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File No. 70-8339
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 7 TO
FORM U-1 APPLICATION-DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
______________________________________
CENTRAL AND SOUTH WEST CORPORATION
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75202
(Names of companies filing this statement and
addresses of principal executive offices)
_____________________________________
CENTRAL AND SOUTH WEST CORPORATION
(Name of top registered holding company parent)
____________________________________
Stephen J. McDonnell
Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75202
Joris M. Hogan
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, New York 10005
(Names and addresses of agents for service)
with copies to
George J. Forsyth, Guilford W. Gaylord & Rodrigo J. Howard
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, New York 10005
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TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transaction. . . . . . . . . . . . . . . . 2
A. Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . 2
B. Description of the Parties . . . . . . . . . . . . . . . . . . 3
1. CSW and Subsidiaries . . . . . . . . . . . . . . . . . . . 3
2. EPE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. CSW Sub Merger Subsidiary. . . . . . . . . . . . . . . . . 4
C. History of EPE Bankruptcy and the Proposed Transaction . . . . 4
D. Treatment of Claims and Interests Under the Plan . . . . . . . 7
1. EPE Common Stock . . . . . . . . . . . . . . . . . . . . . 9
2. Creditors and Preferred Shareholders . . . . . . . . . . . 9
3. Cash in Lieu of Securities . . . . . . . . . . . . . . . . 12
E. Conditions to the Transaction and the Plan . . . . . . . . . . 12
F. Description of Assets Being Acquired . . . . . . . . . . . . . 14
G. Management Arrangements. . . . . . . . . . . . . . . . . . . . 16
H. Reasons for Transaction. . . . . . . . . . . . . . . . . . . . 17
Item 2. Estimated Fees, Commissions and Expenses . . . . . . . . . . . . . 22
Item 3. Applicable Statutory Provisions. . . . . . . . . . . . . . . . . . 24
I. Acquisition of EPE by CSW. . . . . . . . . . . . . . . . . . . 24
A. Section 10(b). . . . . . . . . . . . . . . . . . . . . . . 25
1. Section 10(b)(1) . . . . . . . . . . . . . . . . . . . 25
a. Interlocking Relations . . . . . . . . . . . . . . 25
b. Concentration of Control . . . . . . . . . . . . . 26
2. Section 10(b)(2) . . . . . . . . . . . . . . . . . . . 29
a. Reasonableness of Consideration. . . . . . . . . . 29
b. Reasonableness of Fees . . . . . . . . . . . . . . 33
3. Section 10(b)(3) . . . . . . . . . . . . . . . . . . . 35
B. Section 10(c). . . . . . . . . . . . . . . . . . . . . . . 37
1. Section 10(c)(1) . . . . . . . . . . . . . . . . . . . 37
a. Section 11(b)(2) . . . . . . . . . . . . . . . . . 38
i. Interconnection . . . . . . . . . . . . . . 38
ii. Single Interconnected and Coordinated
System. . . . . . . . . . . . . . . . . . . 41
iii. Single Area or Region . . . . . . . . . . . 44
iv. Localized Management, Efficient Operation
and Effective Regulation. . . . . . . . . . 45
b. Section 11(b)(2) . . . . . . . . . . . . . . . . . 46
2. Section 10(c)(2) . . . . . . . . . . . . . . . . . . . 46
3. Section 10(f). . . . . . . . . . . . . . . . . . . . . 46
II. Other Transaction-Related Actions . . . . . . . . . . . . . . 47
A. Issuances of Securities by CSW and Reorganized EPE . . . . 47
1. Issuance of Common Stock by CSW. . . . . . . . . . . . 48
2. Issuance of CSW Sub Common Stock . . . . . . . . . . . 49
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Page
3. Issuance of New EPE Securities . . . . . . . . . . . . 49
a. Description of Securities. . . . . . . . . . . . . 51
i. First Mortgage Bonds. . . . . . . . . . . . 51
ii. Second Mortgage Bonds.. . . . . . . . . . . 52
iii. Senior Fixed Rate Notes . . . . . . . . . . 54
iv. Secured Floating Rate Notes . . . . . . . . 54
v. Senior Floating Rate Notes. . . . . . . . . 55
vi. Letters of Credit Supporting Maricopa
PCB's . . . . . . . . . . . . . . . . . . . 56
vii. Letter of Credit Supporting Farmington
PCB's . . . . . . . . . . . . . . . . . . . 57
viii. Preferred Stock . . . . . . . . . . 58
b. Analysis . . . . . . . . . . . . . . . . . . . . . 58
4. Registration . . . . . . . . . . . . . . . . . . . . . 60
B. Addition of EPE to CSW System Service Agreement. . . . . . 60
C. Reacquisition by EPE of Ownership of the Leased Palo
Verde Assets. . . . . . . . . . . . . . . . . . . . . . . 61
Item 4. Regulatory Approval. . . . . . . . . . . . . . . . . . . . . . . . 64
I. Bankruptcy Confirmation . . . . . . . . . . . . . . . . . . . 64
II. Pre-Merger Notification . . . . . . . . . . . . . . . . . . . 64
III. State Public Utility Regulation and Other
State Approvals. . . . . . . . . . . . . . . . . . . . . . . 64
A. Texas. . . . . . . . . . . . . . . . . . . . . . . . . 65
B. New Mexico . . . . . . . . . . . . . . . . . . . . . . 65
IV. Federal Power Act . . . . . . . . . . . . . . . . . . . . . . 66
V. Atomic Energy Act . . . . . . . . . . . . . . . . . . . . . . 69
VI. Department of Energy. . . . . . . . . . . . . . . . . . . . . 69
Item 5. Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Item 6. Exhibits and Financial Statements. . . . . . . . . . . . . . . . . 70
I. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . 70
II. Financial Statements. . . . . . . . . . . . . . . . . . . . . 87
Item 7. Information as to Environmental Effects. . . . . . . . . . . . . . 88
Glossary of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . 89
Index of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ii
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Central and South West Corporation ("CSW"), a Delaware corporation
and a holding company registered under the Public Utility Holding Company
Act of 1935, as amended (the "Act"), hereby files this Amendment No. 7 to
the Form U-1 Application-Declaration in File No. 70-8339 to respond to
certain comments and questions by the Staff of the Securities and Exchange
Commission (the "Commission") and to update certain information. As so
amended, the Application-Declaration is hereby restated in its entirety as
follows:
(Note: A glossary of capitalized terms appears at the end of this
application-declaration after Item 7.)
Item 1. Description of Proposed Transaction.
A. Introduction.
Central and South West Corporation ("CSW"), a Delaware corporation
and a holding company registered under the Public Utility Holding Company
Act of 1935, as amended (the "Act"), submits this application-declaration
(the "Application") pursuant to Sections 6(a), 7, 9(a), 10 and 13(f) of
the Act and the rules thereunder, for approval of CSW's proposed
acquisition (the "Transaction") of El Paso Electric Company ("EPE" and,
after completion of its reorganization in bankruptcy, "Reorganized EPE"),
an electric public utility incorporated under the laws of the State of
Texas and a debtor-in-possession in bankruptcy reorganization proceedings
pending in the U.S. Bankruptcy Court for the Western District of Texas,
Austin Division (the "Bankruptcy Court") in Case No. 92-10148-FM, and
certain related transactions.
To effect the Transaction, EPE will merge with a shell subsidiary
to be established by CSW. Simultaneously with that merger, EPE's plan of
reorganization will become effective. As part of the reorganization and
merger, in exchange for existing EPE securities and claims against EPE,
EPE shareholders and creditors will receive shares of common stock, $3.50
par value, of CSW ("CSW Common Stock"), new securities of Reorganized EPE
and cash.
The proposed Transaction is the result of nearly two years of
proceedings and negotiations of enormous complexity and expense, and
resolves a bankruptcy that is only the second bankruptcy of a major
publicly traded electric utility company since the Great Depression. In
the words of the Bankruptcy Court confirmation order, the Transaction
involves a "global compromise" of the "many significant issues" and
"intertwined" claims and interests in the proceedings, and avoids "the
complexities and uncertainties of . . . litigation" and "inevitable
appeals." As such, the Transaction "is calculated to permit EPE's
rehabilitation and expedite its emergence from bankruptcy" on a consensual
basis. Moreover, the Transaction "resolves the claims and interests of
creditors and shareholders in a manner which is fair to each of them . . .
and, in addition, provides the ratepayers with significant benefits."
Finally, as the Bankruptcy Court found, "no other alternative . . . is or
would be appropriate for EPE at this time." (See paragraphs 17 and 19-21
of the Findings of Fact and Conclusions of Law of the Bankruptcy Court
dated December 8, 1993 in support of its order confirming the Plan
("Findings of Fact") (Exhibit D-14 hereto).)
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For these reasons and the other reasons set forth herein, CSW
respectfully requests that the Securities and Exchange Commission (the
"Commission") consider and approve this Application on a timely and
expeditious basis.
B. Description of the Parties.
1. CSW and Subsidiaries.
CSW is an electric utility holding company. CSW owns all of the
outstanding shares of common stock of Central Power and Light Company
("CPL"), Public Service Company of Oklahoma ("PSO"), Southwestern Electric
Power Company ("SWEPCO"), West Texas Utilities Company ("WTU" and,
collectively with CPL, PSO and SWEPCO, the "CSW Electric Operating
Companies"), Transok, Inc. ("Transok"), CSW Credit, Inc. ("CSWC"), CSW
Energy, Inc. ("CSWE"), and Central and South West Services, Inc. ("CSWS"),
and 80% of the outstanding shares of common stock of CSW Leasing, Inc.
("CSWL"). In addition, CSWE holds interests in several power projects.
The CSW System consists of the CSW Electric Operating Companies, Transok,
CSWC, CSWE, CSWS, CSWL and the aforementioned power project interests
(collectively, the "CSW System").
The CSW Electric Operating Companies are public utility companies
engaged in generating, purchasing, transmitting, distributing and selling
electricity. They supply electric service to approximately 1.6 million
retail customers. CPL and WTU operate in south and central west Texas,
respectively; PSO operates in eastern and southwestern Oklahoma; and
SWEPCO operates in northeastern Texas, northwestern Louisiana and western
Arkansas. Transok is a natural gas gathering, transmission and processing
company which transports for and sells natural gas to PSO and for the
other CSW Electric Operating Companies, and processes, transports and
sells natural gas to and for non-affiliates. CSWS performs various
accounting, engineering, tax, legal, financial, electronic data
processing, centralized power dispatching and other services for the CSW
System. CSWC purchases accounts receivable of the CSW Electric Operating
Companies, Transok, and unaffiliated electric and gas utilities. CSWE
pursues cogeneration projects and other energy ventures. CSWL invests in
leveraged leases.
The authorized capital stock of CSW consists of 350,000,000 shares
of CSW Common Stock. As of June 30, 1994, 189,359,000 shares of CSW
Common Stock were issued and outstanding. Additional information
concerning CSW and its subsidiaries is set forth in the Annual Report on
Form 10-K and Annual Report to Shareholders for the year ended December
31, 1993 (Exhibits H-11 and H-13 hereto, respectively) and CSW's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1994 and June 30,
1994 (Exhibits H-15 and H-17 hereto, respectively).
2. EPE.
EPE is engaged in the generation and distribution of electricity
through an interconnected system to approximately 262,000 retail customers
in El Paso, Texas, and an area of the Rio Grande Valley in west Texas and
southern New Mexico, and to wholesale customers located in southern
California, Texas, New Mexico, and Mexico.
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The authorized capital stock of EPE consists of 100,000,000 shares
of common stock, no par value ("EPE Common Stock"), and 2,000,000 shares
of cumulative preferred stock, no par value ("EPE Preferred Stock"). As
of June 30, 1994, 35,544,330 shares of EPE Common Stock, 52,000 shares of
EPE Series 10.75% Preferred Stock, 97,600 shares of EPE Series 8.44%
Preferred Stock, 90,000 shares of EPE Series 8.95% Preferred Stock,
100,000 shares of EPE Series 10.125% Preferred Stock, 300,000 shares of
EPE Series 11.375% Preferred Stock, 15,000 shares of EPE Series 4.5%
Preferred Stock, 15,000 shares of EPE Series 4.12% Preferred Stock, 20,000
shares of EPE Series 4.72% Preferred Stock, 40,000 shares of EPE Series
4.56% Preferred Stock, and 52,450 shares of EPE Series 8.24% Preferred
Stock were issued and outstanding. Additional information concerning EPE
is set forth in EPE's Annual Report on Form 10-K and Annual Report to
Shareholders for the year ended December 31, 1993 (Exhibits H-12 and H-14
hereto, respectively) and EPE's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1994 and June 30, 1994 (Exhibits H-16 and H-18
hereto, respectively).
3. CSW Sub Merger Subsidiary.
Solely for the purpose of facilitating the Transaction, and
subject to the approval of the Commission, CSW will incorporate a new
subsidiary -- CSW Sub, Inc. ("CSW Sub") -- under the laws of the State of
Texas prior to the date on which the Plan becomes effective (the
"Effective Date"). The authorized capital stock of CSW Sub will consist
of 1,000 shares of common stock, $.01 par value ("CSW Sub Common Stock"),
of which 1,000 shares will be issued to CSW at the price of $1 per share.
Except as contemplated in connection with the Transaction, CSW Sub will
not directly or indirectly engage in any business activities, incur any
contractual liabilities or obligations, enter into any agreements or
arrangements, or be subject to or bound by any obligation or undertaking
prior to the consummation of the Transaction.
C. History of EPE Bankruptcy and the Proposed Transaction.
(The discussion in this Item 1.C. is derived from the Bankruptcy
Court's Findings of Fact and from the court-approved disclosure statement
relating to EPE's plan of reorganization (Exhibit B-3 hereto).)
In 1991, as a result of financial difficulties, EPE sought to
negotiate a restructuring of its obligations with its creditors. Despite
protracted negotiations and efforts, EPE was unable to implement an out-
of-court restructuring of its obligations.
On January 8, 1992, EPE filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Chapter
11"). In the summer and fall of 1992, EPE unsuccessfully proposed a plan
of reorganization providing for it to emerge from bankruptcy as a stand-
alone company. In late 1992, it became apparent that EPE would be unable
to emerge from bankruptcy on a stand-alone basis within any predictable
period of time. As a result, EPE undertook efforts to pursue a potential
business combination as a means for emerging from Chapter 11.
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EPE's pursuit of a potential business combination included an
analysis of the entities which might have an interest in a merger or
acquisition. Thirteen of these entities requested and were sent an
information package about EPE prepared by EPE and its investment bankers.
Six of the thirteen entities obtained detailed briefings and additional
information from EPE, and four of them engaged in a formal due diligence
investigation of EPE's business. As the process of merger discussions
evolved, the field narrowed to two bidders -- CSW and Southwestern Public
Service Company ("SPS"). Each held extensive discussions with EPE's
creditors, and their offers to EPE reflected, in part, the results of
those negotiations. Only one offer -- CSW's -- attracted the requisite
support of the Bankruptcy Court and the parties to the EPE reorganization
proceeding.
On May 3, 1993, after months of intensive merger negotiations, CSW
and EPE entered into an Agreement and Plan of Merger dated as of May 3,
1993 (as amended on May 18, 1993 and by amendments dated as of August 26,
1993 and December 1, 1993, and as it may be further amended, the "Merger
Agreement") (Exhibit B-1 hereto), which provides for CSW Sub to merge with
and into EPE and for EPE to become a wholly owned subsidiary of CSW as
part of EPE's reorganization in bankruptcy. Before entering into the
Merger Agreement with CSW, EPE encouraged SPS to make a bid of greater
attractiveness to both EPE's creditors and its shareholders than the CSW
proposal. While SPS responded with a bid that was marginally higher for
creditors and preferred shareholders, the SPS bid provided for minimal
consideration for the holders of EPE Common Stock, so that the overall
enterprise value provided in the SPS offer was less than that offered by
CSW. For these reasons, the EPE Board of Directors determined that the
CSW offer provided a better resolution to the entire group of interested
parties, including creditors, shareholders and ratepayers, and had a
better potential for being implemented on a consensual basis and in an
expeditious manner.
On May 5, 1993, EPE filed a third amended plan of reorganization
(as thereafter modified, the "Plan") (Exhibit B-2 hereto) in connection
with the Merger Agreement, which classified EPE's shareholders and
creditors into nearly 30 classes and subclasses. On May 26, 1993, the
Bankruptcy Court held a hearing on a motion by SPS to permit it to file a
competing plan of reorganization. At the conclusion of the hearing, the
Bankruptcy Court adjourned the hearing on SPS's motion and the hearing on
approval of EPE's disclosure statement without setting a new hearing date,
stating, in essence, that SPS, on the one hand, and EPE and CSW, on the
other hand, needed to obtain a degree of creditor support before
proceeding further. During the period from May 5, 1993 through September
6, 1993, EPE and CSW, on the one hand, and SPS, on the other hand,
conducted extended and intensive negotiations with creditor
representatives to secure creditor support for their respective proposals.
CSW improved its offer to the various constituencies, without increasing
the rate path on which its proposal was premised. After further
negotiations and mediation sessions, the principal classes of secured and
unsecured creditors (Classes 1, 2, 5, 11, and 13), the Palo Verde
bondholders (Class 12(a)), and the equity committee (representing Classes
15 and 16) filed with the Bankruptcy Court statements supporting EPE's
acquisition by CSW and objecting to a motion by SPS for leave to file a
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competing plan. On July 30, 1993 and August 27, 1993, EPE filed
modifications and amendments to its May 5 plan of reorganization. A
related disclosure statement dated August 27, 1993 and corrected
September 15, 1993 (the "Disclosure Statement") (Exhibit B-3 hereto) was
approved by the Bankruptcy Court by orders dated August 27, 1993 and
September 15, 1993 (Exhibits D-11 and D-12 hereto). In addition, the
Bankruptcy Court's August 27 order set December 6, 1993 as the date of the
confirmation hearing on the Plan. On September 17, 1993, the Bankruptcy
Court entered an order denying SPS's motion for permission to file a
competing plan of reorganization.
On November 15, 1993, EPE entered into, and on December 8, the
Bankruptcy Court approved, settlement agreements (the "OP Settlements")
(Exhibit B-8 hereto) with the beneficiaries (the "Palo Verde Owner
Participants") of the trusts holding title to certain interests in the
Palo Verde Nuclear Generating Station which were the subject of sale-
leaseback transactions by EPE. The OP Settlements provide for the
transfer back to EPE, upon the Effective Date, of the ownership interests
covered by the sale-leasebacks. In exchange, the OP Settlements provide
for EPE to release certain claims against the Palo Verde Owner
Participants and to pay certain fees and expenses.
On November 19, 1993, the Bankruptcy Court approved a settlement
agreement (the "APS Settlement") (Exhibit B-9 hereto) between EPE and
Arizona Public Service Company ("APS"), for itself and as operating agent
of, and on behalf of the other participants in, the Palo Verde Nuclear
Generation Station, settling, effective as of the Effective Date, the
dispute between EPE and APS regarding the amount and feasibility of cure
by EPE of its defaults under certain agreements and certain claims by EPE
against APS.
On November 15, 1993, voting on the Plan was completed, with all
applicable classes of creditors and shareholders voting overwhelmingly --
and in most cases unanimously or near unanimously -- in favor of the Plan.
The vote of the impaired classes of creditors and shareholders is
summarized below. Classes 4(a)-(i), 7, 8, 9, 10(a)-(b) and 14 were not
impaired under the Plan and were therefore conclusively presumed to have
accepted the Plan by operation of Section 1126(f) of the Bankruptcy Code,
and no solicitation of the votes of such classes was required.
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Percent of Votes in Favor
--------------------------
Class By Dollar By Number of
No. Description Amount Class Members
- ----- ----------- --------- -------------
1 First Mortgage Bonds 99.7% 97.5%
2 Second Mortgage Bonds 100.0 100.0
3 Revolving Credit Facility 100.0 100.0
5(a) to (c) Letters of Credit for 100.0 100.0
Maricopa PCB's
6 Rio Grande Resources Trust 100.0 100.0
11 Letters of Credit for 100.0 100.0
Farmington PCB's
12(a) Palo Verde Bondholders 99.7 98.4
12(b) Palo Verde Owner Participants 100.0 100.0
13 General Unsecured 99.9 97.4
By Number
of Shares
---------
15 Preferred Stock 93.1%
16 Common Stock 97.9
On December 1 and 6 1993, certain further technical amendments and
modifications to the Plan were made which did not require creditor or
shareholder approval. On December 8, 1993 (the "Confirmation Date"), the
Bankruptcy Court confirmed the Plan and approved the Transaction proposed in
this Application. In its Findings of Fact, the Bankruptcy Court unambiguously
emphasized that the Transaction was the only presently viable option for
allowing EPE to emerge from bankruptcy as a financially viable entity:
"The events of this case, including particularly the competitive
bidding process which involved SPS and the substantial preference for
the CSW Merger which was expressed by the constituencies . . .
demonstrate that no other alternative, including the alternative
presented by the SPS proposal, is or would be appropriate for EPE at
this time. Even if such other alternative were feasible, moreover, it
would not be consistent with the objectives of the Bankruptcy Code or
the best interests of the estate to delay EPE's emergence from Chapter
11 to pursue such other alternative." Findings of Fact para. 19
(emphasis added).
The Bankruptcy Court also stated that liquidation would be "extremely more
undesirable" and "would be inconsistent with EPE's public service
obligations." In addition, the Bankruptcy Court found that liquidation would
yield "piecemeal sales" from which all classes of "unsecured creditors and
interest holders would receive significantly less in liquidation than they
would under the Plan." Id. para. 20.
D. Treatment of Claims and Interests Under the Plan.
The total Transaction consideration will be approximately $2.1 billion,
exclusive of cash retained by EPE and paid out to EPE creditors and preferred
shareholders prior to the Effective Date and exclusive of bonds to be issued
<PAGE> 10
in pledge as security for other obligations. The Transaction consideration
will consist of securities of Reorganized EPE (the "New EPE Securities"), new
shares of CSW Common Stock, and cash. Because the Plan and Merger Agreement
allow CSW to substitute CSW Common Stock or cash for certain of the New EPE
Securities and to substitute cash for CSW Common Stock, the exact amount of
each form of consideration has not yet been determined; however, it is
currently anticipated that the consideration will consist of approximately
$569 million in CSW Common Stock to EPE creditors and common equity holders,
approximately $1.125 billion in Reorganized EPE debt, $68 million of
Reorganized EPE preferred stock, and approximately $336 million in cash. In
addition, because the amount of consideration to be paid to holders of EPE
Common Stock is subject to certain contingencies, the total Transaction
consideration may be somewhat higher than $2.1 billion.
Except as noted below, claims of secured creditors will be paid in
full, including post-petition interest, but with instruments that, after the
Effective Date, are likely to bear interest rates that are lower than the
corresponding existing obligations. Unsecured claims generally will receive
notes of Reorganized EPE and CSW Common Stock equal to 95.5% of their claims,
and post-petition interest from June 25, 1993 through the Effective Date; in
the case of Classes 11 and 13, this interest will be in lieu of all claims for
the period from the commencement of the case to the date such interest
payments cease in the event the Effective Date does not occur. Creditors in
Class 6 will be paid in full, but forego 15% of their interest claims prior to
September 10, 1993. Other classes of claims are unimpaired, including claims
relating to pollution control revenue bonds ("PCB's"). The letters of credit
in Classes 5 and 11 supporting the PCB's will remain outstanding (or be
reinstated or replaced by new letters of credit) under negotiated arrangements
that will permit the favorable PCB financing to be preserved for the benefit
of Reorganized EPE. The claims in Class 12(b) related to the leases entered
into by EPE in connection with its sale and leaseback of certain interests in
the Palo Verde Nuclear Generating Station (the "Palo Verde Leases") are
compromised pursuant to the OP Settlements, and the claims of the Palo Verde
Bondholders in Class 12(a) are treated in a manner similar to the allowed
claims of unsecured creditors. Holders of EPE Preferred Stock will receive,
at CSW's election within one year after the Confirmation Date, either CSW
Common Stock or Reorganized EPE Preferred Stock with a value (calculated as
set forth in the Plan) of $68 million, or 82% of the stated value of the
shares of EPE Preferred Stock presently outstanding, plus accumulated
prepetition dividends, and holders of EPE Common Stock will receive, in CSW
Common Stock, between $3 and $4.50 per share of EPE Common Stock.
Further details regarding the amount and type of securities and other
consideration to be given to EPE shareholders and creditors, and the rights
and preferences of such securities, are set forth in Sections I.D.2. and V.B.
of the Disclosure Statement (Exhibit B-3 hereto). In this regard, it should
be noted that Sections I.D.2. and V.B. of the Disclosure Statement, which
describe the securities and other consideration to be issued under the Plan,
describe a number of alternative treatments which would apply if particular
classes voted against the Plan. As all classes entitled to vote have voted
in favor of the Plan, these alternative treatments are no longer applicable
and should be disregarded. In addition, certain other matters in the
Disclosure Statement -- in particular, the description of arrangements
relating to hedging transactions by EPE on pages 203-204 of the Disclosure
<PAGE> 11
Statement -- have been superseded by subsequent modifications to the Plan.
The sections of the Disclosure Statement describing the securities and other
consideration to be issued under the Plan -- including Sections I.D.2. and
V.B. -- were not affected by these modifications.
1. EPE Common Stock.
For each share of EPE Common Stock outstanding at the time of the
consummation of the Transaction, holders of EPE Common Stock will receive at
least $3 worth of CSW Common Stock, based on a price of $29.4583 per share of
CSW Common Stock. Holders of EPE Common Stock may also receive up to $1.50 of
additional consideration (the "Maximum Additional Consideration Amount")
depending on the resolution of certain contingencies. The Maximum Additional
Consideration Amount will depend on the amount of proceeds realized with
respect to certain assets and the amount of savings realized from reductions
in certain claims, and will be based on one of two pricing methods: (i) if
realized before the Confirmation Date, the amount of additional CSW Common
Stock will be based on a price of $29.4583 per share of CSW Common Stock;
(ii) if realized after the Confirmation Date and before the Effective Date,
the amount of CSW Common Stock will be based on the closing price of CSW
Common Stock on the date such proceeds and/or savings are realized. After the
Effective Date, EPE's rights in the assets and savings in question will be
transferred to a liquidation trust (the "Liquidation Trust") in the event an
amount less than the Maximum Additional Consideration Amount was paid to
holders of EPE Common Stock on the Effective Date, and any further net
proceeds and savings will be distributed from the Liquidation Trust in cash in
the following order of priority: (i) first, pro rata to holders of EPE Common
Stock up to the Maximum Additional Consideration Amount, and (ii) second, to
Reorganized EPE for its own benefit.
In addition, holders of EPE Common Stock will receive "dividend
shares," i.e., additional shares of CSW Common Stock in lieu of dividends that
would be deemed to have been paid between the Confirmation Date and the
consummation of the Transaction, on the shares of CSW Common Stock to be
issued to holders of EPE Common Stock under the Plan, including dividends on
the dividend shares. The value of the "dividend shares" will be equal to the
amount of such dividends and will be based on the closing price of CSW Common
Stock on the relevant dividend payment dates.
2. Creditors and Preferred Shareholders.
The Plan provides for claims and interests of EPE creditors and
preferred shareholders to be discharged as set forth below. See Item
3.II.A.3.a. below for a summary description of the securities to be issued by
Reorganized EPE under the Plan ("the New EPE Securities").
Class 1 -- EPE First Mortgage Bonds. Allowed claims arising from or
relating to EPE First Mortgage Bonds (excluding bonds held as collateral
claims) will be discharged through the issuance of Reorganized EPE Series A
First Mortgage Bonds in the principal amount of $100 million, Reorganized EPE
Series B First Mortgage Bonds for the remainder of the claim, and cash for
claims for unpaid interim interest.
<PAGE> 12
Class 2 -- EPE Second Mortgage Bonds. Allowed claims arising from or
relating to EPE Second Mortgage Bonds (excluding bonds held as collateral
claims) will be discharged through the issuance of Reorganized EPE Series A
Second Mortgage Bonds and cash for claims for unpaid interim interest.
Class 3 -- EPE revolving credit facility. Allowed claims arising from
or related to EPE's revolving credit facility, including EPE First Mortgage
Bonds and EPE Second Mortgage Bonds held as collateral for such facility, will
be discharged through (a) the issuance of, at the creditors' respective
elections no later than 90 days prior to the Effective Date, subject to
certain limitations, either (i) Reorganized EPE Class 3A Secured Notes under a
term loan agreement in the amount of such claims, secured by a combination of
pledged Reorganized EPE Series X First Mortgage Bonds and pledged Reorganized
EPE Series X Second Mortgage Bonds or (ii) Reorganized EPE Series C First
Mortgage Bonds and Reorganized EPE Series B Second Mortgage Bonds in an amount
equal to one-third and two-thirds, respectively, of the amount of such claims,
and (b) cash for claims for unpaid interim interest.
Class 5 -- Claims against EPE relating to the letters of credit
associated with the Maricopa Pollution Control Bonds. The letter of credit
issuers associated with the Maricopa PCB's have committed to provide
replacement letters of credit on certain terms, and will receive Reorganized
EPE Class 5A Secured Notes under term loan agreements, secured by pledged
Reorganized EPE Series Y Second Mortgage Bonds with respect to outstanding
draws and interest on the existing letters of credit, and cash for claims for
unpaid interim interest and letter of credit fees. Post-Effective Date
reimbursement obligations under such replacement letters of credit will be
secured by pledged Reorganized EPE Series Y Second Mortgage Bonds. In the
event a letter of credit issuer does not provide a replacement letter of
credit, it will receive Reorganized EPE Series B Second Mortgage Bonds for
claims determined by the Bankruptcy Court to be secured claims and Reorganized
EPE Class 13 Senior Fixed Rate Notes for claims determined to be unsecured
claims.
Class 6 -- Claims asserted by the Rio Grande Resources Trust. Holders
of allowed claims relating to the Rio Grande Resources Trust, a trust
established for purposes of financing the purchase and enrichment of nuclear
fuel for use by EPE in connection with its interest in the Palo Verde Nuclear
Generating Station, will receive, at the holder's respective election, either
(a) Reorganized EPE Class 6A Secured Notes under a term loan agreement secured
by pledged Reorganized EPE Series Z Second Mortgage Bonds, or (b) Reorganized
EPE Series B Second Mortgage Bonds. In addition, they will receive cash for
claims for 85% of unpaid interim interest.
Class 11 -- Claims relating to the letter of credit associated with the
Farmington PCB's. The issuer of the letter of credit associated with the
Farmington PCB's has committed to provide a replacement letter of credit on
certain terms, and allowed claims relating to the letter of credit associated
with the Farmington PCB's (other than claims, if any, for unreimbursed amounts
drawn to pay the principal amount of the purchase price of Farmington PCB's
that have not been canceled or extinguished) will be discharged by
distribution of a combination of Reorganized EPE Notes and CSW Common Stock in
the following amounts: Reorganized EPE Class 13 Senior Notes (Floating or
Fixed Rate Notes, at the election of the claimants) in a principal amount
<PAGE> 13
equal to 30% of the amount of such allowed claims, shares of CSW Common Stock
with a value equal to 60% of the amount of such allowed claims, and, at the
election of Reorganized EPE on the Effective Date, Reorganized EPE Class 13
Senior Notes (Floating or Fixed Rate Notes, at the claimant's election) or
shares of CSW Common Stock in an amount equal to 5.5% of the amount of such
allowed claims. If the existing letter of credit is drawn upon before the
Effective Date to pay the principal amount of the purchase price of any
Farmington PCB's that have not been canceled or extinguished, such claims will
be discharged and satisfied in full (to the extent not paid out of proceeds of
a remarketing or refunding of the Farmington PCB's) by distribution of
Reorganized EPE Class 11 Senior Floating Rate Notes under a term loan
agreement in a principal amount equal to such claims. In addition, holders
will receive cash for certain interim interest payments. Post-Effective Date
reimbursement obligations under the replacement letter of credit will be
secured by pledged Reorganized EPE Series Y Second Mortgage Bonds. If the
issuer of the letter of credit does not issue a replacement letter of credit,
allowed claims relating to the letter of credit will be discharged through the
distribution of Reorganized EPE Class 13 Senior Fixed Rate Notes in an amount
equal to one-third of such claims, and CSW Common Stock for the balance of
such claims.
Class 12 -- Claims relating to Palo Verde Lease Obligation Bonds and
Secured Lease Obligation Bonds. The $700 million in allowed claims relating
to the Palo Verde lease obligation bonds and secured lease obligation bonds
will be discharged through pro rata distribution of the following securities
in the amount of 95.5% of the allowed claims: unsecured Reorganized EPE
Series A Senior Notes in an amount equal to no less than one-third and no more
than two-thirds of the amount distributed for such claims, and shares of CSW
Common Stock equal to the remaining distribution amount. The Palo Verde Owner
Participants, which are also holders of claims relating to the Palo Verde
Leases, will transfer their interests in the leased Palo Verde Assets, release
their claims for any additional damage amounts under the Palo Verde Leases,
retain $288.4 million previously drawn under the related letters of credit,
and be released from claims by EPE and indemnified by Reorganized EPE for
claims by other creditors.
Class 13 -- General unsecured claims. General unsecured claims will be
discharged through the issuance of a combination of Reorganized EPE Notes and
CSW Common Stock in the following amounts: Reorganized EPE Class 13 Senior
Notes (Floating or Fixed Rate Notes, at the election of the claimants) in an
amount equal to 30% of such claims, exclusive of post-petition fees and costs;
CSW Common Stock in an amount equal to 60% of the amount of such claims,
exclusive of post petition fees and costs; and Reorganized EPE Class 13 Senior
Notes (Floating or Fixed Rate Notes, at the election of the claimants) in an
amount equal to 5.5% of such claims, or, at Reorganized EPE's option on the
Effective Date, CSW Common Stock in an amount equal to 5.5% of the amount of
such claims, exclusive of post-petition fees and costs.
Class 15 -- EPE Preferred Stock. Allowed interests of holders of EPE
Preferred Stock will be discharged through the distribution of shares of
Reorganized EPE Preferred Stock, or, at the election of CSW (which election
must be exercised within one year after confirmation of the Plan) and in lieu
of all or a portion of such shares of Reorganized EPE Preferred Stock, shares
of CSW Common Stock, with an aggregate value, calculated as set forth in the
Plan, of $68 million.
<PAGE> 14
Other Claims. The following claims will be unimpaired and their legal
rights unaltered: allowed claims relating to the Maricopa PCB's and Maricopa
Loan Agreements (Class 4), allowed secured claims not classified elsewhere
(Class 7); allowed priority claims (Class 8); allowed claims by EPE's
customers for refunds or for deposits (Class 9); claims relating to the
Farmington PCB's and Farmington Installment Sale Agreement (Class 10); and
allowed administrative convenience claims of small creditors ($100,000 or
less) (Class 14).
Interim Payments. Holders of certain claims will receive cash for
certain interim interest payments or other periodic payments prior to the
Effective Date. It is currently projected that such interim payments will
total approximately $166 million. The interest rate, duration and other
details of such payments vary by class and are set forth in the Plan and
described in the Disclosure Statement.
3. Cash in Lieu of Securities.
The Plan provides that, in lieu of any or all shares of CSW Common
Stock to be issued under the Plan, CSW may, in its sole discretion, pay cash
to the holders of certain classes of claims and interests, subject to the
following limitations: (a) cash payments to certain classes must be made pro
rata to all holders of allowed claims within that class, based on the dollar
amount of the allowed claim held by each holder, (b) CSW may not elect to pay
cash to the holders of EPE Preferred Stock or EPE Common Stock unless CSW has
also elected to pay cash in lieu of stock to the holders of certain other
claims, and (c) holders of claims within certain classes will receive the same
proportion of cash to the amount of their claims as the holders of claims in
other classes which receive cash distributions. CSW's ability to substitute
cash for CSW Common Stock is discussed in further detail in Section 5.3.C of
the Plan (Exhibit B-2 hereto) and Section I.D.2 of the Disclosure Statement
(Exhibit B-3 hereto) under the heading "CSW Option to Distribute Cash". Under
the present financing plan, EPE will pay approximately $336 million in cash to
satisfy the claims of EPE creditors, of which approximately $200 million will
be contributed by CSW.
The Plan also provides that CSW may, at its election, pay cash to the
holders of certain classes of claims and interests in lieu of an equal
principal amount of Reorganized EPE debt securities. Cash payments to such
holders must be applied first pro rata to those holders that have elected to
cause their Reorganized EPE debt securities to be underwritten and sold, and
then pro rata in respect of all other such holders.
E. Conditions to the Transaction and the Plan.
The consummation of the Transaction and the Plan is subject to a number
of conditions, including:
* entry of a final order by the Bankruptcy Court confirming the Plan;
* receipt of all necessary regulatory approvals, on satisfactory
terms, from the Commission, the Federal Energy Regulatory Commission
("FERC"), the Nuclear Regulatory Commission ("NRC") and the
applicable state regulatory authorities; expiration or termination
<PAGE> 15
of all applicable waiting periods under the Hart-Scott-Rodino Act
without action by the Department of Justice and the Federal Trade
Commission; and receipt of satisfactory rate orders from the Public
Utility Commission of Texas ("PUCT") and the New Mexico Public
Utility Commission ("NMPUC") establishing certain ratemaking,
accounting and regulatory treatments;
* resolution of certain contingent, disputed or allowed general
unsecured claims in a total amount not to exceed $20,000,000;
* receipt of a no-action letter (or effectiveness of a registration
statement) as to the securities to be issued under the Plan and
Merger Agreement;
* receipt of an investment-grade rating for all publicly tradeable
Reorganized EPE Series A and B First Mortgage Bonds and Reorganized
EPE Series A Second Mortgage Bonds; and
* transfer back to Reorganized EPE of good and marketable title to the
leased Palo Verde Assets and resolution of the adversary proceeding
between EPE and the Palo Verde Owner Participants without a material
adverse effect on EPE or Reorganized EPE.
A number of these conditions have already been satisfied, and significant
steps have been taken toward the satisfaction of other conditions: the Plan
was confirmed on December 8, 1993; a no-action letter has been received with
respect to the securities to be issued under the Plan and Merger Agreement;
settlements were entered into on November 15, 1993 (and have been approved by
the Bankruptcy Court) resolving the adversary proceeding between the EPE and
the Palo Verde Owner Participants and providing for the transfer back to
Reorganized EPE of title to the leased Palo Verde Assets on the Effective
Date; and a capital structure for Reorganized EPE has been designed which
positions Reorganized EPE's senior debt securities to meet the rating
agencies' anticipated requirements for an investment-grade rating.
In addition to the conditions described above, the parties' obligations
to consummate the Transaction are subject to a number of other conditions
which must be satisfied or waived, as set forth in the Plan and the Merger
Agreement and as further described in the Disclosure Statement. The other
conditions include, (a) under the Merger Agreement: standard closing
conditions relating to the accuracy of representations and warranties,
performance of covenants and agreements, absence of injunctions, receipt of
third-party consents, and receipt of closing certificates; issuance and
listing of the new shares of CSW Common Stock; absence of a material adverse
effect on EPE or CSW or any fact or circumstance which may reasonably be
expected to give rise to such an effect on EPE; absence of any governmental
enactment or order which would have a material adverse effect on EPE, CSW or
the prospects for the business of CSW or Reorganized EPE; qualification of the
Reorganized EPE mortgage indentures under the Trust Indenture Act of 1939 (to
the extent required); effectiveness of the Plan; and absence of any decision
or governmental enactment materially diminishing the benefits and protections
of the Confirmation Order to EPE, CSW, CSW Sub or their subsidiaries; and (b)
under the Plan: filing of Reorganized EPE's charter; qualification of the
<PAGE> 16
Reorganized EPE note and mortgage indentures; satisfaction or waiver of the
conditions to consummation of the Merger Agreement; and filing of notice with
the Bankruptcy Court relating to the fulfillment of Plan conditions.
F. Description of Assets Being Acquired.
As noted above, EPE is engaged in the generation and distribution of
electricity through an interconnected system to approximately 262,000 retail
customers in El Paso, Texas, and an area of the Rio Grande Valley in western
Texas and southern New Mexico and to wholesale customers located in southern
California, Texas, New Mexico and Mexico. EPE also sells power on a wholesale
basis to Texas-New Mexico Power Company, a non-affiliated electric utility
company ("TNP").
EPE's service area extends approximately 110 miles northwesterly from
El Paso to the Caballo Dam in New Mexico and approximately 120 miles
southeasterly from El Paso to Van Horn, Texas. The service area has an
estimated population of 784,000, including approximately 631,000 in the
metropolitan area of El Paso. As of December 31, 1993, EPE's largest
wholesale customers included Comision Federal de Electricidad (the national
electric utility of Mexico), Imperial Irrigation District (an irrigation
district in California), and TNP.
EPE's generating facilities have a net generating capacity of 1,497 MW,
consisting of an entitlement of 600 MW from Palo Verde Nuclear Generating
Station Units 1, 2 and 3 and 104 MW from the Four Corners Generating Project,
and generating capacity of 246 MW from the Rio Grande Power Station, 478 MW
from the Newman Power Station and 69 MW from the Copper Station. These assets
are more fully described as follows:
Four Corners Generating Project. The Four Corners Generating Project
("Four Corners") consists of five coal-fired generating units located in
northwestern New Mexico. Three units (Units 1, 2 and 3 with ratings of 170
MW, 170 MW and 220 MW, respectively) are owned solely by Arizona Public
Service Company ("APS"). Units 4 and 5, with ratings of 740 MW each, are
jointly owned by the following electric utilities: APS, Public Service
Company of New Mexico, Salt River Project Agricultural Improvement and Power
District, Southern California Edison Company, Tucson Electric Power Company
and EPE. All five units are operated by APS. EPE has an undivided 7%
interest in Units 4 and 5 of Four Corners. Four Corners is located on land
held under easements from the federal government and also under a lease from
the Navajo Nation. Certain of the transmission lines and all of the
contracted coal sources for the Four Corners project are also located on the
territory of the Navajo reservation. Units 4 and 5 are located adjacent to a
surface-mined supply of coal. Units 4 and 5 are among the lowest-cost
coal-fired resources in the western United States.
Rio Grande Power Station. The Rio Grande Power Station, located in
Dona Ana County, New Mexico, adjacent to El Paso, Texas, consists of three
steam-electric generating units owned by EPE which have an aggregate
capability of 246 MW when operating entirely on natural gas. If natural gas
at the station is curtailed, the units operate primarily on fuel oil.
<PAGE> 17
Newman Power Station. The Newman Power Station, located in El Paso,
Texas, consists of three generating units with an aggregate capability of 266
MW and one combined-cycle unit with a capability of 212 MW, all of which are
owned by EPE. The units regularly operate on natural gas, but also are
capable of operating on fuel oil.
Copper Station. The Copper Station, located in El Paso, Texas,
consists of a 69 MW combustion turbine capable of operating on fuel oil or
natural gas and is used for peaking purposes. The combustion turbine and
other generating equipment at the station were sold and leased back by EPE in
1980 pursuant to a 20-year lease with an option to renew of up to seven years.
The Plan provides for the assumption by EPE of all of the agreements related
to the sale and leaseback transaction.
Palo Verde Nuclear Generating Station. The Palo Verde Nuclear
Generating Station is a 3,810 MW facility located outside of Phoenix, Arizona.
As of January 8, 1992, when EPE filed its petition for reorganization, EPE
owned or leased a 15.8% interest in each of Palo Verde Units 1, 2 and 3 and
the associated common plant (the "Palo Verde Assets"). Each Palo Verde Unit
has an operating capability of 1,270 MW. EPE currently owns 100% of its
interest in Unit 1 and 60.5% of its interest in Unit 3, and leases 100% of its
interest in Unit 2 and 39.5% of its interest in Unit 3. EPE shares in Palo
Verde power, energy entitlements and costs with six other utilities: APS,
Southern California Edison Company, Public Service Company of New Mexico, Salt
River Project Agricultural Improvement and Power District, Southern California
Public Power Authority and the Department of Water and Power of the City of
Los Angeles (collectively with EPE, the "Palo Verde Participants"). EPE is
separately licensed by the NRC to possess its interest in the Palo Verde
Assets. Necessary NRC approvals for the proposed indirect transfer of control
of EPE, and the return of the ownership interests in the leased Palo Verde
Assets to EPE, are being applied for in a combined NRC application (Exhibit D-
7 hereto), as discussed below in Item 4.V. Following NRC approval, and upon
the Effective Date of the Transaction, Reorganized EPE will be licensed by
the NRC to possess its interest in the Palo Verde Assets.
EPE's rights and obligations with respect to the Palo Verde Nuclear
Generating Station, exclusive of rights or obligations arising in respect of
sale-leaseback agreements, are governed by several interrelated agreements to
which the Palo Verde Participants are parties. In addition, the Merger
Agreement provides, as a condition to the effectiveness of CSW's obligation to
consummate the Transaction (and, therefore, also as a condition to the
effectiveness of the Plan), that good and marketable title to the leased Palo
Verde Assets be transferred to Reorganized EPE. The OP Settlements provide
for such transfer. Following consummation of the Transaction, EPE's interests
in the Palo Verde Nuclear Generating Station will continue to be used for the
benefit of EPE's operations and customers. The Plan makes no change in the
extent of EPE's utilization of the Palo Verde Nuclear Generating Station, the
percentage of costs that EPE is to bear, or the percentage of capacity it is
entitled to receive.
Transmission Lines. EPE owns a 313-mile long, 345 KV transmission line
and associated substation equipment known as the Arizona Interconnection
Project. The Arizona Interconnection Project transmission line originates at
the Springerville Generating Station in Springerville, Arizona, and terminates
<PAGE> 18
at EPE's Diablo Substation near the Rio Grande Power Station. The Arizona
Interconnection Project facilitates EPE's imports of energy from the Arizona
and New Mexico power grids.
EPE also owns a 230-mile long, 345 KV transmission line from the Arroyo
Substation near Las Cruces, New Mexico, to Albuquerque, New Mexico, at which
point EPE's entitlement from Four Corners is delivered from 150 miles of
transmission lines owned by Public Service Company of New Mexico. This 345 KV
transmission line regularly carries power from Four Corners, where EPE has a
major interconnection with the other five participants in Four Corners, to the
EPE service territory.
EPE also owns undivided interests in a 200-mile long, 345 KV
transmission line from the Newman Power Station across southern New Mexico to
Greenlee, Arizona. Specifically, EPE owns an undivided 40% interest in the
60-mile segment from Greenlee, Arizona, to Lordsburg, New Mexico; an undivided
57.2% interest in the 50-mile segment from Lordsburg, New Mexico, to Deming,
New Mexico; and a 100% interest in the 90-mile segment from Deming, New
Mexico, to El Paso, Texas. This line provides interconnections with Tucson
Electric Power Company through which EPE's entitlement from the Four Corners
Generating Project and Palo Verde Nuclear Generating Station is transmitted to
EPE's core transmission system in southern New Mexico, adding stability,
flexibility and reliability to EPE's systems.
Finally, EPE owns an undivided 66% interest in a 125-mile long, 345 KV
transmission line running between EPE's Amrad Substation and SPS's Eddy County
Substation near Artesia, New Mexico. The line terminates with a direct
current converter facility connected with SPS, providing EPE and TNP, the
co-owner of the line and direct current converter, with 200 MW access to the
Southwest Power Pool.
EPE also owns various other lower voltage transmission lines not
described herein.
Additional Information. Further information regarding EPE's contracts
and franchises is set forth in Section II.A. of the Disclosure Statement.
EPE's material contracts are identified in the exhibit index to its 1993
Annual Report on Form 10-K (Exhibit H-12 hereto). EPE's balance sheet at
December 31, 1993 and its income statements for the three years ending
December 31, 1993 are contained in EPE's 1993 Annual Report on Form 10-K
(Exhibit H-12 hereto); 1993 year-end financial statements are contained in
EPE's 1993 Annual Report on Form 10-K and Annual Report to Shareholders
(Exhibits H-12 and H-14 hereto, respectively).
G. Management Arrangements.
After the Confirmation Date and before the Effective Date, the
business, operations, activities and affairs of EPE will be managed by
substantially the same top management as on the date EPE filed for
reorganization, subject to such changes as may be determined by EPE's Board of
Directors and the applicable provisions of the Merger Agreement. In December
1993, the Bankruptcy Court approved the terms of an early retirement program
to be offered to five senior officers of EPE. As of February 15, 1994, all
five of the officers had accepted the offer and retired. After the Effective
<PAGE> 19
Date, Reorganized EPE will be managed by a modified Board of Directors and
executive officers to be designated by CSW in consultation with EPE, as
discussed more fully in Sections XIII.A. and XIII.E. of the Disclosure
Statement under "Future Management of the Debtor," and shall be governed by
the Reorganized EPE Amended and Restated Articles of Incorporation and By-Laws
(Exhibits A-7 and A-8 hereto, respectively).
H. Reasons for Transaction.
The Transaction is expected to produce a number of benefits for CSW and
EPE, their customers, investors and creditors, and the communities they serve.
As a result of these benefits, the Transaction is in the public interest and
the interests of investors and consumers.
Bankruptcy-related benefits. Foremost among the benefits that will
result from the Transaction are benefits flowing from a consensual end to the
bankruptcy proceedings in which EPE has been mired since January 1992. By
ending the bankruptcy proceedings, the Transaction will provide substantial
immediate benefits to all EPE stakeholders and ratepayers and to the citizens
and States of Texas and New Mexico. Among other things, the bankruptcy
proceedings and related litigation have resulted in substantial direct costs
to the EPE estate. These costs are expected to total between $65 million and
$75 million (assuming that the Transaction is consummated and EPE emerges from
bankruptcy on June 30, 1995). In addition, the bankruptcy has:
* diverted EPE's resources away from the operation of its business;
* created uncertainty for investors and customers and impaired their
ability to make long-term plans; and
* exacerbated the uncertainty hanging over EPE's service territory and
the business plans and economic development efforts of the
businesses and communities served by EPE.
The Transaction will create a financially viable EPE with an investment-grade
credit rating. This will reopen EPE's access to the capital markets and
reduce EPE's cost of capital. As a result of the Transaction, EPE will become
part of a financially secure system and will become a more reliable and stable
corporation.
These benefits cannot be achieved by other means. EPE was unable to
implement a viable stand-alone plan of reorganization within any predictable
period of time despite protracted attempts to do so. No other acquisition
proposal obtained the support of creditors and interest holders whose support
is necessary for EPE to emerge from bankruptcy, and no other alternative
offers the overall benefits provided by the Transaction proposed herein.
Cost Savings and Synergies. Apart from bankruptcy-related benefits,
approximately $420 million (in nominal dollars) in potential cost savings and
synergies from the Transaction have been estimated for the 1995-2004 period in
the areas of non-fuel operating and maintenance expenses, financial synergies,
and production and transmission costs. The projected cost savings and
synergies will help hold future rates and rate increases below what would
otherwise result from a stand-alone plan of reorganization.
<PAGE> 20
Set forth below is CSW's estimate of net savings in these areas during
the 1995-2004 period (in nominal dollars and on a present-value basis using an
8% discount rate):
Nominal $ Present Value
------------ -------------
Non-Fuel O&M $234,000,000 $148,589,000
Financial 152,000,000 112,917,000
Production and Transmission 34,000,000 18,944,000
------------ ------------
Total Net Savings $420,000,000 $280,450,000
The foregoing estimate of Transaction-related savings takes account of all
relevant costs required to achieve the benefits of the Transaction, including
projected transmission access charges which are expected to average $1.5
million annually for the 1995-1998 period and $3.0 million annually for the
1999-2004 period and are discussed in Item 3.I.B.1.a.i. below), the cost of
modifications needed on the CSW and the SPS systems before firm transmission
service can be provided by SPS year-round, and the estimated wheeling costs
associated with non-firm energy transactions. See also, FERC Exhibit (NWF-1)
APP-62 to the direct testimony of Neil W. Felber before the FERC, dated August
1994, in Docket No. EC94-7-000 (non-fuel O&M-related costs which are accounted
for in the $420 million estimate) (Exhibit D-3.77 hereto). A summary of
Transaction savings broken down by company and category is contained in
Exhibit D-1.17 hereto. Each of these areas of savings is discussed in greater
detail below.
Non-Fuel Operation and Maintenance ("O&M") Savings. Initial studies
indicate that substantial non-fuel O&M savings (including general and
administrative savings) can be achieved from the Transaction. Savings are
initially expected from the following areas:
* adoption of CSW "best business" practices and management philosophy
in the operation of EPE, and staff reductions to levels more
consistent with those of the four existing CSW Electric Operating
Companies;
* consolidation of functions such as investor relations, power plant
engineering, nuclear oversight, corporate legal services, and
information processing services;
* reduction in certain costs, including employee benefits, audit fees,
insurance premiums, and savings from reductions in facilities; and
* personnel reductions in technical, professional and managerial staff
positions.
It is currently estimated that EPE and CSW will realize net non-fuel O&M
savings of $234 million, in nominal dollars (approximately $149 million on a
present-value basis), during the 1995-2004 period. A detailed breakdown and
analysis of the non-fuel O&M savings and an analysis of the assumptions
<PAGE> 21
related to the cost savings amounts are included in the direct testimony of
Neil W. Felber before the FERC and the exhibits and workpapers thereto
(Exhibit D-3.77 hereto).
CSW and EPE believe that reductions of current employees will occur
through attrition, transfers within the combined CSW-EPE system, enhanced
voluntary separation packages, and early retirement. CSW and EPE believe that
layoffs will not be necessary to achieve workforce reductions. Although CSW
intends to maintain a separate operating identity and headquarters for EPE in
El Paso, Texas, the Transaction will provide an opportunity to integrate a
number of corporate and administrative functions which at present are
separately performed by CSW and EPE. The integration of certain duplicated
functions in areas such as treasury, accounting, law, purchasing, investor
relations, human resources, corporate planning, public relations, system
planning, fuel management and administration should result in lower costs,
since these costs are relatively fixed and do not vary directly with an
increase in the number of customers served.
The integration of certain corporate and administrative functions will
also result in the reduction of total corporate and administrative
expenditures that are non-labor in nature. Corporate programs and
expenditures which would be combined to reduce total expenditure levels
include insurance, audit fees, information processing, facilities, pensions
and benefits. Additional savings in other areas are anticipated but have not
yet been quantified. The combination of these programs and expenditures as
well as the resulting reduction of costs are not expected to affect the
quality of these programs adversely. The Transaction provides the opportunity
to limit expenditures for many nondiscretionary items to a single occurrence
and to reduce total expenditures of both companies where economies of scale or
scope are present.
Financial Savings. The Transaction is designed to permit EPE to emerge
from bankruptcy with an investment grade credit rating on its senior secured
debt securities versus the non-investment grade rating its debt securities
would have if EPE were to remain a stand-alone entity. An investment grade
bond rating will reduce EPE's financing costs and improve its financial
flexibility by providing access to a much larger and lower cost market for
capital than exists for non-investment grade companies. It is currently
estimated that these financial savings will total up to $152 million in
nominal dollars (approximately $113 million on a present-value basis) during
the 1995-2004 period. In addition, it is expected that EPE will realize
further savings from the factoring of its accounts receivable through CSWC.
A detailed breakdown and analysis of the financial savings and an
analysis of the assumptions regarding the projected amounts of cost savings
are included in the direct testimony and exhibits of Samuel C. Hadaway filed
as part of CSW's Section 203 application to the FERC (Exhibit D-3 hereto and
FERC Exhibit APP-56), and the workpapers thereto (filed as part of Exhibit D-
3.12 hereto). For an analysis of the pre- and post-Transaction cost of
capital reflecting a shift from non-investment to investment grade rating, see
pages 4-8 of the testimony of David Carpenter filed as part of CSW's
application to the PUCT (Exhibit D-1 hereto) and pages 6-17 and 20-26 of the
PUCT testimony of Mr. Hadaway (also filed as part of Exhibit D-3 hereto).
<PAGE> 22
Production and Transmission Cost Savings. The integration of EPE and
the CSW electric systems will be accomplished as set forth in Item 3.I.B.1.a.
and will produce two types of cost savings: (1) fuel cost savings from the
displacement of higher-cost generation with more efficient generation; and (2)
capacity cost savings from the shared use of existing system generating
capacity to avoid the cost of building new capacity or purchasing capacity
from unaffiliated entities. Based on initial engineering studies, net savings
of approximately $34 million in nominal dollars (approximately $19 million on
a present-value basis) over the 1995-2004 period are expected after
subtracting the costs to integrate the system. A detailed breakdown and
analysis of the production and transmission savings and an analysis of the
assumptions regarding the projected amounts of cost savings are included in
the direct testimony and exhibits of James A. Bruggeman filed as part of CSW's
Section 203 application to the FERC (Exhibit D-3 hereto and FERC Exhibit APP-
39), and the workpapers thereto (filed as part of Exhibit D-3.12 hereto).
In the area of joint dispatch, the Transaction is expected to have a
positive impact on the dispatching of CSW and EPE generating facilities to
meet retail, wholesale, and off-system load. The ability to jointly dispatch
the merged system's generating capacity will result in improved coordination
and fuel savings. These savings will result from an improved ability to
schedule and commit each of the base load, intermediate load, and peaking
facilities of the combined CSW-EPE system in a more economical and efficient
manner.
Over the 1995-2004 period, EPE and CSW will exchange both energy and
capacity. However, on balance for the period, EPE is expected to be a net
exporter of relatively low-cost energy to CSW. Such exports will displace
what is projected to be higher-cost gas-fired generation of the existing CSW
Electric Operating Companies and thereby reduce production costs of the
combined CSW-EPE system relative to the costs that would be experienced if EPE
and CSW were to continue separate operations.
In addition, the Transaction will reduce the risk and cost of power
purchases for EPE. EPE is projected to use a mix of capacity purchases and
unit construction to satisfy future capacity needs. Because EPE's capacity
needs are projected to increase in small increments from year to year (annual
increases are projected at approximately 30 MW in years when there are no
retirements), and because EPE's projected capacity needs decrease in 1997 and
2002 due to the expiration of capacity sales contracts that are not expected
to be replaced, incremental capacity purchases would be needed until EPE has a
capacity need sufficient to warrant the construction of an efficiently sized
generating unit. During this period, the Restated and Amended Operating
Agreement, dated October 1, 1993, among CPL, PSO, SWEPCO, WTU and CSWS (as it
is to be amended to make EPE a party thereto the "CSW System Operating
Agreement") will provide a cost-based pricing mechanism for capacity
purchases. Thus, the Transaction will significantly reduce EPE's market risk
in its capacity costs and will produce capacity cost savings as EPE replaces
higher-cost firm power purchases it would otherwise have made had it not
become a part of the CSW System with capacity purchased at a lower cost from
one or more of the CSW Electric Operating Companies through the CSW System
Operating Agreement. This substitution of purchased resources will reduce
EPE's purchased power costs and will at the same time produce additional net
<PAGE> 23
revenue for the CSW Electric Operating Companies. The "at-cost" basis for
capacity purchases under the CSW System Operating Agreement also should
provide EPE with a cost advantage over purchases at projected market prices.
These savings could increase significantly if the market for additional
capacity available to EPE in the late 1990's is smaller than currently
projected.
EPE's purchase of CSW capacity will also provide EPE with greater
flexibility. Purchases of firm capacity from third parties typically require
the buyer to commit to specified levels of capacity over relatively long
periods. Under the CSW System Operating Agreement, EPE would have the
flexibility of purchasing capacity each December for any projected shortfall
for the next year.
Other Savings. In addition to the savings and synergies quantified
above, CSW expects the Transaction to create opportunities for cost savings,
synergies and benefits in other areas that are not readily identifiable or
quantifiable at present, including those set forth below.
Restructuring-Related Savings. The foregoing savings estimates do not
take account of savings that are expected to result from the restructuring of
the CSW System. The restructuring centralizes a number of functions that
would otherwise be performed separately by the CSW Electric Operating
Companies and EPE. As a result, the restructuring of the CSW System may make
additional O&M savings possible.
Expansion of Bulk Power Sales and Purchase Capability. As a result of
the Transaction, EPE will gain increased access to wholesale power markets to
the east, and the CSW Electric Operating Companies will gain increased access
to wholesale power markets to the west. The result will be to increase the
combined system's opportunities to purchase bulk power, to increase
competition in bulk power markets, and to provide the combined companies with
opportunities to expand options for purchased power resources. This broader
set of options will result in a more economic mix of generated and purchased
power to meet system demand, increased opportunities to reduce supply costs,
and better system reliability. Although the benefits of expanded bulk power
transactions have not been quantified, in CSW's judgment, increased access to
bulk power transactions will likely reduce costs and provide benefits to CSW's
Electric Operating Companies and ratepayers.
Coordination of Resource Planning. The Transaction will result in a
more efficient and effective resource planning process by providing an
opportunity to plan jointly for future needs. Through integration of the
resource planning process, the Transaction will enable the CSW Electric
Operating Companies and EPE to take advantage of the expanded diversity and
number of resource options afforded by the combined generation and power
supply mix.
There are three areas where this greater flexibility should prove
especially beneficial to EPE: (1) purchasing capacity; (2) participating in
renewable technology demonstrations; and (3) pursuing a wider range of
demand-side management programs. In each case, the combined CSW-EPE system
has more potential for efficient procurement and program development than
either EPE or CSW alone. This strengthened position could be critical to
meeting customers' needs should the capacity purchase market become very tight
<PAGE> 24
or environmental or economic factors greatly increase the rate at which
demand-side management programs and/or renewable technologies are deployed.
Market volatility and rapidly changing technology pose greater risks for
relatively smaller utilities because of the more limited resources (human and
capital) available to be invested in exploring options and developing
innovative responses to change.
Finally, economic benefits are expected to accrue to EPE and CSW from
the Transaction as a result of added flexibility in making changes in the
types and timing of resource additions. The integrated resource plan of the
combined EPE/CSW system will result in a postponement of capital expenditures
and a consequent savings in capital costs which are expected to accrue in the
second decade of combined operations.
Reduction in Future Operating Systems Expenditures. Currently, the
CSW System and EPE must develop the necessary operational systems for
management information and customer service on an independent basis. After
consummation of the Transaction, these separate development activities will be
replaced by a CSW system-wide integrated development program for new systems.
This is expected to reduce the level of costs that would otherwise be
incurred. The development cost for new systems would be spread among a larger
number of companies, thereby lowering each company's allocated portion of the
development cost.
Item 2. Estimated Fees, Commissions and Expenses.
The projected fees, commissions and expenses to be paid or incurred by
CSW in connection with the Transaction are estimated as follows:
Approximate
Amount
-----------
Holding Company Act filing fee ............ $ 2,000*
Hart-Scott-Rodino filing fees ............. 25,000
Legal fees and expenses:
Bracewell & Patterson ................. 335,999
Broyles & Pratt ....................... 4,636,782
Christy & Viener ...................... 191,632
Jones, Day, Reavis & Pogue ............ 2,382,957
Milbank, Tweed, Hadley & McCloy ....... 7,085,719
Sheinfeld, Maley & Kay ................ 508,871
Simons, Cuddy & Friedman .............. 69,575
Taichert, Wiggins, Virtue, Wilson
& Najjar ............................ 514,249
Exchange and information agent's
fees and expenses ....................... 600,000
<PAGE> 25
Services of engineering and other consultants:
Access Management ..................... 1,028,772
Anderson, John ........................ 82,220
Burson-Marsteller ..................... 335,015
Energy Management ..................... 990,360
Energy Research ....................... 80,631
Espey-Huston .......................... 39,180
Hewitt Associates ..................... 158,582
Power Technology ...................... 61,595
Putnam, Hays & Bartlett, Inc. ......... 1,211,708
Scott, Madden & Associates, Inc. ...... 38,311
Services of temporary personnel:
Pro Staff ............................. 307,798
Vinson and Associates ................. 710,738
Burson-Marsteller ..................... 189,981
Services of financial consultants, accountants'
fees and expenses:
Arthur Andersen & Co. ................. 196,350
Financo ............................... 810,889
National Economic Research
Associates, Inc. .................... 472,853
Wilson Consulting ..................... 478,769
Services of public relations consultants
fees and expenses:
Cambridge Reporting ................... 715,042
Read-Poland. .......................... 1,142,674
Winner/Wagner & Mandabach Camp. ....... 2,034,387
Investment banking fees and expenses:
Morgan Stanley & Co. Incorporated ..... 8,286,792
New York Stock Exchange listing fee ....... 175,000
"Blue Sky" fees and expenses .............. 500
Miscellaneous expenses, including financial
consultants' fees, expert witness fees,
and reimbursed employee expenses ........ 6,134,277
-----------
Total ..................................... $42,035,208
===========
_______________
* Actual Amount.
No person to whom fees or commissions are to be paid in connection with
the proposed Transaction is an associate company or affiliate of CSW or an
affiliate of an associate company.
<PAGE> 26
Item 3. Applicable Statutory Provisions.
The following sections of the Act and rules promulgated by the
Commission pursuant to the Act are or may be applicable to the Transaction and
other transactions described herein.
Transactions to which sections
Section of the Act are or may be applicable
- ------------------ ------------------------------
6 and 7 Issuance of CSW Common Stock by CSW, CSW
Sub Common Stock by CSW Sub, and New EPE
Securities by Reorganized EPE; letters of
credit supporting Maricopa and Farmington
PCB's
9 and 10 Acquisition by CSW of CSW Sub Common
Stock, and through merger of CSW Sub into
EPE, common stock of Reorganized EPE
Re-acquisition by EPE of ownership of the
Palo Verde Assets which were sold and
leased back to EPE
13 CSWS charges to EPE
Rules
- -----
Rules 80-91 CSWS charges to EPE
I. Acquisition of EPE by CSW.
Section 9(a)(1) makes it unlawful, without approval of the Commission
under Section 10, "for any registered holding company or any subsidiary
company thereof to acquire, directly or indirectly, any securities or
utility assets or any other interest in any business." Section 9(a)(1) is
applicable to the Transaction because, as a result of the formation of CSW
Sub and the merger of CSW Sub into EPE, CSW will acquire all outstanding
shares of common stock of CSW Sub and Reorganized EPE.
The Transaction complies with all applicable provisions of Section
10 of the Act and should be approved by the Commission. Among other
things:
* The Transaction will not create detrimental interlocking
relations or concentration of control.
* The consideration to be paid to the various parties in the
Transaction is fair and reasonable.
* The Transaction will not unduly complicate the capital structure
of the CSW System.
<PAGE> 27
* The Transaction does not involve an acquisition unlawful under
the provisions of Section 8 or detrimental to the carrying out
of the provisions of Section 11.
* The Transaction will serve the public interest by tending toward
the economical and efficient development of an integrated
electric utility system.
The standards set forth in each subsection of Section 10 are dealt with
separately below.
A. Section 10(b).
Section 10(b) of the Act requires that the Commission approve a
proposed acquisition unless the Commission finds that:
"(1) such acquisition will tend towards interlocking
relations or the concentration of control of public-utility
companies, of a kind or to an extent detrimental to the public
interest or the interest of investors or consumers;
(2) in case of the acquisition of securities or
utility assets, the consideration, including all fees,
commissions, and other remuneration, to whomsoever paid, to be
given, directly or indirectly, in connection with such
acquisition is not reasonable or does not bear a fair relation
to the sums invested in or the earning capacity of the utility
assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the
capital structure of the holding company system of the
applicant or will be detrimental to the public interest or the
interest of investors or consumers or the proper functioning
of such holding company system."
1. Section 10(b)(1).
The Transaction satisfies the standards of Section 10(b)(1) because
it will not tend towards interlocking relations or the concentration of
control of public utility companies of a kind or to an extent detrimental
to the public interest or the interest of investors or consumers.
a. Interlocking Relations.
By its nature, the proposed Transaction will result in the creation
of interlocking relations between CSW and EPE, but these relations will
not be the sort of "detrimental" interlocking relations prohibited by
Section 10(b)(1). The Merger Agreement provides that the Board of
Directors of Reorganized EPE will consist of CSW's chief executive
officer, Reorganized EPE's chief executive officer and five other
officers, and six outside directors who are residents of EPE's service
area or designated by CSW for at least three years from and after the
Effective Date. In addition, one resident of EPE's service area or one
<PAGE> 28
member of Reorganized EPE's Board of Directors will serve on CSW's Board
of Directors. These interlocking relationships are necessary to integrate
EPE into the CSW System and are, therefore, in the public interest and the
interest of investors and consumers. The public interest is served by
bringing an end to the EPE bankruptcy and providing EPE with the
management needed to make it a viable operating entity again. In
addition, the Transaction is expected to result in a number of benefits to
investors and consumers, as described more fully in Item 1.H. above. The
interlocking relations resulting from the combination of CSW and EPE are
similar to those of all other registered holding company systems and are
not the sort of relations intended to be prohibited by Section 10(b)(1).
b. Concentration of Control.
Section 10(b)(1) is intended to prevent utility acquisitions that
would result in "huge, complex and irrational holding company systems,"
American Electric Power, 46 SEC 1299, 1307 (1978), or "an undue
concentration of economic power." Northeast Utilities, 47 SEC Docket
1270, 1281 (1990). In permitting American Electric Power, a holding
company significantly larger than CSW, to acquire another electric utility
company, the Commission observed that, although the framers of the Act
were "concerned about the evils of bigness":
"they were also aware that the combination of isolated local
utilities into an integrated system afforded opportunities for
economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and
reserves and generally more efficient operations."
American Electric Power, 46 SEC 1299, 1309 (1978). Other recent decisions
confirm that the size of the combined system is not determinative. See
Entergy Corp., 55 SEC Docket 2035 (1993); Northeast Utilities, 47 SEC
Docket 1270, 1279 (1990); Centerior Energy Corp., 35 SEC Docket 769, 771
(1986).
The Transaction will increase the size of the CSW System, but will
not result in a system that exceeds the economies of scale of current
electrical generation and transmission technology. The system will be
smaller, in terms of value of total assets, than 15 other utility systems
in the United States and, as the tables below illustrate, will be
significantly smaller in terms of these and other categories than three
other registered public utility holding company systems.
<PAGE> 29
(As of December 31, 1993)
Operating Total Electric Sales in
Revenues Assets Customers KWH
System ($ Millions) ($ Millions) (Thousands) (Millions)
- ------------------- ------------ ----------- ---------- ---------
Southern Company 8,489 25,911 3,445 144,909
American Electric Power 5,269 15,341 2,841 117,000
Entergy 4,485 22,877 2,337 97,189
CSW 3,687 10,623 1,633 54,360
+EPE 544 1,715 262 8,041
- ------- ------- ------- ------- -------
New CSW 4,231 12,338 1,895 62,401
======= ======= ======= =======
(As of December 31, 1993)
Service Overhead
Net System Territory Transmission Transmission
Capacity (Thousand Assets Capacity
System ($ MW) Sq. Miles) ($ Millions) (Total Miles)
- ----------------- ----------- ------------ ------------- ------------
Southern Company 29,513 120 3,224 26,741
American Electric Power 24,084 46 3,169 21,856
Entergy 21,323 112 2,254 10,312
CSW 12,242 152 1,228 15,744
+EPE 1,497 10 235 715
- ------- ------- ------- ------- -------
New CSW 13,739 162 1,463 16,459
The Transaction will not significantly change the relationship between
the size of the CSW System and the balance of the electric utility industry in
the region. Compared to the recent acquisition of Gulf States Utilities by
Entergy, which resulted in an increase of more than 40% in the Entergy
system's operating revenues, more than 30% in electric customers and more than
40% in its electric sales (based on 1993 figures, as shown in the first of the
two tables above), the acquisition of EPE by CSW would result only in
increases of approximately 15% to 17% in the size of the CSW System in these
same categories. In addition, as demonstrated by the tables below, the CSW
System will remain smaller in these categories than other utilities in its
region, including Entergy and Texas Utilities, and will be comparable in size
to another utility in the region, Houston Industries.
<PAGE> 30
(As of December 31, 1993)
1993
Operating Total Electric Sales in
Revenues Assets Customers KWH
System ($ Millions) ($ Millions) (Thousands) (Millions)
- ------------------- ------------ ----------- ---------- ---------
Entergy 4,485 22,877 2,337 97,189
Texas Utilities 5,435 21,518 2,293 85,494
Houston Industries 4,324 12,230 1,449 61,149
Oklahoma Gas & Elec. 1,447 2,731 659 23,306
Public Service
New Mexico 874 2,212 313 8,822
SPS 810 1,719 359 19,269
CSW 3,687 10,623 1,633 54,360
+EPE 544 1,715 262 8,041
- ------- ------- ------- ------- -------
New CSW 4,231 12,338 1,895 62,401
1993
Service Overhead
Net System Territory Transmission Transmission
Capacity (Thousand Assets Capacity
System ($ MW) Sq. Miles) ($ Millions) (Total Miles)
- ----------------- ----------- ------------ ------------- ------------
Entergy 21,323 112 2,254 10,312
Texas Utilities 21,697 60 1,542 10,695
Houston Industries 13,679 5 841 3,560
Oklahoma Gas & Elec. 5,637 30 1,131 4,612
Public Service
New Mexico 1,541 N/A 216 2,378
SPS 4,062 52 N/A 5,726
CSW 12,242 152 1,228 15,744
+EPE 1,497 10 230 715
- ------- ------- ------- ------- -------
New CSW 13,739 162 1,458 16,459
Note: The above figures were derived from a variety of public sources.
In addition, the Transaction will produce significant benefits for the public,
investors and consumers. Among other things, as more fully discussed in Item
1.H. above, the proposed acquisition will serve the public interest by
bringing a prompt end to the EPE bankruptcy, by providing EPE with the
management capacity and financial reserves to make it a viable entity, and by
creating significant efficiencies and economies.
<PAGE> 31
Section 10(b)(1) also requires the Commission to consider the possible
anti-competitive effects of the Transaction. In its August 1 order, the FERC
found that any concern with potential anticompetitive effects of the
Transaction would be adequately mitigated if "comparable transmission
services" were offered over the transmission facilities of EPE and those of
CSW that are operated in the Southwest Power Pool. On August 10, 1994, CSW
and EPE informed the FERC that, subject to reservation of their rights,
including their rights to seek rehearing of the order and judicial review,
they would accept as a condition to the FERC's approval of the Transaction a
requirement that such transmission services be offered to other electric
utilities. The Transaction should not raise competitive concerns for a number
of reasons, which are described more fully in the expert testimony submitted
by CSW to the FERC in support of CSW's application for FERC approval of the
Transaction (Exhibit D-6 hereto). The testimony concludes that the
Transaction will not adversely affect competition because, among other things:
(1) CSW and EPE have not competed in the past; (2) CSW and EPE will not
dominate the bulk power market for any utility; (3) CSW and EPE will not block
market entry by controlling scarce resources such as generation or fuel; (4)
CSW does not have market power to affect short-term firm power transactions;
(5) CSW and EPE have not competed in or dominated the nonfirm energy market,
and competition in this market will be enhanced by recently available open
access tariffs through other utilities (including PSO and SWEPCO) as well as
an EPE open access tariff to be made effective upon consummation of the
Transaction; (6) CSW and EPE will not control transmission paths that would
otherwise provide competing alternatives to transmission users; and (7) CSW
and EPE will not adversely affect retail competition.
In addition, CSW and EPE each will make filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for review
by the Department of Justice and the Federal Trade Commission, and under the
Federal Power Act, as amended, for approval by the FERC. These filings will
describe the effects of the Transaction on competition in the relevant
markets. CSW and EPE expect that the FERC, the Department of Justice and the
Federal Trade Commission will determine that the Transaction does not raise
any antitrust concerns.
2. Section 10(b)(2).
Section 10(b)(2) requires that the Commission approve the Transaction
unless it finds that the consideration, including all fees, commissions and
other remuneration, is unreasonable or does not bear a fair relation to the
sums invested in or the earning capacity of the utility to be acquired.
a. Reasonableness of Consideration.
The consideration to be paid by CSW in connection with the Transaction
is reasonable and bears a fair relation to the earning capacity of the utility
assets underlying the securities to be acquired, in compliance with
Section 10(b)(2). As discussed in Item 1.D. above, the total Transaction
consideration payable by CSW and EPE will be approximately $2.1 billion,
exclusive of cash retained by EPE and paid out to EPE creditors and preferred
shareholders prior to the Effective Date and exclusive of bonds to be issued
in pledge as security for other obligations. A portion of the Transaction
consideration will be paid by Reorganized EPE in the form of securities of
<PAGE> 32
Reorganized EPE, and a portion will be paid by CSW in the form of new shares
of CSW Common Stock and/or cash. Because the Plan and Merger Agreement allow
CSW to substitute cash and/or CSW Common Stock for certain securities of
Reorganized EPE and cash for CSW Common Stock, the exact amount of each form
of consideration has not yet been determined; however, it is currently
projected that the consideration will consist of approximately $569 million in
CSW Common Stock to EPE creditors and common equity holders, approximately
$1.125 billion in Reorganized EPE debt, $68 million in Reorganized EPE
Preferred Stock, and approximately $336 million in cash. (Based upon the
resolution of certain contingencies, EPE's common shareholders may receive up
to an additional $1.50 worth of CSW Common Stock per share of EPE Common Stock
(or $54.3 million in the aggregate); however, any such additional payments
will represent a pass-through of recoveries by EPE and reductions in claims
against EPE. Such additional payments (if any) would therefore by fully
offset and will not affect the reasonableness of the consideration.)
On April 30, 1993, Morgan Stanley & Co. Incorporated ("Morgan Stanley")
delivered to the CSW Board of Directors a written opinion (Exhibit J-1 hereto)
that the consideration to be paid to the creditors and equity holders of EPE
is fair from a financial point of view to the holders of CSW Common Stock. No
limitations were imposed by the CSW Board of Directors upon Morgan Stanley
with respect to the investigations made or procedures followed by Morgan
Stanley in rendering its opinion. In connection with its opinion, Morgan
Stanley: (i) analyzed certain publicly available financial statements and
other information of EPE and CSW; (ii) analyzed certain internal financial
statements and other financial and operating data concerning EPE prepared by
the management of EPE; (iii) analyzed certain financial projections concerning
EPE prepared by the management of EPE; (iv) discussed the past and current
operations and financial condition and the prospects of EPE with senior
executives of EPE; (v) analyzed certain internal financial statements and
other financial operating data concerning CSW prepared by the management of
CSW; (vi) analyzed certain financial projections concerning CSW prepared by
the management of CSW; (vii) discussed the past and current operations and
financial condition and the prospects of CSW with senior executives of CSW,
and analyzed the pro forma impact of the Merger Agreement and the Plan on
CSW's earnings per share, consolidated capitalization and financial ratios;
(viii) reviewed the reported prices and trading activity for EPE's Common
Stock; (ix) compared the financial performance of EPE and the prices and
trading activity of EPE Common Stock with that of certain other comparable
publicly-traded companies and their securities; (x) discussed the strategic
objectives of the Transaction with CSW and reviewed the amount and timing of
the cost savings and synergies resulting from the Transaction projected by
CSW; (xi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions; (xii) participated in discussions
and negotiations among representatives of CSW and EPE and their financial and
legal advisors; (xiii) reviewed the Merger Agreement and the Plan, and certain
related documents; and (xiv) performed other analyses and examination and
considered other factors deemed appropriate.
The purchase price to be paid to the creditors and equity holders of EPE
was determined through nearly one year of arm's-length negotiations between
CSW, on the one hand, and EPE and all the classes of its creditors on the
other, as described more fully in Item I.C above. During the course of these
negotiations, CSW and Morgan Stanley analyzed, among other factors, EPE's cash
<PAGE> 33
flow from continuing operations and cash on its balance sheet, as well as
prior rate cases and regulatory treatments in order to develop an achievable
rate path, and used this information to determine a range of purchase prices
to consider in CSW's negotiations with EPE and its creditors. CSW did not
arrive at a judgment concerning the reasonableness of the purchase price for
EPE merely by adding the book value of EPE's assets but also considered other
factors such as the present and probable future ability of those assets to
generate income. Similarly, in evaluating the "purchase price" of the Palo
Verde Assets, CSW considered not only the depreciated book value of the
assets, but also the settlement value of claims relating to those assets, tax
benefits arising from the lease rejection damages paid to settle the lease,
and other factors. The ultimate amount of the Palo Verde Settlement was
determined by arm's-length negotiations between CSW and EPE's claimants and
was approved by the Bankruptcy Court on the Confirmation Date, as described
more fully in Item 3.C. (In its Findings of Fact, the Bankruptcy Court found
that the Palo Verde litigation "could not have been settled for a materially
lower amount to obtain a consensual plan." Findings of Fact para. 18(g).) In
its August 1, 1994 order, the FERC held that the consideration paid by CSW for
EPE does not warrant a hearing. See Item 4.IV. The Transaction will result
in a small positive plant acquisition adjustment being recorded. The
development of the plant acquisition adjustment and the amounts of such
adjustments are presented in the FERC testimony of Wendy Hargus, FERC Exhibits
APP-110 and APP-111 (included in Exhibit D-3 hereto).
In addition, Barr Devlin & Co., Incorporated ("Barr Devlin") (formerly
Barr, Beatty, Devlin & Co.) has delivered a written opinion to the Board of
Directors of EPE, dated May 3, 1993 (Exhibit J-2 hereto), stating that, as of
the date of such opinion and based upon the procedures and subject to the
assumptions described in such opinion, the consideration to be paid to the
holders of EPE Common Stock in the Transaction is fair to the holders of EPE
Common Stock from a financial point of view.
The overall Transaction consideration remains at approximately $2.1
billion, a portion of which will be paid by CSW in the form of new shares of
CSW Common Stock and a portion of which will be in the form of new debt
securities and preferred stock of Reorganized EPE. The exact mix of
securities and the exact number of shares of CSW Common Stock will depend on
market conditions -- and CSW's assessment of those conditions -- at the time
the Transaction is consummated.
For illustrative purposes, set forth below is a hypothetical EPE
recapitalization table as of June 30, 1994, showing the amount of stock and
other securities that would be issued under one possible set of assumptions
presented to the PUCT:
<PAGE>
<PAGE> 34
<TABLE>
<CAPTION> Hypothetical Recapitalization of EPE*
(as of June 30, 1994, $ thousands)
Debt and/ Preferred Common
or Cash Equity Equity Total
<S> <C> <C> <C> <C>
Class 1 (EPE First Mortgage Bonds) 317,530 317,530
Class 2 (EPE Second Mortgage Bonds) 176,728 176,728
Class 3 (Revolving Credit Facility) 157,915 157,915
Class 4 (Maricopa Pollution Control Bonds) 159,835 159,835
Class 5 (Maricopa PCB - Letters of Credit) 8,693 8,693
Class 6 (Rio Grand Resources Trust) 70,377 70,377
Class 7 (Other Secured Claims)** 8,106 8,106
Class 10 (Farmington Pollution Control Bonds) 35,805 35,805
Class 11 (Farmington PCB's - Letters of Credit) 1,882 4,108 5,990
Class 12 (SLOB's & LOB's) 427,300 241,200 668,500
Class 13 (Unsecured Creditors) 96,873 211,505 308,378
Class 15 (Preferred Equity) 68,000 68,000
Class 16 (Common Equity) 106,633 106,633
Accrued Dividends 5,432 5,432
Total (including total preferred 1,461,044 68,000 568,878 2,097,922
and common stock issued)
Capital Contribution (204,466) 204,466 0
Projected Cash in EPE Estate (131,273) (131,273)
Balance (including total debt
securities issued) 1,125,305 68,000 773,344 1,966,649
Less: Pollution Control Bond
Funds Held on Deposit (5,981) (5,981)
CSW Transaction Costs 42,035
Proposed Capital Structure 1,119,324 68,000 815,379 2,002,703
Percentage 55.891% 3.395% 40.714% 100.00%
<FN>
______________________
* The recapitalization of EPE must be structured to permit EPE to emerge from bankruptcy with an
investment grade rating, as discussed in Item I.H under the heading "Financial Savings."
** Class 7 includes the lease assumption of EPE's Copper Station in El Paso, Texas.
/TABLE
<PAGE>
<PAGE> 35
It is significant that the Plan has been approved by EPE creditors
and shareholders and confirmed by the Bankruptcy Court. Under Section
1129 of the Bankruptcy Code, the Bankruptcy Court may confirm a plan only
if, among other things, "[c]onfirmation of the plan is not likely to be
followed by the liquidation, or the need for further financial
reorganization, of the debtor or any successor to the debtor under the
plan." In paragraph 31 of its Findings of Fact with respect to the Plan,
the Bankruptcy Court so found. Implicit in these findings of the
Bankruptcy Court is a determination that the debt portion of the capital
structure of Reorganized EPE is reasonable and bears a fair relation to
the earning capacity of its underlying utility assets. This in turn
supports the reasonableness of the Transaction consideration.
Finally, the Merger Agreement contains a number of closing
conditions which help ensure the continued reasonableness of the
consideration. Under section 8.3(f) of the Merger Agreement, it is a
condition to CSW's obligation to consummate the Transaction 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."[1] In addition, under section 8.2(c) of
the Merger Agreement, the obligations of each party to effect the
Transaction 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 EPE after the consummation of the
Transaction. Other closing conditions ensure that the Transaction will
not be consummated in the event of onerous or burdensome regulatory orders
or conditions.
For all of the foregoing reasons, CSW believes that the
consideration bears a fair relation to the earning capacity of the utility
assets that will be owned or leased by EPE.
b. Reasonableness of Fees.
CSW believes that the overall fees, commissions and expenses which
have been or will be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the Transaction
relative to other transactions, that they are consistent with recent
precedent, and that they meet the standards of Section 10(b)(2).
As set forth in Item 2., CSW has incurred or expects to incur a
total of approximately $42 million in fees, commissions and expenses in
connection with the Transaction. This amount is less than the $46.5
million approved by the Commission in connection with the acquisition of
Public Service of New Hampshire by Northeast Utilities, Northeast
Utilities, 51 SEC Docket 934 (1992), and is comparable in magnitude to the
_________________
[1] The Merger Agreement defines an "EPE Material Adverse Effect" as "a
material adverse effect on the business, operations, franchises,
properties, assets, condition (financial or other) or results of
operations" of EPE.
<PAGE> 36
$38 million approved by the Commission in connection with Entergy's recent
acquisition of Gulf States Utilities, Entergy Corp., 55 SEC Docket 2035
(1993).
With respect to financial advisory fees, CSW believes that the fees
payable to its investment banker are fair and reasonable for similar
reasons. CSW retained Morgan Stanley as financial advisor in connection
with its consideration of possible business combinations, including a
business combination with EPE. As compensation for its financial advisory
services in connection with the Transaction, CSW agreed to pay Morgan
Stanley: (i) an advisory fee to reimburse for time and effort expended,
(ii) an exposure fee of $500,000 (to which paid advisory fees are
credited), and (iii) a transaction fee (against which any paid advisory
and exposure fees are credited) of 0.395% of the "Aggregate Value" of the
Transaction (based on an "Aggregate Value" of $2 billion or more). The
"Aggregate Value" is defined in the engagement letter between Morgan
Stanley and CSW, dated June 5, 1992 as follows: "The 'Aggregate Value' of
the transaction shall be the value on the date of closing of the total
consideration paid by CSW in connection with the acquisition, including
the value of any debt, capital lease, or preferred stock obligations
(including accrued interest and/or dividends thereon) of [EPE] directly or
indirectly assumed by CSW." Assuming an "Aggregate Value" of
$2,097,922,000 for the Transaction, the transaction fee payable to Morgan
Stanley upon consummation of the Transaction would be $8,286,792, against
which fees previously paid by CSW would be credited. In addition, CSW has
agreed to reimburse Morgan Stanley for out-of-pocket expenses, which
include travel, document procurement and delivery and fees of attorneys
and other professional advisors, engaged with CSW's consent, should their
advice be required. CSW has also agreed to indemnify Morgan Stanley
against certain liabilities, including liabilities under federal
securities laws, relating to or arising out of its engagement.
In one recent case, the Commission approved investment banking fees
equal to 0.96% of the aggregate value of the acquisition, The Southern
Company, 40 SEC Docket 350, 354 (1988), or nearly three times the
investment banking fee, on a percentage basis, of Morgan Stanley. In the
Northeast Utilities-Public Service of New Hampshire decision, the
Commission approved approximately $10.6 million in financial advisory
fees. Northeast Utilities, 51 SEC Docket 934 (1992). In its recent
Entergy-Gulf States decision, the Commission approved financial advisory
fees of $8.3 million by Entergy to its investment banker. Entergy Corp.,
55 SEC Docket 2035 (1993). The financial advisory fees to be paid by CSW
in connection with the Transaction are significantly smaller on a
percentage basis than those approved in Southern, significantly smaller in
dollar amount to those approved in Northeast Utilities, and comparable in
dollar amount to those approved in Entergy. Moreover, the Transaction
here is significantly more complex than the transactions involved in the
Entergy and Southern orders, none of which involved a bankruptcy and its
associated risks, complexities and duration. Finally, the investment
banking fees to be paid reflect the competition of the marketplace.
Investment banking firms actively compete with each other to act as
financial advisors to prospective merger partners. The investment banking
fees to be paid by CSW in connection with the Transaction reflect this
competition for services.
<PAGE> 37
3. Section 10(b)(3).
Section 10(b)(3) of the Act requires the Commission to determine
whether a proposed acquisition by a holding company will unduly complicate
the capital structure of the holding company system, or will be
detrimental to the public interest, the interest of investors or consumers
or the proper functioning of such holding company system. The proposed
combination of EPE and CSW will neither unduly complicate the capital
structure of the CSW System nor will it be detrimental to the interests of
investors or consumers or the proper functioning of the CSW System. The
only changes to the capital structure of CSW and its subsidiaries
(including Reorganized EPE) as a result of the Transaction will be the
acquisition by CSW of Reorganized EPE Common Stock and the addition of the
capital structure of Reorganized EPE. As in the case of the CSW Electric
Operating Companies, Reorganized EPE will have publicly held debt and may
have publicly held preferred stock, and all of its common stock will be
held by CSW. Moreover, the Plan requires that Reorganized EPE's publicly
traded mortgage bonds be rated "investment grade". The capital structure
of Reorganized EPE will, therefore, be generally similar to the capital
structures of the existing CSW Electric Operating Companies and will form
only a small part of the capital structure of the overall CSW System.
Thus, the Transaction will not unduly complicate the capital structure of
the CSW System.
As of June 30, 1994, the respective capital structures of CSW and EPE
were as follows:
CSW EPE
(in $ millions) (in $ millions)
Common Stock Equity $2,940 47.75% $ (378) -30.91%
Preferred Stock 328 5.33% 81 6.62%
Long-Term Debt 2,889 46.92%
Obligations Subject
to Compromise 1,520 124.28%
------ ------ ------ -----
Total $6,157 100% $1,223 100%
If the Transaction had been consummated on June 30, 1994, the pro
forma consolidated capital structure of CSW as of such date would have
been as follows:
Transaction Pro Forma
(in $ millions)
Common Stock Equity $3,755 46.0%
Preferred Stock 396 4.9%
Long-Term Debt 4,008 49.1%
------ -----
Total $8,159 100.0%
<PAGE> 38
The foregoing pro forma figures assume the capitalization of Reorganized
EPE presently contemplated by CSW and shown in Item 3.I.A.2.a. under the
heading "Hypothetical Recapitalization of EPE". The actual amounts will
depend on market conditions at the time the Transaction is consummated,
elections by CSW to substitute cash for shares of CSW Common Stock, and
other factors.
CSW's pro forma consolidated common equity to total capitalization
ratio of 46% is significantly higher than Northeast Utilities' recently
approved 27.6% common equity position and comfortably exceeds the
"traditionally acceptable 30% level". Northeast Utilities, 47 SEC Docket
1270, 1279 & 1284 (1990).
The Reorganized EPE First and Second Mortgage Bonds will be
substantially similar to the first mortgage bonds issued by the CSW
Electric Operating Companies. However, it is anticipated that the
Reorganized EPE First and Second Mortgage Bonds will vary in certain
respects from the Commission's "Statement of Policy Regarding First
Mortgage Bonds Subject to the Public Utility Holding Company Act of 1935"
(Release No. 35-13105) and the amendments thereto (Release No. 35-16369).
These variances from the Statement of Policy are not material for purposes
of the Section 10(b)(3) analysis. See Exhibit A-21 hereto for a
description of such differences.
The Reorganized EPE Preferred Stock will be substantially similar to
the preferred stock issued by the CSW Electric Operating Companies.
However, it is anticipated that the Reorganized EPE Preferred Stock will
vary in certain respects from the Commission's "Statement of Policy
Regarding Preferred Stock Subject to the Public Utility Holding Company
Act of 1935" (Release No. 35-13106) and the amendments thereto (Release
No. 35-16758). See Exhibit A-22 hereto for a description of such
differences. These variances from the Statement of Policy are not
material for purposes of the Section 10(b)(3) analysis.
Finally, it should be noted that, except for certain lock-up
provisions described in Item 3.II.A.1. below, the CSW Common Stock which
CSW proposes to issue has the same par value, voting rights and preference
as to dividends and distributions and has the same rights as the CSW
Common Stock presently outstanding. The only voting securities of CSW
which will be publicly held after the Transaction will be CSW Common
Stock, and because all of the Reorganized EPE Common Stock will be owned
by CSW as a result of the Transaction, there will be no publicly held
minority common stock interest in Reorganized EPE following the
Transaction.
Interest of public, investors and consumers and proper functioning
of CSW System: The Transaction is in the public interest and the
interests of investors and consumers, and provides all with substantial
benefits. EPE's investors will benefit from an end to EPE's bankruptcy
because their investment in a bankrupt utility will be exchanged for more
creditworthy securities. Investors in existing EPE securities will
receive equity or debt of a financially stronger company -- CSW, in the
case of recipients of CSW Common Stock, or Reorganized EPE, in the case of
recipients of New EPE Securities. After the Transaction, consumers will
<PAGE> 39
enjoy rates which are lower than would otherwise be necessary under a
stand-alone plan of reorganization. Further, the Transaction allows EPE
to continue to fulfill its public service obligations as a utility and
assures its ability to provide efficient and reliable public utility
service (Findings of Fact paragraphs 20-21), while maximizing the value
for all EPE stakeholders. In addition, the public and consumers will
benefit from the greater resources that CSW can commit to economic
development of the territory served by EPE.
The Transaction is entirely consistent with the "proper functioning"
of a registered electric utility holding company system. EPE's electric
operations will be integrated with those of the existing CSW Electric
Operating Companies (see Item 3.I.B.1.a.). In addition, the combination
will result in substantial, otherwise unavailable benefits to the public
and to consumers and investors of both companies. The benefits to be
generated from the combination are further described in Item 1.H.
B. Section 10(c).
Section 10(c) establishes additional standards for approval of the
Transaction. Under Section 10(c), the Commission cannot approve:
"(1) an acquisition of securities or utility assets, or
of any other interest, which is unlawful under the provisions
of section 8 or is detrimental to the carrying out of the
provisions of section 11; or
(2) the acquisition of securities or utility assets of
a public utility or holding company unless the Commission
finds that such acquisition will serve the public interest by
tending towards the economical and the efficient development
of an integrated public utility system."
1. Section 10(c)(1).
Section 10(c)(1) requires that the proposed acquisition be lawful
under the provisions of Section 8. Section 8 prohibits registered holding
companies from acquiring, owning interests in or operating both a gas and
an electric utility serving substantially the same area if prohibited by
state law. Because neither CSW nor EPE has or will have any direct or
indirect interest in any gas utility company, the issues raised under
Section 8 are not implicated by the Transaction.
Section 10(c)(1) also requires that the Transaction not be
detrimental to the carrying out of the provisions of Section 11. Section
11(b)(1) generally requires a registered holding company system to limit
its operations "to a single integrated public utility system, and to such
other businesses as are reasonably incidental, or economically necessary
or appropriate to the operations of such integrated public utility
system." Section 11(b)(2) directs the Commission "to ensure that the
corporate structure or continued existence of any company in the holding
company system does not unduly or unnecessarily complicate the structure,
or unfairly or inequitably distribute voting power among security holders,
of such holding company system."
<PAGE> 40
a. Section 11(b)(2).
The CSW System currently consists of an integrated electric utility
system and other businesses that the Commission has previously approved as
reasonably incidental, or economically necessary or appropriate to the
operations of such system. Since EPE will be engaged solely in the
electric utility business, the Transaction will not add any new businesses
to the CSW System.
With respect to the integration of EPE and the CSW System, Section
2(a)(29)(A) of the Act defines an integrated public utility system, as
applied to an electric utility company, as:
"a system consisting of one or more units of
generating plants and/or transmission lines and/or
distribution facilities, whose utility assets,
whether owned by one or more electric utility
companies, are physically interconnected or
capable of physical interconnection and which
under normal conditions may be economically
operated as a single interconnected and
coordinated system confined in its operations to a
single area or region, in one or more States, not
so large as to impair (considering the state of
the art and the area or region affected) the
advantages of localized management, efficient
operation, and the effectiveness of regulation."
As this language suggests, and as the Commission has previously observed,
Section 11 is not intended to impose "rigid concepts" but rather creates a
"flexible" standard designed "to accommodate changes in the electric
utility industry." UNITIL Corp., 51 SEC Docket 562 (1992). Thus, Section
11 expressly directs the Commission to consider the "state of the art" in
determining whether a system is capable of efficient operation and to
apply "normal conditions" as the standard for determining whether a system
may be economically operated as a single coordinated system.
Recent changes in the law -- in particular, the Energy Policy Act of
1992 and its provisions for mandatory wholesale wheeling -- and the
increasingly competitive and interconnected market for wholesale power
have created significant changes in the electric utility industry and have
redefined what is the "state of the art" and what conditions are "normal."
In addition, the Energy Policy Act expands the means for achieving
physical interconnection and the economic operation and coordination of
utilities with non-contiguous service territories.
i. Interconnection.
EPE is physically interconnected with the CSW electric utility
system through the transmission system of SPS. In order to gain access to
the SPS transmission system, EPE and CSW (through CSWS, as agent for PSO,
WTU, SWEPCO and CPL) filed an application with the FERC on November 4,
1993 (Exhibit D-5 hereto) seeking an order pursuant to Section 211 of the
Federal Power Act to require SPS to provide 133 MW of firm and non-firm
<PAGE> 41
transmission services in connection with the transfer of power and energy
between the EPE and CSW control areas at rates and on terms and conditions
that the FERC determines to be just and reasonable. The 133 MW of total
transmission service is adequate to meet the electric transmission needs
of EPE's interconnect to the CSW system. By its August 1, 1994 order, the
FERC determined that a final order requiring SPS to provide transmission
service requested by CSW and EPE could lawfully be issued once the FERC
has determined that reliability concerns have been met. As discussed
below, the FERC's August 1, 1994 order established procedures by which
reliability matters will be addressed by the FERC.
SPS and EPE are interconnected at SPS's transmission substation near
Artesia, New Mexico. SPS has three points of interconnection with the CSW
Electric Operating Companies: a 115 KV interconnection with WTU near
WTU's Shamrock substation; a 230 KV interconnection with PSO at the
Oklahoma-Texas state line by a 230 KV transmission line, jointly owned by
PSO and SPS, connecting SPS's Harrington/Nichols substation and PSO's Elk
City substation; and a 345 KV interconnection with PSO at PSO's Oklaunion
substation. Power and energy to be delivered by SPS to EPE will be
delivered to SPS by the Electric Operating Companies through a 69 KV
interconnection with WTU at WTU's Shamrock substation (Harrison-Nichols to
Shamrock 115 KV line), a 230 KV interconnection with PSO at Oklahoma state
line (Harrington-Nichols to Elk City 230 KV line) and a 345 KV
interconnection with PSO at PSO's Oklaunion substation (Tuco to Oklaunion
345 KV line); the power and energy from EPE will be delivered to SPS at
Eddy County for redelivery to SPS's points of interconnection with PSO and
WTU. An interconnection map identifying the 115 KV, 230 KV and 345 KV
interconnection points is included in Exhibit E-3 hereto.
In connection with its request of SPS to provide the required
transmission services, CSW conducted load flow studies and stability
studies to determine the extent to which transmission system modifications
would be required in order for the necessary services to be provided. The
results of those studies were submitted to the FERC with the Section 211
application filed on November 4, 1993 and indicate that, at most, only
minor system modifications would be needed to provide bi-directional firm
service across the SPS system in conjunction with the coordination of the
EPE and CSW systems and to assure that such service will not interfere
with reliable SPS system operations. To assure that non-firm
(interruptable) service can be provided without excessive curtailments, it
may be necessary to increase transformer capacity at SPS's Eddy County
substation. To assure that firm service can be provided throughout the
year on this basis, it may also be necessary to increase transformer
capacity at SPS's Tuco substation and to install capacitor banks to
support voltage levels at the Oklaunion, Tuco and Shamrock substations.
Moreover, CSW study results indicate that SPS can provide substantial non-
firm service in shoulder and off-peak hours without making any system
modifications at all. Studies performed by CSW since those submitted to
the FERC on November 4, 1994 indicate that the transformer capacity at
SPS' Tuco substation will not need to be increased. Further, CSW believes
that the ratings used by SPS for its Eddy County substation are too low.
If proper ratings are used, this substation would not need to be upgraded.
<PAGE> 42
CSW estimates that transmission access will cost approximately $1.5
million annually for the 1995-1998 period, during which non-firm service
would be provided, and $3.0 million annually for the 1999-2004 period,
during which firm service would be provided. These costs have been
subtracted from the Transaction benefits estimates to produce the nominal-
dollar and present-value estimates of Transaction benefits described above
in Item 1.H. These cost estimates are based upon CSW's and EPE's load
ratio share of SPS's annual transmission costs, as described in greater
detail in Exhibit D-3 (FERC Ex. JAB-15, APP-54) to this Application.
The physical interconnection requirement of Section 2(a)(29)(A) can
be satisfied by means of a contract path. In past instances, discussed
below, the Commission has found that utility assets are physically
interconnected where there is an agreement giving two affiliated utilities
the right to use a non-affiliated utility's transmission system to
transmit power between such utility assets.
In Centerior Energy Corp., 35 SEC Docket 769 (1986), the Commission
found that the Cleveland Electric Illuminating Company and Toledo Edison
Company were interconnected under the Act by a power transmission line,
owned by an unaffiliated company, that the companies had the right to use.
The service areas of Cleveland Electric and Toledo Edison were 50 miles
apart, separated by the service area of Ohio Edison Company. A 345 KV
transmission line extended through the service areas of Cleveland
Electric, Ohio Edison and Toledo Edison, but each company owned only that
portion of the line which extended over its service territory. Pursuant
to an agreement among the members of a regional power pool, capacity of
the transmission line was available for use by Cleveland Electric and
Toledo Edison as long as such use did not materially interfere with the
power pool's coordinated operations. Although the service areas of the
affiliated companies, Cleveland Electric and Toledo Edison, were separated
by the service area of a non-affiliated company, Ohio Edison, the
Commission found that this agreement and the coordinated use of
transmission lines satisfied the Act's requirement of physical
interconnection.
In Northeast Utilities, 47 SEC Docket 1270 (1990), Northeast
Utilities, a registered holding company, sought Commission approval to
acquire Public Service Company of New Hampshire ("PSNH"), an electric
public utility company in bankruptcy reorganization proceedings. The
transmission lines of Northeast Utilities and PSNH were interconnected
through a transmission line owned by Vermont Electric Power Company. The
transmission lines of Northeast Utilities, PSNH and Vermont Electric
constituted a part of the 345 KV Northfield-Scobie line. Vermont Electric
and other Vermont utilities entered into an agreement with Northeast
Utilities to provide service to Northeast Utilities and PSNH over Vermont
Electric's portion of the Northfield-Scobie line. On the basis of this
right of use agreement, the Commission found that the combined
Northeast-PSNH system formed a single integrated public utility system and
satisfied the requirements of Section 2(a)(29)(A). Northeast Utilities,
47 SEC Docket at 1285. See also Electric Energy, Inc., 38 SEC 658 (1958),
in which the Commission found that, where none of the companies in a
<PAGE> 43
utility system owns the full length of a transmission line connecting them
to the facility to be acquired, the contractual right to use the unowned
portions of the transmission facility constituted the physical
interconnection required by the Act.
In UNITIL Corp., 51 SEC Docket 562 (1992), the Commission has found
that, where utilities had no transmission system at all, contractual
arrangements with non-affiliated companies for transmission service were
sufficient to satisfy the physical interconnection requirement of the Act.
Through its Section 211 application with the FERC, CSW intends to
enter into an agreement with SPS giving EPE and PSO the right to use the
SPS transmission system connecting the utility assets of EPE with those of
PSO. This contractual right to use the SPS transmission facilities
satisfies the physical interconnection requirement of Section 2(a)(29)(A).
See Item 4.IV for further information regarding the current status of the
FERC Section 211 proceeding.
Section 2(a)(29) also provides that the interconnection requirement
also may be satisfied if the utility assets of the combining systems are
capable of physical interconnection even though no such interconnection
exists at the time the application is approved. The Commission has found
that proposals to contract for or construct physical connections between
utilities in a single system satisfy the requirement of interconnection
under Section 2(a)(29)(A). See New England Electric System, 38 SEC 193,
198-99 (1958) (engineering studies and testimony showing feasibility of
direct interconnections among four small systems satisfied the requirement
of the Act that utilities be "capable of physical interconnection"). See
also Panhandle Eastern Pipe Line Co. v. Securities and Exchange Comm'n,
170 F.2d 453, 462 (8th Cir. 1948) (district court upheld Commission's
decision that proposal to construct pipeline connecting utilities
demonstrated system was capable of interconnection, finding that proposed
pipeline was not "so illusory . . . that the Commission could not consider
its construction in determining the propriety of the proposed plan of
compliance"). If wheeling through the SPS system cannot be obtained on a
timely basis or ultimately is determined not to be available under the
Federal Power Act, CSW would implement an alternative plan of integration.
Alternatives available to CSW include construction of transmission
facilities by one or more of the CSW Electric Operating Companies.
Because CSW expects to obtain transmission service from SPS pursuant to
the Federal Power Act, these alternatives and their associated costs are
not further described herein.
ii. Single Interconnected and Coordinated System.
Under normal conditions, EPE and the CSW Electric Operating
Companies may be economically operated as a single interconnected and
coordinated system, as required by Section 2(a)(29)(A).
After consummation of the Transaction, the combined CSW-EPE system
will be dispatched initially using either voice or data link
communications with only minimal incremental costs (i.e., $300,000 to
$500,000). Hourly preset schedules will be arranged each day from the
existing central dispatch facility in Dallas, Texas and such schedules
<PAGE> 44
will be subject to change as necessary to accommodate changing loads, fuel
prices, "off-system" bulk power purchase and sale opportunities, generator
availability and transmission constraints, and other factors. CSW
believes that joint dispatch by means of hourly preset schedules will
realize the majority of the cost savings of joint dispatch. However, in
the future, CSW anticipates that it will be desirable to dispatch EPE on a
minute to minute basis with the current CSW Electric Operating Companies
in order to increase operating flexibility. The facilities required to
accomplish such "real time" dispatch could be completed after the CSW
energy management facilities are upgraded in 1996. The incremental costs
of extending the planned upgrade to include EPE would not exceed $100,000
to $200,000.
The ongoing restructuring of the CSW System (the "Restructuring")
will not change the way in which the combined CSW-EPE system will be
initially dispatched. Joint dispatch of EPE and CSW will be performed
from the CSWS Central Control Center in Dallas. To establish the hourly
preset schedules, studies will be performed at the Dallas facility which
calculate the optimal use of resources available to both CSW and EPE.
Transactions which take place as a result of these studies will take place
under the CSW Operating Agreement filed at the FERC, as amended, upon
consummation of the Transaction.
This dispatch capability will initially be established by verbally
communicating the optimal schedule between EPE and CSW. Each entity will
then use its energy management system to dispatch its generating plants to
meet this optimal schedule. The Central Control Center will continually
monitor this schedule and will verbally change the schedule with EPE as
conditions dictate. The Commission has held that voice dispatch for
utilities separated geographically but within the same system may be
operated as a single interconnected and coordinated system. See Centerior
Energy Corp., 35 SEC Docket 769, 775 (1986). Accordingly, CSW believes
that the dispatch arrangements described above satisfy the requirements of
the Act.
As soon as it is practical after the Transaction, this verbal
communication will be replaced with electronic communication, established
via datalinks between the Central Control Center and EPE. After this data
path has been established and all necessary programming changes are made
to both the EPE and CSW energy management systems, the Central Control
Center facility will send an electronic signal to the EPE energy
management system communicating the schedule to be established between EPE
and CSW which will optimize the use of available resources in "real-time".
Such "real-time" dispatch of EPE will eventually be accomplished in a
manner described below for the existing CSW Electric Operating Companies.
CSW currently is restructuring its dispatch to streamline its
operating procedures. After the Restructuring, the Central Control Center
will be connected directly to the CSW Electric Operating Company
generating units and will receive information from, and provide control
signals to, those facilities. Currently, the Central Control Center
receives information from and provides desired schedules to energy
management systems at each of the operating companies, which in turn,
<PAGE> 45
receive information from and provide control signals to each of the
generating facilities. Transactions which take place after the
Restructuring will continue to take place under the CSW System Operating
Agreement which is filed at the FERC.
Under Section 6.07 (Energy Exchange Pricing) of the CSW System
Operating Agreement, each CSW Electric Operating Company receives the
benefit of its lowest cost generation. This is accomplished through the
economic loading of CSW System generating units and the allocation, in an
after-the-fact dispatch reconstruction process, of generating costs to
individual CSW Electric Operating Companies.
In present-day CSW System operations, CSW System generating units
are committed to load and then dispatched in a manner designed to achieve
the lowest overall system cost. In selecting generating units to be
committed to load for a given day, those generating units that must be on
line for "security" purposes and those generating units which otherwise
"must run" are committed to load. Generating capability expected to be
needed to serve load over and above these "must run" requirements are
selected in the order of lowest running cost. The units thus committed to
load are then operated, first, as needed to meet "must run" requirements,
and otherwise, in economic firing order.
On a daily basis, the CSW Central Control Center "reconstructs" the
dispatch in a process by which the costs of producing energy on the
previous day are allocated among the CSW Electric Operating Companies in
accordance with Section 6.07 of the CSW System Operating Agreement.
Section 6.07 provides that:
For the purpose of pricing Energy exchange among the
Companies, System resources shall be utilized to serve System
requirements in the following order:
(a) Those Generating Units which are designated not to
be operated in the order of lowest to highest Variable Cost
due to Company operating constraints shall be allocated to the
Company requiring the Generating Unit.
(b) The lowest Variable Cost generation of each
Company's Hourly Capability shall first be allocated to serve
its Own Load.
(c) The next lowest Variable Cost portion of each
Company's remaining Hourly Capability shall be allocated to
serve Pool Energy requirements of Companies under System
Economic Dispatch. Pool Energy shall be priced in accordance
with Schedule E [to the CSW System Operating Agreement].
(d) The next lowest Variable Cost portion of each
Company's remaining Hourly Capability shall be used to supply
Internal Economy Energy to Companies under System Economic
Dispatch. Internal Economy Energy shall be priced in
accordance with Schedule F [to the CSW System Operating
Agreement].
<PAGE> 46
These provisions have been included in CSW system operating agreements
since the adoption of the initial agreement and were developed by a
committee which included representatives of the CSW Electric Operating
Companies. The provisions, therefore, represent a collective
determination by the CSW Electric Operating Companies of their best
interests.
The Restructuring will not change the "reconstruction" process
described above. In addition, the Restructuring will not change the basis
upon which unit commitment decisions are made. Units will be committed
first to meet system "security" and other "must run" requirements.
Thereafter, system generating units and other power supply resources will
be deployed in economic order with a view to effecting the lowest overall
system operating cost. Each of the CSW Electric Operating Companies will
continue, in accordance with Section 6.07 of the CSW System Operating
Agreement, to retain the benefit of its lowest cost generating resources.
By participating in central economic dispatch, each participating company
will receive the benefit of energy produced by sister companies that can
generate electricity more cheaply. This economic sharing of generating
resources produces the lowest overall system costs and thus substantial
benefits for the ultimate consumers.
The currently effective CSW System Operating Agreement was filed
with the FERC on October 15, 1993 in Docket No. ER94-32-000. This form of
the CSW System Operating Agreement became effective on January 1, 1994 by
FERC order issued November 15, 1993 in that docket. A copy of the FERC
filing was provided to each of the state utility regulatory commissions
having jurisdiction over the CSW Electric Operating Companies and to the
New Mexico Public Utility Commission, which regulates El Paso Electric
Company ("EPE"). Concurrent with its merger application filed with FERC,
CSW also filed an Agreement to Amend Restated and Amended Operating
Agreement. (Exhibit D-4 hereto.) The purpose of the filing was to add
EPE as the fifth CSW Electric Operating Company to the CSW System
Operating Agreement and to reflect how the addition of EPE would affect
the allocation of the costs and benefits shared among the CSW Electric
Operating Companies under the CSW System Operating Agreement. In its
order issued on August 1, 1994, FERC consolidated the proceedings
regarding the CSW System Operating Agreement and the merger application,
and set both proceedings for hearing.
iii. Single Area or Region.
As required by Section 2(a)(29)(A), the combined CSW-EPE system will
be confined to a "single area or region." The "single area or region"
requirement does not mandate a small service territory. The Commission
has consistently found that utility systems extending over several states
within the same region satisfy the requirements of the Act. American
Electric Power Company, a holding company registered under the Act, has an
electric service territory spanning seven states. Another registered
system, the Southern Company system, spans five states, while the Columbia
system, a registered gas system, also spans five states. EPE and the CSW
Electric Operating Companies will provide retail electric service in Texas
and four geographically contiguous states -- New Mexico, Oklahoma,
<PAGE> 47
Arkansas and Louisiana. A large portion of EPE's retail service market is
within one state, Texas -- and therefore "within the same region" -- as "a
large portion" of CSW's "retail service market." See Environmental Action,
Inc. v. Securities and Exchange Commission, 895 F.2d 1255 (9th Cir. 1990).
The remainder of EPE's retail service market is in an adjacent portion of
a contiguous state, New Mexico.
In evaluating whether the "single area or region" requirement is
met, the Commission has considered not only size and distance, but also
"the existing state of the arts of generating and transmission and the
demonstrated economic advantages of the proposed arrangement." See
Connecticut Yankee Atomic Power Co., 41 SEC 705, 710 (1963); Vermont
Yankee Nuclear Power Corp., 43 SEC 693, 697-98 (1968), remanded on other
grounds, Municipal Elec. Ass'n of Massachusetts v. Securities and Exchange
Commission, 413 F.2d 1052 (D.C. Cir. 1969). cf. Electric Energy, Inc., 38
SEC 658, 668-72 (1958) (utility assets were within the same area or region
as the acquiror's service area despite a distance of up to 100 miles
crossing two states).
Given the proximity of EPE to the CSW Operating Companies and the
present technological ability to transmit power, CSW and EPE have met the
Act's requirement for a "single area or region."
iv. Localized Management, Efficient Operation and Effective
Regulation.
The combined CSW-EPE system will not be so large as to impair the
advantage of localized management, efficient operation, and the
effectiveness of regulation, as required by Section 2(a)(29)(A). EPE will
continue to have local management and directors and will remain
headquartered in El Paso, Texas. CSW will provide support services for
its operations in El Paso. As discussed in Item 1.H. above, the
Transaction will also improve the efficiency of operation and service by
EPE.
The economic dispatch functions described in Item 3.I.B.1.a.ii are
more efficiently performed on a centralized basis because of economies of
scale, standardized operating and maintenance practices and closer
coordination of system-wide matters. Distribution dispatch will continue
to be handled locally. The Transaction maintains the corporate structures
of EPE and the CSW Electric Operating Companies; all will maintain their
local corporate identities, headquarters, corporate names, and boards of
directors, consisting primarily of company executives and independent
business leaders from the respective local communities they serve. The
Commission's past decisions on "localized management" confirm that the
Transaction fully preserves the advantages of localized management in the
CSW System and at EPE. See, e.g., Centerior, 35 SEC Docket at 755
(advantages of localized management would not be compromised by the
affiliation of two electric utilities under a new holding company because
the new holding company's "management [would be] drawn from the present
management" of the two utilities); Northeast Utils., 47 SEC Docket at 1285
(advantages of localized management would be preserved because the New
Hampshire utility, which was to be acquired by an out-of-state holding
company, would be maintained as a separate New Hampshire corporation and
<PAGE> 48
its board included "four New Hampshire residents"). See also American
Electric, Fed. Sec. L. Rep. [paragraph] 81,647 at 80,602 (distance of corporate
headquarters from local management was a "less important factor in
determining what is in the public interest" given the "present-day ease of
communication and transportation").
Finally, the Transaction will not impair the effectiveness of
regulation of either EPE or CSW. In its August 1, 1994 Order, the FERC
held that a hearing on the impairment of effective regulation is
unnecessary. EPE will continue to be subject to regulation by both the
PUCT and the NMPUC. Intra-system transactions between EPE and affiliated
CSW companies will be subject to regulation by the Commission, as are
other CSW System transactions. Wholesale contracts between EPE and other
companies, including the CSW Electric Operating Companies, will continue
to be subject to regulation by the FERC. EPE's ownership interest in Palo
Verde will continue to be regulated by the NRC.
b. Section 11(b)(2).
In addition, the Transaction will not unduly or unnecessarily
complicate the capital structure of the CSW System or unfairly or
inequitably distribute voting power among security holders of such system.
The resulting capital structure is fully discussed in Item 3.I.A.3. above.
Voting power is equitably and fairly distributed among the security
holders of CSW and its current subsidiaries, which have been approved by
the Commission in previous proceedings. The capital structure of EPE,
which will become a wholly owned subsidiary of CSW as a result of the
Transaction, will be generally similar to that of the existing CSW
Electric Operating Companies. All outstanding preferred stock of CSW's
utility subsidiaries following the Transaction, including that of EPE,
will contain the voting provisions required by the Commission. The
Transaction is therefore consistent with Section 11(b)(2).
2. Section 10(c)(2).
Section 10(c)(2) requires the Commission to approve a proposed
transaction only if it will serve the public interest by tending towards
the economical and efficient development of an integrated public utility
system. For the reasons discussed above, the CSW-EPE system will be an
integrated public utility system. In addition, as described in Item 1.H.
above, the Transaction is expected to result in approximately $420 million
in net cost savings and synergies during the 1995-2004 period (on a
nominal basis) and will, therefore, tend towards the "economical and
efficient" development of an integrated public utility system.
3. Section 10(f).
Section 10(f) provides that "[t]he Commission shall not approve any
acquisition as to which an application is made under this section unless
it appears to the satisfaction of the Commission that such state laws as
may apply in respect of such acquisition have been complied with, except
where the Commission finds that compliance with such state laws would be
detrimental to the carrying out of the provisions of Section 11." As
described in Item 4. below, CSW intends to comply with all applicable
<PAGE> 49
state laws in respect of the Transaction. In addition, CSW's obligation
to consummate the Transaction is conditioned, among other things, on the
receipt of all requisite state regulatory approvals. It is not
anticipated that compliance with state laws would raise issues for the
Commission under Section 11.
II. Other Transaction-Related Actions.
A. Issuances of Securities by CSW and Reorganized EPE.
Section 6(a) of the Act prohibits the issuance of securities by a
registered holding company except in accordance with an effective
declaration under Section 7. Section 7 in turn sets forth the standards
applicable for the issuance of securities by a registered holding company
or a subsidiary thereof. Under Section 7(c):
"[t]he Commission shall not permit a declaration regarding the
issue or sale of a security to become effective unless it
finds that (1) such security is (A) a common stock . . . (B) a
bond (i) secured by a first lien on physical property . . . or
(iii) secured by any other assets of the type and character
which the Commission . . . may prescribe as appropriate in the
public interest or for the protection of investors . . . . or
(2) such security is to be issued or sold solely (A) . . . for
the purpose of effecting a merger, consolidation or other
reorganization . . . ."
Section 7(g) of the Act states in pertinent part that if a state
regulatory body informs the Commission that the issuance of securities
does not comply with applicable state laws, then the Commission "shall not
permit a declaration regarding the act in question to become effective
until and unless the Commission is satisfied that such compliance has been
effected."
If the requirements of Sections 7(c) and (g) are satisfied, Section
7(d) requires the Commission to permit the issuance of a security unless:
(1) the security is not reasonably adapted to the security
structure of the declarant and other companies in the same
holding company system;
(2) the security is not reasonably adapted to the declarant's
earning power;
(3) financing by the issue and sale of the security is not
necessary or appropriate;
(4) the fees paid in connection with the issue are unreasonable;
(5) the security is a guaranty of such liability as to be an
improper risk; or
(6) the terms of issuance or sale are detrimental to the public
interest or the interest of investors or consumers.
<PAGE> 50
As set forth more fully below, the proposed issuances of securities under
the Plan and Merger Agreement in connection with the Transaction meet the
standards of Section 7.
1. Issuance of Common Stock by CSW.
As set forth in the Hypothetical Recapitalization Table in Item
3.I.A.2.a., CSW currently expects to issue $568,878,000 in CSW Common
Stock. However, under the Plan and the Merger Agreement, it is
theoretically possible for CSW to issue a maximum of approximately $925
million in CSW Common Stock to EPE creditors and shareholders. In
addition, the Merger Agreement provides that certain options to purchase
EPE Common Stock, if not exercised prior to the Effective Date, will be
converted into options to purchase shares of CSW Common Stock. For the
reasons set forth below, the issuance by CSW of new shares of CSW Common
Stock pursuant to the Plan and Merger Agreement will comply with the
standards of Section 7.
Section 7(c). The issuance is clearly permitted by Section 7(c).
First, CSW Common Stock is a type of security permitted by Section
7(c)(1)(A). Second, the issuance of CSW Common Stock is an integral part
of the reorganization of EPE contemplated by the Plan and therefore
authorized by Section 7(c)(2)(A). The Commission has allowed the issuance
of common stock to effect the reorganization and acquisition of a bankrupt
utility. See Northeast Utilities, 47 SEC Docket 1270 (Dec. 21, 1990).
Section 7(d)(1). The CSW Common Stock to be issued is consistent
with the existing capital structure of CSW and the CSW System. As the
Commission has previously stated, "common stock is the cornerstone of a
company's capital structure." Northeast Utilities, 47 SEC Docket 1270
(1990). As of September 30, 1994, approximately 188 million shares of CSW
Common Stock were outstanding. The new shares of CSW Common Stock will be
of the same rank as these outstanding shares of CSW Common Stock, will
have the same par value and voting rights, and will have the same rights,
privileges and preference as to dividends and distributions as the shares
of CSW Common Stock currently outstanding. The sole difference between
the new shares of CSW Common Stock and other shares is that holders of
large blocks of the new shares will be prohibited from disposing of such
shares during temporary "lock-up periods" specified in the Plan. These
restrictions are intended to avoid having a large number of shares of CSW
Common Stock sold into the market all at once, thereby increasing
volatility in the market for CSW Common Stock. These restrictions are
described more fully on pages 186 through 188 of the Disclosure Statement
and will not apply to holders of 5,000 shares or less.
Section 7(d)(2). The new shares of CSW Common Stock will be
reasonably adapted to the earning power of CSW.
Section 7(d)(3). The Commission has previously approved the
issuance of common stock to finance corporate acquisitions under Section
7(d)(3) of the Act, including the issuance of common stock to creditors
and equity holders in connection with the acquisition of a bankrupt
utility. See Northeast Utilities, 47 SEC Docket 1270 (1990), 51 SEC
Docket 504 (1992). Because CSW is a financially strong company, the use
<PAGE> 51
of CSW Common Stock as part of the Transaction consideration is calculated
to attract investors at reasonable cost and to fund the Transaction as
economically and efficiently as possible.
Section 7(d)(4). The fees, commissions and other remuneration
incurred in connection with the Transaction and the EPE bankruptcy
proceeding are discussed in Items 2. and 3.I.A.2.b. of this Application.
Section 7(d)(5). This subsection applies only to the guarantee or
assumption of liability on securities of another company and is therefore
inapplicable to CSW's proposed issuance of new shares of CSW Common Stock
under the Plan and Merger Agreement.
Section 7(d)(6). The issuance of the CSW Common Stock is clearly in
the public interest and the interest of investors and consumers. The CSW
Common Stock is an integral part of a plan of reorganization which will
permit EPE to emerge from bankruptcy and a Transaction which is expected
to achieve identified cost savings of approximately $420 million. As
described above in Item 1.H. of this Application, the public benefits from
the Transaction include benefits to EPE's creditors, shareholders and
ratepayers arising from the end of EPE's lengthy and costly bankruptcy and
cost savings and synergies which will help hold future rates below what
would otherwise be necessary under a stand-alone plan of reorganization.
Section 7(g). No approval is required under any state law for CSW
to issue shares of CSW Common Stock.
2. Issuance of CSW Sub Common Stock.
CSW Sub will be formed solely for purposes of effecting the
Transaction, and all shares of CSW Sub Common Stock will be issued to CSW
and held by it until consummation of the Transaction, at which time such
shares will be converted into shares of Reorganized EPE Common Stock
pursuant to section 2.8(a) of the Merger Agreement. Prior to the
Transaction, CSW Sub will not directly or indirectly engage in any
business activities, incur any contractual liabilities or obligations,
enter into any agreements or arrangements, or be subject to or bound by
any obligation or undertaking prior to the consummation of the Transaction
except as contemplated by the Merger Agreement. To the extent that the
various provisions of Section 7 of the Act are applicable to the issuance
of CSW Sub Common Stock, such issuance is permitted for substantially the
same reasons as the issuance of CSW Common Stock discussed in Item
3.II.A.1. above.
3. Issuance of New EPE Securities.
Under the Plan, Reorganized EPE may issue Reorganized EPE First
Mortgage Bonds (Series A, B, C and X) in a maximum aggregate principal
amount of up to $400 million; Reorganized EPE Second Mortgage Bonds
(Series A, B, C, D, E, F, X, Y and Z) in a maximum aggregate principal
amount of up to $610 million; Reorganized EPE Secured Notes (Classes 3A,
5A and 6A) in a maximum aggregate principal amount of up to $250 million;
Reorganized EPE Senior Floating Rate Notes (Classes 11 and 13) in a
maximum aggregate principal amount of up to $125 million; Reorganized EPE
<PAGE> 52
Senior Fixed Rate Notes (Series A and Class 13) in a maximum aggregate
principal amount of up to $525 million; and Reorganized EPE Preferred
Stock with a maximum aggregate value (calculated as set forth in the Plan)
of $68 million.
These maximum levels reflect the options of CSW and creditors for
distributions of securities, as discussed below, and bonds to be issued in
pledge as security for other obligations, and therefore exceed the total
amount of New EPE Securities projected to be issued elsewhere in this
Application.
The total amount of debt obligations actually projected to be issued
to classes 3, 5, 6, 11 and 13 in satisfaction or partial satisfaction of
their claims, excluding certain securities issued and pledged as
collateral, is approximately $335,739,000. As a result of CSW's current
capitalization Strategy, it is currently anticipated that the following
securities will be issued or remain outstanding at the Effective Date:
Reorganized EPE Secured Class 3A Secured Floating Rate Notes, Reorganized
EPE Series X Second Mortgage Bonds, Reorganized EPE Secured Class 5A
Secured Floating Rate Notes, Reorganized EPE Series Y Second Mortgage
Bonds, Reorganized EPE Secured Class 6A Secured Floating Rate Notes,
Reorganized EPE Series 7 Second Mortgage Bonds, and Reorganized EPE Senior
Floating Rate Notes.
The actual approximate principal amount of Reorganized EPE debt
securities (excluding securities issued in pledge as collateral) is
expected to be as follows:
First Mortgage Bonds - Series A 109,000
First Mortgage Bonds - Series B 217,530
Second Mortgage Bonds - Series A 176,728
Pollution Control Bonds
Maricopa Series A - 1983 61,700
Maricopa Series B - 18984 37,100
Maricopa Series C - 1985 59,235
Farmington 31,624
Series A Senior Notes 427,300
As set forth more fully below, the issuance of these securities
meets the requirements of Section 7 of the Act and should be approved by
the Commission. CSW has assumed, for purposes of this Application, that
Section 7 applies to EPE's issuance of the New EPE Securities at a time
contemporaneous with the Transaction, even though EPE is not technically a
"registered holding company or subsidiary company thereof" within the
meaning of Section 7(a) until after the Transaction has been consummated.
A summary of the terms of the New EPE Securities is set forth below.
In addition, pursuant to the Plan, holders of the Reorganized EPE
Series A and Series B First Mortgage Bonds and the Reorganized EPE Series
A Second Mortgage Bonds have the right (to be exercised not later than
<PAGE> 53
five days before the Effective Date) to have Reorganized EPE cause to
beunderwritten and sold in a registered secondary offering such bonds
within 60 days after the Effective Date. To the extent that such sales do
not provide the holder with net proceeds equal to the principal amount of
the bonds so sold, then Reorganized EPE will pay such holder cash in an
amount equal to such deficiency. An aggregate of no more than 50% in
aggregate principal amount of such bonds may be required to be so
underwritten. Reorganized EPE will be responsible for all costs and
expenses of any such sale.
a. Description of Securities.
i. First Mortgage Bonds.
The Reorganized EPE First Mortgage Bonds will consist of Series A,
B, C and X and will be issued under an indenture, pursuant to which State
Street Bank and Trust Company will act as Trustee (the "FMB Indenture")
(Exhibit A-13 hereto).
The Series A and Series B First Mortgage Bonds will mature on the
fifth and fifteenth anniversaries of the Effective Date, respectively;
provided that, by timely notice to the recipients thereof, CSW may elect
another maturity for such series of not less than five nor more than
thirty years which will be in increments of five years if a maturity of
greater than fifteen years is chosen. The Series C First Mortgage Bonds
will mature on the eighth anniversary of the Effective Date or such
shorter maturity as CSW may elect. The Series A, B and C First Mortgage
Bonds will bear interest semi-annually in arrears at a per annum rate
equal to a "Market Basket Rate," as defined in the Plan, to be determined
pursuant to Schedule D to the Plan based on the actual maturity and rating
of each series of such bonds.
Neither the Series A nor the Series B First Mortgage Bonds will be
redeemable prior to the fifth anniversary of their issuance. On and after
such date, the Series A and Series B First Mortgage Bonds will be
redeemable at redemption prices calculated in accordance with Schedule B
to the Plan. The Series C First Mortgage Bonds will be redeemable at any
time in whole or in part at redemption prices calculated in accordance
with Section 3.5.A.2. of the Plan and Schedule C thereto.
The Series X First Mortgage Bonds will be issued to partially secure
the payment of the principal and interest due on the Class 3A Secured
Floating Rate Notes. The Series X First Mortgage Bonds will mature on the
same dates and bear interest at the same rates as the Class 3A Secured
Floating Rate Notes. The Series X First Mortgage Bonds will be redeemable
only upon an acceleration of the maturity of the Class 3A Secured Floating
Rate Notes.
The following constitute defaults under the FMB Indenture: (i)
failure to pay principal or premium when due, (ii) failure to pay interest
for 60 days after becoming due, (iii) failure to satisfy sinking fund
obligations for 60 days after becoming due, (iv) failure for 90 days after
notice to observe other covenants and conditions, (v) entry of an order
<PAGE> 54
for reorganization or appointment of a trustee or receiver and continuance
of such order or appointment unstayed for 90 days, and (vi) certain
adjudications, petitions or consents in bankruptcy, insolvency or
reorganization proceedings.
The FMB Indenture includes the following covenants on the part of
Reorganized EPE: (i) to maintain and preserve the lien of the FMB
Indenture, (ii) to pay principal, premium, if any, and interest on the
bonds, (iii) to pay taxes, (iv) to maintain customary insurance, (v) to
maintain property, (vi) to merge, consolidate, or sell all or
substantially all of its assets only upon complying with certain
conditions, and (vii) other covenants of general applicability. The FMB
Indenture also includes a maintenance and renewal covenant whereby
Reorganized EPE agrees to expend in each year 2.5% of the average amount
of Reorganized EPE's depreciable property for (1) the maintenance and
repair of its mortgaged utility properties, (2) the construction or
acquisition of bondable property or (3) the retirement, through purchase
or payment of bonds issued under the FMB Indenture, or redemption of bonds
that are subject to redemption. In addition, the Series A and Series B
First Mortgage Bonds will be entitled to the following additional
covenants: (i) Reorganized EPE will only pay dividends out of GAAP net
income after the Effective Date plus $300 million, (ii) Reorganized EPE
will not retire such bonds to satisfy the annual maintenance and renewal
obligations under the Indenture, and (iii) for so long as any original
holders of such bonds continue to hold such bonds, Reorganized EPE will
not pay dividends on its common stock unless such bonds have an investment
grade rating.
Additional Reorganized EPE First Mortgage Bonds may be issued only
upon the basis of: (i) 66 2/3% of bondable property (including bondable
property existing on the Effective Date less an amount that would be
utilized if the 66 2/3% test were applied to the issuance of the bonds on
such date), (ii) retired bonds and (iii) the deposit of cash. A net
earnings test of two times interest requirements may be applicable in
certain situations.
Additional information regarding the Reorganized EPE First Mortgage
Bonds is set forth in Section VIII.F.1. of the Disclosure Statement.
ii. Second Mortgage Bonds.
The Reorganized EPE Second Mortgage Bonds will consist of Series A,
B, C, X, Y and Z and, under circumstances specified below, Series D, E and
F Second Mortgage Bonds, and will be issued under an indenture, pursuant
to which IBJ Schroder Bank & Trust Company will act as Trustee (the "SMB
Indenture") (Exhibit A-14 hereto).
The Series A Second Mortgage Bonds will mature on the tenth
anniversary of the Effective Date; provided that, by timely notice to the
recipients thereof, CSW may elect another maturity for such series of not
less than five nor more than thirty years which will be in increments of
five years if a maturity of greater than fifteen years is chosen. The
Series B Second Mortgage Bonds will mature on the eighth anniversary of
the Effective Date or such shorter maturity as CSW may elect. The Series
<PAGE> 55
A and B Second Mortgage Bonds will bear interest semi-annually in arrears
at a per annum rate equal to a "Market Basket Rate" to be determined
pursuant to Schedule D to the Plan based on the actual maturity and rating
of each series of such Bonds.
The Series A Second Mortgage Bonds will not be redeemable prior to
the fifth anniversary of their issuance. On and after such date, the
Series A Second Mortgage Bonds will be redeemable at redemption prices
calculated in accordance with Schedule B to the Plan. The Series B Second
Mortgage Bonds will be redeemable at any time in whole or in part at
redemption prices calculated in accordance with Section 3.5.A.2. of the
Plan and Schedule C thereto.
The Series X, Y (sub-series Y-1 through Y-8) and Z Second Mortgage
Bonds will be issued to secure or partially secure the payment of the
principal and interest due on certain secured notes or the payment of
certain reimbursement and other obligations described in such bonds.
These pledged Second Mortgage Bonds will mature on the same dates and bear
interest at the same rates as the obligations which such bonds secure.
The pledged Second Mortgage Bonds will be redeemable only upon an
acceleration of the maturity of the obligations which such bonds secure.
Forms of the letter of credit and reimbursement agreements secured by
Reorganized EPE Series Y Second Mortgage Bonds will be filed as Exhibit A-
20 hereto.
In the event the Maricopa PCB's are not refunded on the Effective
Date as contemplated by the Plan, Reorganized EPE will issue Series D, E
or F pledged Second Mortgage Bonds, as the case may be, to replace the
existing EPE Series D, E or F Second Mortgage Bonds, as applicable,
currently securing the Maricopa PCB's. Upon refunding, the Maricopa PCB's
will no longer be secured.
Apart and independent from the provisions of the Plan, but pursuant
to documents filed with the Bankruptcy Court, it is contemplated that the
Farmington PCB's will be remarketed or refunded on the Effective Date or
soon thereafter. In connection with the remarketing or refunding it is
also contemplated that certain modifications will be made to the
resolution governing the Farmington PCB's.
The terms of the SMB Indenture will be substantially identical to
those of the FMB Indenture, except that Reorganized EPE's obligations
under the SMB Indenture will be secured by a second mortgage on all
bondable property of Reorganized EPE.
Additional Reorganized EPE Second Mortgage Bonds may be issued only
upon the basis of: (i) 33 1/3% of bondable property additions after the
Effective Date, (ii) retired bonds and (iii) the deposit of cash. A net
earnings test of two times interest requirements may be applicable in
certain situations.
Additional information regarding the Reorganized EPE Second Mortgage
Bonds is set forth in Section VIII.F.2 of the Disclosure Statement.
<PAGE> 56
iii. Senior Fixed Rate Notes.
The Reorganized EPE Senior Fixed Rate Notes will consist of Series A
and Class 13 Senior Fixed Rate Notes and will be issued under an
indenture, pursuant to which United States Trust Company of New York will
act as Trustee (the "Note Indenture") (Exhibit A-15 hereto).
The Series A Senior Fixed Rate Notes will mature at the end of the
quarter immediately following the tenth anniversary of the earlier of the
Effective Date or December 31, 1994. The term of the Series A Senior
Fixed Rate Notes may be adjusted at the election of CSW provided that such
term may not exceed 10 years. The Class 13 Senior Fixed Rate Notes will
mature on the ninth anniversary of the earlier of the Effective Date and
December 31, 1994. The Senior Fixed Rate Notes will bear interest semi-
annually in arrears at a per annum rate equal to a "Market Basket Rate" to
be determined pursuant to Schedule D to the Plan based on the actual
maturity and rating of each series of such notes.
The Senior Fixed Rate Notes will be redeemable at any time in whole
or in part at redemption prices calculated in accordance with Sections
3.14.A.2. (with respect to the Series A Senior Fixed Rate Notes) and
3.15.A.2. (with respect to the Class 13 Senior Fixed Rate Notes) of the
Plan and Schedule C thereto.
Additional information regarding the Reorganized EPE Senior Fixed
Rate Notes is set forth in Section VIII.F.4. of the Disclosure Statement.
iv. Secured Floating Rate Notes.
The Reorganized EPE Secured Floating Rate Notes will consist of
Class 3A Secured Floating Rate Notes, Class 5A Secured Floating Rate Notes
and Class 6A Secured Floating Rate Notes. The Class 3A Secured Floating
Rate Notes will be issued under a term loan agreement between Reorganized
EPE, the holders of such Notes, and an agent acting for such holders
(Exhibit A-16 hereto). The Class 5A Secured Floating Rate Notes will be
issued under four separate term loan agreements (each having substantially
similar terms and conditions) between Reorganized EPE and the holders of
the Class 5(a), 5(b) and 5(c) claims (Exhibit A-17 hereto). The Class 6A
Secured Floating Rate Notes will be issued under a term loan agreement
between Reorganized EPE, the holders of such Notes, and Canadian Imperial
Bank of Commerce, as agent for such holders (Exhibit A-18 hereto).
The Class 3A and Class 5A Secured Floating Rate Notes will mature on
the earlier of December 31, 1997 and the last business day of the month in
which the third anniversary of the Effective Date occurs. The Class 6A
Secured Floating Rate Notes will mature on the earlier of December 31,
1998 and the last business day of the month in which the fourth
anniversary of the Effective Date occurs.
The Class 3A, Class 5A and Class 6A Secured Floating Rate Notes will
each be payable in equal quarterly principal installments commencing on
the earlier of December 31, 1994 and the last business day of the month in
which the first anniversary of the Effective Date occurs (provided, that
if the Effective Date occurs after December 31, 1994, any such
<PAGE> 57
installments that would otherwise have been payable prior to the Effective
Date will be payable on the last business day of the month in which the
Effective Date occurs).
The Class 3A and Class 6A Secured Floating Rate Notes will bear
interest at a rate equal to the 3-month London interbank offered rate
("LIBOR") plus 150 basis points (or, at the option of Reorganized EPE, at
the respective agent's adjusted reference rate plus 50 basis points),
payable at the end of each interest period. The Class 5A Secured Floating
Rate Notes will bear interest at a rate equal to the LIBOR (resetting, at
the option of Reorganized EPE, at 1, 3 or 6 months) plus 150 basis points
(or, at the option of Reorganized EPE, at the respective holder's adjusted
reference rate plus 50 basis points), payable at the end of each interest
period (but in any event not less often than quarterly). The term
"adjusted reference rate" means, with respect to any bank, a rate
determined with reference to such bank's "base" or "prime" rate, such
determination to be made according to the formula customarily applied by
such bank to its domestic loans priced with reference to such rate, which
formula may require that such rate be the higher of such "base" or "prime"
rate and the sum of a specified margin plus a rate determined with
reference to certificates of deposit and/or federal funds.
The Reorganized EPE Secured Floating Rate Notes will be prepayable
by Reorganized EPE at any time in whole or in part without premium,
subject only to LIBOR breakage costs, if any. In addition, the Class 5A
Secured Floating Rate Notes will provide that the net proceeds of any
remarketing or refunding after the Effective Date of any Maricopa PCB's
purchased prior to the Effective Date through draws on letters of credit
issued by the holders of such Notes will be applied to repay the principal
of such Notes.
The Class 3A Secured Floating Rate Notes will be secured by bonds,
one-third of which shall be Series X First Mortgage Bonds and two-thirds
of which shall be Series X Second Mortgage Bonds; the Class 5A Secured
Floating Rate Notes will be secured by Series Y Second Mortgage Bonds; and
the Class 6A Secured Floating Rate Notes will be secured by Series Z
Second Mortgage Bonds. Such Series X First Mortgage Bonds and Series X,
Series Y and Series Z Second Mortgage Bonds will be issued and deposited
as security for the payment of, and will have interest and payment terms
identical to those in, the Class 3A, Class 5A and Class 6A Secured
Floating Rate Notes, as the case may be. However, no principal or
interest will be payable on such Bonds except if, and to the extent that,
the corresponding payment on the related Class 3A, Class 5A or Class 6A
Secured Floating Rate Notes remains unpaid after the due date thereof.
Additional information regarding the Reorganized EPE Secured
Floating Rate Notes is set forth in Sections V.B.4(b), V.B.4(c) and
V.B.4(d) of the Disclosure Statement.
v. Senior Floating Rate Notes.
The Reorganized EPE Senior Floating Rate Notes will consist of Class
11 Senior Floating Rate Notes and Class 13 Senior Floating Rate Notes.
The Class 13 Senior Floating Rate Notes will be issued under a term loan
<PAGE> 58
agreement among Reorganized EPE, the holders of such Notes, and an agent
acting for such holders (Exhibit A-19 hereto). The Class 11 Senior
Floating Rate Notes will be issued under a term loan agreement that
contains interest, maturity, amortization, covenant and default terms
identical to the term loan agreement for the Class 13 Senior Floating Rate
Notes, except to the extent discussed below.
The Reorganized EPE Senior Floating Rate Notes will mature on the
seventh anniversary of the earlier of the Effective Date and December 31,
1994, and will each be payable in equal quarterly principal installments
commencing at the end of the quarter after the earlier of the fifth
anniversary of (i) the Effective Date and (ii) December 31, 1994
(provided, that the maturity and amortization schedule of such Notes will
be adjusted prior to the Effective Date, if necessary, such that the
maturity thereof is not greater than the maturity of the Reorganized EPE
Series A Senior Fixed Rate Notes, as selected by CSW).
The Reorganized EPE Senior Floating Rate Notes will bear interest at
a rate equal to 3-month LIBOR plus 200 basis points (or, at the option of
Reorganized EPE, at the respective agent's adjusted reference rate plus
100 basis points), payable at the end of each interest period (but in any
event not less often than quarterly).
The Reorganized EPE Senior Floating Rate Notes will be prepayable by
Reorganized EPE at any time in whole or in part without premium, subject
only to LIBOR breakage costs, if any. Reorganized EPE will be required to
redeem all of the outstanding Class 11 and Class 13 Senior Floating Rate
Notes if at any time less than 33-1/3% of the Series A Senior Fixed Rate
Notes issued on the Effective Date remain outstanding. In addition, the
Class 11 Senior Floating Rate Notes will include provisions for the
mandatory prepayment thereof from the proceeds of any remarketing or
refunding of the Farmington Series A 1983 PCBs paid for or purchased prior
to the Effective Date with a draw on the Farmington PCB letter of credit.
Additional information regarding the Reorganized EPE Senior Floating
Rate Notes is set forth in Sections V.B.4(e) and V.B.4(g) of the
Disclosure Statement.
vi. Letters of Credit Supporting Maricopa PCB's.
The post-Effective Date obligations of Reorganized EPE with respect
to replacement letters of credit supporting the Maricopa PCBs will be
governed by separate letter of credit and reimbursement agreements between
Reorganized EPE and the respective issuers of such replacement letters of
credit (each such agreement having substantially similar terms) (Exhibit
A-23 hereto).
Such replacement letters of credit will be scheduled to expire (i)
in the case of the replacement letter of credit for the Maricopa 1994
Series A PCB's (which replaced the 1983 Series A PCB's on July 1, 1994),
on the earlier of December 31, 1997 and the third anniversary of the
Effective Date, (ii) in the case of the replacement letter of credit for
the Maricopa Series E 1984 PCB's, on the last day of the fourth month
following the earlier of December 31, 1998 and the fourth anniversary of
<PAGE> 59
the Effective Date, and (iii) in the case of the replacement letter of
credit for the Maricopa Series A 1985 PCB's, on the earlier of December
31, 1998 and the fourth anniversary of the Effective Date, in each case
with a one-year extension at the option of Reorganized EPE.
Subject to the satisfaction of conditions specified in the
respective letter of credit and reimbursement agreements, certain drawings
under the replacement letters of credit may be treated as loans by the
respective issuer to Reorganized EPE. Such loans would mature on the
stated termination date of the relevant replacement letter of credit,
would be payable in equal quarterly installments (commencing on the last
day of the calendar quarter in which the 90th day following the relevant
drawing occurs), would bear interest at a rate equal to LIBOR (resetting,
at the option of Reorganized EPE, at 1, 3 or 6 months) plus 150 basis
points (or, at the option of Reorganized EPE, at the respective issuer's
adjusted reference rate plus 50 basis points), and would be prepayable by
Reorganized EPE at any time in whole or in part without premium, subject
only to LIBOR breakage costs, if any. Reimbursement obligations in
respect of the replacement letters of credit (including those treated as
loans, together with interest thereon) will be secured by pledged
Reorganized EPE Series Y Second Mortgage Bonds.
Letter of credit commissions will be payable to the respective
issuers of the replacement letters of credit at an initial rate per annum
equal to 0.75% of the amount available to be drawn under such letter of
credit, such rate increasing by 0.125% per annum on each anniversary of
the earlier of December 31, 1994 and the Effective Date.
vii. Letter of Credit Supporting Farmington PCB's.
The post-Effective Date obligations of Reorganized EPE with respect
to the replacement letter of credit supporting the Farmington PCB's will
be governed by a letter of credit and reimbursement agreement between
Reorganized EPE and the issuer of such replacement letter of credit
(Exhibit A-24 hereto).
Such replacement letter of credit will be scheduled to expire on the
last day of the sixth month after the scheduled final maturity date of the
Reorganized EPE Class 13 Senior Floating Rate Notes.
Subject to the satisfaction of conditions specified in such letter
of credit and reimbursement agreement, certain drawings under such
replacement letter of credit may be treated as loans by such issuer to
Reorganized EPE. Such loans would mature on the stated termination date
of the replacement letter of credit, would be payable in equal quarterly
installments (commencing on the last day of the calendar quarter in which
the 90th day following the relevant drawing occurs), would bear interest
at a rate equal to LIBOR (resetting, at the option of Reorganized EPE, at
1, 3 or 6 months) plus 150 basis points (or, at the option of Reorganized
EPE, at the issuer's adjusted reference rate plus 50 basis points), and
would be prepayable by Reorganized EPE at any time in whole or in part
without premium, subject only to LIBOR breakage costs, if any.
Reimbursement obligations in respect of the replacement letter of credit
(including those treated as loans, together with interest thereon) will be
secured by pledged Reorganized EPE Series Y Second Mortgage Bonds.
<PAGE> 60
Letter of credit commissions will be payable to the issuer of such
replacement letter of credit at an initial rate equal to 0.625% per annum
of the amount available to be drawn under such letter of credit, such rate
increasing on the first seven anniversaries of the earlier of December 31,
1994 and the Effective Date to 0.75% per annum, 0.875% per annum, 1.00%
per annum, 1.125% per annum, 1.25% per annum, 1.625% per annum and 2.00%
per annum, respectively.
viii. Preferred Stock.
The Reorganized EPE Preferred Stock will have the rights and
preferences set forth in the Reorganized EPE Amended and Restated Articles
of Incorporation (Exhibit A-7 hereto).
The Reorganized EPE Preferred Stock will provide for cumulative cash
dividends payable quarterly at a rate equal to the "Market Basket Rate" to
be determined pursuant to Schedule E to the Plan based on the actual
rating of such stock. The Reorganized EPE Preferred Stock will be
redeemable at any time in whole or in part at redemption prices calculated
in accordance with Section 3.17 of the Plan and Schedule C thereto plus
accrued dividends. In addition, on each of the eleventh, twelfth,
thirteenth and fourteenth anniversaries of the Effective Date, Reorganized
EPE is required to redeem one-twentieth of the originally issued
Reorganized EPE Preferred Stock, and on the fifteenth anniversary, it is
required to redeem all outstanding Reorganized EPE Preferred Stock, in
each case at a redemption price equal to the liquidation value of such
stock.
The Reorganized EPE Preferred Stock will be entitled to vote only in
the following limited circumstances: (i) amendments to Reorganized EPE
Preferred Stock terms which are adverse to the holders thereof (including
increases in authorized number of shares); (ii) creation of a class of
stock having a preference superior to the Reorganized EPE Preferred Stock
or of a security convertible into any kind of stock; (iii) issuance of
additional Reorganized EPE Preferred Stock or parity stock (unless an
earnings test is met); and (iv) merger or sale of all or substantially all
of Reorganized EPE's assets. In addition, if dividends are in default in
an amount at least equal to four quarterly dividends, the Preferred Stock,
voting as a class, will be entitled to elect a majority of the Reorganized
EPE Board of Directors.
For a more detailed description of the Reorganized EPE Preferred
Stock, please see Section VIII.F.3. of the Disclosure Statement.
b. Analysis.
Section 7(c). The New EPE Securities are an integral part of the
reorganization of EPE contemplated by the Plan and therefore authorized by
Section 7(c)(2)(A). The Commission has allowed the issuance of securities
to effect the reorganization and acquisition of a bankrupt utility. See
Northeast Utilities, 47 SEC Docket 1270 (1990). In addition, the
Reorganized EPE First Mortgage Bonds and the Reorganized EPE Class 3A
Secured Notes to the extent they are secured by Reorganized EPE Series X
<PAGE> 61
First Mortgage Bonds are securities of the type expressly permitted in
Section 7(c)(1)(B), namely, a bond "secured by a first lien on physical
property."
Section 7(g). Approvals of the NMPUC and the FERC will be sought
before the issuance of the New EPE Securities.
Section 7(d). Of the six subsections of Section 7(d), two --
Sections 7(d)(3) and 7(d)(5) -- are not pertinent to the issuance of the
New EPE Securities. Section 7(d)(3) applies only to "financing[s]" and is
therefore not applicable to the issuance of securities for reorganization
rather than financing purposes. Section 7(d)(5) is not relevant because
CSW is not guaranteeing any of the New EPE Securities. As shown below,
the issuance of the New EPE Securities meets each of the remaining
requirements. Thus, the New EPE Securities will be reasonably adapted to
the security structure and earning power of EPE (Section 7(d)(2)) and will
be consistent with the security structure of the CSW System as a whole
(Section 7(d)(1)); the fees to be paid in connection with the issuance of
the New EPE Securities are reasonable (Section 7(d)(4)); and the terms of
the issuance of the New EPE Securities are not detrimental to the public
interest or the interest of investors or consumers (Section 7(d)(6)).
Section 7(d)(1). In its confirmation order, the Bankruptcy Court
found that the interest rates, maturities, and other terms and conditions
of the New EPE Securities "were negotiated at arm's length, are
appropriate for obligations of that type by comparison with other electric
utilities with comparable financial and other characteristics to EPE, and
represent, in the context of the Plan taken as a whole, a fair and
reasonable resolution of such creditors' claims." (Findings of Fact para.
18(b)) In addition, the Bankruptcy Court found that the New EPE
Securities "will be issued for the discharge or lawful refunding of
[EPE's] obligations, and in all cases, the creditors are giving valid
consideration for the securities to be issued," and that "[i]n many cases
the amount offered to the creditors is less than the consideration they
furnished to [EPE], and the securities will be priced at current market
rates as of the Effective Date, thereby likely leading to a reduction in
[EPE's] interest costs."
The New EPE Securities follow a standard utility capital structure,
and in general, holders of existing EPE debt obligations will receive
comparable new debt obligations. Thus, in general, holders of existing
EPE First Mortgage Bonds will receive Reorganized EPE First Mortgage
Bonds; holders of existing EPE Second Mortgage Bonds will receive
Reorganized EPE Second Mortgage Bonds; holders of claims arising from
secured credit facilities will receive Reorganized EPE Secured Notes;
holders of unsecured claims or claims arising from unsecured credit
facilities will receive Reorganized EPE Senior Floating Rate Notes or
Reorganized EPE Senior Fixed Rate Notes; and holders of existing EPE
Preferred Stock will receive Reorganized EPE Preferred Stock.
The New EPE Securities will be obligations solely of Reorganized EPE
and will be issued in exchange for obligations of EPE. For all of these
reasons, the New EPE Securities are reasonably adapted to the capital
structure of the CSW System as a whole.
<PAGE> 62
Section 7(d)(2). The New EPE Securities are to be issued in
connection with the reorganization of EPE under Chapter 11, the
fundamental purpose of which is to reorganize a debtor to be a viable
business upon emerging from bankruptcy. In its Findings of Fact with
respect to the Plan, the Bankruptcy Court found that the Plan "is not
likely to be followed by the liquidation, or the need for further
financial reorganization" of EPE. Implicit in this finding is a
determination that the New EPE Securities are reasonably adapted to the
expected earning power of Reorganized EPE. In addition, consummation of
the Transaction, and therefore the issuance of the New EPE Securities, is
contingent upon the receipt of rate orders from the PUCT and the NMPUC
establishing certain ratemaking, accounting, and regulatory treatments
that would enable Reorganized EPE to fulfill its obligations under the New
EPE Securities. These conditions ensure that the New EPE Securities are
"reasonably adapted" to the "earning power" of EPE and therefore in
compliance with Section 7(d)(2). CSW's analysis indicates the pretax
interest coverage ratio for EPE upon completion of the Transaction to be
as follows:
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
1.79 3.00 2.74 3.16 3.16
Section 7(d)(4). The fees, commissions and other remuneration
incurred in connection with the Transaction and the EPE bankruptcy
proceeding are discussed in Items 2. and 3.I.A.2.b. of this Application.
Section 7(d)(6). As an integral part of the Plan and the
Transaction, the issuance of the New EPE Securities is clearly in the
public interest and the interest of investors or consumers for all of the
reasons discussed in Item 1.H. above.
4. Registration
CSW and EPE believe that, pursuant to Section 1145 of the Bankruptcy
Code, the New EPE Securities to be issued by Reorganized EPE and the new
shares of CSW Common Stock to be issued by CSW pursuant to the Plan and
the Merger Agreement are exempt from the registration requirements of the
Securities Act of 1933, as amended. By letter dated August 16, 1994, in
response to a no-action request by CSW, the Staff of the Commission
indicated that it would not recommend enforcement action to the Commission
if Reorganized EPE Preferred Stock and CSW Common Stock were issued as
contemplated in the Plan and the Merger Agreement without registration
under the Securities Act of 1933, as amended.
B. Addition of EPE to CSW System Service Agreement.
The Commission has previously authorized the cost allocation methods
employed in the system service agreement among CSW and its subsidiaries
(the "Service Agreement") (Exhibit B-6 hereto), under which CSWS performs
certain engineering, tax, legal, financial, human resources, information,
operational and other services for companies in the CSW System. To
integrate EPE into the CSW System after the Transaction, CSW seeks
authority to cause EPE to become a party to the Service Agreement, subject
to a phase-in period as described below.
<PAGE> 63
The assimilation of EPE into the Service Agreement is essential to
the realization of many of the cost savings and synergies described in
this Application. Thus, as noted in Item 1.H. above, CSW expects the
Transaction to result in approximately $234 million in non-fuel O&M
savings on a nominal basis ($149 million on a present-value basis),
primarily through the elimination of duplicated functions in areas such as
law, investor relations, corporate planning, public relations, and
administration -- areas covered by CSWS and the Service Agreement.
Further savings arising from the inclusion of EPE in the Service
Agreement, in addition to the non-fuel O&M savings described above, are
expected from the elimination of duplication in the areas of treasury,
accounting, purchasing, human resources, system planning, and fuel
management. To maximize these Transaction-related savings, it is
anticipated that EPE will become a party to the Service Agreement
effective immediately upon the consummation of the Transaction.
At the same time, the full assimilation of EPE into the CSW System
is expected to occur over a number of years. Among other things,
adjustments will be required in EPE's workforce to reflect the shift of
various service functions from EPE to CSWS. It is expected that these
workforce adjustments will be effected through attrition, hiring freezes,
and transfers of personnel to other companies in the CSW System. As a
result, the workforce adjustments will not occur simultaneously with the
consummation of the Transaction and the addition of EPE to the Service
Agreement. Full coordination of CSWS and the management systems and
processes of EPE will require several years, consistent with the
organization and restructuring described above.
Although the centralization of services in CSWS will create
significant immediate and even greater long-term financial savings, some
of these savings may initially be offset to some extent by the existence
of duplicate resources at EPE during the first two years after the
consummation of the Transaction. To avoid having EPE bear both CSWS
charges and the cost of such pre-existing service capacity, CSW proposes
to phase in CSWS charges to EPE. Under the phase-in arrangements, EPE
will bear one-third of its pro-rata allocation of CSWS indirect charges
during the first twelve months after the Effective Date, two-thirds during
the second twelve months after the Effective Date, and the full allocation
thereafter. EPE would bear its full share of direct charges by CSWS for
functions such as information processing. This phase-in procedure for
indirect charges will require an amendment to section 3 of the Service
Agreement, which governs the allocation of costs among the parties for
services performed by CSWS.
CSW believes that these phase-in arrangements are consistent with
the at-cost requirements of the Act and the applicable Rules thereunder
and will result in a fair and equitable allocation of expenses among all
companies in the CSW-EPE system.
C. Reacquisition by EPE of Ownership of the Leased Palo Verde
Assets.
As discussed above in Item 1.F. under the caption "Description of
Assets Being Acquired," EPE sold and leased back 100% of its interest in
Palo Verde Unit 2 and 39.5% of its interest in Palo Verde Unit 3
<PAGE> 64
(collectively "Leased Palo Verde Assets"). The Plan and the OP
Settlements provide for EPE to reacquire ownership of the Leased Palo
Verde Assets. Because Section 9(a)(1) prohibits a registered holding
company or its subsidiaries from directly or indirectly acquiring utility
assets without Commission approval pursuant to Section 10, Commission
approval may be required for Reorganized EPE to reacquire ownership of
these interests. However, because the "acquisition" relates to an asset
EPE previously owned and presently leases, Applicant believes that the
only issue presented under Sections 9(a)(1) and 10 (assuming that such
sections apply to the "acquisition") is the reasonableness of the
consideration. As set forth more fully below, the consideration to be
paid for the "acquisition" meets the standards of Section 10. In this
regard, it should be noted that the "acquisition" of the Leased Palo Verde
Assets is an integral part of the Plan and a condition to the consummation
of the Transaction under Section 8.2(e) of the Merger Agreement.
Under the Plan, holders of the Palo Verde bonds will be treated as
creditors of the EPE estate and will receive consideration equal to 95.5%
of their claims, to be allowed in the amount of $700 million, together
with post-petition interest at LIBOR plus 200 basis points from July 29,
1993. Pursuant to the OP Settlements, the liens of the Palo Verde
bondholders and the Palo Verde indenture trustees will be discharged, and
the Palo Verde indenture trustees will transfer their rights with respect
to the Leased Palo Verde Assets to Reorganized EPE and exchange releases
with the Palo Verde Owner Participants. Subject to NRC approval, the Palo
Verde Owner Participants will transfer their interests in the Leased Palo
Verde Assets to Reorganized EPE, release their claims for any additional
damage amounts under the Palo Verde Leases, retain $288.4 million
previously drawn under related letters of credit, and be released from
claims by EPE and other creditors. After the consummation of the
Transaction and the OP Settlements, the Leased Palo Verde Assets will be
used for the benefit of EPE's operations and customers. There will be no
change in the extent of EPE's utilization of the Palo Verde Nuclear
Generating Station, the percentage of costs that EPE is to bear, or the
percentage of capacity it is entitled to receive.
As a consequence of the settlement, $956.9 million will have been
paid on account of the Palo Verde claims, including the $288.4 million
received by the Palo Verde Owner Participants as a result of their draws
on the Palo Verde letters of credit. Of this amount, the Bankruptcy Court
has determined that $605 million is reflective of the fair market value,
based on book value as of June 30, 1993, of the assets which are being
reacquired, and $351.9 million is attributable to lease rejection damages.
(Findings of Fact para. 18(f))
In its order confirming the Plan, the Bankruptcy Court found that,
"[i]n the context of the Plan and the overall benefit it provides, there
was no practical or better alternative to this restructuring, either for
[EPE] or for the holders of Claims in Class 12." According to the
Bankruptcy Court, the OP Settlements constitute "a fair and equitable
<PAGE> 65
resolution and a reasonable and sensible settlement by EPE and the Palo
Verde Indenture Trustees of the respective rights of the parties [and] is
within the reasonable range of litigation possibilities." Among other
things, the Bankruptcy Court found that:
* the Palo Verde litigation "could not have been settled for a
materially lower amount to obtain a consensual plan";
* "[t]he Allowed Claim amount of $700 million represents a
significant reduction in the potential Claims of such
Bondholders, if all the disputed issues had been decided in
their favor," and that "[d]epending on the outcome of the Palo
Verde adversary proceeding, such holders could hold potential
unsecured Claims of approximately $725 million, including pre-
petition interest, plus potential administrative claims for
post-petition rent at the contract rate of $91 million per
year, or such other reasonable rate as the [Bankruptcy] Court
might determine."
* "although there are theories on which [EPE's] Palo Verde
liabilities might have been less, there are also theories on
which damages might have been considerably greater";
* "litigation of the issues, given the amounts involved in this
case and the importance of the issues, would be extensive and
expensive, and likely involve multiple appeals";
* "continued litigation of [claims relating to Palo Verde] would
have precluded [EPE] from entering into a favorable merger
agreement that resolves this proceeding"; and
* "[u]nder all the circumstances, it would not have been
appropriate for [EPE] to continue to litigate."
(Findings of Fact para. 18(d)-(g)) As the Bankruptcy Court clearly
emphasized in finding that the litigation "could not have been settled for
a materially lower amount," the OP Settlements were a critical element for
EPE in achieving a consensual plan. Without the OP Settlements, EPE would
have been committed to years of expensive and uncertain litigation
regarding who was entitled to these valuable assets. By settling, the
value of the Leased Palo Verde Assets is preserved instead of dissipated
in litigation.
In sum, the reacquisition of the Leased Palo Verde Assets
facilitates the Transaction and the emergence of EPE from bankruptcy,
settles a potentially enormous litigation liability and avoids the costs
of protracted litigation. In addition to these significant benefits, the
reacquisition of the Leased Palo Verde Assets is also projected to result
in lower long-term rates for ratepayers than if EPE continued to lease the
Palo Verde Assets. In evaluating the options available to resolve the
claims in EPE's bankruptcy case against EPE in connection with the Palo
Verde leases, CSW performed economic analyses which compared the total net
present worth revenue requirements for the reacquisition of the Leased
<PAGE> 66
Palo Verde Assets to rejection of the leases, payment of damages and
installation of alternative generation (gas, coal or gas/coal
combination). CSW determined that reacquisition of the Leased Palo Verde
Assets would result in lower net present worth revenue requirements for
EPE's customers than rejection of the leases, payment of damages and
installation of alternative generation.
The reacquisition of the Leased Palo Verde Assets does not
substantially increase EPE's liability exposure in respect of Palo Verde,
since under the terms of the leases, EPE is responsible for substantially
the same share of O&M, decommissioning and other costs as it bears as
owner of the Palo Verde Assets under the proposed reacquisition. As of
May 31, 1994, EPE had contributed a total of $17,734,979 to Palo Verde's
six decommissioning funds. EPE is responsible for 15.8% of the aggregate
decommissioning costs for Palo Verde, or approximately $220 million.
As disclosed in 1934 Act filings of EPE, the Palo Verde facility
has experienced axial cracking in steam generators. CSW is monitoring the
situation and has advised EPE that the tube-cracking problems must be
satisfactorily resolved before a closing of the Transaction will occur.
Item 4. Regulatory Approval.
Set forth below is a summary of the regulatory approvals that CSW
and EPE have obtained or will seek in connection with the proposed
transactions.
I. Bankruptcy Confirmation.
For the Plan to become effective, the Bankruptcy Code requires EPE
to obtain confirmation of the Plan by the Bankruptcy Court. As noted
above, the Plan was overwhelmingly approved by all classes of creditors in
November 1993 and was confirmed by the Bankruptcy Court on December 8,
1993.
II. Pre-Merger Notification.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, CSW
and EPE are required to file notification and report forms with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice. CSW and EPE currently anticipate filing the
required notification and report forms in the fourth quarter of 1994.
III. State Public Utility Regulation and Other State Approvals.
EPE is a public utility company operating under the Federal Power
Act, the Texas Public Utility Regulatory Act, and the New Mexico Public
Utility Act. Jurisdictional authority under such statutes may be affected
by EPE's rights and responsibilities under the Bankruptcy Code. EPE is
regulated in many aspects of its business, including as to the rates it
can charge its customers.
<PAGE> 67
A. Texas.
The PUCT is authorized to review acquisitions of utility plant and
mergers involving a public utility to determine whether such transactions
are consistent with the public interest. In addition, incorporated
municipalities, such as the City of El Paso, have original jurisdiction
over the rates and services of a public utility within the municipality's
boundaries. Municipal rate determinations can be appealed to the PUCT
for de novo review. The effectiveness of the Transaction is conditioned
on receipt by Reorganized EPE and CSW of final orders of the PUCT (i)
authorizing a rate increase (as described in Exhibit D-10 hereto) both in
areas of PUCT original jurisdiction and in areas subject to appeals to the
PUCT from municipal determinations, and certain ratemaking, accounting and
regulatory treatments; (ii) to the effect that the combination of
Reorganized EPE with CSW contemplated under the Plan is consistent with
the public interest; and (iii) to the effect that Reorganized EPE's
repurchase of the Palo Verde Assets which were sold and leased back to
EPE, and related ratemaking treatments, are consistent with the public
interest.
An application seeking such orders has been filed with the PUCT
contemporaneously with this Application (Exhibit D-1 hereto). Reorganized
EPE will be required at some time in the future to initiate proceedings to
secure the regulatory approvals for the subsequent base rate increases.
In addition to such PUCT orders, applications have been filed with the
City of El Paso and other incorporated municipalities for an initial base
rate increase within municipal boundaries. The hearing on these
applications commenced on July 20, 1994, and the hearings are expected to
be completed in the near future. An initial decision by the PUCT is
expected in late February or early March 1995.
B. New Mexico.
EPE is subject to regulation as to rates, accounting, standards of
service, issuance of securities and certification of service area and
facilities by the NMPUC. The New Mexico Public Utility Act also requires
the prior express authorization of the NMPUC of a business combination
involving a New Mexico public utility and a public utility holding company
under any jurisdiction. The NMPUC further has the authority to review
certain types of transactions among affiliated interests to assure that
the transactions do not adversely affect public utility service or rates.
The effectiveness of the Plan and the Transaction is conditioned on
the receipt by Reorganized EPE and CSW of the following New Mexico
regulatory approvals and determinations:
(i) a final order of the NMPUC approving the combination;
(ii) a final NMPUC order authorizing the issuance by
Reorganized EPE of the securities required for the consummation
of the Plan;
(iii) a final NMPUC order approving a diversification plan for
Reorganized EPE; and
<PAGE> 68
(iv) a final NMPUC order determining that Reorganized EPE does
not require a new certificate of public convenience and
necessity as a result of the combination.
CSW and EPE filed an application before the NMPUC on March 14, 1994
requesting the NMPUC, to the extent necessary and appropriate under the
law, to approve (i) the acquisition by CSW of the outstanding common stock
of EPE; (ii) the accounting treatment of the Transaction; (iii) the
reacquisition of ownership of the Leased Palo Verde Assets and the
proposed accounting, regulatory and tax treatment associated with the
reacquisition; and (iv) a General Diversification Plan for EPE for
activities that will occur as a result of the Transaction. Under NMPUC
rules, a General Diversification Plan is required for certain transactions
among a public utility and its affiliates, including acquiring an interest
in or guaranteeing the debt of the affiliate. The application before the
NMPUC does not include any requests related to the establishment of
different rates or the issuances of securities pursuant to the Plan; such
requests will be included in separate applications when necessary. CSW
and EPE have proposed a rate freeze in New Mexico through 1997. The
condition in the Merger Agreement requiring an increase of rates in New
Mexico has been waived by CSW.
IV. Federal Power Act.
The FERC has jurisdiction over several of the transactions proposed
herein. These include approval of the disposition by EPE of control of
its jurisdictional facilities to CSW, and amendment of the CSW System
Operating Agreement to include EPE as a party. Applications seeking such
approval (Exhibits D-3 and D-4 hereto) have been filed. On November 4,
1993, CSW filed a related application with the FERC (Exhibit D-5 hereto)
requesting an order under Section 211 of the Federal Power Act to gain
access to the transmission system of SPS for use in coordinating the
operations of EPE and the existing CSW Electric Operating Companies. In
addition to the foregoing applications, on August 12, 1994, EPE filed an
application under Section 204 of the Federal Power Act seeking
authorization to assume liability in connection with the redemption and
reissuance of the Farmington PCB's (Class 10), and to assume liability for
a new letter of credit that will be issued to secure the replacement PCB's
(Class 11).
Section 211 Transmission Application: In its Section 211 order
issued on August l, 1994, the FERC preliminarily found that "a final order
requiring [SPS] to provide the transmission service requested by [CSW and
EPE] would comply with the statutory standards, once reliability concerns
have been met." The FERC's order rejected assertions made by SPS that the
FERC has no authority under Section 211 to order transmission service
where the purpose of the service is to allow coordination of merging
utilities' operations. The FERC stated: "We find nothing in the Energy
Policy Act itself or in the legislative history that restricts
transmission service on the basis of the length of the service, on the
nature of the transaction, or the context in which the applicant applies
for transmission service."
<PAGE> 69
The order directed SPS to perform reliability studies so that the
FERC can determine whether provision of the requested transmission service
will unreasonably impair reliability. On October 11, 1994, SPS filed the
results of its reliability studies with the FERC together with a report of
its planning engineering that argues that the studies show that it will be
necessary for SPS to construct a new 345 kV transmission line at a cost of
about $50 million in order to provide the requested transmission services.
CSW and EPE have also filed with the FERC a report of their assessment of
SPS' study results and presenting the results of studies independently
conducted by CSW with the assistance of an expert consultant. The report
filed by CSW and EPE explains that the SPS studies are flawed because SPS
used improperly specified study models and had drawn incorrect conclusions
from its studies. CSW and EPE intend to supplement their report to
respond to SPS' assessment of its study results, which SPS had not shared
with CSW or EPE prior to filing with the FERC. Such supplement will
explain in detail why the particular study results on which SPS has based
its conclusions are flawed and why properly conducted studies of the same
operating conditions would not support a conclusion that SPS must
construct a new transmission line in order to provide the requested
service.
If, after reviewing the studies and comments filed by SPS, CSW and
EPE, the FERC concludes that reliability will not be unreasonably
impaired, the Commission will issue a further "proposed order" that
requires CSW, EPE and SPS to negotiate the rates, terms and conditions on
which the requested transmission service will be provided.
Section 203 Merger Application: On August l, 1994, the FERC issued
an order setting certain issues for hearing in the merger case. In its
order on the merger application, the FERC announced a new standard by
which merger applications will be judged:
"We . . . do not believe that we could find any newly
filed merger consistent with the public interest if the
merging public utilities do not offer comparable
services, whether or not that merger results in an
increase in market power. . . . Given the transition of
the electric utility industry as a whole, we conclude
that, absent other compelling public interest
considerations, coordination in the public interest can
best be secured only if merging utilities offer
comparable transmission services."
Based on this new standard, the FERC ordered CSW and EPE to inform
it within 15 days after the issuance date of the order whether they would
accept as a condition to the Commission's approval of the Transaction a
requirement to offer "comparable services" to other electric utilities
over the transmission facilities of EPE and those of CSW that are operated
in the Southwest Power Pool. On August 10, 1994, CSW and EPE informed the
FERC that, subject to reservation of their rights, including their rights
to seek rehearing of the order and judicial review, they would accept as a
condition to the FERC's approval of the Transaction requirement that such
transmission services be offered to other electric utilities. On August
31, 1994, CSW and EPE filed with the FERC a Request for Rehearing that,
<PAGE> 70
among other things, asks the FERC to reconsider the imposition of the
comparable service requirement. On August 31, 1994, CSW and EPE also
filed the form of transmission tariffs they would propose to file with the
FERC in order to meet the comparable service requirement if the
requirement is upheld and the Transaction is consummated.
Because the FERC's comparability rule has been so recently
announced, it is not clear what comparability means in the circumstances
presented in any given case. What "comparable service" means in the
context of post-merger operations will be explored at the FERC hearing.
In addition to transmission service issues, the order sets for
hearing several issues regarding the impact on CSW's and EPE's cost of the
Transaction. These issues include:
1. the reasonableness of CSW's and EPE's projection of lower
production costs resulting from the Transaction;
2. the reasonableness of CSW's and EPE's estimates for labor and
administrative cost savings;
3. whether lowering the cost of capital of EPE will be offset by
increases in the cost of capital of the existing CSW Electric
Operating Companies;
4. whether the reacquisition by EPE of the Palo Verde Assets as
part of the Transaction will result in cost savings over the
remaining life of the assets; and
5. whether the costs and risks of the Transaction fall
disproportionately on the CSW Electric Operating Companies (and
their rates).
An administrative law judge of the FERC has established a procedural
schedule providing for discovery procedures, the filing of additional
testimony regarding the transmission and other issues set for hearing.
The hearing is presently expected to be concluded by January 20, 1995 and
the judge's initial decision is expected to be issued by March 24, 1994.
However, the FERC rejected demands by certain intervenors that the
approval of the Transaction be subjected to "hold harmless" conditions.
The FERC indicated that, "if necessary, we will impose conditions in our
final order if the Transaction is approved." Because the proposed changes
in the Operating Agreement directly affect the distribution of costs and
benefits of the Transaction among EPE and the CSW Electric Operating
Companies, the FERC has also set for hearing the reasonableness of those
changes.
The Section 203 order approved the use of purchase accounting for
the Transaction. However, the FERC required that "the companies maintain
full and complete information related to the business combination so that
accounting that would have resulted from use of the pooling method can be
reconstructed for all future accounting periods if necessary to do so for
ratemaking purposes." The FERC also permitted CSW and EPE to record "the
amount paid by CSW to acquire [EPE] in excess of book value depreciation
<PAGE> 71
as an acquisition adjustment on [EPE's] books." Otherwise, the order
found that no issues were presented as to the reasonableness of the
purchase price, whether CSW coerced EPE to merge, or whether effective
regulation would be impaired by the Transaction.
V. Atomic Energy Act.
EPE holds licenses issued by the NRC in connection with its
ownership interests in the Palo Verde Nuclear Generating Station. The
licenses authorize EPE to be a participant in the facility. The Atomic
Energy Act of 1954, as amended, provides that such license or any rights
thereunder may not be transferred or in any manner disposed of, directly
or indirectly, to any person through transfer of control unless the NRC
finds that such transfer is in accordance with the Atomic Energy Act. EPE
and APS have filed a joint application (Exhibit D-7 hereto) for the NRC's
consent to the indirect transfer of control of EPE's interest in the Palo
Verde Nuclear Generating System licenses that will occur as a result of
the Transaction. The application also requests that the NRC amend the
licenses to reflect EPE's reacquisition of ownership of the Palo Verde
Assets which were sold and leased back to EPE.
VI. Department of Energy.
Under the Federal Power Act and the Department of Energy
Organization Act, the United States Department of Energy authorizes
persons to transmit electric energy from the United States. EPE holds an
authorization to transmit electric energy to Comision Federal de
Electricidad, the national electric utility of Mexico. Because CSW will
become the owner of EPE's common stock, the Department of Energy requires
that notice of a succession of ownership be filed with it. CSW intends to
file such a notice as soon as practicable after the consummation of the
Transaction.
Item 5. Procedure.
CSW respectfully requests that the Commission issue notice of this
Application not later than January 25, 1994 and issue an order approving
the same, and permitting the Application to become effective promptly
following the expiration of the period set forth in such notice and in any
event prior to April 1, 1994.
CSW requests the Commission to issue its notice of proceedings as
soon as is reasonably practicable and to make the notice sufficiently
broad so that subsequent re-noticing will not be required if the details
in the way the Plan is implemented should be modified or if the Plan
itself should be modified.
No recommended decision by a hearing officer or 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 thirty-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.
<PAGE> 72
Item 6. Exhibits and Financial Statements.
I. Exhibits.
The number in parentheses after each exhibit description refers to
the number of the amendment to this Application-Declaration with which
that exhibit was filed (exhibit descriptions followed by "(0)" were filed
with the original Form U-1 Application-Declaration).
A-1 Second Restated Certificate of Incorporation of CSW
(incorporated by reference to CSW's Annual Report on Form
10-K for the year ended December 31, 1992 (Exhibit H-1
hereto)) (0)
A-2 By-Laws of CSW (incorporated by reference to CSW's Annual
Report on Form 10-K for the year ended December 31, 1992
(Exhibit H-1 hereto)) (0)
A-3 Articles of Incorporation of EPE (0)
A-4 By-Laws of EPE (0)
A-5 Form of Articles of Incorporation of CSW Sub (to be filed
by amendment)
A-6 Form of By-Laws of CSW Sub (to be filed by amendment)
A-7 Form of Amended and Restated Articles of Incorporation of
Reorganized EPE (including Statement of Resolution
Establishing Series of Shares) (0)
A-8 Form of By-Laws of Reorganized EPE (0)
A-9 Form of Articles of Merger (0)
A-10 Form of CSW Common Stock Certificate (0)
A-11 Form of CSW Sub Common Stock Certificate (to be filed by
amendment)
A-12 Form of Reorganized EPE Preferred Stock Certificate (to be
filed by amendment)
A-13 Form of Reorganized EPE First Mortgage Bond Indenture,
including forms of bonds (1)
A-14 Form of Reorganized EPE Second Mortgage Bond Electronic
Indenture, including forms of bonds (1)
<PAGE> 73
A-15 Form of Reorganized EPE Senior Debt Securities Indenture,
including forms of notes (1)
A-16 Form of Reorganized EPE Term Loan Agreement for Class 3A
Secured Floating Rate Notes (including form of note) (0)
A-17 Forms of Reorganized EPE Term Loan Agreement for Class 5A
Secured Floating Rate Notes (including forms of note) (0)
A-18 Form of Reorganized EPE Term Loan Agreement for Class 6A
Secured Floating Rate Notes (including form of note) (0)
A-19 Form of Reorganized EPE Term Loan Agreement for Class 13
Senior Floating Rate Notes (including form of note) (0)
A-20 Forms of Reorganized EPE Letter of Credit and Reimbursement
Agreements (1)
A-21 Summary of Variances from Statement of Policy Regarding
First Mortgage Bonds Subject to the Public Utility Holding
Company Act of 1935 (0)
A-22 Summary of Variances from Statement of Policy Regarding
Preferred Stock Subject to the Public Utility Holding
Company Act of 1935 (0)
B-1 CSW-EPE Merger Agreement (0)
B-2 EPE Modified Third Amended Plan of Reorganization (0)
B-3 Disclosure Statement to EPE Modified Third Electronic
Amended Plan of Reorganization (without exhibits) (0)
B-4 CSW System Operating Agreement (0)
B-5 Form of CSW System-EPE Operating Agreement (0)
B-6 CSW System Service Agreement (0)
B-7 CSWS-EPE Service Agreement (to be filed by amendment)
B-8 OP Settlement Agreements (0)
B-9 APS Settlement Agreement (0)
B-9.1 Supplement to APS Settlement Agreement (1)
D-1 Application to the PUCT (2)
D-1.1 Presiding Officer's Order No. 1: Suspension Order and
Notice of Consolidated Prehearing Conference (1/12/94) (4)
<PAGE> 74
D-1.2 Order No. 2: Rescheduling Prehearing Conference (1/14/94)
(4)
D-1.3 Order No. 3: Granting Motion to Extend (1/31/94) (4)
D-1.4 Order No. 4: Prehearing Order, Notice of Hearing on the
Merits, Consolidation of Dockets (2/02/94) (4)
D-1.5 Order No. 5: Order Denying Motion to Reconsider (2/04/94)
(4)
D-1.6 Order No. 6: Suspending Deadline for Filing Motion for
Material Deficiencies (2/07/94) (4)
D-1.7 Order No. 7: Extending Time for Filing Motion to Compel;
Revenue Requirement Phase (2/07/94) (4)
D-1.8 Errata Filing, Docket No.s 12700 & 12701 (2/15/94) (4)
D-1.9 Order No. 8: Protective Order (2/16/94) (4)
D-1.10 Order No. 9: Scheduling Prehearing Conference (2/17/94)
(4)
D-1.11 Order No. 10: Regarding Regional Hearing (2/18/94) (4)
D-1.12 Order No. 11: Rescheduling Time of Prehearing and Adding
Topic to be Discussed (2/23/94) (4)
D-1.13 Order No. 12: Ruling on OPC's Motion to Compel EPEC and
CSW to Respond to OPC's Third Request for Information
(3/01/94) (4)
D-1.14 Order No. 13: Memorializing Prehearing Order (3/07/94) (4)
D-1.15 Order No. 14: Notice of Regional Hearing, and Procedure
for Consolidating Appeals from City Ratemaking Ordinances
(3/14/94) (4)
D-1.16 Order No. 15: Ordering the Companies to File and Index
(3/23/94) (4)
D-1.17 Summary of Merger Benefits
D-2 Application to the NMPUC (to be filed by amendment)
D-2.1 New Mexico Public Utility Commission Procedural Order
(4/05/94) (5)
D-2.2 New Mexico Public Utility Commission Order Amending
Procedural Schedule (7/13/94) (6)
D-2.3 New Mexico Pubic Utility Commission Order Requiring Pre-
Hearing Briefs and Supplemental Testimony (7/28/94) (6)
<PAGE> 75
D-2.4 New Mexico Public Utility Commission Order Amending
Procedural Schedule (8/08/94) (6)
D-2.5 New Mexico Public Utility Commission Order Amending
Procedural Schedule (9/01/94) (6)
D-3 Section 203 Application to the FERC (2)
D-3.1 Federal Energy Regulatory Commission Notice of Filing
(1/13/94) (4)
D-3.2 El Paso Electric Company and Central and South West
Services, Inc. Supplemental Filing to Exhibit G and
Workpapers for George R. Hall (1/13/94) (4)
D-3.3 Texas Office of Public Utility Counsel, Public Utility
Commission of Texas, Attorney General of the State of New
Mexico, Louisiana Public Service Commission, and City of
Las Cruces Motion for an Extension of Time to File Protests
and Interventions and Request for Expedited Action on this
Motion (1/18/94) (4)
D-3.4 Southwestern Public Service Company Motion for an Extension
of Time (1/18/94) (4)
D-3.5 Arkansas Public Service Commission Response in Support of
Motion for an Extension of Time to File Protests and
Interventions (1/19/94) (4)
D-3.6 Arkansas Public Service Commission Notice of Intervention
(1/19/94) (4)
D-3.7 Federal Energy Regulatory Commission Notice of Filing
(1/21/94) (4)
D-3.8 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motions for Extension of Time
(1/21/94) (4)
D-3.9 Louisiana Public Service Commission Notice of Intervention
(1/27/94) (4)
D-3.10 Federal Energy Regulatory Commission Notice of Extension of
Time (1/28/94) (4)
D-3.11 New Mexico Industrial Energy Consumers Motion for Leave to
Intervene (2/01/94) (4)
D-3.12 El Paso Electric Company and Central and South West
Services, Inc. Filing to Provide Workpapers for
Applicants' Witnesses: Samuel C. Hadaway, David A.
Harrell, and James A. Bruggeman (2/03/94) (4)
<PAGE> 76
D-3.13 New Mexico Public Utility Commission Notice of Intervention
(2/08/94) (4)
D-3.14 City of El Paso, Texas Notice of Intervention and Motion to
Intervene (2/15/94) (4)
D-3.15 Texas-New Mexico Power Company Motion to Intervene
(2/17/94) (4)
D-3.16 Salt River Project Agricultural Improvement and Power
District Motion to Intervene (2/22/94) (4)
D-3.17 Arizona Public Service Company Motion to Intervene
(2/22/94) (4)
D-3.18 Southern California Public Power Authority Motion for Leave
to Intervene (2/22/94) (4)
D-3.19 Dona Ana County, New Mexico Motion to Intervene (2/23/94)
(4)
D-3.20 Louisiana Public Service Commission Protest, Request for
Hearing, Motion for Consolidation (2/24/94) (4)
D-3.21 Texas Utilities Electric Company Motion to Intervene
(2/24/94) (4)
D-3.22 Public Utility Commission of Texas Notice of Intervention,
Protest, Motion for Consolidation, and Request for Hearing
(2/24/94) (4)
D-3.23 Arkansas Public Service Commission Protest and Request for
Hearing (2/24/94) (4)
D-3.24 New Mexico Attorney General Motion to Intervene and Protest
(2/24/94) (4)
D-3.25 Tucson Electric Power Company Motion to Intervene (2/24/94)
(4)
D-3.26 Southern California Edison Company Motion for Leave to
Intervene (2/24/94) (4)
D-3.27 Texas Office of Public Utility Counsel Motion to Intervene,
Motion for Consolidation, Protest, and Request for Hearing
(2/25/94) (4)
D-3.28 Houston Lighting & Power Company Motion to Intervene
(2/25/94) (4)
D-3.29 Imperial Irrigation District Motion to Intervene (2/25/94)
(4)
<PAGE> 77
D-3.30 Entergy Service, Inc. Motion to Intervene (2/25/94) (4)
D-3.31 Cajun Electric Power Cooperative, Inc. Motion to Intervene,
Protest, and Request for Hearing (2/25/94) (4)
D-3.32 TDU Customers Joint and Several Motion' to Intervene and
Request that the Commission Initiate Hearing Procedures of
Certain Transmission Dependent Customers on the Central and
South West Corporation and Southwestern Public Service
Company Systems (2/25/94) (4)
D-3.33 Northeast Texas Electric Cooperative, Inc. Motion to
Intervene (2/25/94) (4)
D-3.34 Tex-La Electric Cooperative of Texas, Inc. Motion to
Intervene (2/25/94) (4)
D-3.35 Oklahoma Corporation Commission Notice of Intervention
(2/25/94) (4)
D-3.36 Plains Electric Generation and Transmission Cooperative,
Inc. Motion to Intervene, Protest and Request for Hearing
(2/25/94) (4)
D-3.37 Public Service Company of New Mexico Protest, Motion for
Leave to Intervene, Request for Hearing, and Motion to
Consolidate FERC Docket No. TX94-2-000 with this Proceeding
(2/25/94) (4)
D-3.38 Southwestern Public Service Company Motion to Intervene,
Protest, Motion to Consolidate, and Request for Hearing
(2/25/94) (4)
D-3.39 City of Las Cruces, New Mexico Motion to Intervene and
Protest (2/25/94) (4)
D-3.40 Public Service Company of New Mexico Motion for Leave to
File One Day Out of Time (2/28/94) (4)
D-3.41 El Paso Electric Company and Central and South West
Services, Inc. Response to Notice of Intervention of the
New Mexico Public Utility Commission (3/01/94) (4)
D-3.42 Southwestern Public Service Company Answer to Applicants'
Motion for an Extension of time to Answer (3/02/94) (4)
D-3.43 Arkansas Public Service Commission Response in Opposition
to Motion for Extension of Time to Answer, Motion to
Intervene (3/03/94) (4)
D-3.44 Public Utilities Board, City of Brownsville, Texas Motion
to Intervene, Protest, and Answer (3/04/94) (4)
D-3.45 American Forest and Paper Association Motion to Intervene
and Protest and Motion to Consolidate (3/07/94) (4)
<PAGE> 78
D-3.46 Federal Energy Regulatory Commission Notice of Extension of
Time (3/08/94) (4)
D-3.47 El Paso Electric Company and Central and South West
Services, Inc. Supplemental Filing to Exhibit G (3/21/94)
(4)
D-3.48 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motions to Intervene (3/21/94) (4)
D-3.49 New Mexico Public Utility Commission Reply to Applicants'
Response (3/30/94) (5)
D-3.50 American Forest and Paper Association Reply to the Improper
Answer of Applicants (4/01/94) (5)
D-3.51 Public Utility Commission of Texas Response to Answer of
Applicants Motions to Intervene (4/04/94) (5)
D-3.52 City of Las Cruces Motion to Reply and Answer to
Applicants' Answer to Interventions (4/05/94) (5)
D-3.53 Public Service Company of New Mexico Motion for Leave to
File Response and Response to Applicants' Answer (4/05/94)
(5)
D-3.54 Southwestern Public Service Company Answer in Opposition to
Applicants' Request for Leave to Respond to Protests
(4/05/94) (5)
D-3.55 El Paso Electric Company and Central and South West
Services, Inc. Respond to Answers by Certain Intervenors to
Applicants' Answer filed March 21, 1994 (4/19/94) (5)
D-3.56 Federal Energy Regulatory Commission Answer to El Paso
Electric Company's Application of March 22, 1994 (4/20/94)
(5)
D-3.57 Southwestern Public Service Company Answer to Applicants'
Response to Answers filed April 19, 1994 (5/02/94) (5)
D-3.58 Central and South West Services, Inc. and El Paso Electric
Company Letter to the Federal Energy Regulatory Commission
to Update David Harrell's Benefits Analysis (5/17/94) (6)
D-3.59 Southwestern Public Service Company Motion for Leave to
Amend Protest to Address Application of the Commission's
New Policy Regarding Comparability of Service (5/26/94) (6)
D-3.60 El Paso Electric Company and Central and South West
Services, Inc. Answer to SPS' Motion to Amend Protest to
Address Application of the Commission's New Policy
Regarding Comparability of Service (6/10/94) (6)
<PAGE> 79
D-3.61 City of Las Cruces, New Mexico Answer to Motion of SPS to
Address Application of the Commission's Newly Announced
Policy Regarding Comparability of Service (6/10/94) (6)
D-3.62 Plains Electric Generation and Transmission Cooperative,
Inc. Answer to SPS' Motion to Amend SPS' Protest to Address
Transmission Comparability Issues (6/10/94) (6)
D-3.63 City of Las Cruces, New Mexico Motion to Lodge Decision of
U.S. Court of Appeals for the District of Columbia Circuit
for EPE to File an Open Access Tariff (6/20/94) (6)
D-3.64 Central and South West Services, Inc. and El Paso Electric
Company Letter to the Federal Energy Regulatory Commission
Responding to Filing Made by Plains Cooperative and City of
Las Cruces Which Supported a Previous Pleading by SPS to
Amend SPS' Protest (6/28/94) (6)
D-3.65 Central and South West Services, Inc. and El Paso Electric
Company Answer to the City of Las Cruces' Motion to Lodge
for EPE to File an Open Access Tariff (7/25/94) (6)
D-3.66 Southwestern Public Service Company Motion for Leave to
Supplement Record (7/08/94) (6)
D-3.67 Central and South West Services, Inc. and El Paso Electric
Company Response to SPS' Motion For Leave to Supplement
Record (7/15/94) (6)
D-3.68 Federal Energy Regulatory Commission Signed Final FERC
Order On Merger Application and Rate Filing (8/01/94) (6)
D-3.69 Central and South West Services, Inc. and El Paso Electric
Company Motion for Expedited Clarification of FERC's August
1, 1994 Order on Merger Application and Rate Filing
(8/25/94) (6)
D-3.70 Federal Energy Regulatory Commission Approved Order for
Central and South West Services, Inc. and El Paso Electric
Company (8/25/94) (6)
D-3.71 American Forest and Paper Association Request for Rehearing
to the FERC (8/30/94) (6)
D-3.72 Public Service Company of New Mexico Motion for
Clarification and Request for Rehearing to the FERC
(8/31/94) (6)
D-3.73 Arkansas Public Service Commission Petition for Rehearing
to the FERC (8/31/94) (6)
D-3.74 Southwestern Public Service Company Request for Rehearing
(8/31/94) (6)
<PAGE> 80
D-3.75 Central and South West Services, Inc. and El Paso Electric
Company Request for Rehearing (8/31/94) (6)
D-3.76 Central and South West Services, Inc. and El Paso Electric
Company Filing to the FERC of Transmission Tariffs to Offer
"Comparable Service" (8/31/94) (6)
D-3.77 El Paso Electric Company and Central and South West
Services, Inc. Filing to Provide Testimony and Workpapers
for Applicants' Witness: Neil W. Felber.
D-4 Section 205 Application to the FERC (2)
D-4.1 Federal Energy Regulatory Commission Notice of Filing
(1/13/94) (4)
D-4.2 Texas Office of Public Utility Counsel, Public Utility
Commission of Texas, Attorney General of the State of New
Mexico, Louisiana Public Service Commission, and City of
Las Cruces Motion for an Extension of Time to File Protests
and Interventions and Request for Expedited Action on this
Motion (1/18/94) (4)
D-4.3 Arkansas Public Service Commission Notice of Intervention
(1/19/94) (4)
D-4.4 Arkansas Public Service Commission Response in Support of
Motion for an Extension of Time to File Protests and
Interventions (1/19/94) (4)
D-4.5 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motions for Extension of Time
(1/21/94) (4)
D-4.6 Louisiana Public Service Commission Notice of Intervention
(1/27/94) (4)
D-4.7 Federal Energy Regulatory Commission Notice of Extension of
Time (1/28/94) (4)
D-4.8 New Mexico Public Utility Commission Notice of Intervention
(2/08/94) (4)
D-4.9 Texas Utilities Electric Company Motion to Intervene
(2/08/94) (4)
D-4.10 Arizona Public Service Company Motion to Intervene
(2/22/94) (4)
D-4.11 Salt River Project Agricultural Improvement and Power
District Motion to Intervene (2/22/94) (4)
D-4.12 Louisiana Public Service Commission Protest, Request for
Hearing, and Motion for Consolidation (2/24/94) (4)
<PAGE> 81
D-4.13 Public Utility Commission of Texas Notice of Intervention,
Protest, Motion for Consolidation, and Request for Hearing
(2/24/94) (4)
D-4.14 Arkansas Public Service Company Protest and Request for
Hearing (2/24/94) (4)
D-4.15 Cajun Electric Power Cooperative, Inc. Motion to Intervene,
Protest and Request for Hearing (2/25/94) (4)
D-4.16 Houston Lighting and Power Company Motion to Intervene
(2/25/94) (4)
D-4.17 Texas Office of Public Utility Counsel Motion to Intervene,
Motion for Consolidation, Protest and Request for Hearing
(2/25/94) (4)
D-4.18 Southwestern Public Service Company Motion to Intervene and
Motion to Consolidate (2/25/94) (4)
D-4.19 Public Utilities Board of the City of Brownsville, Texas
Motion to Intervene (2/25/94) (4)
D-4.20 Public Service Company of New Mexico Motion for Leave to
Intervene (2/25/94) (4)
D-4.21 Northeast Texas Electric Cooperative, Inc. Motion to
Intervene (2/25/94) (4)
D-4.22 TDU Customers Joint and Several Motion to Intervene,
Protest and Request that the Commission Initiate Hearing
Procedures of Certain Transmission Dependent Customers on
the Central and South West Corporation and Southwestern
Public Service Company Systems (2/25/94) (4)
D-4.23 Oklahoma Corporation Commission Notice of Intervention
(2/25/94) (4)
D-4.24 Public Service Company of New Mexico Motion for Leave to
File One Day Out of Time (2/28/94) (4)
D-4.25 El Paso Electric Company and Central and South West
Services, Inc. Motion for Extension of Time to Answer
Motions to Intervene and Motion for Expedited Procedures
(3/01/94) (4)
D-4.26 Central and South West Services, Inc. Response to Notice of
Intervention of the New Mexico Public Utility Commission
(3/01/94) (4)
D-4.27 Southwestern Public Service Company Answer to Applicants'
Motion for an Extension of Time to Answer (3/02/94) (4)
<PAGE> 82
D-4.28 Arkansas Public Service Commission Response in Opposition
to Motion for Extension of Time to Answer Motion to
Intervene (3/03/94) (4)
D-4.29 Federal Energy Regulatory Commission Notice of Extension of
Time (3/08/94) (4)
D-4.30 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motions to Intervene (3/21/94) (4)
D-4.31 New Mexico Public Utility Commission Reply to Applicants'
Response (3/30/94) (5)
D-4.32 Public Utility Commission of Texas Response to Answer of
Applicants' Motion to Intervene (4/04/94) (5)
D-4.33 Public Service Company of New Mexico Motion for Leave to
File Response and Response to Applicants' Answer (4/05/94)
(5)
D-4.34 Southwestern Public Service Company Answer in Opposition to
Applicants' Request for Leave to Respond to Protests
(4/05/94) (5)
D-4.35 El Paso Electric Company and Central and South West
Services, Inc. Response to Answers by Certain Intervenors
to Applicants' Answer Filed March 21, 1994 (4/19/94) (5)
D-4.36 Southwestern Public Service Company Answer to Applicants'
Response to Answer filed April 19, 1994 (5/02/94) (5)
D-4.37 Southwestern Public Service Company Motion for Leave to
Amend Protest to Address Application of the Commission's
New Policy Regarding Comparability of Service (5/26/94) (6)
D-4.38 El Paso Electric Company and Central and South West
Services, Inc. Answer to SPS' Motion to Amend Protest to
Address Application of the Commission's New Policy
Regarding Comparability of Services (6/10/94) (6)
D-4.39 Plains Electric Generation and Transmission Cooperative,
Inc. Answer to SPS' Motion to Amend SPS' Protest to Address
Transmission Service Comparability Issues (6/10/94) (6)
D-4.40 Southwestern Public Service Company Motion for Leave to
Supplement Record (7/08/94) (6)
D-4.41 Central and South West Services, Inc. and El Paso Electric
Company Answer to the City of Las Cruces' Motion to Lodge
for EPE to File an Open Access Tariff (7/25/94) (6)
D-4.42 Central and South West Services, Inc. and El Paso Electric
Company Response to SPS' Motion for Leave to Supplement
Record (7/15/94) (6)
<PAGE> 83
D-4.43 Federal Energy Regulatory Commission Signed Final FERC
Order on Merger Application and Rate Filing (8/01/94) (6)
D-4.44 Central and South West Services, Inc. and El Paso Electric
Company Motion for Expedited Clarification of FERC's August
1, 1994 Order on Merger Application and Rate Filing
(8/25/94) (6)
D-4.45 Federal Energy Regulatory Commission Approved Order for
Central and South West Services, Inc. and El Paso Electric
Company (8/25/94) (6)
D-4.46 American Forest and Paper Association Request for Rehearing
to the FERC (8/30/94) (6)
D-4.47 Public Service Company of New Mexico Motion for
Clarification and Request for Rehearing to the FERC
(8/31/94) (6)
D-4.48 Arkansas Public Service Commission Petition for Rehearing
to the FERC (8/31/94) (6)
D-4.49 Southwestern Public Service Company Request for Rehearing
(8/31/94) (6)
D-4.50 Central and South West Services, Inc. and El Paso Electric
Company Request for Rehearing (8/31/94) (6)
D-4.51 Central and South West Services, Inc. and El Paso Electric
Company Filing to the FERC of Transmission Tariffs to Offer
"Comparable Service" Per the FERC's Order (8/31/94) (6)
D-5 Section 211 Application to the FERC (2)
D-5.1 Federal Energy Regulatory Commission Notice of Filing
(11/10/93) (4)
D-5.2 Southwestern Public Service Company Motion for an Extension
of Time and Request for Expedited Action on Motion
(11/17/93) (4)
D-5.3 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motion of Southwestern Public
Service Company for an Extension of Time (11/18/93) (4)
D-5.4 Federal Energy Regulatory Commission Notice of Extension of
Time (11/22/93) (4)
D-5.5 Louisiana Public Service Commission Notice of Intervention
(11/23/93) (4)
D-5.6 New Mexico Public Utility Commission Motion to Intervene
(11/30/93) (4)
<PAGE> 84
D-5.7 Western Farmers Electric Cooperative Motion for Leave to
Intervene (12/15/93) (4)
D-5.8 City of El Paso, Texas Motion to Intervene (12/16/93) (4)
D-5.9 Public Service Company of New Mexico Motion to Intervene
(12/17/93) (4)
D-5.10 Southwestern Public Service Company's Full Requirements
Wholesale Customers Motion to Intervene and Protest
(12/20/93) (4)
D-5.11 Dona Ana County, New Mexico Motion to Intervene (12/20/93)
(4)
D-5.12 Texas Office of Public Utility Counsel Motion to Intervene,
Protest, and Motion to Deny Summary Disposition (12/22/93)
(4)
D-5.13 The New Mexico Attorney General Motion to Intervene and
Protest (12/22/93) (4)
D-5.14 New Mexico Industrial Energy Consumers Motion to Intervene
(12/22/93) (4)
D-5.15 Public Utility Commission of Texas Notice of Intervention
(12/22/93) (4)
D-5.16 Arkansas Public Service Commission Notice of Intervention
(12/22/93) (4)
D-5.17 Houston Lighting & Power Company Motion to Intervene
(12/22/93) (4)
D-5.18 City of Las Cruces, New Mexico Motion to Intervene and
Protest (12/22/93) (4)
D-5.19 TDU Customers Joint and Several Motion to Intervene and
Request that the Commission Initiate Hearing Procedures of
Certain Transmission Dependent Customers on the Central and
South West Corporation and Southwestern Public Service
Company Systems (12/22/93) (4)
D-5.20 Westplains Energy Division of Utilicorp United Inc. Motion
to Intervene (12/22/93) (4)
D-5.21 PSI Energy, Inc. Motion to Intervene (12/22/93) (4)
D-5.22 Texas Utilities Electric Company Motion to Intervene
(12/22/93) (4)
D-5.23 Southwestern Public Service Company Protest, Motion to
Dismiss, Motion to Intervene, and Answer (12/22/93) (4)
<PAGE> 85
D-5.24 Duke Power Company Motion to Intervene (12/22/93) (4)
D-5.25 Department of Defense Late Filed Motion to Intervene and
Protest (1/05/94) (4)
D-5.26 New Mexico Public Utility Commission Statement in Support
of Public Evidentiary Hearing (1/12/94) (4)
D-5.27 El Paso Electric Company and Central and South West
Services, Inc. Response to Protest, Motion to Dismiss,
Motion to Intervene, and Answer of Southwestern Public
Service Company (1/13/94) (4)
D-5.28 Southwestern Public Service Company Leave to File and Reply
to Applicants' Response (1/26/94) (4)
D-5.29 Public Service Company of New Mexico Motion for Leave to
Reply to El Paso Electric Company's and Central and South
West Services, Inc.'s Response Opposing PNM's Motion to
Intervene (1/27/94) (4)
D-5.30 Texas Utilities Electric Company Leave to File a Reply to
El Paso Electric Company's and Central and South West
Services, Inc.'s Response (1/28/94) (4)
D-5.31 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motion of Southwestern Public
Service Company for Leave to File and Reply to Applicants'
Response (2/03/94) (4)
D-5.32 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motions of Public Service Company
of New Mexico and Texas Utilities Electric Company to Reply
to Applicants' Response (2/10/94) (4)
D-5.33 The New Mexico Attorney General Letter requesting that its
Motion to Intervene be considered timely filed despite
being one day late due to delivery problems (2/28/94) (4)
D-5.34 Texas Utilities Electric Company Motion for Leave to File
and Reply to Applicants' Answer to Texas Utilities Electric
Company's Reply to Applicants' Responses to Motion to
Intervene (3/04/94) (4)
D-5.35 American Forest and Paper Association Motion to Intervene
and Protest and Motion to Consolidate (3/04/94) (4)
D-5.36 El Paso Electric Company and Central and South West
Services, Inc. Letter indicating no opposition to the New
Mexico Attorney General's letter of February 28, 1994
requesting previously submitted Motion to Intervene to be
timely filed despite being filed one day late due to
delivery problem (3/07/94) (4)
<PAGE> 86
D-5.37 El Paso Electric Company and Central and South West
Services, Inc. Answer to Motion of Texas Utilities Electric
Company for Leave to File and Reply to Applicants' Answer
to Texas Utilities Electric Company's Reply to Applicants'
Response to Motion to Intervene (3/21/94) (4)
D-5.38 American Forest and Paper Association Reply to the Improper
Answer of Applicants (4/01/94) (5)
D-5.39 Federal Energy Regulatory Commission Signed Final FERC
Order on Transmission Services and Establishing Further
Practices (8/01/94) (6)
D-5.40 Oklahoma Municipal Power Authority Notice of Withdrawal
from Proceedings (8/01/94) (6)
D-5.41 Public Service Company of New Mexico Motion for
Clarification and Request for Rehearing (8/31/94) (6)
D-6 Testimony of George R. Hall to the FERC (contained in
Exhibit D-3) (2)
D-7 Application to the NRC (2)
D-7.1 Nuclear Regulatory Commission Notice in Federal Register
(3/02/94) (5)
D-7.2 Plains Electric G & T Cooperative Petition Filed to Address
Anti-Competitive Issues and Request a Hearing (4/01/94) (5)
D-7.3 Arizona Public Service Company Letter to Provide
Supplemental Information for EPE's NRC Filing (4/08/94) (5)
D-7.4 Public Utility Commission of Texas Petition to Intervene
(4/12/94) (5)
D-7.5 Southwestern Public Service Company Petition for Leave to
Intervene and Comments (4/13/94) (5)
D-7.6 City of Las Cruces Comments Regarding Antitrust Concerns
(4/13/94) (5)
D-7.7 Nuclear Regulatory Commission Notice in Federal Register
(4/14/94) (5)
D-7.8 Nuclear Regulatory Commission Order for Plains Electric
Generation and Transmission Cooperative, Inc.'s Petition of
April 1, 1994 (4/14/94) (5)
D-7.9 El Paso Electric Company and Central and South West
Services, Inc. Letter to NRC (5/17/94) (5)
<PAGE> 87
D-7.10 El Paso Electric Company and Central and South West
Services, Inc. Letter to NRC Addressing Issues Raised in
the Comments and Interventions by SPS, Las Cruces, and
Plains Cooperative (5/17/94) (6)
D-7.11 Plains Electric Generation and Transmission Cooperative,
Inc. Letter to NRC Regarding CSW/EPE's May 17, 1994 Letter
to the NRC (6/03/94) (6)
D-7.12 City of Las Cruces Letter to NRC Staff Commenting on
Claiming Errors or Mischaracterizations of CSW/EPE's May
17, 1994 Letter to the NRC (6/16/94) (6)
D-8 Notice of Succession of Ownership to the Department of
Energy (to be filed by amendment)
D-9 Notification and Report Form to U.S. Department of Justice
and Federal Trade Commission (to be filed by amendment)
D-10 Exhibit E to the Disclosure Statement (Rate Path) (0)
D-11 Order of Bankruptcy Court dated August 27, 1993 (Disclosure
Statement Approval Order) (0)
D-12 Order of Bankruptcy Court dated September 15, 1993 (0)
D-13 Order of Bankruptcy Court dated December 8, 1993
(Confirmation Order) (0)
D-14 Findings of Fact (0)
D-14.1 Amended Findings of Fact (1)
E-1 Map showing service territories of CSW and EPE
E-2 Map showing interconnections of CSW and EPE
F-1 Preliminary Opinion of Counsel (to be filed by amendment)
F-2 Final or "past tense" opinion of Counsel (to be filed by
amendment)
G-1 Proposed Notice of Proceeding (0)
H-1 CSW Annual Report on Form 10-K for the year ended December
31, 1992 (previously filed with the Commission and hereby
incorporated by reference) (0)
H-2 EPE Annual Report on Form 10-K for the year ended December
31, 1992 (previously filed with the Commission and hereby
incorporated by reference) (0)
<PAGE> 88
H-3 CSW Annual Report to Shareholders for the year ended
December 31, 1992 (previously filed with the Commission and
hereby incorporated by reference) (0)
H-4 EPE Annual Report to Shareholders for the year ended
December 31, 1992 (previously filed with the Commission and
hereby incorporated by reference) (0)
H-5 CSW Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993 (previously filed with the Commission and
hereby incorporated by reference) (0)
H-6 CSW Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 (previously filed with the Commission and
hereby incorporated by reference) (0)
H-7 CSW Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 (previously filed with the Commission
and hereby incorporated by reference) (0)
H-8 EPE Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993 (previously filed with the Commission and
hereby incorporated by reference) (0)
H-9 EPE Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 (previously filed with the Commission and
hereby incorporated by reference) (0)
H-10 EPE Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 (previously filed with the Commission
and hereby incorporated by reference) (0)
H-11 CSW Annual Report on Form 10-K for the year ended December
31, 1993 (previously filed with the Commission and hereby
incorporated by reference)
H-12 EPE Annual Report on Form 10-K for the year ended December
31, 1993 (previously filed with the Commission and hereby
incorporated by reference)
H-13 CSW Annual Report to Shareholders for the year ended
December 31, 1993 (previously filed with the Commission and
hereby incorporated by reference)
H-14 EPE Annual Report to Shareholders for the year ended
December 31, 1993 (previously filed with the Commission and
hereby incorporated by reference)
H-15 CSW Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993 (previously filed with the Commission and
hereby incorporated by reference)
<PAGE> 89
H-16 EPE Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994 (previously filed with the Commission and
hereby incorporated by reference)
J-1 Morgan Stanley opinion to the CSW Board of Directors dated
April 30, 1993 (0)
J-2 Barr Devlin opinion to the EPE Board of Directors dated
May 3, 1993 (0)
II. Financial Statements.
FS-1 Consolidated Balance Sheet of CSW as of December 31, 1992
(incorporated by reference to CSW's Annual Report on Form
10-K for the year ended December 31, 1992 (Exhibit H-1
hereto)) (0)
FS-2 Consolidated Statement of Income of CSW for the year ended
December 31, 1992 (incorporated by reference to CSW's
Annual Report on Form 10-K for the year ended December 31,
1992 (Exhibit H-1 hereto)) (0)
FS-3 Consolidated Statement of Cash Flows of CSW for the year
ended December 31, 1992 (incorporated by reference to CSW's
Annual Report on Form 10-K for the year ended December 31,
1992 (Exhibit H-1 hereto)) (0)
FS-4 Consolidated Statement of Retained Earnings of CSW for the
year ended December 31, 1992 (incorporated by reference to
CSW's Annual Report on Form 10-K for the year ended
December 31, 1992 (Exhibit H-1 hereto)) (0)
FS-5 Notes to Consolidated Financial Statements of CSW for the
year ended December 31, 1992 (incorporated by reference to
CSW's Annual Report on Form 10-K for the year ended
December 31, 1992 (Exhibit H-1 hereto)) (0)
FS-6 Balance Sheet of EPE as of December 31, 1992 (incorporated
by reference to EPE's Annual Report on Form 10-K for the
year ended December 31, 1992 (Exhibit H-2 hereto)) (0)
FS-7 Statements of Operations of EPE for the year ended December
31, 1992 (incorporated by reference to EPE's Annual Report
on Form 10-K for the year ended December 31, 1992 (Exhibit
H-2 hereto)) (0)
FS-8 Statement of Cash Flows of EPE for the year ended December
31, 1992 (incorporated by reference to EPE's Annual Report
on Form 10-K for the year ended December 31, 1992 (Exhibit
H-2 hereto)) (0)
<PAGE> 90
FS-9 Statement of Retained Earnings (Deficit) of EPE for the
year ended December 31, 1992 (incorporated by reference to
EPE's Annual Report on Form 10-K for the year ended
December 31, 1992 (Exhibit H-2 hereto)) (0)
FS-10 Notes to Financial Statements of EPE for the year ended
December 31, 1992 (incorporated by reference to EPE's
Annual Report on Form 10-K for the year ended December 31,
1992 (Exhibit H-2 hereto)) (0)
FS-11 Unaudited Actual and Pro Forma Combined Capitalization of
CSW and EPE as of June 30, 1993 (0)
FS-12 Unaudited Pro Forma Combined Financial Statements as of and
for the year ended June 30, 1993 (0)
FS-13 CSW Consolidated Balance Sheet as of September 30, 1993
(see page 4 of the Quarterly Report of CSW on Form 10-Q for
the quarter ended September 30, 1993, incorporated by
reference as Exhibit H-7 hereto) (0)
FS-14 CSW Consolidated Statement of Income and Surplus for the
twelve months ended September 30, 1993 (see page 3 of the
Quarterly Report of CSW on Form 10-Q for the quarter ended
September 30, 1993, incorporated by reference as Exhibit
H-7 hereto) (0)
FS-15 CSW Consolidated Statement of Income and Surplus for its
last three fiscal years (see page 24 of the Annual Report
of CSW to Shareholders for the quarter ended December 31,
1992, incorporated by reference as Exhibit H-3 hereto) (0)
FS-16 EPE Balance Sheet as of September 30, 1993 (see page 1 of
the Quarterly Report of EPE on Form 10-Q for the Quarter
ended September 30, 1993, incorporated by reference as
Exhibit H-10 hereto) (0)
FS-17 EPE Statement of Income and Surplus for the twelve months
ended September 30, 1993 (see page 3 of Quarterly Report of
EPE on Form 10-Q for the quarter ended September 30, 1993,
incorporated by reference as Exhibit H-10 hereto) (0)
FS-18 EPE Statement of Income and Surplus for its last three
fiscal years (see page 58 of the Annual Report of EPE on
Form 10-K for the year ended December 31, 1992,
incorporated by reference as Exhibit H-2 hereto) (0)
Item 7. Information as to Environmental Effects.
The proposed transaction does not involve major federal action
having a significant effect on the human environment. No federal agency
has prepared or is preparing an environmental impact statement with
respect to the proposed transaction.
<PAGE> 91
Glossary of Defined Terms
"Act" means the Public Utility Holding Company Act of 1935, as
amended.
"Application" means this Application-Declaration on Form U-1.
"APS" means Arizona Public Service Company.
"APS Settlement" means the settlement agreement between EPE and APS
approved by the Bankruptcy Court on November 19, 1993.
"Bankruptcy Code" means Title 11 of the United States Code, as
amended.
"Bankruptcy Court" means the United States Bankruptcy Court for the
Western District of Texas, Austin Division, before which the EPE
bankruptcy reorganization proceedings, Case No. 92-10148-FM, are pending.
"Chapter 11" means Chapter 11 of the Bankruptcy Code.
"Commission" means the Securities and Exchange Commission.
"Confirmation Date" means December 8, 1993, the date upon which the
Bankruptcy Court confirmed the Plan.
"CPL" means Central Power and Light Company, a wholly owned electric
utility subsidiary of CSW.
"CSW" means Central and South West Corporation, a Delaware
corporation.
"CSW Electric Operating Companies" means CSW's four existing
electric utility subsidiaries: CPL, PSO, SWEPCO and WTU.
"CSW Common Stock" means the shares of common stock, $3.50 par
value, of CSW.
"CSW Sub" means CSW Sub, Inc., a corporation proposed to be
organized under Texas law as a wholly owned subsidiary of CSW for the sole
purpose of facilitating the Transaction.
"CSW Sub Common Stock" means the shares of common stock, $.01 par
value, of CSW Sub.
"CSW System" means CSW, the CSW Electric Operating Companies,
Transok, CSWC, CSWE, CSWL and CSWS.
"CSWC" means CSW Credit, Inc., a wholly owned subsidiary of CSW.
"CSWE" means CSW Energy, Inc., a wholly owned subsidiary of CSW.
"CSWL" means CSW Leasing, Inc., a subsidiary of CSW.
<PAGE> 92
"CSWS" means Central and South West Services, Inc., a wholly owned
subsidiary of CSW.
"Disclosure Statement" means the Disclosure Statement dated August
27, 1993 and corrected September 15, 1993 relating to the Plan (Exhibit B-
3 hereto).
"Effective Date" means the date on which the Plan becomes effective.
"EPE" means El Paso Electric Company.
"EPE Common Stock" means the shares of EPE common stock, no par
value.
"EPE Preferred Stock" means the shares of EPE Series 10.75%
Preferred Stock, no par value, Series 8.44% Preferred Stock, no par value,
Series 8.95% Preferred Stock, no par value, Series 10.125% Preferred
Stock, no par value, Series 11.375% Preferred Stock, no par value, Series
4.5% Preferred Stock, no par value, Series 4.12% Preferred Stock, no par
value, Series 4.72% Preferred Stock, no par value, Series 4.56% Preferred
Stock, no par value, and Series 8.24% Preferred Stock, no par value.
"FERC" means the Federal Energy Regulatory Commission.
"Findings of Fact" means the Findings of Fact and Conclusions of Law
of the Bankruptcy Court dated December 8, 1993 in support of its order
confirming the Plan.
"FMB Indenture" means the indenture pursuant to which State Street
Bank and Trust Company will act as Trustee and under which the Reorganized
EPE First Mortgage Bonds will be issued (Exhibit A-13 hereto).
"Four Corners" means the Four Corners Generating Project.
"Liquidation Trust" means the trust to be established as of the
Effective Date and to which will be assigned EPE's rights to and interests
in excluded assets and certain reductions in claims, if any, not disposed
of or determined prior to the Effective Date.
"Maximum Additional Consideration Amount" with respect to holders of
EPE Common Stock means $1.50.
"Merger Agreement" means the Agreement and Plan of Merger between
EPE and CSW and to be subsequently joined in by CSW Sub, dated as of May
3, 1993, as amended (Exhibit B-1 hereto).
"Morgan Stanley" means Morgan Stanley & Co. Incorporated.
"New EPE Securities" means the securities to be issued by
Reorganized EPE under the Plan: Reorganized EPE First Mortgage Bonds;
Reorganized EPE Second Mortgage Bonds; Reorganized EPE Secured Notes;
Reorganized EPE Senior Floating Rate Notes; Reorganized EPE Senior Fixed
Rate Notes; and Reorganized EPE Preferred Stock.
<PAGE> 93
"NMPUC" means the New Mexico Public Utility Commission.
"Note Indenture" means the indenture pursuant to which United States
Trust Company of New York will act as Trustee and under which the
Reorganized EPE Senior Fixed Rate Notes consisting of Series A and Class
13 Notes will be issued (Exhibit A-15 hereto).
"NRC" means the Nuclear Regulatory Commission.
"OP Settlements" means the settlement agreements dated November 15,
1993 between EPE and the owner-participants in certain sale-leaseback
arrangements relating to EPE's interests in the Palo Verde Nuclear
Generating Station.
"Palo Verde Assets" means the 15.8% interest owned or leased by EPE
in Units 1, 2 and 3 and the related common plant of the Palo Verde Nuclear
Generating Station.
"Palo Verde Leases" means the leases entered into by EPE in
connection with its sale and leaseback of its interest in Unit 2 and a
portion of its interest in Unit 3 of the Palo Verde Nuclear Generating
Station.
"Palo Verde Owner Participants" means the beneficiaries of the
trusts which hold title to certain interests in the Palo Verde Nuclear
Generating Station which were the subject of certain sale-leaseback
transactions by EPE.
"Palo Verde Participants" means EPE, APS, Southern California Edison
Company, Public Service Company of New Mexico, Southern California Public
Power Authority, Salt River Project Agricultural Improvement and Power
District and the Los Angeles Department of Water and Power.
"PCB's" mean pollution control revenue bonds.
"Plan" means the Modified Third Amended Plan of Reorganization of
the Debtor Providing for the Acquisition of El Paso Electric Company by
Central and South West Corporation, dated August 27, 1993 (as corrected on
September 15, 1993 and as modified on December 1, 1993 and December 6,
1993) and all exhibits and other attachments thereto, as the same may be
amended from time to time (Exhibit B-2 hereto). References to the Plan
during the August 27-December 6, 1993 period refer to the version of the
Plan then on file with the Bankruptcy Court.
"PSO" means Public Service Company of Oklahoma, a wholly owned
electric utility subsidiary of CSW.
"PUCT" means the Public Utility Commission of Texas.
"Reorganized EPE" means EPE after the Effective Date of the Plan.
"Service Agreement" means the system service agreement among CSW and
its subsidiaries.
<PAGE> 94
"SMB Indenture" means the indenture pursuant to which IBJ Schroder
Bank & Trust Company will act as Trustee and under which the Reorganized
EPE Second Mortgage Bonds (Exhibit A-14 hereto).
"SPS" means Southwestern Public Service Company.
"SWEPCO" means Southwestern Electric Power Company, a wholly owned
electric utility subsidiary of CSW.
"TNP" means Texas-New Mexico Power Company.
"Transaction" means the acquisition of EPE by CSW as proposed in the
Application.
"Transok" means Transok, Inc., a wholly owned subsidiary of CSW.
"WTU" means West Texas Utilities Company, a wholly owned electric
utility subsidiary of CSW.
<PAGE> 95
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 company has duly caused this
document to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: October 21, 1994
Central and South West Corporation
By: /S/ STEPHEN J. MCDONNELL
Stephen J. McDonnell
Treasurer
<PAGE> 96
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
October 21, 1994
James J. Moeller, Esq.
Office of Public Utility Regulation
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Central and South West Corporation
Application-Declaration on Form U-1
(Acquisition of El Paso Electric Company),
File No. 70-8339
Dear Jim:
On behalf of Central and South West Corporation ("CSW"), the
following information is hereby provided in response to the letter of S.
Kevin An dated June 3, 1994 to Stephen J. McDonnell and the undersigned
(the "Comment Letter") relating to the above-referenced application-
declaration (the "Application"). Capitalized terms that are not defined
herein have the meanings ascribed to them in the Application or the
Comment Letter.
For your convenience, the numbered paragraphs in this letter
correspond to the numbered comments in the Comment Letter. Also enclosed
are: (i) an amended and restated Application (the "Amended Application")
reflecting CSW's responses to the Comment Letter and (ii) CSW's response
(the "Intervention Response") to the petitions for leave to intervene and
requests for hearing filed by Southwestern Public Service Company, the
Texas Office of Public Utility Counsel, the City of Las Cruces, New
Mexico, the New Mexico Public Utility Commission, the Louisiana Public
Service Commission, the Arkansas Public Service Commission, and Texas
Utilities Electric Company. Also enclosed in the courtesy copies of this
filing for the convenience of the Staff is a black-lined version of the
Amended Application marked to show changes from the initial Application as
filed on January 10, 1994.
Set forth below is a summary of CSW's responses to the Staff's
comments raised in the Comment Letter, together with cross references to
the sections of the Amended Application where additional responsive
information can be found. Comment numbers below correspond to numbers in
the Comment Letter.
<PAGE> 97
Comment No. 1. Revised tables with the additional information
requested by the Staff are included in Item 3.I.A.1.b of the Amended
Application.
Comment No. 2. An expanded description of the process and
factors considered in determining the purchase price is included in Item
3.I.A.2.a of the Amended Application, under the heading "Reasonableness of
Consideration."
In response to your request for an analysis of "assumed
liabilities," please note that while CSW is acquiring the ownership of
EPE, CSW will not assume EPE's obligations. Rather, the obligations of
EPE will remain obligations of EPE. For example, EPE first and second
mortgage bonds will be replaced by first and second mortgage bonds of
Reorganized EPE.
Comment No. 2 of the Staff also requests a "hypothetical purchase
price, including the amount of different securities to be issued, as of
May 31, 1994." As you know, the Transaction was not effective and was not
"priced" as of May 31, 1994. Under the terms of the merger agreement and
the plan of reorganization confirmed by the Bankruptcy Court in December
1993, the "purchase price" (including the value of the new securities to
be issued by Reorganized EPE) was -- and remains -- approximately $2.1
billion. A portion of the purchase price will be paid in the form of new
shares of CSW Common Stock and a portion in the form of new debt
securities and preferred stock of EPE. The exact mix of securities and
the exact number of shares of CSW Common Stock will depend on market
conditions -- and CSW's assessment of those conditions -- at the time the
Transaction is consummated. In addition, CSW is entitled to substitute
cash in lieu of stock or debt. This gives CSW flexibility if market
conditions are temporarily unfavorable to the issuance of any of the
securities in question. For illustrative purposes, a hypothetical
recapitalization table as of June 30, 1994, showing the amount of stock
and other securities that would be issued under one possible set of
assumptions, is set forth in Item 3.I.A.2.a of the Amended Application
under the heading "Reasonableness of Consideration". A breakdown of the
securities to be issued under these assumptions is set forth in Item
3.II.A.3 ("Issuance of New EPE Securities").
Comment No. 3(a). Further details regarding CSW's proposal
before the FERC for interconnecting with EPE -- including information
regarding specific transmission lines, proposed transmission
reinforcement, and costs -- is set forth in Item 3.I.B.1.a.i of the
Amended Application under the heading "Interconnection". In sum, parts
(1) through (3) of your description of the proposal are correct. Part
(4), regarding the reinforcement by the building of a new 345 kV
transmission line, is no longer part of the proposal because further
studies indicate that this reinforcement is not needed. Thus, parts (1)
and (2) of the requested explanation are now moot. Regarding part (3) of
the requested explanation, the 133 MW of total transmission service is
adequate to meet the electric transmission needs of EPE's interconnect to
the CSW system.
<PAGE> 98
Comment No. 3(b). Projected transmission access charges are
estimated to be $1.5 million annually for the 1995-1998 period during
which non-firm service would be provided, and $3.0 million annually for
the 1999-2004 period, during which firm service would be provided, and are
discussed in Item 3.I.B.1.a.i, of the Amended Application under the
heading "Interconnection". The estimated cost of transmission access is
included in the estimate of Transaction benefits.
Comment No. 3(c). An interconnection map identifying the 115 kV,
230 kV and 345 kV interconnection points is included in Exhibit E-3, filed
with the Amended Application.
Comment No. 3(d). By order dated August 1, 1994, the FERC
confirmed its power under Section 211 of the Federal Power Act to order
SPS to provide CSW with access to the SPS transmission system for purposes
of integrating the operations of EPE and the CSW Electric Operating
Companies, and established a procedure looking toward granting CSW such
access. Further information regarding the FERC's 211 order is set forth
in Item 4.IV of the Amended Application, under the heading "Section 211
Transmission Application." As a result of the FERC's August 1 order, CSW
continues to expect that the proposed transmission access will be approved
by the FERC. Since FERC approval is expected, alternative methods of
interconnection and their associated costs are not described in the
Amended Application at this time.
Comment No. 3(e). The CSW System central dispatch facility is
located in Dallas. Further information regarding dispatch, including the
effects of the current restructuring plan for the CSW System on central
economic dispatch, the coordination of the CSW System and the preservation
of advantages of localized management is set forth in Items 3.I.B.1.a.i,
ii and iv of the Amended Application.
Comment No. 4(a). The acquisition of EPE is accounted for as a
"purchase" rather than a "pooling of interests." If any one of the twelve
pooling of interests criteria of APB Opinion No. 16 is not met, then the
combination must be accounted for as a "purchase." The Transaction did
not satisfy five of the twelve criteria: (1) the exchange of CSW Common
Stock and cash for voting common stock of EPE violates Criterion 4; (2)
the equity interest of EPE shareholders will be reduced by amounts
received from CSW and the liquidation trust, and EPE shareholders will be
diluted by the issuance of CSW Common Stock to EPE creditors, both in
violation of Criterion 5; (3) the ratio of interest of EPE shareholders to
other shareholders in the CSW-EPE combined entity will be reduced in
violation of Criterion 7; (4) the limited transferability restrictions
imposed on large holders of newly issued shares of CSW Common Stock
violate Criterion 8; and (5) the rights of EPE shareholders in a
liquidation trust from which distributions may be made after the Effective
Date violate Criterion 9.
In addition, this letter will confirm that the pro forma income
statements furnished with the Application include goodwill amortization
which is reflected in "Other Expenses." The amortization period used was
approximately 30 years. This period was determined by measuring the
approximate remaining life of EPE's plant.
<PAGE> 99
Comment No. 4(b). Item 3.I.A.3 of the Amended Application
(headed "Section 10(b)(3)") contains a revised pro forma consolidated
capital structure to show CSW and EPE separately as of June 30, 1994, and
on a combined pro forma basis.
Comment No. 4(c). Item 3.II.A.3.b. of the Amended Application
includes an analysis of EPE's pretax interest coverage ratio for EPE upon
completion of the Transaction.
Comment No. 5(a). CSW estimates that the quantified cost savings
and synergies resulting from the Transaction (net of the relevant costs,
as described in Item 1.H of the Amended Application under the heading
"Reasons for Transaction") will be approximately $420 million in nominal
dollars during the 10-year period 1995-2004, or $280 million on a present-
value basis using a discount rate of 8.0%, which is the discount rate used
with respect to the present value analyses of savings in the merger
proceedings currently pending before the PUCT.
Comment No. 5(b). The foregoing estimate of Transaction savings
(i.e., $420 million on a nominal-dollar basis or $280 million on a
present-value basis) takes account of all relevant costs required to
achieve the benefits of the Transaction, including the estimated costs of
modifications needed on the CSW and the SPS systems before firm
transmission service can be provided by SPS on a year-round basis. The
savings estimate also takes account of the estimated wheeling costs
associated with firm and non-firm energy transactions. (Further
information regarding the costs to achieve the benefits of the Transaction
is set forth in Item 1.H of the Amended Application, under the heading
"Cost Savings and Synergies", and the exhibits cited therein.) In
accordance with APB Opinion No. 16 (which prescribes the accounting for
business combinations), the costs of completing the Transaction --
including the legal fees, investment banking fees and CSW's and EPE's
internal costs -- are not subtracted from the estimate of Transaction
benefits and will not be charged to the CSW Electric Operating Companies,
but are included in the final purchase price and will be capitalized as
part of CSW's common stock equity in Reorganized EPE. Further information
regarding projected Transaction savings by company and category, in
nominal and net present value terms, using a discount rate of 8.0%, is set
forth in Exhibit D-1.17 to the Amended Application. Further information
and analysis regarding the cost savings of the Transaction are included in
Item 1.H of the Amended Application and the exhibits cited therein. CSW
does not have a "worst case scenario" for the Transaction as it would not
be required to close the Transaction under such a scenario given the
conditions precedent to the parties' obligations to close under the Merger
Agreement.
Comment No. 5(c). An analysis of the pre- and post-Transaction
cost of capital reflecting a shift from non-investment to investment grade
rating is included in Item 1.H of the Amended Application.
<PAGE> 100
Comment No. 5(d). Information regarding EPE sales to customers
in the City of Las Cruces, including the amount of revenues received from,
and percentage of aggregate sales to, customers in the City of Las Cruces,
is set forth in the table below.
<TABLE>
<CAPTION>
Twelve Months Ended
Five Months December 31,
Ended ----------------------------------------------
Revenues: May 31, 1994 1993 1992 1991
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Las Cruces $ 14,909,470 $ 36,856,822 $ 35,855,501 $ 35,874,740
Total Company $212,887,844 $543,594,232 $524,759,587 $462,404,511
Percent 7.00% 6.78% 6.83% 7.76%
KWH Sales:
Las Cruces 162,005,791 406,822,116 399,116,026 379,012,391
Total Company 2,830,340,856 7,596,764,157 7,485,525,086 7,030,371,216
Percent 5.72% 5.36% 5.33% 5.39%
Customers:
Las Cruces 30,296 30,081 29,221 28,498
Total Company 263,968 261,958 254,890 249,325
Percent 11.48% 11.48% 11.46% 11.43%
</TABLE>
As set forth in CSW's Current Report on Form 8-K dated September 14,
1994, EPE has stated that it will continue to provide electric service to the
City of Las Cruces, and that before Las Cruces could terminate electric
service from EPE, a number of legal matters would need to be resolved. EPE
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 customers
in Las Cruces. The Bankruptcy Court for the Western District of Texas has
issued an order granting relief from the automatic stay, as of January 1,
1995, to permit the City of Las Cruces to file a condemnation proceeding in
its effort to municipalize EPE's distribution system in the City. CSW has
advised EPE that it will not close the Transaction unless these matters are
resolved in a favorable and timely manner.
Comment No. 5(e). As discussed in Item 1.H of the Application under
the headings "Other Savings" and "Expansion of Bulk Power Sales and Purchase
Capability," the benefits to each CSW Electric Operating Company of increased
access to power markets to the west have not been quantified. In CSW's
judgment, increased access to these markets will likely reduce costs and
provide benefits to CSW's Electric Operating Companies and ratepayers.
Comment No. 5(f). The Application addresses the effect of the
Transaction on rates in Item 1.H under the heading "Cost Savings and
Synergies", which states that the "projected cost savings and synergies will
help hold future rates and rate increases below what would otherwise result
from a stand-alone plan of reorganization." CSW believes that rates will rise
less than they would for EPE on a stand-alone basis. An application to
establish EPE's rates in Texas is currently pending before the PUCT. (See
Exhibit D-1 to the Application.) An explanation and quantification of CSW's
settlement proposal is available in Exhibit D-1 (Vol. 2 of 4, Testimony of
<PAGE> 101
David Carpenter, pp. 13-31 & Exh. DGC-5) to the Application. A request for
rate relief has not been filed with the New Mexico Public Utility Commission,
and CSW recently has announced a settlement offer for New Mexico that would
freeze base rates until at least 1998 and allow only one increase in an
aggregate amount not to exceed 6% during the period 1998-2001. Finally, an
explanation and quantification of potential future rate impacts to New Mexico
ratepayers associated with the merger is set forth in Exhibit D-2 to the
Application (Testimony of Gary R. Hedrick, Vol. 2, pp. 29-43).
Comment No. 6. The net book value of the Leased Palo Verde Assets as
of June 30, 1993 was approximately $605 million. As these assets were sold
and leased back, this amount was determined by subtracting from the reasonable
and prudent original cost of the assets as previously determined by the PUCT
an amount representing accumulated depreciation that would have accrued had
the units not been sold and leased back.
As stated in Item 3.II.C of the Application, the Palo Verde
"acquisition" is an integral and necessary part of the Plan and a condition to
the consummation of the Transaction. In addition, the acquisition is really a
re-acquisition of full ownership of interests that were originally owned and
are now leased by EPE. As discussed therein, CSW performed analyses which
compared the total net present worth revenue requirements for the
reacquisition of the Leased Palo Verde Assets to rejection of the leases,
payment of damages and installation of new generation. These analyses
indicated that the reacquisition of the Leased Palo Verde Assets would result
in lower total net present worth revenue requirements for EPE's customers than
rejection of the leases, payment of damages and installation of new
generation. In any event, for these reasons, CSW has not performed a cost-
benefit analysis of the Palo Verde reacquisition in isolation, apart from the
other benefits of the Transaction. Further information regarding the Palo
Verde Assets -- including a discussion of decommissioning funds and the
potential effects of adding the Palo Verde Assets to the CSW System -- is
included in Item 3.II.C of the Amended Application under the heading
"Reacquisition by EPE of Ownership of the Leased Palo Verde Assets." With
respect to the question raised by the Staff regarding tube cracking, CSW is
monitoring the situation at Palo Verde and has advised EPE that the tube-
cracking problems must be satisfactorily resolved before a closing of the
Transaction will occur.
Comment No. 7(a). EPE sold the assets of Triangle Electric Supply
Company ("Triangle"), the subsidiary cited in Item 1.B.2 of the Application,
in the first quarter of 1994. The sale was approved by the Bankruptcy Court
on March 22, 1994 and was completed on April 18, 1994. EPE intends to
dissolve Triangle and distribute the remaining cash to EPE.
Comment 7(b). CSW undertakes to provide to the Staff additional
terms of certain securities to be issued in connection with the proposed
Transaction as soon as they have been determined pursuant to the terms of the
Plan.
<PAGE> 102
CSW believes that the foregoing responses, together with the Amended
Application, the exhibits filed therewith, and CSW's Intervention Response,
address all of the comments raised in the Staff's Comment Letter. Please
direct questions or comments concerning the foregoing and any further requests
for additional information with respect to the Amended Application to the
undersigned at (212) 530-5106 or Rod J. Howard at (212) 530-5383.
Very truly yours,
/s/ JORIS M. HOGAN
Joris M. Hogan
Attachment
cc: Robert P. Wason
Ferd. C. Meyer, Jr., Esq.
Eduardo Rodriguez, Esq.
Noel J. Darce, Esq.
Clinton A. Vince, Esq.
William L. Lutz, Esq.
Mary W. Cochran, Esq.
Paul R. Hightower, Esq.
Kevin J. Burke, Esq.
Gerald J. Diller
Norma K. Scogin, Esq.
Stephen Fogel, Esq.
James C. Martin, Esq.
<PAGE> 103
UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
In the Matter of ) File No. 70-8339
Central and South West Corporation )
RESPONSE OF CENTRAL AND SOUTH WEST
CORPORATION TO PETITIONS FOR LEAVE TO
INTERVENE, COMMENTS AND REQUESTS FOR
HEARING OF SOUTHWESTERN PUBLIC SERVICE
COMPANY, TEXAS OFFICE OF PUBLIC UTILITY
COUNSEL, CITY OF LAS CRUCES, NEW MEXICO,
ARKANSAS PUBLIC SERVICE COMMISSION,
LOUISIANA PUBLIC SERVICE COMMISSION,
NEW MEXICO PUBLIC UTILITY COMMISSION,
AND TEXAS UTILITIES ELECTRIC COMPANY
Joris M. Hogan
Joseph S. Genova
Rodrigo J. Howard
MILBANK, TWEED, HADLEY & McCLOY
One Chase Manhattan Plaza
New York, NY 10005
(212) 530-5000
Attorneys for Central and
South West Corporation
October 21, 1994
<PAGE> 104
TABLE OF CONTENTS
Page
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . 2
A. Preliminary Statement. . . . . . . . . . . . . . . 2
B. Summary of CSW's Responses . . . . . . . . . . . . 6
1. Intervention And Hearing. . . . . . . . . . . 6
2. Substantive Issues. . . . . . . . . . . . . . 7
II. SPS, TUEC AND OPUC HAVE FAILED TO SHOW THAT THEY
SHOULD BE ALLOWED TO INTERVENE. . . . . . . . . . . . .10
A. Standards For Intervention . . . . . . . . . . . .10
B. Intervention By SPS And TUEC Would
Contravene The Standards Of Rule 9
And Disserve The Purposes Of The Act . . . . . . .12
C. Intervention By The OPUC Would Also Fail To
Meet The Standards Of Rule 9 Or To Serve The
Purposes Of The Act. . . . . . . . . . . . . . . .14
III. THE ISSUES RAISED BY PETITIONERS ARE WITHOUT MERIT
AND DO NOT WARRANT A HEARING. . . . . . . . . . . . . .15
A. Standards For A Hearing. . . . . . . . . . . . . .15
B. The Commission Need Not Hold A Hearing To
Conclude That The CSW-EPE System Will Form An
"Integrated Public Utility System" Within The
Meaning Of Sections 2(a)(29)(A) And 10(c)(2) . . .19
1. CSW And EPE Meet The Interconnection
Requirements Of The Act . . . . . . . . . . .21
a. FERC-Approved Transmission Access
Across SPS's System Satisfies The
Act's Interconnection Requirement. . . .22
b. Application Of The Act's Integration
Requirements Must Reflect Change In
The Law, Technology And The Industry . .26
c. TUEC Raises No Genuine Issues
Relating To The Integration Of CSW
And EPE. . . . . . . . . . . . . . . . .28
2. CSW And EPE Meet The "Single Area Or
Region" Requirements Of The Act . . . . . . .29
3. CSW And EPE Meet The "Coordinated System"
Requirement Of The Act. . . . . . . . . . . .34
-i-
<PAGE> 105
Page
C. The Commission Need Not Hold A Hearing To
Conclude That The Proposed Acquisition Will
Tend Toward The "Economical And Efficient
Development" Of An Integrated Public Utility
System . . . . . . . . . . . . . . . . . . . . . .39
1. Bankruptcy-Related Benefits . . . . . . . . .40
2. Petitioners Have Failed To Raise Any
Material Issues Of Fact That Require A
Hearing . . . . . . . . . . . . . . . . . . .43
3. CSW Has Established That Significant
Production Cost Savings Will Result From
The Transaction . . . . . . . . . . . . . . .44
4. CSW's Financial Savings Are Fully
Supported . . . . . . . . . . . . . . . . . .46
5. CSW's Non-Fuel O&M Savings Are Fully
Supported . . . . . . . . . . . . . . . . . .46
6. The "Reacquisition" Of The Palo Verde
Nuclear Generating Units Will Provide
Significant Cost Savings Over The
Remaining Life Of The Assets. . . . . . . . .47
D. The Commission Need Not Hold A Hearing To
Conclude That The Proposed Consideration Is
Reasonable Under Section 10(b)(2) Of The Act . . .51
E. The Ratepayer Considerations Raised By The OPUC
And APSC Do Not Merit A Hearing By The
Commission . . . . . . . . . . . . . . . . . . . .56
F. No Commission Hearing Is Required To Review The
Competitive Or Antitrust Consequences Of The
Transaction Or The Size Of The Combined System . .57
1. No Commission Hearing Is Required To
Review The Competitive Or Antitrust
Consequences Of The Transaction . . . . . . .58
a. Petitioners' Contentions . . . . . . . .59
b. CSW's Responses. . . . . . . . . . . . .60
c. The FERC's Decision. . . . . . . . . . .61
d. Commission Deference To The FERC . . . .62
2. No Hearing Is Required To Review The Size
Of The Proposed Entity. . . . . . . . . . . .63
IV. THE COMMISSION IS NOT REQUIRED TO AND SHOULD NOT
POSTPONE CONSIDERATION OF THE APPLICATION . . . . . . .65
V. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . .66
-ii-
<PAGE> 106
TABLE OF AUTHORITIES
Page
CASES
American Elec. Power Co.,
46 SEC 1299 (1978) . . . . . . . . . . . . . 27, 32, 33, 64
American Gas & Elec. Co.,
22 SEC 808 (1946). . . . . . . . . . . . . . . . . . . . 27
American Natural Gas Co.,
43 SEC 203 (1966). . . . . . . . . . . . . . . . . . . . 22
Association of Mass. Consumers, Inc. v.
Securities and Exchange Commission,
516 F.2d 711 (D.C. Cir. 1975), cert. denied,
423 U.S. 1052 (1976) . . . . . . . . . . . . . . . . . . 11
Boston Carrier, Inc. v. ICC,
728 F.2d 1508 (D.C. Cir. 1984) . . . . . . . . . . . . . 17
Burco, Inc. v. Whitworth,
81 F.2d 721 (4th Cir.), cert. denied,
297 U.S. 724 (1936). . . . . . . . . . . . . . . . . . . 31
Cajun Elec. Power Coop. v. FERC,
No. 92-1461, 1994 U.S. App. LEXIS 17001
(D.C. Cir. July 12, 1994). . . . . . . . . . . . . . . . 16
Centerior Energy Corp.,
35 SEC Docket 769 (1986) . . . . . . . . . . . . 16, 23, 26,
32, 64
Cities of Carlisle & Neola v. FERC,
741 F.2d 429 (D.C. Cir. 1984). . . . . . . . . . . . . . 17
Cities Serv. Power & Light Co.,
14 SEC 28 (1943) . . . . . . . . . . . . . . . . . . 23, 31
City of Lafayette v. Securities and Exchange Commission,
454 F.2d 941 (D.C. Cir. 1971), aff'd sub nom.
Gulf States Utils. Co. v. Federal Power Comm'n,
411 U.S. 747 (1973). . . . . . . . . . . . . . . . . . . 17
City of New Orleans v. Securities and Exchange
Commission, 969 F.2d 1163 (D.C. Cir. 1992). . . . . . . . . . 16
Connecticut Bankers Ass'n v. Board of Governors
of Fed. Reserve Sys.,
627 F.2d 245 (D.C. Cir. 1980). . . . . . . . . . . . . . 17
Connecticut Yankee Atomic Power Co.,
41 SEC 705 (1963). . . . . . . . . . . . . . . . . . . . 29
-iii-
<PAGE> 107
Page
Eastern Utils. Assoc.,
31 SEC 329 (1950). . . . . . . . . . . . . . . . . . . . 36
Electric Energy, Inc.,
38 SEC 658 (1958). . . . . . . . . . . . . . 19, 29, 35, 36
Entergy Corp.,
55 SEC Docket 2035 (1993). . . . . . . . . . .3, 16, 17, 64
Environmental Action, Inc. v. Securities and
Exchange Commission,
895 F.2d 1255 (9th Cir. 1990). . . . . . . . . . . . . . 30
Georgia Power Co.,
6 SEC Docket 617 (1975). . . . . . . . . . . . . . . 11, 14
Herring v. Securities and Exchange Commission,
673 F.2d 1191 (11th Cir. 1982). . . . . . . . . . . . . .16
Indiana Mich. Power Co.,
64 FERC [paragraph] 61,184 (1993). . . . . . . . . . . . 34
Iroquois Gas Transmission Sys.,
52 FERC [paragraph] 61,091 (1990), aff'd
sub nom. Louisiana Ass'n of Indep.
Producers & Royalty Owners v. FERC, 958
F.2d 1101 (D.C. Dir. 1992). . . . . . . . . . . . . . . .17
Middle South Utils., Inc.,
35 SEC 1 (1953). . . . . . . . . . . . . . . . . . . . . 37
Middle West Corp.,
1 SEC 514 (1936). . . . . . . . . . . . . . . . . . . . .42
Mississippi Valley Generating Co.,
36 SEC 159 (1955). . . . . . . . . . . . . . . . . . 27, 28
Municipal Elec. Ass'n v. Securities and Exchange
Commission,
413 F.2d 1052 (D.C. Cir. 1969). . . . . . . . . . . .58, 62
New England Elec. Sys.,
38 SEC 193 (1958). . . . . . . . . . . . . . . . . . 22, 37
North American Co.,
11 SEC 194 (1942). . . . . . . . . . . . . . . . 31, 37, 38
North American Co.,
28 SEC 742 (1948). . . . . . . . . . . . . . . . . . . . 37
-iv-
<PAGE> 108
Page
Northeast Utils.,
47 SEC Docket 1270 (1990). . . . . . . 22, 23, 24, 25, 26,
30, 31, 32, 36, 64
Northeast Utils.,
48 SEC Docket 694 (1991), aff'd sub nom.
City of Holyoke Gas & Elec. Dep't v.
Securities and Exchange Commission, 972 F.2d
358 (D.C. Cir. 1992). . . . . . . . . . . . . . 16, 17, 24,
39, 42, 62
Northeast Utils. Serv. Co.,
53 FERC [paragraph] 63,020 (1990), aff'd in part, 56 FERC
[paragraph] 61, 269 (1991), modified on reh'q, 58 FERC
[paragraph] 61,070 (1992), aff'd in part sub nom. Northeast
Utils. Serv. Co. v. FERC, 993 F.2d 937 (1st Cir. 1993) . 42
Ohio Power Co. v. FERC,
744 F.2d 162 (D.C. Cir. 1984). . . . . . . . . . . . . . 17
Okin v. Securities and Exchange Commission,
143 F.2d 960 (2d Cir. 1944). . . . . . . . . . . . . . . 11
Peoples Light & Power Co.,
2 SEC 829 (1937). . . . . . . . . . . . . . . . . . . . .42
Sierra Pac. Resources,
40 SEC Docket 103 (1988), aff'd sub nom.
Environmental Action, Inc. v. Securities
and Exchange Commission, 895 F.2d 1255
(9th Cir. 1990). . . . . . . . . . . . . . . . . . . . . 36
Standard Power & Light Corp.,
9 SEC 862 (1941). . . . . . . . . . . . . . . . . . . . .37
UNITIL Corp.,
51 SEC Docket 562 (1992). . . . . . . . . . .24, 25, 26, 28,
30, 35, 36, 37
Utilities Power & Light Corp.,
4 SEC 131 (1938). . . . . . . . . . . . . . . . . . . . .42
Vermont Yankee Nuclear Power Corp.,
43 SEC 693 (1968), rev'd on other
grounds sub nom. Municipal Elec.
Ass'n of Massachusetts v. Securities
and Exchange Commission, 413 F.2d 1052
(D.C. Cir. 1969) . . . . . . . . . . . . . . . . . . . . 29
-v-
<PAGE> 109
Page
Wisconsin's Envtl. Decade, Inc. v. Securities
and Exchange Commission,
882 F.2d 523 (D.C. Cir. 1989). . . . . . . . . . . . 16, 63
Woolen Mill Assocs. v. FERC,
917 F.2d 589 (D.C. Cir. 1990). . . . . . . . . . . . . . 16
Statutes
11 U.S.C. [section] 1129. . . . . . . . . . . . . . . . . 53, 55
15 U.S.C. [section] 79a. . . . . . . . . . . . . . . . . . . .10
15 U.S.C. [section] 79b. . . . . . . . . . . . . . . .19, 20, 34
15 U.S.C. [section] 79j. . . . . . . . . . . . . . . .19, 51, 58
15 U.S.C. [section] 79k. . . . . . . . . . . . . . . . . . . .19
15 U.S.C. [section] 79s. . . . . . . . . . . . . . . . . . . .10
16 U.S.C. [section] 824j. . . . . . . . . . . . . . . . . . . 21
Rules
17 C.F.R. [sections] 201.1 et seq. (1993). . . . . . . . .10, 11
Other Authorities
H.R. Rep. No. 1903, 74th Cong., 1st Sess. 70 (1935) . . . . . 31
S. Rep. No. 621, 74th Cong., 1st Sess. 3 (1935) . . . . . . . 31
S. Rep. No. 621, 74th Cong., 1st Sess. 56 (1935). . . . . . . 30
-vi-
<PAGE> 110
UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
In the Matter of ) File No. 70-8339
Central and South West Corporation )
RESPONSE OF CENTRAL AND SOUTH WEST
CORPORATION TO PETITIONS FOR LEAVE TO
INTERVENE, COMMENTS AND REQUESTS FOR
HEARING OF SOUTHWESTERN PUBLIC SERVICE
COMPANY, TEXAS OFFICE OF PUBLIC UTILITY
COUNSEL, CITY OF LAS CRUCES, NEW MEXICO,
ARKANSAS PUBLIC SERVICE COMMISSION,
LOUISIANA PUBLIC SERVICE COMMISSION,
NEW MEXICO PUBLIC UTILITY COMMISSION,
AND TEXAS UTILITIES ELECTRIC COMPANY
Central and South West Corporation ("CSW") submits
this response (the "Response") in support of its Application-
Declaration, as amended and restated through the date hereof
(the "Application"), in which CSW seeks approval of the
Securities and Exchange Commission (the "Commission") under
the Public Utility Holding Company Act of 1935, as amended
(the "Act"), for its proposed acquisition of El Paso Electric
Company ("EPE").
This Response is also submitted in opposition to the
petitions to intervene filed by Southwestern Public Service
Company ("SPS") and the Texas Office of Public Utility Counsel
(the "OPUC") on April 25, 1994, and by Texas Utilities
Electric Company ("TUEC"), on June 29, 1994.[1]
In addition, this Response addresses the comments,
including the requests that the Commission conduct an
_____________
[1] Citations to a particular petition to intervene will be
in the form of [petitioner's abbreviated name] at [page
number]. For example, a citation to page 75 of the SPS
Petition would be "SPS at 75."
<PAGE> 111
evidentiary hearing, raised in the April 25, 1994 filings by
SPS, the OPUC, the City of Las Cruces, New Mexico ("Las
Cruces"), the Louisiana Public Service Commission (the
"LPSC"), the Arkansas Public Service Commission (the "APSC"),
and the May 27, 1994 filing of the New Mexico Public Utility
Commission.[2]
For the reasons set forth below, the petitions to
intervene of SPS, TUEC and the OPUC should be denied, and
CSW's proposed acquisition of EPE (the "Transaction") should
be approved without a Commission evidentiary hearing.[3]
I. INTRODUCTION
A. Preliminary Statement
The Transaction is the result of nearly three years
of proceedings and negotiations of enormous complexity and
expense. It resolves a bankruptcy that is only the second
bankruptcy of a major publicly-traded electric utility company
since the Great Depression. Moreover, as the United States
Bankruptcy Court for the Western District of Texas, Austin
Division (the "Bankruptcy Court") found, the Transaction
"resolves the claims and interests of creditors and
shareholders in a manner which is fair to each of them . . .
and, in addition, provides the ratepayers with significant
_____________
[2] The Public Utility Commission of Texas ("PUCT") filed a
notice of appearance dated April 20, 1994 but has not
filed comments.
[3] All the entities filing notices, petitions, comments or
requests for hearing are sometimes collectively referred
to as the "Petitioners."
<PAGE> 112
benefits." Bankruptcy Court Findings of Fact and Conclusions
of Law [paragraph] 17 (Dec. 8, 1993) (emphasis added) ("Findings of
Fact") (Ex. D-14 to the Application). Equally importantly,
there is simply no other alternative to the Transaction. As
the Bankruptcy Court found, "no other alternative . . . is or
would [be] appropriate for EPE at this time." Findings of
Fact [paragraphs] 19-21.
Against these concrete findings by an impartial
Federal judge -- findings made after nearly two years of
proceedings -- SPS and the other Petitioners have presented
what are essentially self-interested and unsupported
complaints about this Transaction and speculation about other
hypothetical transactions. These arguments establish no basis
for intervention or a hearing and no basis for delay in the
approval of the Transaction by this Commission.
SPS's objections are the familiar complaints of a
frustrated losing bidder-turned-spoiler. They are nothing
more than an effort by SPS to win by delay, obfuscation and
subterfuge in the regulatory arena what SPS failed to win by
open negotiations and proceedings before the Bankruptcy Court.
SPS's efforts to misuse these proceedings to derail the
Transaction should be rejected by this Commission, just as
similar efforts by frustrated bidders have been rejected by
the Commission in the past,[4] and just as SPS's efforts to
_____________
[4] See, e.g., Entergy Corp., 55 SEC Docket 2035 (1993)
(approving acquisition of Gulf States Utilities over
objections of Houston Industries).
<PAGE> 113
abuse and circumvent the procedures established by the
Bankruptcy Court were rejected by the Bankruptcy Court.
Findings of Fact [paragraph] 13.
The other Petitioners' objections are essentially a
wish that Humpty Dumpty had been put back together
differently. These arguments fly in the face of the long --
and undisputed -- history of unsuccessful efforts by EPE to
reach agreement with its creditors and the similarly
unsuccessful efforts of other would-be acquirors to win
support for their proposals.[5] Such jockeying for advantage
in December 1991 was just the sort of behavior that caused EPE
to fall into bankruptcy in the first place, and, if unchecked,
will prevent EPE's emergence from bankruptcy. Moreover, a
review of the undisputed history of the Transaction confirms
that the Petitioners' speculation about other possible
transactions, on other terms, is just that: speculation.
_____________
[5] This history is summarized in Item 1.C of CSW's
Application and is nowhere disputed by Petitioners. In
1991, EPE engaged in protracted and ultimately
unsuccessful negotiations with creditors to implement an
out-of-court restructuring of its obligations. EPE filed
a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code in January 1992. In the
summer and fall of 1992, EPE unsuccessfully proposed a
plan of reorganization providing for it to emerge from
bankruptcy as a stand-alone company. EPE thereafter
analyzed the possibility of a business combination with
other utility systems. Thirteen potential acquirors
requested and were sent an information package about EPE.
Only six of the thirteen entities obtained detailed
briefings and additional information from EPE, and four
of them engaged in a formal due diligence investigation
of EPE's business. Thereafter, only two potential
acquirors remained in the process -- CSW and SPS, which
now says it is no longer interested in acquiring EPE --
and only one party, CSW, attracted the requisite support
of the Bankruptcy Court and EPE stakeholders.
<PAGE> 114
Such speculation is wholly insufficient to warrant a hearing
or to deny or delay this Commission's approval of the
Transaction.
Moreover, these speculations are contradicted by the
findings of the Bankruptcy Court. In its Findings of Fact,
the Bankruptcy Court unambiguously described the Transaction
as the only presently viable option for allowing EPE to emerge
from bankruptcy as a financially viable entity:
The events of this case, including particularly
the competitive bidding process which involved
SPS and the substantial preference for the CSW
Merger which was expressed by the
constituencies . . . demonstrate that no other
alternative, including the alternative
presented by the SPS proposal, is or would [be]
appropriate for EPE at this time. Even if such
other alternative were feasible, moreover, it
would not be consistent with the objectives of
the Bankruptcy Code or the best interests of
the estate to delay EPE's emergence from
Chapter 11 to pursue such other alternative.
Findings of Fact [paragraph] 19 (emphasis added). The Bankruptcy Court
also stated that liquidation would be "undesirable" and would
be "inconsistent with EPE's public service obligations." Id.
[paragraph] 20.
While the objectors quibble with certain details of
the Transaction, one overarching fact is undisputed: the
Transaction will extract EPE from nearly three years of
bankruptcy proceedings that are expected to have cost an
aggregate of between $65 million and $75 million by June 30,
1995. By ending the EPE bankruptcy, the Transaction will end
this enormous financial hemorrhage and will redirect EPE's
full resources -- which have necessarily been diverted by the
<PAGE> 115
bankruptcy proceedings -- back to the operation of EPE's
business in a time of unique challenges to the entire electric
utility industry.
In addition, the Transaction will end the
uncertainty that bankruptcy has created for EPE's investors
and customers -- thereby providing a more certain basis for
business expansion plans and economic growth opportunities in
EPE's service areas.
Petitioners' desire to divert this Commission's
attention away from these central considerations to other,
less relevant issues is a compelling indication of the lack of
merit in their petitions.
B. Summary Of CSW's Responses
1. Intervention And Hearing
The requests of SPS, TUEC and OPUC for intervention
should be denied. SPS is simply a disappointed bidder who has
become a spoiler, TUEC raises purely private issues which are
already being addressed by the Federal Energy Regulatory
Commission (the "FERC") in proceedings related to the
Transaction,[6] and the OPUC appears to believe that the
Commission is engaged in a ratemaking proceeding. The
_____________
[6] Three proceedings related to the Application are
presently before the FERC: (1) El Paso Electric Co., et
al., Docket No. TX94-2-000 (seeking order pursuant to
section 211 of the Federal Power Act); (2) El Paso
Electric Co., et al., Docket No. EC94-7-000 (seeking
approval of the acquisition pursuant to section 203 of
the Federal Power Act); and (3) Central and South West
Services, Inc., Docket No. ER94-898-000 (seeking approval
to amend CSW's operating agreement pursuant to section
205 of the Federal Power Act).
<PAGE> 116
participation of any of these entities as parties would not
further the purposes of the Act.
The requests that the Commission convene a hearing
should be denied. None of Petitioners' submissions
sufficiently identifies which specific facts are to be the
subject of the requested hearing. On this basis alone, their
requests for a hearing should be denied. In addition, none of
the issues raised has both sufficient merit and sufficient
relationship to an interest protected by the Act to warrant
consideration by the Commission. Even if the issues were
relevant under the Act, no hearing would be necessary because
the voluminous record before the Commission is more than
adequate to enable the Commission to consider the Application
and make all findings required for approval.
2. Substantive Issues
The facts regarding the principal issues raised by
Petitioners are as follows:
* Integration: Petitioners' arguments that the post-
Transaction CSW-EPE system would not be "physically
interconnected," would not be sufficiently "coordinated"
and would not be confined to a "single area or region"
are simply wrong. FERC's recent order on CSW's
section 211 application moots Petitioners' arguments
insofar as transmission and other technical electric
utility issues are concerned.[7] The record before the
_____________
[7] On August 1, 1994, the FERC issued orders in two
proceedings that relate to the Transaction -- (1) an
order (the "211 Order") with respect to EPE's and CSW's
application in Docket No. TX94-2-000 under section 211 of
the Federal Power Act, as amended (the "Federal Power
Act") seeking an order requiring SPS to provide firm and
non-firm transmission services between EPE and CSW; and
(2) an order (the "203 Order") with respect to CSW's
applications in Docket Nos. EC94-7-000 and ER94-898-000
(continued...)
<PAGE> 117
Commission on this Application, which will include the
full record before the FERC, fully supports a Commission
finding that the Application meets the Act's integration
requirements. No Commission hearing is required.
* Transaction Benefits: The record before the Commission
(including the record before the FERC) provides ample
basis for the Commission to find that approval of the
Transaction will tend "towards the economical and
efficient development of an integrated public-utility
system." Many of the Petitioners' arguments regarding
savings are speculative and therefore are not legitimate
bases for a Commission hearing. In any event,
Transaction benefits are being comprehensively addressed
before the FERC, which will hold an evidentiary hearing.
See 203 Order at 64.[8] To hold a separate Commission
hearing is unnecessary and would be duplicative and
therefore wasteful. The end of EPE's bankruptcy is an
additional and substantial public benefit which the
Bankruptcy Court and the FERC have already found to be in
the public interest and which, under Commission
precedent, is sufficient "in itself" to satisfy section
10(c)(2) of the Act.
* Consideration: The consideration payable was the result
of a supervised negotiation and its fairness is supported
by ample evidence in the record and by the findings of
the Bankruptcy Court and a formal written opinion of
Morgan Stanley & Co. Petitioners' concerns regarding
_____________
[7](...continued)
under sections 203 and 205 of the Federal Power Act
seeking FERC approval of CSW's acquisition of EPE and of
an amendment to the CSW System Operating Agreement to add
EPE to that Agreement. See 68 FERC [paragraph] 61,182 (1994).
[8] Pursuant to the FERC's 203 Order, the FERC has set for
hearing the following Transaction-related issues: (1)
the reasonableness of the projection by CSW and EPE of
lower production costs; (2) the reasonableness of CSW's
and EPE's estimates for labor and administrative cost
savings; (3) whether lowering the cost of capital of EPE
will be offset by increases in the cost of capital of
CSW's existing operating companies; (4) whether the
reacquisition by EPE of the Palo Verde Assets will result
in cost savings over the remaining life of the assets;
and (5) whether the costs and risks of the Transaction
fall disproportionately on CSW's operating companies and
their ratepayers. In addition, the FERC will establish
hearing procedures to address the details of transmission
comparability and related cost and rate matters.
<PAGE> 118
this issue or the related one of CSW's issuance of common
stock are ill-defined, speculative and do not raise a
serious factual issue necessitating a hearing.
* Competition, Antitrust and Size: The record before the
Commission is more than sufficient to provide a basis for
the Commission to conclude that the Application meets the
Act's standards on these issues. The Commission should
defer to the FERC's special expertise concerning the
impact of the Transaction on competition and antitrust
issues. As to both of those, the FERC has found that any
potential anticompetitive effects can and will be
"adequately mitigated" once the tariffs of PSO/SWEPCO and
the pro forma tariff of EPE are modified to provide for
comparable services. See 203 Order at 54. CSW has
conditionally agreed to make those modifications. In
addition, antitrust issues will be subject to review by
the Antitrust Division of the Department of Justice and
the Federal Trade Commission under the Hart-Scott-Rodino
Antitrust Improvements Act and by the Nuclear Regulatory
Commission under the Atomic Energy Act. Further
consideration by the Commission is unnecessary and would
be duplicative, and a hearing is not needed.
* Ratepayer Considerations: While the Commission is
charged with protecting consumers, it is not a rate-
making body. Rate issues are being addressed in pending
regulatory proceedings before the applicable state com-
missions. The Commission need not consider rate issues,
much less hold a hearing about them. Apart from rate
concerns, Petitioners have not raised any consumer-
related issue bearing on an interest protected under the
Act.
The sections below address why certain Petitioners
should not be allowed to intervene (section II), why the
principal issues raised by Petitioners lack merit and do not
provide any basis for a hearing (section III), and why the
Commission should not postpone consideration of this
Application (section IV).
<PAGE> 119
II. SPS, TUEC AND OPUC HAVE FAILED TO SHOW THAT THEY
SHOULD BE ALLOWED TO INTERVENE
A. Standards For Intervention
To intervene in a proceeding before the Commission,
a person must assert an interest protected under the Act. See
the Act [section] 1, 15 U.S.C. [section] 79a (1988). The Act protects the
national public interest, investors in securities of holding
companies and their subsidiaries and affiliates, and consumers
of electric energy and gas. Under section 19 of the Act:
In any proceeding before the Commission,
the Commission, in accordance with such
rules and regulations as it may prescribe,
shall admit as a party any interested
State, State commission, State securities
commission, municipality, or other
political subdivision of a State, and may
admit as a party any representative of
interested consumers or security holders,
or any other person whose participation in
the proceedings may be in the public
interest or for the protection of
investors or consumers.
15 U.S.C. [section] 79s (1988) (emphasis added).
Rule 9(e) of the Commission's Rules of Practice, 17
C.F.R. [sections] 201.1 et seq., governs the requirements for
intervention by entities that are other than a State, a State
commission, or a political subdivision of a State. Rule 9(e)
provides, in pertinent part:
[N]o person shall be admitted as a party
to a proceeding by intervention unless the
Commission is satisfied on the basis of
the written application of such person
(and any evidence taken in connection
therewith) that his participation as a
party will be in the public interest, and
that leave to be heard pursuant to [Rules
9(c) and 9(d)] would be inadequate for the
protection of his interests.
<PAGE> 120
17 C.F.R. [section] 201.9(e) (1993) (emphasis added). Neither SPS nor
TUEC has made the requisite showing that any interest it
purports to advance is in the public interest or any other
interest protected under the Act. In the absence of such a
showing, Rule 9(e) specifically provides that "no [such]
person shall be admitted as a party." Id.
These petitioners have also failed to show why, in
the event there is a hearing, their interests could not be
adequately protected by leave to be heard as a limited
participant under Rules 9(c) and 9(d). TUEC concedes that its
purported need to participate in the proceeding is limited.
TUEC at 8 (asking to intervene only "to the extent
necessary"). As Rules 9(c) and 9(d) make clear, whether to
allow intervention of a private party is squarely within the
discretion of the Commission. Similarly, the scope of any
such intervention is within the Commission's discretion.
Association of Mass. Consumers, Inc. v. Securities and
Exchange Commission, 516 F.2d 711, 714-15 (D.C. Cir. 1975),
cert. denied, 423 U.S. 1052 (1976); Okin v. Securities and
Exchange Commission, 143 F.2d 960, 961 (2d Cir. 1944) (per
curiam). Absent exceptional circumstances (which the proposed
intervenor has the burden to prove), private interests are to
be addressed through comments or limited participation. See
Georgia Power Co., 6 SEC Docket 617, 618 (1975). The
Commission should deny SPS's and TUEC's requests to intervene.
The Commission should also deny the OPUC's petition
for intervention. While the OPUC does not suffer from the
<PAGE> 121
private interest disqualification that should exclude SPS and
TUEC, its participation as a party would be duplicative and
wasteful because the PUCT will be a party anyway and will
advocate the interests of Texas consumers.
B. Intervention By SPS And TUEC Would
Contravene The Standards Of Rule 9
And Disserve The Purposes Of The Act
SPS is a disappointed bidder seeking to play the
role of spoiler. SPS's purely private and commercial interest
in preventing CSW from acquiring EPE does not constitute any
protected interest under the Act. That fact, combined with
SPS's utter failure to explain why intervention in the
proceedings before this Commission is necessary to protect its
private interests, as required under Rule 9(e), warrants
denial of SPS's petition for intervention.
Moreover, the issues SPS improperly purports to
raise here are either already moot, by virtue of action taken
by the FERC, or are being addressed in related federal and
state proceedings. See generally 211 Order and 203 Order.
SPS has intervened in all state and federal regulatory
proceedings. In addition, as SPS's submission states, it is
deeply involved in the ongoing proceedings before the FERC, as
it is before the NRC.
Thus, intervention by SPS would neither further the
purposes of the Act nor serve the public interest. Instead,
intervention is another device that would allow SPS to use the
Act, the Commission, and the public's resources to attempt to
<PAGE> 122
keep CSW from obtaining what CSW fairly negotiated for in
EPE's bankruptcy proceedings.
TUEC's submission similarly fails to justify its
intervention as a party. Although the purpose for TUEC's
submission is not entirely clear, it appears that TUEC bases
its intervention request on its assertion that TUEC's
"interconnections" with CSW will be vital to CSW's ability to
achieve integration. This is simply not the case, as the 211
Order and Application demonstrate beyond cavil.
In any event, the technical questions of electrical
feasibility and of the consequences of interconnection are
more appropriately considered by the FERC. TUEC implicitly
concedes as much and expressly states that resolution of the
interconnection issue, and how it may affect TUEC's interests
are fully dependent on the decision of the FERC under section
211 of the FPA. In view of TUEC's concession, and in view of
the FERC's 211 Order (see note 13 and section III.B.1.c), TUEC
does not need to intervene in this proceeding to protect its
purported interests in the Transaction.
Even if the Commission were to consider TUEC's
assertion regarding interconnections, nowhere in TUEC's sub-
mission does it explain why its intervention as a party is
necessary to address that issue. TUEC merely offers the
conclusory statement that "[l]eave to be heard" would be
inadequate. TUEC at 7. Rule 9(e) requires, however, that
TUEC set forth in detail its need for intervention. Since
TUEC has not done that, and indeed, cannot do it, TUEC should
<PAGE> 123
not be permitted to intervene. See Georgia Power Co., 6 SEC
Docket at 618.
C. Intervention By The OPUC Would Also Fail
To Meet The Standards Of Rule 9 Or To
Serve The Purposes Of The Act
The OPUC is not a State, a State commission or
political subdivision of a State. It must therefore satisfy
the standards for permissive intervention, which it has failed
to do. While the OPUC is charged with representing Texas's
residential and small commercial customers in public utility
matters, that fact alone does not warrant according the OPUC
party status in this proceeding.
The OPUC's primary statutory concerns are with
ratepayers' interests in having low rates for reliable
service. However, the OPUC's concerns are more appropriately
addressed in other forums and, in any event, it is
questionable whether the OPUC would be the only, or even the
best, participant to raise these issues.
As described in more detail in section III.E below,
the Commission has no role in ratemaking. To the extent that
the OPUC wishes to protect Texas consumers from what it
believes will be detrimental effects on rates resulting from
the Transaction, it can do so -- and is doing so -- before the
PUCT, which is considering the very same Transaction and
issues. Neither hearing nor intervention is required here
with respect to rate concerns.
Reliability of electric service is within the
province of the FERC and applicable state commissions. The
<PAGE> 124
OPUC, among others, is participating in proceedings before the
FERC and the PUCT, which can and will address OPUC's
reliability arguments. No hearing by the Commission and no
intervention by the OPUC in this proceeding is required with
respect to reliability.
Finally, even if the Commission believes that some
aspects of some of the issues raised by the OPUC ought to be
considered, neither intervention nor a hearing is required.
The interests sought to be represented by the OPUC in this
proceeding are more appropriately and adequately represented
by the PUCT, the state regulatory body charged with protecting
the interests of ratepayers which has filed a notice of
appearance in this proceeding. Intervention by the OPUC will
add nothing except delay, duplication and waste. The
Commission should deny the OPUC's request for intervention.
III. THE ISSUES RAISED BY PETITIONERS ARE WITHOUT MERIT
AND DO NOT WARRANT A HEARING
Various Petitioners have requested an evidentiary
hearing.[9] Each and every request should be denied.
A. Standards For A Hearing
To justify a hearing, a party must show both a
genuine issue regarding a material fact and a useful purpose
to be served by holding a hearing. The burden is on the party
requesting a hearing to make such a showing; bare assertions
will not suffice, and a request for a hearing will not be
_____________
[9] See SPS at 72-73; Las Cruces at 28-30; OPUC at 14-16;
LPSC at 1, 6-7; APSC at 8, 10, 13, 17, 22-23.
<PAGE> 125
granted if no disputed material facts are set forth. See,
e.g., Centerior Energy Corp., 35 SEC Docket 769, 777-78 (1986)
(request for hearing denied for failure to set forth facts
making up a violation of the Act); Herring v. Securities and
Exchange Commission, 673 F.2d 1191, 1193 (11th Cir. 1982)
(evidentiary hearing "meaningless" in light of absence of
disputed facts). Here, the various Petitioners' requests for
a hearing should be denied because each has failed to meet
these two fundamental requirements. If no genuine issue of
material fact exists, the Commission need not conduct a
hearing. Entergy Corp., 55 SEC Docket 2035, 2050 & n.121
(1993) (citing City of New Orleans v. Securities and Exchange
Commission, 969 F.2d 1163, 1167 n.6 (D.C. Cir. 1992));
Wisconsin's Envtl. Decade, Inc. v. Securities and Exchange
Commission, 882 F.2d 523, 526 (D.C. Cir. 1989); Northeast
Utils., 48 SEC Docket 694, 698 (1991), aff'd sub nom. City of
Holyoke Gas & Elec. Dep't v. Securities and Exchange
Commission, 972 F.2d 358 (D.C. Cir. 1992); accord Cajun Elec.
Power Coop. v. FERC, No. 92-1461, 1994 U.S. App. LEXIS 17001
(D.C. Cir. July 12, 1994) (per curiam) (ordering hearing but
reiterating standards that hearing is required only where
there are genuine issues of material fact).
Likewise, speculative and conclusory allegations do
not rise to the level of genuine material issues and cannot
provide a basis for a hearing. Entergy Corp., 55 SEC Docket
at 2050; Woolen Mill Assocs. v. FERC, 917 F.2d 589, 592 (D.C.
Cir. 1990). An agency need not conduct a hearing unless doing
<PAGE> 126
so would serve a useful purpose. Connecticut Bankers Ass'n v.
Board of Governors of Fed. Reserve Sys., 627 F.2d 245, 250-51
(D.C. Cir. 1980); City of Lafayette v. Securities and Exchange
Commission, 454 F.2d 941, 953 (D.C. Cir. 1971) (hearing not
required in matter where ultimate decision would not be
"enhanced or assisted by the receipt of evidence"), aff'd sub
nom. Gulf States Utils. Co. v. Federal Power Comm'n, 411 U.S.
747 (1973). Even where issues of fact exist, a hearing will
not be granted unless the reviewing agency in its discretion
believes that it cannot adequately address the issues upon
written submissions. See, e.g., Cities of Carlisle & Neola v.
FERC, 741 F.2d 429, 431 (D.C. Cir. 1984); Boston Carrier, Inc.
v. ICC, 728 F.2d 1508, 1510-11 & n.5 (D.C. Cir. 1984).
Here, Petitioners requesting a hearing have raised
identical arguments before the FERC. These points are largely
operational and technical in nature and involve policy deci-
sions by the FERC. The resolution of such issues does not
require a hearing by the Commission. See Iroquois Gas
Transmission Sys., 52 FERC [paragraph] 61,091, at 61,368 (1990), aff'd
sub nom. Louisiana Ass'n of Indep. Producers & Royalty Owners
v. FERC, 958 F.2d 1101, 1113 (D.C. Cir. 1992) (per curiam).
Moreover, the duplicative nature of the requests here and at
the FERC is apparent. The Commission should defer to the FERC
in areas of the FERC's particular expertise. Entergy Corp.,
55 SEC Docket at 2041-42 & n.47; Northeast Utils., 48 SEC
Docket at 696-97; cf. Ohio Power Co. v. FERC, 744 F.2d 162,
166 (D.C. Cir. 1984).
<PAGE> 127
Regardless of whether or not they are being
addressed by the FERC, none of the issues raised by
Petitioners would merit an evidentiary hearing. The record
before the Commission is comprehensive and the Application is
legally supported both by Commission precedent and recent
regulatory policy changes.
Petitioners' arguments regarding integration are
premised on an overly restrictive interpretation of the
Commission's precedent and do not reflect present regulatory
policy. Their attack on Transaction benefits is speculative,
conjectural and myopic. CSW has shown and the Bankruptcy
Court has found substantial public benefit from the
Transaction's putting an end to EPE's bankruptcy -- benefit
Petitioners either ignore or refuse to see. CSW has also
fully supported the savings arising from the Transaction in
the non-fuel O&M, production (including the Palo Verde
reacquisition) and financial areas.
The record before the Commission also provides ample
support for the fairness of the consideration to be paid.
Petitioners' speculative concerns, including their vaguely
expressed doubts about CSW's ability to issue common stock or
the consequences of doing so, are an inappropriate basis for a
hearing.
The interests of consumers in paying lower rates,
cited by the OPUC and the APSC, are being addressed in other
regulatory proceedings. Therefore, they are not appropriately
addressed by the Commission, which in any event does not have
<PAGE> 128
ratemaking jurisdiction; much less are they the basis for a
Commission hearing.
Finally, the FERC has fully and adequately dealt
with the competition and antitrust issues, finding that all
such concerns will be mitigated as long as CSW, EPE and
certain of CSW's subsidiaries agree to open access transmis-
sion tariffs on a "comparable" basis. There is no need to
conduct a hearing on those issues or with regard to the size
of the combined CSW-EPE system.
B. The Commission Need Not Hold A Hearing To
Conclude That The CSW-EPE System Will Form
An "Integrated Public Utility System"
Within The Meaning Of Sections 2(a)(29)(A)
And 10(c)(2)
The Petitioners argue that the Transaction fails to
satisfy the Act's integration requirements.[10] Their argu-
ments are without merit and the Commission need not hold a
hearing to dispose of them.
The Act's integration requirements,[11] as applied
to electric utility companies, are set forth in section
_____________
[10] Arguments concerning the Transaction's failure to satisfy
the Act's integration requirements were made by OPUC at
11, 14; SPS at 9, 14-24; and APSC at 4-8, 10, 16.
[11] The Act's integration requirements are set forth in
sections 2(a) (29), 10(c) and 11(b) (1). 15 U.S.C. [sections]
79b(a) (29), 79j(c), 79k(b) (1) (1988 & Supps. IV 1992 &
V 1993). Section 10(c) states that the Commission shall
not approve an acquisition that is "detrimental to the
carrying out of the provisions of section [11]" (which
addresses the integration and simplification of holding
company systems). 15 U.S.C. [section] 79j(c) (1). In addition,
section 10(c) requires that the acquisition "serve the
public interest by tending towards the economical and
efficient development of an integrated public-utility
system." 15 U.S.C. [section] 79j(c) (2). See also Electric
Energy, Inc., 38 SEC 658, 664 (1958) (summarizing
integration standards under the Act).
<PAGE> 129
2(a)(29)(A) of the Act, which defines an "integrated public-
utility system" as
a system consisting of one or more units of
generating plants and/or transmission lines
and/or distributing facilities, whose utility
assets, whether owned by one or more electric
utility companies, are physically
interconnected or capable of physical
interconnection and which under normal
conditions may be economically operated as a
single interconnected and coordinated system
confined in its operations to a single area or
region, in one or more States, not so large as
to impair (considering the state of the art and
the area or region affected) the advantages of
localized management, efficient operation, and
the effectiveness of regulation.
15 U.S.C. [section] 79b(a)(29)(A) (1988) (emphasis added). Only two
Petitioners directly challenge the Transaction's ability to
meet the integration test, and they raise only three
grounds.[12] SPS addresses only the "interconnection" and
"single area or region" requirements, SPS at 14-26, while the
APSC argues that the CSW-EPE system would not satisfy the
Act's "coordinated system" requirement. APSC at 5-8. The
arguments of SPS and the APSC are without merit. In fact, the
Transaction satisfies the Act's integration requirements, and
_____________
[12] The OPUC's comments regarding integration merely state
that "SPS has vigorously protested" CSW's proposed
interconnections and that interconnection alternatives
will have a financial impact upon CSW. OPUC at 11, 14.
The OPUC's concerns regarding alternatives have been
mooted by the FERC's 211 Order, and form no basis for a
hearing. The APSC's comments regarding integration also
question the financial impact upon CSW of interconnecting
by means of FERC-approved transmission access across SPS.
APSC at 4-5. The financial impact upon CSW of
interconnecting across SPS is addressed in section III.C
below.
<PAGE> 130
the Commission should so conclude on the record before it,
without conducting a hearing.
1. CSW And EPE Meet The
Interconnection Requirements Of
The Act
CSW and EPE will be interconnected by means of the
SPS transmission system. Pursuant to section 211 of the FPA,
16 U.S.C. [section] 824j (1988 & Supps. IV 1992 & V 1993), the FERC
has already stated that it will require SPS to provide such
access, subject only to confirmation that doing so will not
unreasonably impact the reliability of SPS's system.[13]
Petitioners' arguments are therefore not properly addressed in
an evidentiary hearing.
_____________
[13] In its 211 Order, the FERC preliminary found that "a
final order requiring [SPS] to provide the transmission
service requested by the Applicants would comply with the
statutory standards, once reliability concerns have been
met." 211 Order at 21. The FERC's order rejected SPS's
assertions that the FERC has no authority under section
211 to order transmission service to allow coordination
of merging utilities' operations, and ordered SPS to
perform reliability studies. 211 Order at 26. On
October 11, 1994, SPS filed the results of its
reliability studies together with a report of its
planning engineering department. CSW and EPE have also
filed a report of their assessment of SPS' study results
and presenting the results of studies independently
conducted by CSW with the assistance of an expert
consultant. If, after reviewing the studies and comments
filed by SPS and CSW, the FERC concludes that reliability
will not be unreasonably impaired, the FERC will issue a
further order that requires CSW and SPS to negotiate the
rates, terms and conditions on which the requested
transmission service will be provided. 211 Order at 29.
<PAGE> 131
a. FERC-Approved Transmission Access Across
SPS's System Satisfies The Act's
Interconnection Requirement
The Commission has previously ruled that the
interconnection requirements of the Act may be satisfied by
FERC-approved transmission access or by a "contract path" over
the transmission lines of other utilities. See Northeast
Utils., 47 SEC Docket 1270, 1285 n.74 (1990) (Northeast's
acquisition of bankrupt utility satisfied integration
requirements in part through a "transmission agreement . . .
pending before FERC which, if approved, would also provide an
interconnection"); cf. American Natural Gas Co., 43 SEC 203,
205-06 (1966) (acquisition of gas utility approved based upon
proposed interconnection for which Federal Power Commission
approval would be sought). Such a contract path is analogous
to the transmission access available pursuant to section 211
which is also akin to the FERC-approved plan which met the
Act's integration requirements in Northeast Utilities.[14]
The Commission has also held that the Act's
interconnection requirements may be satisfied by a contract
path between merging systems over lines owned by other
utilities. E.g., New England Elec. Sys., 38 SEC 193, 198-99
(1958) (four indirectly connected systems integrated due to
_____________
[14] The FERC has rejected SPS's arguments questioning the
purpose of section 211, its alleged adverse effects upon
SPS or "wholesale power markets," and SPS's Fifth
Amendment arguments (SPS at 15-16). Moreover, subject to
the reliability studies, each of the issues raised by SPS
in the 211 proceeding has been decided by FERC adversely
to SPS. See 211 Order. See also section III.F.
<PAGE> 132
feasibility of direct interconnections, central coordination,
and transmission contracts with nonaffiliates); Cities Serv.
Power & Light Co., 14 SEC 28, 53 n.44 (1943) (interconnection
by means of "a transmission line which functions as an
important tie between the companies although it is owned, not
in the system, but by [a federal agency]"). By contracting
for transmission service provided by SPS pursuant to section
211, CSW and EPE will satisfy the requirements of section
2(a)(29)(A) of the Act.[15]
Contrary to SPS's assertion (SPS at 21), Northeast
Utilities, Centerior and other cases show that the Act's
physical interconnection standard may be satisfied by a right
to use transmission lines owned by another utility. See
Northeast Utils., 47 SEC Docket at 1285 (integration found on
the basis of this "right of use agreement" with a non-
affiliated utility); Centerior, 35 SEC Docket at 774-75
(interconnection requirement met by right to use transmission
line of non-affiliated utility to connect two service areas).
SPS attempts to distinguish Northeast Utilities by citing the
"tight" power pool and the settlement agreement in Northeast
Utilities as factors not present in this Application. SPS at
22-23. This attempt ignores other facts in Northeast
Utilities -- such as the presence of a contract path (after
all, the settlement agreement in Northeast Utilities was in
_____________
[15] The costs to CSW and EPE of transmission access across
SPS are addressed in section III.C.3 below and in Items
1.H and 3.I.B.1.a.i of the Application.
<PAGE> 133
effect a contract path) and the FERC's approval of a
transmission agreement. Those factors make the Commission's
approval in Northeast Utilities of the acquisition of a
bankrupt utility analogous to the approval requested in the
present Application.[16]
SPS also ignores the operating agreement between
CSW's four electric operating subsidiaries, which EPE will
join. This operating agreement offers the same advantages as
the "tight" power pool in Northeast Utilities or UNITIL Corp.,
51 SEC Docket 562 (1992), including "centralized dispatch and
. . . coordinated planning, construction, operation and
maintenance of generation and transmission facilities."
UNITIL, 51 SEC Docket at 565 (footnotes omitted). See also
section III.B.3 hereof.
Other historical and technological factors also
explain the Commission's reliance upon a "tight" power pool in
Northeast Utilities and UNITIL. As noted by SPS (SPS at 23-
24), the utilities in UNITIL are very small. Without a
"tight" power pool, the Commission would be justifiably
concerned about their ability to move power reliably. This
concern is not applicable within CSW's service territory, in
which larger generating units regularly transmit power over
_____________
[16] As noted below (in section III.C.1) in the discussion of
the bankruptcy-related benefits of the Transaction, the
Commission noted in a later proceeding in Northeast
Utilities that "a public utility's emergence from
bankruptcy reorganization is a benefit that, in itself,
may satisfy the standards of section 10(c)(2)."
Northeast Utils., 48 SEC Docket 694, 698 n.26 (1991)
(emphasis added).
<PAGE> 134
considerable distances. Moreover, Northeast Utilities and
UNITIL predate the passage of the Energy Policy Act and
therefore focus on the "tight" power pool rather than the more
open transmission access allowed recently under section 211.
Finally, despite SPS's arguments to the contrary
(SPS at 23-24), UNITIL also supports CSW's proposal to inte-
grate CSW and EPE by means of transmission access across SPS.
In UNITIL, the Commission found that three noncontiguous
electric distribution territories were sufficiently capable of
interconnection due to contractual rights to use a third-
party's transmission service, even though no particular lines
would transfer power among the companies. UNITIL, 51 SEC
Docket at 564-66. The description of the transmission
arrangements in UNITIL -- "power will be delivered through a
non-affiliate system and a transmission charge will be paid"
(id. at 566) -- is analogous to the transmission service
requested across SPS. Once again, as with Northeast
Utilities, SPS attempts to distinguish UNITIL by ignoring the
obvious similarities to the present Application.[17]
_____________
[17] In light of the FERC's 211 Order, it is unnecessary to
address SPS's assertion that CSW and EPE would have "no
basis . . . to even argue" that "the proposed system is
interconnected or capable of interconnection" if the FERC
denies CSW's section 211 request. SPS at 16. However,
it should be noted that even if transmission through SPS
were unavailable, the integration provisions of the Act
require only that CSW and EPE be "capable of physical
interconnection", a standard CSW and EPE could meet if it
ever became necessary to do so.
<PAGE> 135
b. Application Of The Act's Integration
Requirements Must Reflect Change In The
Law, Technology And The Industry
At the time of the Act's passage, electric utilities
supplied electricity to captive customers in a limited
geographical area. The Act reflected the industry limitations
of the day. In the 59 years since the Act was passed, the
traditional constraints have eroded due to competitive
pressure, technological change, and regulatory reform.
Economical power sales are now possible over long distances
through interconnected transmission grids.
Even before the Energy Policy Act was passed, the
Commission held that electric utility systems could be inte-
grated despite the necessity of transferring power over long
distances, over third-party lines, or without direct inter-
connections. E.g., UNITIL Corp., 51 SEC Docket 562 (1992)
(interconnection by contractual right to use third-party's
transmission even though no particular lines would transfer
power); Northeast Utils., 47 SEC Docket 1270 (1990) (inter-
connection by right to use third-party's transmission line);
Centerior Energy Corp., 35 SEC Docket 769 (1986) (inter-
connection by right to use transmission line of non-affiliated
utility to connect service areas fifty miles apart).
SPS refuses to recognize this fundamental shift in
policy, arguing for an unreasonably rigid interpretation of
the Act's integration requirements. The Commission has not
allowed the Act to be constrained by Depression-era policies.
Rather, Commission orders have evolved to reflect industry
<PAGE> 136
changes. For example, the Commission approved a transaction
in 1978 (which it had rejected in 1946) because of the
industry's changing "state of the art":
Section 2(a)(29)(A) requires that a
determination as to whether or not a system is
too large be made upon consideration of "the
state of the art." In the years since World
War II, there have been important changes in
the technology of electric generation and
distribution . . . [including] a tremendous
increase in the capacity of individual
generating units . . . [and the ability] to
transmit electricity economically and
efficiently over greater distances. . . .
[T]he concept of self-contained, local utility
systems in each community has become
technologically obsolete. . . . [N]ow there
are technological justifications for large
systems spanning many states.
American Elec. Power Co., 46 SEC 1299, 1309-10 (1978)
(citation omitted) (holding company's acquisition of operating
company approved, given present state of the art, despite
combined system's large size and Commission's disapproval of
identical transaction in 1946); cf. American Gas & Elec. Co.,
22 SEC 808 (1946) (disapproving same transaction). In other
cases, the Commission has noted the need for flexibility in
applying the Act's integration requirement:
We think it clear from the language of Section
2(a)(29)(A) . . . that Congress did not intend to
impose rigid concepts but instead expressly included
flexible considerations in that it provided that
capability of interconnection as well as existing
physical interconnection could satisfy the statutory
standards . . . .
Mississippi Valley Generating Co., 36 SEC 159, 186 (1955)
(acquisition of electric utility outside acquirors' service
areas approved). The Commission recently repeated this
<PAGE> 137
principle in UNITIL (citing Mississippi), and went on to say
that "the Commission has considered advances in technology and
the particular operating circumstances in applying the
integration standards." UNITIL, 51 SEC Docket at 566.
c. TUEC Raises No Genuine Issues Relating
To The Integration Of CSW And EPE
TUEC raises no substantive issues regarding
integration, but asserts that it should be granted intervenor
status since its interconnections with the CSW operating
companies would be used to integrate the operations of EPE
with the existing CSW system in the event FERC issues an order
under section 211 of the Federal Power Act. TUEC at 7-8. If
the FERC refuses to issue an order under section 211,
according to TUEC, it "will need the rights of a full party to
ensure that the public interest will be served and that the
operation and reliability of its transmission system and the
ERCOT grid will not be adversely impacted by this proceeding."
TUEC at 8. TUEC, however, makes no attempt to demonstrate
that the Transaction would have any adverse operational or
reliability impacts (or, as discussed above, how its
participation as a full party would add anything to the
Commission's deliberations in this proceeding). Moreover, any
concerns that TUEC may have about the operational and
reliability impacts of the merger are more appropriately
addressed in the proceedings pending before the FERC, the
agency with particular expertise in those matters.
<PAGE> 138
2. CSW And EPE Meet The "Single
Area Or Region" Requirements Of
The Act
Despite SPS's characterizations (SPS at 17-24), CSW
and EPE are within a "single area or region" and therefore
satisfy this requirement of the Act. The "single area or
region" requirement does not mandate a small service
territory. American Electric Power Company, a holding company
registered under the Act, has an electric service territory
spanning seven states. Another registered electric system,
the Southern Company system, spans five states; and the
Columbia system, a registered gas system, spans five states.
As a matter of law, the service territories of CSW and EPE are
well within Commission precedent regarding the "single area or
region" standard. In evaluating whether the "single area or
region" requirement is met, the Commission has considered not
only size and distance, but also "the existing state of the
arts of generating and transmission and the demonstrated
economic advantages of the proposed arrangement." Connecticut
Yankee Atomic Power Co., 41 SEC 705, 710 (1963); Vermont
Yankee Nuclear Power Corp., 43 SEC 693, 697-98 (1968), rev'd
on other grounds sub nom. Municipal Elec. Ass'n of
Massachusetts v. Securities and Exchange Commission, 413 F.2d
1052 (D.C. Cir. 1969); cf. Electric Energy, Inc., 38 SEC 658,
668-72 (1958) (utility assets were within the "same area or
region" as the acquiror's service area despite a distance of
up to 100 miles crossing two states).
<PAGE> 139
Moreover, in this circumstance, as in Environmental
Action, Inc. v. Securities and Exchange Commission, 895 F.2d
1255, 1265 (9th Cir. 1990), a large portion of EPE's retail
service market is within the same state -- and therefore
"within the same region" -- as "a large portion" of CSW's
"retail service market." The remainder of EPE's retail
service market is in an adjacent portion of a contiguous
state. Given the present technological ability to transmit
power, CSW and EPE have met the Act's requirement for a
"single area or region."
SPS cites Northeast Utilities and UNITIL for the
proposition that "`a third party cannot be relied upon to
integrate two distant utilities.'" SPS at 18 (quoting
Northeast Utils., 47 SEC Docket at 1284 n.75, and citing
UNITIL, 51 SEC Docket at 566 n.30). These cases predate the
passage of the Energy Policy Act and therefore do not reflect
current policy favoring enhanced transmission access.
SPS also mischaracterizes the Act's policy against
"distant" utilities. The Act's clear purpose was to
reorganize unwieldy corporate structures containing "[w]hole
strings of companies with no particular relation to, and often
essentially unconnected with, units in an existing system."
S. Rep. No. 621, 74th Cong., 1st Sess. 56 (1935) (Report of
National Power Policy Committee on Public-Utility Holding
Companies). A House of Representatives report noted:
[S]ection 11(b) . . . contemplates the reestab-
lishment of the advantages of localized manage-
ment in the operating utility industry and the
consequently necessary breakdown of the control
of large holding companies over geographically
scattered operating utility companies.
<PAGE> 140
H.R. Rep. No. 1903, 74th Cong., 1st Sess. 70 (1935). Clearly,
the Act's policy against "distant" utilities arises from
concerns about "localized management," a requirement of
section 2(a)(29)(A) which, significantly, none of the
Petitioners has raised as an issue. In essence, this policy
addresses the fear that electricity nationwide was under the
control of a "few financial centers."[18] S. Rep. No. 621,
74th Cong., 1st Sess. 3 (1935) (President's Message to Con-
gress). The early application of the Act confirms this
interpretation. In North American Co., 11 SEC 194 (1942), the
Commission dismantled a holding company system containing
eighty companies with electric utility operations scattered
nationwide across ten states and the District of Columbia.
North American Co., 11 SEC at 200.[19] The CSW-EPE
combination is unlike the scattered disconnected empires to
which the Commission addressed its policy against "distant"
utilities.
Further, in asserting Northeast Utilities' purported
limitation against third parties integrating "distant"
utilities, SPS quotes selectively from note 75 of Northeast
_____________
[18] The passage states: "[w]e should take the control and the
benefits of the essentially local operating utility industry
out of a few financial centers and give back that control
and those benefits to the localities which produce the
business and create the wealth." S. Rep. No. 621, 74th
Cong., 1st Sess. 3 (1935).
[19] See also Burco, Inc. v. Whitworth, 81 F.2d 721, 724 (4th
Cir.) (public utility holding company cannot retain "seven
separate purely intra-state systems"), cert. denied, 297
U.S. 724 (1936); Cities Serv. Power & Light Co., 14 SEC 28,
31 (1943) (section 11 divestiture proceeding for holding
company with electric utility operations spanning fourteen
states nationwide and Canada).
<PAGE> 141
Utilities and omits stating that the same note not only cites
Centerior[20] with approval but also supports the Commission's
holding that the "combined Northeast-PSNH system" -- a system
requiring the "use of a third party" to interconnect -- "meets
the integration requirements of section 11(b)(1)." Northeast
Utils., 47 SEC Docket at 1285 & n.75.
SPS's citation to American Electric Power is
similarly misleading. SPS at 20. Although American Electric
Power states that the "framers of the Act were clearly
concerned about the evils of bigness,"[21] it balances this
concern in the following sentence not quoted by SPS:
On the other hand, they were also aware that
the combination of isolated local utilities
into an integrated system afforded
opportunities for economies of scale, the
elimination of duplicate facilities and
activities, the sharing of production capacity
and reserves and generally more efficient
operations.
American Elec. Power, 46 SEC at 1309. As described in the
Application, the Transaction offers economies and efficiencies
_____________
[20] Even before the adoption of the Energy Policy Act and the
expansion of FERC wheeling authority under section 211,
the Commission in Centerior approved an acquisition even
though the two utilities' service areas were fifty miles
apart and were separated by a third utility. Centerior,
35 SEC Docket at 774-75. SPS's attempts to distinguish
Centerior (SPS at 21-22) fall short. The merging
utilities in Centerior integrated through transmission
access across a non-affiliated utility by means of a
power pool agreement binding upon all three utilities.
Similarly, this Transaction will integrate CSW and EPE
across SPS by means of a FERC-approved wheeling order and
agreement binding on all three parties, a proposed order
regarding which has already been issued. See 211 Order.
[21] Petitioners' arguments regarding the size of the CSW-EPE
system are addressed below in section III.F.2.
<PAGE> 142
as great as those described above in American Electric Power.
Further, as stated above in section III.B.1.b, American
Electric Power notes that the changing "state of the art" must
be considered when determining whether a system is too large
to meet the integration standards of section 2(a)(29)(A). 46
SEC at 1309-10. As discussed in the Application (e.g.,
Application Item 3.I.B.1.a.ii), CSW and EPE will employ the
present state of the art to integrate the systems.
SPS argues that, by virtue of the Transaction, CSW
will gain control of all transmission gateways that SPS and
others must use to gain access to the Northern Mexican market,
as well as transmission facilities spanning three power grids.
Therefore, SPS asserts, "the proposed [transmission] system
cannot be considered to be confined to a single region as
required by the Act." SPS at 19-20. This is a non sequitur.
SPS makes no attempt to explain how control over inter-
connected transmission facilities, whether located within one
or more grids, has any bearing on the integration requirements
under the Act. Moreover, SPS's gratuitous argument about
control over transmission gateways into Mexico has nothing to
do with the integration requirements. Similarly, SPS's
argument that CSW will usurp SPS's transmission capacity in
violation of the integration requirements of the Act (SPS at
20) is not an argument about integration at all, but just
<PAGE> 143
another attempt by a spurned suitor to raise the issue it has
raised unsuccessfully at the FERC.[22]
3. CSW And EPE Meet The
"Coordinated System" Requirement
Of The Act
Section 2(a)(29)(A) of the Act states that an
integrated system "under normal conditions may be economically
operated as a single interconnected and coordinated system."
15 U.S.C. [section] 79b(a)(29)(A). SPS argues that the Transaction
will not result in a single integrated public utility system
since CSW's ERCOT operating companies, as well as EPE, are
interconnected asynchronously with the CSW operating companies
located within the Southwest Power Pool. SPS at 14-15. As
SPS acknowledges, however, CSW presented this fact to the FERC
in the context of whether a single-system transmission rate
would be appropriate for the entire CSW system, post-
Transaction. This is an entirely separate issue from whether
the CSW system is "integrated" within the meaning of the Act.
In any event, the FERC has determined that "[t]he fact that El
Paso and the other CSW affiliates are located in asynchronous
_____________
[22] SPS bleats about "indentured servitude" and a "taking"
with respect to its transmission facilities. E.g., SPS
at 21. The FERC's 211 Order implicitly rejects these
arguments. SPS's continued whining ignores the FERC's
role in such matters and has nothing to do with the
integration requirements of the Act. The FERC will
assure that SPS is properly compensated. SPS is
therefore without basis to complain of the purported
imposition of "perpetual nonconsensual indentured
servitude by another utility." Id. In addition, SPS may
commence a proceeding before the FERC if SPS believes
that the ultimate order on CSW-EPE's section 211
application does not justly compensate it for the use of
its transmission system. See, e.g., Indiana Mich. Power
Co., 64 FERC [paragraph] 61,184 (1993).
<PAGE> 144
electrical regions is not a deterrent to the integration of
the CSW system." 203 Order at 56.
The APSC tries a different tack. It asserts that
the post-Transaction CSW-EPE system will not be sufficiently
"coordinat[ed]" to satisfy the Act (APSC at 5-8).[23] CSW
agrees that integration requires "not only interconnection,
but also coordination." APSC at 5. Contrary to the APSC's
contentions, however, the CSW-EPE system will meet the
"coordination" requirements of section 2(a)(29)(A).
The coordination requirement was recently addressed
in UNITIL. In that case, the Commission concluded that the
merged system was sufficiently coordinated by means of factors
which will also be present in the CSW-EPE system,
specifically, "centralized dispatch and . . . [the]
coordinated planning, construction, operation and maintenance
of generation and transmission facilities." UNITIL, 51 SEC
Docket at 565 (footnotes omitted).[24] In its analysis of the
_____________
[23] SPS does not apparently question CSW's and EPE's post-
Transaction coordination but instead challenges certain
"production economies" arising from this coordination.
SPS at 24-25. This and other arguments regarding cost
savings are addressed below in section III.C.
[24] See also Electric Energy, Inc., 38 SEC 658, 670-71 (1958)
(acquired company satisfies "coordinated system" standard
if its "generation, transmission and distribution"
functions can be efficiently coordinated with the
existing system through communications equipment, joint
dispatch and joint planning). SPS emphasizes that,
unlike UNITIL, CSW and EPE are not within a "tight" power
pool. SPS at 23 & n.6. That is beside the point,
however. As noted in section III.B.1.a, the post-
Transaction CSW-EPE system will have the same advantages
UNITIL lists as arising from "tight" power pools.
<PAGE> 145
coordination requirement, the UNITIL decision places
particular emphasis on the importance of centralized dispatch:
Section 2(a)(29) further requires that the
utility . . . be "economically operated as a
single interconnected and coordinated system."
The Commission has interpreted this language to
refer to the physical operation of utility
assets as a system in which . . . the genera-
tion and/or flow of current within the system
may be centrally controlled and allocated as
need or economy directs.
UNITIL, 51 SEC Docket at 566 (footnote omitted).[25] The
Commission's emphasis on centralized dispatch is also
reflected in other decisions. In those decisions the
Commission has relied on the presence of centralized dispatch
to conclude that a system is sufficiently "coordinated,"
regardless of whether dispatch was centralized by means of a
power pool,[26] an operating or other agreement,[27] power
_____________
[25] This passage from UNITIL also stresses the need for
"flexible considerations" in applying the Act's
integration requirements. UNITIL, 51 SEC Docket at 566.
See also section III.B.1.b.
[26] E.g., Northeast Utils., 47 SEC Docket at 1286 n.85
("[T]he operation of the generating and transmission
facilities . . . is coordinated and centrally dispatched
[through a power pool]."); Electric Energy, 38 SEC at
670-71 ("generation, transmission and distribution" are
coordinated through communications equipment, joint
dispatch and joint planning).
[27] E.g., Sierra Pac. Resources, 40 SEC Docket 103, 110
(1988) ("Under such operating arrangement, which is an
integrated and coordinated operation, the [new generating
unit] will automatically respond to load changes and
other occurrences on [the acquiror subsidiary]'s
system."), aff'd sub nom. Environmental Action, Inc. v.
Securities and Exchange Commission, 895 F.2d 1255 (9th
Cir. 1990); Eastern Utils. Assocs., 31 SEC 329, 348
(1950) (power is "coordinated under a power agreement and
with a single load dispatching office").
<PAGE> 146
contracts with non-affiliated companies,[28] or evidence of
joint control and planning.[29] As discussed in Item
3.I.B.1.a.ii of the Application, CSW and EPE will be centrally
dispatched in a manner analogous to that described in UNITIL.
The APSC's citation to North American Co. is
misplaced and its attempt to analogize the post-Transaction
CSW-EPE system to an "ordinary buyer-seller relationship"[30]
lacking sufficient "coordination" under the Act (APSC at 6)
misses the mark. The central dispatch for CSW and EPE makes
_____________
[28] New England Elec. Sys., 38 SEC at 198-99 (four small
indirectly connected systems integrated in part due to
power and transmission contracts with nonaffiliates).
[29] New England Elec. Sys., 38 SEC at 198-99 ("Construction
of new generation, transmission and other facilities is
planned . . . [for] the system as a whole as well as of
the constituent company. . . . Daily coordination of the
power supply for the system is controlled by a central
system dispatcher . . . who schedules and controls,
principally through automatic electronic equipment, the
use of the important generating units in the system. He
also arranges the daily purchases and sales with
neighboring companies. The supplying of power for the
[isolated] areas, which are not directly connected with
the system's high voltage transmission lines, is . . .
coordinated with that of the system. . . . [W]e find
that the electric utility assets . . . may be
economically operated as a coordinated system."); Middle
South Utils., Inc., 35 SEC 1, 10 (1953) ("We have also
considered the high degree of coordination which, in
part, appears to be due to common control, leading in
turn to common planning development."); Standard Power &
Light Corp., 9 SEC 862, 871 (1941) ("The electric utility
assets . . . function as a single system. The output of
its generating stations is coordinated in a single load
dispatching office.").
[30] Actually, North American Co.'s "buyer-seller relationship"
language addresses non-utility businesses rather than
"coordination" of an integrated system. North American
Co., 28 SEC 742, 752-56 (1948), cited in APSC at 6.
<PAGE> 147
them unlike ordinary buyers and sellers.[31] This central
dispatch meets the standards set forth in North American Co.
that the "`generation and/or flow of current within the
system'" will be "`centrally controlled and allocated as need
or economy directs.'" APSC at 5 (quoting North American Co.,
11 SEC at 242). In contrast to North American Co.,[32] CSW
has specific dispatching plans to centralize control over the
routing of power within the CSW-EPE system. See Application
Item 3.I.B.1.a.ii. These plans are hardly "[v]ague
expectations of future coordination" of the type described in
North American Co.[33] (APSC at 5 (citing North American Co.,
_____________
[31] The APSC is also incorrect when it says the cost savings
arising from the Transaction are "existing efficiencies
available in the market" (APSC at 6). The production and
financial cost savings and other benefits of
consolidation (as described below in section III.C and in
Item 1.H of the Application) are not available in the
market.
[32] In North American Co., the Commission could not find that
"isolated territories" could be "operated in conjunction
with the remainder of the system [so] that central
control is available for the routing of . . . the
system." North American Co., 11 SEC at 242.
[33] In finding that the system in North American Co. failed
to meet the "coordinated system" requirement, the
Commission noted that:
There has been no attempt to show that the
. . . properties are at present operated as a
"coordinated" system, or that such operation
under "normal" conditions is possible. . . .
[Normal conditions] does not refer to
conditions which might occur in the remote
future, and whose occurrence has not been
foreshadowed by any facts shown in the record.
North American Co., 11 SEC at 243.
<PAGE> 148
11 SEC at 243)), but rather are well-defined and will be
implemented as soon as the Transaction closes.
C. The Commission Need Not Hold A Hearing To
Conclude That The Proposed Acquisition
Will Tend Toward The "Economical And
Efficient Development" Of An Integrated
Public Utility System
Four Petitioners question the cost savings and other
benefits of the Transaction.[34] Their arguments are without
merit and do not warrant a hearing. Petitioners minimize or
ignore one of the principal benefits of the Transaction: the
end of EPE's bankruptcy, a benefit which the Commission has
said can, by itself, satisfy the requirements of section
10(c)(2) of the Act. Northeast Utils., 48 SEC Docket at 698
n.26.
The Transaction will also produce other substantial
benefits in addition to the undisputed public benefits. The
Petitioners' unsupported assertions to the contrary do not
preclude the Commission from determining that the Transaction
is in the public interest. CSW has adequately demonstrated
that the Transaction will produce total net benefits of $420
million during the initial ten years of post-Transaction
operations (1995-2004). See Application Item 1.H and exhibits
cited therein. Post-Transaction operations are expected to
generate $234 million in non-fuel O&M savings, $152 million in
financial savings, and $34 million in production and
_____________
[34] Arguments which generally question cost savings or
Transaction benefits are made by the OPUC at 8-9, 12; SPS
at 24-26; the LPSC at 2-6; and the APSC at 6-7, 9-15.
<PAGE> 149
transmission savings. Id. CSW's estimate of the savings it
and its customers will enjoy as a result of the Transaction
were carefully developed, based on objective and verifiable
data, using appropriate tools and assistance from expert
consultants.
Each of the assumptions on which the estimates are
based is conservative, and the methodologies used are entirely
reasonable. Accordingly, the speculative and unsupported
assertions made by those challenging the savings estimates
provide no basis upon which to hold an evidentiary hearing.
Moreover, since the FERC has already ordered a hearing on the
costs and benefits of the Transaction, (203 Order at 38-41),
there is no need for the Commission to hold a hearing on the
same issue.
1. Bankruptcy-Related Benefits
Petitioners urge the Commission to ignore the
benefit of EPE's emergence from bankruptcy, simply because the
Bankruptcy Court confirmed the reorganization plan over the
objection of the OPUC and certain other Petitioners. This
astonishing argument ignores Commission precedent, the strong
public interest in the rehabilitation of a financially
troubled public utility and the numerous benefits to the
public, investors and consumers that will flow from EPE's
emergence from bankruptcy. As set forth in CSW's amended and
restated Application:
[E]nding the bankruptcy proceedings . . . will
provide substantial immediate benefits to all EPE
stakeholders and ratepayers and to the citizens and
<PAGE> 150
States of Texas and New Mexico. Among other things,
the bankruptcy proceedings and related litigation
have resulted in substantial direct costs to the EPE
estate. These costs are expected to total between
$65 million and $75 million (assuming that the
Transaction is consummated and EPE emerges from
bankruptcy on June 30, 1995. In addition, the
bankruptcy has:
* diverted EPE's resources away from the
operation of its business;
* created uncertainty for investors and customers
and impaired their ability to make long-term
plans; and
* exacerbated the uncertainty hanging over EPE's
service territory and the business plans and
economic development efforts of the businesses
and communities served by EPE.
Application Item 1.H. The Transaction will create a
financially viable EPE with an investment-grade credit rating.
This will reopen EPE's access to the capital markets and
reduce EPE's costs of capital. As a result of the
Transaction, EPE will become part of a financially secure
system and will become a more reliable and stable corporation.
These benefits cannot be achieved by other means.
EPE was unable to implement a viable stand-alone plan of
reorganization within any predictable period of time despite
protracted attempts to do so. No other acquisition proposal
obtained the support of creditors and interest holders whose
support is necessary for EPE to emerge from bankruptcy, and no
other alternative offers the overall benefits provided by the
Transaction proposed herein.
As the Commission held just three years ago, "a
public utility's emergence from bankruptcy reorganization is a
<PAGE> 151
benefit that, in itself, may satisfy the standards of section
10(c)(2)." Northeast Utils., 48 SEC Docket at 698 n.26
(emphasis added). See also Middle West Corp., 1 SEC 514, 516
(1936) (reorganized utility better able to serve the public).
Cf. Utilities Power & Light Corp., 4 SEC 131, 138 (1938)
(facilitates reorganization of the parent of a public
utility); Peoples Light & Power Co., 2 SEC 829, 835 (1937)
(substitution of a solvent company for an insolvent company).
Similarly, the FERC has found under the Federal
Power Act that "emergence from bankruptcy is a distinct
benefit. . . . [The debtor's] recovery is entitled to
substantial weight in the consideration of the acquisition's
consistency with the public interest." Northeast Utils. Serv.
Co., 53 FERC [paragraph] 63,020, at 65,212 (1990), aff'd in part, 56
FERC [paragraph] 61,269 (1991), modified on reh'g, 58 FERC [paragraph] 61,070
(1992), aff'd in part sub nom. Northeast Utils. Serv. Co. v.
FERC, 993 F.2d 937, 946 (1st Cir. 1993). The FERC reaffirmed
this view in its recent order concerning the Transaction. 203
Order at 39-40.
Moreover, the Bankruptcy Court held that the
Transaction "resolves the claims and interests of creditors
and shareholders in a manner which is fair to each of
them . . . and, in addition, provides the ratepayers with
significant benefits." Findings of Fact [paragraph] 17. The resolution
of the bankruptcy is therefore in the public interest and the
interests of consumers and investors -- the interests
specially protected by the Act.
<PAGE> 152
2. Petitioners Have Failed To Raise Any Material
Issues Of Fact That Require A Hearing
Petitioners' submissions are rife with speculation
that cannot support their request for a hearing. OPUC's own
choice of words shows that it is engaged in pure speculation.
OPUC states that "[i]t is possible that depressed returns for
EPEC could raise the cost of capital for CSW's other electric
utility subsidiaries." OPUC at 7 (emphasis added). This
Commission is not required to hold a hearing on every
speculative possibility, let alone to deny or condition its
approval of the Transaction on such a basis.
Many of Petitioners' other issues, in addition to
being too weak on the merits to warrant serious consideration,
are simply not appropriate for a hearing. For example, the
OPUC complains that the estimated cost savings resulting from
the Transaction were presented in nominal dollars, rather than
on a net present value basis. OPUC at 8-9. As a result, the
OPUC argues, a further examination of the Transaction cost
savings is required. However, there is no requirement that
the estimated cost savings be presented on a present value
basis. Moreover, calculating the net present value of the
Transaction savings is a simple mathematical exercise that can
be done without an evidentiary hearing. A hearing would add
nothing to that process. In fact, SPS, using an 8.0% discount
rate, calculates that the net present value of the benefits is
approximately $282 million. SPS at 25-26. SPS's arithmetic
<PAGE> 153
is either right or wrong. To determine which, the Commission
needs a calculator, not a hearing.
3. CSW Has Established That Significant Production
Cost Savings Will Result From The Transaction
Various Petitioners challenge CSW's production cost
savings estimates.[35] However, each of these challenges is
speculative and unsupported. For example, SPS claims that
"EPEC likely will lose load," and therefore have no need for
any additional capacity for the years 2000 through 2004. SPS
at 27. In support of its contentions, SPS contends that the
City of Las Cruces is planning to operate a municipally-owned
electric utility and expects that SPS would be its supplier of
wholesale power. Id. at 27-28. SPS also cites the possible
loss of certain military bases as customers of EPE.
These claims establish no basis for a hearing. As
set forth in CSW's Current Report on Form 8-K dated September
14, 1994, EPE has stated that it will continue to provide
electric service within Las Cruces, and that before Las Cruces
could terminate electric service from EPE, a number of legal
matters would need to be resolved. EPE 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. With regard to the military bases, EPE has filed
suit to prevent the Holloman base from entering into power
supply arrangements with another supplier, and the issue is
being litigated in the U.S. District Court for the District of
_____________
[35] See SPS at 9, 26-35; APSC at 7-9; LPSC at 4-5.
<PAGE> 154
New Mexico. In any event, CSW has advised EPE that it will
not close the Transaction unless these matters are resolved in
a favorable and timely manner. There is therefore no issue
for this Commission to determine.
SPS argues that CSW does not adequately explain or
support the assumption that the cost of transmission over the
SPS system, which will be needed to achieve the fuel-related
savings, will be approximately $27 million over ten years.[36]
SPS at 32. In fact, SPS is the one who has failed to support
its position.
CSW's estimate is based on SPS's embedded costs as
reported in its 1992 FERC Form 1, to which CSW added $3.1
million, which represented CSW's estimate of the cost of
internal system improvements that SPS would have to make in
order to provide bi-directional firm wheeling beginning in
1999 and non-firm wheeling before that time. SPS has failed
to provide any evidence that CSW's projected cost of
transmission over the SPS system is unreasonable. In
addition, while the precise rate for the transmission service
will be determined by the FERC, no Petitioner has proffered
evidence demonstrating that the cost of such service will be
greater than the expected production cost savings.
_____________
[36] CSW has since refined this assumption and now estimates
that transmission access will cost approximately $1.5
million annually for the 1995-1998 period and $3.0
million annually for the 1999-2004 period. Application
Item 3.I.B.1.a.i.
<PAGE> 155
4. CSW's Financial Savings Are Fully Supported
SPS and the APSC quibble with the financial savings
from the Transaction.[37] Their arguments should be rejected.
CSW's financial savings are fully supported.
SPS and the APSC fault CSW for not quantifying any
potential negative cost of capital impacts of the Transaction
on the existing CSW operating companies. SPS at 37-38; APSC
at 11. However, Dr. Samuel C. Hadaway, the expert retained by
CSW to perform cost of capital studies, has reasonably
concluded that the financial savings from the Transaction will
be between $70 million and $152 million.[38] No Petitioner
has seriously and credibly questioned his conclusions, and
thus no hearing on this issue is required. Moreover, given
the conservative assumptions adopted by Dr. Hadaway, CSW
reasonably believes that the high end of the range will be
achieved.
5. CSW's Non-Fuel O&M Savings Are Fully Supported
Various Petitioners argue that CSW's non-fuel O&M
savings are speculative and unsupported. E.g., SPS at 41.
SPS challenges CSW's estimate of the number of employee posi-
tions that will be eliminated as a result of the Transaction.
SPS's argument is without merit. CSW's projection that it can
achieve a reduction of approximately 250 positions in three
_____________
[37] SPS at 10, 36-39, 41-46; APSC at 9-10.
[38] See direct testimony of Samuel C. Hadaway before the
FERC, dated January 1994, in Docket No. EC94-7-000, Ex.
APP-56, and the exhibits and workpapers thereto, included
in Ex. D-3 and Ex. D-3.12 to the Application ("Hadaway
Testimony").
<PAGE> 156
years is based on the experience of other merging utilities,
the judgment of EPE and CSW senior management, and an
assessment of the actual 1992 turnover ratios for EPE and for
CSW's four operating companies. No Petitioner has seriously
and credibly challenged CSW's projections, or proffered any
evidence that would warrant a hearing on this issue.
6. The "Reacquisition" Of The Palo Verde Nuclear
Generating Units Will Provide Significant Cost
Savings Over The Remaining Life Of The Assets
SPS and OPUC question the wisdom of reacquiring the
Palo Verde Assets by terminating the sale/leaseback transac-
tions.[39] These objections are without merit, and the
Commission need not hold a hearing to conclude that such
reacquisition will provide significant cost savings.
SPS asserts that the Commission should investigate
whether the repurchase of the previously leased portions of
Palo Verde "is favorable." SPS at 40. However, SPS provides
no analysis supporting its request for an investigation, or
any other evidence that would undermine the conclusions of the
Bankruptcy Court regarding the appropriateness of
reacquisition or refute the testimony of CSW's expert witness
that the present value of the savings from the repurchase is
in the range of $28.7 million to $69.2 million. See Hadaway
Testimony at 39 (Ex. D-3 to Application, Vol. 4 of 4).
Accordingly, no hearing is necessary with respect to this
issue.
_____________
[39] Arguments concerning the reacquisition of Palo Verde were
made by OPUC at 8 and by SPS at 39-41.
<PAGE> 157
These Petitioners, moreover, ask and answer the
wrong question by focusing on this aspect of the Transaction
in isolation. The "acquisition" involves no change in the
extent of EPE's utilization of the Palo Verde Assets, the
percentage of costs that EPE is to bear, or the percentage of
capacity it is entitled to receive. In reality, the Palo
Verde "acquisition" is a litigation settlement and an integral
part of the overall reorganization of EPE. The question is
therefore not the wisdom of an acquisition in isolation, but
rather, the wisdom of a litigation settlement which resolves a
potentially massive litigation liability on favorable
terms.[40] As to the right question, Petitioners raise no
issue warranting a hearing. Moreover, the Bankruptcy Court
has already addressed and decided the wisdom of the Palo Verde
settlements and has determined that they are fully justified.
In its confirmation order, the Bankruptcy Court
found that, "[i]n the context of the Plan and the overall
benefits it provides, there was no practical or better
alternative to this restructuring." Findings of Fact [paragraph] 18(c).
The Bankruptcy Court stated that the Palo Verde settlements
constitute "a fair and equitable resolution and a reasonable
and sensible settlement by [EPE] and the Palo Verde Indenture
_____________
[40] The settlement calls for total payments of $956.9 million
on account of the Palo Verde claims. Of this amount, the
Bankruptcy Court has determined that $351.9 million is
attributable to lease rejection damages; the remaining
$605 million is reflective of the fair market value,
based on the regulatory book value as of June 30, 1993,
of the assets which are being reacquired. Findings of
Fact [paragraph] 18 (f).
<PAGE> 158
Trustees of the respective rights of the parties [and] is
within the reasonable range of litigation possibilities."
Findings of Fact [paragraph] 18(g). Among other things, the Bankruptcy
Court found that:
* the Palo Verde litigation "could not have been
settled for a materially lower amount to obtain a
consensual plan";
* the settlement "represents a significant reduction
in the potential Claims of [the Palo Verde]
Bondholders";
* "there are . . . theories on which damages might
have been considerably greater";
* "[l]itigation of the issues, given the amounts
involved in this case and the importance of the
issues, would be extensive and expensive, and likely
involve multiple appeals";
* "continued litigation of [claims relating to Palo
Verde] would have precluded [EPE] from entering into
a favorable merger agreement that resolves this
proceeding"; and
* "[u]nder all the circumstances, it would not have
been appropriate for EPE to continue to litigate."
Findings of Fact [paragraph] 18(d)-(g). Without the settlements, EPE
would have been committed to years of expensive and uncertain
litigation. By settling, the value of the leased Palo Verde
Assets is preserved instead of dissipated in litigation.
Petitioners have raised no issues that would justify the
Commission's second-guessing the findings of the Bankruptcy
Court, and certainly nothing that warrants a hearing.
In addition to these significant benefits, the
reacquisition of the leased Palo Verde Assets is also
projected to result in lower long-term rates than if EPE
continued to lease the Palo Verde Assets. CSW performed
<PAGE> 159
economic analyses which compared the total net present worth
revenue requirements for the reacquisition of the Leased Palo
Verde Assets to rejection of the leases, payment of damages
and installation of alternative generation (gas, coal or
gas/coal combination). CSW determined that reacquisition of
the leased Palo Verde Assets would result in lower net present
worth revenue requirements -- i.e. lower rates -- for EPE's
customers than rejection of the leases, payment of damages and
installation of alternative generation.[41] In any event,
FERC has already set for hearing, among other issues, the
question whether reacquisition of the Palo Verde Assets will
result in cost savings over the remaining life of the assets.
Therefore, there is no need for this Commission to address
that issue.
Recently, CSW has advised EPE of certain concerns
relating to tube cracking at the Palo Verde facility. While
these concerns must be satisfactorily resolved before a
closing of the Transaction can occur, they present nothing for
this Commission to review, much less a basis for a hearing.
_____________
[41] Moreover, the reacquisition of the leased Palo Verde
Assets does not substantially increase EPE's liability
exposure in respect of Palo Verde because, under the
terms of the leases, EPE is responsible for substantially
the same share of O&M, decommissioning and other costs as
it will bear as owner of the Palo Verde Assets under the
proposed reacquisition. EPE is responsible for 15.8% of
the aggregate decommissioning costs for Palo Verde, or
approximately $220 million. As of May 31, 1994, EPE had
already contributed a total of $17,734,979 to Palo
Verde's six decommissioning funds.
<PAGE> 160
D. The Commission Need Not Hold A Hearing To
Conclude That The Proposed Consideration
Is Reasonable Under Section 10(b)(2) Of
The Act
Several Petitioners argue that the consideration to
be paid is not fair, either in general[42] or because CSW's
plan to pay EPE's creditors in CSW stock may, they say, have a
negative effect on CSW's operating companies and cost of
capital.[43] None of these arguments has merit. The record
before the Commission fully supports a conclusion that the
consideration is fair and that CSW's proposed methods of
payment are appropriate.
Section 10(b)(2) of the Act states that the
Commission shall approve an acquisition unless the considera-
tion to be paid, including all fees, commissions and other
remuneration, "is not reasonable or does not bear a fair rela-
tion to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying
the securities to be acquired." 15 U.S.C. [section] 79j(b)(2) (1988).
The consideration to be paid by CSW meets this standard. As
set forth in Items 1.D and 3.I.A.2 of the Application, the
_____________
[42] Arguments under [section] 10(b) (2) concerning the fairness of
consideration paid are made by: OPUC at 5-6; and SPS at
66-69.
[43] Arguments under [sections] 6, 7 and 10(b) (3) concerning the
issuance of stock and its effect upon CSW's operating
companies and cost of capital are made by: OPUC at 7-8;
and SPS at 69-72.
<PAGE> 161
total consideration payable by CSW and EPE will be
approximately $2.1 billion.[44]
SPS and the OPUC have questioned the reasonableness
of the consideration to be paid by CSW and EPE. OPUC at 5-6;
SPS at 66-69. The OPUC argues that the Application "does not
constitute substantial evidence to satisfy" this requirement
of the Act because: (1) "there is reason to question" assump-
tions based upon the interpretation of the PUCT's orders and
likelihood of certain rate-related action by the PUCT; and (2)
certain purported deficiencies allegedly lurk in the
procedures followed by Morgan Stanley & Co. Incorporated
("Morgan Stanley") in producing its fairness opinion. OPUC at
6. SPS questions certain assumptions and risks underlying
financial projections and notes that the consideration to be
paid depends upon fluctuating market conditions and the
results of certain "fiercely contested" state regulatory
proceedings.[45] SPS at 66-69.
All of these concerns are speculative and do not
raise a serious factual issue necessitating a hearing, partic-
ularly in light of the extensive record on the reasonableness
_____________
[44] This amount is subject to certain exclusions and
contingencies described in greater detail in Item 3.I.A.2
of the Application. This consideration will be paid by
EPE after the effective date of the Transaction in the
form of new EPE securities and by CSW in the form of new
shares of CSW common stock or cash or both.
[45] SPS also argues that ratepayers "were not represented in
any of the negotiations concerning the plan," (SPS at
69), but, as described below in Section III.E, these
ratepayer considerations are being addressed in state
regulatory proceedings.
<PAGE> 162
of the consideration already before the Commission on this
Application. This record includes: (1) an opinion by Morgan
Stanley that the consideration to be paid to the creditors and
equity holders of EPE is fair from a financial point of view
to the holders of CSW Common Stock (Ex. J-1 to the
Application); (2) an opinion of Barr Devlin & Co.,
Incorporated stating that, as of the date of such opinion and
based upon certain procedures and assumptions, the
consideration to be paid to the holders of EPE Common Stock is
fair to the holders of EPE Common Stock from a financial point
of view (Ex. J-2 to the Application); and (3) a plan of
reorganization approved by EPE creditors and shareholders and
the Bankruptcy Court.[46] In addition, the consideration was
arrived at after nearly two years of Bankruptcy Court
proceedings, competitive arm's-length negotiations between CSW
and EPE's creditors, and a bid by SPS. Application Items 1.A,
1.C; Findings of Fact [paragraph] 18(b) (Ex. D-14 to Application). The
ample record before the Commission provides compelling support
for the reasonableness of the consideration and is more than
_____________
[46] By confirming the plan of reorganization, the Bankruptcy
Court implicitly found under 11 U.S.C. [sections] 1129 that
"[c]onfirmation . . . is not likely to be followed by the
liquidation, or the need for further financial
reorganization, of the debtor or any successor to the
debtor." Findings of Fact [paragraph] 31. Implicit in this
finding is a determination that the debt portion of the
capital structure of EPE after reorganization is
reasonable and bears a fair relation to the earning
capacity of its underlying utility assets. This in turn
supports the reasonableness of the Transaction's
consideration.
<PAGE> 163
sufficient for the Commission to conclude that section
10(b)(2) of the Act has been satisfied.
Neither SPS nor the OPUC has raised a genuine issue
of material fact that would warrant an evidentiary hearing.
Instead, both have merely set forth speculative concerns that
might affect the consideration and now presumably request a
hearing to explore these conjectures. SPS at 68-69, 72-73;
OPUC at 14-15. Neither SPS nor the OPUC has explained how a
hearing on this issue would enhance the Commission's ability
to make an ultimate decision on this Application. Such a
showing -- or lack thereof -- does not justify commitment of
the Commission's scarce resources to a purposeless hearing.
SPS's objections to the amount of consideration are
particularly disingenuous, since SPS itself offered to pay
approximately the same amount for EPE. SPS's comparable
valuation of EPE belies its objections and provides compelling
support for the reasonableness of the consideration to be paid
by CSW.
The reasonableness of the consideration is further
supported by the analysis performed by Morgan Stanley in
connection with its fairness opinion. In rendering that
opinion, Morgan Stanley analyzed a number of factors directly
relevant to fairness of the consideration and its relation to
the earning power of the assets of EPE, including the pro
forma impact of the Transaction on CSW's earnings per share,
consolidated capitalization and financial ratios.
<PAGE> 164
In addition, the Bankruptcy Court's findings contain
an implicit determination that the new capital structure of
EPE bears a fair relation to the earning power of the assets
of EPE. Under section 1129 of the Bankruptcy Code, the
Bankruptcy Court may confirm a plan of reorganization only if
"[c]onfirmation of the plan is not likely to be followed by
the liquidation, or the need for further financial
reorganization, of the debtor or any successor to the debtor
under the plan." In paragraph 31 of its Findings of Fact with
respect to the Plan, the Bankruptcy Court so found.
Finally, the Merger Agreement contains a number of
closing conditions which help ensure the continued
reasonableness of the consideration. Under section 8.3(f) of
the Merger Agreement, it is a condition to CSW's obligation to
consummate the Transaction 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."[47] In addition,
under section 8.2(c) of the Merger Agreement, the obligations
of each party to effect the Transaction 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 EPE after the
_____________
[47] The Merger Agreement defines an "EPE Material Adverse
Effect" as "a material adverse effect on the business,
operations, franchises, properties, assets, condition
(financial or other) or results of operations" of EPE.
<PAGE> 165
consummation of the Transaction. Other closing conditions
ensure that the Transaction will not be consummated in the
event of onerous or burdensome regulatory orders or
conditions.
E. The Ratepayer Considerations Raised By The
OPUC And APSC Do Not Merit A Hearing By
The Commission
The OPUC and the APSC argue that the Transaction is
detrimental to ratepayers for reasons which are inapplicable
to the Commission's consideration of this Application.[48]
The ratepayer considerations cited by the OPUC and the APSC --
such as rate paths, pricing, transmission costs, etc. -- are
not matters within the Commission's power to prescribe under
the Act. Instead, these considerations are appropriately
addressed (and presently being addressed) by the FERC or under
state law in state regulatory proceedings.[49]
The OPUC asserts that EPE's bankruptcy proceedings
excluded ratepayer considerations and that "no ratepayer
representative or regulatory entity" voted in the bankruptcy
proceedings for the rate path upon which the Transaction
depends. OPUC at 9. Yet the next page of the OPUC's petition
states that "[t]his rate path is now at issue before the
PUCT." OPUC at 10. Indeed, EPE applied to the PUCT for
_____________
[48] Arguments concerning benefits to or considerations for
ratepayers made by OPUC at 9-13 and by APSC at 11-15.
[49] The OPUC and APSC are participating in Transaction-
related proceedings before the FERC. In addition, the
OPUC is participating in Transaction-related proceedings
before the PUCT.
<PAGE> 166
approval of the rate path, thereby placing the rate path "at
issue." The PUCT is well able to address ratepayer concerns
in that proceeding. The OPUC is participating in the PUCT
proceedings and has contested the rate path in those more
appropriate forums. Although the OPUC raises several issues
regarding the rate path, it does not explain how these issues
relate to any interest protected by the Act, and therefore
these issues should not be addressed by the Commission in
considering the Application. Instead, these issues are more
appropriately addressed by the FERC or the PUCT.
Similarly, the remaining ratepayer issues raised by
the OPUC -- issues regarding the impact upon ratepayers of
changes in capacity, transmission upgrades, pricing and
reliability (OPUC at 11-13) -- and the issues raised by the
APSC regarding the impact upon ratepayers of cost allocation
formulas or CSW's cost of equity (APSC at 11-15), are more
appropriately addressed by the FERC or in state proceedings.
To the extent these issues touch upon Transaction savings,
they are addressed above in section III.C.
F. No Commission Hearing Is Required To
Review The Competitive Or Antitrust
Consequences Of The Transaction Or The
Size Of The Combined System
Four Petitioners argue that the Transaction will be
anti-competitive or violate antitrust principles, or that the
resulting CSW-EPE system will be too large.[50] Anti-
_____________
[50] Arguments concerning antitrust, size and competition-
related issues made by: OPUC at 5; SPS at 7, 20, 46-47,
50-66; Las Cruces at 2-4, 5-14, 16-27; and APSC at 17.
<PAGE> 167
competitive concerns have been addressed by the FERC in its
203 Order, and will be subject to review by the Antitrust
Division of the Department of Justice and the Federal Trade
Commission under the Hart-Scott-Rodino pre-merger notification
procedures and by the Nuclear Regulatory Commission in its
review of the proposed Transaction. The Commission should
defer to the FERC and other agencies on this issue. With
regard to the size of the CSW-EPE system, none of the
Petitioners has raised a cogent objection using criteria
recognized under section 2(a)(29)(A) of the Act -- effect on
localized management, effectiveness of regulation and
efficiency of operation. Their arguments are therefore
without merit, and the Transaction should be approved without
delay or a hearing.
1. No Commission Hearing Is Required To Review The
Competitive Or Antitrust Consequences Of The
Transaction
Section 10(b)(1) of the Act, 15 U.S.C. [section] 79j(b)(1),
provides that the Commission may not approve a transaction
that "will tend towards . . . the concentration of control of
public-utility companies, of a kind or to an extent detri-
mental to the public interest or the interest of investors or
consumers." In making such a determination, the Commission
must draw upon federal antitrust policies. See Municipal
Elec. Ass'n v. Securities and Exchange Commission, 413 F.2d
1052, 1056-57 (D.C. Cir. 1969).
The antitrust issues raised by Petitioners are
carbon-copies of objections which have already been fully
<PAGE> 168
aired before, and decided by, the FERC. As a result, no
hearing before the Commission is required. The Commission is
entitled to defer to those proceedings.
a. Petitioners' Contentions
SPS argues that the Transaction will foreclose it
from use of EPE's transmission facilities and that the merged
company will have the ability to exercise monopsony power.
SPS at 50-66. This argument focuses largely on the so-called
Eddy County Tie, a HVDC tie with a capacity of 200 MW near
Artesia, New Mexico, which is jointly owned by EPE and Texas-
New Mexico Power. SPS claims that after the Transaction CSW
and EPE will reserve the Eddy County Tie capacity for
themselves, including capacity that SPS currently uses for its
sales to EPE for resale to Mexico, and that SPS's exclusion
from this capacity will prevent it from gaining access to a
transmission path for serving wholesale customers.
To similar effect are the objections of Las Cruces,
a city currently served at retail by EPE. Las Cruces is
investigating the feasibility of establishing a municipally-
owned electric utility. (See discussion of Las Cruces in
section III.C.3 above.) Las Cruces argues that the
Transaction will enable the combined CSW-EPE system to achieve
monopoly power in the market for transmission services and
will result in denying Las Cruces access to an "essential
facility." Las Cruces at 16-28.
The OPUC raises only amorphous concerns about
"regional market dominance" and the prospect of fewer market
<PAGE> 169
options for wholesale purchasers. OPUC at 5. In the absence
of any details, the objections seem to mirror those of other
Petitioners.
b. CSW's Responses
These varied objections have been fully addressed in
the FERC proceedings. See Answer of El Paso Electric Company
and Central and South West Services, Inc. to Motions to
Intervene, at 16 et seq. (Ex. D-3.48 to Application). In
response to SPS's argument that the Transaction will diminish
competition, CSW and EPE pointed out that, in the past, CSW
and EPE have not competed in the provision of transmission
services or in the sale of power because, in the past, SPS,
which lies between them, has steadfastly refused to allow
transmission over its lines. Thus, the Transaction will not
eliminate any pre-existing competition between CSW and EPE or
otherwise deprive bulk-power market participants of an
alternative choice of power suppliers or transmission services
formerly available to them.
As to the Eddy County Tie issue, CSW and EPE pointed
out that the Transaction will not enable EPE to gain control
over the Tie and that SPS will not be denied use of the Eddy
County Tie. In any event, CSW and EPE have agreed, subject to
certain conditions including the preservation of
administrative and judicial review rights, to offer comparable
transmission services to third-party utilities and other
wholesale suppliers. Thus the Transaction will enhance other
utilities' ability to compete in the wholesale market.
<PAGE> 170
With respect to Las Cruces' varied objections, CSW
and EPE pointed out that these claims, although they are
cloaked in the guise of antitrust claims, did not satisfy even
the minimal requirements of pleading in the federal courts.
No support was adduced for the proposition that EPE's
transmission system was an "essential facility" or that the
Transaction would affect Las Cruces' access to the Eddy County
Tie. Indeed, the Transaction would enhance Las Cruces' access
to eligible electric utilities.
c. The FERC's Decision
The FERC issued the 203 Order after fully
considering the submissions of the intervenors (the
Petitioners here) as well as those of CSW and EPE. In the 203
Order, the FERC found that any potential anticompetitive
effects of the Transaction would be adequately mitigated if
"comparable transmission services" were offered over the
transmission facilities of EPE and those of CSW that are
operated in the Southwest Power Pool. On August 10, 1994, CSW
and EPE informed the FERC that, subject to reservation of
their rights, including their rights to seek rehearing of the
order and judicial review, they would accept as a condition to
the FERC's approval of the Transaction a requirement that such
transmission services be offered to other electric utilities.
Hence, the only competition issues remaining to be decided are
those relating to the terms on which transmission service must
be provided in order to mitigate any potential for
anticompetitive effects posed by the Transaction. Those
<PAGE> 171
matters will be decided by the FERC, the agency having
expertise with regard to them.
d. Commission Deference To The FERC
In short, the issues raised by Petitioners in this
proceeding have been addressed by the FERC in accordance with
well-established antitrust principles. These same principles
necessarily guide the Commission in its deliberations. See
Municipal Elec. Ass'n, 413 F.2d at 1056-57. Under such
circumstances, a hearing before the Commission would be
duplicative and a waste of administrative resources. As the
Commission has previously recognized, it is appropriate to
defer to the FERC in crafting conditions designed to regulate
post-merger conduct:
Because the [Federal Power Act] is directed at
operational issues, including transmission access
and bulk power supply, the expertise and technical
ability for resolving the types of anticompetitive
issues raised . . . lie principally with the FERC.
When the [Securities and Exchange] Commission, in
determining whether there is an undue concentration
of control, identifies such issues, we can look to
the FERC's expertise for an appropriate resolution
of these issues.
Northeast Utils., 48 SEC Docket at 697. To coordinate with
the FERC in that case, the Commission conditioned its approval
of the Northeast transaction upon issuance of a final order by
the FERC. The court of appeals sustained the Commission in
Holyoke Gas, 972 F.2d at 363-64, holding that "when the
[Commission] and another regulatory agency both have
jurisdiction over a particular transaction, the [Commission]
may `watchfully defer[]' to the proceedings held before -- and
<PAGE> 172
the result reached by -- that other agency" (citing
Wisconsin's Envtl. Decade, 882 F.2d at 527).
Accordingly, any hearing before the Commission on
competition-related issues in this proceeding would be
wasteful, unnecessary and inappropriate. The Commission is
entitled to defer to the FERC in the resolution of those
issues and in the promulgation of conditions designed to
safeguard competition in the market.
Las Cruces' other antitrust argument, based on
"monopoly leveraging," is defective on its face; the provision
of power to the population of Las Cruces is a matter of state
law with which federal regulation should not interfere.
At the heart of Petitioners' objections is access to
transmission affording competitive alternatives. The FERC has
decided those issues. The Commission need not engage in any
further examination of the antitrust or competitive issues.
2. No Hearing Is Required To Review The Size Of
The Proposed Entity
The Petitioners make references to the size of the
post-Transaction CSW-EPE system. E.g., OPUC at 5; SPS at 20-
21; cf. APSC at 17. However, under section 2(a)(29)(A), the
dispositive consideration in evaluating the size of a system
is not size alone or size in an absolute sense, either big or
small, but size in relation to its effect, if any, on
localized management, efficient operation and effective
regulation. Size is not to be considered abstractly or
mechanistically, on the basis of preconceived notions of
<PAGE> 173
"appropriate" size limitations. Rather, the express terms of
section 2(a)(29)(A) mandate a flexible test based on the
specific facts and circumstances at hand. To this end, the
Act requires that the Commission assess the size of a proposed
system with reference both to the impact on localized
management, efficient operation, and the effectiveness of
regulation and to the state of the art and the area or region
affected.
Commission decisions construing section 2(a)(29)(A)
firmly establish that sheer size is not dispositive, that the
Commission must take into account all relevant circumstances,
and that it must "exercise its best judgment as to the maximum
size of a holding company in a particular area, considering
the state of the art and the area or region affected."
Entergy Corp., 55 SEC Docket 2035, 2040 (1993); Northeast
Utils., 47 SEC Docket at 1281; Centerior, 35 SEC Docket at 771
(determination regarding enlargement of a system should be on
the basis of all the circumstances, and not on the basis of
size alone); American Elec. Power, 46 SEC at 1309-10.
Petitioners make no analysis of the effect of the
Transaction on localized management, effectiveness of
regulation and efficiency of operation (except to the extent
the APSC's argument regarding a "coordinated system," disposed
of in section III.B.3 above, touches upon "efficiency of
operation"). In contrast, these issues are discussed in
considerable detail in the Application. Petitioners' silence
on these issues, and their failure to address the plain
<PAGE> 174
language of section 2(a)(29)(A), are a telling concession that
there is no genuine basis for objection under section
2(a)(29)(A). Further, even on the basis of absolute size, the
post-Transaction CSW-EPE system is smaller by a variety of
measures than three other registered public utility holding
companies, including the neighboring Entergy system, and a
number of other regional utilities. See Application Item
3.I.A.1.b.
IV. THE COMMISSION IS NOT REQUIRED TO AND SHOULD NOT
POSTPONE CONSIDERATION OF THE APPLICATION
SPS and the APSC request that the Commission post-
pone its consideration of the Application until after the FERC
has ruled upon related pending proceedings. SPS further
requests that the Commission defer consideration until after
certain other regulatory actions have been taken.[51]
Postponement of consideration by the Commission will
certainly result in delay, substantial added expense and
uncertainty in the Transaction. Each month of delay adds
several million dollars to the parties' costs and delays the
realization of the savings and benefits that will flow from
the Transaction. For EPE alone, the direct out-of-pocket
costs of the EPE bankruptcy will total between $65 million and
$75 million by June 30, 1995. Delay in the resolution of the
EPE bankruptcy proceedings will compound these already
enormous costs. These costs will ultimately be borne by
_____________
[51] SPS argues for postponement at SPS 4, 17, 73-75; APSC
does so at 21-22.
<PAGE> 175
investors or consumers or both -- the very classes that the
Commission is charged with protecting under the Act.
In addition to the direct out-of-pocket costs, a
prolongation of the EPE bankruptcy will exacerbate the
uncertainty hanging over EPE's service territory and the
business plans and economic development efforts of the
businesses and communities served by EPE. The paralysis of
bankruptcy drastically curtails EPE's ability to respond to
the challenges -- and to take advantage of the opportunities -
- - created by the new, more competitive utility environment
arising from the Energy Policy Act and other recent regulatory
initiatives. The longer EPE languishes in bankruptcy, the
more unlikely its ultimate recovery will become. Needless
delay will also cause considerable harm to CSW and its
shareholders by unnecessarily increasing CSW's Transaction-
related expenses.
Finally, an extended delay would reward the dilatory
tactics of SPS, a spurned suitor seeking an opportunity to
scuttle the Transaction, whatever the cost to consumers,
investors and the public interest. The Commission should not
permit SPS to abuse the process, and should act promptly to
approve the Transaction, subject, if necessary, to a final
order from the FERC.
V. CONCLUSION
Based on the foregoing, the Commission should
approve the Application. There is no necessity for the
<PAGE> 176
Commission to hold a hearing to consider the Application.
Further, SPS, TUEC and OPUC should not be permitted to
participate as full parties. Finally, there is no need for
the Commission to postpone its consideration until the FERC
and the various state regulators have acted.
WHEREFORE, CSW requests that the Commission deny
full party status to SPS, TUEC and OPUC, consider the
Application without a hearing and without postponement, and
promptly approve the Transaction.
Dated: October 21, 1994
Respectfully submitted,
/s/ Joris M. Hogan
Joris M. Hogan
Joseph S. Genova
Rodrigo J. Howard
MILBANK, TWEED, HADLEY & McCLOY
One Chase Manhattan Plaza
New York, NY 10005
(212) 530-5000
Attorneys for Central and
South West Corporation
<PAGE> 1
INDEX OF EXHIBITS
The number in parentheses after each exhibit description refers to
the number of the amendment to this Application-Declaration with which
that exhibit was filed (exhibit descriptions followed by "(0)" were filed
with the original Form U-1 Application-Declaration).
In accordance with Rule 202 of Regulation S-T, exhibits denoted by
an asterisk (*) are being filed in paper pursuant to a continuing
hardship exemption.
EXHIBIT TRANSMISSION
NUMBER EXHIBIT METHOD
- ------- ------- ------------
A-1 Second Restated Certificate of
Incorporation of CSW (incorporated by
reference to CSW's Annual Report on
Form 10-K for the year ended December 31,
1992 (Exhibit H-1 hereto)) (0) By Reference
A-2 By-Laws of CSW (incorporated by reference
to CSW's Annual Report on Form 10-K for
the year ended December 31, 1992 (Exhibit
H-1 hereto)) (0) By Reference
A-3 Articles of Incorporation of EPE (0) Electronic
A-4 By-Laws of EPE (0) Electronic
A-5 Form of Articles of Incorporation of CSW
Sub (to be filed by amendment) ---
A-6 Form of By-Laws of CSW Sub (to be filed
by amendment) ---
A-7 Form of Amended and Restated Articles of
Incorporation of Reorganized EPE
(including Statement of Resolution
Establishing Series of Shares) (0) Electronic
A-8 Form of By-Laws of Reorganized EPE (0) Electronic
A-9 Form of Articles of Merger (0) Electronic
A-10 Form of CSW Common Stock Certificate (0) Electronic
A-11 Form of CSW Sub Common Stock Certificate
(to be filed by amendment) ---
A-12 Form of Reorganized EPE Preferred Stock
Certificate (to be filed by amendment) ---
A-13 Form of Reorganized EPE First Mortgage
Bond Indenture, including forms of
bonds (to be filed by amendment) (1) Electronic
<PAGE>
A-14 Form of Reorganized EPE Second
Mortgage Bond Indenture, including
forms of bonds (to be filed by
amendment) (1) Electronic
A-15 Form of Reorganized EPE Senior Debt
Securities Indenture, including forms
of notes (to be added by amendment) (1) Electronic
A-16 Form of Reorganized EPE Term Loan
Agreement for Class 3A Secured
Floating Rate Notes (including form
of note) (0) Electronic
A-17 Forms of Reorganized EPE Term Loan
Agreement for Class 5A Secured
Floating Rate Notes (including forms
of note) (0) Electronic
A-18 Form of Reorganized EPE Term Loan
Agreement for Class 6A Secured
Floating Rate Notes (including form
of note) (0) Electronic
A-19 Form of Reorganized EPE Term Loan
Agreement for Class 13 Senior
Floating Rate Notes (including
form of note) (0) Electronic
A-20 Forms of Reorganized EPE Letter of
Credit and Reimbursement
Agreements (1) Electronic
A-21 Summary of Variances from Statement
of Policy Regarding First Mortgage
Bonds Subject to the Public Utility
Holding Company Act of 1935 (0) Electronic
A-22 Summary of Variances from Statement
of Policy Regarding Preferred Stock
Subject to the Public Utility Holding
Company Act of 1935 (0) Electronic
B-1 CSW-EPE Merger Agreement (0) Electronic
B-2 EPE Modified Third Amended Plan
of Reorganization (0) Electronic
<PAGE>
B-3 Disclosure Statement to EPE Modified
Third Amended Plan of Reorganization
(without exhibits) (0) Electronic
B-4 CSW System Operating Agreement (0) Electronic
B-5 Form of CSW System-EPE Operating
Agreement (0) Electronic
B-6 CSW System Service Agreement (0) Electronic
B-7 CSWS-EPE Service Agreement (to be
filed by amendment) ---
B-8 OP Settlement Agreement (0) Electronic
B-9 APS Settlement Agreement (0) ---
B-9.1 Supplement to APS Settlement
Agreement (1) Electronic
D-1 Application to the PUCT (2) P*
D-1.1 Presiding Officer's Order No. 1:
Suspension Order and Notice of
Consolidated Prehearing Conference
(1/12/94) (4) P*
D-1.2 Order No. 2: Rescheduling
Prehearing Conference (1/14/94) (4) P*
D-1.3 Order No. 3: Granting Motion to
Extend (1/31/94) (4) P*
D-1.4 Order No. 4: Prehearing Order,
Notice of Hearing on the Merits,
Consolidation of Dockets (2/02/94) (4) P*
D-1.5 Order No. 5: Order Denying Motion
to Reconsider (2/04/94) (4) P*
D-1.6 Order No. 6: Suspending Deadline
for Filing Motion for material
Deficiencies (2/07/94) (4) P*
D-1.7 Order No. 7: Extending Time for
Filing Motion to Compel; Revenue
Requirement Phase (2/07/94) (4) P*
<PAGE>
D-1.8 Errata Filing, Docket Nos. 12700 &
12701 (2/15/94) (4) P*
D-1.9 Order No. 8: Protective Order (2/16/94) (4) P*
D-1.10 Order No. 9: Scheduling Prehearing
Conference (2/17/94) (4) P*
D-1.11 Order No. 10: Regarding Regional
Hearing (2/18/94) (4) P*
D-1.12 Order No. 11: Rescheduling Time of
Prehearing and Adding Topic to be
Discussed (2/23/94) (4) P*
D-1.13 Order No. 12: Ruling on OPC's Motion
to Compel EPEC and CSW to Respond to
OPC's Third Request for Information
(3/01/94) (4) P*
D-1.14 Order No. 13: Memorializing Prehearing
Order (3/07/94) (4) P*
D-1.15 Order No. 14: Notice of Regional
Hearing, and Procedure for Consolidating
Appeals from City Ratemaking Ordinances
(3/14/94) (4) P*
D-1.16 Order No. 15: Ordering the Companies
to File and Index (3/23/94)(4) P*
D-1.17 Summary of Merger Benefits P*
D-2 Application to the NMPUC (to be filed
by amendment) ---
D-2.1 New Mexico Public Utility Commission
Procedural Order (5) P*
D-2.2 New Mexico Public Utility Commission
Order Amending Procedural Schedule
(7/13/94) (6) P*
D-2.3 New Mexico Public Utility Commission
Order Requiring Pre-Hearing Briefs and
Supplemental Testimony (7/28/94) (6) P*
<PAGE>
D-2.4 New Mexico Public Utility Commission
Order Amending Procedural Schedule
(8/08/94) (6) P*
D-2.5 New Mexico Public Utility Commission
Order Amending Procedural Schedule (6) P*
D-3 Section 203 Application to the FERC (2) P*
D-3.1 Federal Energy Regulatory Commission
Notice of Filing (1/13/94) (4) P*
D-3.2 El Paso Electric Company and Central
and South West Services, Inc. Supplemental
Filing to Exhibit G and Workpapers for
George R. Hall (1/13/94) (4) P*
D-3.3 Texas Office of Public Utility Counsel,
Public Utility Commission of Texas,
Attorney General of the State of New
Mexico, Louisiana Public Service
Commission, and City of Las Cruces
Motion for an Extension of Time to
File Protests and Interventions and
Request for Expedited Action on this
Motion (1/18/94) (4) P*
D-3.4 Southwestern Public Service Company
Motion for an Extension of Time
(1/18/94) (4) P*
D-3.5 Arkansas Public Service Commission
Response in Support of Motion for an
Extension of Time to File Protests
and Interventions (1/19/94) (4) P*
D-3.6 Arkansas Public Service Commission
Notice of Intervention (1/19/94 (4) P*
D-3.7 Federal Energy Regulatory Commission
Notice of Filing (1/21/94) (4) P*
D-3.8 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motions for Extension of Time
(1/21/94) (4) P*
<PAGE>
D-3.9 Louisiana Public Service Commission
Notice of Intervention (1/27/94) (4) P*
D-3.10 Federal Energy Regulatory Commission
Notice of Extension of Time (1/28/94)
(4) P*
D-3.11 New Mexico Industrial Energy Consumers
Motion for Leave to Intervene (2/01/94)
(4) P*
D-3.12 El Paso Electric Company and Central
and South West Services, Inc. Filing
to Provide Workpapers for Applicants'
Witnesses: Samuel C. Hadaway, David
A. Harrell, and James A. Bruggeman
(2/03/94) (4) P*
D-3.13 New Mexico Public Utility Commission
Notice of Intervention (2/08/94) (4) P*
D-3.14 City of El Paso, Texas Notice of
Intervention and Motion to Intervene
(2/15/94) (4) P*
D-3.15 Texas-New Mexico Power Company Motion
to Intervene (2/17/94) (4) P*
D-3.16 Salt River Project Agricultural
Improvement and Power District
Motion to Intervene (2/22/94) (4) P*
D-3.17 Arizona Public Service Company
Motion to Intervene (2/22/94) (4) P*
D-3.18 Southern California Public Power
Authority Motion for Leave to
Intervene (2/22/94) (4) P*
D-3.19 Dona Ana County, New Mexico Motion
to Intervene (2/23/94) (4) P*
D-3.20 Louisiana Public Service Commission
Protest, Request for Hearing, Motion
for Consolidation (2/24/94) (4) P*
D-3.21 Texas Utilities Electric Company
Motion to Intervene (2/24/94) (4) P*
<PAGE>
D-3.22 Public Utility Commission of Texas
Notice of Intervention, Protest,
Motion for Consolidation, and Request
for Hearing (2/24/94) (4) P*
D-3.23 Arkansas Public Service Commission
Protest and Request for Hearing
(2/24/94) (4) P*
D-3.24 New Mexico Attorney General Motion to
Intervene and Protest (2/24/94) (4) P*
D-3.25 Tucson Electric Power Company Motion
to Intervene (2/24/94) (4) P*
D-3.26 Southern California Edison Company
Motion for Leave to Intervene (2/24/94) (4) P*
D-3.27 Texas Office of Public Utility Counsel
Motion to Intervene, Motion for
Consolidation, Protest, and Request
for Hearing (2/25/94) (4) P*
D-3.28 Houston Lighting & Power Company
Motion to Intervene (2/25/94) (4) P*
D-3.29 Imperial Irrigation District Motion to
Intervene (2/25/94) (4) P*
D-3.30 Entergy Service, Inc. Motion to
Intervene (2/25/94) (4) P*
D-3.31 Cajun Electric Power Cooperative,
Inc. Motion to Intervene, Protest,
and Request for Hearing (2/25/94) (4) P*
D-3.32 TDU Customers Joint and Several
Motion to Intervene and Request that
the Commission Initiate Hearing
Procedures of Certain Transmission
Dependent Customers on the Central
and South West Corporation and
Southwestern Public Service Company
Systems (2/25/94) (4) P*
D-3.33 Northeast Texas Electric Cooperative,
Inc. Motion to Intervene (2/25/94) (4) P*
<PAGE>
D-3.34 Tex-La Electric Cooperative of Texas,
Inc. Motion to Intervene (2/25/94) (4) P*
D-3.35 Oklahoma Corporation Commission
Notice of Intervention (2/25/94) (4) P*
D-3.36 Plains Electric Generation and
Transmission Cooperative, Inc.
Motion to Intervene, Protest and
Request for Hearing (2/25/94) (4) P*
D-3.37 Public Service Company of New
Mexico Protest, Motion for Leave
to Intervene, Request for Hearing,
and Motion to Consolidate FERC
Docket No. TX94-2-000 with this
Proceeding (2/25/94) (4) P*
D-3.38 Southwestern Public Service Company
Motion to Intervene, Protest, Motion
to Consolidate, and Request for
Hearing (2/25/94) (4) P*
D-3.39 City of Las Cruces, New Mexico Motion
to Intervene and Protest (2/25/94) (4) P*
D-3.40 Public Service Company of New Mexico
Motion for Leave to File One Day Out
of Time (2/28/94) (4) P*
D-3.41 El Paso Electric Company and Central
and South West Services, Inc. Response
to Notice of Intervention of the New
Mexico Public Utility Commission
(3/01/94) (4) P*
D-3.42 Southwestern Public Service Company
Answer to Applicants' Motion for an
Extension of Time to Answer
(3/02/94) (4) P*
D-3.43 Arkansas Public Service Commission
Response in Opposition to Motion for
Extension of Time to Answer, Motion
to Intervene (3/03/94) (4) P*
<PAGE>
D-3.44 Public Utilities Board, City of
Brownsville, Texas Motion to Intervene,
Protest, and Answer (3/04/94) (4) P*
D-3.45 American Forest and Paper Association
Motion to Intervene and Protest and
Motion to Consolidate (3/07/94) (4) P*
D-3.46 Federal Energy Regulatory Commission
Notice of Extension of Time (3/08/94)
(4) P*
D-3.47 El Paso Electric Company and Central
and South West Services, Inc.
Supplemental Filing to Exhibit G
(3/21/94) (4) P*
D-3.48 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motions to Intervene (3/21/94) (4) P*
D-3.49 New Mexico Public Utility Commission
Reply to Applicants' Response
(3/30/94) (5) P*
D-3.50 American Forest and Paper Association
Reply to the Improper Answer of
Applicants (4/01/94) (5) P*
D-3.51 Public Utility Commission of Texas
Response to Answer of Applicants
Motions to Intervene (4/04/94) (5) P*
D-3.52 City of Las Cruces Motion to Reply
and Answer to Applicants' Answer to
Interventions (4/05/94) (5) P*
D-3.53 Public Service Company of New Mexico
Motion for Leave to File Response and
Response to Applicants' Answer
(4/05/94) (5) P*
D-3.54 Southwestern Public Service Company
Answer in Opposition to Applicants'
Request for Leave to Respond to Protests
(4/05/94) (5) P*
<PAGE>
D-3.55 El Paso Electric Company and Central
and South West Services, Inc. Response
to Answers by Certain Intervenors to
Applicants' Answer filed March 21, 1994
(4/19/94) (5) P*
D-3.56 Federal Energy Regulatory Commission
Answer to El Paso Electric Company's
Application of March 22, 1994
(4/20/94) (5) P*
D-3.57 Southwestern Public Service Company
Answer to Applicants' Response to
Answers filed April 19, 1994 (5/02/94)
(5) P*
D-3.58 Central and South West Services, Inc.
and El Paso Electric Company Letter to
the Federal Energy Regulatory
Commission to Update David
Harrell's Benefits Analysis
(5/17/94) (6) P*
D-3.59 Southwestern Public Service Company
Motion for Leave to Amend Protest to
Address Application of the
Commission's New Policy Regarding
Comparability of Service (5/26/94) (6) P*
D-3.60 El Paso Electric Company and Central
and South West Services, Inc. Answer
to SPS' Motion to Amend Protest to
Address Application of the
Commission's New Policy Regarding
Comparability of Service (6/10/94) (6) P*
D-3.61 City of Las Cruces, New Mexico Answer
to Motion of SPS to Address Application
of the Commission's Newly Announced
Policy Regarding Comparability of
Service (6/10/94) (6) P*
D-3.62 Plains Electric Generation and
Transmission Cooperative, Inc. Answer
to SPS' Motion to Amend SPS'
Protest to Address Transmission
Comparability Issues (6/10/94) (6) P*
<PAGE>
D-3.63 City of Las Cruces, New Mexico Motion
to Lodge Decision of U.S. Court of
Appeals for the District of Columbia
Circuit for EPE to File an Open Access
Tariff (6/20/94) (6) P*
D-3.64 Central and South West Services, Inc.
and El Paso Electric Company Letter
to the Federal Energy Regulatory
Commission Responding to Filing Made
by Plains Cooperative and City of
Las Cruces Which Supported a
Previous Pleading by SPS to Amend
SPS' Protest (6/28/94) (6) P*
D-3.65 Central and South West Services, Inc.
and El Paso Electric Company Answer
to the City of Las Cruces' Motion to
Lodge for EPE to File an Open Access
Tariff (7/25/94) (6) P*
D-3.66 Southwestern Public Service Company
Motion for Leave to Supplement Record
(7/08/94) (6) P*
D-3.67 Central and South West Services, Inc.
and El Paso Electric Company Response
to SPS' Motion For Leave to Supplement
Record (7/15/94) (6) P*
D-3.68 Federal Energy Regulatory Commission
Signed Final FERC Order On Merger
Application and Rate Filing (8/01/94) P*
(6)
D-3.69 Central and South West Services, Inc.
and El Paso Electric Company Motion
for Expedited Clarification of FERC's
August 1, 1994 Order on Merger
Application and Rate Filing (8/25/94) (6) P*
D-3.70 Federal Energy Regulatory Commission
Approved Order for Central and South
West Services, Inc. and El Paso
Electric Company (8/25/94) (6) P*
D-3.71 American Forest and Paper Association
Request for Rehearing to the FERC
(8/30/94) (6) P*
<PAGE>
D-3.72 Public Service Company of New Mexico
Motion for Clarification and Request
for Rehearing to the FERC (8/31/94) (6) P*
D-3.73 Arkansas Public Service Commission
Petition for Rehearing to the FERC
(8/31/94) (6) P*
D-3.74 Southwestern Public Service Company
Request for Rehearing (8/31/94) (6) P*
D-3.75 Central and South West Services, Inc.
and El Paso Electric Company Request
for Rehearing (8/31/94) (6) P*
D-3.76 Central and South West Services, Inc.
and El Paso Electric Company Filing
to the FERC of Transmission Tariffs to
Offer "Comparable Service" (8/31/94) (6) P*
D-3.77 El Paso Electric Company and Central
and South West Services, Inc. Filing
to Provide Testimony and Workpapers
for Applicants' Witness: Neil W. Felber. P*
D-4 Section 205 Application to the FERC (2) P*
D-4.1 Federal Energy Regulatory Commission
Notice of Filing (1/13/94) (4) P*
D-4.2 Texas Office of Public Utility Counsel,
Public Utility Commission of Texas,
Attorney General of the State of New
Mexico, Louisiana Public Service
Commission, and City of Las Cruces
Motion for an Extension of Time to
File Protests and Interventions and
Request for Expedited Action on this
Motion (1/18/94) (4) P*
D-4.3 Arkansas Public Service Commission
Notice of Intervention (1/19/94) (4) P*
D-4.4 Arkansas Public Service Commission
Response in Support of Motion for an
Extension of Time to File Protests and
Interventions (1/19/94) (4) P*
<PAGE>
D-4.5 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motions for Extension of Time
(1/21/94) (4) P*
D-4.6 Louisiana Public Service Commission
Notice of Intervention (1/27/94) (4) P*
D-4.7 Federal Energy Regulatory Commission
Notice of Extension of Time (1/28/94)
(4) P*
D-4.8 New Mexico Public Utility Commission
Notice of Intervention (2/08/94) (4) P*
D-4.9 Texas Utilities Electric Company
Motion to Intervene (2/08/94) (4) P*
D-4.10 Arizona Public Service Company Motion
to Intervene (2/22/94) (4) P*
D-4.11 Salt River Project Agricultural
Improvement and Power District Motion
to Intervene (2/22/94) (4) P*
D-4.12 Louisiana Public Service Commission
Protest, Request for Hearing, and
Motion for Consolidation (2/24/94) (4) P*
D-4.13 Public Utility Commission of Texas
Notice of Intervention, Protest,
Motion for Consolidation, and Request
for Hearing (2/24/94) (4) P*
D-4.14 Arkansas Public Service Company Protest
and Request for Hearing (2/24/94) (4) P*
D-4.15 Cajun Electric Power Cooperative, Inc.
Motion to Intervene, Protest and
Request for Hearing (2/25/94) (4) P*
D-4.16 Houston Lighting and Power Company
Motion to Intervene (2/25/94) (4) P*
D-4.17 Texas Office of Public Utility Counsel
Motion to Intervene, Motion for
Consolidation, Protest and Request for
Hearing (2/25/94) (4) P*
<PAGE>
D-4.18 Southwestern Public Service Company
Motion to Intervene and Motion to
Consolidate (2/25/94) (4) P*
D-4.19 Public Utilities Board of the City of
Brownsville, Texas Motion to Intervene
(2/25/94) (4) P*
D-4.20 Public Service Company of New Mexico
Motion for Leave to Intervene (2/25/94) (4) P*
D-4.21 Northeast Texas Electric Cooperative,
Inc. Motion to Intervene (2/25/94) (4) P*
D-4.22 TDU Customers Joint and Several Motion
to Intervene, Protest and Request that
the Commission Initiate Hearing
Procedures of Certain Transmission
Dependent Customers on the Central and
South West Corporation and Southwestern
Public Service Company Systems
(2/25/94) (4) P*
D-4.23 Oklahoma Corporation Commission Notice
of Intervention (2/25/94) (4) P*
D-4.24 Public Service Company of New Mexico
Motion for Leave to File One Day of Time
(2/22/94) (4) P*
D-4.25 El Paso Electric Company and Central
and South West Services, Inc. Motion
for Extension of Time to Answer Motions
to Intervene and Motion for Expedited
Procedures (3/01/94) (4) P*
D-4.26 Central and South West Services, Inc.
Response to Notice of Intervention of
the New Mexico Public Utility Commission
(3/01/94) (4) P*
D-4.27 Southwestern Public Service Company
Answer to Applicants' Motion for an
Extension of Time to Answer (3/02/94) (4) P*
D-4.28 Arkansas Public Service Commission
Response in Opposition to Motion for
Extension of Time to Answer Motion to
Intervene (3/03/94) (4) P*
<PAGE>
D-4.29 Federal Energy Regulatory Commission
Notice of Extension of Time (3/08/94) (4) P*
D-4.30 El Paso Electric Company and Central
and South West Services, Inc. Answer to
Motions to Intervene (3/21/94) (4) P*
D-4.31 New Mexico Public Utility Commission
Reply to Applicants' Response (3/30/94)
(5) P*
D-4.32 Public Utility Commission of Texas
Response to Answer of Applicants' to
Motion to Intervene (4/04/94) (5) P*
D-4.33 Public Service Company of New Mexico
Motion for Leave to File Response and
Response to Applicants' Answer
(4/05/94) (5) P*
D-4.34 Southwestern Public Service Company
Answer in Opposition to Applicants'
Request for Leave to Respond to Protests
(4/05/94) (5) P*
D-4.35 El Paso Electric Company and Central
and South West Services, Inc. Response
to Answers by Certain Intervenors to
Applicants' Answer Filed March 21, 1994
(4/19/94) (5) P*
D-4.36 Southwestern Public Service Company
Answer to Applicants' Response to Answer
filed April 19, 1994 (5/02/94) (5) P*
D-4.37 Southwestern Public Service Company
Motion for Leave to Amend Protest to
Address Application of the Commission's
New Policy Regarding Comparability of
Service (5/26/94) (6) P*
D-4.38 El Paso Electric Company and Central
and South West Services, Inc. Answer to
SPS' Motion to Amend Protest to Address
Application of the Commission's New
Policy Regarding Comparability of
Services (6/10/94) (6) P*
<PAGE>
D-4.39 Plains Electric Generation and
Transmission Cooperative, Inc. Answer
to SPS' Motion to Amend SPS' Protest
to Address Transmission Service
Comparability Issues (6/10/94) (6) P*
D-4.40 Southwestern Public Service Company
Motion for Leave to Supplement Record
(7/08/94) (6) P*
D-4.41 Central and South West Services, Inc.
and El Paso Electric Company Answer
to the City of Las Cruces' Motion to
Lodge for EPE to File an Open Access
Tariff (7/25/94) (6) P*
D-4.42 Central and South West Services, Inc.
and El Paso Electric Company Response
to SPS' Motion for Leave to Supplement
Record (7/15/94) (6) P*
D-4.43 Federal Energy Regulatory Commission
Signed Final FERC Order on Merger
Application and Rate Filing (8/01/94) (6) P*
D-4.44 Central and South West Services, Inc.
and El Paso Electric Company Motion
for Expedited Clarification of FERC's
August 1, 1994 Order on Merger
Application and Rate Filing (8/25/94)
(6) P*
D-4.45 Federal Energy Regulatory Commission
Approved Order for Central and South
West Services, Inc. and El Paso
Electric Company (8/25/94) (6) P*
D-4.46 American Forest and Paper Association
Request for Rehearing to the FERC
(8/30/94) (6) P*
D-4.47 Public Service Company of New Mexico
Motion for Clarification and Request
for Rehearing to the FERC (8/31/94) (6) P*
D-4.48 Arkansas Public Service Commission
Petition for Rehearing to the FERC
(8/31/94) (6) P*
<PAGE>
D-4.49 Southwestern Public Service Company
Request for Rehearing (8/31/94) (6) P*
D-4.50 Central and South West Services, Inc.
and El Paso Electric Company Request
for Rehearing (8/31/94) (6) P*
D-4.51 Central and South West Services, Inc.
and El Paso Electric Company Filing
to the FERC of Transmission Tariffs
to Offer "Comparable Service" Per the
FERC's Order (8/31/94) (6) P*
D-5 Section 211 Application to the FERC (2) P*
D-5.1 Federal Energy Regulatory Commission
Notice of Filing (11/10/93) (4) P*
D-5.2 Southwestern Public Service Company
Motion for an Extension of Time and
Request for Expedited Action on Motion
(11/17/93) (4) P*
D-5.3 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motion of Southwestern Public Service
Company for an Extension of Time
(11/18/94) (4) P*
D-5.4 Federal Energy Regulatory Commission
Notice of Extension of Time (11/22/93) (4) P*
D-5.5 Louisiana Public Service Commission
Notice of Intervention (11/23/93) (4) P*
D-5.6 New Mexico Public Utility Commission
Motion to Intervention (11/30/93) (4) P*
D-5.7 Western Farmers Electric Cooperative
Motion for Leave to Intervene (12/15/93)
(4) P*
D-5.8 City of El Paso, Texas Motion to
Intervene (12/16/93) (4) P*
D-5.9 Public Service Company of New Mexico
Motion to Intervene (12/17/93) (4) P*
<PAGE>
D-5.10 Southwestern Public Service Company's
Full Requirements Wholesale Customers
Motion to Intervene and Protest
(12/20/93) (4) P*
D-5.11 Dona Ana County, New Mexico Motion to
Intervene (12/20/93) (4) P*
D-5.12 Texas Office of Public Utility Counsel
Motion to Intervene, Protest, and
Motion to Deny Summary Disposition
(12/22/93) (4) P*
D-5.13 The New Mexico Attorney General Motion
to Intervene and Protest (12/22/93) (4) P*
D-5.14 New Mexico Industrial Energy Consumers
Motion to Intervene (12/22/93) (4) P*
D-5.15 Public Utility Commission of Texas
Notice of Intervention (12/22/93) (4) P*
D-5.16 Arkansas Public Service Commission
Notice of Intervention (12/22/93) (4) P*
D-5.17 Houston Lighting & Power Company
Motion to Intervene (12/22/93) (4) P*
D-5.18 City of Las Cruces, New Mexico Motion
to Intervene and Protest (12/22/93) (4) P*
D-5.19 TDU Customers Joint and Several Motion
to Intervene and Request that the
Commission Initiate Hearing Procedures
of Certain Transmission Dependent
Customers on the Central and South
West Corporation and Southwestern
Public Service Company Systems
(12/22/93) (4) P*
D-5.20 Westplains Energy Division of
Utilicorp United Inc. Motion to
Intervene (12/22/93) (4) P*
D-5.21 PSI Energy, Inc. Motion to Intervene
(12/22/93) (4) P*
D-5.22 Texas Utilities Electric Company
Motion to Intervene (12/22/93) (4) P*
<PAGE>
D-5.23 Southwestern Public Service Company
Protest, Motion to Dismiss, Motion to
Intervene, and Answer (12/22/93) (4) P*
D-5.24 Duke Power Company Motion to
Intervene (12/22/93) (4) P*
D-5.25 Department of Defense Late Filed
Motion to Intervene and Protest
(1/05/94) (4) P*
D-5.26 New Mexico Public Utility Commission
Statement in Support of Public
Evidentiary Hearing (1/12/94) (4) P*
D-5.27 El Paso Electric Company and Central
and South West Services, Inc. Response
to Protest, Motion to Dismiss, Motion
to Intervene, and Answer of Southwestern
Public Service Company (1/13/94) (4) P*
D-5.28 Southwestern Public Service Company
Leave to File and Reply to Applicants'
Response (1/26/94) (4) P*
D-5.29 Public Service Company of New Mexico
Motion for Leave to Reply to El Paso
Electric Company's and Central and
South West Services, Inc.'s Response
Opposing PNM's Motion to Intervene
(1/27/94) (4) P*
D-5.30 Texas Utilities Electric Company Leave
to File a Reply to El Paso Electric
Company's and Central and South West
Services, Inc.'s Response (1/28/94) (4) P*
D-5.31 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motion of Southwestern Public
Service Company for Leave to File and
Reply to Applicants' Response
(2/03/94) (4) P*
<PAGE>
D-5.32 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motions of Public Service Company
of New Mexico and Texas Utilities
Electric Company to Reply to Applicants'
Response (2/10/94) (4) P*
D-5.33 The New Mexico Attorney General
Letter requesting that its Motion
to Intervene be considered timely
filed despite being one day late due
to delivery problems (2/28/94) (4) P*
D-5.34 Texas Utilities Electric Company
Motion for Leave to File and Reply
to Applicants' Answer to Texas
Utilities Electric Company's Reply to
Applicants' Responses to Motion to
Intervene (3/04/94) (4) P*
D-5.35 American Forest and Paper Association
Motion to Intervene and Protest and
Motion to Consolidate (3/10/94) (4) P*
D-5.36 El Paso Electric Company and Central
and South West Services, Inc. Letter
indicating no opposition to the New
Mexico Attorney General's letter of
February 28, 1994 requesting previously
submitted Motion to Intervene to be
timely filed despite being filed one
day late due to delivery problem
(3/07/94) (4) P*
D-5.37 El Paso Electric Company and Central
and South West Services, Inc. Answer
to Motion of Texas Utilities Electric
Company for Leave to File and Reply
to Applicants' Answer to Texas
Utilities Electric Company's Reply to
Applicants' Response to Motion to
Intervene (3/21/94) (4) P*
D-5.38 American Forest and Paper Association
Reply to the Improper Answer of
Applicants (4/01/94) (5) P*
<PAGE>
D-5.39 Federal Energy Regulatory Commission
Signed Final FERC Order on
Transmission Services and Establishing
Further Practices (8/01/94) (6) P*
D-5.40 Oklahoma Municipal Power Authority
Notice of Withdrawal from Proceedings
(8/01/94) (6) P*
D-5.41 Public Service Company of New Mexico
Motion for Clarification and Request
for Rehearing (8/31/94) (6) P*
D-6 Testimony of George R. Hall to the
FERC (2) P*
D-7 Application to the NRC (2) P*
D-7.1 Nuclear Regulatory Commission Notice
in Federal Register (3/02/94) (5) P*
D-7.2 Plains Electric G & T Cooperative
Petition Filed to Address Anti-
Competitive Issues and Request a
Hearing (4/01/94) (5) P*
D-7.3 Arizona Public Service Company
Letter to Provide Supplemental
Information for EPE's NRC Filing
(4/08/94) (5) P*
D-7.4 Public Utility Commission of Texas
Petition to Intervene (4/12/94) (5) P*
D-7.5 Southwestern Public Service Company
Petition for Leave to Intervene and
Comments (4/13/94) (5) P*
D-7.6 City of Las Cruces Comments Regarding
Antitrust Concerns (4/13/94) (5) P*
D-7.7 Nuclear Regulatory Commission Notice
in Federal Register (4/14/94) (5) P*
D-7.8 Nuclear Regulatory Commission Order
for Plains Electric Generation and
Transmission Cooperative, Inc.'s
Petition of April 1, 1994 (4/14/94) (5) P*
<PAGE>
D-7.9 El Paso Electric Company and Central
and South West Services, Inc. Letter to
NRC (5/17/94) (5) P*
D-7.10 El Paso Electric Company and Central
and South West Services, Inc. Letter
to NRC addressing Issues Raised in
the Comments and Interventions by SPS,
Las Cruces, and Plains Cooperative
(5/17/94) (6) P*
D-7.11 Plains Electric Generation and Transmission
Cooperative, Inc. Letter to NRC Regarding
CSW/EPE's May 17, 1994 Letter to the NRC
(6/03/94) (6) P*
D-7.12 City of Las Cruses Letter to NRC Staff
Commenting on Claiming Errors or
Mischaracterizations of CSW/EPE's
May 17, 1994 Letter to the NRC
(6/16/94) (6) P*
D-8 Notice of Succession of Ownership to
the Department of Energy (to be filed
by amendment) (6) ---
D-9 Notification and Report Form to U.S.
Department of Justice and Federal
Trade Commission (to be filed by
amendment) ---
D-10 Exhibit E to the Disclosure
Statement (Rate Path) (0) Electronic
D-11 Order of Bankruptcy Court dated
August 27, 1993 (Disclosure Statement
Approval Order) (0) Electronic
D-12 Order of Bankruptcy Court dated
September 15, 1993 (0) Electronic
D-13 Order of Bankruptcy Court dated
December 8, 1993 (Confirmation Order) (0) Electronic
D-14 Findings of Fact (0) Electronic
D-14.1 Amended Findings of Fact (1) Electronic
E-1 Map showing service territories of CSW
and EPE P*
E-2 Map showing interconnections of CSW
and EPE P*
F-1 Preliminary Opinion of Counsel (to be
filed by amendment) ---
F-2 Final ("Past Tense") Opinion of Counsel
(to be filed by amendment) ---
G-1 Form of Notice (0) Electronic
<PAGE>
H-1 CSW Annual Report on Form 10-K for the
year ended December 31, 1992
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-2 EPE Annual Report on Form 10-K for the
year ended December 31, 1992 (previously
filed with the Commission and hereby
incorporated by reference) (0) By Reference
H-3 CSW Annual Report to Shareholders for
the year ended December 31, 1992
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-4 EPE Annual Report to Shareholders for
the year ended December 31, 1992
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-5 CSW Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-6 CSW Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-7 CSW Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-8 EPE Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-9 EPE Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
H-10 EPE Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993
(previously filed with the Commission
and hereby incorporated by reference) (0) By Reference
<PAGE>
H-11 CSW Annual Report on Form 10-K for the
year ended December 31, 1993 (previously
filed with the Commission and hereby
incorporated by reference) By Reference
H-12 EPE Annual Report on Form 10-K for the
year ended December 31, 1993 (previously
filed with the Commission and hereby
incorporated by reference) By Reference
H-13 CSW Annual Report to Shareholders for
the year ended December 31, 1993
(previously filed with the Commission
and hereby incorporated by reference) By Reference
H-14 EPE Annual Report to Shareholders for
the year ended December 31, 1993
(previously filed with the Commission
and hereby incorporated by reference) By Reference
H-15 CSW Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994
(previously filed with the Commission
and hereby incorporated by reference) By Reference
H-16 EPE Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994
(previously filed with the Commission
and hereby incorporated by reference) By Reference
J-1 Morgan Stanley opinion to the CSW Board
of Directors dated April 30, 1993 (0) Electronic
J-2 Barr Devlin opinion to the EPE Board
of Directors dated May 3, 1993 (0) Electronic
FS-1 Consolidated Balance Sheets of CSW as
of December 31, 1992 (incorporated by
reference to CSW's Annual Report on
Form 10-K for the year ended December 31,
1992 (Exhibit H-1 hereto)) (0) By Reference
FS-2 Consolidated Statements of Income of
CSW for the year ended December 31, 1992
(incorporated by reference to CSW's
Annual Report on Form 10-K for the year
ended December 31, 1992 (Exhibit H-1
hereto)) (0) By Reference
<PAGE>
FS-3 Consolidated Statements of Cash Flows
of CSW for the year ended December 31,
1992 (incorporated by reference to
CSW's Annual Report on Form 10-K for
the year ended December 31, 1992 (Exhibit
H-1 hereto)) (0) By Reference
FS-4 Consolidated Statements of Retained
Earnings of CSW for the year ended
December 31, 1992 (incorporated by
reference to CSW's Annual Report on
Form 10-K for the year ended
December 31, 1992 (Exhibit H-1
hereto)) (0) By Reference
FS-5 Notes to Consolidated Financial
Statements of CSW for the year
ended December 31, 1992 (incorporated
by reference to CSW's Annual Report
on Form 10-K for the year ended
December 31, 1992 (Exhibit H-1
hereto)) (0) By Reference
FS-6 Balance Sheets of EPE as of
December 31, 1992 (incorporated
by reference to EPE's Annual Report
on Form 10-K for the year ended
December 31, 1992 (Exhibit H-2
hereto)) (0) By Reference
FS-7 Statements of Operations of EPE for
the year ended December 31, 1992
(incorporated by reference to EPE's
Annual Report on Form 10-K for the
year ended December 31, 1992
(Exhibit H-2 hereto)) (0) By Reference
FS-8 Statements of Cash Flows of EPE for
the year ended December 31, 1992
(incorporated by reference to EPE's
Annual Report on Form 10-K for the
year ended December 31, 1992 (Exhibit
H-2 hereto)) (0) By Reference
<PAGE>
FS-9 Statements of Retained Earnings
(Deficit) of EPE for the year ended
December 31, 1992 (incorporated by
reference to EPE's Annual Report on
Form 10-K for the year ended December 31,
1992 (Exhibit H-2 hereto)) (0) By Reference
FS-10 Notes to Financial Statements of EPE
for the year ended December 31, 1992
(incorporated by reference to EPE's
Annual Report on Form 10-K for the year
ended December 31, 1992 (Exhibit H-2
hereto)) (0) By Reference
FS-11 Unaudited Actual and Pro Forma
Combined Capitalization of CSW and EPE
as of June 30, 1993 (0) Electronic
FS-12 Unaudited Pro Forma Combined Financial
Statements as of and for the year
ended June 30, 1993 (0) Electronic
FS-13 CSW Consolidated Balance Sheet as of
September 30, 1993 (see page 4 of the
Quarterly Report of CSW on Form 10-Q
for the quarter ended September 30,
1993, incorporated by reference as
Exhibit H-7 hereto) (0) By Reference
FS-14 CSW Consolidated Statement of Income
and Surplus for the twelve months
ended September 30, 1993 (see page 3
of the Quarterly Report of CSW on form
10-Q for the quarter ended September 30,
1993, incorporated by reference as
Exhibit H-7 hereto) (0) By Reference
FS-15 CSW Consolidated Statement of Income
and Surplus for its last three fiscal
years (see page 24 of the Annual Report
of CSW to Shareholders for the year
ended December 31, 1992, incorporated
by reference as Exhibit H-3 hereto) (0) By Reference
FS-16 EPE Balance Sheet as of September 30,
1993 (see page 1 of the Quarterly Report
of EPE on Form 10-Q for the Quarter
ended September 30, 1993, incorporated
by reference as Exhibit H-10 hereto) (0) By Reference
<PAGE>
FS-17 EPE Statement of Income and Surplus for
the twelve months ended September 30,
1993 (see page 3 of Quarterly Report
of EPE on Form 10-Q for the quarter
ended September 30, 1993, incorporated
by reference as Exhibit H-10 hereto) (0) By Reference
FS-18 EPE Statement of Income and Surplus
for its last three fiscal years (see
page 58 of the Annual Report of EPE on
Form 10-K for the year ended December 31,
1992, incorporated by reference as
Exhibit H-2 hereto) (0) By Reference
There have been no material changes, not in the ordinary course of
business, to the financial statements listed above since the date of such
financial statements.
ENDNOTES
1. The Merger Agreement defines an "EPE Material Adverse Effect" as "a
material adverse effect on the business, operations, franchises,
properties, assets, condition (financial or other) or results of
operations" of EPE.
