates by $71 million, and in
May 1996, CPL placed a $70 million base rate increase into effect under bond,
subject to refund based on the receipt of the CPL 1997 Original Rate Order of
the Texas Commission. On March 31, 1997, the Texas Commission issued a rate
order in CPL's Rate Review, Docket No. 14965. Thereafter, CPL filed a motion for
rehearing which requested the reconsideration of numerous provisions of the
order. Motions for rehearing were also filed by other parties to the rate
proceeding. In response to the motions for rehearing, in June 1997, the Texas
Commission made several modifications to the CPL 1997 Original Rate Order and
also agreed to rehear on remand several other issues. CPL restored its rates in
July 1997, with two exceptions, to levels existing prior to the May 1996
implementation of bonded rates. On August 21, 1997, after reconsidering the
issues on remand, the Texas Commission voted to issue a revised final order and
on September 10, 1997, CPL received the CPL 1997 Final Order. CPL filed its
second motion for rehearing on September 30, 1997. The second motion for
rehearing again requested reconsideration of numerous issues in the rate case.
On October 16, 1997 the Texas Commission issued its second revised final order.
This order lowers the annual retail base rates of CPL by approximately $19
million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas
Commission also included a "Glide Path" rate methodology in the CPL 1997 Final
Order pursuant to which CPL's annual rates will be reduced by an additional $13
million in mid-1998 and another $13 million in mid-1999.
There are numerous contributing factors to the difference between the
$71 million retail base rate increase originally requested by CPL and the $19
million retail base rate reduction included in the CPL 1997 Final Order. The CPL
1997 Final Order decreased CPL's requested return on equity of 12.25% on its
retail rate base to a 10.9% return on equity for all non-ECOM invested capital,
which results in an approximate $30 million decrease in CPL's rate request. The
CPL 1997 Final Order provides for the disallowance of approximately $18 million
of affiliate transactions. In addition, the CPL 1997 Final Order denied CPL's
request to use straight line amortization for CPL's deferred accounting costs.
Instead, the CPL 1997 Final Order requires CPL to continue to use the mortgage
amortization method to amortize its deferred accounting costs, resulting in a
reduction of $14 million from CPL's rate request. The CPL 1997 Final Order also
decreases other depreciation by $17.4 million from CPL's rate request.
<PAGE> 60
Another major provision of the CPL 1997 Final Order was the Texas
Commission's categorization of $800 million of CPL's investment in STP,
including Mirror CWIP and deferred accounting, as ECOM. The term ECOM has been
used to refer to the amount of costs that potentially would become "stranded" if
retail competition were mandated and prices were set in the market, rather than
the price being determined by current regulatory standards of reasonable and
necessary cost of providing service. The CPL 1997 Final Order reduced CPL's
equity return on the ECOM portion of CPL's investment in STP to 7.96%, compared
to the 10.9% return on common equity approved for all other invested capital,
resulting in a $15.9 million decrease in CPL's rate request. At the same time,
the CPL 1997 Final Order accelerated the recovery of the $800 million designated
as ECOM to 20 years from the remaining 32-year life of STP.
The following table contains details of the estimate of the financial
impact of the CPL 1997 Final Order.
1997 1998 1999
----------------------------------
(millions)
Decrease in revenue $(20.9) $(28.7) $(41.9)
------- ------- -------
Items included in decrease in revenue with
an offsetting effect on expense:
Accelerated recovery of STP (ECOM) 40.0 40.0 40.0
Change in depreciation (27.3) (27.3) (27.3)
Decommissioning 4.3 4.3 4.3
Other 6.6 4.5 4.5
------- ------- -------
23.6 21.5 21.5
------- ------- -------
Change in current year income before tax (44.5) (50.2) (63.4)
Federal income taxes 14.7 16.8 21.2
------- ------- -------
Current year impact on net income (29.8) (33.4) (42.2)
1996 effect (17.7) -- --
------- ------- -------
Estimated impact on net income $(47.5) $(33.4) $(42.2)
------- ------- -------
CPL will likely appeal the CPL 1997 Final Order to the Texas State
District Court by the end of 1997 to challenge the resolution of several issues
in the rate case after the rehearing process has concluded. The primary issues
include: (i) the classification of $800 million of invested capital in STP as
ECOM which was also assigned a lower return on equity than non-ECOM property,
(ii) the Texas Commission's use of the "Glide Path" rate reduction methodology
to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of
disallowed affiliate transactions from CSW Services. Management is unable to
predict how the final resolution of these issues will ultimately affect CSW's
and CPL's results of operations and financial condition.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had
recorded approximately $1.2 billion of regulatory related assets at December 31,
1996. The application of SFAS No. 71 is conditioned upon CPL's rates being set
based on the cost of providing service. In the event management concludes that
as a result of changes in regulation, legislation, the competitive environment,
or other factors, including the CPL 1997 Final Order, CPL no longer meets the
criteria for following SFAS No. 71, a write-off of regulatory assets would be
required. In addition, CPL would be required to determine any impairment to
carrying costs of plant investments. If CPL no longer met the criteria for
following SFAS No. 71 and a write-off of regulatory assets was required, CPL and
CSW could experience, depending on the timing and amount of any write-off, a
material adverse effect on their results of operations and financial condition.
<PAGE> 61
The foregoing discussion of CPL RATE REVIEW - DOCKET NO. 14965
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION.
PSO 1997 RATE SETTLEMENT AGREEMENT
On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission and on
October 23, 1997, a final order approving the agreement was issued by the
Oklahoma Commission. The PSO 1997 Rate Settlement Agreement calls for PSO to
lower its retail base rates beginning with the December 1997 billing cycle by
approximately $35.9 million annually, or a 5.3 percent decrease below the
current level of retail rates. Part of the rate reduction includes a reduction
in annual depreciation expense of approximately $10.9 million. In addition, the
PSO 1997 Rate Settlement Agreement will result in PSO making a one-time $29
million refund to customers. Through the third quarter of 1997, PSO has recorded
the estimated financial impact of the PSO 1997 Rate Settlement Agreement,
including recognition of the full $29 million refund obligation.
The refund is expected to be made to customers in December 1997.
As previously reported, in July 1996, the OCC Staff filed an
application seeking a review of PSO's earnings. In accordance with the
established schedule, PSO subsequently filed financial data, cost of service and
rate design testimony supporting both its current rates and an increase in
annual depreciation expense of $26 million. In July 1997, the OCC Staff and
other intervenors to the proceeding filed their revenue requirements testimony.
In its filing, the OCC Staff recommended a rate reduction of $76.8 million for
PSO. Although the OCC Staff's recommended rate reduction included a $109 million
rate base reduction and a specific percentage return on capital, these issues
were not specifically addressed in the PSO 1997 Rate Settlement Agreement.
The PSO 1997 Rate Settlement Agreement also provides that PSO
completely eliminate or amortize before its next rate filing approximately $41
million in certain deferred assets, approximately $26 million of which had been
expensed in 1996. Included in the remaining $15 million of deferred assets are
approximately $9 million of costs incurred for customer energy management
incentive programs. PSO is continuing to analyze the implications of the PSO
1997 Rate Settlement Agreement. The following table is management's estimate of
the financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997
results of operations and also its ongoing annual impact on net income in
successive years.
Ongoing
1997 Annual
Impact Impact
----------- --- -----------
(millions)
Change in revenues $(31.5) $(35.9)
----------- -----------
Changes in expenses (offsetting
impact included in revenues)
Depreciation (6.3) (10.9)
Rate case deferred costs 2.2 --
Income tax (10.2) (8.8)
----------- -----------
(14.3) (19.7)
----------- -----------
Estimated impact on net income $(17.2) $(16.2)
----------- -----------
The PSO 1997 Rate Settlement Agreement resulted in an adverse effect on
PSO's results of operations for 1997 that will have a continuing impact because
of the rate decrease, but importantly, it also reduced significant risks for PSO
related to this regulatory proceeding and will enable PSO's rates to remain
competitive for the foreseeable future.
<PAGE> 62
The foregoing discussion of PSO 1997 RATE SETTLEMENT AGREEMENT
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION.
SEEBOARD RECENT REGULATORY ACTIONS
Following the opening of the United Kingdom domestic and small business
electricity market to competition, from April 1998, these customers will be able
to choose the supplier from which they purchase electricity. SEEBOARD will
compete for customers in its own area as well as throughout the rest of the
United Kingdom. The DGES has allowed most of the system development costs
associated with the introduction of competition to be recovered by the regional
electricity companies through a charge to all customers over the next five
years. The DGES has also announced price restraints which set a maximum amount
that existing electricity supply companies can charge their domestic and small
business customers over the first two years following the introduction of
competition, taking into account his view of future electricity purchase costs.
For SEEBOARD, this proposal reduces prices in real terms by 6% for the
regulatory period ending March 31, 1999 and a further 3% for the following
regulatory period ending March 31, 2000.
OTHER
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
STRATEGIC INITIATIVES
A vital part of CSW's future business strategy involves initiatives
that are complementary to but outside of the traditional United States electric
utility industry. This is due in large measure to the well-documented
fundamental changes currently impacting the electric utility industry. CSW has
undertaken several such initiatives in the past, and will continue to pursue
them in the future provided they are consistent with the overall vision for the
company which is articulated as "CSW is an innovative leader in the global
energy and related services markets." Several initiatives have recently been
undertaken in support of this vision.
In June 1997, the FERC approved the request of CSW PMI to sell power
and energy at market-based rates, rather than prices based on cost-of-service,
in the wholesale electricity market. Although CSW PMI is subject to the
jurisdiction of the FERC, it will not be subject to rate jurisdiction of any
state utility commissions. CSW has also made an equity investment in a firm that
provides technical consulting services to both the nuclear industry and to
governmental agencies associated with the energy industry. In addition, CSW has
formed CSW ESI, a company that will spearhead CSW's competitive efforts in the
retail electricity markets of states outside of CSW's historical service
territories. CSW ESI will not only attempt to secure electricity supply business
in the markets which soon will have retail competition, but will also permit CSW
to extend its business reach and name recognition beyond CSW's traditional
customer base.
CSW International acquired a minority interest in Vale, a Brazilian
electric utility company, for an initial investment of approximately $40 million
in December 1996. In October 1997, CSW International made an additional equity
investment of approximately $40 million in Vale. The $80 million used to make
both equity investments was funded through loans to CSW International by CSW
Energy. CSW Energy obtained the funds from its $200 million Senior Note issuance
in October 1996.
<PAGE> 63
In October 1997, SEEBOARD, through CSW International, announced a joint
venture to develop a new electricity generating station in southeast England.
The South Coast Power joint venture between Scottish Power and SEEBOARD is
currently finalizing proposals for the new 500 megawatt combined cycle gas
turbine power station. The development cost of the project is expected to total
approximately $340 million. South Coast Power already holds governmental permits
to build and operate a station on the site, but because of technological
advances since the permits were initially obtained, certain modifications must
be made to the permits to reflect the current construction plans. Financing
plans for South Coast Power are scheduled to be completed in the first quarter
of 1998.
RECENT DEVELOPMENTS
FERC ORDER NO. 888/TEXAS COMMISSION ERCOT TRANSMISSION RULES
As previously reported, the FERC issued Order No. 888, which is the
final comparable open access transmission service rule, in 1996. The provisions
of FERC Order No. 888 provide for comparable transmission service between
utilities and their transmission customers by requiring utilities to take
transmission service under their open access tariffs for all of their new
wholesale sales and purchases and by requiring utilities to rely on the same
information that their transmission customers rely on to make wholesale
purchases and sales.
In addition, the Texas Commission adopted a rule governing transmission
access and pricing for ERCOT in 1996. The pricing method adopted by the Texas
Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering
70% of total ERCOT transmission costs and a distance-sensitive component which
recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began
recording transmission revenues and expenses in accordance with the Texas
Commission's rule on January 1, 1997.
FERC Order No. 888 requires holding companies to offer single system
transmission rates. However, because the transmission rates of PSO and SWEPCO
are under the exclusive jurisdiction of the FERC while the transmission rates of
CPL and WTU are under the exclusive jurisdiction of the Texas Commission and the
two commissions have different approaches to defining and implementing
comparable open access transmission service, Order No. 888 granted the U.S.
Electric Operating Companies an exemption permitting them an opportunity to
propose a solution that provides comparability to all wholesale users. On
November 1, 1996, the U.S. Electric Operating Companies filed a system-wide
tariff to comply with Order No. 888 and, on December 31, 1996, the FERC accepted
for filing the system-wide tariff which became effective on January 1, 1997,
subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of both the FERC and the Texas Commission although the tariff
does not offer a single system rate.
INDUSTRY RESTRUCTURING INITIATIVES
As previously reported, several initiatives regarding restructuring the
electric utility industry have recently been undertaken in the four states in
which the U.S. Electric Operating Companies operate. Such actions have taken
various forms, including proposed legislation. Legislation was enacted in
Oklahoma that provides for retail competition by July 2002. However, legislative
activities in Texas, Louisiana and Arkansas stopped short of any such definitive
action.
In April 1997, the Oklahoma Legislature enacted legislation dealing
with industry restructuring in Oklahoma, which provides for retail competition
<PAGE> 64
by July 1, 2002. The legislation directs the Oklahoma Commission to study all
relevant issues relating to restructuring and develop a framework for a
restructured industry. The legislation divides the study of restructuring issues
by the Oklahoma Commission into four parts: (i) independent system operator
issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues.
At the end of each of these studies, the Oklahoma Commission must provide
reports along with legislative recommendations. The legislation directs the
Oklahoma Tax Commission to study the impact of electric utility restructuring on
state tax revenues and the existing tax structure, consider the establishment of
a uniform consumption tax, and report to the Oklahoma Legislature by December
31, 1998. The legislation prohibits the establishment of retail competition
until a uniform tax policy is established. The legislation also creates a Joint
Electric Utility Task Force, a 14-member panel composed of an equal number of
representatives from the Oklahoma House of Representatives and the Oklahoma
Senate. The duties of this task force include the oversight and direction of the
studies by the Oklahoma Commission and the Oklahoma Tax Commission. Management
is unable to predict the outcome of these studies or their ultimate impact on
the results of operations and financial condition of CSW and PSO.
In March 1997, the Arkansas Legislature passed a resolution directing
interim legislative committees to study competition in the electric power
industry in Arkansas. The study began in October 1997. Although several bills
addressing industry restructuring and retail competition were introduced in the
recent sessions of the Texas and Louisiana legislatures, no such legislation was
adopted. The Louisiana Senate did adopt a resolution creating a special
committee to assess the impact of retail competition on the state of Louisiana.
The committee is scheduled to issue a report before the next regular session of
the Louisiana Legislature. Management cannot predict the outcome of the studies
in Arkansas and Louisiana or their ultimate impact on the results of operations
and financial condition of CSW and SWEPCO.
CLEAN AIR ENVIRONMENTAL ISSUES
The EPA recently promulgated revised, more stringent ambient air
quality standards for ozone and particulates. While these standards do not
mandate emission levels for facilities such as electricity generating power
plants, they may result in more areas being designated as non-attainment for
these two pollutants. States will be required to develop strategies to achieve
compliance in these areas, strategies that may include lower emission levels for
electricity generating power plants, possibly including facilities within the
CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies
cannot yet be determined and might be ten years from the present, but the impact
could ultimately be significant.
International negotiations continue over the issue of global warming.
If a treaty emerges that is signed by the United States and is ratified by the
United States Congress which places limitations or roll backs of any greenhouse
gas emissions from electricity generating power plants, CSW and the U.S.
Electric Operating Companies could be significantly affected, though the
magnitude and timing of the effect is indeterminable at this point.
MERGER AND ACQUISITION ACTIVITIES
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
As previously reported, 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. In October 1996, SWEPCO, together with
Entergy Texas and the Committee of Certain Members, which currently consists of
seven of the twelve distribution cooperatives served by Cajun, filed the SWEPCO
Plan in the bankruptcy court. In April 1997, the Committee of Certain Members as
well as another cooperative signed term sheets that support the SWEPCO Plan. In
<PAGE> 65
signing the term sheets, the Committee of Certain Members agreed to support the
SWEPCO Plan throughout the confirmation process, and if the SWEPCO Plan is
confirmed, to sign power supply agreements that meet the conditions of the term
sheets.
Under the SWEPCO Plan, which amended other plans filed earlier in 1996,
a SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun for approximately $780 million in cash and up to an additional $20 million
to pay certain other bankruptcy claims and expenses. SWEPCO would acquire claims
of unsecured creditors of up to $7 million. In addition, the SWEPCO Plan
provides for the Cajun member cooperatives to enter into new 25-year power
supply agreements which will provide the Cajun member cooperatives with two
wholesale rate options while permitting the Cajun member cooperatives the
flexibility to acquire power on the open market when their requirements exceed
mutually agreed upon levels of generating capacity. The cooperatives could also
elect, once every five years, to move from one rate option to the other. The
SWEPCO Plan would settle power supply contract claims and related litigation in
the bankruptcy case. The term sheets signed by the eight cooperatives contain
the major provisions of the SWEPCO Plan.
Two competing plans of reorganization for Cajun have also been filed
with the bankruptcy court, each with different rate paths, asset purchase
proposals and other provisions. One of the competing plans has the support of
both the bankruptcy court-appointed trustee and Cajun's largest creditor, the
RUS. This plan also has the support of the three cooperatives not currently
supporting the SWEPCO Plan, although the support is based upon signed memoranda
of understanding which allow the cooperatives to support other competing
parties. In September 1997, SWEPCO reached a contingent settlement in principle
with the RUS whereby the RUS would support SWEPCO if certain contingencies are
met. SWEPCO is currently pursuing certain aspects of this settlement while also
evaluating other conditions of the settlement. However, SWEPCO is currently
unable to predict whether settlement with the RUS will ultimately be achieved.
Confirmation hearings in Cajun's bankruptcy case are now scheduled
through January 1998. Consummation of the SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals and receipt of their
corresponding board approvals. If the SWEPCO Plan is confirmed, CSW and SWEPCO
expect to utilize a combination of external borrowings and internally generated
funds to initially finance the acquisition of Cajun's non-nuclear assets.
The foregoing discussion of SWEPCO CAJUN ASSET PURCHASE PROPOSAL
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION.
TERMINATION OF EL PASO MERGER
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
RISK MANAGEMENT
In October 1997, CSW's board of directors adopted a risk management
resolution authorizing CSW to engage in currency, interest rate and energy spot
and forward transactions and related derivative transactions on behalf of the
corporation with foreign and domestic parties as deemed appropriate by executive
officers of CSW. The risk management program is necessary to meet the growing
demands of CSW's customers for competitive prices and price stability, to enable
<PAGE> 66
CSW to compete in a deregulated power industry, to manage the risks associated
with domestic and foreign investments and to take advantage of strategic
investment opportunities.
The U.S. Electric Operating Companies experience commodity price
exposures related to the purchase of fuel supplies for the generation of
electricity and for the purchase of power and energy from other generation
sources. Contracts that provide for the future delivery of these commodities can
be considered forward contracts which contain pricing and/or volume terms
designed to stabilize the cost of the commodity. Consequently, the U.S. Electric
Operating Companies manage their price exposure for the benefit of customers by
balancing their commodity purchases through a combination of long-term and
short-term (spot-market) agreements. In addition, CSW has been exposed to
currency and interest rate risks which reflect the changing exchange rate that
exists between the U.S. dollar and the British pound since its purchase of
SEEBOARD in 1995. CSW has utilized certain risk management tools to manage
adverse changes in exchange rates and to facilitate financing transactions
resulting from CSW's acquisition of SEEBOARD.
<PAGE> 67
PART II - OTHER INFORMATION
For background and earlier developments relating to PART II
information, reference is made to the Registrants' Combined Annual Report on
Form 10-K for the year ended December 31, 1996 and Combined Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997.
ITEM 1. LEGAL PROCEEDINGS
CPL MUNICIPAL FRANCHISE FEE LITIGATION
As previously reported, in May 1996, the city of San Juan, Texas filed
a class action in Hidalgo County, Texas District Court on behalf of all cities
served by CPL based upon CPL's alleged underpayment of municipal franchise fees.
The city of San Juan asserts various contract and tort claims against CPL as
well as certain audit rights. The suit seeks unspecified damages and attorneys'
fees. CPL filed a counterclaim for any overpayment of franchise fees it may have
made as well as its attorneys' fees. CPL also filed a motion to transfer venue
to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement
asserting that the Texas Commission has primary jurisdiction over the claims
filed by the city of San Juan. In January, 1997, CPL filed an original petition
at the Texas Commission requesting the Texas Commission to declare its
jurisdiction over CPL's collection and payment of municipal franchise fees.
In April 1997, the Texas Commission issued a declaratory order in which
it declined to assert jurisdiction over the claims of the city of San Juan. CPL
appealed the Texas Commission's decision to the Travis County, Texas District
Court. After the Texas Commission's order, the Hidalgo County court overruled
CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo
County court entered an order certifying the case as a class action. CPL
appealed this order to the Corpus Christi Court of Appeals. In May 1996 and
December 1996, respectively, the cities of Pharr, Texas and San Benito, Texas
filed individual suits making claims identical to those claimed by the city of
San Juan.
Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, CPL cannot predict the outcome of these lawsuits.
SWEPCO BURLINGTON NORTHERN TRANSPORTATION CONTRACT
In January 1995, a state district court in Bowie County, Texas entered
judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding
rates charged under two rail transportation contracts for delivery of coal to
SWEPCO's Welsh and Flint Creek power stations. The court awarded SWEPCO
approximately $72 million that would inure to the benefit of customers, if
collected, representing damages for the period from April 27, 1989 through
September 26, 1994, as well as post-judgment interest and attorneys' fees and
granted certain declaratory relief requested by SWEPCO. Burlington Northern
appealed the state district court's judgment to the Texarkana, Texas Court of
Appeals and, in April 1996, that court reversed the judgment of the state
district court. In October 1996, SWEPCO filed an application with the Supreme
Court of Texas to grant a writ of error to review and reverse the judgment of
the Texarkana, Texas Court of Appeals. In June 1997, the Supreme Court of Texas
granted SWEPCO's application for writ of error. Oral argument was held before
the Supreme Court of Texas in October 1997, and the matter is now pending.
<PAGE> 68
SWEPCO LIGNITE MINING AGREEMENT LITIGATION
SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit
1 and jointly own lignite reserves in the Dolet Hills area of northwestern
Louisiana. In 1982 the SWEPCO and CLECO entered into a lignite mining agreement
with the DHMV, a partnership for the mining and delivery of lignite from a
portion of these reserves.
On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its
partners in the United States District Court for the Western District of
Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO
under the lignite mining agreement, including provisions relating to the quality
of the delivered lignite, pricing, and mine reclamation practices. On June 15,
1997, DHMV filed an answer denying the allegations in the suit and filed a
counterclaim asserting various contract-related claims against SWEPCO and CLECO.
SWEPCO and CLECO have denied the allegations in the counterclaims.
SWEPCO intends to vigorously prosecute the claims against DHMV and
defend against the counterclaims which DHMV has asserted. Although SWEPCO cannot
predict the ultimate outcome of this matter, management believes that the
resolution of this matter will not have a material adverse effect on SWEPCO's
results of operations or financial condition.
OTHER LEGAL CLAIMS AND PROCEEDINGS
The CSW System is party to various other legal claims and proceedings
arising in the normal course of business. Management does not expect disposition
of these matters to have a material adverse effect on the Registrants' results
of operations or financial condition. See PART I - NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 5. OTHER INFORMATION
ADOPTION OF RIGHTS PLAN
In September 1997, CSW's board of directors adopted a Rights Plan,
which is subject to SEC approval under the Holding Company Act. An application
to the SEC requesting approval of the Rights Plan was filed on September 29,
1997. The Rights Plan was adopted as part of the fiduciary responsibility of
CSW's board of directors, and was not adopted because of any takeover offer or
threat. The Rights Plan is intended to assure fair and equal treatment for all
of CSW's stockholders in the event of a hostile takeover attempt and to
encourage a potential acquirer to negotiate with CSW's board of directors before
attempting a takeover so as to assure a fair price for all stockholders.
Following SEC approval of the Rights Plan, CSW will make a dividend
distribution of one right for each outstanding share of its common stock, as of
a record date to be determined by its board of directors. CSW stockholders are
not required to take any action to receive their rights distribution. Prior to
the date upon which the rights become exercisable under the Rights Plan, CSW's
outstanding stock certificates will represent both the shares of common stock
and the rights, and the rights will trade only together with the shares.
Upon a "triggering event" under the Rights Plan, which would occur ten
days after a person or group acquires or announces a tender or exchange offer to
acquire fifteen percent or more of CSW's outstanding common stock, the rights
<PAGE> 69
will become exercisable and will trade independently of CSW's common stock.
After a person or group acquires fifteen percent or more of CSW's outstanding
common stock, each right, except those held by such acquiring person or group,
whose rights would become void, will entitle the holder to purchase, at the
exercise price, additional CSW common shares having a current market value of
two times the exercise price. If CSW is acquired in a merger or other business
combination, each right will entitle the holder to purchase, at the exercise
price, common stock of the acquiror having a current market value of two times
the exercise price. In either case, after a triggering event occurs but before
an acquiring person becomes the owner of at least fifty percent of CSW's
outstanding common stock, CSW's board of directors may direct the exchange of
one share of CSW's common stock for each right then outstanding and not
exercised.
CSW's board of directors may redeem the rights for a price of one cent
per right prior to the earlier of the rights becoming exercisable or the
expiration of the Rights Plan. The rights will expire in ten years from the
effective date unless they are earlier redeemed or exchanged by CSW. CSW will
mail additional information to its stockholders as of the record date for
distribution of the rights, which is expected to be the tenth day following
approval of the Rights Plan by the SEC.
NEW MANAGEMENT OF STP
In September 1997, STPNOC was formed to begin the transition from HL&P
as the STP Project Manager to an independent STP operator. Each of the four STP
co-owners will be represented on the STPNOC board of directors. The CPL
representative has been elected as the initial chairman of the board of
directors. CPL believes the formation of STPNOC is in the best interest of CPL
and of each of the other STP co-owners.
The establishment of the independent operating company provides the
following advantages: (i) allows the management and work force to focus
exclusively on the safe, reliable and efficient operation of the STP units; (ii)
removes most of the possibility of disputes between the four owners over the
operation of the facility; (iii) removes dissension over the potential liability
of HL&P who was acting as the project manager; and (iv) allows the management of
the facility to tailor a total compensation package for the STP work force which
best suits that work force and its needs. In addition, the formation and
operation of STPNOC is expected to result in a decrease in costs allocable to
CPL related to its investment in STP.
On October 1, 1997, all HL&P employees assigned to STP were transferred
from HL&P to STPNOC. HL&P will be removed as the STP Project Manager on
completion of various transition agreements, including an amended participation
agreement. The replacement of HL&P as STP Project Manager with STPNOC is
anticipated to be completed before the end of 1997.
SALE OF CSW ENERGY SWEENY OWNERSHIP INTEREST
In August 1997, an affiliate of CSW Energy sold 50% of its 100%
interest in the Sweeny Cogeneration project. The sale of the ownership interest
was necessary for the Sweeny Cogeneration project to maintain its qualifying
facility status under the Public Utility Regulatory Policy Act of 1978. CSW
Energy provided the $56.5 million non-recourse financing for the sale which is
expected to be repaid from project distributions or proceeds from sale, as
defined in the sales agreements. Construction on the 330 megawatt electricity
generating facility is estimated to be completed in early 1998 with a commercial
operation date soon thereafter. CSW Energy did not recognize a gain or loss on
this transaction.
<PAGE> 70
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
(3) ARTICLES OF INCORPORATION AND BY-LAWS OF CSW ESI
1 Certificate of Incorporation, filed herewith.
2 Bylaws, filed herewith.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
1 CSW Shareholder Rights Plan adopted September 27, 1997, filed
herewith.
(12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
CPL - (Exhibit 12.1), filed herewith.
PSO - (Exhibit 12.2), filed herewith.
SWEPCO - (Exhibit 12.3), filed herewith.
WTU - (Exhibit 12.4), filed herewith.
(27) FINANCIAL DATA SCHEDULES
CSW - (Exhibit 27.1), filed herewith.
(B) REPORTS FILED ON FORM 8-K:
CSW
ITEM 5. OTHER EVENTS, dated July 2, 1997, reporting information
related to the United Kingdom Windfall Profits Tax.
ITEM 5. OTHER EVENTS, dated July 16, 1997, reporting the settlement
of litigation related to the termination of the proposed El Paso
Merger.
ITEM 5.OTHER EVENTS, and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS,
dated September 27, 1997, reporting CSW's adoption of the Rights
Plan.
CSW AND CPL
ITEM 5. OTHER EVENTS, dated September 10, 1997, providing certain
information related to CPL's rate review.
CSW AND PSO
ITEM 5. OTHER EVENTS, dated July 17, 1997, reporting information
related to PSO's rate review.
ITEM 5. OTHER EVENTS, dated October 15, 1997, reporting the PSO 1997
Rate Settlement Agreement.
SWEPCO, WTU
None
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
Registrant shall be deemed to relate only to matters having reference to such
Registrant or its subsidiaries.
CENTRAL AND SOUTH WEST CORPORATION
Date: November 13, 1997 /S/ LAWRENCE B. CONNORS
--------------------------
Lawrence B. Connors
Controller and Chief Accounting Officer
(Principal Accounting Officer)
CENTRAL POWER AND LIGHT COMPANY
PUBLIC SERVICE COMPANY OF OKLAHOMA
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
Date: November 13, 1997 /S/ R. RUSSELL DAVIS
-----------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
CERTIFICATE OF INCORPORATION
OF
CSW ENERGY SERVICES, INC.
The undersigned, for the purpose of organizing a corporation under the
General Corporation Law of the State of Delaware, certifies:
FIRST: The name of the corporation is CSW Energy
Services, Inc. (hereinafter referred to as the "Corporation").
SECOND: The address of the Corporation's registered office in the
State of Delaware is The Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, County of New Castle. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (hereinafter referred to as the "GCL").
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is one thousand (1000) shares of common stock,
each without par value.
Each holder of Common Stock shall have one vote in respect of each
share of Common Stock held by such holder of record on the books of the
Corporation for the election of directors and on all other matters on which
stockholders of the Corporation are entitled to vote. The holders of shares of
Common Stock shall be entitled to receive, when and if declared by the Board of
Directors, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in stock or otherwise.
<PAGE>
FIFTH: The directors shall have power to adopt, amend or repeal
By-Laws of the Corporation, except as may otherwise be provided in the By-Laws
of the Corporation.
SIXTH: Elections of directors need not be by written ballot, except
as may otherwise be provided in the By-Laws of the Corporation.
SEVENTH: The name and mailing address of the incorporator is Guilford
W. Gaylord, Milbank, Tweed, Hadley and McCloy, One Chase Manhattan Plaza, New
York, New York 10005-1413.
WITNESS my signature this 24th day of September 1997.
Guilford W. Gaylord
Sole Incorporator
BYLAWS
OF
CSW ENERGY SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
OFFICE AND RECORDS
Section 1.1 DELAWARE OFFICE.............................1
Section 1.2 OTHER OFFICES...............................1
Section 1.3 BOOKS AND RECORDS......................... 1
ARTICLE II
STOCKHOLDERS
Section 2.1 ANNUAL MEETING............................ 1
Section 2.2 SPECIAL MEETINGS.......................... 2
Section 2.3 NOTICE OF MEETINGS........................ 2
Section 2.4 QUORUM.................................... 3
Section 2.5 VOTING.................................... 4
Section 2.6 PROXIES................................... 5
Section 2.7 LIST OF STOCKHOLDERS...................... 5
Section 2.8 WRITTEN CONSENT OF STOCKHOLDERS IN LIEU
OF MEETING................................ 6
ARTICLE III
DIRECTORS
Section 3.1 NUMBER OF DIRECTORS....................... 7
Section 3.2 ELECTION AND TERM OF DIRECTORS............ 7
Section 3.3 VACANCIES AND NEWLY CREATED
DIRECTORSHIPS............................. 8
Section 3.4 RESIGNATION............................... 8
Section 3.5 REMOVAL................................... 8
Section 3.6 MEETINGS.................................. 8
Section 3.7 QUORUM AND VOTING......................... 10
Section 3.8 WRITTEN CONSENT OF DIRECTORS IN LIEU OF
A MEETING................................. 10
Section 3.9 COMPENSATION.............................. 10
Section 3.10 COMMITTEES OF THE BOARD OF DIRECTORS...... 11
ARTICLE IV
OFFICERS, AGENTS AND EMPLOYEES
Section 4.1 APPOINTMENT AND TERM OF OFFICE............ 12
Section 4.2 RESIGNATION AND REMOVAL................... 13
Section 4.3 COMPENSATION AND BOND..................... 13
Section 4.4 CHAIRMAN OF THE BOARD..................... 14
Section 4.5 PRESIDENT................................. 14
Section 4.6 VICE PRESIDENTS........................... 14
<PAGE>
PAGE
Section 4.7 TREASURER................................. 15
Section 4.8 SECRETARY................................. 15
Section 4.9 ASSISTANT TREASURERS...................... 16
Section 4.10 ASSISTANT SECRETARIES..................... 16
Section 4.11 DELEGATION OF DUTIES...................... 16
ARTICLE V
INDEMNIFICATION AND INSURANCE
Section 5.1 RIGHT TO INDEMNIFICATION.................. 17
Section 5.2 RIGHT TO ADVANCEMENT OF EXPENSES.......... 18
Section 5.3 RIGHT OF INDEMNITEE TO BRING SUIT......... 19
Section 5.4 NON-EXCLUSIVITY OF RIGHTS................. 20
Section 5.5 INSURANCE................................. 20
Section 5.6 INDEMNIFICATION OF EMPLOYEES AND AGENTS
OF THE CORPORATION........................ 21
Section 5.7 CONTRACT RIGHTS........................... 21
ARTICLE VI
COMMON STOCK
Section 6.1 CERTIFICATES.............................. 21
Section 6.2 TRANSFERS OF STOCK........................ 22
Section 6.3 LOST, STOLEN OR DESTROYED CERTIFICATES.... 22
Section 6.4 STOCKHOLDER RECORD DATE................... 23
ARTICLE VII
SEAL
Section 7.1 SEAL...................................... 25
ARTICLE VIII
WAIVER OF NOTICE
Section 8.1 WAIVER OF NOTICE.......................... 25
ARTICLE IX
CHECKS, NOTES, DRAFTS, ETC.
Section 9.1 CHECKS, NOTES, DRAFTS, ETC................ 26
ARTICLE X
AMENDMENTS
Section 10.1 AMENDMENTS................................ 26
<PAGE>
BYLAWS
OF
CSW ENERGY SERVICES, INC.
ARTICLE I
OFFICE AND RECORDS
SECTION 1.1 DELAWARE OFFICE. The principal office of the Corporation
in the State of Delaware shall be located in the City of Wilmington, County of
New Castle, and the name and address of its registered agent is The Corporation
Trust Company, 1209 Orange Street, Wilmington, Delaware.
SECTION 1.2 OTHER OFFICES. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Corporation may from time to
time require.
SECTION 1.3 BOOKS AND RECORDS. The books and records of the
Corporation may be kept at the Corporation's principal executive offices in
Dallas, Texas or at such other locations outside the State of Delaware as may
from time to time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1 ANNUAL MEETING. Except as otherwise
provided in Section 2.8 of these Bylaws, an annual meeting of stockholders of
the Corporation shall be held at such time and date in each year as the Board of
Directors, the Chairman of the Board, if any, or the President may from time to
<PAGE>
time determine. The annual meeting in each year shall be held at such place
within or without the State of Delaware as may be fixed by the Board of
Directors, or if not so fixed, at 10 A.M., local time, at the principal
executive offices of the Corporation.
SECTION 2.2 SPECIAL MEETINGS. A special meeting of the holders of
stock of the Corporation entitled to vote on any business to be considered at
any such meeting may be called only by the Chairman of the Board, if any, or the
President or any Vice President, and shall be called by the Chairman of the
Board, if any, or the President or the Secretary when directed to do so by
resolution of the Board of Directors or at the written request of directors
representing a majority of the total number of directors which the Corporation
would at the time have if there were no vacancies (the "Whole Board"). Any such
request shall state the purpose or purposes of the proposed meeting. The Board
of Directors may designate the place of meeting for any special meeting of
stockholders, and if no such designation is made, the place of meeting shall be
the principal executive offices of the Corporation.
SECTION 2.3 NOTICE OF MEETINGS. Whenever stockholders are required or
permitted to take any action at a meeting, unless notice is waived as provided
in Section 8.1 of these Bylaws, a written notice of the meeting shall be given
which shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
<PAGE>
Unless otherwise provided by law, and except as to any stockholder
duly waiving notice, the written notice of any meeting shall be given personally
or by mail, not less than ten nor more than sixty (60) days before the date of
the meeting to each stockholder entitled to vote at such meeting. If mailed,
notice shall be deemed given when deposited in the mail, postage prepaid,
directed to the stockholder at his or her address as it appears on the records
of the Corporation.
When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting the
Corporation may transact any business which might have been transacted at the
original meeting. If, however, the adjournment is for more than thirty (30)
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
SECTION 2.4 QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation or by these Bylaws, at any meeting of stockholders
the holders of a majority of the outstanding stock entitled to vote thereat,
either present or represented by proxy, shall constitute a quorum for the
transaction of any business, but the stockholders present, although less than a
<PAGE>
quorum, may adjourn the meeting to another time or place and, except as provided
in the last paragraph of Section 2.3 of these Bylaws, notice need not be given
of the adjourned meeting.
SECTION 2.5 VOTING. Whenever directors are to be elected at a meeting,
they shall be elected by a plurality of the votes cast at the meeting by the
holders of stock entitled to vote. Whenever any corporate action, other than the
election of directors, is to be taken by vote of stockholders at a meeting, it
shall, except as otherwise required by law or by the Certificate of
Incorporation or by these Bylaws, be authorized by a majority of the votes cast
with respect thereto at the meeting (including abstentions) by the holders of
stock entitled to vote thereon.
Except as otherwise provided by law, or by the Certificate of
Incorporation, each holder of record of stock of the Corporation entitled to
vote on any matter at any meeting of stockholders shall be entitled to one vote
for each share of such stock standing in the name of such holder on the stock
ledger of the Corporation on the record date for the determination of the
stockholders entitled to vote at the meeting.
Upon the demand of any stockholder entitled to vote, the vote for
directors or the vote on any other matter at a meeting shall be by written
ballot, but otherwise the method of voting and the manner in which votes are
counted shall be discretionary with the presiding officer at the meeting.
<PAGE>
SECTION 2.6 PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. Every proxy shall be
signed by the stockholder or by his duly authorized attorney.
SECTION 2.7 LIST OF STOCKHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
<PAGE>
The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
Section or the books of the Corporation, or to vote in person or by proxy at any
meeting of stockholders.
SECTION 2.8 WRITTEN CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any
action required by the General Corporation Law of the State of Delaware (the
"GCL") to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt written notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Any such written consent may be
given by one or any number of substantially concurrent written instruments of
substantially similar tenor signed by such stockholders, in person or by
attorney or proxy duly appointed in writing, and filed with the Secretary or an
Assistant Secretary of the Corporation. Any such written consent shall be
effective as of the effective date thereof as specified therein, provided that
<PAGE>
such date is not more than sixty (60) days prior to the date such written
consent is filed as aforesaid, or, if no such date is so specified, on the date
such written consent is filed as aforesaid.
ARTICLE III
DIRECTORS
SECTION 3.1 NUMBER OF DIRECTORS. The Board of
Directors shall consist of three directors until changed as provided in this
Section. The number of directors may be changed at any time and from time to
time by vote at a meeting or by written consent of the holders of stock entitled
to vote on the election of directors, or by a resolution of the Board of
Directors passed by a majority of the Whole Board, except that no decrease shall
shorten the term of any incumbent director unless such director is specifically
removed pursuant to Section 3.5 of these Bylaws at the time of such decrease.
SECTION 3.2 ELECTION AND TERM OF DIRECTORS. Directors shall be elected
annually, by election at the annual meeting of stockholders or by written
consent of the holders of stock entitled to vote thereon in lieu of such
meeting. If the annual election of directors is not held on the date designated
therefor, the directors shall cause such election to be held as soon thereafter
as convenient. Each director shall hold office from the time of his or her
election and qualification until his successor is elected and qualified or until
his or her earlier resignation, or removal.
<PAGE>
SECTION 3.3 VACANCIES AND NEWLY CREATED Directorships. Vacancies and
newly created directorships resulting from any increase in the authorized number
of directors may be filled by election at a meeting of stockholders or by
written consent of the holders of stock entitled to vote thereon in lieu of a
meeting. Except as otherwise provided by law, vacancies and such newly created
directorships may also be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director.
SECTION 3.4 RESIGNATION. Any director may resign at any time upon
written notice to the Corporation. Any such resignation shall take effect at the
time specified therein or, if the time be not specified, upon receipt thereof,
and the acceptance of such resignation, unless required by the terms thereof,
shall not be necessary to make such resignation effective.
SECTION 3.5 REMOVAL. Any or all of the directors may be removed at any
time, with or without cause, by vote at a meeting or by written consent of the
holders of stock entitled to vote on the election of directors.
SECTION 3.6 MEETINGS. Meetings of the Board of Directors, regular or
special, may be held at any place within or without the State of Delaware.
Members of the Board of Directors, or of any committee designated by the Board
<PAGE>
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting by such means shall constitute presence in person
at such meeting. An annual meeting of the Board of Directors shall be held after
each annual election of directors. If such election occurs at an annual meeting
of stockholders, the annual meeting of the Board of Directors shall be held at
the same place and immediately following such meeting of stockholders, and no
further notice thereof need be given other than this Bylaw. If an annual
election of directors occurs by written consent in lieu of the annual meeting of
stockholders, the annual meeting of the Board of Directors shall take place as
soon after such written consent is duly filed with the Corporation as is
practicable, either at the next regular meeting of the Board of Directors or at
a special meeting. The Board of Directors may fix times and places for
additional regular meetings of the Board of Directors and no notice of such
meetings need be given. A special meeting of the Board of Directors shall be
held whenever called by the Chairman of the Board, if any, or by the President
or by at least one-third of the directors for the time being in office, at such
time and place as shall be specified in the notice or waiver thereof. Notice of
each special meeting shall be given by the Secretary or by a person calling the
meeting to each director by mailing the same, postage prepaid, not later than
<PAGE>
the second day before the meeting, or personally or by telegraphing or
telephoning the same not later than the day before the meeting.
SECTION 3.7 QUORUM AND VOTING. A whole number of directors equal to at
least a majority of the Whole Board shall constitute a quorum for the
transaction of business, but if there be less than a quorum at any meeting of
the Board of Directors, a majority of the directors present may adjourn the
meeting from time to time, and no further notice thereof need be given other
than announcement at the meeting which shall be so adjourned. Except as
otherwise provided by law, by the Certificate of Incorporation, or by these
Bylaws, the vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
SECTION 3.8 WRITTEN CONSENT OF DIRECTORS IN LIEU OF A MEETING. Any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board of Directors or of such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or such committee.
<PAGE>
SECTION 3.9 COMPENSATION. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board
of Directors.
SECTION 3.10 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of
Directors may from time to time, by resolution passed by majority of the Whole
Board, designate one or more committees, each committee to consist of one or
more directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. The resolution of the
Board of Directors may, in addition or alternatively, provide that in the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he, she or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it, except as otherwise provided by law.
Unless the resolution of the Board of Directors expressly so provides, no such
committee shall have the power or authority to declare a dividend or to
<PAGE>
authorize the issuance of stock. Any such committee may adopt rules governing
the method of calling and time and place of holding its meetings. Unless
otherwise provided by the Board of Directors, a majority of any such committee
(or the member thereof, if only one) shall constitute a quorum for the
transaction of business, and the vote of a majority of the members of such
committee present at a meeting at which a quorum is present shall be the act of
such committee. Each such committee shall keep a record of its acts and
proceedings and shall report thereon to the Board of Directors whenever
requested so to do. Any or all members of any such committee may be removed,
with or without cause, by resolution of the Board of Directors, passed by a
majority of the whole Board.
ARTICLE IV
OFFICERS, AGENTS AND EMPLOYEES
SECTION 4.1 APPOINTMENT AND TERM OF OFFICE. The
officers of the Corporation may include a President, a Secretary and a
Treasurer, and may also include a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. All such officers shall be appointed by the Board of Directors or by
a duly authorized committee thereof, and shall each have such powers and duties
as generally pertain to their respective offices, subject to the specific
provisions of this Article IV, together with such other powers and duties as
<PAGE>
from time to time may be conferred by the Board of Directors or any committee
thereof. Any number of such offices may be held by the same person, but no
officer shall execute, acknowledge or verify any instrument in more than one
capacity. Except as may be prescribed otherwise by the Board of Directors or a
committee thereof in a particular case, all such officers shall hold their
offices at the pleasure of the Board of Directors for an unlimited term and need
not be reappointed annually or at any other periodic interval. The Board of
Directors may appoint, and may delegate power to appoint, such other officers,
agents and employees as it may deem necessary or proper, who shall hold their
offices or positions for such terms, have such authority and perform such duties
as may from time to time be determined by or pursuant to authorization of the
Board of Directors.
SECTION 4.2 RESIGNATION AND REMOVAL. Any officer may resign at any
time upon written notice to the Corporation. Any officer, agent or employee of
the Corporation may be removed by the Board of Directors, or by a duly
authorized committee thereof, with or without cause at any time. The Board of
Directors or such a committee thereof may delegate such power of removal as to
officers, agents and employees not appointed by the Board of Directors or such a
committee. Such removal shall be without prejudice to a person's contract
rights, if any, but the appointment of any person as an officer, agent or
employee of the Corporation shall not of itself create contract rights.
<PAGE>
SECTION 4.3 COMPENSATION AND BOND. The compensation of the officers of
the Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
The Corporation may secure the fidelity of any or all of its officers, agents or
employees by bond or otherwise.
SECTION 4.4 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there
be one, shall preside at all meetings of stockholders and of the Board of
Directors, and shall have such other powers and duties as may be delegated to
him or her by the Board of Directors.
SECTION 4.5 PRESIDENT. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), he or she shall preside at all meetings of the stockholders and
of the Board of Directors. He or she shall have general charge of the business
affairs of the Corporation. He or she may employ and discharge employees and
agents of the Corporation, except such as shall be appointed by the Board of
Directors, and he or she may delegate these powers. The President may vote the
stock or other securities of any other domestic or foreign corporation of any
type or kind which may at any time be owned by the Corporation, may execute any
stockholders' or other consents in respect thereof and may in his or her
<PAGE>
discretion delegate such powers by executing proxies, or otherwise, on behalf of
the Corporation. The Board of Directors by resolution from time to time may
confer like powers upon any other person or persons.
SECTION 4.6 VICE PRESIDENTS. Each Vice President shall have such
powers and perform such duties as the Board of Directors or the President may
from time to time prescribe. In the absence or inability to act of the
President, unless the Board of Directors shall otherwise provide, the Vice
President who has served in that capacity for the longest time and who shall be
present and able to act, shall perform all the duties and may exercise any of
the powers of the President.
SECTION 4.7 TREASURER. The Treasurer shall have charge of all funds
and securities of the Corporation, shall endorse the same for deposit or
collection when necessary and deposit the same to the credit of the Corporation
in such banks or depositaries as the Board of Directors may authorize. He or she
may endorse all commercial documents requiring endorsements for or on behalf of
the Corporation and may sign all receipts and vouchers for payments made to the
Corporation. He or she shall have all such further powers and duties as
generally are incident to the position of Treasurer or as may be assigned to him
or her by the President or the Board of Directors.
<PAGE>
SECTION 4.8 SECRETARY. The Secretary shall record all the proceedings
of the meetings of the stockholders and directors in a book to be kept for that
purpose and shall also record therein all action taken by written consent of the
stockholders or directors in lieu of a meeting. He or she shall attend to the
giving and serving of all notices of the Corporation. He or she shall have
custody of the seal of the Corporation and shall attest the same by his or her
signature whenever required. He or she shall have charge of the stock ledger and
such other books and papers as the Board of Directors may direct, but he or she
may delegate responsibility for maintaining the stock ledger to any transfer
agent appointed by the Board of Directors. He or she shall have all such further
powers and duties as generally are incident to the position of Secretary or as
may be assigned to him or her by the President or the Board of Directors.
SECTION 4.9 ASSISTANT TREASURERS. In the absence or inability to act
of the Treasurer, any Assistant Treasurer may perform all the duties and
exercise all the powers of the Treasurer. An Assistant Treasurer shall also
perform such other duties as the Treasurer or the Board of Directors may assign
to him or her.
SECTION 4.10 ASSISTANT SECRETARIES. In the absence or inability to act
of the Secretary, any Assistant Secretary may perform all the duties and
exercise all the powers of the Secretary. An Assistant Secretary shall also
perform such other duties as the Secretary or the Board of Directors may assign
to him or her.
<PAGE>
SECTION 4.11 DELEGATION OF DUTIES. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of Directors
may deem sufficient, the Board of Directors may confer for the time being the
powers or duties, or any of them, of such officer upon any other officer or upon
any director.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 5.1 RIGHT TO INDEMNIFICATION. Each person
who was or is made a party or is threatened to be made a party to or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she or a person of whom he or she is the legal representative is
or was a director or an officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of any
other corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to any employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
<PAGE>
authorized by the GCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, excise taxes or penalties under the Employee Retirement Income
Security Act of 1974, as amended, and amounts paid or to be paid in settlement)
reasonably incurred by such indemnitee in connection therewith; PROVIDED,
HOWEVER, that except as provided in Section 5.3 with respect to proceedings
seeking to enforce rights to indemnification, the Corporation shall indemnify
any such indemnitee seeking indemnification in connection with a proceeding (or
part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors.
SECTION 5.2 RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in Section 5.1 shall include the right to be paid by
the Corporation the expenses (including attorneys' fees) incurred in defending
any such proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"); PROVIDED, HOWEVER, that, if the GCL requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
<PAGE>
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee,
to repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter a
"final adjudication") that such indemnitee is not entitled to be indemnified for
such expenses under this Section 5.2 or otherwise.
SECTION 5.3 RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under
Section 5.1 or Section 5.2 is not paid in full by the Corporation within thirty
(30) days after a written claim has been received by the Corporation, except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right of an advancement of expenses) it shall be a
defense that, and (ii) in any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
<PAGE>
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the GCL. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the GCL, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel
or stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article V or otherwise shall be on the Corporation.
SECTION 5.4 NON-EXCLUSIVITY OF RIGHTS. The right to indemnification
and the advancement of expenses conferred in this Article V shall not be
exclusive of any other right which any person may have or hereafter acquire
<PAGE>
under any statute, provision of the Certificate of Incorporation, provision of
these Bylaws, agreement, vote of stockholders or disinterested directors or
otherwise.
SECTION 5.5 INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the GCL.
SECTION 5.6 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE
CORPORATION. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification, and rights to the
advancement of expenses, to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article V with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 5.7 CONTRACT RIGHTS. The rights to indemnification and to the
advancement of expenses conferred in Section 5.1 and Section 5.2 shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
<PAGE>
ARTICLE VI
COMMON STOCK
SECTION 6.1 CERTIFICATES. Certificates for stock of the Corporation
shall be in such form as shall be approved by the Board of Directors and shall
be signed in the name of the Corporation by the Chairman of the Board, if any,
or the President or a Vice President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary. Such certificates may be
sealed with the seal of the Corporation or a facsimile thereof. Any of or all
the signatures on a certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
SECTION 6.2 TRANSFERS OF STOCK. Transfers of stock shall be made only
upon the books of the Corporation by the holder, in person or by duly authorized
attorney, and on the surrender of the certificate or certificates for the same
number of shares, properly endorsed. The Board of Directors shall have the power
to make all such rules and regulations, not inconsistent with the Certificate of
<PAGE>
Incorporation and these Bylaws and the GCL, as the Board of Directors may deem
appropriate concerning the issue, transfer and registration of certificates for
stock of the Corporation. The Board of Directors may appoint one or more
transfer agents or registrars of transfers, or both, and may require all stock
certificates to bear the signature of either or both.
SECTION 6.3 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation
may issue a new stock certificate in the place of any certificate theretofore
issued by it, alleged to have been lost, stolen or destroyed, and the
Corporation may require the owner of the lost, stolen or destroyed certificate
or his or her legal representative to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate. The Board of Directors may require such owner to
satisfy other reasonable requirements as it deems appropriate under the
circumstances.
SECTION 6.4 STOCKHOLDER RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
<PAGE>
or for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date on which the
resolution fixing the record date is adopted by the Board of Directors, and
which shall not be more than sixty nor less than ten (10) days before the date
of such meeting, nor more than sixty (60) days prior to any other action.
If no record date is fixed by the Board of Directors, (l) the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
date on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held, (2) the record
date for determining stockholders entitled to express consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is necessary, shall be at the close of business on the day on which
the first written consent is expressed by the filing thereof with the
Corporation as provided in Section 2.8 of these Bylaws, and (3) the record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
<PAGE>
PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the
adjourned meeting.
Only such stockholders as shall be stockholders of record on the date
so fixed shall be entitled to notice of, and to vote at, such meeting and any
adjournment thereof, or to give such consent, or to receive payment of such
dividend or other distribution, or to exercise such rights in respect of any
such change, conversion or exchange of stock, or to participate in such action,
as the case may be, notwithstanding any transfer of any stock on the books of
the Corporation after any record date so fixed.
ARTICLE VII
SEAL
SECTION 7.1 SEAL. The seal of the Corporation shall be circular in
form and shall bear, in addition to any other emblem or device approved by the
Board of Directors, the name of the Corporation, the year of its incorporation
and the words "Corporate Seal" and "Delaware". The seal may be used by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE VIII
WAIVER OF NOTICE
SECTION 8.1 WAIVER OF NOTICE. Whenever notice is
required to be given to any stockholder or director of the Corporation under any
provision of the GCL or the Certificate of Incorporation or these Bylaws, a
<PAGE>
written waiver thereof, signed by the person or persons entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. In the case of a stockholder, such waiver of notice
may be signed by such stockholder's attorney or proxy duly appointed in writing.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors or members of a committee of directors need be specified
in any written waiver of notice.
ARTICLE IX
CHECKS, NOTES, DRAFTS, ETC.
SECTION 9.1 CHECKS, NOTES, DRAFTS, ETC. Checks,
notes, drafts, acceptances, bills of exchange and other orders or obligations
for the payment of money shall be signed by such officer or officers or person
or persons as the Board of Directors or a duly authorized committee thereof may
from time to time designate.
ARTICLE X
AMENDMENTS
SECTION 10.1 AMENDMENTS. These Bylaws or any of them may be altered or
repealed, and new Bylaws may be adopted, by the stockholders by vote at a
meeting or by written consent without a meeting. The Board of Directors shall
<PAGE>
also have power, by a majority vote of the Whole Board, to alter or repeal any
of these Bylaws, and to adopt new Bylaws.
Exhibit 4.1
Central and South West Corporation
and
[ ]
Rights Agent
Rights Agreement
Dated as of _____________, 1997
<PAGE>
Table of Contents
Section Page
1. Certain Definitions...................................1
2. Appointment of Rights Agent...........................4
3. Issue of Rights Certificates..........................4
4. Form of Rights Certificates...........................6
5. Countersignature and Registration.....................7
6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen
Rights Certificates...................................7
7. Exercise of Rights; Purchase Price; Expiration
Date of Rights........................................8
8. Cancellation and Destruction of Rights Certificates...10
9. Reservation and Availability of Capital Stock.........10
10. Common Stock Record Date..............................12
11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights............................12
12. Certificate of Adjusted Purchase Price or Number of
Shares................................................19
13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power......................................19
14. Fractional Rights and Fractional Shares...............21
15. Rights of Action......................................22
16. Agreement of Rights Holders...........................22
17. Rights Certificate Holder Not Deemed a Stockholder....23
18. Concerning the Rights Agent...........................23
19. Merger or Consolidation or Change of Name of Rights
Agent.................................................24
20. Duties of Rights Agent................................24
21. Change of Rights Agent................................26
22. Issuance of New Rights Certificates...................27
23. Redemption and Termination............................27
24. Exchange..............................................28
25. Notice of Certain Events..............................29
26. Notices...............................................30
27. Supplements and Amendments............................30
28. Successors............................................31
29. Determination and Actions by the Board of
Directors, etc........................................31
30. Benefits of this Agreement............................31
31. Severability..........................................32
32. Governing Law.........................................32
33. Counterparts..........................................32
34. Descriptive Headings..................................32
<PAGE>
RIGHTS AGREEMENT
This RIGHTS AGREEMENT, dated as of ___________, 1997 (this
"Agreement"), is by and between Central and South West Corporation, a Delaware
corporation (the "Company"), and [ ], a _____ Corporation (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, on __________ __, 1997 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared, a
dividend distribution of one Right (as hereinafter defined) for each share of
Common Stock (as hereinafter defined) of the Company outstanding at the Close of
Business on _______ __, 1997 (the "Record Date"), each Right initially
representing the right to purchase one-tenth of a share of Common Stock of the
Company, upon the terms and subject to the conditions hereinafter set forth (the
"Rights"), and has further authorized the issuance of one Right for each share
of Common Stock issued between the Record Date and the earlier of the
Distribution Date and the Expiration Date (as such terms are hereinafter
defined) or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the shares of Common Stock then outstanding, but shall not
include the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or of any Subsidiary of the Company, or any Person organized,
appointed or established by the Company for or pursuant to the terms of any such
plan. Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition of shares of Common Stock by the Company
which, by reducing the number of shares outstanding, increases the proportionate
number of shares beneficially owned by such Person to 15% or more of the shares
of Common Stock then outstanding; provided, however, that if a Person shall
become the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
shares of Common Stock, then such Person shall be deemed to be an "Acquiring
Person". Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an "Acquiring
Person" (as defined pursuant to the foregoing provisions of this paragraph (a))
has become such inadvertently, and such Person divests as promptly as
practicable a sufficient number of shares of Common Stock so that such Person
would no longer be an "Acquiring Person" (as defined pursuant to the foregoing
provisions of this paragraph (a)), then such Person shall not be deemed to be an
"Acquiring Person" for any purposes of this Agreement.
(b) "Act" shall mean the Securities Act of 1933, as amended.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended and in effect on the date of
this Agreement (the "Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether
such right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding (whether
or not in writing) or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," (A) securities tendered pursuant to a tender or
exchange offer made by such Person or any of such Person's Affiliates
or Associates until such tendered securities are accepted for purchase
or exchange, or (B) securities issuable upon exercise of Rights at any
time prior to the occurrence of a Triggering Event, or (C) securities
issuable upon exercise of Rights from and after the occurrence of a
Triggering Event which Rights were acquired by such Person or any such
Person's Affiliates or Associates prior to the Distribution Date or
pursuant to Section 3(a) or Section 22 hereof (the "Original Rights")
or pursuant to Section 11(i) hereof in connection with an adjustment
made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of
or has "beneficial ownership" of (as determined pursuant to Rule 13d-3
of the General Rules and Regulations under the Exchange Act), including
pursuant to any agreement, arrangement or understanding, whether or not
in writing; provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," any security under
this subparagraph (ii) as a result of an agreement, arrangement or
understanding to vote such security if such agreement, arrangement or
understanding: (A) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable provisions of the General Rules
and Regulations under the Exchange Act, and (B) is not also then
reportable by such Person on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which
such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing),
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in the proviso to subparagraph (ii) of
this paragraph (d)) or disposing of any voting securities of the
Company;
provided, however, that nothing in this paragraph (d) shall cause a Person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
(e) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
(f) "Close of Business" on any given date shall mean 5:00 P.M., Texas
time, on such date; provided, however, that if such date is not a Business Day,
it shall mean 5:00 P.M., Texas time, on the next succeeding Business Day.
(g) "Common Stock" shall mean the common stock, par value $3.50 per
share, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company shall mean the capital stock of such Person
with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person.
(h) "Person" shall mean any individual, firm, limited liability
company, corporation, partnership or other entity and shall include any
successor (by merger or otherwise) of such entity.
(i) "Section 11(a)(ii) Event" shall mean the event described in
Section 11(a)(ii) hereof.
(j) "Section 13 Event" shall mean any event described in clauses (x),
(y) or (z) of Section 13(a) hereof.
(k) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
(l) "Subsidiary" shall mean, with reference to any Person, any
corporation or other entity of which an amount of voting securities sufficient
to elect at least a majority of the directors of such corporation is
beneficially owned, directly or indirectly, by such Person, or otherwise
controlled by such Person.
(m) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
In addition, for purposes of this Agreement, the following terms have
the meanings indicated in specified sections of this Agreement: (i) "Adjustment
Shares" shall have the meaning set forth in Section 11(a)(ii) hereof; (ii)
"common share equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof; (iii) "current market price" shall have the meanings set
forth in Section 11(d) hereof; (iv) "Current Value" shall have the meaning set
forth in Section 11(a)(iii) hereof; (v) "Distribution Date" shall have the
meaning set forth in Section 3(a) hereof; (vi) "equivalent common shares" shall
have the meaning set forth in Section 11(b) hereof; (vii) "Nasdaq" shall have
the meaning set forth in Section 11(d) hereof; (viii) "Principal Party" shall
have the meaning set forth in Section 13(b) hereof; (ix) "Purchase Price" shall
have the meaning set forth in Sections 4(a), 11(a)(ii) and 13 hereof; (x)
"Redemption Price" shall have the meaning set forth in Section 23(a) hereof;
(xi) "Rights Certificates" shall have the meaning set forth in Section 3(a)
hereof; (xii) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in Section 11(a)(iii) hereof; (xiii) "Spread" shall have the meaning set forth
in Section 11(a)(iii) hereof; (xiv) "Substitution Period" shall have the meaning
set forth in Section 11(a)(iii) hereof; (xv) "Summary of Rights" shall have the
meaning set forth in Section 3(b) hereof; and (xvi) "Trading Day" shall have the
meaning set forth in Section 11(d) hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall, prior to the Distribution Date, also
be the holders of the Common Stock) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Rights Certificates. (a) Until the earlier of (i)
the Close of Business on the tenth day after the Stock Acquisition Date (or, if
the tenth day after the Stock Acquisition Date occurs before the Record Date,
the Close of Business on the Record Date), or (ii) the Close of Business on the
tenth Business Day (or such later date as may be determined by action of the
Board of Directors of the Company prior to such time as any Person becomes an
Acquiring Person) after the date that a tender or exchange offer by any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person
organized, appointed or established by the Company for or pursuant to the terms
of any such plan) is first published or sent or given within the meaning of Rule
14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon
consummation thereof, such Person would be the Beneficial Owner of 15% or more
of the shares of Common Stock then outstanding (the earlier of (i) and (ii)
being herein referred to as the "Distribution Date"), (x) the Rights will be
evidenced (subject to the provisions of paragraph (b) of this Section 3) by the
certificates for the Common Stock registered in the names of the holders of the
Common Stock (which certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates and (y) the Rights
will be transferable only in connection with the transfer of the underlying
Common Stock (including a transfer to the Company). As soon as practicable after
the Distribution Date, the Rights Agent will send by first-class, insured,
postage prepaid mail, to each record holder of the Common Stock as of the Close
of Business on the Distribution Date, at the address of such holder shown on the
records of the Company, one or more Rights certificates, in substantially the
form of Exhibit A hereto (the "Rights Certificates"), evidencing one Right for
each share of Common Stock so held, subject to adjustment as provided herein.
(b) As promptly as practicable following the Record Date, the Company
will send a copy of a Summary of Rights to Purchase Common Stock, in
substantially the form attached hereto as Exhibit B (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of the Common Stock
as of the Close of Business on the Record Date, at the address of such holder
shown on the records of the Company. With respect to certificates for the Common
Stock outstanding as of the Record Date, until the Distribution Date, the Rights
will be evidenced by such certificates registered in the names of the holders
thereof together with a copy of the Summary of Rights attached thereto. Until
the earlier of the Distribution Date or the Expiration Date (as such term is
defined in Section 7(a) hereof), the surrender for transfer of any certificate
representing shares of Common Stock in respect of which Rights have been issued,
with or without a copy of the Summary of Rights attached thereto, shall also
constitute the transfer of the Rights associated with such shares of Common
Stock.
(c) Rights shall be issued in respect of all shares of Common Stock
which are issued (whether originally issued or from the Company's treasury)
after the Record Date but prior to the earlier of the Distribution Date or the
Expiration Date or, in certain circumstances provided in Section 22 hereof,
after the Distribution Date. Certificates representing such shares of Common
Stock shall also be deemed to be certificates for Rights, and shall bear the
following legend:
This certificate also evidences and entitles the holder hereof
to certain rights as set forth in the Rights Agreement between Central
and South West Corporation (the "Company") and [ ] (the "Rights Agent")
dated as of ________, 1997 (the "Rights Agreement"), the terms of which
are hereby incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement, as in effect on the date of
mailing, without charge promptly after receipt of a written request
therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or
becomes an Acquiring Person or any Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether currently held
by or on behalf of such Person or by any subsequent holder, may become
null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the surrender
for transfer of any of such certificates shall also constitute the transfer of
the Rights associated with the Common Stock represented by such certificates. In
the event the Company purchases or acquires any shares of its Common Stock after
the Record Date but prior to the Distribution Date, any Rights associated with
such shares shall be deemed cancelled and retired so that the Company shall not
be entitled to exercise any rights associated with shares of Common Stock which
are no longer outstanding.
Section 4. Form of Rights Certificates. (a) The Rights Certificates
(and the forms of election to purchase and of assignment to be printed on the
reverse thereof) shall each be substantially in the form set forth in Exhibit A
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights
Certificates, whenever distributed, shall be dated as of the Record Date or, in
the case of Rights with respect to shares of Common Stock issued or becoming
outstanding after the Record Date, the same date as the stock certificate
evidencing such shares, and on their face shall entitle the holders thereof to
purchase such number of shares of Common Stock as shall be set forth therein at
the price per whole share of Common Stock set forth therein (the "Purchase
Price"), but the amount of Common Stock or other type of securities purchasable
upon the exercise of each Right and the Purchase Price thereof shall be subject
to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by any Person known to be:
(i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person,
(ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate)
who becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 7(e) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration. (a) The Rights
Certificates shall be executed on behalf of the Company by its Chairman and
Chief Executive Officer, President and Chief Operating Officer or any Senior or
Executive Vice President, either manually or by facsimile signature, and shall
have affixed thereto the Company's seal or a facsimile thereof which shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Rights Certificates shall be
countersigned manually or by facsimile signature by the Rights Agent and shall
not be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificates may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the certificate number and the date of
each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. (a)
Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof,
at any time after the Close of Business on the Distribution Date, and at or
prior to the Close of Business on the Expiration Date, any Rights Certificate or
Certificates (other than Rights Certificates representing Rights that have
become void pursuant to Section 11(a)(ii) or that have been exchanged pursuant
to Section 24 hereof) may be transferred, split up, combined or exchanged for
another Rights Certificate or Certificates, entitling the registered holder to
purchase a like number of shares of Common Stock (or, following a Triggering
Event, other securities, cash or other assets, as the case may be) as the Rights
Certificate or Certificates surrendered then entitled such holder (or former
holder in the case of a transfer) to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Rights Certificate or Certificates
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Rights Certificate or Certificates to be transferred, split up,
combined or exchanged at the principal office or offices of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Rights Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Rights Certificate and shall have provided such additional evidence
of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e), Section
14 and Section 24 hereof, countersign and deliver to the Person entitled thereto
a Rights Certificate or Rights Certificates, as the case may be, as so
requested. The Company may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificates if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of one-tenth of the Purchase Price with respect
to the total number of one-tenths of one share of Common Stock (or other
securities, cash or other assets, as the case may be) as to which such
surrendered Rights are then exercisable, at or prior to the earliest of (i) the
Close of Business on [_______], 2007 (the "Final Expiration Date"), (ii) the
time at which the Rights are redeemed as provided in Section 23 hereof or (iii)
the time at which such Rights are exchanged pursuant to Section 24 hereof (the
earliest of (i), (ii) and (iii) being herein referred to as the "Expiration
Date").
(b) The Purchase Price for each whole share of Common Stock pursuant to
the exercise of a Right shall initially be $50 (equivalent to $5 for each
one-tenth of one share of Common Stock), and shall be subject to adjustment from
time to time as provided in Sections 11 and 13(a) hereof and shall be payable in
accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly executed,
accompanied by payment of the Purchase Price for the shares of Common Stock (or
other securities, cash or other assets, as the case may be) to be purchased as
set forth below and an amount equal to any applicable transfer tax (as
determined by the Rights Agent) required to be paid by the holder of the Rights
Certificate in accordance with Section 9 hereof, the Rights Agent shall, subject
to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any
transfer agent of the shares of Common Stock (or make available, if the Rights
Agent is the transfer agent for such shares) certificates for the total number
of shares of Common Stock to be purchased and the Company hereby irrevocably
authorizes its transfer agent to comply with all such requests, or (B) if the
Company shall have elected to deposit the total number of shares of the Common
Stock issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of shares of Common Stock as are to be purchased (in which case
certificates for the shares of Common Stock represented by such receipts shall
be deposited by the transfer agent with the depositary agent) and the Company
will direct the depositary agent to comply with such request, (ii) requisition
from the Company the amount of cash, if any, to be paid in lieu of fractional
shares in accordance with Section 14 hereof, (iii) after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder, and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof) shall be made in
cash or by certified bank check or bank draft payable to the order of the
Company. In the event that the Company is obligated to issue other securities of
the Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate. The Company reserves the right to require
prior to the occurrence of a Triggering Event that, upon any exercise of Rights,
a number of Rights be exercised so that only whole shares of the Common Stock
would be issued.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a) (ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person (or
any Affiliate or Associate thereof) to holders of equity interests in such
Acquiring Person (or any Affiliate or Associate thereof) or to any Person with
whom the Acquiring Person (or any Affiliate or Associate thereof) has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise. The Company shall use all reasonable efforts to
insure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Rights Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person or any of its Affiliates, Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof, except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificates purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Rights Certificates to the Company, or shall, at the written request
of the Company, destroy such cancelled Rights Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock. (a) The
Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued shares of Common Stock (and,
following the occurrence of a Triggering Event, out of its authorized and
unissued other securities) or any authorized and issued shares of Common Stock
held in its treasury, the number of shares of Common Stock (and, following the
occurrence of a Triggering Event, other securities) that, as provided in this
Agreement, including Section 11(a)(iii) hereof, will be sufficient to permit the
exercise in full of all outstanding Rights.
(b) So long as the shares of Common Stock (and, following the
occurrence of a Triggering Event, other securities) issuable and deliverable
upon the exercise of the Rights may be listed on any national securities
exchange, the Company shall use its best efforts to cause, from and after such
time as the Rights become exercisable, all shares reserved for such issuance to
be listed on such exchange upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Act with respect to the securities
purchasable upon exercise of the Rights on an appropriate form, (ii) cause such
registration statement to become effective as soon as practicable after such
filing, and (iii) cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act) until the earlier
of (A) the date as of which the Rights are no longer exercisable for such
securities, and (B) the date of the expiration of the Rights. The Company will
also take such action as may be appropriate under, or to ensure compliance with,
the securities or "blue sky" laws of the various states in connection with the
exercisability of the Rights. The Company may temporarily suspend, for a period
of time not to exceed ninety (90) days after the date set forth in clause (i) of
the first sentence of this Section 9(c), the exercisability of the Rights in
order to prepare and file such registration statement and permit it to become
effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect. In addition, if the Company shall determine that a
registration statement is required following the Distribution Date, and a
Section 11(a)(ii) Event has not occurred, the Company may temporarily suspend
the exercisability of Rights until such time as a registration statement has
been declared effective. Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification or exemption in such jurisdiction shall not have been
obtained, the exercise thereof shall not be permitted under applicable law or a
registration statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all such actions
as may be necessary to ensure that all shares of Common Stock (and, following
the occurrence of a Triggering Event, other securities) delivered upon exercise
of Rights shall, at the time of delivery of the certificates for such shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay, when due
and payable, any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates and
of any shares of Common Stock (or other securities, as the case may be) upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of
shares of Common Stock (or other securities, as the case may be) in respect of a
name other than that of, the registered holder of the Rights Certificates
evidencing Rights surrendered for exercise or to issue or deliver any
certificates or depositary receipts for shares of Common Stock (or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Common Stock Record Date. Each person in whose name any
certificate for shares of Common Stock (or other securities, as the case may be)
is issued upon the exercise of Rights shall for all purposes be deemed to have
become the holder of record of such shares of Common Stock (or other securities,
as the case may be) represented thereby on, and such certificate shall be dated,
the date upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and applicable transfer taxes)
was made; provided, however, that if the date of such surrender and payment is a
date upon which the Common Stock (or other securities, as the case may be)
transfer books of the Company are closed, such Person shall be deemed to have
become the record holder of such shares on, and such certificate shall be dated,
the next succeeding Business Day on which the Common Stock (or other securities,
as the case may be) transfer books of the Company are open. Prior to the
exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a stockholder of the Company with respect
to shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Common Stock
payable in shares of Common Stock, (B) subdivide the outstanding Common
Stock, (C) combine the outstanding Common Stock into a smaller number
of shares, or (D) issue any shares of its capital stock in a
reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Common Stock or
capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the
Purchase Price then in effect, the aggregate number and kind of shares
of Common Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date and at a time
when the Common Stock transfer books of the Company were open, such
holder would have owned upon such exercise and been entitled to receive
by virtue of such dividend, subdivision, combination or
reclassification.
(ii) Subject to Section 24 hereof, in the event any Person
becomes an Acquiring Person, then each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the
right to receive, upon exercise thereof at a price equal to the then
current Purchase Price for a whole share of Common Stock in accordance
with the terms of this Agreement, such number of shares of Common Stock
as shall equal the result obtained by (x) multiplying the then current
Purchase Price for a whole share of Common Stock by the then number of
one-tenths of a share of Common Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii) Event
and (y) dividing that product (which, following such first occurrence
shall thereafter be referred to as the "Purchase Price" for each Right
and for all purposes of this Agreement) by 50% of the current market
price (determined pursuant to Section 11(d) hereof) per share of Common
Stock on the date of such first occurrence (such number of shares, the
"Adjustment Shares").
(iii) In the event that the number of shares of Common Stock
which are authorized by the Company's certificate of incorporation, but
not outstanding or reserved for issuance for purposes other than upon
exercise of the Rights, is not sufficient to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii)
of this Section 11(a), the Company shall: (A) determine the value of
the Adjustment Shares issuable upon the exercise of a Right (the
"Current Value"), and (B) with respect to each Right, make adequate
provision to substitute for the Adjustment Shares, upon payment of the
applicable Purchase Price, (1) cash, (2) a reduction in the Purchase
Price, (3) other equity securities of the Company which the Board of
Directors of the Company has deemed to have substantially the same
value or economic rights as shares of Common Stock ("common share
equivalents"), (4) debt securities of the Company, (5) other assets, or
(6) any combination of the foregoing, having an aggregate value equal
to the Current Value (less the amount of any reduction in the Purchase
Price), where such aggregate value has been determined by the Board of
Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors
of the Company; provided, however, if the Company shall not have made
adequate provision to deliver value pursuant to clause (B) above within
thirty (30) days following the later of (x) the first occurrence of a
Section 11(a)(ii) Event and (y) the date on which the Company's right
of redemption pursuant to Section 23(a) expires (the later of (x) and
(y) being referred to herein as the "Section 11(a)(ii) Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase
Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value equal
to the Spread. For purposes of the preceding sentence, the term
"Spread" shall mean the excess of (i) the Current Value over (ii) the
Purchase Price. If the Board of Directors of the Company shall
determine in good faith that it is likely that sufficient additional
shares of Common Stock could be authorized for issuance upon exercise
in full of the Rights, the thirty (30) day period set forth above may
be extended to the extent necessary, but not more than ninety (90) days
after the Section 11(a)(ii) Trigger Date, in order that the Company may
seek stockholder approval for the authorization of such additional
shares (such thirty (30) day period, as it may be extended, the
"Substitution Period"). To the extent that action is to be taken
pursuant to the first and/or third sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding
Rights, and (y) may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek such stockholder
approval for such authorization of additional shares and/or to decide
the appropriate form of distribution to be made pursuant to such first
sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended, as
well as a public announcement at such time as the suspension is no
longer in effect. For purposes of this Section 11(a)(iii), the value of
each Adjustment Share shall be the current market price (as determined
pursuant to Section 11(d) hereof) per share of Common Stock on the
Section 11(a)(ii) Trigger Date and the value of any "common share
equivalent" shall be deemed to equal the current market price per share
of Common Stock.
(b) In case the Company shall fix a record date for the issuance of
rights (other than the Rights), options or warrants to all holders of shares of
Common Stock entitling them to subscribe for or purchase (for a period expiring
within forty-five (45) calendar days after such record date) shares of Common
Stock (or shares having the same rights, privileges and preferences as the
shares of Common Stock ("equivalent common shares")) or securities convertible
into shares of Common Stock or equivalent common shares at a price per share of
Common Stock or per equivalent common share (or having a conversion price per
share, if a security convertible into shares of Common Stock or equivalent
common shares) less than the current market price (as determined pursuant to
Section 11(d) hereof) per share of Common Stock on such record date, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such record date, plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
and/or equivalent common shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price, and the denominator of which shall be the number
of shares of Common Stock outstanding on such record date, plus the number of
additional shares of Common Stock and/or equivalent common shares to be offered
for subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
by delivery of consideration part or all of which may be in a form other than
cash, the value of such consideration shall be as determined in good faith by
the Board of Directors of the Company, whose determination shall be described in
a statement filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights. Shares of Common Stock owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to
all holders of shares of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in shares of Common Stock, but including any
dividend payable in stock other than Common Stock) or subscription rights or
warrants (excluding those referred to in Section 11(b) hereof), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the current market price (as
determined pursuant to Section 11(d) hereof) per share of Common Stock on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights) of the portion of the cash, assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to a share of Common Stock and the denominator of which shall be such
current market price (as determined pursuant to Section 11(d) hereof) per share
of Common Stock. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price which would have
been in effect if such record date had not been fixed.
(d) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "current market
price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of Common Stock for the thirty (30)
consecutive Trading Days (as such term is hereinafter defined) immediately prior
to such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "current market price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices per share of
Common Stock for the ten (10) consecutive Trading Days immediately following
such date; provided, however, that in the event that the current market price
per share of Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities convertible into such shares of Common Stock (other than the Rights),
or (B) any subdivision, combination or reclassification of such Common Stock,
and the ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification shall not have occurred
prior to the commencement of the requisite thirty (30) Trading Day or ten (10)
Trading Day period, as set forth above, then, and in each such case, the
"current market price" shall be properly adjusted to take into account any
trading during the period prior to such ex-dividend date or record date. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the shares of Common
Stock are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading or, if the shares of
Common Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("Nasdaq") or such other system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common Stock selected by the Board of Directors of the Company.
If on any such date no market maker is making a market in the Common Stock, the
fair value of such shares on such date as determined in good faith by the Board
of Directors of the Company shall be used. The term "Trading Day" shall mean a
day on which the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the transaction of
business or, if the shares of Common Stock are not listed or admitted to trading
on any national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, "current market price" per share shall
mean the fair value per share as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest one ten-thousandth of a share of Common
Stock. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction which mandates such adjustment, or
(ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any capital stock of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right and the Purchase Price thereof shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Sections 11(a), (b),
(c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9,
10, 13 and 14 hereof with respect to the Common Stock shall apply on like terms
to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of shares of Common Stock
purchasable from time to time hereunder upon exercise of the Rights, all subject
to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of shares of Common Stock
(calculated to the nearest one-ten-thousandth) obtained by (i) multiplying (x)
the number of shares of Common Stock covered by a Right immediately prior to
this adjustment, by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price, and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of shares of Common Stock purchasable upon the exercise of a Right. Each
of the Rights outstanding after the adjustment in the number of Rights shall be
exercisable for the number of shares of Common Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one-ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Rights Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of shares of Common Stock issuable upon the exercise of the Rights,
the Rights Certificates theretofore and thereafter issued may continue to
express the Purchase Price and the number of shares of Common Stock which were
expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Rights, the Company shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the shares of Common Stock and other capital stock or securities of the Company,
if any, issuable upon such exercise over and above the shares of Common Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares or securities upon the occurrence of the event requiring such
adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that the Board of Directors of the Company, in its good faith
judgment, shall determine to be advisable in order that any (i) consolidation or
subdivision of the Common Stock, (ii) issuance wholly for cash of any shares of
Common Stock at less than the current market price, (iii) issuance wholly for
cash of shares of Common Stock or securities which by their terms are
convertible into or exchangeable for shares of Common Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Common Stock shall
not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger, sale or transfer there are any rights, warrants or
other instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger, sale or transfer, the stockholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution Date,
it will not, except as permitted by Section 23 or Section 27 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Common Stock, a copy of such certificate, and (c) mail a brief summary thereof
to each holder of a Rights Certificate (or, if prior to the Distribution Date,
to each holder of a certificate representing shares of Common Stock) in
accordance with Section 26 hereof. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment therein contained and
shall not be deemed to have knowledge of such adjustment unless and until it
shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. (a) In the event that, directly or indirectly, at any time after
a Person has become an Acquiring Person, (x) the Company shall consolidate with,
or merge with and into, any other Person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof), and the Company
shall not be the continuing or surviving corporation of such consolidation or
merger, (y) any Person (other than a Subsidiary of the Company in a transaction
which complies with Section 11(o) hereof) shall consolidate with, or merge with
or into, the Company, and the Company shall be the continuing or surviving
corporation of such consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding shares of Common Stock
shall be changed into or exchanged for stock or other securities of any other
Person or the Company or cash or any other property, or (z) the Company shall
sell or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or one or more of its wholly-owned Subsidiaries in one
or more transactions each of which complies with Section 11(o) hereof), then,
and in each such case, proper provision shall be made so that: (i) each holder
of a Right, except as provided in Section 7(e) hereof, shall thereafter have the
right to receive upon the exercise thereof at the then current Purchase Price
for a whole share of Common Stock in accordance with the terms of this
Agreement, and in lieu of shares of Common Stock of the Company, such number of
validly authorized and issued, fully paid, nonassessable and freely tradeable
shares of Common Stock of the Principal Party (as such term is hereinafter
defined), not subject to any liens, encumbrances, rights of first refusal or
other adverse claims, as shall be equal to the result obtained by (l)
multiplying the then current Purchase Price for a whole share of Common Stock by
the number of one-tenths of a share of Common Stock for which a Right is
exercisable immediately prior to the first occurrence of a Section 13 Event, and
dividing that product (which, following the first occurrence of a Section 13
Event, shall be referred to as the "Purchase Price" for each Right and for all
purposes of this Agreement) by (2) 50% of the current market price (determined
pursuant to Section 11(d) hereof) per share of Common Stock of such Principal
Party on the date of consummation of such Section 13 Event; (ii) such Principal
Party shall thereafter be liable for, and shall assume, by virtue of such
Section 13 Event, all the obligations and duties of the Company pursuant to this
Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of Section
11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number of
its shares of Common Stock) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
shares of Common Stock thereafter deliverable upon the exercise of the Rights;
and (v) the provisions of Section 11(a)(ii) hereof shall be of no effect
following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of Section 13(a), the Person that is the
issuer of any securities into which shares of Common Stock of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of
the first sentence of Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stock of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
its authorized shares of Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that, as soon as practicable after the date of any
consolidation, merger, sale or transfer of assets mentioned in paragraph (a) of
this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon exercise
of the Rights on an appropriate form, and will use its best efforts to
cause such registration statement to (A) become effective as soon as
practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Act) until the
Expiration Date; and
(ii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its Affiliates
which comply in all respects with the requirements for registration on
Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event
shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the
Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue fractions of Rights or to distribute Rights
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Rights Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For purposes of this Section 14(a), the current market value of a whole
Right shall be the closing price of the Rights for the Trading Day immediately
prior to the date on which such fractional Rights would have been otherwise
issuable. The closing price of the Rights for any day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported to the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading, or if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by Nasdaq or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of shares of
Common Stock upon exercise of the Rights or to distribute certificates which
evidence fractional shares of Common Stock. In lieu of fractional shares of
Common Stock, the Company shall pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one share of
Common Stock. For purposes of this Section 14(b), the current market value of
one share of Common Stock shall be the closing price of one share of Common
Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Rights expressly
waives such holder's right to receive any fractional Rights or any fractional
shares upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant to
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Stock), without
the consent of the Rights Agent or of the holder of any other Rights Certificate
(or, prior to the Distribution Date, of the Common Stock), may, in such holder's
own behalf and for such holder's own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise act in respect of, his or her right to exercise the Rights evidenced
by such Rights Certificate in the manner provided in such Rights Certificate and
in this Agreement. Without limiting the foregoing or any remedies available to
the holders of Rights, it is specifically acknowledged that the holders of
Rights would not have an adequate remedy at law for any breach of this Agreement
and shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and
the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificates made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use
reasonable efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose to be the holder of the shares of Common
Stock or any other securities of the Company which may at any time be issuable
upon the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 25 hereof), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent. (a) The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and disbursements and other disbursements incurred in
the administration and execution of this Agreement and the exercise and
performance of its duties hereunder.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons, or
otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the corporate
trust or stock transfer business of the Rights Agent or any successor Rights
Agent, shall be the successor to the Rights Agent under this Agreement without
the execution or filing of any paper or any further act on the part of any of
the parties hereto. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement, any of the Rights Certificates
shall have been countersigned but not delivered, any such successor Rights Agent
may adopt the countersignature of a predecessor Rights Agent and deliver such
Rights Certificates so countersigned; and in case at the time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed,
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case, at
that time, any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current market price") be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by the
Chairman and Chief Executive Officer, President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of
the Company and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recital contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including
Rights becoming void pursuant to Section 7(e) hereof) or any adjustment required
under the provisions of Section 11, Section 13 or Section 24 hereof or
responsible for the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by Rights Certificates
after actual notice of any such adjustment); nor shall it by any act hereunder
be deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock to be issued pursuant to this
Agreement or any Rights Certificate or as to whether any shares of Common Stock
will, when so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chief Executive Officer, President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, that reasonable care was exercised in
the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock, by registered or certified
mail, and to the holders of the Rights Certificates by first-class mail. If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Rights Certificate (who shall, with such notice, submit his
or her Rights Certificate for inspection by the Company), then any registered
holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business in good standing under the laws of the
United States or any state of the United States and which is authorized under
such laws to exercise corporate trust or share transfer powers. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further reasonable assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock,
and mail a notice thereof in writing to the registered holders of the Rights
Certificates. Failure to give any notice provided for in this Section 21 or any
defect therein shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company shall,
with respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, granted or
awarded prior to the Distribution Date, or upon the exercise, conversion or
exchange of securities hereinafter issued by the Company, issue Rights
Certificates representing an appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Rights Certificate
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Rights Certificate
would be issued, and (ii) no such Rights Certificate shall be issued if, and to
the extent that, appropriate adjustment shall otherwise have been made in lieu
of the issuance thereof.
Section 23. Redemption and Termination. (a) The Board of Directors of
the Company may, at its option, at any time prior to the earlier of (i) the
Close of Business on the tenth day following the Stock Acquisition Date (or, if
the Stock Acquisition Date shall have occurred prior to the Record Date, the
Close of Business on the tenth day following the Record Date), or (ii) the Final
Expiration Date, redeem all but not less than all of the then outstanding Rights
at a redemption price of $.01 per Right, as such amount may be appropriately
adjusted to reflect any share split, share dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price"). Notwithstanding anything contained in
this Agreement to the contrary, the Rights shall not be exercisable after the
first occurrence of a Section 11(a)(ii) Event until such time as the Company's
right of redemption hereunder has expired. The Company may, at its option, pay
the Redemption Price in cash, shares of Common Stock (based on the "current
market price", as defined in Section 11(d) hereof, of the Common Stock at the
time of redemption) or any other form of consideration deemed appropriate by the
Board of Directors. The redemption of the Rights by the Board of Directors may
be made effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have been
filed with the Rights Agent and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to all such holders at each holder's last address as it appears upon
the registry books of the Rights Agent or, prior to the Distribution Date, on
the registry books of the transfer agent for the Common Stock. Any notice which
is mailed in the manner herein provided shall be deemed given, whether or not
the holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made.
Section 24. Exchange. (a) The Board of Directors of the Company may, at
its option, at any time after any Person becomes an Acquiring Person, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become void pursuant to the provisions of Section 7(e)
hereof) for shares of Common Stock at an exchange ratio of one share of Common
Stock per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or of any Subsidiary of
the Company, or any Person organized, appointed or established by the Company
for or pursuant to the terms of any such plan), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of fifty percent (50%)
or more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Stock for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange will be effected pro rata based on the number of
Rights (other than Rights which have become void pursuant to the provisions of
Section 7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute common share equivalents (as such term is defined in
Section 11(a)(iii) hereof) for some or all of the shares of Common Stock
exchangeable for Rights.
(d) In the event that there shall not be sufficient shares of Common
Stock issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such actions as may be necessary to authorize additional
shares of Common Stock for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares of Common Stock, there shall be
paid to the registered holders of the Rights Certificates with regard to which
such fractional shares of Common Stock would otherwise be issuable, an amount in
cash equal to the same fraction of the current market value of a whole share of
Common Stock. For the purposes of this subsection (e), the current market value
of a whole share of Common Stock shall be the closing price of a share of Common
Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day
immediately prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company shall
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Common Stock or to make any
other distribution to the holders of Common Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company), or
(ii) to offer to the holders of Common Stock rights or warrants to subscribe for
or to purchase any additional shares of Common Stock or stock of any class or
any other securities, rights or options, or (iii) to effect any reclassification
of its Common Stock (other than a reclassification involving only the
subdivision of outstanding Common Stock), or (iv) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in
a transaction which complies with Section 11(o) hereof), or to effect any sale
or other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one transaction or a series of related transactions,
of more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Common
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the Common Stock for
purposes of such action, and in the case of any such other action, at least
twenty (20) days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of the shares of Common Stock,
whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then, in any such case, the Company shall as soon as practicable
thereafter give to each holder of a Rights Certificate, to the extent feasible
and in accordance with Section 26 hereof, a notice of the occurrence of such
event, which shall specify the event and the consequences of the event to
holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
Attention: Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
[ ]
[ ]
[ ]
Attention: [ ]
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. The Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Rights Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights. Prior to the
Distribution Date, the interest of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Stock. Without limiting
the foregoing, the Company may at any time prior to such time as any Person
becomes an Acquiring Person amend this Agreement to lower the thresholds set
forth in Sections 1(a) and 3(a) to a percentage that (subject to exceptions for
specified Persons or groups excepted from the definition of "Acquiring Person")
is not less than the greater of (i) the sum of .001% and the largest percentage
of the outstanding shares of Common Stock then known by the Company to be
beneficially owned by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, any Person organized, appointed or established by the Company for or
pursuant to the terms of any such plan or, to the extent excepted from the
definition of "Acquiring Person", other specified persons or groups) and (ii)
10.0%.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determination and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(l)(i) of the General Rules and Regulations
under the Exchange Act. The Board of Directors of the Company shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board of Directors of the Company
or to the Company, or as may be necessary or advisable in the administration of
this Agreement, including, without limitation, the right and power to (i)
interpret the provisions of this Agreement, and (ii) make all determinations
deemed necessary or advisable for the administration of this Agreement
(including, but not limited to, a determination to redeem or not redeem the
Rights or to amend this Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
of Directors of the Company in good faith, shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties, and (y) not subject the Board of Directors of the Company to any
liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Board of Directors of
the Company.
Section 32. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: CENTRAL AND SOUTH WEST CORPORATION
By: By:
Name: Name:
Title: Title:
Attest: [ ]
By: By:
Name: Name:
Title: Title:
<PAGE>
Exhibit A
[Form of Rights Certificate]
Certificate No. R- __________ Rights
NOT EXERCISABLE AFTER ____________, 2007 OR EARLIER IF REDEEMED OR EXCHANGED BY
THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY,
AT $.01 PER RIGHT, AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH
AGREEMENT.]
<PAGE>
Rights Certificate
CENTRAL AND SOUTH WEST CORPORATION
This certifies that , or registered assigns, is the registered owner of
the number of Rights set forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the Rights Agreement, dated
as of ___________, 1997 (the "Rights Agreement"), between Central and South West
Corporation, a Delaware corporation (the "Company"), and [ ], a [ ] corporation
(the "Rights Agent"), to purchase from the Company at any time prior to 5:00
P.M. (Texas time) on ___________, 2007 at the office or offices of the Rights
Agent designated for such purpose, or its successors as Rights Agent, one-tenth
of one fully paid, nonassessable share of Common Stock, $3.50 par value per
share (the "Common Stock"), of the Company, at a purchase price (the "Purchase
Price") of $50 per whole share of Common Stock (equivalent to $5 for each
one-tenth of one share of Common Stock), upon presentation and surrender of this
Rights Certificate with the Form of Election to Purchase and related Certificate
duly executed. The number of Rights evidenced by this Rights Certificate (and
the number of shares which may be purchased upon exercise thereof) set forth
above, and the Purchase Price per share set forth above, are the number and
Purchase Price as of __________, 1997, based on the Common Stock as constituted
at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person or an Affiliate or Associate of such Person, such Rights shall
become null and void and no holder hereof shall have any right with respect to
such Rights from and after the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Common Stock or other securities which may be purchased
upon the exercise of the Rights evidenced by this Rights Certificate are subject
to modification and adjustment upon the happening of certain events, including
Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the office of the Rights Agent and
are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of shares of Common Stock as the Rights
evidenced by the Rights Certificates surrendered shall have entitled such holder
to purchase. If this Rights Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Rights Certificate or
Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may, in each case at the option of the Company, be (i)
redeemed by the Company at its option at a redemption price of $.01 per Right or
(ii) exchanged in whole or in part for shares of Common Stock or other
securities of the Company. Immediately upon the action of the Board of Directors
of the Company authorizing redemption, the Rights will terminate and the only
right of the holders of Rights will be to receive the redemption price.
No fractional shares of Common Stock will be issued upon the exercise
of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will
be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Common
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned manually or by facsimile
signature by the Rights Agent.
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of __________, 19__
ATTEST: CENTRAL AND SOUTH WEST CORPORATION
____________________________ By:_______________________________
Secretary Name:
Title:
Countersigned:
[ ]
By:__________________________
Authorized Signature
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED _______________________________________________________
hereby sells, assigns and transfers unto _________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
Dated: ___________________, ____
______________________________________
Signature
Signature Guaranteed:
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of an Acquiring Person
(as such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by
this Rights Certificate from any Person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate of an Acquiring
Person.
Dated: _____________, ____ __________________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise Rights represented by the
Rights Certificate.)
TO: CENTRAL AND SOUTH WEST CORPORATION
The undersigned hereby irrevocably elects to exercise ______ Rights
represented by this Rights Certificate to purchase the shares of Common Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares (or other securities) be
issued in the name of and delivered to:
Please insert social security
or other identifying number
___________________________________________________________________________
(Please print name and address)
___________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
_____________________________________________________________________________
(Please print name and address)
_____________________________________________________________________________
Dated: _____________, ____
_________________________________________
Signature
Signature Guaranteed:
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [
] are not being exercised by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.
Dated: ______________, ____ _______________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
Exhibit B
SUMMARY OF RIGHTS TO PURCHASE COMMON STOCK
On ___________, 1997, the Board of Directors of Central and South West
Corporation (the "Company") declared a dividend distribution of one Right for
each outstanding share of the Company's common stock, $3.50 par value per share
("Common Stock"), to stockholders of record at the close of business on
__________, 1997. Each Right entitles the registered holder to purchase from the
Company one-tenth of one share of Common Stock at a purchase price (the
"Purchase Price") of $50 per whole share of Common Stock (equivalent to $5 for
each one-tenth of one share of Common Stock), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") dated as of __________, 1997 between the Company and [ ], as
Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights certificates will
be distributed. The Rights will separate from the Common Stock and the
Distribution Date will occur upon the earlier of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Common Stock (the "Stock
Acquisition Date"), or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group becomes an Acquiring Person) following the commencement of a tender
offer or exchange offer, which, if consummated, would result in a person or
group becoming an Acquiring Person.
Until the Distribution Date, (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such Common
Stock certificates, (ii) new Common Stock certificates issued after __________,
1997 will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on __________, 2007, unless earlier redeemed by the
Company as described below.
As soon as practicable after the Distribution Date, Rights certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise provided in
the Rights Agreement, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that, at any time following the Distribution Date, a person
or group becomes an Acquiring Person, each holder of a Right will thereafter
have the right to receive, upon exercise, Common Stock at a 50% discount from
the then current market price. If an insufficient number of shares of Common
Stock is authorized for issuance, then the Board would be required to substitute
cash, property or other securities of the Company for the Common Stock.
Notwithstanding any of the foregoing, following the occurrence of the event set
forth in this paragraph, all rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by any Acquiring
Person will be null and void. However, Rights are not exercisable following the
occurrence of the event set forth in this paragraph until such time as the
Rights are no longer redeemable by the Company as set forth below.
For example, at an exercise price of $50 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $50 worth
of Common Stock (or other consideration, as noted above) at a purchase price per
share equal to 50% of the then current market price of a share of Common Stock.
Assuming that the Common Stock had a per share value of $25 at such time, the
holder of each valid Right would be entitled to purchase four shares of Common
Stock for $50.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation, or (ii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a Right
(except Rights which previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company at a 50% discount from the then current market price of such
common stock. The events set forth in this paragraph and in the second preceding
paragraph are referred to as the "Triggering Events."
The purchase price payable, and the number of shares of Common Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of stock
dividend on, or a subdivision, combination or reclassification of, the shares of
Common Stock, (ii) if holders of the Common Stock are granted certain rights or
warrants to subscribe for Common Stock or convertible securities at less than
the current market price of the Common Stock, or (iii) upon the distribution to
holders of the Common Stock of evidences of indebtedness or assets (excluding
regular quarterly cash dividends) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Common Stock will be issued. In lieu thereof,
there shall be paid to registered holders of Rights Certificates an amount in
cash based on the market price of the shares of Common Stock on the last trading
day prior to the date of exercise.
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding shares of Common Stock, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by such person or group which will
have become void), in whole or in part, at an exchange ratio of one share of
Common Stock (or other equity securities of the Company having equivalent
rights, preferences and privileges), per Right (subject to adjustment).
In general, the Company may redeem the Rights in whole, but not in part,
at a price of $.01 per Right (payable in cash, Common Stock or other
consideration deemed appropriate by the Board of Directors) at any time until
ten days following the Stock Acquisition Date. Immediately upon the action of
the Board of Directors authorizing any redemption, the Rights will terminate and
the only right of the holders of Rights will be to receive the redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
result in the recognition of taxable income by stockholders or the Company,
stockholders may, depending upon the circumstances, recognize taxable income
after a Triggering Event.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to lower certain thresholds described above to not less than the greater of (i)
the sum of .001% and the largest percentage of the outstanding shares of Common
Stock then known to the Company to be beneficially owned by any person or group
of affiliated or associated persons and (ii) 10%, except that from and after
such time as any person or group of affiliated or associated persons becomes an
Acquiring Person no such amendment may adversely affect the interests of the
holders of the Rights.
A copy of the Rights Agreement is available free of charge from the Rights
Agent. This description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
EXHIBIT 12.1
CENTRAL POWER AND LIGHT COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $ 251,943
Adjustments:
Income taxes 59,982
Provision for deferred income taxes 23,458
Deferred investment tax credits (4,728)
Other income and deductions 3,359
Allowance for borrowed and equity funds
used during construction 3,728
--------
Earnings $ 337,742
========
Fixed Charges:
Interest on long-term debt $ 108,286
Interest on short-term debt and other 20,536
--------
Fixed Charges $ 128,822
========
Ratio of Earnings to Fixed Charges 2.62
========
EXHIBIT 12.2
PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $ 86,262
Adjustments:
Income taxes 29,303
Provision for deferred income taxes (1,455)
Deferred investment tax credits (2,134)
Other income and deductions 514
Allowance for borrowed and equity funds
used during construction 2,355
--------
Earnings $ 114,845
========
Fixed Charges:
Interest on long-term debt $ 30,474
Amortization of debt issuance cost 1,734
Other interest 5,253
--------
Fixed Charges $ 37,461
========
Ratio of Earnings to Fixed Charges 3.07
========
EXHIBIT 12.3
SOUTHWESTERN ELECTRIC POWER COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $ 143,776
Adjustments:
Income taxes 37,683
Provision for deferred income taxes 7,171
Deferred investment tax credits (4,679)
Other income and deductions 1,574
Allowance for borrowed and equity funds
used during construction 1,940
Interest portion of financing leases 1,252
--------
Earnings $ 188,717
========
Fixed Charges:
Interest on long-term debt $ 41,160
Amortization of debt issuance cost 3,502
Other interest 6,050
Interest portion of financing leases 1,252
--------
Fixed Charges $ 51,964
========
Ratio of Earnings to Fixed Charges 3.63
========
EXHIBIT 12.4
WEST TEXAS UTILITIES COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(Thousands Except Ratio)
(Unaudited)
Operating Income $ 46,565
Adjustments:
Income taxes 4,558
Provision for deferred income taxes 9,725
Deferred investment tax credits (1,321)
Other income and deductions 492
Allowance for borrowed and equity funds
used during construction 1,082
-------
Earnings $ 61,101
=======
Fixed Charges:
Interest on long-term debt $20,027
Interest on short-term debt and other 5,048
-------
Fixed Charges $ 25,075
=======
Ratio of Earnings to Fixed Charges 2.44
=======
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000018540
<NAME> CENTRAL AND SOUTH WEST CORPORTION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,343
<OTHER-PROPERTY-AND-INVEST> 191
<TOTAL-CURRENT-ASSETS> 2,002
<TOTAL-DEFERRED-CHARGES> 505
<OTHER-ASSETS> 2,762
<TOTAL-ASSETS> 13,803
<COMMON> 743
<CAPITAL-SURPLUS-PAID-IN> 1,039
<RETAINED-EARNINGS> 1,848
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,630
26
499
<LONG-TERM-DEBT-NET> 3,887
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 40
<COMMERCIAL-PAPER-OBLIGATIONS> 1,288
<LONG-TERM-DEBT-CURRENT-PORT> 200
1
<CAPITAL-LEASE-OBLIGATIONS> 6
<LEASES-CURRENT> 3
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,223
<TOT-CAPITALIZATION-AND-LIAB> 13,803
<GROSS-OPERATING-REVENUE> 3,939
<INCOME-TAX-EXPENSE> 135
<OTHER-OPERATING-EXPENSES> 3,205
<TOTAL-OPERATING-EXPENSES> 3,340
<OPERATING-INCOME-LOSS> 599
<OTHER-INCOME-NET> 27
<INCOME-BEFORE-INTEREST-EXPEN> 626
<TOTAL-INTEREST-EXPENSE> 321
<NET-INCOME> 129
10
<EARNINGS-AVAILABLE-FOR-COMM> 129
<COMMON-STOCK-DIVIDENDS> 277
<TOTAL-INTEREST-ON-BONDS> 168
<CASH-FLOW-OPERATIONS> 409
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
