Public Service Co. of New Mexico (PNM) applied March 31 at the Federal Energy Regulatory Commission for authorizations necessary to permit PNM to reacquire certain undivided ownership interests in Unit 2 of the Palo Verde Nuclear Generating Station (PVNGS) as part of PNM’s continuing transition from sale/leaseback arrangements to direct ownership by PNM.
The purpose and effect of each covered transaction will be an acquisition by PNM of direct ownership of certain undivided interests in PVNGS Unit 2 from certain grantor trusts (collectively called the “Owner-Lessors”), which the Owner-Lessors (including an Owner-Lessor that has become a subsidiary of PNM) currently hold on a passive basis as part of a lease finance structure. PNM currently has operational control over the output of the subject interests in PVNGS, and thus control of those interests will not change as a result of these transactions.
Affected parties are:
- CGI Capital Inc., an equipment leasing company;
- Cypress Verde LLC, a single-purpose subsidiary of one or more affiliated investment funds; and
- Cypress Second PV Partnership, a single-purpose subsidiary of one or more affiliated investment funds.
PNM leases interests in Units 1 and 2 of PVNGS. The PVNGS leases were entered into in 1985 and 1986 and were scheduled to expire on Jan. 15, 2015, for the four Unit 1 leases and Jan. 15, 2016, for the five Unit 2 leases. Each of the leases provided PNM with an option to purchase the leased assets at fair market value at the end of the leases, but PNM does not have a fixed price purchase option. In addition, the leases provided PNM with options to renew the leases at fixed rates set forth in each of the leases for two years beyond the termination of the original lease terms. The option periods on certain leases could be further extended for up to an additional six years (the “Maximum Option Period”) if the appraised remaining useful lives and fair value of the leased assets are greater than parameters set forth in the leases.
Following procedures set forth in the PVNGS leases, PNM notified each of the lessors under the Unit 1 leases that it would elect to renew those leases for the Maximum Option Period on the expiration date of the original leases. In addition, PNM notified the lessor under the one Unit 2 lease containing the Maximum Option Period provision that it would elect to renew that lease for the Maximum Option Period on the expiration date of the original lease. In December 2013, PNM and each of the Unit 1 lessors entered into amendments to each of the Unit 1 leases setting forth the terms and conditions to implement the extension of the term of the lease through the agreed upon Maximum Option Period expiring on Jan. 15, 2023. Similarly, in March 2014, PNM and the lessor under the one Unit 2 lease containing the Maximum Option Period provision entered into an amendment to that lease setting forth the terms and conditions that will implement the extension of the term of the lease through the agreed upon Maximum Option Period expiring Jan. 15, 2024.
For the three PVNGS Unit 2 leases which do not contain the Maximum Option Period provisions (the “Non-MOP Leases”), PNM, following procedures set forth in such leases, notified each of the Owner-Lessors that PNM would elect to purchase the PVNGS assets underlying those leases on the expiration date of the original leases. In February 2014, PNM and the Owner Lessor under one of the Non-MOP Leases entered into a letter agreement that establishes that the purchase price, representing the fair market value, to be paid by PNM upon the purchase of the assets underlying that lease will be $78.1 million on Jan. 15, 2016. This lease is for 31.25 MW of the entitlement from PVNGS Unit 2. The lease remains in existence and PNM will record the purchase at the termination of the lease on Jan. 15, 2016.
In May 2014, PNM and the Owner Lessors under the other two Non-MOP Leases signed a letter agreement that establishes a binding agreement regarding the purchase price, representing the fair market value, to be paid by PNM upon the purchase of the PVNGS assets underlying those leases of $85.2 million on Jan. 15, 2016. These leases are for 32.76 MW of the entitlement from PVNGS Unit 2. PNMR Development and Management Corp. is also a party to the letter agreement, which constitutes a letter of intent providing PNMR Development with the option, subject to certain conditions, to acquire the entities that own the leased assets at any time from June 1, 2014, through Jan. 14, 2016. PNMR has determined that PNMR Development will not exercise the early purchase option.
On Jan. 15, 2016, PNM said it will acquire direct ownership of, and title to, the interests in PVNGS Unit 2 which it presently holds as lessee under the three Non-MOP Leases and the Owned Lease.