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File No. 70-8677
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM U-1 APPLICATION-DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________
CENTRAL POWER AND LIGHT COMPANY
539 North Carancahua Street
Corpus Christi, Texas 78401
(Name of company filing this statement and address
of principal executive office)
_________________________
CENTRAL AND SOUTH WEST CORPORATION
(Name of top registered holding company parent)
_________________________
Shirley S. Briones, Treasurer
Central Power and Light Company
539 North Carancahua Street
Corpus Christi, Texas 78401
Stephen J. McDonnell, Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75266-0164
Joris M. Hogan, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
(Names and addresses of agents for service)
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Central Power and Light Company (the "Company"), a Texas corporation
and a wholly-owned electric public utility subsidiary of Central and South
West Corporation ("CSW"), a Delaware corporation and a registered holding
company under the Public Utility Holding Company Act of 1935, as amended (the
"Act"), hereby files this Amendment No. 2 to Form U-1 Application-Declaration
in File No. 70-8677 for the purpose of amending Item 1 in the following
respect. In all other respects, the Application-Declaration as previously
filed and amended will remain the same.
Item 1.Description of Proposed Transaction.
Item 1 is hereby restated in its entirety to read as follows:
The Company is seeking authority through December 31, 1998, to incur
obligations in connection with the proposed issuance by Nueces County
Navigation District No. 1 ("Nueces") and/or Guadalupe - Blanco River Authority
(Texas) ("Guadalupe") in one or more series of up to $95,000,000 aggregate
principal amount of Pollution Control Revenue Bonds of which (i) up to
$45,000,000 aggregate principal amount may be Pollution Control Revenue
Refunding Bonds (Central Power and Light Company Project) (the "Refunding
Bonds"), and (ii) up to $50,000,000 aggregate principal amount may be new
money Revenue Bonds (Central Power and Light Company Project) (the "New Money
Bonds" and, together with the Refunding Bonds, the "New Bonds"). The issuance
of New Money Bonds may be combined with the issuance of Refunding Bonds.
Guadalupe and Nueces are each referred to herein as an "Issuer" and, together
as the "Issuers".
The purpose of the issuance of the Refunding Bonds is to reacquire
all or a portion of (i) Nueces' $7,425,000 of outstanding 7-1/8% Environmental
Improvement Revenue Bonds (Central Power and Light Company Facilities) Series
1974, Issue A (the "Series 1974A Bonds"), (ii) Nueces' $1,000,000 of
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outstanding 7-1/8% Environmental Improvement Revenue Bonds (Central Power and
Light Company Facilities) Series 1974, Issue B (the "Series 1974B Bonds"),
(iii) Guadalupe's $33,465,000 of outstanding 6% Pollution Control Revenue
Bonds (Central Power and Light Company Project) Series 1977 (the "Series 1977
Bonds") and (iv) Guadalupe's $770,000 of outstanding 6% Pollution Control
Revenue Bonds (Central Power and Light Company Project) Series 1977A (the
"Series 1977A Bonds" and, together with the Series 1974A Bonds, Series 1974B
Bonds and Series 1977 Bonds, the "Old Bonds"). The purpose of the issuance of
the New Money Bonds is to reimburse the Company's treasury for any
expenditures made that qualify for tax-exempt financing or to provide for
current solid waste expenditures. See "Use of Proceeds" below.
As discussed below under the heading "Managing Interest Rates", the
Company also seeks authorization to manage interest rate risk or lower its
interest rate costs on any variable rate New Bonds through the use of caps and
floors and related instruments during the life of the New Bonds.
The Old Bonds
In July 1974, Nueces issued the Series 1974A Bonds and the Series
1974B Bonds pursuant to the Indenture of Trust between Nueces and NationsBank
of Texas, N.A., Dallas, Texas (successor to Commerce Union Bank, Nashville,
Tennessee), as Trustee. In November 1977, Guadalupe issued the Series 1977
Bonds and the Series 1977A Bonds pursuant to the Indenture of Trust between
Guadalupe and Texas Commerce Bank - Dallas, N.A. (successor to Corpus Christi
National Bank), as Trustee. The Indentures of Trust for the Old Bonds are
referred to collectively herein as the "Indentures". NationsBank of Texas,
N.A., Dallas, Texas and Texas Commerce Bank - Dallas, N.A. are referred to
collectively herein as the "Trustees".
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Certain terms of the Indentures include the following:
Interest
Series Rate Maturity Date First Redemption Date (1)
(per annum)
1974A 7-1/8% June 1, 2004 June 1, 1984
1974B 7-1/8% June 1, 2004 June 1, 1984
1977 6% November 1, 2007November 1, 1987
1977A 6% November 1, 2007November 1, 1987
____________________________
(1)The Indentures provide that the bonds of each series may not be redeemed
prior to its First Redemption Date and thereafter may be redeemed at the
then applicable redemption price plus accrued interest to the redemption
date. The Old Bonds are currently callable at par.
The Company and the Issuers entered into Installment Sale Agreements
(the "Sale Agreements") between the Issuers and the Company to provide for the
issuance of the Old Bonds. In connection with the issuance of the New Bonds,
the Company will (i) amend the Sale Agreements, (ii) enter into agreements
with substantially the same terms as the Sale Agreements and/or (iii) enter
into new installment sale agreements (each, an "Amended Sale Agreement").
The Series 1974A Bonds and the Series 1974B Bonds were originally
issued to provide funds for the acquisition, construction and improvement of
air and water pollution control facilities (the "Davis Facilities") at the
Barney M. Davis Power Station (the "Davis Power Station") which is operated by
the Company and located in Nueces County, Texas.
The Series 1977 Bonds and the Series 1977A Bonds were originally
issued to provide funds for the acquisition, construction and improvement of
certain facilities designed to abate or control air and water pollution (the
"Coleto Facilities", and together with the Davis Facilities, the "Facilities")
at the Coleto Creek generating plant (the "Coleto Plant", and together with
the Davis Power Station, the "Plants") of the Company located in Goliad
County, Texas.
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The Series 1974A Bonds and the Series 1977 Bonds are subject to
sinking fund provisions. The Company looses the tax-exempt financing on the
amount of the sinking funds each year. To date, the Company has lost an
aggregate $4,535,000 in tax-exempt financing due to the sinking fund
requirements imposed on the Series 1974A Bonds and the Series 1977 Bonds:
Original Sinking Fund Current
Principal Payments Other Principal
Series Amount to date Redemptions Amount
------ ----------- ------------ ----------- ------------
1974A 8,825,000 1,400,000 0 7,425,000
1974B 1,000,000 0 0 1,000,000
1977 36,600,000 3,135,000 0 33,465,000
1977A 1,000,000 0 230,000 770,000
----------- ----------- ----------- -----------
$47,425,000 $ 4,535,000 $ 230,000 $42,660,000
By refunding the Old bonds, the Company will preserve tax-exempt financing on
the $40,890,000 aggregate principal amount of the Series 1974A Bonds and the
Series 1977 Bonds.
Terms of the New Bonds
The New Bonds will bear interest at a fixed or floating rate, may or
may not be secured with First Mortgage Bonds and will mature in not more than
forty years. The interest rate, redemption provisions and other terms and
conditions applicable to the New Bonds will be determined by negotiations
between the Company and one or more investment banking firms or other entities
that will purchase or underwrite the New Bonds (the "Purchasers"). It is
anticipated that (i) the New Bonds will be redeemable at any time in whole at
the option of the Company at the principal amount thereof plus accrued
interest, upon the occurrence of various extraordinary events specified in the
Amended Sale Agreements, as supplemented, or similar documents utilized in
connection with the issuance of the New Bonds, and the Indentures as amended
by one or more supplements (each a "Supplemental Indenture"), or a new
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indenture (the "New Indenture"), relating generally to (a) destruction or
condemnation of the Facilities or the Plants, (b) conditions rendering
operation of the Facilities or the Plants infeasible, (c) the imposition on
the Company or the Issuers of unreasonable burdens or excessive liabilities
with respect to the Facilities or the Plants, or (d) if a constitutional
amendment or legislative, administrative or judicial action causes the
obligations of the Company under the Sale Agreements to become unenforceable
or impossible of performance in any material respect with the expressed
intention of the parties; (ii) the New Bonds will be subject to optional
redemption in whole or in part at times and with premiums to be determined by
negotiations between the Company and the Purchaser(s); and (iii) the New Bonds
will be subject to special mandatory redemption, in whole or in part, at the
principal amount thereof plus accrued interest, in the event the interest on
the New Bonds becomes subject to federal income tax.
Pursuant to the Sale Agreements, the Company transferred the Davis
Facilities and the Coleto Facilities to Nueces and Guadalupe, respectively,
which financed the acquisitions and related costs thereof with the proceeds of
the Old Bonds. The Sale Agreements contain commitments by the Company to pay
to the Issuers at specified times amounts sufficient to enable the Issuers to
pay debt service on the Old Bonds, including principal, interest and
redemption premium, if any.
The Company may obtain credit enhancement for the New Bonds, which
could include bond insurance, a letter of credit or a liquidity facility. Due
to heightened credit sensitivity in the short-term tax-exempt market, the
Company anticipates it may be required to provide credit enhancement if it
were to issue floating rate bonds, whereas credit enhancement would be a
purely economic decision for the Company if it were to issue fixed rate bonds.
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The Company anticipates that even though it would be required to pay a premium
or fee to obtain the credit enhancement, it would realize a net benefit
through a reduced interest rate on the New Bonds. The Company would obtain
credit enhancement only if it determines it would be economically beneficial
to do so.
If bond insurance is obtained, the Company may be required to enter
into an agreement with the insurer and an escrow agent pursuant to which the
Company would be obligated to make payments of certain amounts into an escrow
fund upon the Company's failure to maintain certain financial ratios and on
the occurrence of certain other events. Amounts held in such an escrow fund
would be payable to the insurer as an indemnity for any amounts paid by the
insurer with respect to principal or interest on the New Bonds. The New Bonds
may also contain other terms and conditions deemed necessary or desirable to
take maximum advantage of the then current market conditions.
The Company also requests authority to issue First Mortgage Bonds as
security for the payment of the New Bonds, at its option, depending upon
market conditions at the time of issuance of the New Bonds. The Company will
issue First Mortgage Bonds, subject to applicable indenture restrictions upon
the issuance thereof, by executing a Supplemental Indenture to its
Mortgage Indenture dated November 1, 1943 to the First National Bank of
Chicago and A.H. Bohm (the "Mortgage Indenture"). Such First Mortgage Bonds
will be issued to the Trustee for the New Bonds pursuant to the Mortgage
Indenture. The First Mortgage Bonds will be held by the Trustee solely for
the benefit of the holders of the New Bonds and will not be transferable
except to a successor Trustee. The First Mortgage Bonds will be issued in the
exact amount and have substantially the same terms as the New Bonds. To the
extent payments in respect of the New Bonds are made in accordance with their
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terms, corresponding payment obligations under the First Mortgage Bonds will
be deemed satisfied.
As applied to any First Mortgage Bonds that may be issued as
collateral for the New Bonds, the optional redemption provisions described
herein may deviate from the Securities and Exchange Commission's (the
"Commission") Statement of Policy Regarding First Mortgage Bonds Subject to
the Public Utility Holding Company Act of 1935, Release No. 35-13105, 21 Fed.
Reg. 1286 (1956), as supplemented by Commission Release No. 35-16369, 34 Fed.
Reg. 9553 (1969) (together, the "Statement of Policy"), in that the First
Mortgage Bonds may be subject to a redemption limitation of up to fifteen
years while the Statement of Policy requires that first mortgage bonds be
subject to redemption at any time upon reasonable notice and with reasonable
redemption premiums, if any. The Company has been advised by several
investment banks that purchasers of fixed-rate, tax-exempt bonds generally
expect a ten year redemption limitation and that failure to include such a
limitation may cause the New Bonds to be unmarketable to a large pool of such
purchasers, and may result in an increase in the effective interest cost to
the Company. In consideration of current and future market expectations with
regard to redemption limitations, the Company hereby requests that the
Commission approve the above-described deviation from the Statement of Policy
so that the First Mortgage Bonds, and therefore the New Bonds, may contain up
to a 15 year optional redemption limitation.
As applied to the First Mortgage Bonds, any sinking fund provisions
may also deviate from the Statement of Policy, in that the First Mortgage
Bonds will not have sinking fund provisions unless the New Bonds have sinking
fund provisions. The Statement of Policy requires the Company to deposit
annually with the trustee for the First Mortgage Bonds an amount of cash equal
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to not less than one percent of the aggregate principal amount of Bonds of all
series authenticated under the First Mortgage Bond indenture. The Company has
been advised by several investment bankers that purchasers of private activity
bonds generally do not expect sinking fund provisions. In light of market
expectations, and the Company's desire to retain 'permanent' tax-exempt
financing (see "The Old Bonds" above), the Company hereby requests that the
Commission approve the above-described deviation from the Statement of Policy
so that the First Mortgage Bonds, and therefore the New Bonds, may omit
sinking fund provisions.
The Company also requests a waiver from the requirement in the
Statement of Policy for a limitation on dividends. The Company
believes that dividend limitations, if any, are a matter best left to the
financial marketplace and the state regulatory commissions. The limitation on
dividends provision in the Statement of Policy was adopted when accounting
standards and ratemaking practices were very different from today. For
example, ratemaking disallowances on grounds of alleged lack of prudence or
alleged excess capacity have become more prevalent today. Under today's
accounting requirements, disallowances might result in charges to the income
statement and current retained earnings, which could preclude the payment of
dividends on common stock.
All of the Company's bonds of Series AA and prior contain dividend
restrictions in the supplemental indentures which will continue to limit the
Company's dividend payments until all such bonds mature or are retired. In
light of these dividend restrictions and provisions in the Company's Articles
of Incorporation restricting the payment of dividends to a percentage of net
income available for dividends on common stock if the Company's common stock
equity is not maintained at a certain percentage of total capitalization,
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the Company believes that the omission of the limitation on dividends as
contemplated by the Statement of Policy will not materially and adversely
affect the holders of the New Bonds. The terms and provisions of the First
Mortgage Bonds will not otherwise materially deviate from the Statement of
Policy.
Messrs. McCall, Parkhurst & Horton, who are anticipated to act as
Bond Counsel, have informed the Company that they will be prepared to give a
legal opinion that interest on the New Bonds will be excluded from gross
income for federal income tax purposes.
The Company anticipates that the New Bonds will be sold by the
Issuer(s) pursuant to a Bond Purchase Agreement (the "Purchase Agreement")
between the Issuer(s) and one or more Purchasers. The Company may or may not
be a party to the Purchase Agreement, but if it is not a party, the Purchase
Agreement will be subject to approval by the Company and the Company will
enter into a letter of representation with the Purchasers, containing various
warranties, representations and indemnities upon which the Purchasers will
rely in entering into the Purchase Agreement.
The Company requests authority to enter into negotiations with
Purchasers with respect to the interest rate, redemption provisions and other
terms and conditions applicable to the New Bonds and to set the terms of the
New Bonds subject to the receipt of an order under the Act if an order has not
been issued when the Company enters into the Purchase Agreement.
Use of Proceeds
The proceeds of the offering of the New Bonds will be used to
(i) redeem the Old Bonds pursuant to the terms of the Indentures (the
"Redemption") and (ii) reimburse the Company's treasury for any expenditures
made that qualify for tax-exempt financing or to provide for current
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solid waste expenditures. The proceeds of any offering may also be
used to reimburse the Company's treasury for Old Bonds previously acquired.
The Company may be required to deposit the proceeds of the New Bonds
with the Trustees in connection with the Redemption of the Old Bonds. Any
additional funds required to pay for the Redemption of Old Bonds and the costs
of issuance of the New Bonds will be provided by the Company from internally
generated funds and short-term borrowings pursuant to orders of the Commission
dated March 31, 1993 (HCAR No. 35-25777), September 28, 1993 (HCAR No. 35-
25897), March 18, 1994 (HCAR No. 35-26007), June 15, 1994 (HCAR No. 35-26066)
and March 21, 1995 (HCAR No. 35-26254), or subsequent orders (the "Short-Term
Borrowing Orders").
The Company believes that the Redemption of the Old Bonds and the
issuance of floating rate Refunding Bonds could result in substantial savings
to the Company and benefit the Company's ratepayers. Based on the average of
the last 10 years J.J. Kenny Index, it is estimated that the Issuer(s) could
issue floating rate Refunding Bonds at an interest rate of approximately
4.42%. As set forth in Exhibit 11 hereto, the acquisition of the Old Bonds
and the issuance of the floating rate Refunding Bonds based upon the J.J.
Kenny 10 year average would result in an estimated annual aggregate reduction
in interest costs to the Company of $768,809, if all of the Old Bonds were
reacquired. Total interest savings to the Company over the remaining life of
the Old Bonds would aggregate $8,542,020.
In any case, whether or not net present value savings are available,
the Company proposes to refund the Series 1974A Bonds and the Series 1977
Bonds to eliminate the sinking fund requirement so that the current amount of
tax-exempt bonds outstanding will be maintained. To the extent that Series
1974A Bonds and Series 1977 Bonds are retired through the sinking fund,
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the Company would otherwise be required to fund such retired bonds on a
taxable basis, which is a more expensive funding source. For example,
currently a taxable 30 year, no-call ten-year structure is approximately 160
basis points higher than on a tax-exempt basis. The company proposes to
refund the Series 1974B Bonds and the Series 1977A Bonds in conjunction with
the refunding of the Series 1974A Bonds and the Series 1977 Bonds to achieve
the administrative benefits and associated cost savings resulting from
consolidating several series of bonds into one or two series. In addition, if
the Series 1974B Bonds and the Series 1977A Bonds are not refunded along with
the Series 1974A Bonds and the Series 1977 Bonds, then the Company will likely
not be able to refund the Series 1974B Bonds and the Series 1977A Bonds when
such bonds mature, thus loosing the benefit of the tax-exempt financing,
because the size of such an offering would be too small to market.
None of the proceeds from the sale of New Bonds will be used by CSW
or any subsidiary thereof for the direct or indirect acquisition of an
interest in an exempt wholesale generator ("EWG") or a foreign utility company
("FUCO"). Rule 54 promulgated under the Act states that in determining
whether to approve the issue or sale of a security by a registered holding
company for purposes other than the acquisition of an EWG or a FUCO, or other
transactions by such registered holding company or its subsidiaries other than
with respect to EWGs or FUCOs, the Commission shall not consider the effect of
the capitalization or earnings of any subsidiary which is an EWG or a FUCO
upon the registered holding company system if Rule 53(a), (b) and (c) are
satisfied. As set forth below, all applicable conditions set forth in Rule
53(a) are, and, assuming the consummation of the transactions proposed herein,
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will be, satisfied and none of the conditions set forth in Rule 53(b) exist or
will exist as a result of the transactions proposed herein.
CSW Northwest GP, Inc. and CSW Northwest LP, Inc. (collectively, "CSW
Northwest"), each an indirect subsidiary of CSW, are the only EWGs, as defined
in Section 32 of the Act, in which CSW has equity interests. CSW, through its
subsidiary, CSW Energy, Inc., has invested less than 1% of $1,811,750,000, the
average of CSW's consolidated retained earnings for the four consecutive
quarters ended June 30, 1995, thus satisfying Rule 53(a)(1). CSW will
maintain and make available the books and records required by Rule 53(a)(2).
No more than 2% of the employees of CSW's operating subsidiaries will, at any
one time, directly or indirectly, render services to an EWG or FUCO in which
CSW directly or indirectly owns an interest, satisfying Rule 53(a)(3). And
lastly, CSW will submit a copy of Item 9 and Exhibits G and H of CSW's Form
U5S to each of the public service commissions having jurisdiction over the
retail rates of CSW's operating utility subsidiaries, satisfying Rule
53(a)(4).
None of the conditions described in Rule 53(b) exist with respect to
CSW or any of its subsidiaries, thereby satisfying such rule and making Rule
53(c) inapplicable.
Managing Interest Rates
The Company proposes to manage interest rate risk through the use of
interest rate caps ("Caps") and interest rate collars ("Collars") if it issues
variable rate New Bonds. The Company therefore requests authority from time
to time during the life of the New Bonds to purchase Caps and Collars in
respect of outstanding New Bonds. Caps and Collars are designed to mitigate
and/or transfer interest rate risk and, from the Company's perspective, are
not for speculation purposes. The Company may elect to purchase a Cap to
limit its exposure to rising interest rates. The Company may also elect to
enter into a Collar, which consists of purchasing a Cap together with the sale
of an interest rate floor ("Floor"). The Company will only sell a Floor if it
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is part of a Collar.
The parties to a Cap agree upon a set interest rate, or "strike rate"
that will apply to a series of New Bonds. If the interest rate on the capped
bonds exceeds the strike rate during the term of the Cap, the Cap provider
pays to the Company the difference between the strike rate and the actual
interest rate of the New Bonds. The Company, however, continues to make
interest payments on the New Bonds at the actual interest rate.
A Floor is essentially the opposite of a Cap. As with a Cap, the
parties to a Floor agree on a strike rate. When the actual interest rate on
the New Bonds subject to a Floor falls below the Floor strike rate, the
Company must pay to the Floor provider the difference between the actual
interest rate and the Floor strike rate. The Company continues to make
interest payments on the bonds at the actual interest rate.
Caps and Collars are purchased from a Cap or Collar "provider", at a
purchase price based on a percentage of the aggregate principal amount of the
bonds to be capped or collared. The cost of a Cap or a Collar is determined
by reference to prevailing interest rates, the proposed duration of the Cap or
Collar and the proposed Cap and Floor strike rates. The longer the duration
of a Cap or Collar, the higher the price. The lower the Cap strike rate, the
more expensive the Cap is and the higher the Floor strike rate, the greater
the offset from the Cap price. The maximum the Company would spend on a ten
year Cap would be 10% of the aggregate principal amount of the New Bonds
then outstanding, and the actual cost would be expected to be less than 10%.
Caps and Collars are designed to mitigate interest rate risk and do
not expose the Company to financial or other risks. If the actual interest
rate on the New Bonds does not exceed the Cap strike rate at any time during
the term of the Cap, then the Company will neither benefit from or be exposed
to risk by the Cap or Collar; the Company will only risk the initial cost of
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the Cap or Collar. If the actual interest rate falls below and remains below
the Floor strike rate, the Company will be required to pay interest at the
Floor strike rate. Also, the Company is subject to the credit risk on the Cap
provider's ability to make payments on the Cap.
While Caps and Collars purchased for the New Bonds may technically
exist when the underlying bonds are retired, the Company proposes to terminate
any Caps or Collars upon retirement of the New Bonds. If the Company wishes
to terminate a Cap or Collar when interest rates on the New Bonds are between
the Floor strike rate and the Cap strike rate, it would receive a portion of
the original cost of the Cap or Collar in return, or receive nothing,
depending on interest rates and the remaining term of the Cap or Collar. If
the Company seeks to terminate a Collar when the actual interest rate is below
the Floor strike rate, the Company may be required to pay a termination fee
based upon the value of the Collar to the other party at the time.
Conclusion
The Company believes that the consummation of the transactions
proposed herein will be in the best interests of its consumers and investors
and consistent with sound and prudent financial policy.
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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: September 7, 1995
CENTRAL POWER AND LIGHT COMPANY
By:/s/ SHIRELY S. BRIONES
Shirley S. Briones
Treasurer
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