FILE NO. ________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
MANZANO CORPORATION
A NEW MEXICO CORPORATION
ALVARADO SQUARE
ALBUQUERQUE, NEW MEXICO 87158
(Name of Company Filing This Statement and Address of
Principal Executive Office)
M. H. Maerki
Senior Vice President and Chief Financial Officer
MANZANO CORPORATION
ALVARADO SQUARE
ALBUQUERQUE, NEW MEXICO 87158
(Name and Address of Agent for Service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
Michael F. Cusick
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
Patrick T. Ortiz
Senior Vice President, General Counsel and Secretary
MANZANO CORPORATION
Alvarado Square
Albuquerque, New Mexico 87158
(505) 241-2700
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
INTRODUCTION
Pursuant to Sections (9)(a)(2) and 10 of the Public Utility Holding
Company Act of 1935 (the "1935 Act" or the "Act"), Manzano Corporation, a New
Mexico corporation ("Manzano"), hereby requests that the Securities and Exchange
Commission (the "Commission") issue an order (i) approving the acquisition by
Manzano of all of the issued and outstanding voting securities of Public Service
Company of New Mexico ("PNM"), pursuant to a share-for-share exchange whereby
all of the common shareholders of PNM will become common shareholders of
Manzano, and PNM will become a wholly-owned direct subsidiary of Manzano; (ii)
approving the acquisition by Manzano (pursuant to a dividend distribution by PNM
to Manzano) of all of the issued and outstanding voting securities of a
corporation yet to be formed in New Mexico ("UtilityCo"); and (iii) granting
such other authorizations as may be necessary in connection therewith.
The Board of Directors of PNM proposes to reorganize PNM into a holding
company structure (as described herein) as a means of achieving the corporate
and asset separations required by New Mexico's Electric Utility Industry
Restructuring Act of 1999 (the "Restructuring Act"). Under the terms of the
Agreement and Plan of Share Exchange (the "Agreement"), all of the outstanding
shares of PNM common stock will be exchanged on a share-for-share basis for
shares of Manzano common stock. Thus, when the share exchange is completed, each
person who owned PNM common stock immediately prior to the share exchange will
own the same number of shares (and percentage) of Manzano common stock after the
share exchange. Manzano will own all of the outstanding shares of PNM common
stock. Manzano will, at that point, be a "holding company" under the Act and
will claim an exemption under Section 3(a)(1) of the Act pursuant to Rule 2
under the Act. In and of itself, this exchange does not require prior approval
of the Commission under Section 9(a)(2) of the Act.
Prior to completion of the proposed share exchange, PNM will form
another wholly-owned subsidiary, referred to in this Application/Declaration as
"UtilityCo," which, after completion of the proposed share exchange and
corporate separation, will be a wholly-owned subsidiary of Manzano and a sister
company to PNM. After completion of the proposed share exchange and corporate
separation, UtilityCo will acquire the name "Public Service Company of New
Mexico," and the existing PNM will be renamed Manzano Energy Corporation. For
purposes of this Application/Declaration, however, the term "PNM" refers to the
current Public Service Company of New Mexico. In addition, the term "Energy"
refers to the subsidiary (currently PNM) that will own PNM's existing electric
generation and related assets, and the term "UtilityCo" refers to the future
Public Service Company of New Mexico. (The acquisition by Manzano of the voting
securities of PNM and UtilityCo and the transfer of the Regulated Assets, as
defined later, from PNM to UtilityCo are collectively referred to herein as the
"Separation.")
After completion of the proposed share exchange and receipt of all
necessary regulatory and other approvals, to comply with the Restructuring Act,
PNM's plant related assets identified for Federal Energy Regulatory Commission
("FERC") accounting purposes as electric and gas distribution and transmission
related assets (the "Regulated Assets") will be transferred to UtilityCo.
Shareholder approval is not required for this asset transfer.
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Primarily as a result of federal and state regulatory reforms, the
electric generation industry is undergoing a fundamental transformation into a
competitive marketplace. The Restructuring Act enacted by the New Mexico
legislature (the "Legislature") and signed into law in April 1999 begins to open
the state's electric generation market to choice for certain customers in 2001
and the remainder in 2002, which dates are subject to extension by up to one
year by the New Mexico Public Regulation Commission ("PRC"). The Restructuring
Act also requires that assets and activities subject to the jurisdiction of the
PRC and the FERC, primarily electric and gas distribution and transmission
assets and activities (collectively, the "Regulated Business"), be separated
from competitive, deregulated businesses, primarily electric generation assets
and service and related energy services (collectively, the "Competitive,
Deregulated Businesses"). This separation is required by the Restructuring Act
to be accomplished through the use of at least two separate corporations. The
Restructuring Act expressly authorizes the use of a holding company structure to
effectuate the required separation.
PNM has decided to accomplish this mandated separation by the formation
of Manzano and the transfer by PNM of the Regulated Business to UtilityCo,
subject to various regulatory and other approvals. Under a holding company
structure, PNM's Regulated Business (that is, electric and gas transmission and
distribution services and other ancillary services including metering and
billing) and its Competitive, Deregulated Businesses will each be owned by
separate companies. As a result, Manzano will be in a better position to adapt
to the rapidly changing energy marketplace and to meet and take advantage of
future challenges and opportunities while continuing to own and operate its
Regulated Business through UtilityCo.
Following the Separation, Manzano will be a holding company under
Section 2(a)(7) of the 1935 Act. It will own all of the issued and outstanding
voting securities of UtilityCo and PNM (the future Energy). Each of Energy and
UtilityCo will be a "public-utility company" as defined in Section 2(a)(5) of
the 1935 Act. Manzano will claim an exemption from all of the provisions of the
1935 Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) and
Rule 2 thereunder immediately after the share exchange.
It is the current intention to have Manzano's competitive subsidiaries,
Energy and its subsidiaries including Avistar, Inc. ("Avistar") (currently a
wholly-owned non-utility subsidiary of the present PNM), engage principally in
the Competitive, Deregulated Businesses.
A. DESCRIPTION OF PARTIES TO THE TRANSACTION
1. General Description.
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(a) PNM. PNM was organized under the laws of the State of New Mexico in
1917. The principal executive offices of PNM are located in Albuquerque, New
Mexico. PNM is an integrated public utility primarily engaged in the generation,
transmission, distribution and sale of electricity and in the transmission,
distribution and sale of natural gas within the State of New Mexico. PNM is, and
after the Separation will continue to be, a public utility company within the
meaning of Section 2(a)(5) of the 1935 Act.
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The total population of the area served by one or more of PNM's utility
services is estimated to be approximately 1.35 million, of which 52.2% live in
the greater Albuquerque area. For the year ended December 31, 1999, 78.8% of
PNM's operating revenues were derived from electric operations, 20.4% from
natural gas operations and 0.8% from unregulated businesses. As of December 31,
1999, PNM employed 2,667 persons.
PNM is currently subject to the jurisdiction of the PRC with respect to
its retail electric and gas rates, service, accounting, issuance of securities,
construction of major new generation and transmission facilities and other
matters. The FERC has jurisdiction over rates and other matters related to
transmission service and wholesale electric sales. As a co-licensee with respect
to three nuclear generating units, PNM is also subject to the authority of the
NRC.
PNM's corporate structure (including the planned formation of
UtilityCo) prior to the commencement of the Separation is as follows:
--------------------
| |
| PNM |
| |
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|
----------------------------------------------------
| | |
--------------------- ---------------------- --------------------
| | | | | |
| MANZANO | | UTILITYCO | | AVISTAR |
| | | (to be formed) | | |
| | | | | |
--------------------- ---------------------- --------------------
The above chart does not show any of PNM's other existing subsidiaries
since these subsidiaries are either inactive or immaterial to PNM.
After the asset transfer, the existing PNM will be renamed Manzano
Energy Corporation. It will be a generation, power supply and energy-related
services company with its principal executive offices located in Albuquerque,
New Mexico. Energy will be a wholly-owned subsidiary of Manzano. After the
Separation, Energy will engage principally in the Competitive, Deregulated
Businesses.
(b) Manzano. Manzano, a New Mexico corporation, was organized in
March 2000 for the purpose of carrying out the reorganization of PNM into a
holding company structure. Manzano is currently a direct, wholly-owned shell
subsidiary of PNM. Upon the consummation of the share exchange, Manzano will
become the parent of PNM. Manzano's principal executive offices are located in
Albuquerque, New Mexico. Manzano does not, and before and after the Separation
will not, own any utility assets.
Manzano will, upon completion of the share exchange, be a "holding
company" under the Act and will claim an exemption under Section 3(a)(1) of the
Act pursuant to Rule 2 under the Act. In and of itself, this exchange does not
require prior approval of the Commission under Section 9(a)(2) of the Act. As
part of the reorganization, PNM will distribute the outstanding shares of common
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stock of UtilityCo to Manzano by way of a dividend so that UtilityCo will also
be a wholly-owned subsidiary of Manzano after the consummation of the share
exchange. Manzano is not expected to be an operating company. Thus, the business
and operations conducted by PNM and its subsidiaries immediately before the
share exchange will continue to be conducted by UtilityCo and Energy (the former
PNM).
Similarly, the consolidated assets and liabilities of PNM and its
subsidiaries immediately before the share exchange will be the same as the
consolidated assets and liabilities of Manzano and its subsidiaries, UtilityCo
(the future PNM) and Energy (the former PNM), immediately after the Separation.
Although Manzano will not be an operating company, Manzano will engage in those
activities that are necessary for it to meet its fiduciary and financial
obligations as a publicly-traded company.
PNM expects the reorganized corporate structure of Manzano immediately
after the Separation to be as follows:
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| |
| MANZANO |
| |
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|
----------------------------------------------------
| |
--------------------- --------------------
| MANZANO | | UTILITYCO |
| ENERGY | | (renamed Public |
| (the former PNM) | | Service Company |
| | | of New Mexico) |
--------------------- --------------------
|
---------------------
| |
| AVISTAR |
| |
---------------------
The above chart does not show any of PNM's other existing subsidiaries
since these subsidiaries are either inactive or immaterial to PNM. Manzano may
also establish other subsidiaries in the future to engage in competitive or
other businesses.
(c) UtilityCo. UtilityCo will be incorporated in New Mexico; the
currently anticipated date of its incorporation is in the second quarter of
2000. Its principal executive offices will be located in Albuquerque, New
Mexico.
To comply with the Restructuring Act, UtilityCo will be formed so that
PNM can transfer its Regulated Business assets to UtilityCo after the
consummation of the share exchange. In addition, the names "PNM" and "Public
Service Company of New Mexico" will be transferred to UtilityCo. As discussed,
as a result of a dividend by PNM of all of the outstanding shares of UtilityCo
common stock, after the consummation of the share exchange, UtilityCo will be a
wholly-owned subsidiary of Manzano. After completion of the share exchange and
the separation of PNM's Regulated Business and Competitive, Deregulated
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Businesses, the PRC will retain the authority to regulate the rates and services
of UtilityCo for distribution services while the FERC will regulate transmission
rates and service. The transfer of the Regulated Business assets will not occur
until shareholder, regulatory and other approvals are obtained. At the time the
Regulated Business assets are transferred, UtilityCo will become a
public-utility company within the meaning of Section 2(a)(5) of the 1935 Act.
(d) Energy. Upon consummation of the share exchange, PNM will be
renamed Manzano Energy Corporation and will be a direct, wholly-owned subsidiary
of Manzano. After the transfer of the Regulated Business to UtilityCo, assuming
the receipt of all necessary regulatory and other approvals, Energy will be a
generation, power supply and energy-related services company that ultimately
will provide these services pursuant to the Restructuring Act on a competitive,
deregulated basis. The Competitive, Deregulated Businesses that will be retained
by Energy include PNM's interests in the Palo Verde Nuclear Generating Station,
the Four Corners Power Plant and San Juan Generating Station, as well as less
significant generation assets. Avistar will continue to be a wholly-owned
subsidiary of Energy as will the other existing subsidiaries of PNM that are
currently either inactive or immaterial. In the future, as business conditions
warrant, Energy may form new subsidiaries to take advantage of competitive,
deregulated business opportunities.
(e) Avistar. PNM's wholly-owned unregulated subsidiary, Avistar, was
formed in August 1999 as a New Mexico corporation and is currently engaged in
certain non-utility businesses, including energy and utility-related services
previously operated by PNM. In February 2000, Avistar invested $3 million in
AMDAX.com, a start-up company which will provide an online auction service to
bring together electricity buyers and sellers in the deregulated electric power
market. In addition, Avistar operates and manages the City of Santa Fe's water
system under a contract that will expire on July 1, 2000. That contract is not
expected to be renewed. Pursuant to PRC authority, PNM can invest up to $50
million in equity in Avistar and can enter into a reciprocal loan agreement with
Avistar for up to $30 million. PNM has currently invested $25 million in Avistar
and has no amounts outstanding under the reciprocal loan agreement.
2. Description of Utility Operations.
---------------------------------
(a) PNM. PNM is currently an integrated public utility, operating in
both electricity generation, transmission, distribution and sale and gas
transmission, distribution and sale.
(i) Electric Operations. PNM's electric operations serve four
principal markets. Sales to retail customers and sales to firm-requirements
wholesale customers, sometimes referred to collectively as "system" sales,
comprise two of these markets. The third market consists of other contracted
sales to utilities for which PNM commits to deliver a specified amount of
capacity (measured in megawatts ("MW")) or energy (measured in megawatt hours
("MWh")) over a given period of time. The fourth market consists of economy
energy sales made on an hourly basis at fluctuating, spot-market rates. Sales to
the third and fourth markets are sometimes referred to collectively as
"off-system" sales.
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PNM provides retail electric service to a large area of north central
New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las
Vegas, Belen and Bernalillo. PNM also provides retail electric service to Deming
in southwestern New Mexico and to Clayton in northeastern New Mexico. As of
December 31, 1999, approximately 361,000 retail electric customers were served
by PNM, the largest of which accounted for approximately 4.7% of PNM's total
electric revenues for the year ended December 31, 1999.
PNM holds long-term, non-exclusive franchise agreements for its
electric retail operations, expiring between June 6, 2000, and November 2028.
These franchise agreements provide PNM access to public rights-of-way for the
placement of PNM's electric facilities. The City of Albuquerque (the "COA"),
City of Santa Fe, Town of Cochiti Lake, Bernalillo County, Luna County, Sandoval
County and San Miguel County franchises have expired. Customers in the area
covered by the expired franchises represent approximately 43.2%, of PNM's 1999
total electric operating revenues, and no other franchise area represents more
than 4.97%. PNM continues to collect and pay franchise fees to COA, City of
Santa Fe and Town of Cochiti Lake. PNM currently does not pay franchise fees to
Bernalillo County, Luna County, Sandoval County and San Miguel County. PNM
remains obligated under state law to provide service to customers in the
franchise area even in the absence of a franchise agreement.
PNM has ownership interests in certain generating facilities located in
New Mexico, including the Four Corners Power Plant, a coal fired plant ("Four
Corners"), Reeves Station, a gas and oil fired unit ("Reeves"), Las Vegas
Generating Station, a gas and oil fired unit ("Las Vegas") and San Juan
Generating Station, a coal fired plant ("SJGS"). In addition, PNM has ownership
and leasehold interests in Palo Verde Nuclear Generating Station, a nuclear
plant ("PVNGS") located in Arizona. As of December 31, 1999, the total net
generation capacity of facilities owned or leased by PNM was 1,521 MW. In
addition to generation capacity, PNM purchases power in the market. PNM is also
interconnected with various utilities for economy interchanges and mutual
assistance in emergencies. PNM has been actively trading in the wholesale power
market and has entered into and anticipates that it will continue to enter into
power purchases to accommodate its trading activity.
PNM has ownership and leasehold interests, with a total net generation
capacity of 390 MW, in the three 1,270 MW units of PVNGS. PNM has a 10.2%
ownership interest in PVNGS, with portions of its interests in Units 1 and 2
held under leases. PNM has ownership interests in four units located at SJGS, a
coal fired generating station in Waterflow, New Mexico. PNM has a 50% ownership
interest in Units 1, 2 and 3 and a 38.457% ownership interest in Unit 4 at SJGS.
Units 1, 2, 3 and 4 at SJGS have net rated capacities of 327 MW, 316 MW, 497 MW
and 507 MW, respectively. PNM owns 192 MW of net rated capacity derived from its
13% interest in Units 4 and 5 of Four Corners located in Fruitland, New Mexico,
on land leased from the Navajo Nation and adjacent to available coal deposits.
PNM also owns 154 MW of generation capacity at Reeves in Albuquerque,
New Mexico, and 20 MW of generation capacity at Las Vegas, New Mexico. These
stations are used primarily for peaking and transmission support.
As of December 31, 1999, PNM owned, jointly owned or leased 2,803
circuit miles of electric transmission lines, 4,399 miles of distribution
overhead lines, 3,590 cable miles of underground distribution lines (excluding
street lighting) and 214 substations.
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In April or May of 2000, PNM will have approximately 132 MW of
additional unit contingent peaking capacity as a result of the Cobisa-Person
Limited Partnership ("PLP") gas turbine generating unit coming on line. PNM
entered into a 20 year power purchase agreement with PLP to purchase
approximately 132 MW of unit contingent peaking capacity, with an option to
renew for an additional five years.
PNM intends to principally use the FERC accounting guidelines when
determining whether plant assets will be transferred to UtilityCo or remain with
Energy. For example, those plant-related assets classified as generation-related
will be assigned to Energy and those plant-related assets classified as
distribution or transmission will be assigned to UtilityCo. As a general policy,
all other asset and liability balances associated with electricity supply and
energy services will remain with Energy, asset and liability account balances
associated with electric and gas distribution and transmission will be assigned
to UtilityCo, and remaining asset and liability balances will be assigned to
Manzano.
(ii) Gas Operations. PNM Gas Services, a division of PNM
("PNMGS"), distributes natural gas to most of the major communities in New
Mexico, including Albuquerque and Santa Fe, serving approximately 426,000
customers as of December 31, 1999. The Albuquerque metropolitan area accounts
for approximately 51.7% of the total sales-service customers. PNMGS holds
long-term, non-exclusive franchises providing access to public rights of way
with varying expiration dates in all incorporated communities requiring
franchise agreements except for the COA. This franchise with the COA expired on
January 28, 1998. Although the franchise has expired, PNM continues to pay
franchise fees to COA and remains obligated to serve customers under state law.
PNMGS' customer base includes both sales-service customers and
transportation-service customers. Sales-service customers purchase natural gas
and receive transportation and delivery services from PNMGS for which PNMGS
receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues
collected from on-system sales-service customers are recovered in accordance
with PRC rules and regulations and do not affect the net earnings of PNM in that
they represent recovery of the costs of purchasing gas from third parties with
no mark-up upon resale. Additionally, PNMGS makes occasional gas sales to
off-system customers. Off-system sales deliveries generally occur at interstate
pipeline interconnects with PNMGS' system. Transportation-service customers, who
produce or purchase gas independently of PNMGS and contract with PNMGS for
transportation and related services, provide PNMGS with cost-of-service revenues
only. Transportation services are provided to gas marketers, producers and end
users for delivery to locations throughout the PNMGS distribution systems, as
well as for delivery to interstate pipelines. PNMGS provided gas transportation
deliveries to approximately 1,244 gas marketers, producers and end users during
1999.
For the twelve months ended December 31, 1999, PNMGS had throughput of
approximately 92.3 million decatherms, including sales of 52.1 million
decatherms to both sales-service customers and off-system customers. No single
sales-service customer accounted for more than 4.2% of PNMGS' therm sales in
1999. During 1999, approximately 43.6% of PNMGS' total gas throughput was
related to transportation gas deliveries. PNMGS' transportation rates are
unbundled and transportation customers only pay for the service they receive.
PNMGS' total operating revenues for the year ended December 31, 1999, were
approximately $236.7 million. Cost-of-gas revenues, received from sales-service
and off-system customers, accounted for approximately 47.7% of PNMGS' total
operating revenues. Since a major portion of PNMGS' load is related to heating,
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levels of therm sales are affected by weather. Approximately 43.3% of PNMGS'
total therm sales in 1999 occurred in the months of January, February, November
and December.
PNMGS obtains its supply of natural gas primarily from sources within
New Mexico pursuant to contracts with producers and marketers. These contracts
are generally sufficient to meet PNMGS peak-day demand. PNMGS serves certain
cities which depend on El Paso Natural Gas Company or Transwestern Pipeline
Company for transportation of gas supplies. Because these cities are not
directly connected to PNMGS transmission facilities, gas transported by these
companies is the sole supply source for those cities. Such transportation is
regulated by the FERC. As a result of FERC Order 636, PNMGS' options for
transporting gas to such cities and other portions of its distribution system
have increased.
PNM's natural gas properties, as of December 31, 1999, consisted
primarily of natural gas storage, transmission and distribution systems.
Provisions for storage made by PNMGS include ownership and operation of an
underground storage facility located near Albuquerque, New Mexico. The
transmission systems consisted of approximately 1,334 miles of pipe with
appurtenant compression facilities. The distribution systems consisted of
approximately 10,693 miles of pipe.
(iii) Asset Transfer from PNM to UtilityCo. At the time of the
Separation, the Regulated Assets will be transferred from PNM to UtilityCo. This
will occur both directly through sale and indirectly through a dividend to
Manzano and an equity contribution to UtilityCo. UtilityCo will own and operate
the Regulated Business. UtilityCo will acquire the name "Public Service Company
of New Mexico." Energy (the former PNM) will retain all other assets not
transferred to UtilityCo or Manzano and will own and operate the Competitive,
Deregulated Businesses.
(b) Manzano. Manzano does not own any utility assets, and
after the Separation, it will not own any utility assets or perform any utility
operations. Manzano will own assets needed for it to meet its fiduciary and
financial obligations as a publicly traded company as well as to provide certain
services to its subsidiaries, and will own all the outstanding common shares of
UtilityCo and Energy.
(c) UtilityCo. At the time of the Separation, the Regulated
Assets and associated liabilities will be transferred from PNM to UtilityCo, and
UtilityCo will own and operate the Regulated Assets. (See above discussion of
PNM's utility operations for more specific information.) UtilityCo will acquire
the name Public Service Company of New Mexico.
(d) Energy. Upon consummation of the share exchange, Energy,
the former PNM, will be renamed and will be a direct, wholly-owned subsidiary of
Manzano. After the transfer of the Regulated Assets to UtilityCo, Energy will
only own those remaining assets, not transferred, which will allow it to be an
electric generation, power supply and energy-related services company that
ultimately will provide these services pursuant to the Restructuring Act on a
competitive, deregulated basis. (See above discussion of PNM's utility
operations for more specific information).
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(e) Avistar. Avistar does not, nor will it after the
Separation, own or operate any utility assets.
(f) Utility Regulation. This U-1 Application/Declaration is
made as part of the regulatory approvals needed by PNM to establish the holding
company structure. In addition to Commission approval, approval of the proposed
holding company structure and the share exchange is required from the PRC, the
FERC and the Nuclear Regulatory Commission ("NRC").
PNM received an order from the PRC in February 2000 authorizing it to
form Manzano and UtilityCo as wholly-owned shell subsidiaries of PNM. PNM filed
an application with the PRC in November 1999, that is still pending, seeking by
June 1, 2000, all PRC approvals necessary for PNM to implement the formation of
the holding company structure and the share exchange and the Separation,
including necessary financing transactions, pursuant to the Restructuring Act.
The hearing on the application was scheduled for May 15, 2000 but was vacated on
March 10, 2000 with no replacement date scheduled. Based upon discussions with
the PRC staff and other intervenors, it appears that a late second quarter
hearing and third quarter 2000 separation are reasonable assumptions at the
current time. If PNM can obtain a stipulated settlement, these dates could be
moved forward. Part three of PNM's transition plan, currently scheduled to be
filed by PNM no later than June 1, 2000, will address transition costs, stranded
costs, UtilityCo's cost of service, standard offer service and other issues
required to be considered under the Restructuring Act.
After the formation of a holding company, the completion of the
Separation requires the Commission's approval under Section 9(a)(2) of the 1935
Act. Section 9(a)(2) applies to any person who acquires any security of a public
utility company if the person owns, controls or holds with the power to vote 5%
or more of the outstanding voting securities of the utility and of any other
public utility or holding company, or will by virtue of the acquisition, own,
control or hold with the power to vote 5% or more of the outstanding voting
securities of the utility. As a result of the share exchange and the Separation,
Manzano will own all of the outstanding voting securities of UtilityCo and
Energy. Energy, the current PNM, is a public utility within the meaning of the
1935 Act. After the transfer of the Regulated Business from PNM to UtilityCo,
UtilityCo will also be a public utility within the meaning of the 1935 Act.
Therefore, Manzano submits this application for an order authorizing it to
acquire the capital stock of Energy and UtilityCo. After consummation of the
share exchange and again after the consummation of the Separation, Manzano will
claim an exemption from all of the provisions of the 1935 Act (except for
Section 9(a)(2) thereof).
The FERC has held that the transfer of control of a public utility
company from its existing shareholders to a holding company constitutes a
transfer of the facilities of such utility. Such an exchange must therefore be
reviewed and approved by the FERC under Section 203 of the Federal Power Act.
PNM currently plans to file an application with the FERC requesting this
approval shortly after the PRC Part three filing. As part of this FERC filing,
PNM will also be requesting approval from the FERC to transfer transmission
assets from PNM to UtilityCo.
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As a co-licensee with respect to three nuclear generating units, PNM is
subject to the authority of the NRC. The formation of a holding company and the
separation of PNM's Regulated Business and Competitive, Deregulated Businesses
will involve two matters requiring NRC approval: (1) consent to the transfer of
control of PNM's NRC license for its minority interests in PVNGS Units 1, 2 and
3 to a holding company, and (2) approval of amendments to the operating licenses
for PVNGS Units 1, 2 and 3 to reflect the change in PNM's name. PNM filed an
application with the NRC requesting the first approval in March 2000. The
application is currently pending with the NRC. The request for approval of
license amendments will be filed by Arizona Public Service Company, as Operating
Agent of PVNGS.
In addition to the regulatory approvals described above that are
necessary to implement the formation of the holding company structure and the
share exchange, PNM must obtain the approval of the Federal Communications
Commission ("FCC") and certain financial consents to effect the separation of
the Regulated Business and the Competitive, Deregulated Businesses.
Manzano will not be subject to regulation by the PRC, the FERC or the
NRC, except to the extent that the rules and orders of these agencies impose
restrictions on Manzano's relationships with UtilityCo or Energy or UtilityCo's
or Energy's relationships with any future subsidiaries of Manzano or with other
utilities or entities.
PNM is, and following approval of the Commission, the FERC, and the PRC
of the holding company structure, Energy (the former PNM) will be, subject to
the jurisdiction of the FERC under the Federal Power Act with respect to matters
related to transmission service and wholesale electric sales. Operation of
nuclear generating units is subject to the regulatory jurisdiction of the NRC,
including the issuance by it of operating licenses.
UtilityCo will be subject to the jurisdiction of the PRC with respect
to its retail gas rates; local distribution rates; service; accounting; issuance
of securities; construction of major new transmission facilities; and other
matters. The FERC has jurisdiction over rates and other matters related to
transmission service.
B. DESCRIPTION OF THE PROPOSED TRANSACTION
1. Terms. PNM proposes to reorganize its operations by forming a
holding company structure as a means of achieving the corporate and asset
separations required by the Restructuring Act. Under the terms of the Agreement,
all of the outstanding shares of PNM common stock will be exchanged on a
share-for-share basis for shares of Manzano common stock. Thus, when the share
exchange is completed, each person who owned PNM common stock immediately prior
to the share exchange will own the same number of shares (and percentage) of
Manzano common stock. Likewise, Manzano will own all of the outstanding shares
of PNM common stock. If the share exchange is implemented, shareholders will not
be required to surrender their existing PNM stock certificates for stock
certificates of Manzano.
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The Board of Directors of PNM has approved the Agreement because it
believes the share exchange is in the best interests of PNM, its shareholders
and its customers and, furthermore, because it complies with the requirements of
the Restructuring Act. If the shareholders approve the transactions contemplated
by the Agreement, and if the applicable regulatory approvals are obtained and
other conditions are satisfied, the share exchange will become effective upon
the filing of the Articles of Exchange relating to the share exchange with the
Corporations Bureau of the PRC. As discussed elsewhere, consummation of the
share exchange may occur in the third quarter 2000. The share exchange proposal
requires the affirmative vote of the holders of two-thirds of the shares of PNM
common stock entitled to vote at the annual meeting to be held June 6, 2000.
If PNM receives all necessary regulatory and other approvals, pursuant
to the Restructuring Act, all of PNM's electric and gas distribution and
transmission assets will be transferred by PNM to UtilityCo after completion of
the share exchange. After this asset transfer, UtilityCo will acquire the name
"Public Service Company of New Mexico" and the existing PNM, or Energy, will be
renamed. Energy will continue to own PNM's existing electric generation and
related assets after completion of the transfer of the Regulated Business to
UtilityCo.
2. Description of the Regulated Assets. The Regulated Assets will be
transferred from PNM to UtilityCo. As stated previously, these assets are
principally those plant-related assets identified for FERC accounting purposes
as electricity and gas transmission and distribution related. Energy (the former
PNM) will retain all other assets not transferred to UtilityCo or Manzano and
will own and operate the Competitive, Deregulated Businesses.
3. Financial Aspects of the Transaction. All assets and liabilities
constituting the Regulated Business will be transferred to UtilityCo at net book
value; certain of such assets may be dividended by PNM to Manzano and then
transferred to UtilityCo as an equity contribution from Manzano.
The share exchange itself will not result in any change in the
outstanding indebtedness of PNM. In connection with the transfer of the
Regulated Business by PNM to UtilityCo and the permanent debt financing of a
portion of the purchase price (the "Purchase Price") for the assets and
liabilities to be transferred, subject to necessary regulatory approvals,
UtilityCo may make an offer to holders of PNM's public senior unsecured notes
("SUNs") (approximately $400 million outstanding as of December 31, 1999) to
exchange these notes for newly-issued senior unsecured notes of UtilityCo with
the same terms as the existing PNM notes. Alternatively, some or all of these
notes could continue to be debt of Energy depending on the results of any
exchange offer or if it is more appropriate to capitalize UtilityCo with newly
issued debt and use the proceeds from this debt issue to pay a portion of the
Purchase Price for the assets to be transferred to UtilityCo from Energy. In any
event, it is PNM's intent that $586 million of currently outstanding pollution
control revenue bonds ("PCBs") (secured by senior unsecured notes and first
mortgage bonds) will remain as debt instruments of Energy after the share
exchange since these bonds were issued to finance the ownership and operation of
facilities related to electric generation assets. To facilitate the transfer of
assets and proposed financing transactions, UtilityCo may opt to utilize an
interim strategy of entering into a temporary bridge loan in the amount of $500
million.
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PNM's preferred stock ($12.8 million outstanding as of December 31,
1999) will remain an equity security of Energy after the share exchange unless
an exchange offer is made by UtilityCo and accepted by all the holders or the
preferred stock is redeemed by PNM. Depending on the results of any exchange
offer for PNM's preferred stock, some or all of this preferred stock could
remain an equity security of Energy or become a new equity security of
UtilityCo.
Following the share exchange, Manzano initially will have approximately
$887 million of common stock equity and no long-term debt of its own. Because
the assets and debt of UtilityCo, Energy and other Manzano subsidiary companies
will be consolidated into Manzano for financial accounting purposes, the initial
capital structure of Manzano will be approximately 53% debt and 47% equity on a
consolidated basis (the same as PNM's ratio immediately prior to consummation).
This ratio of total debt to total capital on a consolidated basis is anticipated
to decrease slightly over the next five years. This ratio may be further
effected as a result of financing growth in the consolidated entity. Over time,
Manzano will receive dividend payments from its subsidiary companies and could
raise future capital through the issuance of new common equity, or through other
appropriate financings of its own.
UtilityCo initially will have approximately $600 million of debt and
approximately $400 million of equity, for a capital structure consisting of 60%
debt and 40% equity. This capital structure is expected to remain in
approximately the same proportion during the next five (5) years. UtilityCo may
issue new debt in the form of SUNs, commercial paper or a combination of both
and may incur additional SUNs debt through an exchange offer with current
holders of PNM SUNs.
C. REASONS FOR AND ANTICIPATED EFFECTS OF THE PROPOSED TRANSACTION
The primary purpose of the formation of a holding company structure and
consummation of the Separation is to establish a corporate structure that will
respond to increased competition in the electric and natural gas utility
industries and to comply with the recently adopted Restructuring Act.
The energy industry is evolving at an accelerated pace and undergoing a
fundamental transformation into a competitive marketplace. This is primarily a
result of state and federal regulatory developments, including the passage of
the Federal Energy Policy Act of 1992 (the "Energy Policy Act") and the
Restructuring Act, and escalating competitive pressures. To respond effectively
to the increased competition and restructured regulatory environment mandated by
the Restructuring Act, the Board of Directors of PNM has determined that PNM
must position itself to take advantage of potential business opportunities
outside of its present markets and legally separate its Regulated Assets.
In the opinion of PNM's Board of Directors, it is desirable in the long
run for PNM to pursue the new business opportunities created by the
Restructuring Act through a holding company structure. The structure is a
well-established form of organization for companies engaging in multiple lines
of business, and is increasingly prevalent in the utility industry. In addition,
it is expressly authorized by the Restructuring Act to effectuate the required
separation of Regulated Assets and Competitive, Deregulated Businesses. The
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holding company structure will increase financial and regulatory flexibility,
while permitting UtilityCo, as the transferee of PNM's electric and gas
distribution and transmission assets as part of the Separation, to operate the
Regulated Business. The separation of PNM's businesses will also provide a
better structure for regulators to assure that there is no cross-subsidization
of costs or transfer of business risk between its Regulated Business and
Competitive, Deregulated Businesses. The proposed holding company structure also
will permit the use of financing techniques that are better suited to the
particular requirements, characteristics and risks of non-utility operations
without affecting the capital structure or creditworthiness of UtilityCo.
In recent years, federal and state initiatives have promoted the
development of competition in the sale of electricity and gas. In general, these
initiatives have sought to unbundle the integrated services that electric and
gas utilities have traditionally provided and to enable customers to purchase
electricity and gas directly from suppliers other than their local utilities
while continuing to have this electricity and gas delivered by their local
utilities.
1. Federal Electric Initiatives. Beginning with the passage of the
Public Utility Regulatory Policies Act of 1978 and, subsequently, the Energy
Policy Act, there has been a significant increase in the level of competition in
the market for the generation and sale of electricity. The Energy Policy Act
reduced barriers to market entry for companies wishing to build, own and operate
electric generating facilities, and it also promoted competition by authorizing
the FERC to require transmission service for wholesale power transactions. In
this regard, in 1996, the FERC issued Order 888, which, among other things,
required electric utilities controlling transmission facilities to file open
access transmission tariffs that would make the utility transmission systems
available to wholesale sellers and buyers of electric energy on a
non-discriminatory basis. PNM filed its open access transmission tariffs with
the FERC in April 1996.
2. The Restructuring Act. At the retail level, the Restructuring Act in
New Mexico was enacted into law on April 8, 1999, opening the state's electric
power market to choice for certain customers beginning in 2001 and the remainder
in 2002. The law requires the competitive unregulated activities of a public
utility to be separated from its regulated activities through the use of at
least two separate corporations and expressly authorizes the use of a holding
company structure to meet this requirement. The law also requires that public
utilities be allowed to recover at least half of their stranded costs through a
non-bypassable wires charge on all customer bills for five years after the
implementation of customer choice. The PRC could authorize a public utility to
recover up to 100% of its stranded costs if certain criteria specified in the
law are met. Public utilities will also be allowed to recover in full any
prudent and reasonable costs incurred in implementing full open access, or
"transition costs". These transition costs will be recovered through 2007 by
means of a separate wires charge. PNM was initially required to file a
transition plan with the PRC by March 1, 2000, for approval on or before
December 1, 2000, which plan must include, among other things, proposals for
separating regulated and competitive business activities and proposed charges
for the recovery of stranded costs and transition costs. The PRC has the
authority under the Restructuring Act to extend the deadline for filing a
transition plan and the commencement dates for customer choice by up to one
year.
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On January 18, 2000, the PRC extended the deadline for the transition
plan filing for all New Mexico utilities three months to June 1, 2000. The PRC
also asked for written comments within 60 days about extending the open access
starting dates, but no extensions or changes have been made at this time.
PNM is filing its transition plan with the PRC pursuant to the
Restructuring Act in three parts. In November 1999, PNM filed the first two
parts of the transition plan with the PRC. Part one requested approval by
February 1, 2000 to create Manzano and UtilityCo as wholly-owned shell
subsidiaries of PNM. In response to this request, PNM received an order from the
PRC on February 15, 2000, authorizing it to form Manzano and UtilityCo as
wholly-owned shell subsidiaries of PNM.
Part two of the transition plan requested that all PRC approvals
necessary for PNM to implement the formation of the holding company structure
and the share exchange and its plan for Separation pursuant to the Restructuring
Act be granted by June 1, 2000. The Part two hearing was scheduled for May 15,
2000, but was vacated on March 10, 2000 with no replacement date scheduled.
Based upon discussions with the PRC staff and other intervenors, it appears that
a late second quarter hearing and late third quarter Separation are reasonable
assumptions at the current time. If PNM can obtain a stipulated settlement,
these dates could be moved forward.
As discussed above, the plan of Separation includes the transfer of the
Regulated Business of PNM (generally, electric and gas distribution and
transmission assets) to UtilityCo so that PNM, or Energy as it will be called
after the transfer, will maintain ownership of the Competitive, Deregulated
Businesses (generally, electric generation and related assets). This transfer is
expected to take place after the consummation of the share exchange assuming the
receipt of all necessary regulatory and other approvals.
Part three of PNM's transition plan, currently planned to be filed by
PNM no later than June 1, 2000, will address transition costs, stranded costs,
UtilityCo's cost of service, standard offer service and other issues required to
be considered under the Restructuring Act.
D. ADDITIONAL INFORMATION
The directors and executive officers of PNM hold less than 1% of the
outstanding common stock of PNM. No current or future associate company or
affiliate of PNM has any, nor will it have any, direct or indirect material
interest in the proposed transaction except as stated herein.
As of March 8, 2000, The Prudential Insurance Company of America
("Prudential") holds 6.81% of the outstanding common stock of PNM. Prudential
will be an affiliate of Manzano under Section 2(a)(11) after the share exchange
has been completed. This information is based on reports filed with the
Commission. Neither Manzano nor PNM makes any representation as to the accuracy
or completeness of this information. This is the only person known to Manzano or
PNM, as of March 8, 2000, to be the beneficial owner of more than 5% of PNM's
common stock.
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ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the transactions contemplated herein, including
the solicitation of proxies and other related matters, are estimated as follows:
Commission filing for the Registration Statement on Form S-4....... $163,396
Accountants' fees.................................................. *
Legal fees and expenses relating to the Act........................ *
Other legal fees................................................... *
Stockholder communication and proxy solicitation................... *
NYSE listing fee................................................... *
Exchanging, printing and engraving of stock certificates........... *
Miscellaneous...................................................... *
TOTAL.............................................................. *
* To be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
It is believed that Sections 9(a)(2) and 10 of the Act are applicable
to the proposed transactions. To the extent that the proposed transactions are
considered by the Commission to require authorization, approval or exemption
under any section of the Act or provision of the rules or regulations thereunder
other than those specifically referred to herein, request for such
authorization, approval or exemption is hereby made.
Upon consummation of the transfer of the Regulated Assets from PNM to
UtilityCo, UtilityCo will become an "electric utility company" as defined in
Section 2(a)(3) of the Act and a "gas utility company" as defined in Section
2(a)(4) of the Act as well as a "public-utility company" as defined in Section
2(a)(5) of the Act. Because Manzano will, as a result of the transactions
contemplated herein, be directly acquiring five per centum or more of the
outstanding voting securities of each of PNM (the future Energy) and UtilityCo,
such acquisitions (or the acquisition of the Regulated Business of UtilityCo, if
that acquisition occurs subsequent to the consummation of the share exchange)
will be subject to Section 9(a)(2) of the Act. Thus, Manzano believes that the
proposed transactions cannot proceed without the Commission's approval pursuant
to Section 10 of the Act, and therefore, Manzano makes this
Application/Declaration. The relevant statutory standards to be satisfied are
set forth in Sections 10(b), 10(c), and 10(f) of the Act.
A. SECTION 10(b)
Section 10(b) of the Act provides that, if the requirements of Section
10(f) are satisfied, the Commission shall approve an acquisition under Section
9(a) unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
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(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration,
to whomsoever paid, to be given, directly or indirectly, in connection
with such acquisition is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of the utility
assets to be acquired or the utility assets underlying the securities
to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be detrimental to
the public interest of consumers or the proper functioning of such
holding company system.
The Separation and the requests contained in this
Application/Declaration do not contemplate the growth or extension of PNM and
are well within the precedent of transactions approved by the Commission as
consistent with the 1935 Act. In addition, a number of the recommendations made
by the Division of Investment Management (the "Division") in the report issued
by the Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report") support PNM's analysis. The Commission's approval
of the Separation would be consistent with previous Commission rulings and would
also be consistent with the Division's overall recommendation in the 1995 Report
that the Commission "act administratively to modernize and simplify holding
company regulation . . . and minimize regulatory overlap, while protecting the
interests of consumers and investors."
1. Section 10(b)(1) - Interlocking Relations and Concentration of
Control. The transactions described herein will not tend towards "interlocking
relations or the concentration of control of public utility companies, of a kind
or to an extent detrimental to the public interest or the interest of investors
or consumers." Although the transactions described herein will result, as in any
transaction subject to 9(a)(2), in certain interlocking relations and
concentration of control, they are not of a kind or to an extent detrimental to
the public interest or the interest of investors or consumers.
Following the transactions described herein, there will exist among
Manzano and its public utility subsidiaries, Energy and UtilityCo, interlocking
directors and officers only of such nature and to such extent as normally exist
in public utility holding company systems among affiliated and associated
companies. See CIPSCO, Inc., Holding Co. Act. Release No. 25152 (September 18,
1990).
The initial Board of Directors of Manzano consists of six of the
nine directors of the Board of Directors of PNM and a seventh member who has
been nominated for election to the PNM Board at the June 6, 2000, annual meeting
of shareholders. One of the two nominees for re-election to the PNM Board is a
member of the initial Manzano Board. The initial term of each of the directors
of Manzano will be until the first election of Manzano directors at its annual
meeting of shareholders in 2001. There will be minimal overlap between the
Manzano Board of Directors and the UtilityCo Board of Directors and between the
Manzano Board of Directors and the Energy Board of Directors. There will be no
overlap between the Boards of UtilityCo and Energy, or its subsidiaries that are
involved in a competitive business. It is anticipated that Manzano, Energy and
UtilityCo may have some common officers. The existence of common directors and
officers among Manzano, Energy and UtilityCo will comply with the PRC Code of
Conduct and PNM's Statement of Policy and Procedure after they become effective.
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Additionally, the proposed transaction will not tend toward any
"concentration of control of public-utility companies" that is detrimental to
the public interest, consumers or investors. The proposed transactions will not
involve the acquisition of any utility assets that are not already owned, either
directly or indirectly, by PNM and "will therefore have no effect on the
concentration of control of public-utility companies." Wisconsin Energy Corp.,
Holding Co. Act Release No. 24267 (1986).
Pursuant to the Separation, PNM's generation facilities will be
separated from its transmission and distribution facilities to comply with
Section 8B of the Restructuring Act (NMSA 1978, ss. 62-3A-8 (1999)). As proposed
herein, the Regulated Assets that are now owned by PNM will be acquired by
UtilityCo. Neither Manzano, Energy nor UtilityCo proposes to merge with or
acquire any other entity in the instant Application/Declaration.
2. Section 10(b)(2) - Fairness of Consideration and Fees.
-----------------------------------------------------
(a) Fairness of Consideration. Section 10(b)(2) of the 1935 Act
requires the Commission to determine whether the consideration in connection
with a proposed acquisition of securities is reasonable and whether it bears a
fair relation to the investment in and the earning capacity of the utility
assets underlying the securities being acquired.
The transactions contemplated hereby will be accomplished through (i)
the acquisition by Manzano, after the required approval by PNM's shareholders
and federal and state regulators, on a share-for-share basis of all of the
outstanding shares of PNM, whereby all of the common shareholders of PNM will
become common shareholders of Manzano, and PNM will become a wholly-owned direct
subsidiary of Manzano; (ii) Manzano's acquisition of all of the issued and
outstanding voting securities of UtilityCo (pursuant to a dividend distribution
by PNM to Manzano); and (iii) the sale and transfer from PNM to UtilityCo of the
Regulated Assets in consideration for the Purchase Price to be financed as set
forth in Item 1(B)(3) above.
The Separation does not involve the payment of any consideration to
third parties for any of the transactions that are the subject of this
Application/Declaration, except PNM may pay certain consent fees to lessors of
some of its utility assets in amounts which cannot be determined at the date of
the filing of this Application/Declaration. The share exchange involves a simple
share-for-share exchange to establish the parent/subsidiary relationship between
Manzano and PNM.
PNM believes that the inter-company consideration to be paid to PNM by
UtilityCo for the Regulated Assets bears a fair relation to the investment in
and the earning capacity of the Regulated Assets because it is based on the net
book value of those assets and liabilities in the hands of PNM. Since UtilityCo
will be subject to PRC and FERC rate regulation after the transfer and since
these agencies have traditionally established rates based upon book value, it is
to be expected that the rates to be established for UtilityCo will permit
UtilityCo to achieve a fair return on them, as well. This being the case,
Manzano, being the sole equity owner of UtilityCo, can expect to earn a fair
return on its investment. In any event, the proposed transaction is not in a
real sense an acquisition of securities; it is merely a corporate
reorganization.
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(b) Reasonableness of Fees. An estimate of the fees and expenses to
be paid in connection with the proposed transactions is set forth in Item 2
hereof or will be set forth by amendment. The estimated amounts to be paid are
fees required to be paid to governmental bodies, fees for necessary professional
services, and other expenses incurred or to be incurred in connection with
carrying out the proposed transactions. PNM believes that such fees and expenses
are, or will be, reasonable and customary in light of the size and nature of
transactions contemplated and comparable transactions and thus meet the
standards of Section 10(b)(2).
3. Section 10(b)(3) - Capital Structure. Section 10(b)(3) requires the
Commission to determine whether the proposed transactions will unduly complicate
Manzano's capital structure, or will be detrimental to the public interest, the
interest of investors or consumers or the proper functioning of the combined gas
and electric systems.
(a) Capital Structure. Manzano will be the only issuer of publicly
owned voting equity securities in the system. Energy and UtilityCo will have
debt owned by the public. Energy, subject to an exchange offer with UtilityCo,
will have preferred stock owned by the public. (For more detailed information,
see Item 1(B)(3).) Such a capital structure is typical of a contemporary holding
company system and is within the traditional standards of the Act.
(b) Public Interest, Interest of Investors and Consumers, and
Proper Functioning of Systems. As set forth more fully in Item 1(C) and
elsewhere in this Application/Declaration, the Separation is expected to result
in a number of benefits to both the public and consumers and will not impair the
proper functioning of the gas and electric systems operated within the holding
company structure. The Restructuring Act requires that the Regulated Business
subject to the jurisdiction of the PRC be separated from the Competitive,
Deregulated Businesses. This separation is required by the Restructuring Act to
be accomplished through the use of at least two separate corporations. The
Restructuring Act expressly authorizes the use of a holding company structure to
effectuate the required separation.
PNM has decided to accomplish this mandated separation by the formation
of a holding company and the transfer of the Regulated Business to UtilityCo,
subject to various regulatory and other approvals. Under a holding company
structure, PNM's Regulated Business and its Competitive, Deregulated Businesses
would each be indirectly owned by Manzano.
B. SECTION 10(c)
Section 10(c) of the 1935 Act provides that:
Notwithstanding the provisions of subsection (b), the Commission shall
not approve:
(1) an acquisition of securities or utility assets, or of any
other interest, which is unlawful under the provisions of Section 8 or
is detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a
public utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system . . . .
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1. Section 10(c)(1). Consistent with the standards set forth in Section
10(c)(1) of the Act, the proposed acquisition of securities will not be unlawful
under the provisions of Section 8 of the Act (inasmuch as Section 8 applies only
to registered holding companies), or detrimental to the carrying out of the
provisions of Section 11 of the 1935 Act, which also applies, by its terms, only
to registered holding companies. PNM believes that, following the consummation
of the proposed transactions, Manzano will be a holding company entitled to an
exemption under Section 3(a)(1) of the 1935 Act from all of the provisions of
the 1935 Act (except for Section 9(a)(2) thereof), including provisions relating
to registration.
(a) Section 8 Analysis. Section 8 prohibits a registered holding
company or any of its subsidiaries from acquiring, owning interests in or
operating both a gas utility company and an electric utility company serving
substantially the same area if prohibited by state law. New Mexico law does not
prohibit the ownership or operation by a single company of the utility assets of
electric and gas utilities serving substantially the same territory. Moreover,
the PRC already regulates PNM, a combination electric and gas utility, and will
extensively regulate the retail operations of UtilityCo after the Separation.
Accordingly, the Separation will not be unlawful under the provisions of Section
8. Indeed, the Separation is mandated by New Mexico law.
(b) Section 11 Analysis - Corporate Structure. Section 10(c)(1)
also requires that an acquisition not be detrimental to carrying out the
provisions of Section 11 of the Act. Section 11(a) of the Act requires the
Commission to examine the corporate structure of registered holding companies to
ensure, among others, that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. The proposed transactions meet the
standards of Section 11(a) of the Act. As discussed above with respect to the
requirements of Section 10(b)(3) of the Act, the corporate structure of Manzano
will not be unnecessarily complicated. Holding Co will acquire all of the issued
and outstanding voting securities of PNM (the future Energy), and UtilityCo and
leave no minority interests outstanding.
(c) Section 11 Analysis - Integration. Section 10(c)(1) also
requires that the proposed acquisition not be detrimental to carrying out the
provisions of Section 11 of the Act. Section 11(b)(1), in pertinent part,
requires, with limited exceptions, a registered holding company and its
subsidiaries to limit their operations to "a single integrated public utility
system."
(i) Integrated Electric Utility System. Section 2(a)(29)(A) of the
Act defines an integrated public utility system with respect to electric utility
companies as:
a system consisting of one or more units of generating plants
and/or transmission lines and/or distribution facilities,
whose utility assets, whether owned by one or more electric
utility companies, are physically interconnected or capable of
interconnection and which under normal circumstances may be
economically operated as a single interconnected and
coordinated system confined in its operations to a single area
or region, in one or more states, not so large as to impair
(considering the state of the art and area or region affected)
the advantages of localized management, efficient operation,
and the effectiveness of regulation.
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On the basis of the statutory definition above, the Commission has
established four standards that must be met before the Commission will find that
an integrated public-utility system, as applied to electric utility systems,
will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically
interconnected or capable of physical interconnection;
(2) the utility assets, under normal conditions, may be
economically operated as a single interconnected and coordinated
system;
(3) the system must be confined in its operations to a single
area or region; and
(4) the system must not be so large as to impair (considering
the state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990),
quoting In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958). The proposed
Separation satisfies all four of these requirements.
CAPABLE OF PHYSICAL INTERCONNECTION. PNM's existing utility system is
an integrated system, and upon consummation of the proposed Separation, Energy
(the former PNM) and UtilityCo will continue to be "physically interconnected or
capable of physical interconnection" within the meaning of Section 2(a)(29)(A).
The proposed Separation will maintain a continuous, geographically compact
system. After the transfer of the Regulated Assets to UtilityCo contemplated as
part of the proposed Separation and the implementation of the holding company
structure, the same physical interconnections will be maintained in the holding
company system.
In view of the above, the facts presented clearly support a finding
that the utility assets of the holding company system will be "physically
interconnected or capable of physical interconnection" within the meaning of
Section 2(a)(29)(A) of the Act.
SINGLE INTERCONNECTED AND COORDINATED SYSTEM. Section 2(a)(29)(A) of
the Act requires that the electric utility assets, under normal circumstances,
may be "economically operated as a single interconnected and coordinated
system." The Commission has interpreted this language to refer to the physical
operation of electric utility assets as a system in which, among other things,
the generation and/or flow of current within the system may be centrally
controlled and allocated as need or economy directs. See UNITIL Corp., Holding
Co. Act Release No. 25524 (April 24, 1992). The electric transmission and
distribution system of UtilityCo and the electric generation system of Energy
will be operated in a manner that satisfies the standard of economic and
coordinated operations in Section 2(a)(29)(A) of the Act.
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SINGLE AREA OR REGION. The "single integrated system" of PNM and its
subsidiaries is currently, and, following the Separation, Manzano and its
subsidiaries will be confined in its operations to a single area or region,
namely, the southwestern United States -predominantly the State of New Mexico
with certain generation and transmission assets in the State of Arizona. This
will not change as a result of the consummation of the proposed Separation,
including the introduction of UtilityCo into the holding company system.
LOCALIZED MANAGEMENT, EFFICIENT OPERATION AND EFFECTIVE REGULATION.
Manzano's utility system will not be enlarged at all as a result of the proposed
transactions; thus, they will not impair the advantages of localized management,
efficient operations and the effectiveness of regulation. Moreover, the
Commission's past decisions on "localized management" show that the proposed
transactions fully preserve the advantages of localized management. In such
cases, the Commission has evaluated localized management in terms of: (i)
responsiveness to local needs, see American Electric Power Co., Holding Co. Act
Release No. 20633 (July 21, 1978)(advantages of localized management evaluated
in terms of whether an enlarged system could be "responsive to local needs");
General Public Utilities Corp., Holding Co. Act Release No. 13116 (March 2,
1956) (localized management evaluated in terms of "local problems and matters
involving relations with consumers"); (ii) whether management and directors were
drawn from local utilities, see Centerior Energy Corp., Holding Co. Act Release
No. 24073 (April 29, 1986)(advantages of localized management would not be
compromised by the affiliation of two electric utilities under a new holding
company because the new holding company's "management would be drawn from the
present management" of the two utilities); (iii) the preservation of corporate
identities, see Northeast Utilities, Holding Co. Act Release No. 25221 (December
21, 1990) (utilities "will be maintained as separate New Hampshire corporations
. . . [;][t]herefore the advantages of localized management will be preserved");
Columbia Gas System, Inc., Holding Co. Act Release No. 24599 (March 15,
1988)(benefits of local management maintained where the utility to be added
would be a separate subsidiary); and (iv) the ease of communications, see
American Electric Power Co., Holding Co. Act Release No. 20633 (July 21,
1978)(distance of corporate headquarters from local management was a "less
important factor in determining what is in the public interest" given the
"present-day ease of communications and transportation"). Moreover, the
effectiveness of regulation will not be diminished as a result of the proposed
transactions; UtilityCo will remain subject to regulation by the PRC and FERC,
and Energy will be subject to regulation of the FERC and NRC with respect to
rates and other matters.
(ii) Integrated Gas Utility System. As applied to gas utility
companies, the term "integrated public utility system" is defined in Section
2(a)(29)(B) of the Act as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its
operations to a single area or region, in one or more States, not so
large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
21
<PAGE>
PNM's gas utility operations, which will be transferred to
UtilityCo, are located in a single contiguous territory within the state of New
Mexico and are currently integrated. The properties of PNM (and, after the
transfer of assets, UtilityCo) used for the production, storage, distribution
and transmission of gas are located solely within the State of New Mexico.
(d) Section 11 Analysis - ABC Clauses. Although Section 11(b)(1)
generally limits a registered holding company to ownership of a single
integrated system, an exception to this requirement is provided in Section
11(b)(1) (A-C) ("ABC Clauses"). A registered holding company may own one or more
additional systems, if each system meets the criteria of these clauses.
Specifically, the Commission must find that (A) the additional system "cannot be
operated as an independent system without the loss of substantial economies
which can be secured by the retention of control by such holding company of such
system," (B) the additional system is located in one state or adjoining states,
and (C) the combination of systems under the control of a single holding company
is "not so large ... as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation."
The Commission has repeatedly held that a registered holding company
cannot own properties that are not part of its principal integrated system
unless they satisfy the ABC clauses. See Allegheny Energy, Inc., Holding Co. Act
Release No. 27121 (December 23, 1999); Dominion Resources Inc., Holding Co. Act
Release No. 27113 (December 15, 1999). The Commission has also previously held
that a holding company may acquire additional utility assets that will not, when
combined with its existing utility assets, make up an integrated system or
comply fully with the ABC Clauses, provided that there is de facto integration
of contiguous utility properties and the holding company will be exempt from
registration under Section 3(a) of the Act following the acquisition. See TUC
Holding Co. Inc., Holding Co. Act Release No. 26749 (August 1, 1997); BL Holding
Corp., Holding Co. Act Release No. 26875 (May 15, 1998); CMP Group, Inc.,
Holding Co. Act Release No. 26977 (February 12, 1999).
The ABC Clauses must be analyzed here because of Manzano's anticipated
interests in UtilityCo and the fact that Manzano will, in addition to the
integrated electric system, own and operate an integrated gas system.
(i) Requirements of Clause A. The Commission has stated that the
Act does not prohibit ownership of combination gas and electric systems, but
rather specifies the showing that must be made by an applicant to justify
ownership of such properties. The Commission has addressed, in many cases, the
question of retainability by an electric registered holding company system of
additional integrated gas systems, and has reached its findings under Clause A
on a case-by-case basis in light of the particular facts presented.
The principal issue under Clause A is whether there would be a loss of
substantial economies if the additional system were divested. Following
consummation of the Separation, Manzano will provide the two systems with shared
administrative services. Further, the Separation will not give rise to any of
the abuses, such as ownership of scattered properties, inefficient operations,
lack of local management or evasion of state regulation, that the Act, including
Section 11(b)(1), was intended to address. In 1984, the New Mexico Public
Utility Commission issued an order allowing the acquisition of the gas utility
in New Mexico by PNM, finding that the benefits outweighed the costs, including
the development of economies of scale/scope. Subsequent orders allowed
22
<PAGE>
consolidation of services for further economies and better service to the
public. The Restructuring Act voided any remaining requirements to keep the gas
and electric sides separate, allowing for more economies. The move to a holding
company structure does not alter in any substantial way these public interest
benefits to local utility operation now conducted wholly within New Mexico.
(ii) Requirements of Clauses B and C. The proposed ownership and
operation by Manzano of both integrated electric and gas systems does not raise
any issues under Clause B or C. With respect to Clause B, the retail electric
operations and the retail gas operations will be located in New Mexico. As
required by Clause C, the combination of systems under the ownership of Manzano
will not be "so large ... as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation."
2. Section 10(c)(2). The proposed transactions, which are subject to
the prior approval of the PRC, will result in a complete separation of the
Regulated Business from the Competitive, Deregulated Businesses, as required by
the Restructuring Act. The preamble to the Restructuring Act states that the
Legislature has determined that retail electric customers in New Mexico should
have the opportunity to benefit from competition in the electric generation
markets and should have the choice to select their supplier of electricity. The
Legislature also determined that competition in the retail market for
electricity is expected to provide long-term benefits for the economy of New
Mexico, including the lowering of electricity prices, the creation of business
opportunities, the improvement of energy efficiency and innovations in services
and supply. The Legislature determined that, to the greatest extent possible,
products and services are and should be available from non-regulated providers
in the competitive marketplace. The Legislature determined that comprehensive
implementing legislation was required to establish direction for all aspects of
the restructuring of the electric utility industry in New Mexico. In order to
achieve the benefits envisioned by the Legislature, the implementing legislation
requires a separation of regulated assets from the competitive, deregulated
businesses of electric utilities. Thus, the State of New Mexico has determined
that the appropriate structure for the State's electric utilities involves the
separation into separate companies of the generation function from the
transmission and distribution functions. This separation is subject to the prior
approval of the PRC, which will ensure that plans conform to the requirements of
the Restructuring Act.
C. SECTION 10(f)
Section 10(f) provides that
The Commission shall not approve any
acquisition as to which an application is made under
this section unless it appears to the satisfaction
of the Commission that such State laws as may apply
in respect of such acquisition have been complied
with, except where the Commission finds that
compliance with such State laws would be detrimental
to the carrying out of the provisions of Section 11.
23
<PAGE>
PNM is currently, and UtilityCo will be following the Separation,
subject to the jurisdiction of the PRC. Parts one and two of the application to
the PRC have been filed for the approval of the PRC with respect to the proposed
transfer of the relevant Regulated Assets from PNM to UtilityCo and the creation
of the holding company utility system. Part three of PNM's transition plan,
currently planned to be filed by PNM no later than June 1, 2000, will address
transition costs, stranded costs, UtilityCo's cost of service, standard offer
service and other issues required to be considered under the Restructuring Act.
Copies of parts one and two of the application to the PRC are filed herewith as
exhibits D-3 and D-4.
ITEM 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that the
applicants have obtained or expect to obtain in connection with the proposed
transactions. Except as set forth below, no other state or local regulatory body
or agency and no other federal commission or agency has jurisdiction over the
transactions proposed herein.
A. FEDERAL POWER ACT
Under Section 203 of the Federal Power Act, the FERC has jurisdiction
over the proposed transactions. PNM will file an application (a copy of which
will be filed by amendment as Exhibit D-1) with the FERC for authority to
consummate the proposed Separation. The filing with the FERC will be made
shortly after the PRC Part three filing. PNM also will file certain new
agreements or modifications of existing agreements with the FERC pursuant to the
Federal Power Act in order to implement the transition.
B. THE ATOMIC ENERGY ACT
PNM holds interests in operating licenses in connection with its
ownership and leasehold interests in PVNGS. PNM is not authorized to operate
PVNGS; it is one of seven co-licensees, including Arizona Public Service Company
("APS"). APS alone is authorized to operate PVNGS. The Atomic Energy Act
provides that a license or any rights thereunder may not be transferred or in
any manner disposed of, directly or indirectly, to any person through transfer
of control unless the NRC finds that such transfer is in accordance with the
Atomic Energy Act and consents to the transfer. Pursuant to the Atomic Energy
Act, PNM has filed an application for approval from the NRC (a copy of which
will be filed by amendment as Exhibit D-7) to reflect the fact that pursuant to
the Separation, there will be an indirect transfer of control of PNM's interests
in the operating licenses to Manzano. Also, a request for approval of license
amendments to reflect the change in PNM's name will be filed by Arizona Public
Service Company, the Operating Agent for PVNGS.
C. STATE PUBLIC UTILITY REGULATION
As discussed in Item 3(C), Parts one and two of the application with
the PRC have been filed for approval of the PRC with respect to the proposed
transfer of the relevant Regulated Assets from PNM to UtilityCo and the creation
of the holding company utility system. Part three of PNM's transition plan,
currently planned to be filed by PNM no later than June 1, 2000, will address
transition costs, stranded costs, UtilityCo's cost of service, standard offer
service and other issues required to be considered under the Restructuring Act.
24
<PAGE>
D. FEDERAL COMMUNICATIONS COMMISSION
An application with the FCC (a copy of which will be filed by amendment
as Exhibit D-9) will be filed for appropriate approval of the FCC with respect
to the proposed transfer of the Regulated Assets from PNM to UtilityCo.
E. OTHER
Manzano may file other applications for, or request, certain other
consents or authorizations by federal, state or municipal agencies in connection
with the issuance of securities, system operations and franchises or any other
activities subject to regulatory approval.
ITEM 5. PROCEDURE
The Applicant requests that there be no 30-day waiting period between
the issuance of the Commission's order and the date on which it is to become
effective. The Applicant submits that a recommended decision by a hearing or
other responsible officer of the Commission is not needed with respect to the
proposed transaction and that the Division of Investment Management may assist
with the preparation of the Commission's decision and/or order in this matter
unless such Division opposes the matters covered hereby.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
EXHIBIT
A-1 Restated Articles of Incorporation of PNM as amended through May 10,
1985 (Incorporated by reference to Exhibit 4-(b) of PNM's Registration
Statement No. 2-99990).
A-2 Articles of Incorporation of Manzano (attached as Exhibit B to
the Proxy Statement/Prospectus) (included in the Registration
Statement on Form S-4 filed as Exhibit C-1 herein).
A-3 Articles of Incorporation of UtilityCo.*
B-1 Plan of Share Exchange (attached as Exhibit A to the Proxy
Statement/Prospectus) (included in Registration Statement on
Form S-4 filed as Exhibit C-1 herein).
C-1 Registration Statement on Form S-4 (including all exhibits
thereto) (Incorporated by reference to the Registration
Statement filed with the Commission on March 10, 2000, pursuant
to the Securities Act of 1933, File No. 333-32170).
C-2 Proxy Statement/Prospectus (included in Registration Statement
on Form S-4 filed as Exhibit C-1 herein).
D-1 Application of PNM to the FERC (without exhibits).*
25
<PAGE>
D-2 Order of the FERC.*
D-3 Part One of the Application to the PRC (without exhibits).
D-4 Part Two of the Application to the PRC (without exhibits).
D-5 Order of the PRC (Part One).*
D-6 Order of the PRC (Part Two).*
D-7 Application to the NRC (without exhibits).*
D-8 Order of the NRC.*
D-9 Application to the FCC (without exhibits).*
E-1 Map(s) showing current PNM's (and future UtilityCo's) gas service
areas.* +
E-2 Map(s) showing current PNM's (and future Energy's and UtilityCo's)
electric operations areas.*+
F-1 Preliminary Opinion of Counsel.*
F-2 Past Tense Opinion of Counsel (To be filed with certificate of
notification).*
G-1 Form 10-K Annual Report of Public Service Company of New Mexico
for the year ended December 31, 1999 (Incorporated by reference
to such filing, File No. 1-6986).
H-1 Form of Notice. *
----------------------------
* To be filed by amendment.
+ To be filed in paper form.
26
<PAGE>
B. FINANCIAL STATEMENTS
EXHIBIT
FS-1 Public Service Company of New Mexico Consolidated Balance
Sheets as of December 31, 1999 and 1998 (see Annual Report of
Public Service Company of New Mexico on Form 10-K for the year
ended December 31, 1999 (Exhibit G-1 hereto)).
FS-2 Public Service Company of New Mexico Consolidated Statements of
Income for the years ended December 31, 1997, 1998 and 1999
(see Annual Report of Public Service Company of New Mexico on
Form 10-K for the year ended December 31, 1999 (Exhibit G-1
hereto)).
-------------------------
* To be filed by amendment.
Financial Statements of UtilityCo are not included herein because
Utility Co has yet to be formed. Financial Statements of Manzano are not
included herein because, although formed, Manzano has conducted no business,
owns no assets and has no liabilities.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The proposed transactions do not involve "major federal actions
significantly affecting the quality of the human environment" as set forth in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. ss. 4321
et seq. Consummation of the proposed transactions will not result in changes in
the operations of PNM, the future Energy, nor create any changes in the
operations of UtilityCo that would have any impact on the environment. No
federal agency is preparing an environmental impact statement with respect to
this matter.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application/Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 21, 2000
Albuquerque, New Mexico
MANZANO CORPORATION
By: /s/ B.F. Montoya
---------------------------------
B.F. Montoya
Chairman and Chief Executive Officer
By: /s/ M.H. Maerki
---------------------------------
M.H. Maerki
Senior Vice President and
Chief Financial Officer
By: /s/ J.R. Loyack
---------------------------------
J.R. Loyack
Vice President, Corporate Controller
and Chief Accounting Officer
<PAGE>
Exhibit D-3
BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION
--------------------------------------------------
In the Matter of Public Service Company of New )
Mexico's Transition Plan Filed Pursuant to the )
Electric Utility Industry Restructuring Act of 1999 )
) Utility Case No. 3137
PART I - Authorizations Requested in Connection ) PART I - Shell Corporation
with PNM's Separation Plan - Shell Corporation ) Approval
Approval )
)
Public Service Company of New Mexico, )
)
Petitioner. )
--------------------------
APPLICATION
-----------
Public Service Company of New Mexico ("PNM" or "Company"), a utility
regulated in New Mexico by the New Mexico Public Regulation Commission ("NMPRC"
or "Commission"), hereby applies to the Commission for a final order by February
1, 2000, authorizing PNM to form two subsidiary shell corporations, specifically
(1) a subsidiary of PNM that will ultimately become the holding company for
PNM's regulated and competitive business subsidiaries, and (2) a subsidiary of
PNM that will ultimately become the regulated utility company for PNM's
regulated transmission and distribution electric and gas company to comply with
the Electric Utility Industry Restructuring Act of 1999, SB 428, NMSA 1978,
ss.ss. 62-3A-1 through 23 (1999) ("Restructuring Act" or "Act").
This Application is being filed concurrently with PNM's Part II
Application for approval of its Separation Plan. The Part II Separation Plan
Application seeks all approvals necessary for the Company's restructuring
pursuant to NMSA 1978, ss. 62-3A-6(A)(1) (1999).
1. Background and Introduction
---------------------------
a. The Restructuring Act requires a public utility to file its
Transition Plan no later than March 1, 2000, for Commission approval on or
before December 1, 2000, to show how it intends to comply with the Act. NMSA
1978, ss. 62-3A-6(A) (1999).
<PAGE>
b. The transition plan must include a detailed description of the
public utility's:
(1) proposal and alternatives to separate its supply service and
energy-related service assets from its distribution and transmission
services assets pursuant to Section 8 [62-3A-8 NMSA 1978] of the
Restructuring Act;
(2) associated unbundled cost-of-service studies and an explanation
of all cost allocations made to the unbundled services;
(3) proposed methodologies to allow residential and small business
customers to have customer choice without requiring additional
end-use metering equipment;
(4) proposals to implement customer choice and open access;
(5) proposed standard offer service tariffs, exclusive of price
terms that shall be incorporated prior to customer choice, for
residential and small business customers that do not select a power
supplier pursuant to customer choice eligibility;
(6) proposed competitive procurement process or other process for
the selection of power supply for standard offer service tariffs,
together with a proposed rate setting procedure. The initial
procurement of power for standard offer service shall occur at least
three months prior to customer choice, or earlier as determined by
the commission, so that price terms can be the basis for
determination of stranded costs;
(7) proposed tariffs for distribution service for customers and
competitive power suppliers, and transmission service, either on
file with a federal regulatory agency having jurisdiction or as
proposed by the public utility;
(8) the projected amounts of stranded costs and transition costs
sought to be recovered by the public utility;
2
<PAGE>
(9) proposed non-bypassable wires charges for recovery of transition
costs and stranded costs allocated among customer classes;
(10) proposed system for the collection, recovery and accounting of
the system benefits charge and stranded and transition costs through
wires charges;
(11) proposed customer education programs, necessary computer
hardware and software modifications and meter upgrades necessary to
provide open access;
(12) proposed procedures for balancing, settlements and
communications with competitive power suppliers; and
(13) any other information, documentation or justification requested
by the commission.
NMSA 1978, ss. 62-3A-6 (1999).
c. PNM is filing its Transition Plan in three Parts.
o Part I, this filing, requests approval by February 1, 2000, of a
Class II transaction creating two subsidiary shell corporations
required in order to set in motion certain federal filings and
shareholder approvals necessary to effectuate PNM's Separation
Plan ("Shell Corporation Approval" or "Part I").
o Part II, filed concurrently with the instant filing, requests,
no later than June 1, 2000, all NMPRC approvals necessary for
PNM to implement its Separation Plan in accordance with NMSA
1978, ss. 62-3A-6(A)(1) (1999) and other provisions of the
Public Utility Act ("Separation Plan" or "Part II").
o Part III will include all Transition Plan requirements other
than its Separation Plan and will be filed no later than March
1, 2000, and will comply with NMSA 1978, ss.ss. 62-3A-6(A)(2)
through (13) (1999) of the Act ("March 1 Filing" or "Part III").
d. PNM is filing its Transition Plan in three parts for the following
reasons:
(1) The Restructuring Act requires all public utilities to,
before January 1, 2001,
3
<PAGE>
separate into at least two corporations, separating supply
service and energy-related service consisting of generation
and power supply facilities, operations and services and
energy-related facilities, operations and services that are
to be made available to the public pursuant to the Electric
Utility Industry Restructuring Act of 1999 on a competitive
unregulated basis from transmission and distribution services
consisting of transmission facilities, operations and
service, distribution facilities, operations and service and
customer billing and metering that are to be made available
to the public pursuant to that act on a regulated basis.
NMSA 1978, ss. 62-3A-8(B) (1999).
(2) The Act further requires public utilities to accomplish this
separation "by either the creation of separate affiliated companies that may be
owned by a common holding company, through the creation of separate
non-affiliated corporations or through the sale of assets to one or more third
parties." NMSA 1978, ss. 62-3A-8(C) (1999).
(3) PNM has opted to create separate affiliated companies owned by
a common holding company to comply with the Act. Part I of its Transition Plan
is the critical first step.
(4) The transition to competition will require massive
organizational, institutional and operational changes by PNM. Early approvals of
Part I and Part II of its Transition Plan, filed concurrently today, authorizing
by February 1, 2000, formation of the shell corporations, and implementation of
the Separation Plan by July 1, 2000, respectively, will give PNM six months to
carry out the internal organizational changes necessary to be ready for customer
choice by January 1, 2001. By phasing these changes, PNM believes that the
transition to competition can be more orderly and manageable for customers, the
Commission and PNM.
(5) In addition, filing Parts I and II of its Transition Plan at
this time allows PNM to coordinate these filings with those required by the
United States Securities and Exchange Commission, the Federal Energy Regulatory
Commission, the Federal Communications Commission, and the Nuclear Regulatory
Commission. With these filings completed, PNM can turn its attention to the
balance of its Transition Plan.
4
<PAGE>
(6) The Act does not prohibit, and in fact is consistent with,
Commission approval of formation of the shell corporations prior to Commission
approval of the remainder of the Transition Plan. NMSA 1978, ss. 62-3A-6(A)
(1999).
2. Summary of PNM's Separation Plan
--------------------------------
PNM has chosen to separate its generation from its transmission and
distribution assets by creation of separate affiliated companies owned by a
common holding company ("HoldingCo"). All non-competitive and ancillary services
for the provision of electric transmission and distribution service as well as
gas distribution service will be provided by a regulated utility corporation,
referred to herein as "UtilityCo." Competitive generation energy supply and
ancillary supply service will be provided by a separate, unregulated corporation
referred to as "PowerCo." As required by the Act, unregulated service will not
be provided by a regulated company.
3. Approvals Requested
-------------------
a. The approval of the formation of the two shell corporations
requested herein is for the limited purpose of setting in motion certain federal
filings and shareholder approvals. The final order requested by this Application
(Part I) does not seek substantive approval of PNM's Separation Plan (Part II).
b. The formation of the shell subsidiaries requested in this
Application will not materially or adversely affect PNM's ability to provide
reasonable and proper utility service at fair, just and reasonable rates.
Because the formation of the subsidiaries as requested herein is specifically
contemplated by the Restructuring Act and because of the limited purpose of this
request, PNM respectfully requests in this filing a variance pursuant to Rule
450.25 from any provisions of Rule 450, including the filing of a general
diversification plan ("GDP") for purposes of this Part I Application. See, NMSA
1978, ss. 62-3A-23 (1999). PNM has filed a GDP with its Separation Plan (Part
II).
5
<PAGE>
c. PNM respectfully submits that approval of this Application does not
require a hearing because the shell corporations will be able to operate as
functional corporations only if the Separation Plan in the Part II Application
is approved.
<PAGE>
d. This Application is supported by the testimony of Terry R. Horn,
Vice President and Treasurer of PNM.
4. Pleadings and notice should be sent to:
---------------------------------------
PUBLIC SERVICE COMPANY OF NEW MEXICO
Terry R. Horn, Vice President & Treasurer
Alvarado Square, MS-2704
Albuquerque, NM 87158
(505) 241-2117
PUBLIC SERVICE COMPANY OF NEW MEXICO
Charles W. Gunter, Regulatory Project Manager
Alvarado Square, MS-0920
Albuquerque, NM 87158
(505) 241-2212
EASTHAM JOHNSON MONNHEIMER & JONTZ, P.C.
Marilyn C. O'Leary
Charlotte Lamont
Attorneys for Public Service Company of New Mexico
500 Marquette NW, Suite 1200
Albuquerque, New Mexico 87102
P.O. Box 1276
Albuquerque, New Mexico 87103
(505) 247-2315 (Telephone)
(505) 764-5480 (Facsimile)
6
<PAGE>
WHEREFORE, PNM respectfully requests a final order by February 1, 2000,
from the Commission authorizing PNM: (1) to form a subsidiary of PNM that will
ultimately become the holding company for PNM's regulated and competitive
business subsidiaries; (2) to form a subsidiary of PNM that will ultimately
become the regulated utility company for PNM's regulated electric and gas,
transmission and distribution services; and (3) to minimally capitalize the
corporations as discussed in the testimony, all in order to comply with the
Restructuring Act.
Respectfully submitted,
PUBLIC SERVICE COMPANY OF NEW MEXICO
Joanne Reuter, Deputy General Counsel
414 Silver, SW, M-S 0806 Albuquerque, NM
87102 (505) 241-4932
WHITE, KOCH, KELLY & McCARTHY, P.A.
Benjamin Phillips
Rebecca Dempsey
Post Office Box 787
Santa Fe, NM 87504-0787
(505) 982-4374
EASTHAM JOHNSON MONNHEIMER & JONTZ, P.C.
By /s/ Marilyn C. O'Leary
-------------------------
Marilyn C. O'Leary
Charlotte Lamont
Attorneys for Public Service Company of
New Mexico
500 Marquette NW, Suite 1200
Albuquerque, New Mexico 87102
P.O. Box 1276
Albuquerque, New Mexico 87103
(505) 247-2315
7
Exhibit D-4
BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION
In the Matter of Public Service Company of New )
Mexico's Transition Plan Filed Pursuant to the )
Electric Utility Industry Restructuring Act of 1999 )
)Utility Case No. 3137
Part II - Authorizations Requested in Connection )PART II - Separation Plan
With PNM's Separation Plan )
)
Public Service Company of New Mexico, )
)
Petitioner. )
---------------------------
APPLICATION
Public Service Company of New Mexico ("PNM" or "Company"), a utility
regulated in New Mexico by the New Mexico Public Regulation Commission ("NMPRC"
or "Commission"), hereby files its application ("Application") for a final order
granting all approvals required in order for the Company to separate its
regulated and competitive businesses into at least two separate corporations
held by a common holding company pursuant to the Electric Utility Industry
Restructuring Act of 1999, SB 428, NMSA 1978, ss.ss. 62-3A-1 through 23 (1999)
("Restructuring Act" or "Act").
1. Background and Introduction
---------------------------
a. The Restructuring Act requires a public utility to file its
Transition Plan no later than March 1, 2000, for Commission approval on or
before December 1, 2000, to show how it intends to comply with the Act. NMSA
1978, ss. 62-3A-6(A) (1999).
b. The transition plan must include a detailed description of the
public utility's:
(1) proposal and alternatives to separate its supply service and
energy-related service assets from its distribution and
transmission services assets pursuant to Section 8 [62-3A-8 NMSA
1978] of the Electric Utility Industry Restructuring Act of 1999;
<PAGE>
(2) associated unbundled cost-of-service studies and an explanation
of all cost allocations made to the unbundled services;
(3) proposed methodologies to allow residential and small business
customers to have customer choice without requiring additional
end-use metering equipment;
(4) proposals to implement customer choice and open access;
(5) proposed standard offer service tariffs, exclusive of price
terms that shall be incorporated prior to customer choice, for
residential and small business customers that do not select a power
supplier pursuant to customer choice eligibility;
(6) proposed competitive procurement process or other process for
the selection of power supply for standard offer service tariffs,
together with a proposed rate setting procedure. The initial
procurement of power for standard offer service shall occur at
least three months prior to customer choice, or earlier as
determined by the commission, so that price terms can be the basis
for determination of stranded costs;
(7) proposed tariffs for distribution service for customers and
competitive power suppliers, and transmission service, either on
file with a federal regulatory agency having jurisdiction or as
proposed by the public utility;
(8) the projected amounts of stranded costs and transition costs
sought to be recovered by the public utility;
(9) proposed non-bypassable wires charges for recovery of
transition costs and stranded costs allocated among customer
classes;
(10) proposed system for the collection, recovery and accounting of
the system benefits charge and stranded and transition costs
through wires charges;
(11) proposed customer education programs, necessary computer
hardware and software modifications and meter upgrades necessary to
provide open access;
(12) proposed procedures for balancing, settlements and
communications with competitive power suppliers; and
2
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(13) any other information, documentation or justification
requested by the commission.
NMSA 1978, ss. 62-3A-6 (1999).
c. PNM is filing its Transition Plan in three Parts.
o Part I, filed concurrently with this filing, requests approval
by February 1, 2000, of a Class II transaction creating two
subsidiary "shell" corporations required in order to set in
motion certain federal filings and shareholder approvals
necessary to effectuate PNM's Separation Plan ("Shell
Corporation Approval" or "Part I").
o Part II is the instant filing, and requests by June 1, 2000, all
NMPRC approvals necessary for PNM to implement its Separation
Plan in accordance with NMSA 1978, ss. 62-3A-6(A)(1) (1999) and
other provisions of the Public Utility Act ("Separation Plan" or
"Part II").
o Part III will include all Transition Plan requirements other
than its Separation Plan, will be filed no later than March 1,
2000 in accordance with the Restructuring Act and will comply
with NMSA 1978, ss.ss. 62-3A-6(A)(2) through (13) (1999) ("March
1 Filing" or "Part III").
d. PNM is filing its Transition Plan in three parts for the
following reasons:
(1) The Restructuring Act requires all public utilities to,
before January 1, 2001,
separate into at least two corporations, separating
supply service and energy-related service consisting
of generation and power supply facilities, operations
and services and energy-related facilities,
operations and services that are to be made available
to the public pursuant to the Electric Utility
Industry Restructuring Act of 1999 on a competitive
unregulated basis from transmission and distribution
services consisting of transmission facilities,
operations and service, distribution facilities,
operations and service and customer billing and
metering that are to be made available to the public
pursuant to that act on a regulated basis.
NMSA 1978, ss. 62-3A-8(B) (1999).
(2) The Act further requires public utilities to accomplish
this separation "by either the creation of separate affiliated companies that
may be owned by a common holding company, through the creation of separate
non-affiliated corporations or through the sale of assets to one or more third
parties." NMSA 1978, ss. 62-3A-8(C) (1999).
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(3) PNM has opted to create separate affiliated companies
owned by a common holding company to comply with the Act and is submitting its
proposal in this application. The transition to competition will require massive
organizational, institutional and operational changes by PNM. Implementation of
the Separation Plan by July 1, 2000, will allow PNM six months to carry out the
internal organizational changes necessary to be ready for customer choice by
January 1, 2001. By phasing this change, PNM believes that the transition can be
more orderly and manageable for customers, the Commission and PNM. The
financings required to effectuate these changes, for which approval is requested
in this Application, will be facilitated if the Commission grants approvals by
June 1, 2000, and will allow PNM to implement its Separation Plan in July, 2000.
(4) In addition, filing its Separation Plan at this time
allows PNM to coordinate this filing with those required by the United States
Securities and Exchange Commission, the Federal Energy Regulatory Commission,
the Federal Communications Commission, and the Nuclear Regulatory Commission.
With these filings completed, PNM can turn its attention to the balance of its
Transition Plan.
(5) Approval and implementation of the Separation Plan will
have no effect on customers' rates and service. It will be invisible to
customers. All rate issues will be dealt with in Part III.
(6) The Act does not prohibit, and in fact is consistent with,
Commission approval of a Separation Plan prior to Commission approval of the
remainder of the Transition Plan. See NMSA 1978, ss. 62-3A-6(A) (1999).
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(i) NMSA 1978,ss. 62-3A-6 (1999) of the Act requires
public utilities to file a Transition Plan that complies with the Act no later
than March 1, 2000, for Commission approval on or before December 1, 2000.
(ii) NMSA 1978,ss. 62-3A-6(A)(1) (1999) of the Act
requires a public utility to file its proposal and alternatives to separate its
supply service and energy related service assets from its distribution and
transmission services assets pursuant to Section 8 of the Act. This Application
sets forth the Company's Separation Plan and complies with that requirement.
e. PNM hopes that by filing its Separation Plan at this time it will
be able to receive approval of Part II no later than June 1, 2000. Approval by
that date, along with other necessary approvals, will allow PNM to separate
assets and personnel, set up its holding company and subsidiaries, and subject
to other Commission requirements, allow its regulated and competitive businesses
to begin to function in ways that will benefit customers of both its regulated
and competitive businesses and its stockholders.
2. Summary of PNM's Separation Plan
--------------------------------
PNM has chosen to separate its generation from its transmission and
distribution assets by creation of separate affiliated companies owned by a
common holding company ("HoldingCo"). All non-competitive and ancillary services
for the provision of electric transmission and distribution service as well as
gas transmission and distribution service will be provided by a regulated
utility corporation, referred to herein as "UtilityCo." Competitive generation
energy supply and ancillary supply service will be provided by a separate,
unregulated corporation referred to as "PowerCo." As required by the Act,
unregulated service will not be provided by a regulated company. Shared services
will be provided by a division of HoldingCo. This Separation Plan fulfills the
mandates of NMSA 1978, ss. 63-3A-8(C) (1999).
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3. Approvals Required
------------------
a. PNM is requesting all approvals necessary to implement its
Separation Plan. Because this Separation Plan is required by the Restructuring
Act, and because the design of PNM's proposed Separation Plan is expressly
authorized by the Restructuring Act, the granting of the approvals that may
technically still be required under the Public Utility Act ("PUA") should be far
more streamlined and straightforward than had there been no Restructuring Act.
Nevertheless, to provide full information to the NMPRC and because many of the
requirements of the PUA and Rule 450 provide a framework for testimony filed in
support of this application, PNM is specifically requesting all approvals that
would otherwise be required and is providing supporting documentation. Specific
approvals requested to the full extent required by law are:
o NMSA 1978, ss. 62-3A-6(A)(1) (1999) - approval of PNM's
Separation Plan; o NMSA 1978, ss.ss. 62-6-6 and 62-6-7 -
approval to issue securities; o NMSA 1978, ss. 62-6-12(A)(4) -
sale and purchase of public utility plant (both gas and
electric);
o NMSA 1978, ss.ss. 62-9-1 and 62-9-6 - certificate of public
convenience and necessity for gas and electric operations of
UtilityCo;
o NMSA 1978, ss. 62-9-5 - abandonment of service by both PNM Gas
Services and PNM Electric Services.
b. PNM believes that its filing complies with requirements under the
above statutes and any corresponding rules; however, to the extent that
traditional application of the standards involved with these PUA approvals would
operate to hinder or foreclose compliance with the Restructuring Act, those
provisions of the PUA have been superseded by the requirements of the
Restructuring Act. NMSA 1978,ss.62-3A-23 (1999).
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4. Compliance with the Restructuring Act and the Public Interest
-------------------------------------------------------------
a. The Separation Plan proposed in this filing is required by the
Restructuring Act. This Separation Plan complies with the Act and will achieve
the goals of the Act.
b. The issuance of securities will allow PNM to capitalize the new
utility in a manner intended to achieve an investment grade rating. Such
issuance is not inconsistent with the public interest; its purpose is permitted
by the PUA; and the aggregate amount of securities outstanding and proposed to
be outstanding will not exceed the fair value of the properties and business of
UtilityCo.
c. Transmission and distribution assets will be transferred at net book
value. This will allow the formation of a regulated transmission and
distribution ("T & D") utility with essentially the same asset value as the T &
D portion of PNM's current assets.
d. Authorization to abandon service and issuance of a certificate of
public convenience and necessity ("CCN") to operate a public utility, if
required, will allow the Commission to authorize PNM to abandon its T & D assets
and will authorize the new T & D utility to operate in the state of New Mexico
subject to the jurisdiction of the Commission. The new utility company is a
successor in interest to PNM and entitled to the CCN pursuant to NMSA 1978, ss.
62-3A-5 (1999), whether the Commission determines that a new CCN is necessary
coupled with abandonment by the 1917 corporation, or simply a transfer of the
existing CCN to UtilityCo pursuant to NMSA 1978, ss. 62-3A-5 (1999).
e. Plans for capitalization of UtilityCo and PowerCo will provide both
companies with the financial viability appropriate to their prospective
functions.
f. The creation of a division within HoldingCo to provide shared
services will allow both UtilityCo and PowerCo to benefit from economies of
scope and scale.
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5. Testimony
---------
Attached to this Application as Exhibit A is a General Diversification
Plan as required by Rule 450. Testimony of PNM witnesses Roger J. Flynn, Thomas
G. Sategna and Terry R. Horn are provided in support of the Application.
6. Waiver
------
PNM respectfully requests a waiver from the requirements of 17 NMAC 1.2
ss.ss. 51.2.2, 51.2.3 and 51.4. As grounds for this request, PNM states that its
annual informational financing filing ("AIFF") for 1999 did not include the
securities for which approvals are now sought because the Restructuring Act was
enacted less than one month prior to the filing of the AIFF and PNM had not yet
formulated financing plans related to the Act. Further, PNM will file its annual
informational financing filing for 2000 in April of that year. Providing a form
of notice according to ss. 51.4 is inapplicable because PNM is not requesting
approval of the application in 30 days and because notice will be published as
required by the Commission.
7. Pleadings and notice should be sent to:
---------------------------------------
PUBLIC SERVICE COMPANY OF NEW MEXICO
Terry R. Horn, Vice President & Treasurer
Alvarado Square, MS-2704
Albuquerque, NM 87158
(505) 241-2117
PUBLIC SERVICE COMPANY OF NEW MEXICO
Charles W. Gunter, Regulatory Project Manager
Alvarado Square, MS-0920
Albuquerque, NM 87158
(505) 241-2212
EASTHAM JOHNSON MONNHEIMER & JONTZ, P.C.
Marilyn C. O'Leary
Charlotte Lamont
Attorneys for Public Service Company of New Mexico
500 Marquette NW, Suite 1200
Albuquerque, New Mexico 87102
P.O. Box 1276
Albuquerque, New Mexico 87103
(505) 247-2315 (Telephone)
(505) 764-5480 (Facsimile)
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WHEREFORE, PNM hereby requests that the Commission issue a final order
granting all approvals required for it to implement its Separation Plan as
described in this Application.
Respectfully submitted,
PUBLIC SERVICE COMPANY OF NEW MEXICO
Joanne Reuter, Deputy General Counsel
414 Silver, SW, M-S 0806 Albuquerque, NM
87102 (505) 241-4932
WHITE, KOCH, KELLY & McCARTHY, P.A.
Benjamin Phillips
Rebecca Dempsey
Post Office Box 787
Santa Fe, NM 87504-0787
(505) 982-4374
EASTHAM JOHNSON MONNHEIMER & JONTZ, P.C.
By /s/ Marilyn C. O'Leary
--------------------------
Marilyn C. O'Leary
Charlotte Lamont
Attorneys for Public Service Company
of New Mexico
500 Marquette NW, Suite 1200
Albuquerque, New Mexico 87102
P.O. Box 1276
Albuquerque, New Mexico 87103
(505) 247-2315
9
