File No. 70-8809
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 AND SOUTH WEST CORPORATION
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75202
CSW ENERGY, INC.
1616 Woodall Rodgers Freeway
P.O. Box 660789
Dallas, Texas 75202
CSW INTERNATIONAL, INC.
1616 Woodall Rodgers Freeway
P.O. Box 660789
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)
Wendy G. Hargus
Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75202
Terry D. Dennis
President
CSW Energy, Inc.
1616 Woodall Rodgers Freeway
P.O. Box 660789
Dallas, Texas 75202
Terry D. Dennis
President
CSW International, Inc.
1616 Woodall Rodgers Freeway
P.O. Box 660789
Dallas, Texas 75202
Joris M. Hogan
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, NY 10005-1413
(Names and addresses of agents for service)
Respectfully request that copies be sent to:
Edwin F. Feo
Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street
30th Floor
Los Angeles, CA 90017
<PAGE>
Central and South West Corporation, a Delaware corporation ("CSW") and
a registered holding company under the Public Utility Holding Company Act of
1935, as amended (the "Act"), CSW Energy, Inc., a Texas corporation and
wholly-owned nonutility subsidiary of CSW ("Energy"), and CSW International,
Inc., a Delaware corporation and wholly-owned nonutility subsidiary of CSW
("CSWI"), hereby file this Amendment No. 2 to the Form U-1
Application-Declaration (the "Application- Declaration") in this File No.
70-8809 for the purposes of amending Items 1, 3 and 5 thereof and restating the
Application- Declaration, as so amended, in its entirety. In all other respects,
the Application-Declaration as previously filed will remain the same.
1. Items 1 and 3 are amended to update the amount of CSW's "aggregate
investment" (as defined under Rule 53(a) of the Act) in exempt wholesale
generators and foreign utility companies and certain other financial information
provided in Item 3 to satisfy Rule 53(c) under the Act.
2. In Item 1 ("Description of Proposed Transaction"):
(a) The third sentence of the first paragraph of
Subsection (1) is amended to be restated in its entirety as follows:
"Since 1994, CSW, directly or through its wholly-owned subsidiary, CSWI,
has engaged in development and investment activities with respect to EWGs
and foreign utility companies, as defined in Section 33(a) of the Act
("FUCOs" and, collectively with EWGs, the "Exempt Projects"), and is
authorized to provide design, construction, engineering, operation,
maintenance, management, administration, employment, tax, accounting,
economic, financial, fuel, environmental, communications, energy
conservation, demand side management, overhead efficiency, utility
performance and electronic data processing services and software
development and support services in connection therewith to Exempt Projects
and (except for operation) to foreign electric utility enterprises that are
not Exempt Projects."
(b) The last paragraph of Subsection (1) is amended to
be restated in its entirety as follows:
"Under the terms of each of the Financing Orders, CSW may use the
proceeds of common stock sales and borrowings, among other things, to
finance the acquisition of the securities of or otherwise invest in one or
more Exempt Projects, and may issue Guarantees in respect of the securities
of such Exempt Projects; provided, that the sum of the Guarantees at any
time outstanding and the net proceeds of common stock sales and borrowings
by CSW that may at any time be used by CSW to fund investments in Exempt
Projects (whether directly or indirectly through Energy, CSWI or Project
Parents) shall not, when added to CSW's "aggregate investment," as defined
in Rule 53(a) under the Act, in all such entities, exceed 50% of CSW's
"consolidated retained earnings." The term "consolidated retained
earnings," also defined in Rule 53(a), is the average of consolidated
retained earnings for the previous four quarters, as reported in CSW's
Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. CSW's
"consolidated retained earnings" as of June 30, 1996 were approximately
$1.883 billion."
(c) The last two sentences of the first paragraph of Subsection (2)(a)
are deleted in their entirety and replaced as follows:
"As of April 30, 1996, CSW UK had acquired shares representing 100% of the
outstanding share capital of SEEBOARD."
(d) The third paragraph of Subsection (2)(a) is
amended to be restated in its entirety as follows:
"As of August 15, 1996, having acquired 100% of the outstanding
share capital of SEEBOARD, CSW had contributed approximately $829 million
of the purchase price of SEEBOARD, and had an "aggregate investment" (as
defined under Rule 53(a) of the Act) in SEEBOARD of approximately $829
million. CSW initially obtained such funds through borrowings under an $850
million credit agreement (the "CSW Credit Agreement"). On February 27,
1996, CSW sold 15,525,000 shares of CSW common stock and received
approximately $398 million in net proceeds, which CSW used on February 28,
1996 to repay a portion of the indebtedness incurred by CSW to finance the
acquisition of SEEBOARD. On June 6, 1996, CSW completed the sale of
Transok, Inc. and on June 13, 1996, used a portion of the net proceeds from
such sale to repay in full the remaining indebtedness outstanding under the
CSW Credit Agreement. The remaining funds needed to consummate the
acquisition -- approximately $1.29 billion -- have been obtained by CSW UK
from capital contributions or loans by its sole shareholder, CSW
Investments, which arranged a credit facility (the "CSW Investments Credit
Facility") for that purpose. CSW Investments is a company organized under
the laws of the United Kingdom and is an indirect, wholly-owned subsidiary
of CSWI. The CSW Investments Credit Facility is neither guaranteed by, nor
otherwise provides for recourse to, CSW, CSWI or any of CSW's operating
utility subsidiaries. As of August 15, 1996, CSW Investments had borrowed
approximately $1.27 billion under the CSW Investments Credit Facility
solely to fund CSW's investment in SEEBOARD. As of September 3, 1996, CSW
UK transferred all of the share capital of SEEBOARD to SEEBOARD Group plc,
also a wholly-owned indirect subsidiary of CSW, to allow CSW to enjoy
certain tax benefits that had accrued to CSW UK.1 CSW Investments
anticipates that amounts borrowed under the CSW Investments Credit
Facility, or amounts borrowed in the capital markets in order to refinance
indebtedness under the CSW Investments Credit Facility, will be repaid
through dividends and other amounts received, indirectly through SEEBOARD
Group plc, from SEEBOARD. Giving effect to the financing arrangements
described above, CSW's "aggregate investment" (as defined under Rule 53(a)
of the Act) in SEEBOARD is expected to remain approximately $829 million."
"(1) CSW holds its interest in SEEBOARD indirectly through
several Project Parents. CSW owns 100% of the outstanding share
capital of CSWI. CSWI owns 100% of the outstanding share capital of
each of CSW International Two, Inc., a Delaware corporation ("CSWI
2"), and CSW International Three, Inc., a Delaware corporation ("CSWI
3"). CSWI 2 owns 99.9% of the outstanding share capital of CSW
Investments, and CSWI 3 owns the remaining 0.1% of the outstanding
share capital of CSW Investments. CSW Investments owns 100% of the
outstanding share capital of each of CSW UK and SEEBOARD Group plc.
Prior to September 3, 1996, CSW UK owned all of the outstanding share
capital of SEEBOARD." "As the result of a recent restructuring,
SEEBOARD Group plc owns 100% of the outstanding share capital of
SEEBOARD. On September 3, 1996, CSW Investments restructured its
indirect ownership of SEEBOARD, such that 100% of the outstanding
share capital of SEEBOARD was transferred from CSW UK to SEEBOARD
Group plc. This transaction took CSW UK out of the chain of ownership
of SEEBOARD and made available certain tax attributes of CSW UK. CSW
is seeking a third party to acquire CSW UK, and such tax attributes
will be sold to such third party along with the outstanding share
capital of CSW UK." (e) A new sentence is added immediately at the end
of the fourth paragraph of subsection (2)(a) as follows:
"CSW projects returns of ["P"] % on CSW's investment in SEEBOARD for
the years 1996 through 1999. These returns are commensurate with the
risk associated with a distribution system and demonstrate strong,
solid earnings and steady cash flows. These returns are expected to
contribute to the financial strength of the CSW system for many
years to come."
(f) The first sentence of the last paragraph of Subsection (2)(a) is
deleted in its entirety and replaced as follows:
"When CSW decided to acquire SEEBOARD, CSW anticipated that
SEEBOARD would make an immediate contribution to CSW's earnings per share.
Results for the first and second quarters of 1996 have been consistent with
CSW's expectations. CSW's earnings for the first quarter of 1996 were $51
million, or 26 cents per share, up from $39 million, or 20 cents per share,
for the first quarter of 1995, and CSW's earnings for the second quarter of
1996 were $128 million, or 61 cents per share, up from $103 million, or 54
cents per share, for the second quarter of 1995. Along with higher kilowatt
sales resulting from increased usage and weather-related demand experienced
by the Operating Subsidiaries, the increase was due primarily to the
addition of earnings from SEEBOARD."
(g) The following paragraph is added at the end of
Subsection (2)(a):
"SEEBOARD has been among the most profitable and successful of
the regional electricity companies of the United Kingdom. Among the 12
regional electricity companies in England and Wales that resulted from the
privatization of the sector by the British Government in 1990, SEEBOARD has
achieved amongst the lowest overall customer tariffs and highest overall
returns for its shareholders. Since privatization, not only has SEEBOARD
provided the greatest return to shareholders of all the 12 regional
electricity companies in the U.K., but at the time of its acquisition by
CSW, SEEBOARD had outperformed all the other privatized water, gas and
telecommunication utilities. It also holds the highest ratings for customer
service, as measured by the U.K. Office of Electricity Regulation, and has
a highly regarded management team which, since privatization, has led
SEEBOARD to five years of steady growth in earnings and dividends. By these
measures, with SEEBOARD, CSW believes it acquired the highest rated and
best performing regional electricity company in the United Kingdom."
(h) Subsection (2)(b) is amended to be restated in its
entirety as follows:
"(b) CSW, indirectly through a wholly-owned Mexican subsidiary of
CSWI, and Alpek, S.A. de C.V., a company organized under the laws of the
United Mexican States ("Alpek"), are developing jointly a project near
Altamira, in the state of Tamaulipas, Mexico (the "Altamira Project"),
which will be an Exempt Project. Alpek is a subsidiary of Grupo Alfa, a
large Mexican company with business interests in petrochemicals, food,
steel, telecommunications and other areas. The project is a nominal 105
megawatt gas-fired cogeneration facility that will serve an expanding
industrial park. The project will be expandable to 400 megawatts. Most of
the customers for electricity and steam are either Alpek affiliates or
Alpek joint venture partners that are located either in the industrial park
or some distance away in Monterrey, Mexico. Long-term contracts are
presently in place for all the necessary steam production and for
approximately 20% of the electricity production, with another 60% of the
electricity production having been committed to be purchased under letters
of intent. In each case, such purchases will be made, for the most part, in
U.S. dollars or dollar-indexed pesos. Contract negotiations have also been
completed with the Mexican gas entity, Pemex Gas y Petroquimica B sica, for
the long-term supply of natural gas to the project and with the electric
company, Comisi(cent)n Federal de Electricidad, for a backup supply and the
transportation of electricity. The Altamira Project is expected to begin
construction during the third quarter of 1996 and completion is anticipated
to be in early 1998. CSW is expected to provide financing for the
construction of the Altamira Project until third party financing is
secured. Alpek has guaranteed to CSW the repayment of 50% of such financing
provided by CSW. CSW's expenditures in the Altamira Project as of August
15, 1996 were approximately $2.9 million. However, assuming for purposes of
this Application-Declaration that the agreement by Alpek to guarantee 50%
of the financing to be supplied by CSW until third party financing is
secured does not reduce CSW's "aggregate investment", then during the
construction period, CSW's "aggregate investment" in the Altamira Project
is ultimately expected to be approximately $85 million."
(i) The first paragraph of Subsection 2(c) is amended
to be restated in its entirety as follows:
"(c) Energy, with its partners, Northwest Power Enterprises, Inc.
and KLT Power Generation, Inc., are developing jointly projects in the
Pacific Northwest of the United States. In connection with such development
activities, an EWG application has been filed with and approved by the
Federal Energy Regulatory Commission (the "FERC") for the Northwest
Regional Power Facility."
(j) Subsection (2)(d) is amended to be restated in its
entirety as follows:
"(d) CSWI, indirectly through a Project Parent, has entered into
a letter of intent with a Brazilian company to acquire, directly or
indirectly, an ownership interest in Exempt Projects located in Brazil.
Assuming the transactions in such letter of intent are consummated, CSW's
`aggregate investment' (as defined under Rule 53(a) of the Act) in such
Exempt Projects is expected to be approximately $100 million. CSW's
expenditures on these projects as of August 15, 1996 were approximately
$1.8 million."
(k) Subsection (2)(e) is deleted in its entirety and Subsection (2)(f)
is amended to be redesignated as Subsection (2)(g) and the following new
Subsections (2)(e) and (2)(f) are added immediately following Subsection (2)(d):
"(e) On May 17, 1995, Energy, through its wholly-owned subsidiary
Newgulf Power Venture, Inc., a Delaware corporation ("Newgulf Power"),
purchased an 85 megawatt electric generating facility located in Wharton
County, Texas (the "Newgulf Project"). The electric generating facility was
originally operated by an unaffiliated third party owner as a topping-cycle
cogeneration facility that qualified as a QF and provided steam to a sulfur
mine operated by the former owner. The sulfur mine has been closed and no
longer requires a steam supply from the facility. Energy modified the
generating assets to operate in a combined cycle mode and the Newgulf
Project was deemed ready for commercial operation on September 1, 1996.
Newgulf Power filed and the FERC approved an application for determination
of its status as an EWG in connection with its ownership and operation of
the Newgulf Project. Energy anticipates operating the Newgulf Project
initially during the remaining warm-weather months of 1996. Energy's
`aggregate investment' (as defined under Rule 53(a) of the Act) in the
Newgulf Project as of August 15, 1996 was approximately $15 million. Energy
expects its ultimate `aggregate investment' in the Newgulf Project to be
approximately $17 million by the end of the third quarter of 1996.
"(f) CSW Power Marketing, Inc., a Delaware corporation and a
wholly-owned subsidiary of CSW ("Power Marketing"), filed and the FERC
approved an application for a determination of its status as an EWG. Power
Marketing will conduct business activities such as power marketing, power
brokering and fuel delivery and brokering activities. CSW's `aggregate
investment' (as defined under Rule 53(a) of the Act) in Power Marketing as
of August 15, 1996 was less than $200,000. CSW's `aggregate investment' (as
defined under Rule 53(a) of the Act) in Power Marketing is expected to be
approximately $25 million."
(l) The second sentence of the redesignated Subsection (2)(g) is
amended to be restated in its entirety as follows:
"Giving effect to the additional expected investments and
the assumptions being made for such investments described
above, CSW's `aggregate investment' (as defined under Rule
53(a) of the Act) in Exempt Projects is expected to increase
to at least $1.231 billion by the year 2001, summarized as
follows:
" Approximate Approximate
8/15/96 Anticipated
Project Type Investment Investment
SEEBOARD FUCO $829 million $829 million
Alpek Project FUCO $2.9 million $85 million
Northwest Regional
Power Facility EWG $5 million $175 million
Brazil Project FUCO $0 million $100 million
Newgulf Project EWG $15 million $17 million
Power Marketing EWG $.2 million $25 million
Total $852.1 million $1.231 billion."
(m) Subsection (3)(b)(i) is amended to be restated in
its entirety as follows:
"(i) Operating risks. Each of Energy and CSWI has
focused its project development efforts on projects that use fuel
technologies with which the CSW System has existing competencies in coal,
gas or oil generation. Due diligence of operating assumptions is carried
out by Energy's and CSWI's engineers with experience in the technology
being evaluated and by outside technical consultants. The risk of changes
in the price of fuel is typically passed through to the purchaser of
electricity under the negotiated terms of a long-term power sales
agreement. Other operating risks can be covered by equipment warranties and
by casualty, business interruption and other forms of insurance. Further,
in addition to such operating risks subject to mitigation prior to an
investment, when Energy, CSWI or one of its affiliates is responsible for
managing the day-to-day operations of Exempt Projects in which it holds an
ownership interest, its ability to address and correct problems that may
arise during operation is far greater than would be the case if operating
control were in the hands of a third party."
(n) Subsection (3)(b)(iv) is amended to be restated in
its entirety as follows:
"(iv) Financial risks. Energy and CSWI address the
financial risks of their respective projects in a variety of ways. First
and foremost, Energy and CSWI seek to secure the maximum amount of
permanent debt financing for such projects that is available at reasonable
cost and that is, by its express terms, non-recourse to CSW or any
associate company (other than other Exempt Projects or Project Parents).
This means that the non-recourse debt of each project or foreign utility
system is secured solely by its assets and revenues, and creditors have no
ability to seek repayment upon default from CSW. The amount of such
non-recourse debt applicable to Exempt Projects owned directly or
indirectly by CSW as of August 15, 1996, was approximately $1.27 billion.
This method of financing ensures that CSW's exposure to any independent
power project is limited to the amount of its equity commitment and that
CSW's domestic public utility subsidiaries (the "Operating Companies") and
their customers bear no risk of a project's failure or financial distress.
From time to time, CSW may agree to provide Guarantees in connection with
Exempt Project financings, but these financial supports are carefully
monitored and treated as a part of CSW's equity commitment for regulatory
reporting and internal control purposes. To date, CSW has never been called
upon to fund its obligation under any such Guarantee issued with respect to
an investment in an Exempt Project.
"In addition to the non-recourse nature of the great majority of
project debt financing, project debt is carefully structured to meet, or
match, the characteristics of the particular project. For example, when the
value of a project depends on a long-term, fixed-price, off-take contract
(i.e., a power purchase contract), the project debt is typically designed
to be of a similar term, with scheduled debt payments usually covered by
fixed charges (usually the capacity payment component in the contract). On
the other hand, where there is no long-term, fixed source of revenue, the
percentage of non-recourse debt financing is typically smaller, so that
financial risk is not increased by excessive debt levels. Thus, while
Energy's and CSWI's projects with long-term off-take contracts have debt
capitalization levels in the 70% to 80% range, Energy's and CSWI's other
projects are anticipated to be leveraged at levels similar to those of
United States regulated utilities, in the 45% to 55% range.
"Another financing risk is the potential variability of interest
rates. This risk is addressed, in part, by borrowing, to the extent
possible, on a long-term, fixed-rate basis. After contractual terms for a
project have been agreed but before financial closing, Energy and CSWI are
also exposed to interest rate variability. This risk can be (and will be,
upon approval of the finance department of Energy or CSWI, as the case may
be, as described in the next sentence) mitigated by purchasing financial
instruments which provide hedges against interest rate volatility. The
finance department of Energy or CSWI, as the case may be, is responsible
for reviewing, analyzing and comparing the costs of such financial
instruments and the perceived interest rate risk, for approving the
purchase of such financial instruments when the cost of the perceived risk
exceeds the costs associated with the financial instrument and for
monitoring the use of these instruments to ensure they are used properly."
(o) Subsection (3)(b)(vi) is amended to add the
following sentence immediately at the end of the last paragraph
thereof as follows:
"CSW analyzes the perceived risk and costs associated therewith and
compares that with the cost of obtaining such insurance and, when such
costs associated with such risks exceed the costs of insurance coverage
therefor, CSW plans to procure such insurance."
(p) Subsection (3)(b)(vii) is amended to add the
following sentence immediately at the end of the first paragraph
thereof as follows:
"By the authority of the Commission granted pursuant to the effectiveness
of this Application-Declaration, CSW expects to make additional investments
in Exempt Projects to diversify its portfolio of Exempt Projects by
country, project type and stage of development."
(q) Subsection (3)(b)(vii) is further amended to add
the following sentence immediately at the end of the last
paragraph thereof as follows:
"CSW anticipates that its project portfolio will also provide a positive
contribution to earnings after the turn of the century."
(r) The following new Subsection (3)(c) is added to
Subsection (3) immediately at the end thereof:
"(c) Application of Review Process and Risk Factors to Specific
Investment Decisions: CSW's acquisition activity in the United Kingdom
provides an illustration of the review process and risk analysis outlined
above.
"Review process: The SEEBOARD acquisition project was developed
and executed by a CSW team with past experience in U.K. electric utility
acquisition activity. In October 1995, before focusing on SEEBOARD, CSW
formed a bidding partnership with Houston Industries, Inc. ("Houston"),
under the name Texas Energy Partners, and made an acquisition offer for
another U.K. regional electricity company, Norweb plc. Although the bid was
favorably received by Norweb management, a British water utility made a
higher offer. After careful financial analysis, CSW and Houston increased
their bid, but were again outbid by the British water company. Because a
higher bid posed excessive financial risks and would no longer be
beneficial to CSW's shareholders, CSW made a decision to withdraw.
"Shortly thereafter, CSW met with SEEBOARD's management. After
receiving favorable information regarding SEEBOARD's plans, financial
characteristics, growth opportunities and management group, CSW made a
successful bid.
"Risk factors: In the SEEBOARD acquisition, construction risk was
not a significant factor, since CSW was acquiring a company with existing
facilities. Financial risks were addressed through a financing structure
relying in significant part on non-recourse financing which limits CSW's
exposure.
"In assessing the commercial and operating risks of acquiring
SEEBOARD, CSW took comfort from a number of factors, including SEEBOARD's
extremely successful operating history since privatization, its five-year
record of earnings and its dividend growth. In addition, CSW considered the
high quality of SEEBOARD's management and took steps to retain the services
of existing management following the acquisition.
"To limit the foreign currency risk of the acquisition, CSW took
a number of steps. The bulk of the financing for the acquisition borrowed
under the CSW Investments Credit Facility is denominated in sterling and is
expected to be repaid ultimately out of SEEBOARD's earnings, which are also
in sterling. The remainder of the acquisition financing was in the form of
dollar-denominated borrowings by CSW under the CSW Credit Agreement. These
borrowings have since been repaid in full out of the dollar-denominated
proceeds of an offering of CSW common stock and the sale of Transok, Inc.
By matching the currency of the debt and the repayment source, these
arrangements significantly reduce the exchange rate and currency risks of
the acquisition. Finally, the British pound is freely convertible and
actively traded, and a variety of financial instruments are available if
needed for further management of the currency and exchange rate risk as
required.
"Given the advanced state of the British legal and political
system and the developed state of the British economy, the SEEBOARD
acquisition did not present significant legal, political, country or
economic risks. To reduce any residual legal risk of the acquisition, and
to ensure compliance with local law, CSW engaged U.K. counsel to assist in
the acquisition.
"Finally, the SEEBOARD acquisition added to the diversification
of CSW's investment activity, which theretofore had been concentrated in
Asia and Latin and South America."
(s) The third paragraph of Subsection (4) is amended
to be restated in its entirety as follows:
"Over the past ten (10) years, the Operating Companies have
funded substantially all of their construction expenditures from internal
sources of cash and from sales of senior securities and other borrowings.
Present projections indicate that the Operating Companies will continue to
fund substantially all of their construction expenditures from internal
sources of cash and from sales of senior securities and other borrowings
for the next ten (10) years and that CSW will not have to make any equity
investment in any Operating Company for at least the next ten (10) years.
Thus, acquisitions of Exempt Projects present CSW with the opportunity to
continue to grow through reinvestment of retained earnings in an industry
sector that CSW has decades of experience in, while at the same time
diversifying overall asset risk. In the event that one or more of the
Operating Companies requires additional equity capital after such ten (10)
year period, CSW believes that its investments in Exempt Projects will give
the CSW system a larger and more diversified base for raising equity
capital, because CSW's intended portfolio will be diversified by region and
operating assets and have an increased potential for revenue growth and be
less susceptible to adverse effects from any one particular market. In
addition, as set forth below, CSW believes that its investments in Exempt
Projects will help the CSW system remain competitive as competition
increases in the U.S. electric utility industry. For these reasons, CSW
believes that its investments in Exempt Projects will not have a negative
effect on its ability to make any additional equity investments in the
Operating Companies that may be required in the future."
(t) The last paragraph of Subsection (5) is amended to
be restated in its entirety as follows:
"As described in Subsection (2) above, CSW's `aggregate
investment' in Exempt Projects is expected to increase to at least $1.231
billion by the year 2001, or approximately 65% of CSW's consolidated
retained earnings as of June 30, 1996, without investment in any additional
new Exempt Projects as described in Subsection (4) above. The additional
authority requested herein will be sufficient to enable CSW to make
investments in all Exempt Projects it is presently developing, as well as
additional investment opportunities in Exempt Projects that are under
investigation at present or that arise in the future."
3. In Item 3 ("Applicable Statutory Provisions"):
(a) The phrase "CSW addresses each of these
requirements as follows:" at the end of the second paragraph
thereof is replaced in its entirety with the following:
"The Commission has performed an analysis of the requirements of
Rule 53(c) with respect to an application- declaration filed by The
Southern Company ("Southern") in File No. 70-8725. In such
application-declaration, Southern sought almost identical authority to the
authority sought by the Applicants hereunder, namely relief from the
safe-harbor requirements of Rule 53(a)(1) to allow investments in Exempt
Projects in an amount not to exceed its `consolidated retained earnings.'
The Commission granted such authority by issuing its order making such
application-declaration effective on April 1, 1996 (HCAR No. 26501) (the
"Southern Order"). In that order, the Commission found that Southern had
demonstrated successfully, through the use of certain financial indicators,
that investing in Exempt Projects in an amount not to exceed its
`consolidated retained earnings' would not have a substantial adverse
impact on the financial integrity of its system. A comparison with CSW of
those financial indicators used by Southern, considering the size and
market position of CSW relative to Southern, demonstrates that the
financial integrity of the CSW system is substantially similar to the
financial integrity of the Southern system. As discussed below in
subsection (1)(g) of this Item 3, any overall differences are not
significant especially when compared to other key financial indicators in
which CSW outperforms Southern. Thus, this Application- Declaration, which
seeks substantially the same authority (for CSW to invest in Exempt
Projects in an aggregate amount not to exceed its `consolidated retained
earnings'), is consistent with the rational of, and the conclusions reached
by the Commission in, the Southern Order."
"CSW addresses each of the requirements of Rule
53(c) as follows:"
(b) Subsection (1) is amended to restate the first sentence of the
second paragraph thereof in its entirety as follows:
"The lack of any "substantial adverse impact" on CSW's financial integrity
as a result of increased levels of investments in Exempt Projects can be
demonstrated in several ways, including by analyses of CSW's success to
date in its investment in SEEBOARD and historic trends in CSW's
consolidated capitalization ratios and retained earnings, the market view
of CSW's securities and CSW's proven success in obtaining appropriate
levels of non-recourse debt financing and third-party equity for its
investments in QFs and Exempt Projects."
(c) Subsection (1) is further amended to add the
following paragraphs immediately at the end of the second
paragraph thereof:
"Substantially all of CSW's "aggregate investment" (as defined
under Rule 53(a) of the Act) to date in Exempt Projects is in SEEBOARD. As
noted above, SEEBOARD has achieved amongst the lowest overall customer
tariffs and highest overall returns for its shareholders among the 12
regional electricity companies of the United Kingdom. SEEBOARD holds the
highest ratings for customer service, has a highly regarded management
team, serves an affluent suburban and rural area and is a low
cost-of-service provider. SEEBOARD had net earnings of approximately $118
million for the year ended December 31, 1995, and net earnings for the
first six months of 1996 were $51 million, an increase of $12 million over
results for the same period in 1995. Thus, CSW's investment in SEEBOARD has
improved CSW's overall financial position and demonstrates CSW's ability to
prudently make these types of investments.
"CSW has a solid, competitive core electric utility business,
strong management, a growing international presence and diversified
businesses that provide real and immediate benefits to CSW's core utility
business, as well as enhance the potential for substantial long-term
earnings growth. CSW's consolidated retained earnings have grown on average
approximately 3.8% per year over each of the previous 5 years, and CSW
expects the SEEBOARD acquisition to contribute to additional increases in
its earnings in 1996. In January 1996, CSW declared its 45th consecutive
annual dividend increase making it one of only a handful of companies on
the New York Stock Exchange to have such an uninterrupted history of
dividend increases. CSW's consolidated capitalization and interest coverage
ratios are within industry ranges for Single-A rated companies. In February
1996, CSW successfully issued approximately $400 million of new common
stock, the proceeds of which were used to partially pay down its bridge
debt incurred to fund its equity investment in SEEBOARD. CSW paid down the
remaining portion of that debt in June 1996 with a portion of the proceeds
from the sale of its intrastate gas pipeline subsidiary, Transok, Inc.
Finally, the market's assessment of CSW's prospects for future growth and
earnings compares favorably to other electric utility companies, and its
dividend policy is aligned with the electric industry as a whole. CSW has a
strong "customers first" focus, relatively low rates in the region where
its system operates, experienced management and strong growth prospects.
Due in part to its SEEBOARD investment, CSW expects that its payout ratio
will compare favorably to the rest of the electric utility industry in the
future."
(d) Subsection (1)(a) is amended to add the following
sentence immediately at the end thereof:
"Such percentages are not significantly higher than those of Southern as of
December 31, 1995 (16.3%, 15.4%, 11.0% and 20.4%, respectively) described
by the Commission in the Southern Order as `a relatively small commitment
of capital.'"
(e) Subsection (1)(c) is amended to be deleted in its
entirety and to redesignate the remaining subsections of
Subsection (1) as appropriate.
(f) The first three sentences of the newly designated Subsection
(1)(c) are amended to be restated in their entirety as follows:
"There is every indication that CSW's ability to raise common equity
has been positively affected by investments in Exempt Projects, as
evidenced by CSW's continued success in raising funds in the capital
markets. In February, CSW successfully issued $400 million of its common
stock in a public offering. In addition, CSW has ongoing public offerings
of common stock through its PowerShare program which commenced in February
1994, and on February 27, 1996 sold 15,525,000 shares of common stock of
CSW, at a price of $26.385 per share, the proceeds of which were used to
reduce the bridge debt incurred by CSW to fund its equity investment in
SEEBOARD."
(g) The third sentence of subsection (1)(d) is deleted
in its entirety and replaced as follows:
"The implication of a relatively conservative payout policy is
that CSW's earnings are more than adequate to cover current dividend levels
and to support dividend levels necessary to attract common stock investors,
while continuing to strengthen the equity base through retained earnings
growth."
(h) The following sentences are hereby added immediately after the
second sentence of the newly designated Subsection (1)(f) (beginning with the
words "Specifically, (1) there has been no bankruptcy"):
"SFAS 121 requires a listing of all assets of a utility that a
company plans to write down and take as a loss. CSW presently has no assets
listed pursuant to SFAS 121. Based on CSW's current knowledge, no assets
with respect to any Exempt Project presently owned (directly or indirectly)
by CSW are expected to be placed on such list pursuant to SFAS 121."
(i) The following sentences are hereby added immediately at the end of
the newly designated Subsection (1)(f):
"None of the circumstances described in Rule 53(b) has occurred.
CSW undertakes to notify the Commission by filing a post-effective
amendment in this proceeding in the event that any of the circumstances
described in Rule 53(b) should occur during the authorization period."
(j) Subsection 1 is amended to add the following new
subsection (g) immediately at the end thereof:
"(g) Any differences between the financial indicators of CSW and
Southern discussed in subsection (a) above are not significant as indicated
by the performance of CSW in certain other key financial indicators. In
particular, based upon publicly available information for Southern, the
average of CSW's recent price/earnings ratio (13.5 for the year ended 1995
and 17.7 for the six months ended June 1996), earnings per share ($2.10 for
the year ended 1995 and $2.08 for the year ended 1994) and return on equity
for shareholders (12.9% for the year ended 1995 and 13.2% for the year
ended 1994) are better than those of Southern. CSW believes that such
financial indicators exemplify the market's positive assessment of CSW's
overall performance and future prospects and that such indicators have been
enhanced by CSW's present strategy of diversifying its holdings to include
investments in Exempt Projects."
(k) The first sentence of the second paragraph of Subsection (2) is
amended to be restated in its entirety as follows:
"The conclusion that the Operating Companies and their customers will not
be adversely impacted by increased levels of investment by CSW in Exempt
Projects is well supported by analyses of the Operating Companies'
financial integrity (including ability of the Operating Companies to issue
senior securities), lack of present and anticipated need for any equity
capital from CSW for the next ten (10) years (as discussed in Subsection
(4) of Item 1 and Subsection (2)(c) of this Item 3), continuing compliance
with other applicable requirements of Rule 53(a) and the proven
effectiveness of State commission oversight together with the affirmation
by the State commissions of Louisiana, Oklahoma and Texas that they have
authority and jurisdiction, and will exercise such authority, to protect
ratepayers in their respective state from any adverse impact, and the
acknowledgement by the State commission of Arkansas that it does not object
to the relief sought by CSW in this Application-Declaration, contained in
the letters from the State commissions filed as Exhibit 2 to this
Application-Declaration. The State commissions can set the cost of capital
for electric utilities by comparison with selected groups of domestic
utilities, which exclude any utilities with adverse impacts due to foreign
investments or EWGs. Therefore, the States have the authority and the
mechanism to prohibit any adverse effects on the cost of capital due to
investments in Exempt Projects from being passed on to ratepayers. CSW has
complied and will continue to comply with the requirements of Rule 53(a)(4)
regarding filing of copies of applications and reports with other
regulatory commissions."
(l) Subsection (2)(a) is amended to be restated in its entirety
(excluding footnote 3, which shall remain as previously stated) as follows:
"(a) All of CSW's investments in Exempt Projects are, and
are currently expected in the future to remain, segregated from the
Operating Companies. The Operating Companies are, and are currently
expected in the future to remain, insulated from the direct effects of
investments by CSW in Exempt Projects. No Operating Company owes
indebtedness or has extended credit or sold or pledged its assets directly
or indirectly to any Exempt Project in which CSW owns any interest, no
Operating Company intends to do so in the future, and any losses that may
be incurred by such Exempt Projects would have no effect on domestic rates
of any Operating Company (because of the Applicants' undertaking not to
seek recovery in rates). CSW represents that it will not seek recovery
through higher rates to the Operating Companies' utility customers in order
to compensate CSW for any possible losses that it may sustain on
investments in Exempt Projects or for any inadequate returns on such
investments."
(m) Subsection 2(c) is amended to restate the first
paragraph thereof in its entirety as follows:
"(c) Additional investments in Exempt Projects will not have any
negative impact on the Operating Companies' ability to fund operations and
growth. The last significant equity infusion by CSW in the Operating
Companies was made in 1985 (approximately $70 million). Over the past 10
years, the Operating Companies have funded substantially all of their
construction expenditures from internal sources of cash and from sales of
senior securities and other borrowings. Present projections indicate that
the Operating Companies will continue to fund substantially all of their
construction expenditures from internal sources of cash and from sales of
senior securities and other borrowings for the next 10 years and that CSW
will not have to make any equity investment in any Operating Company for at
least the next ten (10) years. In addition, present projections indicate
that CSW will not have to make any equity investment in SEEBOARD during the
next ten (10) years to maintain SEEBOARD's existing business. Any
additional investment by CSW in SEEBOARD would be subject to the provisions
of the Act and the rules thereunder and would increase CSW's "aggregate
investment" (as defined under Rule 53(a) of the Act) in Exempt Projects in
accordance with Rule 53(a) of the Act."
(n) After the first sentence of Subsection (2)(e), a new sentence and
footnote 5 are hereby added, reading as follows:
"These ratings were affirmed by Standard & Poor's following the
announcement of the SEEBOARD acquisition in November 1995.(FN) "
(FN) In other rating action since the announcement of CSW's
plans to acquire SEEBOARD in November 1995, Moody's Investors Service
in December 1995 lowered its rating on CSW commercial paper from
Prime-1, the highest rating, to Prime-2, the next-highest rating. In
addition, each of Standard & Poor's and Moody's lowered its ratings on
SEEBOARD's unsecured debt from AA+ to A- and from Aa2 to Baa1,
respectively, and on SEEBOARD's commercial paper from A-1+ to A-2 and
from P-1 to P-2, respectively. Based on currently available public
information and correspondence with the rating agencies that rate the
CSW system, CSW believes that such downgradings relate to the
structure and size of the acquisition of SEEBOARD and not to the
status of SEEBOARD as a FUCO. The rating changes apply only to CSW
commercial paper and securities of SEEBOARD. The ratings do not apply
to any securities of the Operating Companies and should have no
adverse effect on the Operating Companies. All of the new ratings are
investment-grade ratings. In addition, the new rating on CSW
commercial paper (Prime-2) signifies `a strong capacity for short-term
promissory obligations,' with `sound' earnings trends and coverage
ratios, `appropriate' capitalization characteristics, and `ample'
alternate liquidity. In addition, on August 27, 1996, Standard &
Poor's decided to put a `negative outlook' on the ratings of the
Operating Subsidiaries, which is not an actual downgrading of the
rating of the securities of such companies, but is an indication that
Standard & Poor's believes that conditions exist that could justify
such a downgrading at some future time. Based on currently available
public information and correspondence with the ratings agencies that
rate the CSW system, CSW believes that Standard & Poor's justification
for such `negative outlook' is the potential uncertainty that the
Operating Subsidiaries face in future rate cases and is not dependent
on CSW's investments in Exempt Projects. As of September 27, 1996, no
actual downgrading of the securities of any of the Operating
Subsidiaries or CSW had occurred. Additionally, as of such date, such
`negative outlook' has not had (i) a substantial adverse impact on the
financial integrity of CSW's holding company system or (ii) an adverse
impact on any Operating Company or its customers, or on the ability of
State commissions to protect the Operating Companies."
(o) The last sentence of text of Subsection (2)(e) before the
tables is amended to be restated in its entirety as follows:
"Based on currently available public information and correspondence with
the ratings agencies that rate the CSW system, CSW believes there has been
no adverse effect on the financial ratings of the Operating Companies as a
result of CSW's investments in Exempt Projects."
(p) Subsection (2)(e) is amended to add the following
tables at the end thereof:
"Moody's Rating: 1991 1992 1993 1994 1995
SWEPCO Aa2 Aa2 Aa2 Aa2 Aa2
WTU Aa2 Aa2 Aa2 Aa2 A1
CPL A2 A2 A2 A2 A2
PSO Aa2 Aa2 Aa2 Aa2 Aa3
Duff & Phelps Rating: 1991 1992 1993 1994 1995
SWEPCO AA+ AA+ AA+ AA+ AA+
WTU AA AA AA AA AA-
CPL A A A A A
PSO AA AA AA AA AA".
(q) Subsection (2)(h) is amended to be restated in its entirety
(excluding footnote 6, which shall remain as previously stated) as follows:
"(h) In the opinion of CSW, Energy and CSWI, the four State
commissions of Arkansas, Louisiana, Oklahoma and Texas have jurisdiction
over the Operating Companies and are able to protect utility customers
within their respective states. The State commissions have not raised
objections (or have withdrawn any such objection) to CSW's current
investments in Exempt Projects. To provide the Commission with additional
assurances, CSW met with each of the State commissions having jurisdiction
over the Operating Companies and requested each to provide the Commission
with a letter certifying that such State commission has jurisdiction over
certain Operating Companies and that such State commission will protect
ratepayers from any adverse effect or costs that might result from CSW's
investments in Exempt Projects. Specifically, CSW, SWEPCO and the State
commission of Arkansas have entered into an agreement to ensure that such
State commission has the ability to protect its ratepayers against any
potential adverse impact that may result from investments by CSW in Exempt
Projects; the State commission of Louisiana asserts in its letter included
in Exhibit 2 that it "has the authority and jurisdiction to protect the
ratepayers of SWEPCO, and intends to exercise such authority" and that such
authority "is applicable to all EWGs and FUCOs in which CSW or its
subsidiaries seek to obtain an ownership interest"; the State commission of
Oklahoma asserts in its letter included in Exhibit 2 that it has both State
"constitutional and statutory authority . . . to supervise and regulate
electric utilities and all matters relating to the performance of their
public duties and their charges therefore, and to correct any abuses of
such utilities" and that it "intends to exercise such authority"; and the
State commission of Texas asserts in its letter included in Exhibit 2 that
a State rule is in effect, the purpose of which is "to ensure that Texas
ratepayers are protected from the potential adverse effects associated with
FUCO diversification" and that "the rule requires the reporting of certain
information so the [State commission of Texas] may monitor FUCO activities
and requires the holding company to make certain covenants designed to
insulate the utility from the potential adverse effects of FUCO
activities." Additionally, with respect to certain State commissions, CSW
will, among other things, have to comply with certain reporting
requirements and covenant that such investments in Exempt Projects will not
result in any obligation by the Operating Companies. CSW and its affiliates
have been subjected to numerous audits by the FERC and the Commission, and
it is assumed both staffs will participate in future audits. Audits by the
Commission have not raised "significant" questions."
(r) Subsection (3) is added immediately at the end of
Subsection (2) as follows:
"Rule 54 provides that the Commission, 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 Exempt Project, or other
transactions by such registered holding company or its subsidiary other
than with respect to Exempt Projects, shall not consider the effect of the
capitalization or earnings of any subsidiary which is an Exempt Project
upon the registered holding company system if the provisions of Rule 53(a),
(b) and (c) are satisfied. If the transactions contemplated hereby are
consummated and CSW's `aggregate investment' in Exempt Projects exceeds 50%
of its `consolidated retained earnings,' the provisions of Rule 53(a) will
not be satisfied. The Applicants have included in this Application certain
reporting requirements that are intended to enable the Commission to
monitor the impact of the transactions for which authority is sought
hereby. The Applicants believe that such reporting requirements will assist
the Commission in its determinations concerning the effect of Exempt
Projects on other transactions for which CSW will require authorization."
4. In Item 5 ("Procedure"), the following
paragraph is hereby added immediately at the end of such Item 5:
"CSW proposes to file, within 60 days after the end of the
applicable quarter, a quarterly report pursuant to Rule 24, commencing with
the report for the quarter ending September 30, 1996, which contains the
following information:
(i) A computation in accordance with Rule 53(a)
(as modified by the Commission's order in
this proceeding) of CSW's `aggregate
investment' in all Exempt Projects;
(ii) CSW's cumulative `aggregate investment' in
all Exempt Projects expressed as a percentage
of: total capitalization, net utility plant,
total consolidated assets and market value of
common equity, all as of the end of such
quarter;
(iii) Consolidated capitalization ratios as of the end of such
quarter, with consolidated debt to be inclusive of all
short-term debt and non-recourse debt of Exempt Projects to
the extent normally consolidated under applicable financial
reporting rules;
(iv) The market-to-book ratio of CSW's common
stock at the end of such quarter;
(v) An analysis of the growth in consolidated retained earnings
which segregates earnings growth attributable to Exempt
Projects as a whole versus all other subsidiaries of CSW;
and
(vi) A breakdown in revenues and net income of
each of the Exempt Projects for the 12-months
then ended.
CSW proposes to file a single report under Rule 24
which combines the foregoing information with the
information required pursuant to Rule 24 in File No. 70-8423
(Holding Co. Act Rel. Nos. 26156 and 26383, dated November
2, 1994 and September 27, 1995, respectively)."
As so amended, the Application-Declaration is hereby
restated in its entirety as follows:
Item 1. Description of Proposed Transaction.
(1) History and Nature of Request. CSW is a registered holding company
under the Act. Since 1990, CSW, directly or through its wholly-owned subsidiary,
Energy, has engaged in development activities to conduct preliminary studies of,
to investigate, to research, to develop, to consult with respect to, and to
agree to construct (such construction subject to further Commission
authorization), "qualifying facilities" ("QFs") as defined under the Public
Utility Regulatory Policies Act of 1978, as amended, and independent power
facilities, including exempt wholesale generators, as defined in Section 32(a)
of the Act ("EWGs"). Since 1994, CSW, directly or through its wholly-owned
subsidiary, CSWI, has engaged in development and investment activities with
respect to EWGs and foreign utility companies, as defined in Section 33(a) of
the Act ("FUCOs" and, collectively with EWGs, the "Exempt Projects"), and is
authorized to provide design, construction, engineering, operation, maintenance,
management, administration, employment, tax, accounting, economic, financial,
fuel, environmental, communications, energy conservation, demand side
management, overhead efficiency, utility performance and electronic data
processing services and software development and support services in connection
therewith to Exempt Projects and (except for operation) to foreign electric
utility enterprises that are not Exempt Projects.
CSW is presently authorized under the terms of orders and supplemental
orders issued under File Nos. 70-7758, 70-8205 and 70-8423 (collectively, the
"Financing Orders") to finance the operations of CSW, Energy, CSWI and their
respective subsidiaries by issuing and selling debt and equity securities and by
issuing guarantees of the securities of certain subsidiaries. CSW's
authorization under the Financing Orders may be summarized as follows:
(a) File No. 70-7758. Pursuant to an order of the
Commission dated September 28, 1990 (HCAR No. 25162) and
supplemental orders dated November 22, 1991 (HCAR No. 25414),
December 31, 1992 (HCAR No. 25728) and November 28, 1995 (HCAR
No. 26417) with respect to File No. 70-7758, CSW and Energy
obtained authorization, among other things, to (i) spend up to
$250 million to conduct preliminary studies of, to investigate,
to research, to develop, to consult with respect to, and to agree
to construct (such construction subject to further Commission
authorization), QFs and independent power facilities, including
EWGs; and (ii) finance such activities through capital
contributions, open account advances and loans in an aggregate
amount not to exceed $250 million. Such authorization expires on
December 31, 2000.
(b) File No. 70-8205. Pursuant to an order of the Commission dated
August 6, 1993 (HCAR No. 25866) and a supplemental order dated November 28, 1995
(HCAR No. 26416), CSW and Energy obtained authorization, among other things,
from time to time to issue letters of credit, bid bonds or guarantees
(collectively, the "CSWE Guarantees") in connection with the development of QFs
and independent power facilities, including EWGs, in an aggregate amount not to
exceed $75 million. Such authorization expires on December 31, 2000.
(c) File No. 70-8423. CSW and Energy received authority of the
Commission by order dated November 3, 1994 (HCAR No. 26156) and a supplemental
order dated September 27, 1995 (HCAR No. 26383), among other things, (i) to
organize CSWI and certain other subsidiaries meeting certain specifications set
forth in the application-declaration in File No. 70-8423 (the "Project Parents")
to invest in Exempt Projects in an amount up to 50% of CSW's "consolidated
retained earnings" as determined in accordance with Rule 53(a)(1)(ii) under the
Act for such investments for which there is recourse to CSW and up to $3 billion
for such investments for which there is not recourse to CSW, (ii) to fund such
investments from time to time through issuances by CSW, CSWI and/or Project
Parents of stock, partnership interests, promissory notes, commercial paper or
other debt or equity securities and (iii) for CSW to provide guarantees of, and
to arrange for letters of credit, bid bonds or similar credit support
arrangements (collectively, the "CSWI Guarantees"; and together with the CSWE
Guarantees, collectively, the "Guarantees") concerning CSWI's or Project
Parents' activities permitted under such order and supplemental order. In
addition, the order and supplemental order in such file authorize CSW, directly
or through CSWI or their respective subsidiaries, to provide design,
construction, engineering, operation, maintenance, management, administration,
employment, tax, accounting, economic, financial, fuel, environmental,
communications, energy conservation, demand side management, overhead
efficiency, utility performance and electronic data processing services and
software development and support services in connection therewith to Exempt
Projects and (except for operation) to foreign electric utility enterprises that
are not Exempt Projects. Such authorization expires on December 31, 1997.
Under the terms of each of the Financing Orders, CSW may use the
proceeds of common stock sales and borrowings, among other things, to finance
the acquisition of the securities of or otherwise invest in one or more Exempt
Projects, and may issue Guarantees in respect of the securities of such Exempt
Projects; provided, that the sum of the Guarantees at any time outstanding and
the net proceeds of common stock sales and borrowings by CSW that may at any
time be used by CSW to fund investments in Exempt Projects (whether directly or
indirectly through Energy, CSWI or Project Parents) shall not, when added to
CSW's "aggregate investment," as defined in Rule 53(a) under the Act, in all
such entities, exceed 50% of CSW's "consolidated retained earnings." The term
"consolidated retained earnings," also defined in Rule 53(a), is the average of
consolidated retained earnings for the previous four quarters, as reported in
CSW's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. CSW's
"consolidated retained earnings" as of June 30, 1996 were approximately $1.883
billion.
(2) Description of Exempt Projects Presently Owned or Under
Investigation by CSW. CSW's "aggregate investment" (as defined under Rule 53(a)
of the Act) as of August 15, 1996 was approximately $852.1 million in Exempt
Projects, or about 45% of CSW's "consolidated retained earnings" as of June 30,
1996, which were approximately $1.883 billion. Additional funds required to
purchase the securities of and/or finance construction costs of the facilities
owned by these entities have been obtained from lenders on a non-recourse basis;
that is, from loans that are secured solely by the assets and revenues of a
particular Exempt Project or the Project Parent that holds the ownership
interest in such Exempt Project and for which the lender does not have recourse
to CSW or any associate company (other than another Exempt Project or a Project
Parent), except to the extent of any presently effective Guarantees, which are
included in CSW's "aggregate investment" for purposes of Rule 53(a). CSW's
present holdings of Exempt Projects are as follows:
(a) SEEBOARD plc ("SEEBOARD"). On November 6, 1995, CSW,
indirectly through CSW (UK) plc ("CSW UK"), announced its intention to commence
an offer in the United Kingdom to acquire all of the outstanding share capital
of SEEBOARD for an aggregate purchase price of approximately $2.52 billion,
which was reduced by approximately $400 million to approximately $2.12 billion
to reflect the distribution by SEEBOARD to its shareholders, including CSW UK,
of SEEBOARD's ownership interest in The National Grid Group plc, which occurred
effective December 11, 1995. On January 10, 1996, CSW UK announced that all
conditions necessary to consummate the offer for SEEBOARD had been satisfied or
waived, and that such offer had been declared wholly unconditional in all
respects. As of April 30, 1996, CSW UK had acquired shares representing 100% of
the outstanding share capital of SEEBOARD.
SEEBOARD, which is a FUCO, serves approximately 2 million customers in
England. SEEBOARD's distribution territory covers approximately 3,000 square
miles and extends from the outlying areas of London to the English Channel. It
was one of the 12 regional electricity companies created in 1990 by the British
government as part of the privatization of the electric utility industry in
England and Wales. SEEBOARD is primarily a distribution and supply company,
purchasing most of its electricity requirements from third-party generators.
As of August 15, 1996, having acquired 100% of the outstanding share
capital of SEEBOARD, CSW had contributed approximately $829 million of the
purchase price of SEEBOARD, and had an "aggregate investment" (as defined under
Rule 53(a) of the Act) in SEEBOARD of approximately $829 million. CSW initially
obtained such funds through borrowings under an $850 million credit agreement
(the "CSW Credit Agreement"). On February 27, 1996, CSW sold 15,525,000 shares
of CSW common stock and received approximately $398 million in net proceeds,
which CSW used on February 28, 1996 to repay a portion of the indebtedness
incurred by CSW to finance the acquisition of SEEBOARD. On June 6, 1996, CSW
completed the sale of Transok, Inc. and on June 13, 1996, used a portion of the
net proceeds from such sale to repay in full the remaining indebtedness
outstanding under the CSW Credit Agreement. The remaining funds needed to
consummate the acquisition -- approximately $1.29 billion -- have been obtained
by CSW UK from capital contributions or loans by its sole shareholder, CSW
Investments, which arranged a credit facility (the "CSW Investments Credit
Facility") for that purpose. CSW Investments is a company organized under the
laws of the United Kingdom and is an indirect, wholly-owned subsidiary of CSWI.
The CSW Investments Credit Facility is neither guaranteed by, nor otherwise
provides for recourse to, CSW, CSWI or any of CSW's operating utility
subsidiaries. As of August 15, 1996, CSW Investments had borrowed approximately
$1.27 billion under the CSW Investments Credit Facility solely to fund CSW's
investment in SEEBOARD. As of September 3, 1996, CSW UK transferred all of the
share capital of SEEBOARD to SEEBOARD Group plc, also a wholly-owned indirect
subsidiary of CSW, to allow CSW to enjoy certain tax benefits that had accrued
to CSW UK.(FN)
(FN) CSW holds its interest in SEEBOARD indirectly through several Project
Parents. CSW owns 100% of the outstanding share capital of CSWI. CSWI owns
100% of the outstanding share capital of each of CSW International Two, Inc.,
a Delaware corporation ("CSWI 3"). CSWI 2 owns 99.9% of the outstanding
share capital of CSW Investments, and CSWI 3 owns the remaining 0.1% of the
outstanding share capital of CSW Investments. CSW Investments owns 100% of
theoutstanding share capital of each of CSW UK and SEEBOARD Group plc. Prior
to September 3, 1996, CSW UK owned all of the outstanding share capital of
SEEBOARD.
As the result of a recent restructuring, SEEBOARD Group plc own 100% of the
outstanding share capital of SEEBOARD. On September 3, 1996, CSW Investments
restructured its indirect ownership of SEEBOARD, such that 100% of the
outstanding share capital of SEEBOARD was transferred from CSW UK to
SEEBOARD Group plc. This transaction took CSW UK out of the chain of
ownership of SEEBOARD and made available certain tax attributes of CSW UK.
CSW is seeking a third parety to acquire CSW UK, and such tax attributes will
be sold to s;uch third party along with the outstanding share capital of
CSW UK.
CSW Investments anticipates that amounts borrowed under the CSW
Investments Credit Facility, or amounts borrowed in the capital markets in order
to refinance indebtedness under the CSW Investments Credit Facility, will be
repaid through dividends and other amounts received, indirectly through SEEBOARD
Group plc, from SEEBOARD. Giving effect to the financing arrangements described
above, CSW's "aggregate investment" (as defined under Rule 53(a) of the Act) in
SEEBOARD is expected to remain approximately $829 million.
When CSW decided to acquire SEEBOARD, CSW anticipated that SEEBOARD
would make an immediate contribution to CSW's earnings per share. Results for
the first and second quarters of 1996 have been consistent with CSW's
expectations. CSW's earnings for the first quarter of 1996 were $51 million, or
26 cents per share, up from $39 million, or 20 cents per share, for the first
quarter of 1995, and CSW's earnings for the second quarter of 1996 were $128
million, or 61 cents per share, up from $103 million, or 54 cents per share, for
the second quarter of 1995. Along with higher kilowatt sales resulting from
increased usage and weather-related demand experienced by the Operating
Subsidiaries, the increase was due primarily to the addition of earnings from
SEEBOARD. In addition to providing CSW with a relatively stable source of income
in the future, the SEEBOARD acquisition is particularly attractive to CSW for
other reasons. First, CSW believes that it will add value to its investment in
SEEBOARD's shares, primarily through implementation of cost savings measures.
Under the British regulatory system, the benefits of these cost savings will
accrue primarily to CSW, as SEEBOARD's shareholder. Second, CSW, through
SEEBOARD, will compete as a power marketer in a market in which retail customers
with a minimum annual peak demand of 100 kilowatts or more can choose their
electricity supplier. The experience that CSW will gain in operating a utility
in such a competitive environment is expected to be highly valuable to CSW in
the United States. Finally, CSW's purchase of SEEBOARD is the first in a series
of anticipated events that will lead to a rationalization, possibly through
further consolidations, of the electricity sector in the United Kingdom, a
process that in itself could produce attractive returns for investors. By
acquiring SEEBOARD, CSW has achieved early entry into that market and therefore
believes that it is positioned to earn an attractive return on its investment.
CSW projects returns of ["P"] % on CSW's investment in SEEBOARD for the years
1996 through 1999. These returns are commensurate with the risk associated with
a distribution system and demonstrate strong, solid earnings and steady cash
flows. These returns are expected to contribute to the financial strength of the
CSW system for many years to come.
SEEBOARD has been among the most profitable and successful of the
regional electricity companies of the United Kingdom. Among the 12 regional
electricity companies in England and Wales that resulted from the privatization
of the sector by the British Government in 1990, SEEBOARD has achieved amongst
the lowest overall customer tariffs and highest overall returns for its
shareholders. Since privatization, not only has SEEBOARD provided the greatest
return to shareholders of all the 12 regional electricity companies in the U.K.,
but at the time of its acquisition by CSW, SEEBOARD had outperformed all the
other privatized water, gas and telecommunication utilities. It also holds the
highest ratings for customer service, as measured by the U.K. Office of
Electricity Regulation, and has a highly regarded management team which, since
privatization, has led SEEBOARD to five years of steady growth in earnings and
dividends. By these measures, with SEEBOARD, CSW believes it acquired the
highest rated and best performing regional electricity company in the United
Kingdom.
(b) CSW, indirectly through a wholly-owned Mexican subsidiary of
CSWI, and Alpek, S.A. de C.V., a company organized under the laws of the United
Mexican States ("Alpek"), are developing jointly a project near Altamira, in the
state of Tamaulipas, Mexico (the "Altamira Project"), which will be an Exempt
Project. Alpek is a subsidiary of Grupo Alfa, a large Mexican company with
business interests in petrochemicals, food, steel, telecommunications and other
areas. The project is a nominal 105 megawatt gas-fired cogeneration facility
that will serve an expanding industrial park. The project will be expandable to
400 megawatts. Most of the customers for electricity and steam are either Alpek
affiliates or Alpek joint venture partners that are located either in the
industrial park or some distance away in Monterrey, Mexico. Long-term contracts
are presently in place for all the necessary steam production and for
approximately 20% of the electricity production, with another 60% of the
electricity production having been committed to be purchased under letters of
intent. In each case, such purchases will be made, for the most part, in U.S.
dollars or dollar- indexed pesos. Contract negotiations have also been completed
with the Mexican gas entity, Pemex Gas y Petroquimica B sica, for the long-term
supply of natural gas to the project and with the electric company,
Comisi(cent)n Federal de Electricidad, for a backup supply and the
transportation of electricity. The Altamira Project is expected to begin
construction during the third quarter of 1996 and completion is anticipated to
be in early 1998. CSW is expected to provide financing for the construction of
the Altamira Project until third party financing is secured. Alpek has
guaranteed to CSW the repayment of 50% of such financing provided by CSW. CSW's
expenditures in the Altamira Project as of August 15, 1996 were approximately
$2.9 million. However, assuming for purposes of this Application-Declaration
that the agreement by Alpek to guarantee 50% of the financing to be supplied by
CSW until third party financing is secured does not reduce CSW's "aggregate
investment", then during the construction period, CSW's "aggregate investment"
in the Altamira Project is ultimately expected to be approximately $85 million.
(c) Energy, with its partners, Northwest Power Enterprises, Inc.,
and KLT Power Generation, Inc., are developing jointly projects in the Pacific
Northwest of the United States. In connection with such development activities,
an EWG application has been filed with and approved by the Federal Energy
Regulatory Commission ("FERC") for the Northwest Regional Power Facility.
The Northwest Regional Power Facility is an 838 megawatt
gas-fired EWG project located in Creston, Washington. The project is in the last
stage of approval from the Washington State Energy Facility Site Evaluation
Council to obtain a permit to construct. Power sales activity is expected to
escalate upon approval.
Energy is also investigating two additional projects, which may
qualify as EWGs, for development in the Pacific Northwest. The Everett Delta
Project is a 238 megawatt project located in Everett, Washington designed to
provide electric power to the Snohomish Public Utility District and others while
providing thermal energy to a paper recycling facility. The Starbuck Project is
a 244 megawatt peaking-type combustion turbine project to be located near
Starbuck, Washington. CSW's "aggregate investment" (as defined under Rule 53(a)
of the Act) as of August 15, 1996 with respect to the Northwest Regional Power
Facility was approximately $5 million. CSW's anticipated "aggregate investment"
in the projects presently under consideration by Energy and its joint venture
partners in the Pacific Northwest is expected to be approximately $175 million
with the placement of equity expected to occur between 1997 and 2000.
(d) CSWI, indirectly through a Project Parent, has entered into a
letter of intent with a Brazilian company to acquire, directly or indirectly, an
ownership interest in Exempt Projects located in Brazil. Assuming the
transactions in such letter of intent are consummated, CSW's "aggregate
investment" (as defined under Rule 53(a) of the Act) in such Exempt Projects is
expected to be approximately $100 million. CSW's expenditures on these projects
as of August 15, 1996 were approximately $1.8 million.
(e) On May 17, 1995, Energy, through its wholly-owned subsidiary
Newgulf Power Venture, Inc., a Delaware corporation ("Newgulf Power"), purchased
an 85 megawatt electric generating facility located in Wharton County, Texas
(the "Newgulf Project"). The electric generating facility was originally
operated by an unaffiliated third party owner as a topping-cycle cogeneration
facility that qualified as a QF and provided steam to a sulfur mine operated by
the former owner. The sulfur mine has been closed and no longer requires a steam
supply from the facility. Energy modified the generating assets to operate in a
combined cycle mode and the Newgulf Project was deemed ready for commercial
operation on September 1, 1996. Newgulf Power filed and the FERC approved an
application for determination of its status as an EWG in connection with its
ownership and operation of the Newgulf Project. Energy anticipates operating the
Newgulf Project during the remaining warm-weather months of 1996. Energy's
"aggregate investment" (as defined under Rule 53(a) of the Act) in the Newgulf
Project as of August 15, 1996 was approximately $15 million. Energy expects its
ultimate "aggregate investment" in the Newgulf Project to be approximately $17
million by the end of the third quarter of 1996.
(f) CSW Power Marketing, Inc., a Delaware corporation and a
wholly-owned subsidiary of CSW ("Power Marketing"), filed and the FERC approved
an application for a determination of its status as an EWG. Power Marketing will
conduct business activities such as power marketing, power brokering and fuel
delivery and brokering activities. CSW's "aggregate investment" (as defined
under Rule 53(a) of the Act) in Power Marketing as of August 15, 1996 was less
than $200,000. CSW's "aggregate investment" (as defined under Rule 53(a) of the
Act) in Power Marketing is expected to be approximately $25 million.
(g) Anticipated Investments in Exempt Projects. As of August 15,
1996, CSW had an "aggregate investment" (as defined under Rule 53(a) of the Act)
in Exempt Projects of approximately $852.1 million. Giving effect to the
additional expected investments and the assumptions being made for such
investments described above, CSW's "aggregate investment" (as defined under Rule
53(a) of the Act) in Exempt Projects is expected to increase to at least $1.231
billion by the year 2001, summarized as follows:
Approximate Approximate
8/15/96 Anticipated
Project Type Investment Investment
SEEBOARD FUCO $829 million $829 million
Alpek Project FUCO $2.9 million $85 million
Northwest Regional
Power Facility EWG $5 million $175 million
Brazil Project FUCO $0 million $100 million
Newgulf Project EWG $15 million $17 million
Power Marketing EWG $.2 million $25 million
Total $852.1 million $1.231 billion
(3) Risk Profile of CSW's Investments in Exempt Projects. Investments
in independent power production facilities and foreign utility systems involve a
variety of risks that are not necessarily present in the traditional, regulated,
electric utility industry. The Applicants have established comprehensive
procedures to identify and address (i.e., limit and/or mitigate) these risks.
(a) The Project Review Process. Every potential project
investment opportunity developed by Energy or CSWI is subjected to a series of
formal reviews to ensure the project's soundness. The process begins with a
consideration of Energy's and CSWI's strategic plans which survey independent
power opportunities domestically and throughout the world and provides a variety
of tools to assist in the evaluation of risks. These plans, which are updated
periodically, lead to the identification of projects and countries where Energy
or CSWI intends to pursue project development efforts. The plans also lead to
the development of budgeted levels of expenditure on foreign development
activities. Before CSW makes any investment in a foreign country, an analysis of
that opportunity, including the specific country risk, is presented first to the
executive management group at Energy or CSWI, as the case may be, then to the
board of directors of Energy or CSWI, as the case may be, and finally to CSW's
board of directors. The analysis includes a review of the political and economic
stability of the particular country, the government's commitment to private
power, the legal and regulatory framework for private investment in electricity
facilities and whether local business practices will support long-term
investment of private capital. The board of directors of both CSW and either
Energy or CSWI (as the case may be) must approve investments in any foreign
country. This careful planning and budgeting process helps to mitigate an
important risk of the independent power business: the expenditure of development
funds without a realistic expectation of success in terms of both making
investments in projects and in obtaining appropriate levels of non-recourse
financing on commercially reasonable terms.
Once development of a project is undertaken, milestones are
established to ensure that continuing expenditures on development are producing
acceptable results. In addition, project teams are required to identify the
major technical, financial, commercial and legal risks associated with their
particular project and whether and how those risks have been mitigated. The
members of the project team are responsible for the due diligence investigation
of those risks that have been identified and must present their findings to an
officer of Energy or CSWI, as the case may be, with functional oversight over
the relevant risk factor subject matter.
Finally, every project is subjected to increasing levels of management
review. Depending on the amount of CSW's anticipated financial exposure to a
particular project, the proposed investment must be approved successively by the
entire executive management group of Energy or CSWI (as the case may be), the
board of directors of Energy or CSWI (as the case may be), and finally, by the
board of directors of CSW.
Significantly, the final project review process is to a large extent
replicated by the lenders who agree to provide construction or permanent debt
financing on a non-recourse basis, since repayment of that debt will depend
solely upon the success of the project. Project debt maturities are often
long-term (e.g., 15 or more years), meaning that the lenders' exposure to the
risks of a project extends for many years after closing or completion of
construction. Typically, project debt documents require the establishment of
plant overhaul, debt service and other funded reserves, all of which are
designed to preserve the asset and protect the financial performance of the
project against interruptions in revenues and other contingencies. Energy's and
CSWI's success in arranging appropriate levels of non-recourse financing for its
QF and Exempt Project investments in effect serves as a validation of the
project review process described above.
(b) Risk Mitigation of Independent Power Projects. Each of Energy
and CSWI carefully evaluates the potential risks of an independent power project
or foreign utility system before CSW's funds are committed.
(i) Operating risks. Each of Energy and CSWI has focused its
project development efforts on projects that use fuel technologies with which
the CSW System has existing competencies in coal, gas or oil generation. Due
diligence of operating assumptions is carried out by Energy's and CSWI's
engineers with experience in the technology being evaluated and by outside
technical consultants. The risk of changes in the price of fuel is typically
passed through to the purchaser of electricity under the negotiated terms of a
long-term power sales agreement. Other operating risks can be covered by
equipment warranties and by casualty, business interruption and other forms of
insurance. Further, in addition to such operating risks subject to mitigation
prior to an investment, when Energy, CSWI or one of its affiliates is
responsible for managing the day-to-day operations of Exempt Projects in which
it holds an ownership interest, its ability to address and correct problems that
may arise during operation is far greater than would be the case if operating
control were in the hands of a third party.
(ii) Construction risks. Construction risks are typically
addressed under fixed-price contracts with milestones and performance guarantees
(e.g., guaranteed heat rates, availability factors), backed by appropriate
levels of liquidated damages. The credit-worthiness and "track record" of the
construction contractor is a very important consideration in this regard. In
those cases where Energy or CSWI, as the case may be, or its respective
subsidiary serves as its own general construction contractor, it looks to
pre-negotiated cost and damage provisions from sub-contractors, including,
without limitation, equipment vendors, to protect against performance
shortfalls, cost overruns and schedule delays.
(iii) Commercial risks. Many independent power projects rely
on the "off-take" commitment of a single power purchaser, usually the local
utility company, to eliminate all or most of the risk of variation in revenues.
In such cases, Energy or CSWI, as the case may be, makes an assessment of the
credit-worthiness of the power purchaser over the life of the project and/or
seeks to have a contingency plan in the event of off-take defaults.
In competitive power markets outside the United States, long-term
off-take contracts are not always available and electricity prices may be
determined by supply and demand. Energy and CSWI conduct extensive
investigations of the electricity markets in these environments to ensure the
viability of long-term demand. Further, Energy and CSWI seek projects that will
be capable of producing electricity at or below long-run marginal costs in the
region, thus providing that the project will be a competitive supplier.
(iv) Financial risks. Energy and CSWI address the financial
risks of their respective projects in a variety of ways. First and foremost,
Energy and CSWI seek to secure the maximum amount of permanent debt financing
for such projects that is available at reasonable cost and that is, by its
express terms, non-recourse to CSW or any associate company (other than other
Exempt Projects or Project Parents). This means that the non-recourse debt of
each project or foreign utility system is secured solely by its assets and
revenues, and creditors have no ability to seek repayment upon default from CSW.
The amount of such non-recourse debt applicable to Exempt Projects owned
directly or indirectly by CSW as of August 15, 1996, was approximately $1.27
billion. This method of financing ensures that CSW's exposure to any independent
power project is limited to the amount of its equity commitment and that CSW's
domestic public utility subsidiaries (the "Operating Companies") and their
customers bear no risk of a project's failure or financial distress. From time
to time, CSW may agree to provide Guarantees in connection with Exempt Project
financings, but these financial supports are carefully monitored and treated as
a part of CSW's equity commitment for regulatory reporting and internal control
purposes. To date, CSW has never been called upon to fund its obligation under
any such Guarantee issued with respect to an investment in an Exempt Project.
In addition to the non-recourse nature of the great majority of
project debt financing, project debt is carefully structured to meet, or match,
the characteristics of the particular project. For example, when the value of a
project depends on a long-term, fixed-price, off-take contract (i.e., a power
purchase contract), the project debt is typically designed to be of a similar
term, with scheduled debt payments usually covered by fixed charges (usually the
capacity payment component in the contract). On the other hand, where there is
no long-term, fixed source of revenue, the percentage of non-recourse debt
financing is typically smaller, so that financial risk is not increased by
excessive debt levels. Thus, while Energy's and CSWI's projects with long-term
off-take contracts have debt capitalization levels in the 70% to 80% range,
Energy's and CSWI's other projects are anticipated to be leveraged at levels
similar to those of United States regulated utilities, in the 45% to 55% range.
Another financing risk is the potential variability of interest rates.
This risk is addressed, in part, by borrowing, to the extent possible, on a
long-term, fixed-rate basis. After contractual terms for a project have been
agreed but before financial closing, Energy and CSWI are also exposed to
interest rate variability. This risk can be (and will be, upon approval of the
finance department of Energy or CSWI, as the case may be, as described in the
next sentence) mitigated by purchasing financial instruments which provide
hedges against interest rate volatility. The finance department of Energy or
CSWI, as the case may be, is responsible for reviewing, analyzing and comparing
the costs of such financial instruments and the perceived interest rate risk,
for approving the purchase of such financial instruments when the cost of the
perceived risk exceeds the costs associated with the financial instrument and
for monitoring the use of these instruments to ensure they are used properly.
(v) Foreign currency exchange risk. There are several ways
in which Energy and CSWI have addressed the foreign currency exchange risk
element, depending on the status of the host country. In countries which do not
have a history of stability in the management of their exchange policy, part or
all of the revenue from a project is payable in or indexed to hard currency
(almost invariably United States dollars), as is presently contemplated to be
the case with the Altamira Project. In addition, back-up guarantees or other
undertakings by the central government may be available to ensure that the
United States dollar payments due under an off-take contract are actually made
available by the central bank or ministry of finance.
In some countries, the source of revenues can be tied in other ways to
the United States dollar. For example, the capacity charge element of revenues
derived by an Exempt Project may be tied to the cost of new capacity measured in
United States dollars. In addition, an Exempt Project's revenue may be expressed
in a unit of account (i.e., a national monetary unit) which adjusts for any
inflation of the local currency, thereby protecting the project against
depreciation of the currency.
In other cases (SEEBOARD, for example), the non-recourse project debt
is borrowed in the same currency as the project's revenues, thereby ensuring a
match between debt service obligations and operating income. In addition, in
more developed countries, long-term currency swaps are available to provide
further hedging for the equity component of the investment.
(vi) Legal risks. Legal risks are addressed by careful
review of any investment by legal counsel, including local and international
counsel where foreign projects are concerned. Such legal reviews address
regulatory and permitting risks, environmental risks, the adequacy and
enforceability of guarantees or other contractual undertakings of third parties,
the status of title to utility property and the obligations inherent in the
financing arrangements.
In addition to the specific risks mentioned above, investment outside
the United States can entail country-specific risks related to political or
economic performance. As indicated above, Energy and CSWI evaluate country risk
at the outset of any project development effort and attempt to mitigate this
risk through a number of measures. Most important, the country review process
described above ensures that the political and economic stability of any country
has been reviewed at several decisional levels up to and including CSW's board
of directors before any investment occurs. In addition to a general review, the
country analysis focuses specifically on the country's electric sector and on
the government's support for private ownership in that sector.
Also at the outset of development work in a foreign country, Energy
and CSWI seek local partners who are experienced in doing business in the host
country. Local partners are a very important element in mitigating the risk of
future expropriation or unfair regulatory treatment. An additional mitigating
factor is the participation of official or multilateral agencies in a project.
When funds for the project are supplied by government- sponsored export credit
agencies or other governments or institutions, such as the World Bank through
its International Finance Corporation affiliate, the host country has strong
incentives not to take actions which would harm a project's viability. In
addition, political risk can often be addressed through political risk insurance
obtained from the Overseas Private Investment Corporation, a United States
agency, or the Multilateral Investment Guaranty Agency, a World Bank affiliate,
or in the commercial insurance market. Political risk insurance is available to
insure the project debt or the return of an investor's equity. One can also
insure against outright expropriation, acts of civil violence or even "creeping"
nationalization brought about by punitive regulation. CSW analyzes the perceived
risk and costs associated therewith and compares that with the cost of obtaining
such insurance and, when such costs associated with such risks exceed the costs
of insurance coverage therefor, CSW plans to procure such insurance.
(vii) Portfolio Diversification. Apart from the detailed and
comprehensive approach to the specific risks described above, CSW's fundamental
view is that the best long-term approach to managing the risk of investing in
the independent power business is through diversifying both the type and the
location of projects. In this regard, CSW recognizes that the risk inherent in
any investment cannot be eliminated entirely, even by the most careful approach
to project development. Consequently, CSW is committed to diversifying its
investments across countries and regions of the world. CSW's strategy has been
focused on investment opportunities in North America (outside the core regulated
business of CSW), Europe, Latin America, Australia and Asia. Substantial
investments have been made in the first two regions, and extensive development
efforts are underway in Latin America and, to a lesser degree, in Asia. By the
authority of the Commission granted pursuant to the effectiveness of this
Application-Declaration, CSW plans to make additional investments in Exempt
Projects to diversify its portfolio of Exempt Projects by country, project type
and stage of development.
Regional diversification is important since economic and political
instability, when they have occurred historically, have tended to involve
multiple countries in a region. Accordingly, CSW's board of directors may set
limits on investment in specific countries which vary according to an assessment
of the country's stability.
Another element of CSW's diversification policy is to achieve a
balance between so-called "greenfield" projects and acquisitions of existing
facilities and power systems. Greenfield projects are those that involve
completely new development and construction of electric facilities, principally
generating stations. Greenfield projects involve a higher degree of risk since
they entail a lengthy process of development and construction. Funds are
expended during the early years of such projects; return on investment is not
earned until the project is in operation. Nevertheless, while these projects
have higher levels of risk and deferred returns, they are important to CSW
because they generally produce higher rates of return on investment than
investments in existing assets and because they lay the foundation for continued
earnings growth for CSW after the turn of the century.
To balance these greenfield project development efforts, CSW's
development efforts target assets to be purchased that are already in operation,
either from existing private owners or through privatizations. These
acquisitions reduce the risk of CSW's overall business by producing near-term
earnings without significant development or construction risk.
The result of this balanced portfolio strategy is that CSW is not
dependent on any single country, regulatory environment or type of asset for its
earnings from independent power projects and foreign utility investments. In
addition, while CSW has successfully developed significant investments in
projects which are expected to produce long-term results, it has also ensured
that its portfolio of projects will add cash flow and earnings for its
shareholders in the immediate future, thereby supporting share value and
dividend growth. CSW anticipates that its project portfolio will also provide a
positive contribution to earnings after the turn of the century.
(c) Application of Review Process and Risk Factors to Specific
Investment Decisions: CSW's acquisition activity in the United Kingdom provides
an illustration of the review process and risk analysis outlined above.
Review process: The SEEBOARD acquisition project was developed and
executed by a CSW team with past experience in U.K. electric utility acquisition
activity. In October 1995, before focusing on SEEBOARD, CSW formed a bidding
partnership with Houston Industries, Inc. ("Houston"), under the name Texas
Energy Partners, and made an acquisition offer for another U.K. regional
electricity company, Norweb plc. Although the bid was favorably received by
Norweb management, a British water utility made a higher offer. After careful
financial analysis, CSW and Houston increased their bid, but were again outbid
by the British water company. Because a higher bid posed excessive financial
risks and would no longer be beneficial to CSW's shareholders, CSW made a
decision to withdraw.
Shortly thereafter, CSW met with SEEBOARD's management. After
receiving favorable information regarding SEEBOARD's plans, financial
characteristics, growth opportunities and management group, CSW made a
successful bid.
Risk factors: In the SEEBOARD acquisition, construction risk was not a
significant factor, since CSW was acquiring a company with existing facilities.
Financial risks were addressed through a financing structure relying in
significant part on non-recourse financing which limits CSW's exposure.
In assessing the commercial and operating risks of acquiring SEEBOARD,
CSW took comfort from a number of factors, including SEEBOARD's extremely
successful operating history since privatization, its five-year record of
earnings and its dividend growth. In addition, CSW considered the high quality
of SEEBOARD's management and took steps to retain the services of existing
management following the acquisition.
To limit the foreign currency risk of the acquisition, CSW took a
number of steps. The bulk of the financing for the acquisition borrowed under
the CSW Investments Credit Facility is denominated in sterling and is expected
to be repaid ultimately out of SEEBOARD's earnings, which are also in sterling.
The remainder of the acquisition financing was in the form of dollar-denominated
borrowings by CSW under the CSW Credit Agreement. These borrowings have since
been repaid in full out of the dollar-denominated proceeds of an offering of CSW
common stock and the sale of Transok, Inc. By matching the currency of the debt
and the repayment source, these arrangements significantly reduce the exchange
rate and currency risks of the acquisition. Finally, the British pound is freely
convertible and actively traded, and a variety of financial instruments are
available if needed for further management of the currency and exchange rate
risk as required.
Given the advanced state of the British legal and political system and
the developed state of the British economy, the SEEBOARD acquisition did not
present significant legal, political, country or economic risks. To reduce any
residual legal risk of the acquisition, and to ensure compliance with local law,
CSW engaged U.K. counsel to assist in the acquisition.
Finally, the SEEBOARD acquisition added to the diversification of
CSW's investment activity, which theretofore had been concentrated in Asia and
Latin and South America.
(4) Potential Investments in Additional Exempt Projects. Energy and
CSWI are presently investigating, alone and in conjunction with others,
investment opportunities in several additional domestic and foreign power
projects and existing foreign utility systems. Most of these ventures are
expected to qualify as either EWGs or FUCOs. In particular, several foreign
countries, such as Australia and Brazil, are now privatizing state-owned utility
systems. Other countries, such as Korea, Taiwan and Thailand, are promoting
private investment to construct, own and operate generating plants.
CSW intends to make substantial additional investments in Exempt
Projects, primarily for the following reasons:
Over the past ten (10) years, the Operating Companies have funded
substantially all of their construction expenditures from internal sources of
cash and from sales of senior securities and other borrowings. Present
projections indicate that the Operating Companies will continue to fund
substantially all of their construction expenditures from internal sources of
cash and from sales of senior securities and other borrowings for the next ten
(10) years and that CSW will not have to make any equity investment in any
Operating Company for at least the next ten (10) years. Thus, acquisitions of
Exempt Projects present CSW with the opportunity to continue to grow through
reinvestment of retained earnings in an industry sector that CSW has decades of
experience in, while at the same time diversifying overall asset risk. In the
event that one or more of the Operating Companies requires additional equity
capital after such ten (10) year period, CSW believes that its investments in
Exempt Projects will give the CSW system a larger and more diversified base for
raising equity capital, because CSW's intended portfolio will be diversified by
region and operating assets and have an increased potential for revenue growth
and be less susceptible to adverse effects from any one particular market. In
addition, as set forth below, CSW believes that its investments in Exempt
Projects will help the CSW system remain competitive as competition increases in
the U.S. electric utility industry. For these reasons, CSW believes that its
investments in Exempt Projects will not have a negative effect on its ability to
make any additional equity investments in the Operating Companies that may be
required in the future.
Second, CSW, directly or through Energy or CSWI, has purposely pursued
investments in utility systems in geographical regions, such as England,
Australia and South America, which have moved much further than the United
States towards deregulation and full competition in both wholesale and retail
electricity markets. CSW believes that the creation and maintenance of value for
its shareholders will depend critically on its ability to operate its core
business in the United States successfully as that business becomes subject to
increasing competition. CSW's experience in markets that are already largely
deregulated will be critical to the long-term success of its core business.
Moreover, the lessons learned from these markets provide CSW with insights about
the market structures that produce efficient and equitable results for consumers
and shareholders. These insights will allow CSW to play a role in shaping the
evolution of the electric sector of the United States.
(5) Proposed Increase in Financing of Exempt Projects. For the reasons
stated above, CSW, Energy and CSWI hereby request that the Commission exempt
CSW, Energy and CSWI from the requirements of Rule 53(a)(1) under the Act such
that CSW, Energy and CSWI may use the net proceeds from the issuance of recourse
debt and equity securities and issue Guarantees, each in accordance with and
upon the terms of the Financing Orders, in an aggregate amount at any time
outstanding which, when added to CSW's direct and indirect "aggregate
investment" in all Exempt Projects, would not at any time exceed CSW's
"consolidated retained earnings." Based on CSW's "aggregate investment" in all
Exempt Projects (approximately $852.1 million as of August 15, 1996) and
"consolidated retained earnings" as of June 30, 1996 (approximately $1.883
billion), such limitation would allow financing of additional investments in
Exempt Projects of approximately $1.031 billion.
As described in Subsection (2) above, CSW's "aggregate investment" in
Exempt Projects is expected to increase to at least $1.231 billion by the year
2001, or approximately 65% of CSW's consolidated retained earnings as of June
30, 1996, without investment in any additional new Exempt Projects as described
in Subsection (4) above. The additional authority requested herein will be
sufficient to enable CSW to make investments in all Exempt Projects it is
presently developing, as well as additional investment opportunities in Exempt
Projects that are under investigation at present or that arise in the future.
Item 2. Fees, Commissions and Expenses.
The estimate of the approximate amount of fees and
expenses payable in connection with this Application-Declaration
is as follows:
Holding Company Act filing fee..........$ 2,000.00*
Counsel fees
Milbank, Tweed, Hadley & McCloy.... 15,000.00
Miscellaneous and incidental expenses
including travel, telephone,
postage and copying................ 5,000.00
Total.........................$22,000.00
--------------------
* Actual Amount.
Item 3. Applicable Statutory Provisions.
The proposal herein is subject to Sections 6(a), 7,
12(b), 32 and 33 of the Act and Rules 45, 53 and 54 thereunder. Rule 53 provides
that, if each of the conditions of paragraph (a) thereof is met, and none of the
conditions of paragraph (b) thereof is applicable, then the Commission may not
make certain adverse findings under Sections 7 and 12 of the Act in determining
whether to approve a proposal by a registered holding company to issue
securities in order to finance an investment in any EWG or to guaranty the
securities of any EWG. Giving effect to the proposals contained herein, CSW will
satisfy all of the conditions of Rule 53(a) except for clause (1) thereof, since
CSW is proposing herein that CSW's "aggregate investment" may exceed 50% of
CSW's "consolidated retained earnings." None of the conditions specified in Rule
53(b) is or will be applicable.
Rule 53(c) states that, in connection with a proposal to issue and
sell securities to finance an investment in any EWG, or to guarantee the
securities of any EWG, a registered holding company that is unable to satisfy
the requirements of paragraph (a) or (b) of Rule 53 must "affirmatively
demonstrate" that such proposal:
(a) will not have a substantial adverse impact upon the financial
integrity of the registered holding company system; and (b) will not
have an adverse impact on any utility subsidiary of the registered
holding company, or its customers, or on the ability of State
commissions to protect such subsidiary or customers. The Commission
has performed an analysis of the
requirements of Rule 53(c) with respect to an application- declaration filed by
The Southern Company ("Southern") in File No. 70-8725. In such
application-declaration, Southern sought almost identical authority to the
authority sought by the Applicants hereunder, namely relief from the safe-harbor
requirements of Rule 53(a)(1) to allow investments in Exempt Projects in an
amount not to exceed its "consolidated retained earnings." The Commission
granted such authority by issuing its order making such application-declaration
effective on April 1, 1996 (HCAR No. 26501) (the "Southern Order"). In that
order, the Commission found that Southern had demonstrated successfully, through
the use of certain financial indicators, that investing in Exempt Projects in an
amount not to exceed its "consolidated retained earnings" would not have a
substantial adverse impact on the financial integrity of its system. A
comparison with CSW of those financial indicators used by Southern, considering
the size and market position of CSW relative to Southern, demonstrates that the
financial integrity of the CSW system is substantially similar to the financial
integrity of the Southern system. As discussed below in subsection (1)(g) of
this Item 3, any overall differences are not significant especially when
compared to other key financial indicators in which CSW outperforms Southern.
Thus, this Application-Declaration, which seeks substantially the same authority
(for CSW to invest in Exempt Projects in an aggregate amount not to exceed its
"consolidated retained earnings"), is consistent with the rational of, and the
conclusions reached by the Commission in, the Southern Order.
CSW addresses each of the requirements of Rule 53(c) as follows:
(1) The use of proceeds from the issuance of debt and equity
securities of CSW to make investments in EWGs (as well as in FUCOs), and the
issuance of, or provision for, Guarantees in connection therewith by CSW, in
amounts of up to CSW's "consolidated retained earnings" will not have a
"substantial adverse impact" on the financial integrity of the CSW System.
The lack of any "substantial adverse impact" on CSW's financial
integrity as a result of increased levels of investments in Exempt Projects can
be demonstrated in several ways, including by analyses of CSW's success to date
in its investment in SEEBOARD and historic trends in CSW's consolidated
capitalization ratios and retained earnings, the market view of CSW's securities
and CSW's proven success in obtaining appropriate levels of non-recourse debt
financing and third-party equity for its investments in QFs and Exempt Projects.
Consideration of these and other relevant factors supports the conclusion that
the issuance of securities and Guarantees by CSW to finance investments in
Exempt Projects exceeding the 50% consolidated retained earnings limitation in
Rule 53(a)(1) will not have any "substantial adverse impact" on the financial
integrity of the CSW System.
Substantially all of CSW's "aggregate investment" (as defined under
Rule 53(a) of the Act) to date in Exempt Projects is in SEEBOARD. As noted
above, SEEBOARD has achieved amongst the lowest overall customer tariffs and
highest overall returns for its shareholders among the 12 regional electricity
companies of the United Kingdom. SEEBOARD holds the highest ratings for customer
service, has a highly regarded management team, serves an affluent suburban and
rural area and is a low cost-of-service provider. SEEBOARD had net earnings of
approximately $118 million for the year ended December 31, 1995, and net
earnings for the first six months of 1996 were $51 million, an increase of $12
million over results for the same period in 1995. Thus, CSW's investment in
SEEBOARD has improved CSW's overall financial position and demonstrates CSW's
ability to prudently make these types of investments.
CSW has a solid, competitive core electric utility business, strong
management, a growing international presence and diversified businesses that
provide real and immediate benefits to CSW's core utility business, as well as
enhance the potential for substantial long-term earnings growth. CSW's
consolidated retained earnings have grown on average approximately 3.8% per year
over each of the previous 5 years, and CSW expects the SEEBOARD acquisition to
contribute to additional increases in its earnings in 1996. In January 1996, CSW
declared its 45th consecutive annual dividend increase making it one of only a
handful of companies on the New York Stock Exchange to have such an
uninterrupted history of dividend increases. CSW's consolidated capitalization
and interest coverage ratios are within industry ranges for Single-A rated
companies. In February 1996, CSW successfully issued approximately $400 million
of new common stock, the proceeds of which were used to partially pay down its
bridge debt incurred to fund its equity investment in SEEBOARD. CSW paid down
the remaining portion of that debt in June 1996 with a portion of the proceeds
from the sale of its intrastate gas pipeline subsidiary, Transok, Inc. Finally,
the market's assessment of CSW's prospect for future growth and earnings
compares favorably to other electric utility companies, and its dividend policy
is aligned with the electric industry as a whole. CSW has a strong "customers
first" focus, relatively low rates in the region where its system operates,
experienced management and strong growth prospects. Due in part to its SEEBOARD
investment, CSW expects that its payout ratio will compare favorably to the rest
of the electric utility industry in the future.
(a) Aggregate investments in Exempt Projects in amounts up to
100% of CSW's "consolidated retained earnings," which were $1.883 billion as of
June 30, 1996, would still represent a relatively small commitment of capital
for a company the size of CSW, based on various key financial ratios at June 30,
1996. For example, investments in this amount would be equal to only 23% of
CSW's total capitalization ($8.2 billion), 23% of consolidated net utility plant
($8.3 billion), 14% of total consolidated assets ($13.3 billion), and 31% of the
market value of CSW's outstanding common stock ($6.1 billion). Such percentages
are not significantly higher than those of Southern as of December 31, 1995
(16.3%, 15.4%, 11.0% and 20.4%, respectively) described by the Commission in the
Southern Order as "a relatively small commitment of capital."
(b) CSW's consolidated retained earnings have grown on average
approximately 3.8% per year over each of the previous 5 years. Consolidated
retained earnings increased $71 million from 1993 to 1994, a 4.1% increase; and
by $69 million for the year ended December 31, 1995, a 3.8% increase.
(c) There is every indication that CSW's ability to raise common
equity has been positively affected by investments in Exempt Projects, as
evidenced by CSW's continued success in raising funds in the capital markets. In
February, CSW successfully issued $400 million of its common stock in a public
offering. In addition, CSW has ongoing public offerings of common stock through
its PowerShare program which commenced in February 1994, and on February 27,
1996 sold 15,525,000 shares of common stock of CSW at a price of $26.385 per
share, the proceeds of which were used to reduce the bridge debt incurred by CSW
to fund its equity investment in SEEBOARD. Net proceeds from the sale of CSW
common stock through its PowerShare program for 1994 and 1995 sales (average
$23.23 and $25.27, respectively, per share) compare favorably to the then per
share net book values for CSW's common stock ($16.01 and $16.48, respectively),
resulting in market-to-book ratios of 145% and 154%, respectively. The market's
assessment of CSW's future growth and earnings also compared favorably to other
electric utility issuers in the 1994 to 1995 time frame. This can be shown by
comparison of price-earnings and market-to-book ratios, both of which were
generally above the electric utility industry average in that period. These
measures indicate investor confidence in CSW's ability to deliver shareholder
value.
1992 1993 1994 1995
P/E Ratio:
CSW 14.3 18.6 10.9 13.3
Electric Industry* 14.8 15.1 11.8 12
Market-to-Book
Ratio:
CSW 187% 195% 141% 169%
Electric Industry* 160% 161% 133% 137%
*(Source: Historical - Compustat Electric Utilities Database;
Current - Utility Focus, Regulatory Research Associates, Inc.,
August 1995)
(d) In recent years, CSW has been aligned with the industry as a
whole in its dividend payout policy.(FN) This can be shown by CSW's dividend
payout ratio (percentage of earnings paid out in dividends), which has
consistently approximated the electric utility industry average. The implication
of a relatively conservative payout policy is that CSW's earnings are more than
adequate to cover current dividend levels and to support dividend levels
necessary to attract common stock investors, while continuing to strengthen the
equity base through retained earnings growth.
1992 1993 1994 1995
CSW Payout Ratio (%): 75.9 99.4 81.7 81.9
Electric Industry* 84.3 78.6 81.4 81
(FN)The exception was 1993, during which CSW underwent a corporate-wide
restructuring and early retirement program and recorded a one-time pretax charge
of approximately $100 million.
*(Source: Historical - Compustat Electric Utilities Database;
1995 - Merrill Lynch & Co., Utility Data Sheet, June 19, 1995
(for 12 months ended May 31, 1995))
(e) The market's assessment of the overall quality of Energy's
and CSWI's portfolio of projects (Exempt Projects and QFs) is demonstrated by
the success that Energy and CSWI have had in obtaining appropriate levels of
non-recourse debt to finance and refinance the operations of these projects. For
example, Energy recently arranged a $104 million and a $59 million non-recourse
refinancing of Energy's pro rata investment in the Ft. Lupton and Mulberry
Projects, respectively, and CSW Investment has arranged a $1.29 billion
non-recourse financing of a portion of CSW's investment in the SEEBOARD project.
(f) None of the conditions described in paragraph (b) of Rule 53
is applicable. Specifically, (1) there has been no bankruptcy of any CSW
associate company, (2) CSW's consolidated retained earnings, as previously
indicated, have increased in recent years, and (3) CSW has never reported an
"operating loss" attributable to its Exempt Projects. SFAS 121 requires a
listing of all assets of a utility that a company plans to write down and take
as a loss. CSW presently has no assets listed pursuant to SFAS 121. Based on
CSW's current knowledge, no assets with respect to any Exempt Project presently
owned (directly or indirectly) by CSW are expected to be placed on such list
pursuant to SFAS 121. Further, with the completion of the purchase of the
capital shares of SEEBOARD, and with the Altamira Project scheduled to go into
commercial operation in early 1998, it is reasonable to expect a positive impact
on the "operating income" of CSW's Exempt Projects as a group. Finally, no
associate Exempt Project has ever defaulted under the terms of any financing
document. None of the circumstances described in Rule 53(b) has occurred. CSW
undertakes to notify the Commission by filing a post-effective amendment in this
proceeding in the event that any of the circumstances described in Rule 53(b)
should occur during the authorization period.
(g) Any differences between the financial indicators of CSW and
Southern discussed in subsection (a) above are not significant as indicated by
the performance of CSW in certain other key financial indicators. In particular,
based upon publicly available information for Southern, the average of CSW's
recent price/earnings ratio (13.5 for the year ended 1995 and 17.7 for the six
months ended June 1996), earnings per share ($2.10 for the year ended 1995 and
$2.08 for the year ended 1994) and return on equity for shareholders (12.9% for
the year ended 1995 and 13.2% for the year ended 1994) are better than those of
Southern. CSW believes that such financial indicators exemplify the market's
positive assessment of CSW's overall performance and future prospects and that
such indicators have been enhanced by CSW's present strategy of diversifying its
holdings to include investments in Exempt Projects.
(2) The proposed increased use of financing proceeds to invest in
Exempt Projects will not have an "adverse impact" on any of CSW's Operating
Companies, their respective customers, or on the ability of the four State
commissions having jurisdiction over one or more such Operating Companies to
protect such Operating Companies or such customers.
The conclusion that the Operating Companies and their customers will
not be adversely impacted by increased levels of investment by CSW in Exempt
Projects is well supported by analyses of the Operating Companies' financial
integrity (including ability of the Operating Companies to issue senior
securities), lack of present and anticipated need for any equity capital from
CSW for the next ten (10) years (as discussed in Subsection (4) of Item 1 and
Subsection (2)(c) of this Item 3), continuing compliance with other applicable
requirements of Rule 53(a), and the proven effectiveness of State commission
oversight together with the affirmation by the State commissions of Louisiana,
Oklahoma and Texas that they have authority and jurisdiction, and will exercise
such authority, to protect ratepayers in their respective state from any adverse
impact, and the acknowledgement by the State commission of Arkansas that it does
not object to the relief sought by CSW in this Application- Declaration,
contained in the letters from the State commissions filed as Exhibit 2 to this
Application-Declaration. The State commissions can set the cost of capital for
electric utilities by comparison with selected groups of domestic utilities,
which exclude any utilities with adverse impacts due to foreign investments or
EWGs. Therefore, the States have the authority and the mechanism to prohibit any
adverse effects on the cost of capital due to investments in Exempt Projects
from being passed on to ratepayers. CSW has complied and will continue to comply
with the requirements of Rule 53(a)(4) regarding filing of copies of
applications and reports with other regulatory commissions.
(a) All of CSW's investments in Exempt Projects are, and are
currently expected in the future to remain, segregated from the Operating
Companies. The Operating Companies are, and are currently expected in the future
(FN)to remain, insulated from the direct effects of investments by CSW in Exempt
Projects. No Operating Company owes indebtedness or has extended credit or sold
or pledged its assets directly or indirectly to any Exempt Project in which CSW
owns any interest, no Operating Company intends to do so in the future,(FN)
and any losses that may be incurred by such Exempt Projects would have no
effect on domestic rates of any Operating Company (because of the Applicants'
undertaking not to seek recovery in rates). CSW represents that it will not
seek recovery through higher rates to the Operating Companies' utility
customers in order to compensate CSW for any possible losses that it may
sustain on investments in Exempt Projects or for any inadequate returns on
such investments.
(FN)It should be noted that Section 33(f), with a minor exception, prohibits
State regulated public utilities from financing investments in FUCO's, and
Section 33(g) prohibits outright any pledge or encumbrance of utility assets by
a State regulated public utility for the benefit of any associate FUCO.
(b) Debt (including short-term debt) ratios of the Operating
Companies are consistent with industry averages for 'A'-rated electric
utilities. The current industry average for 'A'-rated electric utilities is 49%*
Debt as % of 1991 1992 1993 1994 1995
Capitalization
SWEPCO 45% 48% 48% 48% 49%
WTU 45% 44% 43% 48% 52%
PSO 47% 49% 49% 49% 48%
CPL 45% 48% 48% 49% 50%
*(Source: 'A' industry average-Calculated using Merrill Lynch &
Co., Utility Data Sheet - Electric and Combination Utility
Companies, April 1995)
Debt levels of the Operating Companies are projected to steadily decline, moving
to the 44-45% range by the year 2000. The reduction in debt levels is
attributable largely to projected growth in retained earnings.
(c) Additional investments in Exempt Projects will not have any
negative impact on the Operating Companies' ability to fund operations and
growth. The last significant equity infusion by CSW in the Operating Companies
was made in 1985 (approximately $70 million). Over the past 10 years, the
Operating Companies have funded substantially all of their construction
expenditures from internal sources of cash and from sales of senior securities
and other borrowings. Present projections indicate that the Operating Companies
will continue to fund substantially all of their construction expenditures from
internal sources of cash and from sales of senior securities and other
borrowings for the next 10 years and that CSW will not have to make any equity
investment in any Operating Company for at least the next ten (10) years. In
addition, present projections indicate that CSW will not have to make any equity
investment in SEEBOARD during the next ten (10) years to maintain SEEBOARD's
existing business. Any additional investment by CSW in SEEBOARD would be subject
to the provisions of the Act and the rules thereunder and would increase CSW's
"aggregate investment" (as defined under Rule 53(a) of the Act) in Exempt
Projects in accordance with Rule 53(a) of the Act.
Operating Companies - Construction Expenditures: Actual (1992-1995) and
projected (1996-1997) expenditures, net of Allowance for Funds Used During
Construction ($million):
1991 1992 1993 1994 1995 1996 1997
276 326 480 493 397 332 356
Percent internally generated:
1991 1992 1993 1994 1995
114% 87% 82% 66% 76%
CSW presently estimates that for 1996 and 1997 the cash flow from operations
will be sufficient to fund expected construction expenditures.
(d) The Operating Companies' ability to issue debt and equity
securities in the future depends upon earnings coverages at the time such
securities are issued; that is, the Operating Companies must comply with certain
coverage requirements designated in their mortgage bond indentures. Presently,
the Operating Companies anticipate having more than adequate earnings coverages
for financing requirements in the foreseeable future.(FN)
(e) The senior securities of each of the Operating Companies are
presently rated AA-, A+, A and A+ for SWEPCO, WTU, CPL and PSO, respectively, by
Standard & Poor's. These ratings were affirmed by Standard & Poor's following
the announcement of the SEEBOARD acquisition in November 1995.(FN)
(FN) 1995 indenture earnings coverages for the Operating Companies reange from
about 5.2x to 8.1x, in each case well above the required coverages of 2x.
(FN) In other rating action since the announcement of CSW's plans to acquire
(SEEBOARD)in November 1995, Moody's Investores Service in December 1995 lowered
its rating on CSW commercial paper from Prime-1, the highest rating, to Prime-
2, the next highest rating. In addition, each of Standard & Poor's and Moody's
lowered its ratings on SEEBOARD's unsecured debt from AA+ to A- and from Aa2 to
Baa1, respectively, and on SEEBOARD's commercial paper from A-1+ to A-2 and
from P-1 to P-2, respectively. Based on currently available public information
and correspondence with the rating agencies that rate the CSW system, CSW
believes that such downgradings relate to the structure and size of the
acquisition of SEEBOARD and not to the status of SEEBOARD as a FUCO. The rating
changes apply only to CSW commercial paper and securities of SEEBOARD. The
ratings do not apply to any securities of the Operating Companies and should
have no adverse effect on the Operating Companies. All of the new ratings are
investment-grade ratings. In addition, the new rating on CSW commercial paper
(Prime-2) signifies "a strong capacity for short-term promissory obligations,"
with "sound" earnings trends and coverage ratios, "appropriate" capitalization
characteristics, and "ample" alternate liquidity. In addition, on August 27,
1996, Standard & Poor's decided to put a "negative outlook" on the ratings of
the Operating Subsidiaries, which is not an actual downgrading of the rating of
the securities of such companies, but is an indication that Standard & Poor's
believes that conditions exist that could justify such a downgrading at some
future time. Based on currently available public information and correspondence
with the ratings agencies that rate the CSW system, CSW believes that Standard
& Poor's justification for such "negative outlook" is the potential uncertainty
that the Operating Subsidiaries face in future rate cases and is not dependent
on CSW's investment in Exempt Projects. As of September 27, 1996, no actual
downgrading of the securities of any of the Operating Subsidiaries or CSW had
occurred. Additionally, as of such date, such "negative outlook" has had no
(i) a substantial adverse impact on the financial integrity of CSW's holding
company system or (ii) an adverse impact on any Operating Company or its
customers, or on the ability of State commissions to protect the Operating
Companies.
The Operating Companies' coverages have generally been within the 'A' and 'AA'
ranges set by the major rating agencies in recent years.The Operating Companies
continue to show strong financial statistics as measured by the rating agencies
(pre-tax interest coverage, debt ratio, funds from operations to debt, funds
from operations interest coverage, and net cash flow to capital expenditures).
Based on currently available public information and correspondence with the
ratings agencies that rate the CSW system, CSW believes there has been no
adverse effect on the financial ratings of the Operating Companies as a result
of CSW's investments in Exempt Projects.
S&P Rating: 1991 1992 1993 1994 1995
SWEPCO AA- AA- AA- AA- AA-
WTU AA- AA- AA- A+ A+
CPL A- A A A A
PSO AA- AA- AA- A+ A+
Moody's Rating: 1991 1992 1993 1994 1995
SWEPCO Aa2 Aa2 Aa2 Aa2 Aa2
WTU Aa2 Aa2 Aa2 Aa2 A1
CPL A2 A2 A2 A2 A2
PSO Aa2 Aa2 Aa2 Aa2 Aa3
Duff & Phelps Rating: 1991 1992 1993 1994 1995
SWEPCO AA+ AA+ AA+ AA+ AA+
WTU AA AA AA AA AA-
CPL A A A A A
PSO AA AA AA AA AA
(f) CSW has complied and will continue to comply with the
requirements of Rule 53(a)(2) regarding preparation of and making available
books and records and financial reports regarding Exempt Projects.
(g) CSW has complied and will continue to comply with the
requirements of Rule 53(a)(3) regarding the limitation on the use of Operating
Company employees in connection with providing services to Exempt Projects.
Increased levels of investment in Exempt Projects are not expected to have any
impact on utilization of Operating Company employees. The Operating Companies
have not and will not increase staffing levels or acquire other resources to
support the operations of Exempt Projects. In this regard, the vast majority of
the operational employees of the Exempt Projects are hired or contracted
locally. This is true even where Energy, CSWI or their respective subsidiary is
the operator. Project development, management and home office support functions
for the Exempt Projects are largely performed by Energy or CSWI, which together
have approximately 89 full time employees, and by outside consultants (e.g.,
engineers, investment advisors, accountants and attorneys) engaged by Energy or
CSWI. Accordingly, Energy's and CSWI's need for the support of personnel
provided by the Operating Companies has been and is projected to remain
relatively modest.
(h) In the opinion of CSW, Energy and CSWI, the four State
commissions of Arkansas, Louisiana, Oklahoma and Texas have jurisdiction over
the Operating Companies and are able to protect utility customers within their
respective states. The State commissions have not raised objections (or have
withdrawn any such objection) to CSW's current investments in Exempt Projects.
(FN)To provide the Commission with additional assurances, CSW met with each of
the State commissions having jurisdiction over the Operating Companies and
requested each to provide the Commission with a letter certifying that such
State Commission has jurisdiction over certain Operating Companies and that such
State commission will protect ratepayers from any adverse effect or costs
that might result from CSW's investments in Exempt Projects. Specifically, CSW,
SWEPCO and the State commission of Arkansas have entered into an agreement to
ensure that such State commission has the ability to protect its ratepayers
against any potential adverse impact that may result from investments by CSW in
Exempt Projects; the State commission of Louisiana asserts in its letter
included in Exhibit 2 that it "has the authority and jurisdiction to protect the
ratepayers of SWEPCO, and intends to exercise such authority" and that such
authority "is applicable to all EWGs and FUCOs in which CSW or its subsidiaries
seek to obtain an ownership interest"; the State commission of Oklahoma asserts
in its letter included in Exhibit 2 that it has both State "constitutional and
statutory authority . . . to supervise and regulate electric utilities and all
matters relating to the performance of their public duties and their charges
therefore, and to correct any abuses of such utilities" and that it "intends to
exercise such authority"; and the State commission of Texas asserts in its
letter included in Exhibit 2 that a State rule is in effect, the purpose of
which is "to ensure that Texas ratepayers are protected from the potential
adverse effects associated with FUCO diversification" and that "the rule
requires the reporting of certain information so the [State commission of Texas]
may monitor FUCO activities and requires the holding company to make certain
covenants designed to insulate the utility from the potential adverse effects of
FUCO activities." Additionally, with respect to certain State commissions, CSW
will, among other things, have to comply with certain reporting requirements and
covenant that such investments in Exempt Projects will not result in any
obligation by the Operating Companies. CSW and its affiliates have been
subjected to numerous audits by the FERC and the Commission, and it is assumed
both staffs will participate in future audits. Audits by the Commission have not
raised "significant" questions. Rule 54 provides that the Commission, 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 Exempt
Project, or other transactions by such registered holding company or its
subsidiary other than with respect to Exempt Projects, shall not consider the
effect of the capitalization or earnings of any subsidiary which is an Exempt
Project upon the registered holding company system if the provisions of Rule
53(a), (b) and (c) are satisfied. If the transactions contemplated hereby are
consummated and CSW's "aggregate investment" in Exempt Projects exceeds 50% of
its "consolidated retained earnings," the provisions of Rule 53(a) will not be
satisfied. The Applicants have included in this Application certain reporting
requirements that are intended to enable the Commission to monitor the impact of
the transactions for which authority is sought hereby. The Applicants believe
that such reporting requirements will assist the Commission in its
determinations concerning the effect of Exempt Projects on other transactions
for which CSW will require authorization.
(FN)Section 33(c) (2) provides that the State commissions may make
recommendations to the Commission regarding a registered holding company's
relationship to FUCOs, and that the Commission shall "reasonably and fully
consider" such recommendations.
Item 4. Regulatory Approval.
The issuance and sale of securities by CSW and the use of the proceeds
thereof to acquire or guaranty the securities of any Exempt Project are not
subject to the jurisdiction of any State commission or of any federal commission
other than this Commission. CSW has complied with the requirements of Rule
53(a)(4) by submitting a copy of this Application-Declaration to the public
utility commissions in Texas, Arkansas, Louisiana and Oklahoma. In addition, CSW
and the Operating Companies have discussed the request for additional investment
authority set forth in this Application-Declaration with each of the four State
commissions having jurisdiction over one or more such Operating Companies. Item
5. Procedure.
It is requested that the Commission issue and publish no later than
March 1, 1996, the requisite notice under Rule 23 with respect to the filing of
this Application-Declaration, such notice to specify a date not later than March
26, 1996, as the date after which an order granting and permitting this
Application-Declaration to become effective may be entered by the Commission and
the Commission enter not later than March 27, 1996, an appropriate order
granting and permitting this Application-Declaration to become effective.
CSW, Energy and CSWI respectfully request that appropriate and timely
action be taken by the Commission in this matter in order that the development
activities of CSW, Energy and CSWI may continue to expand to the levels sought
hereby.
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, unless such Division opposes the matters
covered hereby. 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 such order be made effective
immediately upon the entry thereof.
CSW proposes to file, within 60 days after the end of the applicable
quarter, a quarterly report pursuant to Rule 24, commencing with the report for
the quarter ending September 30, 1996, which contains the following information:
(i) A computation in accordance with Rule 53(a)
(as modified by the Commission's order in
this proceeding) of CSW's "aggregate
investment" in all Exempt Projects;
(ii) CSW's cumulative "aggregate investment" in
all Exempt Projects expressed as a percentage
of: total capitalization, net utility plant,
total consolidated assets and market value of
common equity, all as of the end of such
quarter;
(iii) Consolidated capitalization ratios as of the end of such
quarter, with consolidated debt to be inclusive of all
short-term debt and non-recourse debt of Exempt Projects to
the extent normally consolidated under applicable financial
reporting rules;
(iv) The market-to-book ratio of CSW's common
stock at the end of such quarter;
(v) An analysis of the growth in consolidated retained earnings
which segregates earnings growth attributable to Exempt
Projects as a whole versus all other subsidiaries of CSW;
and
(vi) A breakdown in revenues and net income of
each of the Exempt Projects for the 12-months
then ended.
CSW proposes to file a single report under Rule 24
which combines the foregoing information with the information
required pursuant to Rule 24 in File No. 70-8423 (Holding Co. Act
Rel. Nos. 26156 and 26383, dated November 2, 1994 and September
27, 1995, respectively).
Item 6. Exhibits and Financial Statements.
Exhibit 1 - Proposed Notice of Proceeding.
Exhibit 2 - Correspondence from State Commissions.
Item 7. Information as to Environmental Effects.
The proposed transactions do not involve major federal
action having a significant effect on the human environment. See
Item 1. No federal agency has prepared or is preparing an
environmental impact statement with respect to the proposed
transaction.
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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.
Date: October 21, 1996
CENTRAL AND SOUTH WEST CORPORATION
By:/s/WENDY G. HARGUS
Wendy G. Hargus
Treasurer
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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.
Date: October 21, 1996
CSW ENERGY, INC.
By:/s/TERRY D. DENNIS_
Terry D. Dennis
President and Chief Executive
Officer
<PAGE>
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.
Date: October 21, 1996
CSW INTERNATIONAL, INC.
By:/s/TERRY D. DENNIS
Terry D. Dennis
President and Chief Executive
Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Transmission
Number Exhibit Method
1 Proposed Notice of Proceeding. (Previously
filed)
2 Correspondence from State Commissions. ---
