<PAGE> 1
File No. 70-8199
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 6 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 75266
CENTRAL POWER AND LIGHT COMPANY
539 N. Carancahua Street
Corpus Christi, Texas 78401-2431
(Name of company filing this statement and address
of principal executive office)
__________________________________
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 75266
David P. Sartin
Controller
Central Power and Light Company
539 N. Carancahua Street
Corpus Christi, Texas 74801-2431
M. Douglas Dunn
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
(Names and addresses of agents for service)
With copies to:
Joris M. Hogan and Guilford W. Gaylord
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
<PAGE> 2
Central and South West Corporation ("CSW"), a Delaware
corporation and a registered holding company under the Public Utility
Holding Company Act of 1935, as amended (the "Act"), and Central Power and
Light Company ("CPL"), a Texas corporation and a wholly-owned electric
utility subsidiary of CSW, hereby file this Amendment No. 6 to the Form U-
1 Application-Declaration in this File No. 70-8199 for the purposes of
amending Items 1, 2, 3 and 4 thereof and filing Exhibit F-1 thereto, and,
as so amended, restating the Application-Declaration in its entirety. In
all other respects, the Application-Declaration as previously filed and as
heretofore amended will remain the same.
1. In Item 1 ("Description of Proposed Transactions"):
(a) the last sentence of the third paragraph of the subsection
headed "Background" (beginning with the words "The estimated cost") is
hereby amended to insert the word "construction" between the words
"estimated" and "cost";
(b) the second "bullet" point in the paragraph headed "Fiber
Needs" (beginning with the words "its carrying capacity") is hereby
amended to delete the words "its carrying capacity" and to substitute in
place thereof the words "the carrying capacity of the CSW system's
existing microwave system";
(c) the second sentence of the first paragraph of the subsection
headed "Transfer of Initial Segment" (beginning with the words "As noted
above") is hereby amended to add a new footnote after the words "points of
presence" (and to renumber later footnotes accordingly), such new footnote
to read as follows: "Regenerating stations are locations where equipment
is housed for the retransmission of the signal on a fiber optic cable, to
compensate for signal degradation over long distances. Points of presence
<PAGE> 3
are locations where communications traffic can be added to or dropped from
a fiber optic cable. The costs of construction, engineering, right-of-way
acquisition and design, management fees, and regenerating stations and
points of presence described above -- currently estimated at $7,029,532 --
are collectively referred to in this Application as the "construction
cost" or "cost of construction" of the Initial Segment."
(d) the fourth sentence of the third paragraph of the subsection
headed "Transfer of Initial Segment" (beginning with the words "Projected
costs") is hereby amended and restated to read as follows: "As noted
above, the estimated total construction cost of the Initial Segment is
$7,029,532; the projected cumulative net present value of all costs,
including construction costs, depreciation, costs of capital, taxes, and
other costs of ownership, and factoring in base rent payments, is
$6,111,000, which results in a levelized aggregate annual cost of $745,000
for the 22 fibers to be leased or held for lease to CPL and an annual cost
per fiber of $33,864, as set forth more fully in Section 1 of Exhibit G-
3.[7]";
(e) the first sentence of old footnote 10 (renumbered as
footnote 11 as a result of paragraph 1(c) above) is hereby amended and
restated to read as follows: "The exact base rent will be determined by a
formula, the components of which were reached through arm's length
negotiation between representatives of the CSW system and CapRock";
(f) the third sentence of the first paragraph of the subsection
headed "Purchase Option" (beginning with the words "CSW Communications")
is hereby amended to delete the phrase "in the electric utility business
of CPL or its sister companies" and to substitute in place thereof the
following: "in the business of the CSW system";
<PAGE> 4
(g) the first sentence of the third paragraph of the subsection
headed "Purchase Option" (beginning with the words "Based on present cost
estimates") is hereby amended and restated to read as follows: "Based on
present cost estimates, exercise of the option would reduce the estimated
$7,029,532 cost of construction of the Initial Segment by approximately
$5,006,396 to $2,023,136";
(h) the third sentence of the paragraph headed "Capitalization"
is hereby amended to add after the words "from time to time" the words
"through December 31, 1996"; and
(i) the last paragraph of Item 1 (beginning with the words "CSW
Communications agrees to provide") is hereby deleted and the following is
substituted in its place: "Reports: Each quarter under Rule 24, not
later than 60 days after the end of each quarter (90 days in the case of
the fourth quarter), CSW Communications will provide the Commission with
copies of its balance sheet as of the end of, and income statement for,
such quarter (and, in the case of the fourth quarter, for the year then
ended); a summary and concise description of billings to and payments by
associated companies during such quarter; and a summary and concise
description of payments by CapRock to CSW Communications during such
quarter. In addition, in its first such quarterly report, CSW
Communications will provide the Commission with copies of its accounting
system, its billing procedures for charges to associated companies, and
its work order system."
2. In Item 2 ("Fees, Commissions and Expenses"), the estimate of
counsel fees set forth in Item 2 is hereby further amended to $75,000, and
the estimate of total fees is adjusted accordingly.
<PAGE> 5
3. In Item 3 ("Applicable Statutory Provisions"):
(a) the fifth item in the table of Transactions and Applicable
Provisions in Section A of Item 3 is hereby further amended to add two
parenthetical clarifications and is hereby restated to read as follows:
"Sales/services in the ordinary course of business by Central and South
West Services, Inc. (including legal, accounting, engineering and other
services) and affiliated utility companies (including maintenance services
and government- and landowner-relations services with respect to permits,
franchises, easements, rights of way and similar matters) to CSW
Communications in connection with the development, design, construction,
ownership, maintenance and operation of the Fiber System as set forth in
Item 1"; and
(b) the first sentence of the first paragraph of subsection B.2.
("Transfer of Assets") (beginning with the words "As noted above") is
hereby amended to insert the words "of construction" after the word
"cost".
4. Item 4 ("Regulatory Approval") is hereby further amended to
add at the end thereof the following new paragraph: "Representatives of
CSW have held individual meetings with each of the three commissioners of
the PUCT, in which CSW advised them of, and answered questions concerning,
the transactions proposed herein. In addition, CSW provided a copy of the
Application-Declaration (as then on file with the Commission, except as to
confidential exhibits) to Mr. Ali Al-Jabir, manager of economic and
regulatory policy for the PUCT."
As so amended, the Application-Declaration is hereby restated in
its entirety as follows:
<PAGE> 6
Item 1. Description of Proposed Transactions.
CSW proposes to establish a new subsidiary to centralize the
development, design, construction, acquisition, maintenance and operation
of the fiber optic and other communications systems used in the electric
utility and related businesses of the CSW system. To these ends, CSW and
CPL hereby seek all requisite authority under the Act and the Commission's
rules thereunder, including Sections 6(a), 7, 9(a)(1), 10, 12(b) and 13
and Rule 45: (a) for CSW to establish a new, wholly-owned limited purpose
communications subsidiary company ("CSW Communications") and for CSW to
make capital contributions and loans to CSW Communications and to
guarantee its obligations in an aggregate amount not to exceed $25
million, and for CSW Communications to issue its capital stock to CSW; (b)
for CSW Communications to acquire certain existing fiber optic assets from
CPL and to lease fiber capacity or otherwise provide communications
services to CPL and other companies in the CSW system; (c) for CSW
Communications to lease certain excess capacity of the fiber system to
CapRock Fiber Network, Ltd., an unaffiliated third party, as more fully
described herein; and (d) for the other transactions described herein.
Background
The CSW system is developing a fiber optic communications network
(the "Fiber System") to upgrade its existing microwave communications
network. The Fiber System will provide a more reliable means of voice
communication and data transmission among generating stations,
transmission and distribution systems, dispatching centers, service and
repair facilities, and administrative offices, and will put in place the
communications infrastructure required for residential demand-side
management and other means of load management, remote meter reading,
<PAGE> 7
remote connection and disconnection of service, remote control and
monitoring of transmission and distribution systems, and other
applications in the CSW system's electric utility business.
It is anticipated that the Fiber System will be constructed in a
number of segments over a number of years. Spreading construction out in
this manner will permit the CSW system to fund construction costs out of
internally generated funds, to make adjustments in later segments based on
operating experience with earlier segments, and to take advantage of
opportunities to construct particular segments on favorable terms.
The initial segment of the Fiber System (the "Initial Segment")
is in the final stages of construction and runs approximately 185 miles
through the Gulf Coast portion of CPL's service territory from the city of
Corpus Christi, where CPL's headquarters and its Lon C. Hill, Barney M.
Davis and Nueces Bay generating stations are located, through the city of
Harlingen, near CPL's La Palma generating station, to the city of McAllen,
near CPL's J.L. Bates generating station.[1] The Initial Segment consists
of one cable containing 42 fibers. The estimated construction cost of the
Initial Segment (exclusive of ancillary electronic, optic and other
equipment) is approximately $7,029,532, of which $3,348,704.05 had been
invoiced and paid by CPL as of July 30, 1993.
Although the Initial Segment has been constructed directly by
CPL, the Applicants believe it is preferable that future development,
design, construction, ownership, maintenance and operation of the Fiber
_______________
[1] Together, these stations have a net dependable generating capability
of approximately 1952 MW, or nearly 50% of CPL's total of 3963 MW.
<PAGE> 8
System be centralized in a specialized system-wide communications
subsidiary of CSW. Such a subsidiary will:
* provide cost efficiencies and economies of scale;
* facilitate system-wide design and development, thereby promoting
standardization of equipment, eliminating redundancy and
incompatibility, and increasing system operating efficiencies;
* facilitate financing;
* simplify accounting and other administrative functions;
* possess the expertise necessary to remain abreast of developments
and changes in technology and, as a non-utility subsidiary, the
flexibility necessary to take advantage of transient
opportunities in the rapidly changing telecommunications market;
and
* permit any excess fiber capacity that may exist from time to time
to be more efficiently marketed with lower transaction costs
(instead of negotiating with four separate companies, third
parties can deal with one system-wide entity).
Fiber Needs: In determining to construct a fiber system,
Applicants considered a number of factors, including cost, reliability and
probable future capacity needs. Among other things:
* a fiber system will be quantitatively and qualitatively superior
to the CSW system's existing microwave system;
* the carrying capacity of the CSW system's existing microwave
system is limited and is inadequate for the CSW system's
anticipated future needs, particularly in the areas of
residential demand-side management, telemetering and other
emerging technologies which the Applicants expect will assume
increasing importance in the electric utility industry in the
coming decade;
* increasing demands for spectrum have led the Federal
Communications Commission to withdraw utilities' priority claim
on microwave spectrum and have diminished the amount of microwave
spectrum available to CSW and other utility systems;
* the CSW system's microwave system is less reliable and more
vulnerable to disruption (for example, from storms and sunspot
activity) than a fiber system;
* a fiber system can be installed underground at points of
particularly high storm risk, such as the Gulf Coast of Texas,
whereas a microwave system cannot; and
* electric utility companies are increasingly turning to fiber
systems for their internal communications needs.
As a result of these considerations, CSW has determined to adopt
fiber optic technology for the communications needs of the CSW system.
<PAGE> 9
As indicated by the CPL 1993 Backbone Network Capacity Forecast
(the "Fiber Study") (a copy of which is filed as Exhibit G-2), exact fiber
capacity needs will depend on a number of future developments.
Implementation of residential demand-side management and other emerging
technologies will significantly increase the fiber capacity needs.
For the Initial Segment, the Fiber Study indicates that at least
22 and possibly as many as 42 fibers will be needed for use in CPL's
electric utility operations by the end of the study period. The exact
number will depend on improvements in electronic and optical transmission
equipment, load growth, and cost considerations.[2] Because economies of
scale make it dramatically less expensive to install fibers all at once,
it is economically preferable to install 42 fibers all at once, even if
all 42 are not needed immediately and even if future technical advances
ultimately allow CPL's needs to be accommodated economically by a 22-fiber
system.
The primary cost in constructing a fiber system is in the
placement of the cable -- i.e., trenching, conduit placement and fiber
"pulling" in the case of underground cable, and cable hanging in the case
of overhead cable. These costs must be repeated for each new cable and do
not vary significantly with the number of fibers in the cable. In an
underground system, cable placement is an even greater percentage of total
_______________
[2] Improvements in electronic and optical transmission equipment have
historically increased the carrying capacity of optical fiber.
Improvements in the future may produce further increases, thereby
increasing the effective capacity of the Initial Segment without an
increase in the number of fibers.
<PAGE> 10
costs.[3] The main cost difference between a smaller and larger system
is in the material cost of the fibers, which is relatively small. For the
Initial Segment, the material cost of 42-fiber cable was approximately
$2.6 million, versus a material cost of approximately $2.0 million for the
same amount of 22-fiber cable -- a difference of $600,000, or less than
10% of the cost of the project. Thus, a 22-fiber system from Corpus
Christi to Harlingen to McAllen would cost approximately $6.4 million to
construct, versus approximately $7 million for a 42-fiber system between
those same points. By contrast, if a 22-fiber system had been constructed
now and a separate 20-fiber system later, the total cost would be
approximately $12.8 million based on present costs, or almost twice the
cost of a single 42-fiber system.[4] Installing 42-fiber capacity avoids
the expense of re-excavating and laying additional cable in the future,
lowers the ultimate cost of the Fiber System, and increases the benefits
of the Fiber System.
Transfer of Initial Segment: Under the arrangements proposed
herein, CSW Communications will purchase the Initial Segment from CPL at
cost and will then reserve and lease back, as required, 22 of the Initial
Segment's 42 fibers to CPL at cost. As noted above, the estimated total
cost of the Initial Segment is $7,029,532, including $5,430,194 for
construction, $790,000 for engineering, $59,348 for right-of-way
_______________
[3] The Initial Segment was designed as an underground system to the
extent feasible because the Gulf Coast area of Texas, where the route
of the Initial Segment is located, is subject to hurricanes and other
severe weather. An underground line will be more reliable and less
vulnerable to weather-related damage and disruption.
[4] Because of cable and equipment limitations, it might be necessary to
install a 24-fiber system in order to obtain 20- or 22- fiber
capacity.
<PAGE> 11
acquisition and design, $350,000 in management fees, and approximately
$400,000 for regenerating stations and points of presence.[5] Of this
amount, $3,348,704.05 had been invoiced and paid by CPL as of July 30,
1993.
Upon the transfer of the Initial Segment from CPL to CSW
Communications, CSW Communications will pay CPL all construction costs
paid by CPL to the date of transfer and will assume CPL's remaining
payment obligations for costs that have not yet been invoiced as of the
transfer date. In addition, CSW Communications will pay CPL $123,016[6]
representing CPL's cost for interim financing.
After the transfer, CSW Communications will make the capacity and
service of 22 of the 42 fibers of the Initial Segment available to CPL on
an as-needed basis, either by lease or otherwise. Charges to CPL will be
at cost in compliance with Rules 90 and 91, on a per-fiber basis based on
the actual number of fibers used. Any fibers not used by CPL will be held
by CSW Communications for CPL's future use. As noted above, the estimated
total construction cost for the Initial Segment is $7,029,532; the
projected cumulative net present value of all costs, including the cost of
construction, depreciation, costs of capital, taxes, and other costs of
_______________
[5] Regenerating stations are locations where equipment is housed for the
retransmission of the signal on a fiber optic cable, to compensate
for signal degradation over long distances. Points of presence are
locations where communications traffic an be added to or dropped from
a fiber optic cable. The costs of construction, engineering, right-
of-way acquisition and design, management fees, and regenerating
stations and points of presence described above -- currently
estimated at $7,029,532 -- are collectively referred to in this
Application as the "construction cost" or "cost of construction" of
the Initial Segment.
[6] Based on an estimated total cost of $7,029,532, short-term financing
at 3.5%, and a financing period of 6 months.
<PAGE> 12
ownership, and factoring in base rent payments, is $6,111,000, which
results in a levelized aggregate annual cost of $745,000 for the 22 fibers
to be leased or held for lease to CPL and an annual cost per fiber of
$33,864, as set forth more fully in Section 1 of Exhibit G-3.[7] If the
purchase option described below were to be exercised, the annual per-fiber
cost to CPL would drop to between $14,682 and $25,318, depending on when
the option were to be exercised.[8]
Lease of Excess Capacity: In order to take advantage of the
economies of scale described above, the Fiber System will have temporary
excess capacity. Rather than leave this capacity unused, Applicants
propose that CSW Communications lease out the fibers not required for
near-term use in electric utility applications. CSW Communications would
lease to non-associated parties and would seek to charge the maximum
amount obtainable in arm's-length negotiations.
For the Initial Segment, CSW Communications proposes to lease out
20 of the 42 fibers of the Initial Segment to CapRock Fiber Network, Ltd.,
a Texas limited partnership ("CapRock")[9] under an eight-year operating
lease. CapRock will in turn sublease the fibers out to non-affiliates of
CSW and CPL for all or part of the lease term.[10]
_______________
[7] The levelized cost per fiber discounted at CPL's weighted average
cost of capital over the 20-year depreciation life of the asset.
[8] Assuming an option exercise price of $5,006,396.
[9] CapRock is the construction manager for the initial Segment and
provided critical design, engineering and other assistance which
significantly expedited the development of the initial Segment and
reduced its expected cost.
[10] All lease and sublease transactions will be in compliance with
applicable regulations (if any) of the Federal Communications
Commission ("FCC") and the Public Utility Commission of Texas
("PUCT"). It is anticipated that excess capacity in future segments
(continued...)
<PAGE> 13
In the case of CapRock, rent will be determined pursuant to an
agreed-upon formula and will depend on total final construction costs.
Based on present cost assumptions, the annual base rent will be $644,529
with additional rent equal to one-half of CapRock's net revenues from
subleasing the leased fibers.[11]
Purchase Option: As part of the consideration required by
CapRock to enter into the lease, CapRock will have the right to purchase a
50% undivided ownership interest in the 20 leased fibers at any time
during the lease term at a price equal to Applicable Construction Costs.
CapRock will thereafter continue to lease CSW Communications' remaining
50% interest in the 20 fibers and will continue to make payments of
additional (but not base) rent to CSW Communications. CSW Communications
will have the right to lease back CapRock's interest at cost to the extent
needed in the business of the CSW system. To this end, the lease between
CSW Communications and CapRock will contain provisions to the effect that
CSW Communications will have the option, at any time and from time to
time, upon reasonable notice to CapRock, to lease back all or part of the
optioned interest at cost, and that CapRock's rights to lease or otherwise
use the optioned interest will be subject to CSW Communications' leaseback
rights. Proceeds from the purchase option will be applied by CSW
_______________
[10] (continued)
of the Fiber System would also be leased until needed. CSW
Communications will seek authorization of the Commission prior to
leasing any such excess capacity in future segments of the Fiber
System.
[11] The exact base rent will be determined by a formula, the components
of which were reached through arm's length negotiation between
representatives of the CSW system and CapRock. Under the formula,
base rent will be equal to (a) 80% of "Applicable Construction Costs"
(continued...)
<PAGE> 14
Communications to reduce the cost basis of the Initial Segment for
purposes of Rules 90 and 91 and fiber charges to companies within the CSW
System.
The purchase option is the product of three considerations: (1)
CapRock's insistence on an option in arm's-length bargaining; (2)
differences in the probability factors associated with CPL's need for the
first 22 fibers of the Initial Segment and the 20 fibers covered by the
option; and (3) the overall benefits obtained in return for the option and
related transactions.
Based on present cost estimates, exercise of the option would
reduce the estimated $7,029,532 cost of construction of the Initial
Segment by approximately $5,006,396 to $2,023,136. Assuming exercise of
the option, CSW Communications will retain a 50% interest in the 20 fibers
covered by the option (and will continue to have 100% ownership of the
other 22 fibers in the Initial Segment), and will also have the right to
lease back the optioned 50% interest at cost if needed by CPL, without
_______________
[11] (continued)
amortized over 20 years with a 10% lease factor, plus (b) total costs
of the electronic and optical equipment associated with the leased
fibers, amortized over the lease term, with a 10% lease factor.
"Applicable Construction Costs" means (i) the total costs of
construction of the Initial Segment (exclusive of the cost of
electronic and optical equipment), less (ii) the $250,000 cost of a
portion of the Initial Segment not involved in the lease, less (iii)
52.38% (i.e., 22/42) of the total cost of (A) the fibers in the
Initial Segment, (B) fusion splicing of such fibers, and (C) the
buildings used in the Initial Segment for regenerating stations and
points of presence. Based on anticipated total construction costs of
$7,029,532, anticipated total costs for fiber and fusion splicing of
$2,985,140, anticipated total costs of $400,000 for regenerating
stations and points of presence, and estimated equipment costs of
$928,757, annual base rent comes to $644,529.
<PAGE> 15
being obligated to do so if the optioned interest is not needed or if more
economical alternatives are then available. Thus, if it is more
economical to increase the capacity of Fibers 1 through 22 as a result of
improvements in optical and electronic transmission equipment, or to build
another fiber system, or to obtain telecommunications services from a
third party, CSW Communications and CPL would be free to do so without
penalty.
Capitalization: CSW proposes to incorporate CSW Communications
under the laws of the State of Delaware with an authorized capital of up
to 1,000 shares of common stock with a par value of one cent ($.01) per
share. CSW will subscribe to all of CSW Communications' common stock at a
subscription price of $1.00 per share. To permit CSW Communications to
acquire the Initial Segment and related optical and electronic equipment
and to further develop the Fiber System, CSW hereby requests authority
from time to time through December 31, 1996 to make capital contributions,
make loans and issue guarantees of CSW Communications obligations, in any
combination thereof, in an aggregate amount not to exceed $25 million.
CSW proposes to provide such contributions and loans out of its internally
generated funds or borrowings. Any such loans from CSW to CSW
Communications will have an interest rate per annum not in excess of
Mellon Bank's prime commercial lending rate as announced from time to time
plus 3% and will have a final maturity not to exceed 20 years. CSW
Communications intends to use a portion of such $25 million to pay for the
cost of acquiring the Initial Segment and the balance to fund initial
operating and maintenance expenses, costs of development, design and
construction with respect to additional segments of the Fiber System and
extensions of the Initial Segment, and the cost of optical and electronic
equipment required to operate the Fiber System.
<PAGE> 16
Reports: Each quarter under Rule 24, not later than 60 days
after the end of each quarter (90 days in the case of the fourth quarter),
CSW Communications will provide the Commission with copies of its balance
sheet as of the end of, and income statement for, such quarter (and, in
the case of the fourth quarter, for the year then ended); a summary and
concise description of billings to and payments by associated companies
during such quarter; and a summary and concise description of payments by
CapRock to CSW Communications during such quarter. In addition, in its
first such quarterly report, CSW Communications will provide the
Commission with copies of its accounting system, its billing procedures
for charges to associated companies, and its work order system.
Item 2. Fees, Commissions and Expenses.
An estimate of the fees and expenses to be paid or incurred by
CSW and CPL in connection with the proposed transactions are set forth
below:
Holding Company Act filing fees ............... $ 2,000*
Counsel fees in connection with the Act:
Milbank, Tweed, Hadley & McCloy
New York, NY ............... ................ $75,000
Central and South West Services, Inc. ......... $ 500
Miscellaneous and incidental expenses
including travel, telephone and
postage, and copying ........................ $ 500
-------
TOTAL $78,000
=======
____________________
* Actual amount (previously paid).
The fees and expenses include those charges incurred for the
services of Central and South West Services, Inc. ("CSWS"), an affiliated
service company of CSW operating pursuant to Section 13 of the Act and the
<PAGE> 17
rules thereunder. The services of CSWS will consist principally of
services performed by the Treasury, Accounting and Telecommunications
Planning Departments.
Item 3. Applicable Statutory Provisions.
A. Applicable Provisions
The proposed transactions are subject to the following provisions
of the Act and the rules thereunder:
Transaction Applicable Provisions
Acquisition by CSW of capital Sections 9(a)(1) and 10
stock of CSW Communications
Issuance by CSW Communications of Sections 6(a) and 7; Rule 50(a)(3)
capital stock to CSW
Capital contributions and loans Section 12(b); Rule 45
by CSW to CSW Communications and
guarantees by CSW of CSW
Communications' obligations
Transfer to CSW Communications of Section 13(b); Rules 90 and 91
Initial Segment including regenerating
stations, points of presence and
associated equipment as described
in Item 1
Sales/services in the ordinary Section 13; Rules 90, 91, 93
course of business by Central and and 94
South West Services, Inc. (including
legal, accounting, engineering and
other services) and affiliated
utility companies (including
maintenance services and government-
and landowner-relations services
with respect to permits, franchises,
easements, rights of way and similar
matters) to CSW Communications in
connection with the development,
design, construction, ownership,
maintenance and operation of the
Fiber System as set forth in Item 1
Lease of excess Fiber System capacity Sections 9(a)(1) and 10
and sale pursuant to option of 50%
interest in certain fibers by CSW
<PAGE> 18
To the extent any other provisions of the Act or the rules promulgated
thereunder may be applicable to the proposed transactions, CSW and CPL
hereby request appropriate orders thereunder.
B. Analysis
1. Establishment of New Subsidiary
CSW Communications' activities will be functionally related
to the electric utility business of CSW's utility subsidiaries.
First, as noted above, CSW Communications will develop a
Fiber System that will upgrade the existing microwave communications
network of CSW's utility subsidiaries; provide a more reliable means of
voice communication and data transmission among CSW generating stations,
transmission and distribution systems, dispatching centers, service and
repair facilities, and administrative offices; and put in place the
communications infrastructure required for residential demand-side
management and other means of load management, remote meter reading,
remote connection and disconnection of service, remote control and
monitoring of transmission and distribution systems.
Second, the arrangements facilitate the development of the
Fiber System. Among other things, the telecommunications market is a
large, competitive and rapidly and evolving market. As a result, the
development of the Fiber System is likely to require resources and
expertise which CPL and its sister CSW utility subsidiaries do not
possess, and may involve significant time and expense. By centralizing
the ownership and management of the Fiber System in CSW Communications,
the requisite expertise can be developed without duplication and without
distraction from the core utility businesses.
<PAGE> 19
Third, as a specialized, system-wide, centralized, non-
utility subsidiary, CSW Communications will:
* provide cost efficiencies and economies of scale;
* facilitate system-wide design and development, thereby
promoting standardization of equipment, eliminating
redundancy and incompatibility, and increasing system
operating efficiencies;
* facilitate financing;
* simplify accounting and other administrative functions;
* possess the expertise necessary to remain abreast of
developments and changes in technology and the flexibility
necessary to take advantage of transient opportunities in
the rapidly changing telecommunications market; and
* permit any excess fiber capacity that may exist from time to
time to be more efficiently marketed with lower transaction
costs (instead of negotiating with four separate companies,
third parties can deal with one system-wide entity).
Finally, the proposed arrangements will serve a financial
risk-spreading function similar to that served by CSW Credit through its
purchase of accounts receivable from other CSW companies, which the
Commission has previously authorized.[12] Like CSW Credit, which give the
CSW operating companies the benefits of an asset (i.e., accounts
receivable) while allowing them to divest themselves of the costs and
risks associated with that asset (i.e., collection costs and collection
risks), CSW Communications will give CPL and its sister companies the
benefits of an asset (i.e., the Fiber System) while allowing them to
divest themselves of the associated costs and risks (i.e., ownership
costs, the overbuilding risk and the associated financial and regulatory
risks if a portion of the Fiber System is not "used and useful" and the
marketing costs and risks associated with undertaking to lease 20 fibers
directly).
_______________
[12] See, e.g., Central and South West Corporation, HCAR No. 35-23767
(July 19, 1985); HCAR No. 35-24157 (July 31, 1986).
<PAGE> 20
The Commission has previously authorized a variety of
subsidiaries to render services or to construct or acquire facilities in
support of the utility activities of registered systems. In one recent
order, the Commission authorized The Southern Company to establish a rail
subsidiary to "facilitate the construction and operation of rail lines for
the benefit of the [Southern utility] companies." The Southern Company,
HCAR No. 35-25734 (Jan. 13, 1993). In an earlier order, the Commission
authorized Middle South Utilities (now Entergy) to establish a new
subsidiary to explore investment opportunities in communications and load
management and to enter into a telecommunications-related DSM venture.
Middle South Utilities, HCAR No. 35-22818 (Jan. 11, 1983); Entergy
Corporation, et al., HCAR No. 35-25353, 49 SEC Docket 664 (July 25, 1991).
See also The Southern Company, HCAR No. 35-23440, 31 SEC Docket 556 (Oct.
1, 1984) (authorizing telecommunications venture relating to an energy
optimization program, load management, remote meter reading, rate design,
and remote connection or disconnection of service).[13]
Like the Southern's rail subsidiary, CSW Communications will
"facilitate the construction and operation of . . . lines for the benefit
of the [CSW utility] companies," only instead of rail lines, CSW
Communications will construct and operate fiber optic and other
communications lines. And like Entergy's subsidiary, CSW Communications
will facilitate the development of the communications infrastructure
required for residential demand-side management.
_______________
[13] Although the orders have not dealt with pure communications
subsidiaries, at least one other application is pending -- by The
Southern Company -- requesting authorization for a communications
subsidiary.
<PAGE> 21
2. Transfer of Assets
As noted above, the estimated total cost of construction of the
assets to be transferred by CPL to CSW Communications is $7,029,532, of
which $3,348,704.05 had been invoiced and paid by CPL as of July 30, 1993.
Under the proposed arrangements here, CSW Communications will pay
$3,348,704.05 (plus CPL's cost of capital and associated internal
expenses) upon transfer of the assets (or such greater amount as CPL may
have paid as of the transfer date) and will assume CPL's remaining payment
obligations. Thus, CPL will receive the complete cost of the transferred
assets, in accordance with Rules 90 and 91.
3. Lease of Excess Capacity
Commission orders have authorized registered holding company
systems to lease excess fiber optic and other communications capacity to
third parties. See Appalachian Power Company, et al., HCAR No. 35-24772
(Dec. 9, 1988) (excess fiber optic capacity); Consolidated Gas
Transmission Corp., HCAR No. 35-23914, 34 SEC Docket 750 (Nov. 20, 1985)
(excess microwave communications channels).[14]
Outside of the communications area, numerous Commission orders
have permitted the lease of excess capacity. E.g., Appalachian Power
Company, HCAR No. 18971, 6 SEC Docket 868 (May 7, 1975) (sublease of
excess railcars); Indiana & Michigan Electric Company, HCAR No. 19212, 8
SEC Docket 172 (Oct. 15, 1975) (same); Monongahela Power Co., et al., HCAR
No. 22176, 23 SEC Docket 700 (Aug. 24, 1981) (same); Georgia Power Co.,
_______________
[14] A second application for the lease of excess fiber optic is pending
and has been noticed by the Commission. Jersey Central Power & Light
Co., et al., HCAR No. 35-25359 (Aug. 9, 1991).
<PAGE> 22
HCAR No. 22487, 25 SEC Docket 265 (May 3, 1982) (same); System Fuels,
Inc., et al., HCAR No. 22556, 25 SEC Docket 812 (June 29, 1982) (same);
Central Power and Light Company, et al., HCAR No. 23755, 33 SEC Docket 833
(July 2, 1985) (same); Indiana & Michigan Electric Company, HCAR No.
19986, 11 SEC Docket 2249 (Apr. 14, 1977) (coal barges and towboats); Ohio
Power Company, HCAR No. 21975, 22 SEC Docket 584 (March 24, 1981) (coal
barges); Indiana & Michigan Electric Company, HCAR No. 24039, 35 SEC
Docket 207 (Mar. 4, 1986) (towboats, barges and related coal handling
equipment).
Public Interest
As discussed above, the proposed transactions will facilitate the
development of a Fiber System that will upgrade and improve the
reliability of existing CSW system microwave communications system and
facilitate the introduction of residential demand-side management, remote
meter reading, remote connection and disconnection of service, remote
control and monitoring of transmission and distribution systems, and other
innovations -- all of which will benefit CPL customers. By reducing the
cost of the Fiber System, the proposed transactions will enable the CSW
system and its ratepayers to have the benefits of a larger fiber optic
system, at lower cost, than would otherwise be possible.
For CPL, the arrangements provide the benefits of a low-cost
fiber system without the risks of overbuilding and underbuilding and
without the costs and risks of owning and attempting to lease excess
capacity directly. CPL will thereby avoid the market risk of being unable
to lease some or all of the available capacity of the Fiber System for
some or all of the period in question. In addition, CPL will not be
required to hire additional personnel or devote CPL personnel or resources
<PAGE> 23
to engage in leasing efforts. (The costs and benefits of the Fiber System
and the proposed lease arrangements to CPL consumers are described in
further detail above and in the Fiber Study.)
The exact rate treatment of the Fiber System will be determined
by the applicable state regulatory commissions. In the case of the
Initial Segment, the rate treatment will be determined by the Public
Utility Commission of Texas when CPL files its next rate case. In
general, CPL expects to seek treatment similar to that of its existing
microwave system. In accordance with that treatment, CPL expects to
include amounts paid to CSW Communications for the use of the Initial
Segment in its cost of service calculation at such time -- and to the
extent -- that the Initial Segment is put to use in CPL's electric utility
operations. Base rent under the CapRock lease and proceeds to CSW
Communications from CapRock under the purchase option will reduce charges
to CPL and will reduce CPL's cost of service to a commensurate extent.
The proposed lease terms were the product of arm's-length
negotiation and are to the benefit of CPL and its ratepayers, with no
detriment to the public or securityholders of CSW or CPL. At
approximately $5 million, the exercise price of the option is more than
eight times the $600,000 marginal cost of construction of the optioned
fibers[15], one-and-one-half times the $3.3 million average cost of the
optioned fibers[16], and approximately 70% of the total cost of
construction of the entire 42-fiber Initial Segment. The proceeds of the
_______________
[15] Representing the additional material cost of the 20 fibers subject to
the purchase option.
[16] Based on total construction costs of $7 million for 42 fibers.
<PAGE> 24
purchase option would be credited against the cost of the Initial Segment
and would reduce the cost of the Initial Segment to approximately $2.0
million -- a small fraction of what it would otherwise cost to construct a
22-fiber system from Corpus Christi to Harlingen to McAllen. CPL's
payments to CSW Communications would be reduced commensurately.
Item 4. Regulatory Approval.
No approval of any state or federal regulatory authority, other
than the Commission under the Act, is required for the transactions
proposed in this Application.
As noted in footnote 9, it is intended that all lease and
sublease transactions be conducted in compliance with applicable
regulations (if any) of the FCC and PUCT. At the federal level, it is
intended that CSW Communications conduct its activities so as to be a
private carrier, for which no FCC approval is required and no tariffs need
be filed. At the state level, certain types of communications companies
are required by Texas law to register with the PUCT (which registration is
accomplished by filing a brief informational statement) and thereafter to
file tariffs and periodic reports. Applicants do not believe that any
such registration or filing requirements will apply to CSW Communications
in connection with the transactions proposed herein, and in any event, no
PUCT approvals are required in connection with such registration and
filings. In addition, it is anticipated that the lease from CSW
Communications to CapRock will require CapRock to make all regulatory
filings required in connection with its fiber subleasing activities and
otherwise to conduct its activities in accordance with applicable law.
<PAGE> 25
Representatives of CSW have held individual meetings with each of
the three commissioners of the PUCT, in which CSW advised them of, and
answered questions concerning, the transactions proposed herein. In
addition, CSW provided a copy of the Application-Declaration (as then on
file with the Commission, except as to confidential exhibits) to Mr. Ali
Al-Jabir, manager of economic and regulatory policy for the PUCT.
Item 5. Procedure.
Applicants request that the Commission issue and publish no later
than August 27, 1993, the requisite notice under Rule 23 with respect to
the filing of this Application, such notice to specify a date not later
than September 20, 1993, as the date after which an order granting and
permitting this Application to become effective may be entered by the
Commission and the Commission enter not later than September 21, 1993, an
appropriate order granting and permitting this Application to become
effective.
Applicants respectfully request that appropriate and timely
action be taken by the Commission in this matter in order to permit
consummation of the proposed transactions in accordance with the schedule
outlined above.
No recommended decision by a hearing officer or any other
responsible officer of the Commission is necessary or required in this
matter. The Division of Investment Management of the Commission may
assist in the preparation of the Commission's decision in this matter.
There should be no 30-day waiting period between the issuance and the
effective date or 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> 26
Item 6. Exhibits and Financial Statements.
Exhibit A-1 Form of Certificate of Incorporation and By-Laws of
CSW Communications (previously filed).
Exhibit B-1 Form of Fiber System Lease and Option Agreement
(previously filed).
Exhibit F-1 Preliminary opinion of Milbank, Tweed, Hadley &
McCloy, counsel to CSW and CPL.
Exhibit F-2 Final or "past tense" opinion of Milbank, Tweed,
Hadley & McCloy, counsel to CSW and CPL (to be
filed with Certificate of Notification).
Exhibit G-1 Proposed Notice of Proceeding (previously filed).
Confidential
Exhibit G-2 1993 Backbone Network Capacity Forecast (previously
filed).
Confidential
Exhibit G-3 Supplemental Information Requested by the Staff of
the Commission (previously filed).
Exhibit G-4 Financial Statements per books and pro forma as of
June 30, 1993 of CSW and consolidated subsidiaries,
CSW, CPL and CSW Communications (previously filed
as "Exhibit 5").
Item 7. Information as to Environmental Effects.
The proposed transactions do not involve major federal action
having a significant effect on the human environment. To the best of
CSW's and CPL's knowledge, no federal agency has prepared or is preparing
an environmental impact statement with respect to the proposed
transactions.
<PAGE> 27
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: January 27, 1994
CENTRAL AND SOUTH WEST CORPORATION
By: /s/ STEPHEN J. MCDONNELL
Stephen J. McDonnell
Treasurer
<PAGE> 28
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: January 27, 1994
CENTRAL POWER AND LIGHT COMPANY
By: /s/ DAVID P. SARTIN
David P. Sartin
Controller
<PAGE> 1
RESTATED INDEX OF EXHIBITS
EXHIBIT TRANSMISSION
NUMBER EXHIBIT METHOD
- ------- ------- ------------
A-1 Form of Certificate of Incorporation ---
and By-Laws of CSW Communications
(previously filed).
B-1 Form of Fiber System Lease and Option ---
Agreement (previously filed).
F-1 Preliminary opinion of Milbank, Tweed, Electronic
Hadley & McCloy, counsel to CSW and CPL.
F-2 Final or "past tense" opinion of Milbank, ---
Tweed, Hadley & McCloy, counsel to CSW
and CPL (to be filed with Certificate of
Notification).
G-1 Proposed Notice of Proceeding (previously ---
filed).
G-2 1993 Backbone Network Capacity Forecast ---
(Confidential Treatment) (previously filed).
G-3 Supplemental Information Requested by ---
the Staff of the Commission (Confidential
Treatment) (previously filed).
G-4 Financial Statements per books and pro ---
forma as of June 30, 1993 of CSW and
consolidated subsidiaries, CSW, CPL and
CSW Communications (previously filed as
"Exhibit 5").
<PAGE> 1
EXHIBIT F-1
-----------
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
January 27, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Central and South West Corporation
Form U-1 Application-Declaration
(File No. 70-8199)
Dear Sirs:
We refer to the Form U-1 Application-Declaration, as amended (the
"Application"), under the Public Utility Holding Company Act of 1935, as
amended (the "Act"), filed with the Securities and Exchange Commission (the
"Commission") by Central and South West Corporation ("CSW"), a Delaware
corporation and a registered public utility holding company, and Central Power
and Light Company ("CPL"), a Texas corporation and a wholly-owned electric
utility subsidiary of CSW. The Application seeks authorization, among other
things, (a) for CSW to establish and acquire the capital stock of a new,
wholly-owned communications subsidiary company ("CSW Communications"); (b) for
CSW Communications to acquire certain assets, which are referred to in the
Application and hereinafter as the Initial Segment, from CPL; (c) for CSW
Communications to lease fiber optic capacity or otherwise provide
communications services to CPL and other companies in the CSW system; and (d)
for CSW Communications to lease a portion of the Initial Segment and
associated electronic and optical equipment to CapRock Fiber Network, Ltd., an
unaffiliated third party, all as more fully set forth in the Application and
the Form of Fiber System Lease and Option Agreement filed as Exhibit B-1
thereto (the "Transactions"). We have acted as special counsel for CSW and
CPL in connection with the Application and, as such counsel, we are familiar
with the corporate proceedings taken by CSW and CPL in connection with the
Transactions as described in the Application. Terms used herein and not
defined herein shall have the respective meanings assigned thereto in the
Application and the exhibits thereto.
We have examined originals, or copies certified to our satisfaction,
of such corporate records of CSW and CPL, certificates of public officials,
certificates of officers and representatives of CSW and CPL, and other
documents as we have deemed it necessary to examine as a basis for the
opinions hereinafter expressed. In such examination we have assumed the
<PAGE> 2
genuineness of all signatures and the authenticity of all documents submitted
to us as originals and the conformity with the originals of all documents
submitted to us as copies. As to various questions of fact material to such
opinions we have, when relevant facts were not independently established,
relied upon certificates of officers of CSW and CPL and other appropriate
persons and statements contained in the Application and the exhibits thereto.
The opinions expressed below in respect of the Transactions
described in the Application are subject to the following assumptions and
conditions:
1. The Transactions shall have been duly authorized and approved to
the extent required by the governing corporate documents and
applicable state laws by the Boards of Directors and shareholders of
CSW, CPL, and CSW Communications.
2. All required approvals, authorizations, consents, certificates,
and orders of, and all filings and registrations with, all
applicable federal and state commissions and regulatory authorities
with respect to the Transactions (including the approval and
authorization of the Commission under the Act) shall have been
obtained or made, as the case may be, and shall remain in effect;
the Commission shall have duly entered an appropriate order or
orders granting and permitting the Application to become effective
with respect to the Transactions as described in the Application;
and the Transactions shall have been accomplished in accordance with
all such approvals, authorizations, consents, certificates, orders,
filings and registrations.
3. A certificate of incorporation for CSW Communications shall have
been duly and validly filed with the Secretary of State of the State
of Delaware in substantially the form of the Form of Certificate of
Incorporation filed as Exhibit A-1 to the Application, and such
other corporate formalities as are required by Delaware law for the
organization of a corporation shall have been taken.
4. CPL shall have obtained all consents, waivers and releases, if
any, required under all applicable governing corporate documents,
contracts, agreements, debt instruments, indentures, franchises,
licenses and permits, if any, for the transfer of the Initial
Segment and associated equipment to CSW Communications.
5. No act or event other than as described herein shall have
occurred subsequent to the date hereof which would change the
opinions expressed above.
6. The consummation of the Transactions shall be conducted under
our supervision and all legal matters incident thereto shall be
satisfactory to us, including the receipt in satisfactory form of
such opinions of other counsel, qualified to practice in
jurisdictions pertaining to the Transactions in which we are not
admitted to practice, as we may deem appropriate.
<PAGE> 3
Based upon the foregoing, and subject to the assumptions and
conditions set forth above, and having regard to legal considerations which we
deem relevant, we are of the opinion that, in the event that the proposed
Transactions are consummated in accordance with the Application:
a. All state laws applicable to the proposed Transactions will
have been complied with.
b. CSW is, and CSW Communications will be, validly organized
and duly existing under the laws of the State of Delaware, and CPL
is validly organized and duly existing under the laws of the State
of Texas.
c. Any shares of common stock, par value one cent ($.01) per
share, of CSW Communications ("CSW Communications Common Shares")
issued to CSW in connection with the proposed Transactions will be
validly issued, fully paid and nonassessable, and CSW, as the holder
thereof, will be entitled to the rights and privileges appertaining
thereto set forth in the Certificate of Incorporation of CSW
Communications.
d. CSW will legally acquire any CSW Communications Common
Shares issued to CSW in connection with the proposed Transactions.
e. The consummation of the proposed Transactions will not
violate the legal rights of the holders of any securities issued by
CSW or CPL or any associate company of CSW or CPL.
We hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ MILBANK, TWEED, HADLEY & MCCLOY
Milbank, Tweed, Hadley & McCloy
TAW/RBW
