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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 14, 1994
CENTRAL AND SOUTH WEST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
1-1443 51-0007707
(Commission File Number) (IRS Employer Identification No.)
1616 Woodall Rodgers Freeway, Dallas TX 75202
(Address of principal executive offices) (zip code)
(214) 777-1000
(Registrant's telephone number, including area code)
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Item 5. Other Events
Proposed El Paso Electric Company (El Paso) Merger
As previously announced, Central and South West Corporation
(Corporation or CSW), has entered into an agreement and plan of merger
between El Paso and CSW, dated as of May 8, 1993, as amended (Merger
Agreement), pursuant to which El Paso would emerge from bankruptcy
through a merger (Merger) as a wholly owned subsidiary of the
Corporation. Various regulatory approvals and other conditions must be
obtained or met on terms satisfactory to the Corporation before it will
consummate the Merger. Background information on the proposed Merger is
contained in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993 and the Corporation's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1994 and June 30, 1994.
Las Cruces, New Mexico Referendum
On August 30, 1994 voters in the City of Las Cruces, New Mexico
(Las Cruces), approved a referendum authorizing the city government to
proceed with efforts to acquire from El Paso, through negotiated
purchase or eminent domain, the electric utility system, including
certain distribution, substation and associated transmission facilities
(Distribution System). As previously reported, El Paso's franchise with
Las Cruces expired March 18, 1994 and has not been replaced or extended.
Since that time, El Paso has continued to provide electric service to
customers within Las Cruces. On June 6, 1994, the Las Cruces City
Council approved resolutions (i) selecting the proposals of Southwestern
Public Service Company (SPS) for the provision of firm wholesale
electric power and operation and maintenance services for the
Distribution System; and (ii) authorizing the staff of Las Cruces to
negotiate contracts with SPS related to such services. Las Cruces has
stated that it continues to examine alternatives for acquiring a
distribution system and has obtained authority from the New Mexico State
Board of Finance to issue up to $90 million in revenue bonds to finance
the acquisition. On August 22, 1994, Las Cruces awarded a wholesale
full requirements power contract to SPS. As discussed above, delivery
of power under the contract would be subject to the outcome of efforts
by Las Cruces to acquire the Distribution System.
El Paso stated that it will continue to provide electric service
within Las Cruces, despite the outcome of the referendum discussed
above, Before Las Cruces could terminate electric service from El Paso,
a number of legal matters must be resolved. El Paso has informed CSW
that it intends to continue its challenges to Las Cruces' efforts to
force its removal as the provider of electric service to Las Cruces.
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Bankruptcy Proceeding
One of the legal impediments to Las Cruces' pursuit of
municipalization is the automatic stay in El Paso's bankruptcy
proceeding. Las Cruces has filed a motion with the United States
Bankruptcy Court for the Western District of Texas, Austin Division
(Bankruptcy Court) to lift the automatic stay in El Paso's bankruptcy
case to allow Las Cruces to (i) commence action against El Paso for
failure to pay franchise fees after expiration of the franchise in March
1994; (ii) enter El Paso's property to conduct an appraisal of the
electric distribution system and any suitability studies; (iii) give
notice of intent to file a condemnation action; and (iv) commence state
court condemnation proceedings against El Paso to condemn El Paso's
distribution system within Las Cruces' city limits. The Bankruptcy
Court is scheduled to hear the motion on September 20, 1994.
On August 1, 1994, in response to Las Cruces' motion, the
Corporation filed an amended response with the Bankruptcy Court which
states that the threat or actual commencement of condemnation
proceedings by Las Cruces or the elimination of El Paso's service to Las
Cruces by condemnation or otherwise may constitute an El Paso Material
Adverse Effect (MAE) as defined in the Merger Agreement, the absence of
which is a condition of the Corporation's obligation to consummate the
Merger. The existence of a MAE would preclude consummation of the
Merger unless the Corporation waives this condition in writing.
On September 14, 1994, CSW filed its second amended response with
the Bankruptcy Court stating that, whether or not the automatic stay is
modified or maintained, the intent and plan of Las Cruces' to file a
condemnation proceeding creates a situation that must be timely and
favorably resolved by El Paso before the consummation of the Merger. El
Paso has asserted that it believes that it is in the best interest of
this estate and the Merger for the stay to remain in place. Because El
Paso believes it is in a better position to resolve the Las Cruces
dispute with the stay in place, CSW supports the maintenance of the stay
as a means of avoiding disruption while a timely solution to the
condemnation problem is sought by El Paso. See "El Paso Notification"
below.
Preemption and Preclusion Matters
As previously reported, in late June 1994, intervenors and the
staff of the Public Utility Commission of Texas (Texas Commission) filed
testimony in the Texas regulatory proceedings relating to the Merger.
The Corporation and El Paso later filed motions to strike the portions
of such testimony relating to certain important issues they believe have
already been conclusively decided by the Bankruptcy Court as part of its
confirmation order, including issues of fairness of certain aspects of
the Merger and the appropriateness of El Paso's reaquisition of the Palo
Verde Nuclear Generating Station leased assets. The Corporation and El
Paso filed a joint motion with the Bankruptcy Court seeking its
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determination as to what effect the confirmation order has on the issues
raised in their motion to strike in the Texas proceedings.
The administrative law judge hearing the Texas proceedings denied
intervenor and Texas Commission staff procedural motions seeking to
suspend the hearing until a determination of these issues and, subject
to a binding determination to the contrary by the Bankruptcy Court, will
decide the issues as part of the overall proceeding. This matter is
pending before the Bankruptcy Court.
On September 14, 1994, CSW submitted a notice of dismissal without
prejudice with the Bankruptcy Court to remove CSW from the proceeding.
In the notice, CSW stated that while it supports a timely resolution of
the preemption issues, its participation is not necessary to a full and
complete adjudication of the matters set forth therein.
Federal Energy Regulatory Commission (FERC) Application
On September 1, 1994, CSW and El Paso asked the FERC to rehear its
order that requires the companies to offer "comparable transmission
service" to other electric utilities as a condition to approval of the
companies' proposed Merger. In their filing, CSW and El Paso stated
that this requirement represents a significant policy change and that
the FERC has exceeded its authority under the Federal Power Act, which
limits the FERC's discretion in establishing conditions to its approval
of a merger only to those conditions necessary to mitigate any detriment
to the public.
The filing also stated that, until now, the FERC has sought to
determine only whether a merger transaction would result in a detriment
to the public interest and, to the extent the FERC found it necessary to
ameliorate any such detriment, approved the transaction subject to
appropriate conditions. CSW and El Paso contend that in this case,
instead of following this historic approach, the FERC has applied to
them a new standard without establishing that the facts of the Merger
justify the change in the FERC's position.
In seeking the rehearing, CSW and El Paso stated that they would
offer comparable service if that is what is required, but that their
willingness to do so would not relieve the FERC of its obligation to
explain its decisions and support them by reference to substantial
evidence of record.
CSW and El Paso also have filed, as ordered by the FERC, proposed
comparable-service revisions to their open-access transmission tariffs.
The comparable-service revisions filed by CSW and El Paso affect tariffs
that had been proposed previously for the El Paso electric system and
that had been filed previously for Public Service Company of Oklahoma
and Southwestern Electric Power Company, both of which are wholly-owned
subsidiaries of CSW. The revised tariffs were submitted as evidence in
the Merger case and would not become effective until after the Merger is
completed.
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In the filing CSW and El Paso also stated that: (i) The FERC's
requirement that transmission service be provided over facilities
outside the Electric Reliability Council of Texas (ERCOT) at a single,
systemwide rate is unsupported by substantial evidence and at odds with
established FERC precedents; (ii) the FERC has no authority to order
transmission service to Mexico, and (iii) the FERC's requirement that
allocation of benefits from the Merger be set for hearing is
inconsistent with precedents under Section 203 of the Federal Power Act.
On September 9, 1994 the Texas Commission initiated an inquiry to
determine whether the existing rates, terms and conditions of Central
Power and Light Company and West Texas Utilities Company from
transmission services provided over their ERCOT facilities continue to
be just, reasonable, and nondiscriminatory under the Texas Public
Utility Regulatory Act in light of the open access transmission tariffs
CSW plans to file with the FERC in response to the FERC's recent order,
discussed above. A prehearing conference in the inquiry docket has been
scheduled for September 26, 1994.
El Paso Notification
In a letter dated and delivered September 12, 1994 to El Paso
attached as Exhibit 99, CSW notified El Paso that certain adverse
developments jeopardize the completion of the companies' proposed
Merger. CSW notified El Paso that because sales to customers in Las
Cruces represent approximately 8% of El Paso's annual gross revenues,
the favorable resolution of Las Cruces' dispute with El Paso, as
described above, is a material element of CSW's bargain with El Paso.
CSW advised El Paso that it will not close the transaction unless the
Las Cruces matter is resolved in a favorable and timely manner.
In addition, CSW cited other adverse matters that could
potentially impact the Merger. These include: (i) the potential loss of
other customers including military installations in El Paso's service
area; (ii) cracking in steam generator tubes at the Palo Verde Nuclear
Generating Station; (iii) intense political and regulatory opposition to
the Merger; and (iv) the new "comparable transmission service" standard
being imposed on the Merger by the FERC, as discussed above.
CSW stated that the foregoing matters, individually and
cumulatively, constitute a MAE or failure of other closing conditions
which, unless timely resolved in accordance with the Merger Agreement,
will preclude closing of the proposed Merger. CSW further stated that
it continues to use its best efforts to consummate the proposed Merger.
For a complete statement of the Corporation's position please see
the letter attached as Exhibit 99.
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Other
The Corporation is analyzing these and other developments
regarding El Paso and its operations and is evaluating the possible
adverse operational and financial effects those developments may have on
El Paso or the Merger both now and in the future. The Corporation is
currently continuing to pursue the receipt of all regulatory approvals
required in order to consummate the Merger. The financial assumptions
underlying the Modified Plan assume, among other things, that regulatory
approvals necessary to implement acceptable rate treatment will be
secured and that other conditions to the Merger are met on satisfactory
terms. The Corporation can give no assurances, however, as to whether
the required regulatory approvals will be received or other conditions
to the Merger will be met on timely and satisfactory terms.
Other Available Information
El Paso is subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended and in accordance
therewith files reports and other information with the Securities and
Exchange Commission. For additional information concerning El Paso, see
El Paso's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1994 and June 30, 1994 and the documents referenced therein and its
Annual Report on Form 10-K for the year ended December 31, 1993 and the
documents referenced therein.
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Item 7. Financial Statements and Exhibits
Exhibit:
Exhibit 99. Letter from CSW to El Paso Dated September 12, 1994.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CENTRAL AND SOUTH WEST CORPORATION
Date: September 14, 1994
By: WENDY G. HARGUS
Wendy G. Hargus
Controller
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Exhibit 99
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164 Dallas, Texas
75266-0164
214-777-1096
FERD. C. MEYER. JR.
Senior Vice President
and
General Counsel
September 12, l994
Eduardo Rodriguez, Esq.
Vice President & General Counsel
El Paso Electric Company
303 North Oregon
El Paso, Texas 79960
Dear Mr. Rodriguez:
This letter is in response to your letter of August 5, l994 to
Henry Kaim regarding the situation in Las Cruces. Because sales by El
Paso Electric to customers in the City represent approximately 8 percent
of El Paso Electric's annual gross revenues, the favorable resolution of
this dispute is a material element of CSW's bargain with El Paso
Electric. Merely delaying a "litigated settlement" with Las Cruces
beyond the Termination Date under the Merger Agreement would not be a
satisfactory resolution of this matter. CSW will not close this
transaction unless this matter is favorably and timely resolved.
The statements in your letter of August 5 regarding CSW's
pleadings in the Bankruptcy Court relating to the Las Cruces situation
and with your reading of the requirements of the Merger Agreement are in
error. CSW's Amended Response to the City of Las Cruces pending Motion
for Relief from Stay was neither harmful nor inappropriate. CSW's
filing of the Amended Response was fully consistent with the terms of
the Merger Agreement.
Section 7.1(a) of the Merger Agreement permits each party to file
"any pleading" -- with or without the other party's approval and whether
or not acceptable to the other party -- if it is determined by the
filing party in good faith to be "required in the exercise of its
respective duties". In addition, Section 7.1(a) requires that
objections to a filing be "in the reasonable exercise of [the objecting
party's] judgment" (emphasis added). The filing of CSW's Amended
Response was fully consistent with these provisions.
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Mr. Eduardo Rodriguez, Esq.
September 12, l994
Page 2
Under Section 8.3(f) of the Merger Agreement, it is a condition to
CSW's obligations that "no EPE Material Adverse Effect shall have
occurred" and that "there shall exist no fact or circumstance which may
reasonably be expected to give rise to an EPE Material Adverse Effect".
Furthermore, under Section 8.2(c) of the Merger Agreement, the
obligations of each party to effect the proposed merger are conditioned
on no Governmental Authority enacting any law, rule, regulation or
ordinance, or issuing any order, which would have an EPE Material
Adverse Effect or a Material Adverse Effect upon the prospects for the
business of CSW or El Paso after the proposed Merger. For these
reasons, CSW believed when it filed the Amended Response -- and CSW
continues to believe now -- that the "situation placed before the Court
by the City of Las Cruces' intent to condemn places the closing of the
Merger Agreement in severe jeopardy" and whether the automatic stay is
modified or maintained, the underlying threat of condemnation and the
City of Las Cruces' expressed intent to condemn the Las Cruces
distribution system creates a situation that must be timely and
favorably resolved before a closing of the Merger can occur.
In addition to the City of Las Cruces, the Departments of the Air
Force and the Army within the last several months have requested
proposals related to the provision of electric service to Holloman Air
Force Base and White Sands Missile Range, respectively. The potential
for losses of further customers could also constitute Material Adverse
Effects which would make it impossible to close the transaction.
Another adverse situation which has arisen relates to the nature
and amount of tube cracking in the Palo Verde Nuclear Generating Station
("Palo Verde") steam generators. The precise nature and extent of the
problem has been the subject of continuing investigation and analysis by
Arizona Public Service Company ("APS"), as operator of Palo Verde, after
the execution of the Merger Agreement. Although APS has developed a
system of plugging cracked tubes in these steam generators, it is
uncertain how long the units may be operated before significant expense
may be required with respect to the replacement of these generators.
This in turn increases the potential frequency and length of outages
from the tube cracking problem. These problems may lead to decreased
capacity, increased operating costs, additional capital expenditures and
increased costs for purchased power. The significance of these problems
will have to be determined before CSW will close the transaction.
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Mr. Eduardo Rodriguez, Esq.
September 12, l994
Page 3
CSW also views recent developments related to the pending Merger
rate case in Texas with concern. As you know, CSW filed a proposed rate
settlement plan in connection with the pending Merger application that
would limit the non-fuel cash base rate increase for Texas
jurisdictional customers to $25 million. On June 23, 1994, the El Paso
City Council voted to deny the company's requested rate increase
following a recommendation from the City's Public Utility Regulatory
Board that rates be reduced by $15.7 million. On June 24, l994, the
staff ("Staff") of the Public Utility Commission of Texas ("PUCT")
announced that it had filed testimony in the case recommending an
increase in base rates of only $17.1 million. In addition, the Staff
took the position that the proposed Merger is not in the public interest
because of anticipated cost increases to existing CSW subsidiaries; that
the proposed purchase price is too high by $300-500 million; and that it
disagreed with the estimates of Merger-related savings presented by El
Paso Electric and CSW. Several rate base treatments also have been
proposed which, if adopted, jeopardize the future rate relief
contemplated under the Plan and Merger Agreement. In addition to the
immediate effect of these developments in the Texas rate proceedings,
these developments are also troubling in light of the "public interest"
and other determinations that are required as part of the regulatory
deliberations by the Securities and Exchange Commission and other
regulatory agencies reviewing the proposed Merger. Moreover, the
failure for whatever reason to obtain a finding that the proposed merger
is in the public interest or the inability for whatever reason to obtain
a rate path substantially in the amount described in the disclosure
statement will constitute a failure of the regulatory closing conditions
in the Merger Agreement.
Finally, as you know, the Federal Energy Regulatory Commission
last month issued an order in the merger proceeding requiring the
companies to offer "comparable transmission service" to other electric
utilities as a condition of proceeding further with the case. The
FERC's order represents a significant policy change and imposes
conditions not previously imposed in recent FERC orders in mergers
involving electric utility companies. On September 1, the companies
sought a rehearing of the FERC's order.
As you know, it is a condition precedent to CSW's obligation to
close the Merger that all necessary regulatory approvals and orders be
obtained on terms that satisfy Section 8.3(g) of the Merger Agreement.
Failure to obtain the necessary regulatory approvals and orders for
whatever reason will not satisfy the terms of the Merger Agreement and
will preclude closing of the proposed Merger.
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Mr. Eduardo Rodriguez, Esq.
September 12, l994
Page 4
CSW believes that the foregoing matters, individually and
cumulatively, constitute a Material Adverse Effect or failure of other
closing conditions which, unless timely resolved in accordance with the
Merger Agreement, will preclude closing of the proposed Merger. Of
course, other events may occur or come to our attention which constitute
a Material Adverse Effect or failure of other closing conditions.
CSW continues to use its best efforts to consummate the proposed
Merger. However, CSW believes that it is appropriate to apprise El Paso
Electric of these concerns that must be satisfactorily resolved in light
of the parties' respective rights and obligations under applicable
provisions of the Merger Agreement and the Plan. As always, we are more
than willing to discuss with you any issues raised in this letter or in
any way related to the proposed Merger.
Yours truly
Ferd C. Meyer Jr.
FCM/ml
cc: Creditor Committee Representatives
