<PAGE>
File No. 70-______
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1 APPLICATION-DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________
CENTRAL POWER AND LIGHT COMPANY
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
PUBLIC SERVICE COMPANY OF OKLAHOMA
212 East Sixth Street
Tulsa, Oklahoma 74119-1212
WEST TEXAS UTILITIES COMPANY
301 Cypress
Abilene, Texas 79601
(Names of companies filing this statement and addresses
of principal executive offices)
_________________________
CENTRAL AND SOUTH WEST CORPORATION
(Name of top registered holding company parent)
_________________________
Shirley S. Briones, Treasurer
Central Power and Light Company
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
Shirley S. Briones, Treasurer
Public Service Company Of Oklahoma
212 East Sixth Street
Tulsa, Oklahoma 74119-1212
Shirley S. Briones, Treasurer
West Texas Utilities Company
301 Cypress
Abilene, Texas 79601
Stephen J. McDonnell, Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
Joris M. Hogan, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
(Names and addresses of agents for service)
Central Power & Light Company ("CPL"), a Texas corporation,
Public Service Company of Oklahoma (PSO), an Oklahoma
corporation, and West Texas Utilities Company (WTU and,
together with CPL and PSO, the Companies), a Texas corporation,
are wholly-owned electric public utility subsidiaries of Central
and South West Corporation ("CSW"), a Delaware corporation and a
registered holding company under the Public Utility Holding
Company Act of 1935, as amended (the "Act").
Item 1. Description of Proposed Transaction.
The Companies are seeking authority through December 31,
1999, to incur obligations in connection with the proposed
issuance by Red River Authority of Texas ("Red River" or the
"Issuer") in one or more series of up to $113,300,000 aggregate
principal amount of Pollution Control Revenue Bonds of which (i)
up to $63,300,000 aggregate principal amount may be Pollution
Control Revenue Refunding Bonds (Oklaunion Project) (the
"Refunding Bonds"), and (ii) up to $50,000,000 aggregate
principal amount may be new money Revenue Bonds (Oklaunion
Project) (the "New Money Bonds" and, together with the Refunding
Bonds, the "New Bonds"). The issuance of New Money Bonds may be
combined with the issuance of Refunding Bonds.
The purpose of the issuance of the Refunding Bonds is to
reacquire all or a portion of Red Rivers $63,300,000 of
outstanding 7-7/8% Pollution Control Revenue Bonds (Oklaunion
Project) Series 1984 (the "Old Bonds"). The purpose of the
issuance of the New Bonds is to reimburse the Companies
treasuries for any expenditures made that qualify for tax-exempt
financing or to provide for current solid waste expenditures.
See "Use of Proceeds" below.
As discussed below under the heading "Managing Interest
Rates", the Companies also seek authorization to manage interest
rate risk or lower its interest rate costs through the use of
hedging products, including interest rate swaps, forward swaps,
caps and collars through the life of the Old Bonds and/or New
Bonds.
The Old Bonds
In September 1984, Red River issued the Series 1984 Bonds
pursuant to the Indenture of Trust dated as of September 15,
1984, between Red River and The Bank of New York, New York, New
York (successor to RepublicBank Dallas, National Association), as
Trustee. Prior to September 15, 1986, interest on the Series
1984 Bonds was adjustable annually. As of that date, the
interest rate on the Old Bonds was converted to a fixed rate.
The Indenture of Trust for the Old Bonds is referred to herein as
the "Indenture". The Bank of New York, New York, New York is
referred to herein as the "Trustee".
Certain terms of the Indenture include the following:
Interest
Series Rate Maturity Date First
Redemption Date (1)
(per annum)
1984 7-7/8% September 15, 2014 September 15, 1996
____________________________
(1) The Indenture provides that the bonds may not be redeemed
prior to their First Redemption Date and thereafter may be
redeemed at the then applicable redemption price plus accrued
interest to the redemption date. The Old Bonds will be redeemable
on September 15, 1996 at 103% of par.
The Companies and the Issuer entered into an Installment
Sale Agreement, (the "Sale Agreement") between the Issuer and the
Companies to provide for the issuance of the Old Bonds. In
connection with the issuance of the New Bonds, the Companies will
(i) amend or supplement the Sale Agreement, (ii) enter into an
agreement with substantially the same terms as the Sale Agreement
and/or (iii) enter into a new installment sale agreement (an
"Amended Sale Agreement")
The proceeds of the Series 1984 Bonds were used to acquire,
construct and improve certain air and water pollution control and
solid waste disposal facilities (the "Facilities") at the
Oklaunion Electric Generating Plant (the "Plant"), located near
Vernon, Texas, in which CPL, PSO, and WTU own 7.8%, 15.6% and
54.7% undivided interests, respectively. Only that portion of
the air and water pollution control and solid waste disposal
facilities at the Plant which is owned by the Companies has been
financed with the proceeds of the Old Bonds.
Terms of the New Bonds
The New Bonds will bear interest at a fixed or floating
rate, may or may not be secured with First Mortgage Bonds and
will mature in not more than forty years. The interest rate,
redemption provisions and other terms and conditions applicable
to the New Bonds will be determined by negotiations between the
Companies and one or more investment banking firms or other
entities that will purchase or underwrite the New Bonds (the
"Purchasers"). It is anticipated that (i) the New Bonds will be
redeemable at any time in whole at the option of the Companies at
the principal amount thereof plus accrued interest, upon the
occurrence of various extraordinary events specified in the
Amended Sale Agreement, or similar documents utilized in
connection with the issuance of the New Bonds, and the Indenture
as amended by one or more supplements (each a "Supplemental
Indenture"), or a new indenture (the "New Indenture"), relating
generally to (a) destruction or condemnation of the Facilities or
the Plant, (b) conditions rendering operation of the Facilities
or the Plant infeasible, (c) the imposition on the Companies or
the Issuer of unreasonable burdens or excessive liabilities with
respect to the Facilities or the Plant, or (d) if a
constitutional amendment or legislative, administrative or
judicial action causes the obligations of the Companies under the
Amended Sale Agreement to become unenforceable or impossible of
performance in any material respect with the expressed intention
of the parties; (ii) the New Bonds will be subject to optional
redemption in whole or in part at times and with premiums to be
determined by negotiations between the Companies and the
Purchaser(s); and (iii) the New Bonds will be subject to special
mandatory redemption, in whole or in part, at the principal
amount thereof plus accrued interest, in the event the interest
on the New Bonds becomes subject to federal income tax.
Pursuant to the Sale Agreement, the Companies transferred
the Facilities to Red River, which financed the acquisitions and
related costs thereof with the proceeds of the Old Bonds. The
Sale Agreement contains commitments by the Companies to pay to
the Issuer at specified times amounts sufficient to enable the
Issuer to pay debt service on the Old Bonds, including principal,
interest and redemption premium, if any.
The Companies may obtain credit enhancement for the New
Bonds, which could include bond insurance, a letter of credit or
a liquidity facility. Due to heightened credit sensitivity in
the short-term tax-exempt market, the Companies anticipate they
may be required to provide credit enhancement if they were to
issue floating rate bonds, whereas credit enhancement would be a
purely economic decision for the Companies if they were to issue
fixed rate bonds. The Companies anticipate that even though they
would be required to pay a premium or fee to obtain the credit
enhancement, they would realize a net benefit through a reduced
interest rate on the New Bonds. The Companies would obtain
credit enhancement only if they determine it would be
economically beneficial to do so. The New Bonds may also contain
other terms and conditions not inconsistent herewith that are
deemed necessary or desirable to take maximum advantage of the
then current market conditions.
The Companies also request authority to issue First
Mortgage Bonds as security for the payment of the New Bonds, at
its option, depending upon market conditions at the time of
issuance of the New Bonds. CPL will issue First Mortgage Bonds,
subject to applicable indenture restrictions upon the issuance
thereof, by executing a Supplemental Indenture to its Mortgage
Indenture dated November 1, 1943 to The First National Bank of
Chicago and R. D. Manella as trustees (the "CPL Mortgage
Indenture"). PSO will issue First Mortgage Bonds, subject to
applicable indenture restrictions upon the issuance thereof, by
executing a Supplemental Indenture to its Mortgage Indenture
dated July 1, 1945 to Liberty Bank and Trust Company of Tulsa,
National Association as trustee (the "PSO Mortgage Indenture").
WTU will issue First Mortgage Bonds, subject to applicable
indenture restrictions upon the issuance thereof, by executing a
Supplemental Indenture to its Mortgage Indenture dated August 1,
1943 to Harris Trust and Savings Bank and J. Bartolini as
trustees (the "WTU Mortgage Indenture" and, together with the CPL
Mortgage Indenture and the PSO Mortgage Indenture, the
"Companies' Mortgage Indentures"). Such First Mortgage Bonds
will be issued to the Trustee for the New Bonds pursuant to the
Companies Mortgage Indentures. The First Mortgage Bonds will be
held by the Trustee solely for the benefit of the holders of the
New Bonds and will not be transferable except to a successor
Trustee. The First Mortgage Bonds will be issued in the exact
amounts and have substantially the same terms as the New Bonds.
The Supplemental Indenture or New Indenture for the New Bonds may
provide that the New Bonds will cease to be secured by the First
Mortgage Bonds when all other First Mortgage Bonds have been
retired. To the extent payments in respect of the New Bonds are
made in accordance with their terms, corresponding payment
obligations under the First Mortgage Bonds will be deemed
satisfied.
As applied to any First Mortgage Bonds that may be issued
as collateral for the New Bonds, the optional redemption
provisions described herein may deviate from the Securities and
Exchange Commission's (the "Commission") Statement of Policy
Regarding First Mortgage Bonds Subject to the Public Utility
Holding Company Act of 1935, Release No. 35-13105, 21 Fed. Reg.
1286 (1956), as supplemented by Commission Release No. 35-16369,
34 Fed. Reg. 9553 (1969) (together, the "Statement of Policy"),
in that the First Mortgage Bonds may be subject to a redemption
limitation of up to fifteen years while the Statement of Policy
requires that first mortgage bonds be subject to redemption at
any time upon reasonable notice and with reasonable redemption
premiums, if any. The Companies have been advised by several
investment banks that purchasers of fixed-rate, tax-exempt bonds
generally expect a ten year redemption limitation and that
failure to include such a limitation may cause the New Bonds to
be unmarketable to a large pool of such purchasers, and may
result in an increase in the effective interest cost to the
Companies. In consideration of current and future market
expectations with regard to redemption limitations, the Companies
hereby request that the Commission approve the above-described
deviation from the Statement of Policy so that the First Mortgage
Bonds, and therefore the New Bonds, may contain up to a 15 year
optional redemption limitation.
As applied to the First Mortgage Bonds, any sinking fund
provisions may also deviate from the Statement of Policy, in that
the First Mortgage Bonds will not have sinking fund provisions
unless the New Bonds have sinking fund provisions. The Statement
of Policy requires the Companies to deposit annually with the
trustee for the First Mortgage Bonds an amount of cash equal to
not less than one percent of the aggregate principal amount of
Bonds of all series authenticated under the First Mortgage Bond
indenture. The Companies have been advised by several investment
bankers that purchasers of private activity bonds generally do
not expect sinking fund provisions. In light of market
expectations, the Companies hereby request that the Commission
approve the above-described deviation from the Statement of
Policy so that the First Mortgage Bonds, and therefore the New
Bonds, may omit sinking fund provisions. The Companies also
request a waiver from the requirement in the Statement of Policy
for a limitation on dividends. The Companies believe that
dividend limitations, if any, are a matter best left to the
financial marketplace and the state regulatory commissions. The
limitation on dividends provision in the Statement of Policy was
adopted when accounting standards and ratemaking practices were
very different from today. For example, ratemaking disallowances
on grounds of alleged lack of prudence or alleged excess capacity
have become more prevalent today. Under today's accounting
requirements, disallowances might result in charges to the income
statement and current retained earnings, which could preclude the
payment of dividends on common stock.
CPL's bonds of Series J, L, T and AA and PSO's bonds of
Series J, K and L contain dividend restrictions in the respective
supplemental indentures which will continue to limit the
Companies dividend payments until all such bonds mature or are
retired. In light of these dividend restrictions and provisions
in the Companies Restated Certificate of Incorporation
restricting the payment of dividends to a percentage of net
income available for dividends on common stock if the Companies
common stock equity is not maintained at a certain percentage of
total capitalization, the Companies believe that the omission of
the limitation on dividends as contemplated by the Statement of
Policy will not materially and adversely affect the holders of
the New Bonds. The terms and provisions of the First Mortgage
Bonds will not otherwise materially deviate from the Statement of
Policy.
Messrs. McCall, Parkhurst & Horton, who are anticipated to
act as Bond Counsel, have informed the Companies that they will
be prepared to give a legal opinion that interest on the New
Bonds will be excluded from gross income for federal income tax
purposes.
The Companies anticipate that the New Bonds will be sold
by the Issuer pursuant to a Bond Purchase Agreement (the
"Purchase Agreement") between the Issuer and one or more
Purchasers. The Companies may or may not be a party to the
Purchase Agreement, but if they are not a party, the Purchase
Agreement will be subject to approval by the Companies and the
Companies will enter into a letter of representation with the
Purchasers, containing various warranties, representations and
indemnities upon which the Purchasers will rely in entering into
the Purchase Agreement.
The Companies request authority to enter into negotiations
with Purchasers with respect to the interest rate, redemption
provisions and other terms and conditions applicable to the New
Bonds and to set the terms of the New Bonds subject to the
receipt of an order under the Act if an order has not been issued
when the Companies enter into the Purchase Agreement.
Use of Proceeds
The proceeds of the offering of the New Bonds will be used
to (i) redeem the Old Bonds pursuant to the terms of the
Indenture (the "Redemption") and (ii) reimburse the Companies
treasuries for any expenditures made that qualify for tax-exempt
financing or to provide for current solid waste expenditures.
The proceeds of any offering may also be used to reimburse the
Companies treasuries for Old Bonds previously acquired.
The Companies may be required to deposit the proceeds of
the New Bonds with the Trustee in connection with the Redemption
of the Old Bonds. Any additional funds required to pay for the
Redemption of Old Bonds and the costs of issuance of the New
Bonds will be provided by the Companies from internally generated
funds and short-term borrowings pursuant to orders of the
Commission dated March 31, 1993 (HCAR No. 35-25777), September
28, 1993 (HCAR No. 35-25897), March 18, 1994 (HCAR No. 35-26007),
June 15, 1994 (HCAR No. 35-26066) and March 21, 1995 (HCAR No.
35-26254), or subsequent orders (the "Short-Term Borrowing
Orders").
The Companies believe that the Redemption of the Old Bonds
and the issuance of floating rate Refunding Bonds could result in
substantial savings to the Companies and benefit the Companies
ratepayers. Based on the average of the last 10 years J.J. Kenny
Index, it is estimated that the Issuer could issue floating rate
Refunding Bonds at an interest rate of approximately 4.29%. As
set forth in Exhibit 11 hereto, the acquisition of the Old Bonds
and the issuance of the floating rate Refunding Bonds based upon
the J.J. Kenny 10 year average would result in an estimated
annual aggregate reduction in combined interest costs to the
Companies of $2,206,005, if all of the Old Bonds were reacquired.
Total combined interest savings to the Companies over the
remaining life of the Old Bonds would aggregate $39,708,090.
No proceeds from the sale of New Bonds will be used by CSW
or any subsidiary thereof for the direct or indirect acquisition
of an interest in an exempt wholesale generator, as defined in
Section 32 of the Act ("EWG"), or a foreign utility company, as
defined in Section 33 of the Act ("FUCO"). Rule 54 promulgated
under the Act states that in determining whether to approve the
issue or sale of a security by a registered holding company for
purposes other than the acquisition of an EWG or a FUCO, or other
transactions by such registered holding company or its
subsidiaries other than with respect to EWGs or FUCOs, the
Commission shall not consider the effect of the capitalization or
earnings of any subsidiary which is an EWG or a FUCO upon the
registered holding company system if Rule 53(a), (b) and (c) are
satisfied. As set forth below, all applicable conditions set
forth in Rule 53(a) are, and, assuming the consummation of the
transactions proposed herein, will be, satisfied and none of the
conditions set forth in Rule 53(b) exist or will exist as a
result of the transactions proposed herein.
CSWs aggregate investment (as defined under Rule 53(a)
of the Act) in EWGs and FUCOs as of May 2, 1996 was approximately
$845 million, or approximately 45% of CSWs average consolidated
retained earnings for the four quarters ending March 31, 1996.
CSW thus satisfies Rule 53(a)(1). CSW will maintain and make
available the books and records required by Rule 53(a)(2). No
more than 2% of the employees of CSW's operating subsidiaries
will, at any one time, directly or indirectly, render services to
an EWG or FUCO in which CSW directly or indirectly owns an
interest, satisfying Rule 53(a)(3). And lastly, CSW will submit
a copy of Item 9 and Exhibits G and H of CSW's Form U5S to each
of the public service commissions having jurisdiction over the
retail rates of CSW's operating utility subsidiaries, satisfying
Rule 53(a)(4).
None of the conditions described in Rule 53(b) exist with
respect to CSW or any of its subsidiaries, thereby satisfying
such rule and making Rule 53(c) inapplicable.
Managing Interest Rates
The Companies propose to manage interest rate risk, as
appropriate, through the use of hedging products, including
interest rate swaps, forward swaps, caps and collars and through
forward transactions as described under the heading "Forward
Underwritings" below. The Companies may also use interest rate
swaps for the purpose of effectively lowering its interest costs
on Old Bonds and/or New Bonds. The Companies request authority
to enter into the foregoing types of transactions from time to
time either in connection with the issuance of New Bonds or
otherwise.
The Companies could use the interest rate swap market to
hedge against changes in the interest rates of variable rate
securities by entering into a fixed-for-floating swap arrangement
(the Companies pay a fixed rate to a counterparty and receives,
in return, a floating rate). In addition, the Companies may be
able to realize a lower all-in rate in the synthetic fixed market
than in the natural cash fixed market. A synthetic fixed rate
issuance is achieved by issuing variable rate securities and
simultaneously entering into a fixed-for-floating interest rate
swap. The variable rate amounts received by the Companies on the
swap are used to pay the variable rate interest on the bonds,
thereby leaving the Companies with a net fixed rate payment. A
natural cash fixed rate issuance is achieved by simply issuing
fixed rate securities.
The Companies may also issue fixed rate New Bonds and then
seek to effectively lower its interest costs on such New Bonds by
entering into a floating-for-fixed interest rate swap arrangement
(the Companies pay a floating rate to a counterparty and
receives, in return, a fixed rate). In this manner, the
Companies would hope to take advantage of interest cost savings
associated with short-term interest rates. The floating rate
payable by the Companies would be based upon a market index, such
as LIBOR (London Interbank Deposit Offered Rate), Federal Funds,
reserve-adjusted certificate of deposit or commercial paper rates
or the J.J. Kenny or PSA tax-exempt indices. The Companies may
be required to pay a margin in addition to such floating rate,
which margin shall not be greater than 5%. In such event, the
fixed interest rate payable by the counterparty would include the
amount of such margin.
None of the interest rate swaps would be "leveraged." This
means that changes in interest payments or receipts under any
interest rate swap due to changes in the floating rate index used
in the swap will not exceed the product of the change in such
index and the notional amount of that swap. In no event would
the aggregate notional amount of the interest rate swaps, at any
one time, exceed $113,300,000.
The interest rate swaps mentioned above may also be forward
swaps, whereby a swap agreement is entered into but the exchange
of fixed and floating payments does not begin until a future
date, which is generally the call date on outstanding bonds.
The Companies will only enter into swaps permitting
termination at the option of the Companies and the Companies
would exercise any such option for a corresponding notional
amount upon the redemption, reacquisition or maturation of the
corresponding Old Bonds and/or New Bonds. The Companies
termination of its obligations under an interest rate swap
agreement may require the Companies to pay an additional amount
under the terms of the swap agreement, which may be substantial
depending upon market conditions at the time of the termination.
In order to obtain flexibility in the event that market
conditions with respect to interest rates change after the
Companies have entered into an interest rate swap agreement as
described herein, the Companies also request authorization to
enter into reverse (or offsetting) interest rate swap agreements,
or other contractual arrangements, in order to limit the impact
of anticipated movements in interest rates or offset the effect
of existing interest rate swap agreements.
If the Companies issue variable rate New Bonds, they
propose to manage interest rate risk through the use of interest
rate caps ("Caps) and interest rate collars ("Collars"). The
Companies therefore request authority from time to time during
the life of the New Bonds to purchase Caps and Collars in respect
of outstanding New Bonds. Caps and Collars are designed to
mitigate and/or transfer interest rate risk and, from the
Companies perspective, are not for speculation purposes. The
Companies may elect to purchase a Cap to limit its exposure to
rising interest rates. The Companies may also elect to enter
into a Collar, which consists of purchasing a Cap together with
the sale of an interest rate floor ("Floor"). The Companies will
only sell a Floor if it is part of a Collar.
The parties to a Cap agree upon a set interest rate, or
"strike rate" that will apply to a series of New Bonds. If the
interest rate on the capped bonds exceeds the strike rate during
the term of the Cap, the Cap provider pays to the Companies the
difference between the strike rate and the actual interest rate
of the New Bonds. The Companies, however, continue to make
interest payments on the New Bonds at the actual interest rate.
A Floor is essentially the opposite of a Cap. As with a
Cap, the parties to a Floor agree on a strike rate. When the
actual interest rate on the New Bonds subject to a Floor falls
below the Floor strike rate, the Companies must pay to the Floor
provider the difference between the actual interest rate and the
Floor strike rate. The Companies continue to make interest
payments on the bonds at the actual interest rate.
Caps and Collars are purchased from a Cap or Collar
"provider", at a purchase price based on a percentage of the
aggregate principal amount of the bonds to be capped or collared.
The cost of a Cap or a Collar is determined by reference to
prevailing interest rates, the proposed duration of the Cap or
Collar and the proposed Cap and Floor strike rates. The longer
the duration of a Cap or Collar, the higher the price. The lower
the Cap strike rate, the more expensive the Cap is and the higher
the Floor strike rate, the greater the offset from the Cap price.
The maximum the Companies would spend on a ten year Cap would be
10% of the aggregate principal amount of the New Bonds then
outstanding, and the actual cost would be expected to be less
than 10%.
Caps and Collars are designed to mitigate interest rate
risk and do not expose the Companies to financial or other risks.
If the actual interest rate on the New Bonds does not exceed the
Cap strike rate at any time during the term of the Cap, then the
Companies will neither benefit from or be exposed to risk by the
Cap or Collar. If the actual interest rate falls below and
remains below the Floor strike rate, the Companies will be
required to pay interest at the Floor strike rate. Also, the
Companies are subject to the credit risk on the Cap provider's
ability to make payments on the Cap.
While Caps and Collars purchased for the New Bonds may
remain outstanding when the underlying bonds are retired, the
Companies propose to terminate any Caps or Collars upon
retirement of the corresponding New Bonds. If the Companies wish
to terminate a Cap or Collar when interest rates on the New Bonds
are between the Floor strike rate and the Cap strike rate, it
would receive a portion of the original cost of the Cap or Collar
in return, or receive nothing, depending on interest rates and
the remaining term of the Cap or Collar. If the Companies seek
to terminate a Collar when the actual interest rate is below the
Floor strike rate, the Companies may be required to pay a
termination fee based upon the value of the Collar to the Floor
provider at the time.
Under Rule 24, within 45 days after the end of each quarter
in which the Companies have outstanding any Caps or Collars as
described herein relating to the Series 1996 Bonds, the Companies
shall file a certificate with the Commission disclosing the
following information with respect to each such Cap or Collar:
(a) the transaction date, (b) the type of transaction (either a
Cap or a Collar), (c) the notional amount, (d) the name of the
counterparty and (e) a description of the material terms,
including the maturity or termination date and the Cap and/or
Floor strike rates. Such certificate shall also disclose the
market value of all open Cap or Collar positions at the end of
each quarter and any gains or losses realized from the
liquidation of any Cap or Collar positions during such quarter.
Conclusion
The Companies believe that the consummation of the
transactions proposed herein will be in the best interests of its
consumers and investors and consistent with sound and prudent
financial policy.
Item 2. Fees, Commissions and Expenses.
An estimate of the appropriate amount of the fees and
expenses, other than underwriting commissions or discounts, to be
paid or incurred by the Companies in connection with the proposed
transaction is as follows:
Approximate
Amount
-----------
Holding Company Act filing fee ........... $ 2,000*
Printing of Official Statement
and Bonds .............................. 20,000
Fees of Public Accountant ................ 7,500
Fee of Trustee ........................... 6,000
Fee of District .......................... 550,000
Fees of Rating Agencies .................. 40,000
Expenses of Central and South West
Services, Inc. ......................... 3,500
Counsel fees:
Milbank, Tweed, Hadley & McCloy,
New York, New York ..................... 65,000
Sidley & Austin,
Chicago, Illinois ...................... 25,000
Vinson & Elkins L.L.P.,
Dallas, Texas .......................... 3,000
Doerner, Stuart, Saunders, Daniel
& Anderson,
Tulsa, Oklahoma ........................ 1,000
Wagstaff, Alvis, Stubbeman, Seamster
& Longacre, L.L.P.,
Abilene, Texas ......................... 1,000
McCall, Parkhurst & Horton
Dallas, Texas (Bond Counsel) ........... 70,000
Blue Sky and investment fees
and expenses ........................... 5,000
Miscellaneous expenses, including
travel, telephone, copying,
postage ................................ 2,000
----------
TOTAL $ 801,000
==========
_______________
* Actual Amount.
The fees and expenses include those charges incurred for
the services of Central and South West Services, Inc. ("CSWS"),
an affiliated service company of CSW operating pursuant to
Section 13 of the Act and the rules thereunder. The services of
CSWS will consist principally of services performed by the
Treasury Departments and the Controller's Department.
Item 3. Applicable Statutory Provisions.
Sections 6(a) and 7 of the Act are or may be applicable
with respect to the Companies obligations under the Sale
Agreement to make debt service payments with respect to the New
Bonds.
Section 9(a)(1) and 10 of the Act are applicable with
respect to the repurchase by the Companies of the Companies
portion of the Facilities. Section 12(d) and Rule 44 thereunder
of the Act are applicable to the sale of any completed portions
of the Facilities.
If the Companies enter into a Preliminary Agreement, as
defined in Rule 51, such Agreement will satisfy the conditions
set forth in paragraphs (a) through (d) of said Rule. Sections
6(a), 7, 9(a) and 10 of the Act are or may be applicable to the
proposed entering into of hedging products, including interest
rate swaps, forward swaps, caps, collars and related instruments.
To the extent any other provisions of the Act or the rules
promulgated thereunder may be applicable to the proposed
transactions, the Companies hereby requests appropriate orders to
such effect.
Item 4. Regulatory Approval.
No state regulatory authority and no federal regulatory
authority, other than the Commission under the Act, has
jurisdiction over the proposed transaction.
The Companies believe (based on a review of applicable
state laws) that no state approvals are required in connection
with the entering into by the Companies of one or more hedging
products, including interest rate swaps, forward swaps, caps,
collars and forward transactions (Instruments) to manage
interest rate risk or to effectively lower the Companies
interest cost on the Old Bonds and/or New Bonds. The Companies
will, however, prior to entry into any such Instruments, provide
information on such products to members of the staff of the
Public Utility Commission of Texas.
Item 5. Procedure.
The Companies request that the Commission issue and publish
no later than May 31, 1996, the requisite notice under Rule 23
with respect to the filing of this Application-Declaration, such
notice to specify a date not later than June 24, 1996, as the
date after which an order granting and permitting this
Application-Declaration to become effective may be entered by the
Commission and the Commission enter not later than June 25, 1996,
an appropriate order granting and permitting this Application-
Declaration to become effective with respect to the proposed
transactions.
The Companies respectfully request that appropriate and
timely action be taken by the Commission in this matter in order
to permit consummation of the proposed transactions in accordance
with the schedule outlined above.
No recommended decision by a hearing officer or any other
responsible officer of the Commission is necessary or required in
this matter. The Division of Investment Management of the
Commission may assist in the preparation of the Commission's
decision in this matter. There should be no 30-day waiting
period between the issuance and the effective date of any order
issued by the Commission in this matter; and it is respectfully
requested that any such order be made effective immediately upon
the entry thereof.
Item 6. Exhibits and Financial Statements.
Exhibit 1 - Form of Installment Sale Agreement between
the Companies and the District (to be filed by
amendment).
Exhibit 2 - Form of Indenture of Trust between the
District and the Trustee (to be filed by
amendment).
Exhibit 3 - Form of Bond Purchase Agreement between the
District and the Purchasers (to be filed by
amendment).
Exhibit 4 - Form of Letter of Representation from the
Companies to the Purchasers (to be filed by
amendment).
Exhibit 5 - Preliminary Official Statement relating to
the New Bonds (to be filed by amendment).
Exhibit 6 - Preliminary opinion of Milbank, Tweed,
Hadley & McCloy, counsel for the Companies (to
be filed by amendment).
Exhibit 7 - Final or "past tense" opinion of counsel for
the Company (to be filed with Certificate of
Notification).
Exhibit 8 - Financial Statements per books and pro forma
as December 31, 1995 (to be filed by amendment).
Exhibit 9 - Proposed Notice of Proceeding.
Exhibit 10- Form of Proposed Supplemental Indentures to
First Mortgage Indenture (to be filed by
amendment, if applicable).
Exhibit 11- Illustration of hypothetical interest
savings.
Item 7. Information as to Environmental Effects.
The proposed transaction does not involve major federal
action having a significant effect on the human environment. To
the best of the Companies knowledge, no federal agency has
prepared or is preparing an environmental impact statement with
respect to the proposed transactions.
S I G N A T U R E
- - - - - - - - - -
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, as amended, the undersigned Companies have
duly caused this document to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 28, 1996
CENTRAL POWER & LIGHT COMPANY
By:/s/SHIRLEY S. BRIONES
Shirley S. Briones
Treasurer
PUBLIC SERVICE COMPANY OF OKLAHOMA
By:/s/SHIRLEY S. BRIONES
Shirley S. Briones
Treasurer
WEST TEXAS UTILITIES COMPANY
By:/s/SHIRLEY S. BRIONES
Shirley S. Briones
Treasurer
INDEX OF EXHIBITS
EXHIBIT TRANSMISSION
NUMBER EXHIBITS METHOD
- ------- -------- ------------
1 Form of Installment Sale Agreement ---
between the Companies and the Issuer
(to be filed by amendment).
2 Form of Indenture of Trust between the ---
Issuer and the Trustee (to be filed
by amendment).
3 Form of Bond Purchase Agreement between ---
the Issuer and the Underwriters (to
be filed by amendment).
4 Form of Letter of Representation from ---
the Companies to the Purchasers (to be
filed by amendment).
5 Preliminary Official Statement relating ---
to the New Bonds (to be filed by amendment).
6 Preliminary opinion of Milbank, Tweed, ---
Hadley & McCloy, counsel for the Companies
(to be filed by amendment).
7 Final or "past tense" opinion of counsel ---
for the Companies (to be filed with
Certificate of Notification).
8 Financial Statements per books and pro ---
forma as of December 31, 1995 (to be filed
by amendment).
9 Proposed Notice of Proceeding. Electronic
10 Form of Proposed Supplemental Indentures ---
to First Mortgage Indenture (to be
filed by amendment).
11 Illustration of hypothetical interest Electronic
savings.
<PAGE>
EXHIBIT 9
---------
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35 - __________)
Filings Under the Public Utility Holding Company Act of 1935
("Act")
______________, 1996
Notice is hereby given that the following filings(s)
has/have been made with the Commission pursuant to provisions of
the Act and rules promulgated thereunder. All interested persons
are referred to the application(s) and/or declaration(s) for
complete statements of the proposed transactions(s) summarized
below. The application(s) and/or declaration(s) and any
amendment(s) thereto is/are available for public inspection
through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a
hearing on the application(s) and/or declaration(s) should submit
their views in writing by _________________, 1996 to the
Secretary, Securities and Exchange Commission, Washington, DC
20549, and serve a copy on the relevant applicant(s) and/or
declarant(s) at the address(es) specified below. Proof of
service (by affidavit or, in case of an attorney at law, by
certificate) should be filed with the request. Any request for
hearing shall identify specifically the issues of fact or law
that are disputed. A person who so requests will be notified of
any hearing, if ordered, and will receive a copy of any notice or
order issued in the manner. After said date, the application(s)
and/or declaration(s), as filed or as amended, may be granted
and/or permitted to become effective.
Central Power & Light Company et. al. (File No. 70-_______)
The Companies are seeking authority through December 31,
1999, to incur obligations in connection with the proposed
issuance by Red River Authority of Texas ("Red River" or the
"Issuer") in one or more series of up to $113,300,000 aggregate
principal amount of Pollution Control Revenue Bonds of which (i)
up to $63,300,000 aggregate principal amount may be Pollution
Control Revenue Refunding Bonds (Oklaunion Project) (the
"Refunding Bonds"), and (ii) up to $50,000,000 aggregate
principal amount may be new money Revenue Bonds (Oklaunion
Project) (the "New Money Bonds" and, together with the Refunding
Bonds, the "New Bonds"). The issuance of New Money Bonds may be
combined with the issuance of Refunding Bonds.
The purpose of the issuance of the Refunding Bonds is to
reacquire all or a portion of Red Rivers $63,300,000 of
outstanding 7-7/8% Pollution Control Revenue Bonds (Oklaunion
Project) Series 1984 (the "Old Bonds"). The purpose of the
issuance of the New Bonds is to reimburse the Companies
treasuries for any expenditures made that qualify for tax-exempt
financing or to provide for current solid waste expenditures.
See "Use of Proceeds" below.
As discussed below under the heading "Managing Interest
Rates", the Companies also seek authorization to manage interest
rate risk or lower its interest rate costs through the use of
hedging products, including interest rate swaps, forward swaps,
caps and collars through the life of the Old Bonds and/or New
Bonds.
The Old Bonds
In September 1984, Red River issued the Series 1984 Bonds
pursuant to the Indenture of Trust dated as of September 15,
1984, between Red River and The Bank of New York, New York, New
York (successor to RepublicBank Dallas, National Association), as
Trustee. Prior to September 15, 1986, interest on the Series
1984 Bonds was adjustable annually. As of that date, the
interest rate on the Old Bonds was converted to a fixed rate.
The Indenture of Trust for the Old Bonds is referred to herein as
the "Indenture". The Bank of New York, New York, New York is
referred to herein as the "Trustee".
Certain terms of the Indenture include the following:
Interest
Series Rate Maturity Date First Redemption Date (1)
(per annum)
1984 7-7/8% September 15, 2014 September 15, 1996
____________________________
(1) The Indenture provides that the bonds may not be redeemed
prior to their First Redemption Date and thereafter may be
redeemed at the then applicable redemption price plus accrued
interest to the redemption date. The Old Bonds will be redeemable
on September 15, 1996 at 103% of par.
The Companies and the Issuer entered into an Installment
Sale Agreement, (the "Sale Agreement") between the Issuer and the
Companies to provide for the issuance of the Old Bonds. In
connection with the issuance of the New Bonds, the Companies will
(i) amend or supplement the Sale Agreement, (ii) enter into an
agreement with substantially the same terms as the Sale Agreement
and/or (iii) enter into a new installment sale agreement (an
"Amended Sale Agreement")
The proceeds of the Series 1984 Bonds were used to acquire,
construct and improve certain air and water pollution control and
solid waste disposal facilities (the "Facilities") at the
Oklaunion Electric Generating Plant (the "Plant"), located near
Vernon, Texas, in which CPL, PSO, and WTU own 7.8%, 15.6% and
54.7% undivided interests, respectively. Only that portion of
the air and water pollution control and solid waste disposal
facilities at the Plant which is owned by the Companies has been
financed with the proceeds of the Old Bonds.
Terms of the New Bonds
The New Bonds will bear interest at a fixed or floating
rate, may or may not be secured with First Mortgage Bonds and
will mature in not more than forty years. The interest rate,
redemption provisions and other terms and conditions applicable
to the New Bonds will be determined by negotiations between the
Companies and one or more investment banking firms or other
entities that will purchase or underwrite the New Bonds (the
"Purchasers"). It is anticipated that (i) the New Bonds will be
redeemable at any time in whole at the option of the Companies at
the principal amount thereof plus accrued interest, upon the
occurrence of various extraordinary events specified in the
Amended Sale Agreement, or similar documents utilized in
connection with the issuance of the New Bonds, and the Indenture
as amended by one or more supplements (each a "Supplemental
Indenture"), or a new indenture (the "New Indenture"), relating
generally to (a) destruction or condemnation of the Facilities or
the Plant, (b) conditions rendering operation of the Facilities
or the Plant infeasible, (c) the imposition on the Companies or
the Issuer of unreasonable burdens or excessive liabilities with
respect to the Facilities or the Plant, or (d) if a
constitutional amendment or legislative, administrative or
judicial action causes the obligations of the Companies under the
Amended Sale Agreement to become unenforceable or impossible of
performance in any material respect with the expressed intention
of the parties; (ii) the New Bonds will be subject to optional
redemption in whole or in part at times and with premiums to be
determined by negotiations between the Companies and the
Purchaser(s); and (iii) the New Bonds will be subject to special
mandatory redemption, in whole or in part, at the principal
amount thereof plus accrued interest, in the event the interest
on the New Bonds becomes subject to federal income tax.
Pursuant to the Sale Agreement, the Companies transferred
the Facilities to Red River, which financed the acquisitions and
related costs thereof with the proceeds of the Old Bonds. The
Sale Agreement contains commitments by the Companies to pay to
the Issuer at specified times amounts sufficient to enable the
Issuer to pay debt service on the Old Bonds, including principal,
interest and redemption premium, if any.
The Companies may obtain credit enhancement for the New
Bonds, which could include bond insurance, a letter of credit or
a liquidity facility. Due to heightened credit sensitivity in
the short-term tax-exempt market, the Companies anticipate they
may be required to provide credit enhancement if they were to
issue floating rate bonds, whereas credit enhancement would be a
purely economic decision for the Companies if they were to issue
fixed rate bonds. The Companies anticipate that even though they
would be required to pay a premium or fee to obtain the credit
enhancement, they would realize a net benefit through a reduced
interest rate on the New Bonds. The Companies would obtain
credit enhancement only if they determine it would be
economically beneficial to do so. The New Bonds may also contain
other terms and conditions not inconsistent herewith that are
deemed necessary or desirable to take maximum advantage of the
then current market conditions.
The Companies also request authority to issue First
Mortgage Bonds as security for the payment of the New Bonds, at
its option, depending upon market conditions at the time of
issuance of the New Bonds. CPL will issue First Mortgage Bonds,
subject to applicable indenture restrictions upon the issuance
thereof, by executing a Supplemental Indenture to its Mortgage
Indenture dated November 1, 1943 to The First National Bank of
Chicago and R. D. Manella as trustees (the "CPL Mortgage
Indenture"). PSO will issue First Mortgage Bonds, subject to
applicable indenture restrictions upon the issuance thereof, by
executing a Supplemental Indenture to its Mortgage Indenture
dated July 1, 1945 to Liberty Bank and Trust Company of Tulsa,
National Association as trustee (the "PSO Mortgage Indenture").
WTU will issue First Mortgage Bonds, subject to applicable
indenture restrictions upon the issuance thereof, by executing a
Supplemental Indenture to its Mortgage Indenture dated August 1,
1943 to Harris Trust and Savings Bank and J. Bartolini as
trustees (the "WTU Mortgage Indenture" and, together with the CPL
Mortgage Indenture and the PSO Mortgage Indenture, the
"Companies' Mortgage Indentures"). Such First Mortgage Bonds
will be issued to the Trustee for the New Bonds pursuant to the
Companies Mortgage Indentures. The First Mortgage Bonds will be
held by the Trustee solely for the benefit of the holders of the
New Bonds and will not be transferable except to a successor
Trustee. The First Mortgage Bonds will be issued in the exact
amounts and have substantially the same terms as the New Bonds.
The Supplemental Indenture or New Indenture for the New Bonds may
provide that the New Bonds will cease to be secured by the First
Mortgage Bonds when all other First Mortgage Bonds have been
retired. To the extent payments in respect of the New Bonds are
made in accordance with their terms, corresponding payment
obligations under the First Mortgage Bonds will be deemed
satisfied.
As applied to any First Mortgage Bonds that may be issued
as collateral for the New Bonds, the optional redemption
provisions described herein may deviate from the Securities and
Exchange Commission's (the "Commission") Statement of Policy
Regarding First Mortgage Bonds Subject to the Public Utility
Holding Company Act of 1935, Release No. 35-13105, 21 Fed. Reg.
1286 (1956), as supplemented by Commission Release No. 35-16369,
34 Fed. Reg. 9553 (1969) (together, the "Statement of Policy"),
in that the First Mortgage Bonds may be subject to a redemption
limitation of up to fifteen years while the Statement of Policy
requires that first mortgage bonds be subject to redemption at
any time upon reasonable notice and with reasonable redemption
premiums, if any. The Companies have been advised by several
investment banks that purchasers of fixed-rate, tax-exempt bonds
generally expect a ten year redemption limitation and that
failure to include such a limitation may cause the New Bonds to
be unmarketable to a large pool of such purchasers, and may
result in an increase in the effective interest cost to the
Companies. In consideration of current and future market
expectations with regard to redemption limitations, the Companies
hereby request that the Commission approve the above-described
deviation from the Statement of Policy so that the First Mortgage
Bonds, and therefore the New Bonds, may contain up to a 15 year
optional redemption limitation.
As applied to the First Mortgage Bonds, any sinking fund
provisions may also deviate from the Statement of Policy, in that
the First Mortgage Bonds will not have sinking fund provisions
unless the New Bonds have sinking fund provisions. The Statement
of Policy requires the Companies to deposit annually with the
trustee for the First Mortgage Bonds an amount of cash equal to
not less than one percent of the aggregate principal amount of
Bonds of all series authenticated under the First Mortgage Bond
indenture. The Companies have been advised by several investment
bankers that purchasers of private activity bonds generally do
not expect sinking fund provisions. In light of market
expectations, the Companies hereby request that the Commission
approve the above-described deviation from the Statement of
Policy so that the First Mortgage Bonds, and therefore the New
Bonds, may omit sinking fund provisions. The Companies also
request a waiver from the requirement in the Statement of Policy
for a limitation on dividends. The Companies believe that
dividend limitations, if any, are a matter best left to the
financial marketplace and the state regulatory commissions. The
limitation on dividends provision in the Statement of Policy was
adopted when accounting standards and ratemaking practices were
very different from today. For example, ratemaking disallowances
on grounds of alleged lack of prudence or alleged excess capacity
have become more prevalent today. Under today's accounting
requirements, disallowances might result in charges to the income
statement and current retained earnings, which could preclude the
payment of dividends on common stock.
CPL's bonds of Series J, L, T and AA and PSO's bonds of
Series J, K and L contain dividend restrictions in the respective
supplemental indentures which will continue to limit the
Companies dividend payments until all such bonds mature or are
retired. In light of these dividend restrictions and provisions
in the Companies Restated Certificate of Incorporation
restricting the payment of dividends to a percentage of net
income available for dividends on common stock if the Companies
common stock equity is not maintained at a certain percentage of
total capitalization, the Companies believe that the omission of
the limitation on dividends as contemplated by the Statement of
Policy will not materially and adversely affect the holders of
the New Bonds. The terms and provisions of the First Mortgage
Bonds will not otherwise materially deviate from the Statement of
Policy.
Messrs. McCall, Parkhurst & Horton, who are anticipated to
act as Bond Counsel, have informed the Companies that they will
be prepared to give a legal opinion that interest on the New
Bonds will be excluded from gross income for federal income tax
purposes.
The Companies anticipate that the New Bonds will be sold
by the Issuer pursuant to a Bond Purchase Agreement (the
"Purchase Agreement") between the Issuer and one or more
Purchasers. The Companies may or may not be a party to the
Purchase Agreement, but if they are not a party, the Purchase
Agreement will be subject to approval by the Companies and the
Companies will enter into a letter of representation with the
Purchasers, containing various warranties, representations and
indemnities upon which the Purchasers will rely in entering into
the Purchase Agreement.
The Companies request authority to enter into negotiations
with Purchasers with respect to the interest rate, redemption
provisions and other terms and conditions applicable to the New
Bonds and to set the terms of the New Bonds subject to the
receipt of an order under the Act if an order has not been issued
when the Companies enter into the Purchase Agreement.
Use of Proceeds
The proceeds of the offering of the New Bonds will be used
to (i) redeem the Old Bonds pursuant to the terms of the
Indenture (the "Redemption") and (ii) reimburse the Companies
treasuries for any expenditures made that qualify for tax-exempt
financing or to provide for current solid waste expenditures.
The proceeds of any offering may also be used to reimburse the
Companies treasuries for Old Bonds previously acquired.
The Companies may be required to deposit the proceeds of
the New Bonds with the Trustee in connection with the Redemption
of the Old Bonds. Any additional funds required to pay for the
Redemption of Old Bonds and the costs of issuance of the New
Bonds will be provided by the Companies from internally generated
funds and short-term borrowings pursuant to orders of the
Commission dated March 31, 1993 (HCAR No. 35-25777), September
28, 1993 (HCAR No. 35-25897), March 18, 1994 (HCAR No. 35-26007),
June 15, 1994 (HCAR No. 35-26066) and March 21, 1995 (HCAR No.
35-26254), or subsequent orders (the "Short-Term Borrowing
Orders").
The Companies believe that the Redemption of the Old Bonds
and the issuance of floating rate Refunding Bonds could result in
substantial savings to the Companies and benefit the Companies
ratepayers. Based on the average of the last 10 years J.J. Kenny
Index, it is estimated that the Issuer could issue floating rate
Refunding Bonds at an interest rate of approximately 4.29%. As
set forth in Exhibit 11 hereto, the acquisition of the Old Bonds
and the issuance of the floating rate Refunding Bonds based upon
the J.J. Kenny 10 year average would result in an estimated
annual aggregate reduction in combined interest costs to the
Companies of $2,206,005, if all of the Old Bonds were reacquired.
Total combined interest savings to the Companies over the
remaining life of the Old Bonds would aggregate $39,708,090.
No proceeds from the sale of New Bonds will be used by CSW
or any subsidiary thereof for the direct or indirect acquisition
of an interest in an exempt wholesale generator, as defined in
Section 32 of the Act ("EWG"), or a foreign utility company, as
defined in Section 33 of the Act ("FUCO"). Rule 54 promulgated
under the Act states that in determining whether to approve the
issue or sale of a security by a registered holding company for
purposes other than the acquisition of an EWG or a FUCO, or other
transactions by such registered holding company or its
subsidiaries other than with respect to EWGs or FUCOs, the
Commission shall not consider the effect of the capitalization or
earnings of any subsidiary which is an EWG or a FUCO upon the
registered holding company system if Rule 53(a), (b) and (c) are
satisfied. As set forth below, all applicable conditions set
forth in Rule 53(a) are, and, assuming the consummation of the
transactions proposed herein, will be, satisfied and none of the
conditions set forth in Rule 53(b) exist or will exist as a
result of the transactions proposed herein.
CSWs aggregate investment (as defined under Rule 53(a)
of the Act) in EWGs and FUCOs as of May 2, 1996 was approximately
$845 million, or approximately 45% of CSWs average consolidated
retained earnings for the four quarters ending March 31, 1996.
CSW thus satisfies Rule 53(a)(1). CSW will maintain and make
available the books and records required by Rule 53(a)(2). No
more than 2% of the employees of CSW's operating subsidiaries
will, at any one time, directly or indirectly, render services to
an EWG or FUCO in which CSW directly or indirectly owns an
interest, satisfying Rule 53(a)(3). And lastly, CSW will submit
a copy of Item 9 and Exhibits G and H of CSW's Form U5S to each
of the public service commissions having jurisdiction over the
retail rates of CSW's operating utility subsidiaries, satisfying
Rule 53(a)(4).
None of the conditions described in Rule 53(b) exist with
respect to CSW or any of its subsidiaries, thereby satisfying
such rule and making Rule 53(c) inapplicable.
Managing Interest Rates
The Companies propose to manage interest rate risk, as
appropriate, through the use of hedging products, including
interest rate swaps, forward swaps, caps and collars and through
forward transactions as described under the heading "Forward
Underwritings" below. The Companies may also use interest rate
swaps for the purpose of effectively lowering its interest costs
on Old Bonds and/or New Bonds. The Companies request authority
to enter into the foregoing types of transactions from time to
time either in connection with the issuance of New Bonds or
otherwise.
The Companies could use the interest rate swap market to
hedge against changes in the interest rates of variable rate
securities by entering into a fixed-for-floating swap arrangement
(the Companies pay a fixed rate to a counterparty and receives,
in return, a floating rate). In addition, the Companies may be
able to realize a lower all-in rate in the synthetic fixed market
than in the natural cash fixed market. A synthetic fixed rate
issuance is achieved by issuing variable rate securities and
simultaneously entering into a fixed-for-floating interest rate
swap. The variable rate amounts received by the Companies on the
swap are used to pay the variable rate interest on the bonds,
thereby leaving the Companies with a net fixed rate payment. A
natural cash fixed rate issuance is achieved by simply issuing
fixed rate securities.
The Companies may also issue fixed rate New Bonds and then
seek to effectively lower its interest costs on such New Bonds by
entering into a floating-for-fixed interest rate swap arrangement
(the Companies pay a floating rate to a counterparty and
receives, in return, a fixed rate). In this manner, the
Companies would hope to take advantage of interest cost savings
associated with short-term interest rates. The floating rate
payable by the Companies would be based upon a market index, such
as LIBOR (London Interbank Deposit Offered Rate), Federal Funds,
reserve-adjusted certificate of deposit or commercial paper rates
or the J.J. Kenny or PSA tax-exempt indices. The Companies may
be required to pay a margin in addition to such floating rate,
which margin shall not be greater than 5%. In such event, the
fixed interest rate payable by the counterparty would include the
amount of such margin.
None of the interest rate swaps would be "leveraged." This
means that changes in interest payments or receipts under any
interest rate swap due to changes in the floating rate index used
in the swap will not exceed the product of the change in such
index and the notional amount of that swap. In no event would
the aggregate notional amount of the interest rate swaps, at any
one time, exceed $113,300,000.
The interest rate swaps mentioned above may also be forward
swaps, whereby a swap agreement is entered into but the exchange
of fixed and floating payments does not begin until a future
date, which is generally the call date on outstanding bonds.
The Companies will only enter into swaps permitting
termination at the option of the Companies and the Companies
would exercise any such option for a corresponding notional
amount upon the redemption, reacquisition or maturation of the
corresponding Old Bonds and/or New Bonds. The Companies
termination of its obligations under an interest rate swap
agreement may require the Companies to pay an additional amount
under the terms of the swap agreement, which may be substantial
depending upon market conditions at the time of the termination.
In order to obtain flexibility in the event that market
conditions with respect to interest rates change after the
Companies have entered into an interest rate swap agreement as
described herein, the Companies also request authorization to
enter into reverse (or offsetting) interest rate swap agreements,
or other contractual arrangements, in order to limit the impact
of anticipated movements in interest rates or offset the effect
of existing interest rate swap agreements.
If the Companies issue variable rate New Bonds, they
propose to manage interest rate risk through the use of interest
rate caps ("Caps) and interest rate collars ("Collars"). The
Companies therefore request authority from time to time during
the life of the New Bonds to purchase Caps and Collars in respect
of outstanding New Bonds. Caps and Collars are designed to
mitigate and/or transfer interest rate risk and, from the
Companies perspective, are not for speculation purposes. The
Companies may elect to purchase a Cap to limit its exposure to
rising interest rates. The Companies may also elect to enter
into a Collar, which consists of purchasing a Cap together with
the sale of an interest rate floor ("Floor"). The Companies will
only sell a Floor if it is part of a Collar.
The parties to a Cap agree upon a set interest rate, or
"strike rate" that will apply to a series of New Bonds. If the
interest rate on the capped bonds exceeds the strike rate during
the term of the Cap, the Cap provider pays to the Companies the
difference between the strike rate and the actual interest rate
of the New Bonds. The Companies, however, continue to make
interest payments on the New Bonds at the actual interest rate.
A Floor is essentially the opposite of a Cap. As with a
Cap, the parties to a Floor agree on a strike rate. When the
actual interest rate on the New Bonds subject to a Floor falls
below the Floor strike rate, the Companies must pay to the Floor
provider the difference between the actual interest rate and the
Floor strike rate. The Companies continue to make interest
payments on the bonds at the actual interest rate.
Caps and Collars are purchased from a Cap or Collar
"provider", at a purchase price based on a percentage of the
aggregate principal amount of the bonds to be capped or collared.
The cost of a Cap or a Collar is determined by reference to
prevailing interest rates, the proposed duration of the Cap or
Collar and the proposed Cap and Floor strike rates. The longer
the duration of a Cap or Collar, the higher the price. The lower
the Cap strike rate, the more expensive the Cap is and the higher
the Floor strike rate, the greater the offset from the Cap price.
The maximum the Companies would spend on a ten year Cap would be
10% of the aggregate principal amount of the New Bonds then
outstanding, and the actual cost would be expected to be less
than 10%.
Caps and Collars are designed to mitigate interest rate
risk and do not expose the Companies to financial or other risks.
If the actual interest rate on the New Bonds does not exceed the
Cap strike rate at any time during the term of the Cap, then the
Companies will neither benefit from or be exposed to risk by the
Cap or Collar. If the actual interest rate falls below and
remains below the Floor strike rate, the Companies will be
required to pay interest at the Floor strike rate. Also, the
Companies are subject to the credit risk on the Cap provider's
ability to make payments on the Cap.
While Caps and Collars purchased for the New Bonds may
remain outstanding when the underlying bonds are retired, the
Companies propose to terminate any Caps or Collars upon
retirement of the corresponding New Bonds. If the Companies wish
to terminate a Cap or Collar when interest rates on the New Bonds
are between the Floor strike rate and the Cap strike rate, it
would receive a portion of the original cost of the Cap or Collar
in return, or receive nothing, depending on interest rates and
the remaining term of the Cap or Collar. If the Companies seek
to terminate a Collar when the actual interest rate is below the
Floor strike rate, the Companies may be required to pay a
termination fee based upon the value of the Collar to the Floor
provider at the time.
Under Rule 24, within 45 days after the end of each quarter
in which the Companies have outstanding any Caps or Collars as
described herein relating to the Series 1996 Bonds, the Companies
shall file a certificate with the Commission disclosing the
following information with respect to each such Cap or Collar:
(a) the transaction date, (b) the type of transaction (either a
Cap or a Collar), (c) the notional amount, (d) the name of the
counterparty and (e) a description of the material terms,
including the maturity or termination date and the Cap and/or
Floor strike rates. Such certificate shall also disclose the
market value of all open Cap or Collar positions at the end of
each quarter and any gains or losses realized from the
liquidation of any Cap or Collar positions during such quarter.
Conclusion
The Companies believe that the consummation of the
transactions proposed herein will be in the best interests of its
consumers and investors and consistent with sound and prudent
financial policy.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
Jonathan G. Katz
Secretary
<PAGE>
EXHIBIT 11
- ----------
THE COMPANIES
ESTIMATED INTEREST SAVINGS
SERIES 1984
EXISTING SECURITIES BONDS
- ------------------- ---------------
Amount Outstanding $ 63,300,000
Coupon Rate 7-7/8%
---------------
Annual Interest Expense $ 4,984,875
===============
Amount Redeemed $ 63,300,000
Redemption Price 103.00
---------------
Aggregate Redemption Price $ 65,199,000
NEW SECURITIES
- --------------
Principal Amount $ 63,300,000
Coupon Rate 4.29%*
---------------
Annual Interest $ 2,715,570
Amortization of Redemption
Premium** 63,300
---------------
Annual Interest Cost $ 2,778,870
===============
Annual Interest Savings by
Refunding $ 2,206,005
Total Interest Savings over
the 18 year remaining life
of the Old Bonds $ 39,708,090
===============
* Based on the average of the last 10 years J. J. Kenny Index
** Amortized over an assumed 30-year life of New Bonds
