UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
Date of Report (Date of earliest events reported) April 18, 2000
--------------
April 18, 2000
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PUBLIC SERVICE COMPANY OF NEW MEXICO
------------------------------------
(Exact name of registrant as specified in its charter)
New Mexico 85-00019030
- ----------------------------- Commission ----------------------
(State or Other Jurisdiction File Number 1-6986 (I.R.S. Employer
of Incorporation) ------ Identification) Number)
Alvarado Square, Albuquerque, New Mexico 87158
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(505) 241-2700
--------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
<PAGE>
Item 5. Other Events
As discussed in the Annual Report on Form 10-K of Public Service Company of New
Mexico (the "Company") for the fiscal year ended December 31, 1999, New Mexico's
Electric Utility Industry Restructuring Act of 1999 (the "Restructuring Act"),
enacted in April 1999, begins to open the state's electric power market to
customer choice in 2001. The Restructuring Act gives schools, and residential
and small business customers the opportunity to choose among competing power
suppliers beginning in January 2001. Competition will be expanded to include all
customers starting in January 2002. The New Mexico Public Regulation Commission
(the "PRC"), however, can extend these dates by up to one year if necessary.
Rural electric cooperatives and municipal electric systems have the option not
to participate in the competitive market.
Residential and small business customers who do not select a power supplier in
the open market can buy their electricity through their local utility through a
"standard offer" whereby the local distribution utility will procure power
supplies through a process approved by the PRC. The local distribution utility
system and related services such as billing and metering will continue to be
regulated by the PRC, while transmission services and wholesale power sales will
remain subject to federal regulation.
The Restructuring Act requires that assets and activities subject to the
jurisdiction of the PRC, primarily electric and gas distribution and
transmission assets and activities (collectively, the "Regulated Businesses"),
be separated from competitive, deregulated businesses, primarily electric
generation assets and service and other energy services (collectively, "the
Deregulated Competitive Businesses"). The separation is required by the
Restructuring Act to be accomplished through the creation of at least two
separate corporations. The Company has decided to accomplish this mandated
separation by the formation of a holding company and the transfer of the
Regulated Businesses to a newly-created, wholly owned subsidiary of the holding
company ("UtilityCo"), subject to various regulatory and other approvals. The
holding company structure is expressly authorized by the Restructuring Act and
will ultimately result in the separation of the Company into two subsidiaries
under the holding company Manzano Corporation ("Manzano"). Corporate separation
of the Regulated Business from the Deregulated Competitive Businesses must be
completed by January 1, 2001 although the date may be extended by up to one year
by the PRC if necessary. Completion of corporate separation will require a
number of regulatory approvals by, among others, the PRC, the Securities and
Exchange Commission ("SEC") under the Public Utility Holding Company Act of
1935, the Federal Energy Regulatory Commission, the Nuclear Regulatory
Commission and other approvals. Approval of the holding company structure and
related share exchange requires shareholder approval that is being sought at the
Company's annual meeting on June 6, 2000.
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The Company is filing its transition plan with the PRC pursuant to the
Restructuring Act in three parts. In November 1999, the Company filed the first
two parts of the transition plan with the PRC. Part one, which has been
approved, requested approval to create Manzano and UtilityCo as wholly-owned
shell subsidiaries of the Company. Part two of the Company's transition plan
requested that all PRC approvals necessary for the Company to implement the
formation of the holding company structure, the share exchange and the
separation plan be granted by June 1, 2000. The part two hearing is currently
scheduled for July 19, 2000. Accordingly, the Company's Management believes that
implementation of the separation plan could occur by the end of 2000. If the
Company can obtain a stipulated settlement with all involved parties, it is
possible that implementation of the separation plan could be accelerated.
However, there is no assurance that implementation of the separation plan will
occur in 2000. Part three of the Company's transition plan, which is currently
planned to be filed by the Company no later than June 1, 2000, will address
transition costs, stranded costs, UtilityCo's cost of service and other issues
required to be considered under the Restructuring Act. On January 18, 2000, the
PRC extended the March 1 deadline for the transition plan filing for all New
Mexico utilities by three months to June 1, 2000.
If the Company receives PRC approval for part two of the Company's transistion
plan and all other necessary regulatory and other approvals, all of the
Company's assets and certain related liabilities relating to the Regulated
Businesses will be transferred (the "Asset Transfer") to UtilityCo. After the
Asset Transfer, UtilityCo will acquire the name "Public Service Company of New
Mexico" and the corporation formerly named Public Service Company of New Mexico
will be renamed Manzano Energy Corporation (for purposes of this discussion,
this subsidiary will be referred to as "PowerCo"). PowerCo will continue to own
the Company's existing assets relating to the Deregulated Competitive Businesses
after completion of the Asset Transfer. UtilityCo and PowerCo will be
wholly-owned subsidiaries of Manzano.
The Company is filing as Exhibit 99.1 to this Form 8-K, and incorporated by
reference herein, unaudited pro forma financial statements of PowerCo and
UtilityCo as of and for the periods presented therein that give effect to the
Company's proposed plan for separating its regulated and nonregulated business
activities (the "Proposed Plan") as required by the Restructuring Act as if the
Proposed Plan had been consummated as of the various dates described therein.
The Proposed Plan is based on management's intent as of April 18, 2000, the date
of this filing, and is based on certain assumptions that in management's opinion
are reasonable. The Proposed Plan as detailed in such unaudited pro forma
financial statements has not been finalized by the Company and is subject to
regulatory and other approvals. As such, the Proposed Plan may be subject to
significant changes before implementation and the pro forma financial statements
may require revision to reflect the final plan of separation pursuant to the
Restructuring Act. The pro forma financial statements have been prepared in
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accordance with Regulation S-X, Rule 11-02. The pro forma financial statements
are qualified in their entirety by the statements made as part of the discussion
and the related notes to the pro forma financial statements.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
99.1 Unaudited Pro Forma Financial Statements of PowerCo and UtilityCo
4
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
------------------------------------------
(Registrant)
Date: April 18, 2000 /s/ John R. Loyack
------------------------------------------
John R. Loyack
Vice President, Corporate Controller
and Chief Accounting Officer
(Officer duly authorized to sign this report)
5
Exhibit 99.1
Unaudited Pro Forma Financial Statements
The following unaudited pro forma financial statements give effect to the
proposed plan of Public Service Company of New Mexico (the "Company") for
separating its regulated and nonregulated business activities (the "Proposed
Plan") as required by New Mexico's Electric Utility Industry Restructuring Act
of 1999 (the "Restructuring Act") (for a detailed discussion of the Proposed
Plan see Item 5 of the Form 8-K in which these unaudited pro forma financial
statements are filed as an exhibit). The Proposed Plan will create a holding
company to be called Manzano Corporation ("Manzano") and will separate the
Company into two subsidiaries. The holding company structure will be effected
through a one-for-one share exchange between the shareholders of the Company and
Manzano, whereby the shareholders of the Company become shareholders of Manzano
and Manzano will own all of the Company's common stock. In addition, as part of
the proposed restructuring, certain corporate assets and liabilities will be
transferred to Manzano (these proposed transactions for purposes of these
unaudited pro forma financial statements will be referred to as the "Share
Exchange").
Under the Proposed Plan, all of the Company's electric and gas distribution and
substantially all transmission assets will be transferred to a newly created
subsidiary which will acquire the name "Public Service Company of New Mexico"
(for purposes of these pro forma financial statements, this subsidiary will be
referred to as "UtilityCo" and this transfer will be referred to as the "Asset
Transfer") and the corporation formerly named Public Service Company of New
Mexico will be renamed Manzano Energy Corporation (for purposes of these pro
forma financial statements, this subsidiary will be referred to as "PowerCo").
PowerCo will continue to own the Company's existing electric generation and
unregulated, competitive assets after completion of the Asset Transfer.
The basis for the Company's assets and liabilities that will be transferred in
the Share Exchange and the Asset Transfer will be historical cost. These
unaudited pro forma financial statements assume that Manzano will acquire
certain of the Company's corporate assets and liabilities through the issuance
of an inter-company note. This note will bear interest at rates consistent with
the rates available under the Company's existing revolving credit facility.
These unaudited pro forma financial statements also assume that the Asset
Transfer will be accomplished as follows: Manzano will make an equity
contribution to UtilityCo of $425 million of regulated assets. These assets will
be transferred through a dividend from PowerCo to Manzano. UtilityCo will then
acquire the remaining regulated assets from PowerCo through the following
transactions: (i) by way of an exchange offer, as described below, an assumption
of PowerCo's (formerly the Company's) outstanding public Senior Unsecured Notes
("SUNs") and preferred stock, (ii) the proceeds (approximately $253 million)
from the issuance of commercial paper and newly-issued UtilityCo SUNs, and (iii)
the assumption of $334 million of certain related liabilities. All transactions
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are expected to be completed simultaneously. Although there are other
alternatives to finance the acquisition of the regulated assets from PowerCo,
based on current market and economic conditions, the Company currently believes
that the foregoing transactions represent the most advantageous way to effect
the Asset Transfer.
The current holders of PowerCo's public SUNs will be offered the opportunity to
exchange their approximately $368 million of existing SUNs for $368 million of
SUNs issued by UtilityCo with like terms and conditions (the "Debt Exchange").
The current holders of PowerCo's preferred stock will be offered the opportunity
to exchange their approximately $12.8 million of preferred stock for preferred
stock issued by UtilityCo with like terms and conditions (the "Preferred
Exchange" and, together with the Debt Exchange, the "Exchanges").
In addition, UtilityCo will issue approximately $100 million of renewable
commercial paper. The commercial paper will have liquidity support from a $150
million committed revolving credit facility at UtilityCo. The additional credit
capacity above the commercial paper level will be available for the working
capital needs of UtilityCo. The commercial paper is assumed to have a 6.51%
effective rate per year including fees. UtilityCo will also issue up to
approximately $153 million of newly-issued SUNs. These SUNs are assumed to have
a stated interest rate per annum of 7.67% and an effective rate of 7.8%
including fees (collectively, these transactions for purposes of these uuaudited
pro forma financial statements will be referred to as the "New Issuances").
These unaudited pro forma financial statements also reflect the Company's
repurchase through April 11, 2000 of 963,284 shares of its common stock at a
cost of $18.8 million and $35 million of its 7.5% SUNs through open market
purchases at a cost of $34 million (collectively, the "Buyback").
These unaudited pro forma financial statements present the pro forma balance
sheets of PowerCo and UtilityCo as of December 31, 1999, as if the Share
Exchange, the Asset Transfer, the Exchanges, the New Issuances and the Buyback
had occurred on December 31, 1999, and present the pro forma statements of
earnings of PowerCo and UtilityCo for each of the three years ended December 31,
1999, as if the Share Exchange, the Asset Transfer and the Exchanges had
occurred on January 1, 1997 and as if the New Issuances and the Buyback had
occurred on January 1, 1999. These unaudited pro forma financial statements are
based on the Company's historical consolidated financial statements and the
accompanying notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (the "Form 10-K").
The unaudited pro forma financial statements of PowerCo are derived from the
Company's balance sheet at December 31, 1999 and consolidated statements of
earnings for the three years ended December 31, 1999 after giving effect to the
Asset Transfer, the Exchanges, the Share Exchange and the Buyback (for the year
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ended December 31, 1999). These unaudited pro forma financial statements are
presented in a diversified commercial entity format as opposed to the
traditional regulated utility format promulgated by the Federal Energy
Regulatory Commission ("FERC") as PowerCo's operations under the Restructuring
Act will no longer be regulated as to rates by the New Mexico Public Regulation
Commission (the "PRC").
The unaudited pro forma financial statements of UtilityCo are derived from the
asset and liability balances at December 31, 1999, proposed to be acquired in
the Asset Transfer and the related results of operations for the three years
ended December 31, 1999 associated with the respective asset and liability
balances after giving effect to the Exchanges and the New Issuances (for the
year ended December 31, 1999). These unaudited pro forma financial statements
are presented in a traditional regulated utility format promulgated by the FERC.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that the Company's management believes are reasonable
as of the filing date. There can be no assurance that the actual adjustments
will not materially differ from the pro forma adjustments reflected in these
unaudited pro forma financial statements. The unaudited pro forma financial
statements are not necessarily indicative of the financial position of either
future results of operations or results of UtilityCo or PowerCo that might have
been achieved if the foregoing transactions had been consummated as of the
indicated dates. These unaudited pro forma financial statements should be read
in conjunction with the Company's historical consolidated financial statements
and management's discussion and analysis of financial condition and results of
operations contained in the Form 10-K.
In addition, the following factors should be considered in the context of these
unaudited pro forma financial statements as factors that could cause such
statements to require significant revision or updating.
The Proposed Plan has not been finalized by the Company. The Share Exchange
requires the affirmative vote of the holders of two-thirds of the shares of the
Company's common stock entitled to vote at the annual meeting of the Company's
shareholders to be held in June 2000. If shareholder approval of the Share
Exchange is obtained, the Company must still receive separate approval of its
Proposed Plan, including the Asset Transfer and the financings related thereto,
from the PRC as well as other regulatory approvals and certain other approvals.
If the Company were not to receive shareholder approval of the Share Exchange or
if the Company were not to receive the necessary regulatory and other approvals
of its Proposed Plan, including the Asset Transfer and the financings related
thereto, the Company cannot predict the form that the separation of its
regulated activities and its competitive, deregulated activities would take
under the Restructuring Act. Accordingly, these unaudited pro forma financial
statements might require significant revision if all or any of the necessary
regulatory and other approvals are not obtained.
3
<PAGE>
In addition, the Asset Transfer as presented in these unaudited pro forma
financial statements assumes that all holders of the Company's public SUNs will
exchange these SUNs for newly-issued SUNs of UtilityCo with substantially the
same terms as the existing SUNs in the Debt Exchange. Although the Company
believes that there are sufficient economic reasons why the holders of the
public SUNs would agree to participate in the Debt Exchange, there can be no
assurance that such holders will agree to so participate. If the Debt Exchange
were not completed or only partially completed, it may be necessary for
UtilityCo to directly issue up to $368 million of additional SUNs or seek other
alternative financing which may not be on as favorable terms as the Company's
existing SUNs, depending on economic, market and other conditions at the time of
the Asset Transfer. Accordingly, these unaudited pro forma financial statements
might require significant revision if less than all holders of the Company's
public SUNs participate in the Debt Exchange or the Debt Exchange is materially
different than contemplated.
The Asset Transfer as presented in these unaudited pro forma financial
statements also assumes that holders of the Company's cumulative preferred stock
(the "Preferred Stock") will exchange their shares for newly issued cumulative
preferred stock with substantially the same terms as the existing Preferred
Stock in the Preferred Exchange. There can be no assurance that such holders
will agree to so participate. If the Preferred Exchange were not completed or
only partially completed, it may be necessary for UtilityCo to issue up to $12.8
million of additional SUNs or seek other alternative financing which may not be
on as favorable terms as the Preferred Stock depending on economic, market and
other conditions at the time of the Asset Transfer. Accordingly, these unaudited
pro forma financial statements might require significant revision if less than
all the holders of the Company's Preferred participate in the Preferred Exchange
or the Preferred Exchange is materially different than contemplated.
The ability to obtain the assumed financing terms for the New Issuances is
largely dependent upon the credit ratings of UtilityCo. For purposes of these
unaudited pro forma financial statements, UtilityCo's debt rating is assumed to
be BBB+/Baa1 based on the ratings criteria of Standard and Poor's Ratings
Services and Moody's Investor Services, Inc. As a result, the Company believes
that UtilityCo will be able to issue $100 million of renewable commercial paper
at an assumed effective rate of 6.51% per year and issue the fixed rate SUNs at
an assumed annual interest rate of 7.67%. If UtilityCo's actual debt ratings, at
the time of the New Issuances, are lower than the assumed ratings or interest
conditions are not favorable, depending on economic, market and other
conditions, UtilityCo may not receive the assumed terms for the New Issuances or
may be required to seek financing alternatives. Accordingly, these unaudited pro
forma financial statements may require significant revision if the assumed
financing terms of the New Issuances are materially different than contemplated.
The Restructuring Act authorizes utilities to recover in full any prudent and
reasonable costs incurred in implementing full open access ("transition costs").
These transition costs will be recovered through 2007 by means of a separate
wires charge. The PRC may extend this date by up to one year. The Company is
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still evaluating its expected transition costs and has not made a final
determination of those costs. The Company, however, currently estimates that
these costs will be approximately $30 million to $40 million. Transition costs
for which the Company will seek recovery include professional fees, financing
costs including underwriting fees, consents relating to the transfer of assets,
management information system changes including billing system changes and
public and customer education and communications. Recoverable transition costs
are currently being capitalized and will be amortized over the recovery period
to match related revenues. Recovery of any transition costs, which are not
deemed recoverable by the PRC, may be vigorously pursued through all remedies
available to the Company with the ultimate outcome uncertain. Costs not
recoverable will be expensed when incurred unless these costs are otherwise
permitted to be capitalized under current and future accounting rules. The
unaudited pro forma financial statements of UtilityCo do not give effect to the
incurrence of any transition costs or their recovery. If the amount of
non-recoverable transition costs is material, the resulting charge to earnings
may have a material effect on the future financial results and position of
UtilityCo.
In addition, the Restructuring Act recognizes that electric utilities should be
permitted a reasonable opportunity to recover an appropriate amount of the costs
previously incurred in providing electric service to its customers ("stranded
costs"). Stranded costs represent all electric power generating costs, currently
in rates, in excess of the expected competitive market price and include plant
decommissioning costs, regulatory assets, and lease and lease-related costs.
Utilities will be allowed to recover no less than 50% of such costs through a
non-bypassable charge on all customer bills for five years after implementation
of customer choice. The PRC could authorize a utility to recover up to 100% of
its stranded costs if the PRC finds that recovery of more than 50%: (i) is in
the public interest; (ii) is necessary to maintain the financial integrity of
the public utility; (iii) is necessary to continue adequate and reliable
service; and (iv) will not cause an increase in rates to residential or small
business customers during the transition period. The Restructuring Act also
allows for the recovery of nuclear decommissioning costs by means of a separate
wires charge. The Company expects to recover its regulatory assets along with
other stranded costs associated with the deregulated business through its
stranded costs recovery. As a result, these regulatory assets have been
reclassified to reflect the costs associated with the discontinuation of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71), and the adoption of Statement of
Financial Accounting Standards No. 101, "Regulated Enterprises--Accounting for
the Discontinuance of Application of FASB Statement 71," and transferred to
UtilityCo in the Asset Transfer. Stranded costs include other operating costs in
excess of the established regulatory assets. The Company is still evaluating its
expected stranded costs and has not made a final determination of those costs.
The Company's current estimate of its stranded costs ranges from $650 million to
$750 million which reflects the present value of these costs as calculated in
2002 dollars based on its most current set of assumptions at the time of this
filing and a strict interpretation of the language of the Restructuring Act. The
Company has not yet finalized the amount of stranded cost recovery it will
actually seek from the PRC pursuant to the Restructuring Act. The calculation of
stranded costs is subject to a number of highly sensitive assumptions, including
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the date of open access and projected market prices, among others. The Company
believes that the Restructuring Act if properly applied provides an opportunity
for recovery of a reasonable amount of stranded costs. If regulatory orders do
not provide for a reasonable recovery, the Company is prepared to vigorously
pursue judicial remedies. The unaudited pro forma financial statements reflect
historical actual rate recovery of the Company's costs including regulatory
assets and do not give effect to any stranded cost recovery. While recoverable
stranded costs will be collected as part of the regulated business by UtilityCo,
the collections would be paid to PowerCo under an agency agreement to be
executed between UtilityCo and PowerCo and be part of the revenues available to
PowerCo subsequent to the restructuring. Final determination and quantification
of stranded cost recovery has not been made by the PRC. The determination will
have an impact on the recoverability of the related assets and may have a
material effect on the future financial results and position of PowerCo.
Historically, the Company has operated as an integrated regulated utility. The
Company's electric power generation operations, the business that will become
deregulated under the Restructuring Act and be conducted by PowerCo, has
provided electric power to the Company's electric distribution and transmission
operations, the business that will be conducted by UtilityCo under the
separation mandated by the Restructuring Act. The unaudited pro forma statements
of earnings account for these transactions using historic internally developed
transfer pricing that was not necessarily reflective of market prices. In
addition, this historic internally developed transfer pricing is not necessarily
representative of the stranded costs for which the Company will seek recovery,
as stranded cost recovery will be based on future estimated costs. In accordance
with the Restructuring Act, upon implementation of deregulation, residential and
small business customers of UtilityCo will be able to select a power supplier in
the open market or may receive electric service pursuant to a Standard Offer
provided or arranged by UtilityCo through a process approved by the PRC. Under
current law, there is not any direct competition for the Company's retail
customers. As a result of deregulation under the Restructuring Act, PowerCo may
face competition from companies with greater financial and other resources.
There can be no assurance that market prices for electric power after the
implementation of deregulation will equal the historic internal transfer prices
utilized by the Company prior to deregulation as reflected in the unaudited pro
forma statements of earnings, nor can there be any assurance that stranded cost
recovery will compensate for the difference.
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POWERCO
UNAUDITED PRO FORMA BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------------------------------
The Pro Forma Other
Company Asset Pro Forma Pro Forma
Historical Transfer (1.) Adjustments PowerCo
----------- ------------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents................... $ 120,399 $ 223,616 (1.d.) $(52,739) (3.) $291,276
Accounts receivable......................... 147,746 (111,898) - 35,848
Other receivables........................... 68,911 (2,675) (15,364) (2.) 50,872
Regulatory assets........................... 24,056 (24,056) - -
Other current assets........................ 44,926 (11,269) (1,439) (2.) 32,218
----------- ----------- --------- ----------
Total current assets 406,038 73,178 (69,542) 410,214
----------- ----------- --------- ----------
Property, Plant and Equipment:
Property, Plant and Equipment............... 2,533,540 (1,419,684) (23,901) (2.) 1,089,955
Less accumulated depreciation
and amortization ......................... (1,077,577) 585,059 6,524 (2.) (485,994)
----------- ----------- --------- ----------
1,455,963 (834,625) (17,377) 603,961
Construction work in progress............... 104,934 (77,984) (2,208) (2.) 24,742
Nuclear fuel................................ 25,923 - - 25,923
----------- ----------- --------- ----------
Net utility plant........................ 1,586,820 (912,609) (19,585) 654,626
----------- ----------- --------- ----------
Other Assets:
Other investments........................... 483,008 (1,446) (17,282) (2.) 464,280
Regulatory assets........................... 195,397 (195,397) - -
Prepaid benefit cost........................ 16,126 - (16,126) (2.) -
Other assets and deferred charges........... 35,879 (23,082) 123 (2.) 12,920
----------- ----------- --------- ----------
Total other assets....................... 730,410 (219,925) (33,285) 477,200
----------- ----------- --------- ----------
$2,723,268 $(1,058,816) $(122,412) $1,542,040
=========== =========== ========== ==========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
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POWERCO
UNAUDITED PRO FORMA BALANCE SHEET
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------------------------
The Pro Forma Other
Company Asset Pro Forma Pro Forma
Historical Transfer (1.) Adjustments PowerCo
---------- ------------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable........................... $ 150,645 $ (28,816) (1.e.) $ (13,043) (2.) $ 108,786
Accrued interest and taxes................. 34,237 (12,698) (1.e.) (14,562) (3.) 6,977
Other current liabilities.................. 54,137 (19,786) (1.e.) (28,127) (2.) 6,224
---------- ------------ ----------- ----------
Total current liabilities............... 239,019 (61,300) (55,732) 121,987
----------- ------------ ----------- ----------
Long-term debt, less current maturities...... 988,489 (368,303) (1.b.) (34,975)(3.) 585,211
----------- ------------ ----------- ----------
Deferred Credits:
Intercompany note.......................... - (106,890) (1.e.) 246,326 (2.) 139,436
Accumulated deferred income taxes.......... 204,330 - (243,583) (2.) -
39,253 (11.) -
Regulatory liabilities..................... 103,434 (66,356) (1.e.) (39,253) (11.)
2,175 (3.) -
Accrued postretirement benefit costs....... 8,945 - (8,945) (2.) -
Other deferred credits..................... 266,389 (60,167) (1.e.) (8,832) (2.) 197,390
----------- ------------ ----------- ----------
Total deferred credits.................. 583,098 (233,413) (12,859) 336,826
----------- ------------ ----------- ----------
Minority interest............................ 12,771 - - 12,771
----------- ------------ ----------- ----------
Equity....................................... 899,891 (12,800) (1.c.) (18,846)(3.) 485,245
(10.)
(383,000) (1.a.)
----------- ------------ ----------- ----------
$2,723,268 $(1,058,816) $ (122,412) $1,542,040
=========== ============ =========== ==========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
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POWERCO
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------------------
The Pro Forma Other
Company Asset Pro Forma Pro Forma
Historical Transfer (1.) Adjustments PowerCo
---------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric..................................... $ 911,977 $(541,574) $ 319,579 (4.) $ 689,982
Gas.......................................... 236,711 (236,711) - -
Unregulated businesses....................... 8,855 - - 8,855
---------- ---------- ---------- ----------
Total operating revenues.................. 1,157,543 (778,285) 319,579 698,837
Cost of energy sold............................ 531,952 (436,290) 319,579 (4.) 415,241
---------- ---------- ---------- ----------
Gross Margin................................... 625,591 (341,995) - 283,596
---------- ---------- ---------- ----------
Operating Expenses:
Other operation expenses..................... 229,916 (138,403) (8,551) (2.) 82,962
Maintenance and repairs...................... 50,217 (21,457) - 28,760
Lease expense................................ 73,624 (7,332) - 66,292
Depreciation and amortization................ 92,661 (50,066) (2,116) (2.) 40,479
Taxes, other than income taxes............... 34,084 (26,012) (435) (2.) 7,637
---------- ---------- ---------- ----------
Total operating expenses.................. 480,502 (243,270) (11,102) 226,130
---------- ---------- ---------- ----------
Operating income........................... 145,089 (98,725) 11,102 57,466
Other Income and Deductions.................... 47,500 206 (1,466) (6.)
11,118 (12.) 57,358
Interest charges............................... 70,667 (2,917) (3,773) (5.)
(26,560)(1.b.) 8,905 (7.) 46,322
---------- ---------- ---------- ----------
Earnings Before Income Taxes................... 121,922 (69,042) 15,622 68,502
Income taxes................................... 42,308 (27,156) 6,185 (9.) 21,337
---------- ---------- ---------- ----------
Net Earnings from Continuing Operations........ $ 79,614 $ (41,886)(10.) $ 9,437 $ 47,165
========== ========== ========== ==========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
9
<PAGE>
POWERCO
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------------
The Pro Forma Other
Company Asset Pro Forma Pro Forma
Historical Transfer (1.) Adjustments PowerCo
---------- ----------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric........................................ $ 835,204 $(556,275) $ 363,429 (4.) $642,358
Gas............................................. 255,975 (255,975) - -
Unregulated businesses.......................... 1,266 - - 1,266
---------- ---------- ---------- --------
Total operating revenues..................... 1,092,445 (812,250) 363,429 643,624
Cost of energy sold............................... 449,426 (502,050) 363,429 (4.) 310,805
---------- ---------- ---------- --------
Gross Margin...................................... 643,019 (310,200) - 332,819
---------- ---------- ---------- --------
Operating Expenses:
Other operation expenses........................ 216,641 (121,357) (8,464) (2.) 86,820
Maintenance and repairs......................... 51,666 (20,519) - 31,147
Lease expense................................... 73,624 (7,332) - 66,292
Depreciation and amortization................... 86,141 (46,833) (3,510) (2.) 35,798
Taxes, other than income taxes.................. 37,992 (27,631) (358) (2.) 10,003
---------- ---------- ---------- --------
Total operating expenses..................... 466,064 (223,672) 230,060
---------- ---------- ---------- --------
Operating income............................. 176,955 (86,528) 102,759
12,332
Other Income and Deductions....................... 37,672 (5,284) 517 (2.) 32,905
Interest Charges.................................. 63,217 (16,709) (1.b.) - 46,508
---------- ---------- ---------- --------
Earnings Before Income Taxes...................... 151,410 (75,103) 12,849 89,156
Income taxes...................................... 56,291 (30,176) 5,087 (9.) 31,202
---------- ---------- ---------- --------
Net Earnings from Continuing Operations........... $ 95,119 $ (44,927) (10) $ 7,762 $ 57,954
========== ========== ========= ========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
10
<PAGE>
POWERCO
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------
The Pro Forma Other
Company Asset Pro Forma Pro Forma
Historical Transfer (1) Adjustments PowerCo
---------- ------------ ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric................................... $ 722,438 $ (536,332) $ 342,463 (4.) $ 528,569
Gas........................................ 294,769 (294,769) - -
Unregulated businesses..................... 3,314 - - 3,314
---------- ----------- ----------- ---------
Total operating revenues................ 1,020,521 (831,101) 342,463 531,883
Cost of energy sold.......................... 409,717 (515,865) 342,463 (4.) 236,315
---------- ----------- ----------- ---------
Gross Margin................................. 610,804 (315,236) - 295,568
---------- ----------- ----------- ---------
Operating Expenses:
Other operation expenses................... 193,569 (117,045) (6,400) (2.) 70,124
Maintenance and repairs.................... 52,626 (20,040) - 32,586
Lease expense.............................. 73,624 (7,332) - 66,292
Depreciation and amortization.............. 82,694 (40,525) (4,470) (2.) 37,699
Taxes, other than income taxes............. 36,803 (26,303) (296) (2.) 10,204
---------- ----------- ----------- ---------
Total operating expenses................ 439,316 (211,245) (11,166) 216,905
---------- ----------- ----------- ---------
Operating income........................ 171,488 (103,991) 11,166 78,663
Other Income and Deductions.................. 21,548 (1,683) 317 (2.) 20,182
Interest Charges............................. 56,214 (14,083) (1.b.) - 42,131
---------- ----------- ----------- ---------
Earnings Before Income Taxes................. 136,822 (91,591) 11,483 56,714
Income taxes................................. 50,325 (36,436) 4,546 (9.) 18,435
---------- ----------- ----------- ---------
Net Earnings from Continuing Operations...... $ 86,497 $ (55,155) (10) $ 6,937 $ 38,279
========== =========== =========== =========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
11
<PAGE>
UTILITYCO
UNAUDITED PRO FORMA BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------------------------
Pro Forma Other
Asset Pro Forma Pro Forma
Transfer (1) Adjustments UtilityCo
------------- ----------- ---------
(In Thousands)
<S> <C> <C> <C>
Utility Plant:
Electric plant in service..................................... $ 921,946 $ - $ 921,946
Gas plant in service.......................................... 483,819 - 483,819
Common plant in service and plant held for future use......... 13,077 - 13,077
----------- --------- -----------
1,418,842 - 1,418,842
Less accumulated depreciation and amortization................ (585,059) - (585,059)
----------- --------- -----------
833,783 - 833,783
Construction work in progress................................. 77,984 - 77,984
----------- --------- -----------
Net utility plant.......................................... 911,767 - 911,767
----------- --------- -----------
Other Property and Investments:
Other investments............................................. 1,446 - 1,446
Non-utility property.......................................... 842 - 842
----------- --------- -----------
Total other property and investments....................... 2,288 - 2,288
----------- --------- -----------
Current Assets:
Cash and cash equivalents..................................... (223,616) (1.d.) 223,694 (8.) 78
Accounts receivable........................................... 111,898 - 111,898
Other receivables............................................. 2,675 - 2,675
Inventories................................................... 9,297 - 9,297
Regulatory assets............................................. 24,056 - 24,056
Other current assets.......................................... 1,972 - 1,972
----------- --------- -----------
Total current assets....................................... (73,718) 223,694 149,976
----------- --------- -----------
Deferred charges:
Regulatory assets............................................. 195,397 - 195,397
Other deferred charges........................................ 23,082 435 (8.) 23,517
----------- --------- -----------
Total deferred charges..................................... 218,479 435 218,914
----------- --------- -----------
$1,058,816 $224,129 $1,282,945
=========== ========= ===========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
12
<PAGE>
UTILITYCO
UNAUDITED PRO FORMA BALANCE SHEET
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------
Pro Forma Other
Asset Pro Forma Pro Forma
Transfer (1) Adjustments UtilityCo
------------- ----------- ---------
<S> <C> <C> <C>
Capitalization: (In Thousands)
Common stock equity:
Additional paid-in capital.................... $ 383,000 (1.a.) $ - $ 383,000
------------ --------- ------------
Total common stock equity.................. 383,000 - 383,000
Cumulative preferred stock...................... 12,800 (1.c.) - 12,800
(10.)
Long-term debt.................................. 368,303 (1.b.) 224,129 (8.) 592,432
------------ --------- ------------
Total capitalization......................... 764,103 224,129 988,232
------------ --------- ------------
Current Liabilities:
Accounts payable................................ 28,816 (1.e.) - 28,816
Accrued interest and taxes...................... 12,698 (1.e.) - 12,698
Other current liabilities....................... 19,786 (1.e.) - 19,786
------------ --------- ------------
Total current liabilities.................... 61,300 - 61,300
------------ --------- ------------
eferred Credits:
Intercompany note............................... 106,890 - 106,890
Accumulated deferred investment tax credits..... - (1.e.) - -
Regulatory liabilities.......................... 51,421 (1.e.) - 51,421
Regulatory liabilities related to ADIT.......... 14,935 14,935
Other deferred credits.......................... 60,167 (1.e.) - 60,167
------------ --------- ------------
Total deferred credits....................... 233,413 - 233,413
------------ --------- ------------
Commitments and contingencies.................... - - -
------------ --------- ------------
$ 1,058,816 $ 224,129 $ 1,282,945
============ ========= ============
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
13
<PAGE>
UTILITYCO
UNAUDITED PRO FORMA STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------
Pro Forma Other
Asset Pro Forma Pro Forma
Transfer (1) Adjustments UtilityCo
------------ ----------- ---------
(In Thousands)
<S> <C> <C> <C>
Operating Revenues:
Electric................................................. $ 541,574 $ - $ 541,574
Gas....................................................... 236,711 236,711
Unregulated businesses.................................... - -
----------- ----------- ----------
Total operating revenues............................... 778,285 - 778,285
----------- ----------- ----------
Operating Expenses:
Cost of energy sold....................................... 436,290 - 436,290
Other operation expenses.................................. 138,403 - 138,403
Maintenance and repairs................................... 21,457 - 21,457
Lease expense............................................. 7,332 - 7,332
Depreciation and amortization............................. 50,066 - 50,066
Taxes, other than income taxes............................ 26,012 - 26,012
Income taxes.............................................. 27,219 (9,161)(9.) 18,058
----------- ----------- ----------
Total operating expenses............................... 706,779 (9,161) 697,618
----------- ----------- ----------
Operating income....................................... 71,506 9,161 80,667
----------- ----------- ----------
Other Income and Deductions:
Other..................................................... (206) - (206)
Income tax benefit........................................ 63 - 63
----------- ----------- ----------
Net other income and deductions........................ (143) - (143)
----------- ----------- ----------
Income before interest charges......................... 71,363 9,161 80,524
----------- ----------- ----------
Interest Charges:
Interest on long-term debt................................ 26,560 16,192 (8.) 42,752
Other interest charges.................................... 2,917 6,948 (9.) 9,865
----------- ----------- ----------
Net interest charges................................... 29,477 23,140 52,617
----------- ----------- ----------
Net Earnings from Continuing Operations (10)................ $ 41,886 $ (13,979) $ 27,907
=========== =========== ==========
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
14
<PAGE>
UTILITYCO
UNAUDITEDPRO FORMA STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 Pro 1997 Pro
Forma Asset Forma Asset
Transfer (1) Transfer (1)
------------ ------------
(In Thousands)
<S> <C> <C>
Operating Revenues:
Electric........................................................ $ 556,275 $ 536,332
Gas............................................................. 255,975 294,769
----------- ------------
Total operating revenues..................................... 812,250 831,101
----------- ------------
Operating Expenses:
Cost of energy sold............................................. 502,050 515,865
Other operation expenses........................................ 121,357 117,045
Maintenance and repairs......................................... 20,519 20,040
Lease expense................................................... 7,332 7,332
Depreciation and amortization................................... 46,833 40,525
Taxes, other than income taxes.................................. 27,631 26,303
Income taxes.................................................... 28,026 35,770
----------- ------------
Total operating expenses..................................... 753,748 762,880
----------- ------------
Operating income............................................. 58,502 68,221
----------- ------------
Other Income and Deductions:
Other........................................................... 5,284 1,683
Income tax expense.............................................. (2,150) (666)
----------- ------------
Net other income and deductions.............................. 3,134 1,017
----------- ------------
Income before interest charges............................... 61,636 69,238
----------- ------------
Interest Charges:
Interest on long-term debt...................................... 15,937 12,167
Other interest charges.......................................... 772 1,916
----------- ------------
Net interest charges......................................... 16,709 14,083
----------- ------------
Net Earnings from Continuing Operations (10)...................... $ 44,927 $ 55,155
=========== ============
The accompanying notes are an integral part of these Unaudited Pro Forma Financial Statements.
</TABLE>
15
<PAGE>
Notes to the Unaudited Pro Forma Financial Statements
The following notes provide explanations of the pro forma adjustments and
further describe the assumptions used in preparing the preceding unaudited pro
forma financial statements.
(1) To reflect the Asset Transfer which is the separation of the Company's
regulated assets, primarily electric and gas distribution and
transmission assets, and certain related liabilities from the Company's
unregulated, competitive businesses, under the Restructuring Act, and
the results of operations associated with such regulated assets and
liabilities. Total assets of $1.1 billion (the Asset Transfer excludes
the Company's investment of $438 million of Palo Verde Nuclear
Generating Station notes that are classified as Other Investments and
are underlying the assets held under lease) are planned to be acquired
by UtilityCo pursuant to the Asset Transfer through:
(a) A dividend of regulated assets of $383 million by PowerCo to
Manzano which then will in turn make an equity contribution to
UtilityCo of those assets,
(b) the assumption of $368 million of PowerCo's (formerly the
Company's) SUNs pursuant to the Debt Exchange, as follows:
7.10% due 2005 $268 million
7.50% due 2018 $100 million
------------
$368 million
Interest expense on the assumed SUNs is $26.5 million per year
with related debt amortization of deferred debt financing costs
of $1.1 million per year,
(c) the assumption of $12.8 million of PowerCo's (formerly the
Company's) preferred stock pursuant to the Preferred Exchange,
(d) a cash payment of $224 million to PowerCo from the proceeds of
$100 million of renewable commercial paper and $124 million of
the fixed rate SUNs pursuant to the New Issuances (see note 8)
and
(e) the assumption of $295 million of other related operating
liabilities and deferred credits.
These transactions are expected to occur simultaneously.
(2) To reflect the Share Exchange and the related transfer of certain
corporate assets and liabilities and the related expenses to Manzano,
the newly created holding company, including income tax liabilities and
net deferred income tax liabilities of $267 million. The transfer will
be accomplished through the issuance of an inter-company note from
PowerCo to Manzano at rates consistent with the rates available under
the Company's existing and unused revolving credit facility.
(3) To reflect the Buyback. The Company repurchased $35 million of its 7.5%
SUNs with an accrued interest obligation of $1.1 million at a cost of
$34 million and deferred, as a regulatory liability, a $2.2 million
gain on the transaction. This gain is being amortized over 18 years and
its effect on the pro forma statements is immaterial.
16
<PAGE>
(4) To reverse the Company's consolidating inter-company elimination for
the sale of electric power by PowerCo to UtilityCo. The pro forma
adjustment is necessary because the PowerCo unaudited pro forma
statement of earnings represents only PowerCo's results of operations;
therefore, PowerCo's revenues must also include inter-company sales.
Likewise, because UtilityCo's results are no longer reflected in the
PowerCo unaudited pro forma statement of earnings, the elimination of
UtilityCo's inter-company cost must be reversed.
The inter-company sale is reflected in both the PowerCo and UtilityCo
Pro Forma Statements of Earnings at historical transfer pricing which
may not necessarily represent competitive market prices.
(5) To reverse the interest expense and amortization of the deferred debt
issuance costs related to the Buyback.
(6) To reverse the interest income earned on the cash and cash equivalent
balances utilized for the Buyback. The adjustment is based on an
average interest rate of 4.6% earned on the incremental cash and cash
equivalent balances of $52.7 million utilized for the Buyback.
(7) To reflect interest expense related to PowerCo's inter-company debt
balance of $139 million with Manzano as a result of the related Share
Exchange transactions (see note 2). Interest expense is calculated
using 6.5% which is consistent with the rates available under the
Company's unused revolving credit facility.
(8) To reflect the New Issuances. The commercial paper is expected to have
an effective interest rate of 6.51% per annum including fees resulting
in interest expense of $6.5 million. The newly-issued SUNs of UtilityCo
are expected to have a stated interest rate of 7.67% per annum.
Underwriting costs are expected to be 0.35% for an effective rate of
7.8% per annum resulting in interest expense of $16.2 million.
Accordingly, UtilityCo is expected to realize net proceeds from the New
Issuances of $224 million and $0.4 million is expected to be
capitalized as deferred debt financing costs.
(9) To reflect income taxes at the statutory rate of 39.59%.
(10) As a result of the Preferred Exchange, UtilityCo will pay preferred
dividends to the holders of its newly-issued cumulative preferred
stock. The dividend rate is 4.58% or $586,000 per annum.
17
<PAGE>
(11) To reverse the regulated liability and related accumulated deferred tax
assets associated with ceratin investment tax credits and gains on
certain sale leaseback transactions recorded in accordance with SFAS
71. To the extent that these items will no longer be part of the
Regulated Businesses, the balances must be eliminated and excluded from
the Asset Transfer. The adjustment does not have an impact on the
unaudited pro forma statement of earnings.
(12) To reflect the interest income earned on the cash and cash equivalent
balances resulting from the $224 million cash payment from UtilityCo
that is part of the Asset Transfer. The adjustment is based on an
average interest rate of 4.97% earned on the incremental cash and cash
equivalent balances of $224 million.
18
<PAGE>
