San Juan Generating Station Restructuring Agreements - Steve Cummins, Tim Glasco & Richard Virtue July 15, 2015
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San Juan Generating Station Restructuring Agreements Steve Cummins, Tim Glasco & Richard Virtue July 15, 2015
Agenda
1. San Juan Generating Station Project History
2. Restructuring the Ownership in the San Juan Generating Station (Background)
3. Restructuring Benefits to LAC Residents
4. Current Generation Resources Plan
5. Current Coal Supply through 2017
6. New Coal Supply
7. Restructuring Agreement
8. Mine Reclamation Agreement
9. Decommissioning Agreement
10. San Juan Project Participation Agreement Restructuring Amendment
Conforming Changes
11. San Juan Project Participation Agreement
Exit Date Amendment
12. Summary
13. Time Line to Close the Deal
14. Consequences of FailureSan Juan Generating Station
Project History
Investments in Power Generating Resources
1. County Council established the Citizens Review Committee (CRC) 1984
2. Tasked to assess Utilities Acquisition Projects
3. Committee made recommendations as follows:
Approved by Utility Board and County Council
Purchase of:
7.2% of PNM’s San Juan Unit 4 coal-fired generating plant;
PNM’s White Rock electric distribution system
PNM’s White Rock gas distribution system - 1989
Construction of:
El Vado and Abiquiu hydroelectric plants providing renewable energy since 1990San Juan Generating Station
Project History cont.
1985 - 86 issuance of utility revenue bonds $110 million
Funding over 30 years (paid off in 2015)
SJGS original cost - $46.3 million
San Juan Project Participation Agreement
Term of agreement, 2022
9 current owners (PNM, TEP,COF, LAC, UAMPS, TSGT, MSR, SCPPA, Anaheim)
SJGS has 4 generating units
LAC owns 7.2% interest in unit 4Restructuring the Ownership in the San Juan Generating Station (Background)
Restructuring the Ownership in the San Juan
Generating Station (Background)
1. January 2011, the U.S. Environmental Protection Agency (“EPA”) issued a proposed Federal
Implementation Plan (“FIP”) to reduce regional haze using BART.
2. February 2013, PNM, EPA and the State of New Mexico executed a non-binding agreement
(“EPA Term Sheet”) outlining an alternative to BART.
3. The BART Alternative will require retirement of San Juan Unit 2 and Unit 3 by December 31,
2017 and the installation of selective non-catalytic reduction (“SNCR”) technology on San
Juan Unit 1 and Unit 4 by January 31, 2016.
4. September 2013, the State of New Mexico approved the BART Alternative.Restructuring the Ownership in the San Juan
Generating Station (Background)cont.
5. March 2014, PNM commences studies, analysis, assessments and design related to the installation
of the BART Alternative on San Juan Units 1 & 4 in order to comply with the deadlines set forth
in the EPA Term Sheet.
6. The EPA issues final approval of the BART Alternative in the Fall of 2014.
7. As a result of the BART Alternative, four of the SJGS owners decided it was in their interests to
exit the plant early.
8. With the shut down of two units and four participants desire to exit early, Restructuring of the
plant participation agreement became necessary.
9. The Participants have completed San Juan Restructuring negotiations.Restructuring Benefits to LAC Residents 1. Most Economical Option 2. Aligns with current bond debt expiring in 2022 3. Environmental – reduced emissions from the SJGS by 50% 4. Aligns with our goal of being carbon neutral by 2040 5. Finalized a decommissioning Agreement among the 9 owners 6. SJGS is the County’s only controllable resource (hazard sharing, spin) 7. No rate increases resulting from restructuring 8. Potential for savings that can help us transition to future energy resources
Current Generation Resources Plan Time line 2015 to 2040 1. 2015 Prepare for 2022 – 2025 departure from the San Juan Project 2. 2025 Expiration of ECA in its current form 3. 2022 – 2025 Long term PPA to serve LAPP as necessary 4. Distributed Generation contribution to serve load (2015 approx. 400 kW) 5. Continue to stay apprised of industry changes with renewable energy resources dealing with the effects of intermittency 6. Investigate new base load resources 7. Implement FER committee recommendations approved by Utility Board
Current Coal Supply through 2017 1. Expires December 31, 2017 2. 2015 Price - $3.07/mmbtu 3. Take or pay minimum 4. 9 months of coal reserve for 4 unit operation 5. RSIP requires SNCR in operation by Jan 2016 and shut down of Units 2&3 by December 2017 6. BHP desire to exit coal mining in North America
New Coal Supply
March 19, Coal bids received
April 30, 2015 PNM and SJGS owners agree to terms of new coal supply
agreement (CSA)
PNM and Westmoreland are the signatories to CSA
Decrease in Fuel Supply cost annually – Estimate $2.3 mil per year
New fuel price ($2.20/mmbtu) is approximately a 29% reduction from current
contract price
Contract similar to current agreement (base coal min. tons (tier 1), incremental
coal (tier 2)
Term of agreement – Jan. 1, 2016 through June 30, 2022, aligns with SJPPA
Option to extend beyond 2022 must be decided by participants in 2018Restructuring Agreement Summary
Exiting Participants 8/26/2014 The following four owners wish to exit the project on December 31, 2017 (Exit Date) prior to 2022 which is the contract date for the San Juan Project Participation Agreement (SJPPA): MSR – Public Power Agency SCPPA – Southern California Public Power Authority City of Anaheim TSGT - Tri-State Generation & Transmission
$$$ Cost To Exit Early Demand Charge of $6.2 million paid by exciter's for the use of new capital improvements on Unit 4 to be paid in equal shares from Jan 2015 through Dec. 2017: PNM 0.00% TEP 0.00% Farmington 55.6% LAC 22.2% x $6.2 million = $1,376,400.00 UAMPS 22.2% Restructuring Fee of $8.8 million will also be allocated using the percentages above and paid on the effective date. Consideration for cost to restructure LAC 22.2% x $8.8 million = $1,953,600.00
Remaining Participants PNM – Public Service Company of New Mexico “Utility” PNMR-D – Public Service Company of New Mexico Resources and Development (Power Merchant) TEP – Tucson Electric Power COF – City of Farmington LAC – Los Alamos County UAMPS – Utah Associated Municipal Power Systems
Compensation To Remaining Participants for negotiating early exit Receive Demand Charge - LAC 22.2% x $6.2 million = $1,376,400.00 total Receive Restructuring Fee - LAC 22.2% x $8.8 million = $1,953,600.00 total LAC common O&M reduced from 4.309% to 3.123% from Jan. 1, 2018 through June 30, 2022 (Value of reduced O&M over 5.5 years is estimated at approx. $3 million) Commitment is for LAPP not to be harmed financially from Restructuring
Project Liabilities Legacy Liabilities – remain the responsibility of the current owners by participant share LAC Decommissioning fund Reclamation trusts to be Funded by 2022 Environmental Liabilities – all current SJGS participants retain their participant share unless it can be pointed to a particular incident post 2017
Mine Reclamation Agreement Summary
Mine Reclamation Responsibilities
1. Participants requirement to fund reclamation
Section 23 of SJPPA reference to the UGCSA
2. Reclamation of old surface mine and underground mine mouth and
associated disturbances (vent shafts, access roads etc.)
Coal Combustion Residuals (Ash) are used to fill the pit
10 feet of earth fill above the ash, with 2 feet of top soil
Permit requires 10 year monitoring post final reclamation
3. Reclamation scenarios and the associated funding curves
Cost of reclamation is highly dependent on quantity of AshMine Reclamation Trust Funds
1. Current Trust established in 2012 per current UG-CSA
2038 closure scenario to be fully funded by 2017
estimated cost $38 million in 2012 dollars
LAC trust fund $478,000 YE 2014
2. Participants desire is to fund 2022 closure by 2017
estimated cost $133 million in 2012 dollars
LAC has this scenario budgeted in the 2016 budget
3. Funding Curves developed by PACE Wiley for multiple closure scenarios
4. Funding curves to be reviewed by modified as necessary by new minerMine Reclamation Agreement
Overview
1. Term – 180 days after Bond Release
10 year monitoring period begins after final reclamation is completed
2. Recognition of Obligations
Pre 2017 Exit date disturbances
Post Exit date disturbances
3. Funding of Reclamation Trusts
beneficiary, Investment Policies, Annual True-ups, defaults etc.
4. Adjustments to Reclamation Curves as necessaryMine Reclamation Agreement
Overview Cont.
1. Reclamation Investment Committee
review funding levels
allowable investments
2. Reclamation Oversight Committee
Oversee reclamation work, cost reviews, surveys
3. Reclamation Trust Funds Operating Agent
PNM to monitor operations of the San Juan Coal Co.
review budgets and invoices
reclamation progress etc.SJGS Decommissioning Agreement Summary
SJGS Decommissioning
Initial Decommissioning Work $1.2 million (Exhibit D)
Interim Decommissioning Work
Period between Exit Date(Dec. 31, 2017) & retirement of units 1 & 4
Any necessary decommission work will be treated as O&M if below threshold of $
$500,000 and paid by the remaining participants
Decommissioning Work above threshold will either be required by law or determined
to be a prudent cost avoidance and paid by all nine participantsSJGS Decommissioning Cont. Use of equipment located on Units 2 & 3 for continued operation on units 1 & 4 without compensation to exiting participants Unit 3 and Unit 4 have the same capacity However any salvage value obtained will be distributed to all nine parties Ex. Sale of turbine generator set
Final Decommissioning Plan After final shut down of units 1 and unit 4 an updated decommissioning plan will be performed to identify the cost associated with following scenarios: 1. What’s required by law, Asset Retirement Obligations (ARO) 2. Brownfield 3. Green Field Decommissioning Committee will vote on desired plan – Need unanimous vote to select any plan other than the minimum required by law
Decommissioning Trust Fund
1. Initial funding level $30 million to meet expected ARO
2. All nine participants must fund by 2022
3. LAC currently has $4.2 Million in a restricted fund designated for decommissioning of
SJGSDecommissioning Trust Fund cont. 1. Brown field scenario estimated in 2012 at $150 million – LAC share $3 million 2. Reassessment of target amount in 2022 and every five years thereafter 3. Excess funds released 2 years after decommissioning work is completed 4. Obligations are several and not joint
San Juan Project Participation Agreement Restructuring Amendment Conforming Changes Amendment incorporates relevant provisions of the Restructuring Agreement
San Juan Project Participation Agreement Exit Date Amendment
Purpose of Exit Amendment Amendment reflects the exit from the project of the Exiting Participants and to set forth the terms of the SJPPA under which the remaining participants will continue their participation in the project Operations of Units 1 & 4 Exiting Participants (MSR, SCPPA, Anaheim, TSGT) Retirement of Unit 2 and Unit 3 Effective Date on the Exit Date Dec. 31, 2017 Remaining Participants(PNM, PNMR-D, TEP, COF, LAC, UAMPS)
Administration San Juan Project Participation Agreement Exit Date Amendment Coordination Committee Voting Projects greater than $5 million or Coal related decisions require More than 82% majority of common participant shares and a Minimum of 66 2/3 % majority of the number of the individual participants
Extension of Termination Date for Large Capital Improvement section 40A San Juan Project Participation Agreement Exit Date Amendment Capital Project Cost > $50 million require unanimous approval (section 18.4.5) Participants to negotiate in good faith equitable option for all parties or possible conveyance of ownership interest
Extension of Termination Date and Coal
Supply Agreement, section 40B
San Juan Project Participation Agreement
Exit Date Amendment
1. No later than June 30, Operating Agent shall have negotiated prices for
coal supply beginning July 1, 2022
2. Participants shall provide notification to extend agreement beyond July 1,
2022 by July 1, 2018
Negotiate Sale of ownership interest
Binding Agreement on sale of ownership interest must be executed by
November 15, 2018
If no Purchase Contract, Non-Extenders shall negotiate with Extenders to convey
right, title, and interest in the San Juan Project to other participants to assure the
continued successful and proper operation and maintenance of the projectBudgets & Operating Expenses
San Juan Project Participation Agreement
Exit Date Amendment
Equipment and Facilities Common to all units (section 22.1.7)
LAC common O&M reduced from 4.309% to 3.123% from Jan. 1, 2018 through June
30, 2022
Value of reduced O&M over 5.5 years is estimated at approx. $3 millionIn Summary
Summary of Restructuring Agreements
“Package Deal”
1. Agreements contingent upon one another to complete the deal
2. Participant Agreements
Restructuring
Mine Reclamation
Decommissioning
Exit Date Amendment to the SJPPA
Amended and Restated SJPPA
3. Operating Agent Agreements (PNM)
Coal Sales (CSA)
Coal Combustion Residuals Disposal (CCRDA)
Mine Reclamation & Trust Fund (MRTFA)Summarizing of benefits
1. LAC is made whole financially from the restructuring
2. Preserve our option to exit the project in 2022 or option to extend
3. Formalized the Decommissioning obligations among the existing
participants
4. Environmental – reduced emissions from the SJGS by 50%
5. Aligns with our goal of being carbon neutral by 2040
6. SJGS is the County’s only controllable resource (hazard sharing, spin)
7. No rate increases resulting from restructuring
8. Potential for savings that can help us transition to future energy resourcesSummary of liabilities
The current 9 owners of the San Juan Generating Station retain all of their
liabilities except as modified by the restructuring agreements are as follows:
SJPPA Term 2022 – modified for the exiting participants
Environmental – Exiting participants not liable if environmental issue can be
shown to have occurred post 2017 (Exit Date)
Reclamation - Exiting participants not liable for new disturbances
associated with mining operations post 2017 (minor disturbances if any)
Decommissioning – Exiting participants retain their decommissioning
liabilities based on a sliding scale using MW-years (LAC increases by 0.2% if
we exit in 2022 at which time it will begin to decrease until the plant is shut
down.Summary of Economics 1. LAC Receives Demand Charge $1,376,400 2. LAC Receives Restructuring Fee $1,953,600 3. LAC Decrease in Fuel Supply cost for term of contract $14,950,000 4. LAC Increase in common O&M for term of contract ($2,300,000) Total dollar value $15,980,000
Time Line to close deal 1. PNM’s NMPRC Filing for Certificate of Public Convenience and Necessity (CCN) 2. 9 Participants Governing Body’s Approvals prior to August 1st 3. FERC filing of Amended SJPPA (August 2015) 4. CSA effective date Jan 1, 2016, dependent on Mine Purchase Closing
Consequences of Failure 1. Decommissioning Principles unresolved 2. Mine Reclamation trusts under funded 3. Current Coal contract expires in 2017 4. Current SJPPA term through June 30, 2022 5. New coal supply deal fails 6. Unit 1 and Unit 4 completed installation of SNCR’s (Totaling $130 Million of new capital investment). The only two units able to operate through term of SJPPA would have no coal supply 7. Potential for Extensive Litigation
THE END Questions
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