before the new mexico public regulation commission …/media/files/p/pnm... · 7/15/2014 · 1...

BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF THE APPLICATION ) OF PUBLIC SERVICE COMPANY OF NEW ) MEXICO FOR APPROVAL TO ABANDON ) SAN JUAN GENERATING STATION UNITS ) 2 AND 3, ISSUANCE OF CERTIFICATES OF PUBLIC CONVENIENCE AND NECESSITY FOR REPLACEMENT POWER ) RESOURCES, ISSUANCE OF ACCOUNTING ) ORDERS AND DETERMINATION OF RELATED RATEMAKING PRINCIPLES AND) TREATMENT,

) )

Case No. 13-00390-UT )

) )

PUBLIC SERVICE COMPANY OF NEW MEXICO,

) ) )

Applicant )

JULY 15 SUPPLEMENTAL DIRECT TESTIMONY

OF

CHRIS M. OLSON

July 15, 2014

JULY 15 SUPPLEMENTAL DIRECT TESTIMONY OF CHRIS M. OLSON

NMPRC CASE NO. 13-00390-UT

1 Q. PLEASE STATE YOUR NAME, POSITION AND BUSINESS ADDRESS.

2 My name is Chris M. Olson. I am Vice President, Generation, for Public Service A.

Company of New Mexico ("PNM" or the "Company"). My business address is 3

2401 Aztec Road, NE, Albuquerque, New Mexico 87107. 4

5

6 Q. HAVE YOU PREVIOUSLY FILED TESTIMONY IN THIS

7 PROCEEDING?

8 Yes. I submitted my Direct Testimony in this proceeding on December 20, 2013,

9 and my Supplemental Direct Testimony on February 5, 2014.

10

11 Q- HOW IS YOUR JULY 15 SUPPLEMENTAL DIRECT TESTIMONY

12 ORGANIZED?

My testimony is organized into the following general subjects: 13 A.

14 Purpose of Testimony and Exhibits

15 Background and Benefits of Resolution and Remainers' Term II.

16 Sheet

17 III. Ownership Transfers and Cost Allocations

18 IV. Restructuring Fees, Demand Charges and Fuel Inventory

V. Liability and Indemnity Provisions 19

VI. Miscellaneous Provisions 20

VII. Required Conditions and Approvals 21

22 VOL Conclusion

23

1

JULY 15 SUPPLEMENTAL DIRECT TESTIMONY OF CHRIS M, OLSON


I. PURPOSE OF TESTIMONY AND EXHIBITS 1

2 Q WHAT IS THE PURPOSE OF YOUR JULY 15 SUPPLEMENTAL

3 DIRECT TESTIMONY?

My July 15 Supplemental Direct Testimony is filed pursuant to the Hearing 4 A.

Examiner's Order (1) Partially Granting PNM Motion, as Supplemented, For Leave 5

to File Supplemental Testimony, to Extend Procedural Schedule and for Shortened

7 Response Time and (2) Denying PNM Motion for Leave to File Reply in Support of

Motion for Leave to File Supplemental Testimony ("Order") issued on June 11, 8

9 2014. My testimony addresses the portion of the Order that requires PNM to "file

10 further supplemental testimony due on July 15, 2014 that shall describe the

1 1 restructured San Juan participation agreement and the terms of PNM's acquisition of

12 capacity in San Juan Unit 4." (Order, p. 10)

13

14 Q. ARE YOU SPONSORING ANY EXHIBITS IN YOUR JULY 15

15 SUPPLEMENTAL DIRECT TESTIMONY?

16 A. Yes. My Supplemental Direct Testimony includes PNM Exhibit CMO-1 (July 15

17 Supplemental) which is a copy of the approved Resolution of the San Juan

18 Generating Station Coordination Committee Regarding San Juan Project

19 Restructuring ("Resolution") and PNM Exhibit CMO-2 (July 15 Supplemental)

20 which is a copy of the approved San Juan Generating Station Restructuring Non-

2 1 Binding Term Sheet of Remaining Participants ("Remainers' Term Sheet").

22 These two documents represent the "term sheet" among the participants in the San

2



Juan Generating Station ("San Juan" or "SJGS") with respect to the restructuring 1

2 of the ownership of San Juan as necessary to implement the Revised State

3 Implementation Plan ("Revised SIP"). I am also sponsoring the attached PNM

4 Exhibit CMO-3 (July 15 Supplemental) which is a copy of a letter agreement

5 ("Famnington Letter Agreement") between PNM and the City of Farmington,

New Mexico ("Farmington") dated June 26, 2014, relating to certain capital 6

improvement credits that Farmington will receive in connection with its 7

acquisition of additional capacity in San Juan Unit 4. 8

9

10 II. BACKGROUND AND BENEFITS OF RESOLUTION AND REMAINERS' TERM SHEET 1 1

12 Q. HOW DID THE SAN JUAN PARTICIPANTS ARRIVE AT AN

AGREEMENT FOR THE RESTRUCTURE OF THE OWNERSHIP OF 13

14 SAN JUAN?

As discussed in my prior testimony filed in this case, the nine San Juan 15 A

participants have been engaged in discussions and negotiations for over a year 16

concerning the restructuring of the ownership of San Juan necessitated by the 17

18 planned retirements of SJGS Units 2 and 3. In order to resolve the myriad issues

involved in the restructuring, the participants engaged the services of 19

20 Administrative Law Judge Bruce Birchman (Ret.) to serve as a mediator. After

numerous in-person mediation sessions and numerous conference calls with sub-21

22 groups of the various participants over the past six months, the negotiating

23 representatives of the San Juan participants agreed on proposed terms for

3



ownership restructuring on June 20, 2013. The terms are encompassed in the 1

Resolution which was unanimously adopted by the SJGS Coordination 2

3 Committee on June 26, 2014, and the Remainers' Term Sheet which was

approved on June 26, 2014, by those San Juan Participants who will continue with 4

the operation of San Juan after the retirement of Units 2 and 3 at the end of 2017. 5

The end result is that the necessary understandings have been reached which. 6

when finalized, will allow San Juan to continue to operate and comply with the 7

8 EPA's Regional Haze Rule by implementing the Revised SIP.

9

10 Q. WHY DOES PNM BELIEVE THAT CONTINUED OPERATION OF SAN

1 1 JUAN IS IN THE BEST INTERESTS OF ITS CUSTOMERS?

12 A. As detailed in the testimonies of PNM Witness Patrick J. O'Connell in this case,

13 PNM has examined various scenarios for complying with the EPA's Regional

14 Haze Rule, including implementation of the Revised SIP, installation of selective

15 catalytic reduction ("SCR") technology on all four units and early retirement of

all four units. The early retirement of all four San Juan units is a more expensive 16

compliance option with a high degree of uncertainty. Implementation of the 17

18 Revised SIP is the most cost-effective means for complying with the EPA's

19 Regional Haze Rule. Accordingly, it was in the best interests of PNM's

20 customers for PNM to diligently pursue an ownership restructure for San Juan

that will allow for the implementation of the Revised SIP. 2 1

4



IS PNM SATISFIED THAT IT NEGOTIATED TERMS FOR THE 1 Q.

2 RESTRUCTURED OWNERSHIP OF SAN JUAN THAT MEET THE

3 BEST INTERESTS OF ITS CUSTOMERS?

4 A. Yes. The Resolution, the Remainers' Term Sheet and the Farmington Letter

Agreement are all the result of arm's length negotiations. There were many very 5

complicated issues that had to be addressed. Each participant had its individual 6

interests and objectives. As I discuss below, each participant, including PNM, 7

made concessions in order to reach an agreement in principle on ownership 8

9 restructuring. The end result is that the Resolution and the Remainers' Term

Sheet form the blueprint for the ownership restructure of San Juan in a manner 10

that will allow for implementation of the Revised SIP with its attendant cost 1 1

savings and environmental benefits. PNM's customers will greatly benefit from 12

this outcome. 13

14

WHICH PARTICIPANTS ARE THE "EXITING PARTICIPANTS" AND 15 Q.

WHICH ARE THE "REMAINING PARTICIPANTS"? 16

As detailed in Section La. of the Resolution, the "Exiting Participants" are Tri-17 A.

State Generation and Transmission Association, Inc. ("Tri-State"), M-S-R Public 18

19 Power Agency ("M-S-R"), Southern California Public Power Authority

("SCPPA") and the City of Anaheim, California ("Anaheim"). 20 The Exiting

Participants will cease active involvement in San Juan on December 31, 2017 21

("Exit Date"). 22



Section Lb of the Resolution identifies the "Remaining Participants", i.e., those 1

2 who will continue active ownership in and operation of one or more units of San

3 Juan after the Exit Date, as PNM, Farmington, Tucson Electric Power Company

4 ("TEP"), the Incorporated County of Los Alamos, New Mexico ("Los Alamos")

5 and Utah Associated Municipal Power Systems ("UAMPS").

6

7 Q. PLEASE EXPLAIN HOW THE RESOLUTION AND THE REMAINERS'

8 TERM SHEET RELATE TO ONE ANOTHER.

9 A. These two documents need to be considered together to fully understand the terms

of the ownership restructuring for San Juan. The Resolution memorializes the 10

essential terms of the restructured ownership, both overall and as between the 11

Exiting Participants and the Remaining Participants. The Resolution describes 12

13 the terms, conditions and financial consideration for the Exiting Participants'

14 withdrawal from San Juan. It also defines the San Juan participants' ownership

rights and responsibilities for capital and operating and maintenance ("O&M") 15

16 costs as well as responsibility for past and future San Juan liabilities. The

Resolution includes a detailed provision relating to existing fuel supply inventory 17

and responsibility for costs associated with procurement of a future fuel supply. 18

Lastly, the Resolution provides a process to achieve the necessary final 19

agreements and approvals for implementation of the agreed San Juan ownership 20

restructuring. 21

6



The Remainers' Term Sheet provides the essential terms for the restructured 1

ownership of San Juan among the Remaining Participants. It addresses the 2

3 ownership interests in the various San Juan units and common facilities as well as

voting rights and responsibility for capital and O&M costs among the Remaining 4

Participants. The Remainers' Term Sheet reflects various financial arrangements 5

among the Remaining Participants that were necessary to facilitate the agreed 6

ownership restructuring and will be implemented though allocations of fees, costs 7

and fuel inventory. 8

9

10 Q. WHAT IS THE PURPOSE OF THE FARMINGTON LETTER

11 AGREEMENT?

12 A. As I will describe in more detail below, the Farmington Letter Agreement

provides the details of the arrangement between Farmington and PNM whereby 13

PNM will provide a credit to Farmington for common plant O&M expenses 14

against future capital improvement invoices. 15

16

17 Q. PLEASE PROVIDE SOME CONTEXT FOR THE TERMS OF THE

18 RESOLUTION AND REMAINERS' TERM SHEET.

As has already been addressed in some detail by several PNM witnesses in this 19 A.

20 case, the Revised SIP requires that San Juan Units 2 and 3 be permanently retired

effective December 31, 2017. The Revised SIP also requires the installation of 21

22 selective non-catalytic reduction ("SNCR") technology on San Juan Units 1 and

4. In addition, San Juan's New Source Review air permit requires the conversion 23

7


NMPRC CASE NO. 13-00390-liT

1 of Units 1 and 4 to a balanced draft configuration. These compliance measures

not only require additional capital investment, but also the realignment of the

3 existing ownership structure to account for the two-unit retirement.

4

5 Q. WHAT ROLE DID THE EXISTING SAN JUAN OWNERSHIP

6 STRUCTURE PLAY IN THE NEGOTIATIONS?

7 A. As I discussed at pages 6 and 7 in my December 20, 2013 Direct Testimony, the

8 four San Juan units are subject to diverse and varying ownership interests. This

structure complicated the negotiations because the retirement of San Juan Units 2 C)

and 3 impacted varying ownership interests in different degrees. The nine 10

participants each have voting rights under the Amended and Restated San Juan 1 1

Project Participation Agreement dated March 23, 2006 ("SJPPA") and significant 12

decisions relating to capital investments and plant operations must generally be 13

14 approved by the requisite voting majorities. Therefore, barring exigent

15 circumstances covered under the SJPPA, PNM would necessarily have to secure

the approval of the other SJGS owners for the capital investments and retirements 16

17 necessary to implement the Revised SIP. In addition, the San Juan ownership

18 restructuring involves amendments to the SJPPA which require the unanimous

19 agreement of the participants. Therefore, in order to achieve ownership

20 restructuring and approval for the necessary capital investments, the requisite

approvals from each of the participants had to be obtained. 21

8



1 Q. WHAT WERE SOME OF THE INTERESTS THAT HAD TO BE

2 ADDRESSED IN NEGOTIATING THE RESTRUCTURED OWNERSHIP?

3 A. The California governmental agency owners (M-S-R, SCPPA and Anaheim) felt

they were constrained under California law in making the capital investments in 4

San Juan necessary to comply with the EPA's Regional Haze Rule. As a result, 5

they were interested in exiting active involvement in San Juan. Tri-State was also

interested in exiting San Juan. The Exiting Participants have ownership interests 7

only in San Juan Units 3 and 4 and these units figure prominently in the 8

Resolution and the Remainers' Term Sheet. 9

10

The other participants, including PNM, agree that San Juan Units 1 and 4 are still 1 1

and will remain viable, low cost generation resources to serve their respective 12

customers for the foreseeable future. 13 Therefore, they were interested in

continuing operations under a restructured ownership provided that their 14

respective interests and objectives could be met. 15

16

17 Q. PLEASE PROVIDE A SUMMARY OF SOME OF THE BASIC

CONCEPTS THAT ARE INCORPORATED INTO THE TERMS OF THE 18

SAN JUAN OWNERSHIP RESTRUCTURE. 19

1 will start with the Resolution. On the one hand there are the Exiting Participants 20 A.

who wish to exit active involvement in San Juan. Then there are the Remaining 21

Participants who want to continue San Juan operations. The central issues 22

between these two groups involved: (a) the terms under which the Exiting 23

9



Participants would be allowed to exit and transfer their project interests; (b) the 1

responsibility for capital and O&M costs prior to their exit; (c) disposal of the 2

3 Exiting Participants' interests in San Juan fuel inventory; and (d) responsibility

for existing and future liabilities relating to coal mine reclamation, environmental 4

issues and decommissioning costs. 5

6

Under the SJPPA, O&M costs and capital improvement costs are generally 7

allocated based on each participant's percentage ownership in; (a) each 8

individual unit; (b) plant common facilities; (c) Units 1 and 2 common facilities; 9

10 and (d) Units 3 and 4 common facilities. The ownership restructuring means that

the percentages and amounts of each participant's responsibilities for such things 11

as O&M costs and capital improvement costs will change. In order to address the 12

individual financial requirements and objectives of the Remaining Participants 13

14 with respect to these costs, the Remaining Participants have agreed to specific

15 allocations of the Restructure Fee, the Demand Charge, O&M costs and the

Exiting Participants' interests in the San Juan fuel inventory. 16

17

The basic principle guiding the allocation of existing and future liabilities is that 18

all of the current participants will continue to share in their existing liabilities in 19

20 proportion to their current ownership interests in San Juan. This insures that

2 1 PNM and its customers will not assume any greater responsibility than currently

exists for any matters that arise prior to the ownership restructuring of San Juan. 22

Correspondingly, the Exiting Participants will not be responsible for liabilities 23

1 0



1 that arise solely after the Exit Date and any post-Exit Date liabilities will be the

responsibility of the Remaining Participants. 2

3

4 Q. IN GENERAL TERMS, HOW WERE THE ISSUES OF THE

5 CONDITIONS FOR EXITING SAN JUAN AND THE TRANSFER OF

6 INTERESTS HANDLED?

As I describe in more detail below, the Exiting Participants are to pay a 7 A.

8 Restructure Fee in the amount of $8.8 million to be allocated to the Remaining

9 Participants according to the terms of the Resolution and the Remainers' Term

10 Sheet in consideration of the costs to restructure the ownership of San Juan. They

will also transfer their interests in San Juan to PNM and Farmington on the Exit 1 1

12 Date.

13

14 Q. WHAT ARE THE GENERAL TERMS RELATING TO RESPONSIBILITY

15 FOR SAN JUAN O&M AND CAPITAL EXPENSES?

16 A. For the period prior to the Exit Date, the participants will pay their respective

17 shares of O&M costs under the terms of the SJPPA. However, the Exiting

18 Participants will not have responsibility for capital costs for the period from July

19 1, 2014, through the Exit Date. Instead, the Exiting Participants will pay a

"Demand Charge" in the amount of $6.2 million to be allocated among the 20

Remaining Participants according to the terms of the Resolution and the 2 1

Remainers' Term Sheet for use of the capital improvements through the Exit 22

23 Date.

1 1



1 Q. HOW IS THE ISSUE OF THE EXITING PARTICIPANTS' INTEREST IN

THE SAN JUAN FUEL INVENTORY ADDRESSED? 2

The Exiting Participants wiil transfer their interests in the San Juan fuel inventory 3 A.

to PNM for a specified price which is less, on an aggregate basis, than the current 4

and anticipated future costs for fuel under the Underground Coal Sales Agreement 5

presently in effect. As discussed below, the financial benefit of this fuel 6

inventory is an important element in the allocation of financial benefits and costs 7

among the Remaining Participants. 8

9

10 III. OWNERSHIP TRANSFERS AND COST ALLOCATIONS

11 Q. PLEASE DESCRIBE THE TRANSFERS OF THE VARIOUS

OWNERSHIP INTERESTS UNDER THE RESOLUTION AND THE 12

REMAINERS' TERM SHEET. 13

As detailed in Section 1 of the Resolution, the Exiting Participants will be 14 A.

transferring their respective interests in SJGS Units 3 and 4 to the Remaining 15

Participants on the Exit Date. Of the 197 MW in Unit 4 currently owned by M-S-16

R and Anaheim, PNM is to acquire capacity equivalent to 132 MW and 17

Farmington is to acquire 65 MW. In addition, effective on the Exit Date, PNM 18

will acquire the interests currently owned by SCPPA and Tri-State in San Juan 19

Unit 3 (which will be retired by the Exit Date). Therefore, as of the Exit Date, the 20

ownership in San Juan Units 3 and 4 and plant common will be as follows: 21

1 2



Unit 3&4 Plant Common Unit 3 Unit 4 Common

PNM 100.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

64.482% 0.000%

21.290% 7.200% 7.028% 0.000% 0.000% 0.000% 0.000%

64.482% 0.000%

21.290% 7.200% 7.028% 0.000% 0.000% 0.000% 0.000%

58.671% 20.068% 12.749% 4.309% 4.203% 0.000% 0.000% 0.000% 0.000%

TEP Farmington LAC UAMPS M-S-R Anaheim SCPPA Tri-State Total 100.000% 100.000% 100.000% 100.000%

1 Q. ARE THERE ANY OWNERSHIP CHANGES WITH RESPECT TO SAN

2 JUAN UNITS 1 AND 2?

3 A. No. The ownership structure of those units remains the same with PNM and TEP

each retaining their respective fifty percent interests. 4

5

6 Q. ARE ANY RIGHTS-OF-FIRST-REFUSAL UNDER THE SJPPA

7 IMPLICATED BY THESE TRANSFERS?

8 A. Yes. Under Section I.e. of the Resolution, those participants with rights-of-first

refusal are waiving them to allow these transfers to take place. The Remaining 9

Participants further confirm the waiver of their respective rights-of-first-refusal 10

1 1 under Section 5 of the Remainers' Term Sheet.

1 2

IN THE MAY 22 SUPPLEMENTAL TESTIMONY, PNM INDICATED 13 Q.

14 THAT IT MAY BE ACQUIRING AN ADDITIONAL 132 MW IN SAN

15 JUAN UNIT 4 INSTEAD OF THE 78 MW THAT WAS REFERENCED IN

13



PNM'S ORIGINAL APPLICATION IN THIS CASE. HAS THIS ISSUE 1

2 BEEN RESOLVED?

Yes, as indicated above, PNM can now confirm that it proposes to acquire the 3 A.

additional 132 MW as described in its May 22 Supplemental Testimony filed in 4

this proceeding. 5

6

7 Q. WHAT AMOUNT WILL PNM PAY FOR ITS ADDITIONAL 132 MW IN

SAN JUAN UNIT 4? 8

As detailed in PNM's May 22 Supplemental Testimony, PNM is not paying any 9 A.

money to M-S-R or Anaheim for the acquisition of the additional 132 MW in San 10

Juan Unit 4. Neither will PNM be paying any money for the acquisition of 1 1

SCPPA's or Tri-State's interest in SJGS Unit 3. As also discussed in PNM's May 12

22 Supplemental Testimony, there will no longer be any trade or swap of capacity 13

in San Juan Unit 3 for the additional capacity in San Juan Unit 4. 14

15

16 Q. SCPPA AND TRI-STATE ARE NOW TRANSFERRING THEIR

RESPECTIVE INTERESTS IN SAN JUAN UNIT 3 TO PNM. WHAT IS 17

THE PURPOSE OF THIS TRANSFER? 18

This transfer is to facilitate the exit of SCPPA and Tri-State from active 19 A.

involvement in San Juan and to simplify the ownership structure of San Juan on a 20

going forward basis. PNM is merely taking record ownership of San Juan Unit 3. 2 1

San Juan Unit 3 will be immediately retired and PNM is not paying anything for 22

14



these interests. In addition, because Unit 3 is being retired, this transfer does not 1

2 represent an acquisition of any additional generation capacity by PNM.

3

4 Q. ARE THERE ANY ADVANTAGES TO PNM IN TAKING OVER ALL OF

5 THE OWNERSHIP INTERESTS IN SJGS UNIT 3?

There are some small benefits associated with PNM assuming this ownership. 6 A.

7 Because San Juan Unit 3 is a "twin" to Unit 4, there may be some opportunities to

recycle parts from Unit 3 for use on Unit 4 resulting in some cost savings in the 8

relative near term. Full ownership of Unit 3 will afford PNM total access to the 9

unit and broad discretion with regard to any matters that might affect Unit 3 in the 10

future. 1 1

12

13 Q. IS PNM AGREEING TO ADDITIONAL CAPITAL OR O&M

RESPONSIBILITIES WITH RESPECT TO THE TRANSFER OF THE 14

OWNERSHIP INTERESTS IN SAN JUAN UNIT 3? 15

Because SJGS Unit 3 is being retired simultaneously with the transfer of 16 A.

ownership to PNM, there should be no additional capital expenses associated with 17

this unit. To the extent that there are costs associated with common facilities for 18

19 SJGS Units 3 and 4, those will be shared among all of the Remaining Participants

20 in accordance with the terms of the Remainers' Term Sheet. There may be some

nominal expense to secure Unit 3 in a dormant state that PNM may incur, but it 21

will not be a material amount. 22

15



1 Q. HOW ARE O&M COSTS TO BE HANDLED UNDER THE REMAINERS'

TERM SHEET FOLLOWING THE RESTRUCTURED OWNERSHIP? 2

3 A. O&M costs are addressed in Section 3 of the Remainers' Term Sheet. Under

Section 3.a., these costs are allocated among the Remaining Participants for the 4

period from January 1, 2018, to July 1, 2022, as follows: 5

6 PNM 61.311%

7 TEP 19.800%

8 Farmington 12.749%

9 Los Alamos 3.123%

10 UAMPS 3.017%

11

12 Q. WHY IS PNM PAYING A GREATER PERCENTAGE OF THE SAN JUAN

13 COMMON PLANT O&M COSTS FOR THE PERIOD FROM JANUARY

14 1, 2018 TO JULY 1, 2022 THAN ITS ACTUAL PERCENTAGE

15 OWNERSHIP OF THE SAN JUAN COMMON PLANT?

16 A. As I noted previously, the San Juan ownership restructuring will result in the

17 Remaining Participants having different percentage ownership interests in the

18 plant, including the common plant. If common plant O&M costs are allocated

19 based on the restructured percentage of common plant ownership, the O&M costs

for the Remaining Participants will increase. To ameliorate a portion of this 20

2 1 increase on the other Remaining Participants, other than Farmington, PNM has

22 agreed to assume a larger share of common plant O&M costs for the period from

23 the Exit Date to July 1, 2022. In the case of Farmington, as I discuss in more

16



detail below, PNM will credit a portion of Farmington's increased O&M costs 1

against invoices for capital improvements. 2

3

4 Q. WHY IS IT IN PNM'S INTEREST TO TAKE ON RESPONSIBILITY FOR

5 O&M COSTS IN AN AMOUNT GREATER THAN ITS RESTRUCTURED

6 OWNERSHIP SHARE?

In exchange for PNM temporarily taking on this additional share of common plant 7 A.

O&M costs and providing Farmington a credit for these costs, the other 8

Remaining Participants will forgo their right to acquire any portion of the Exiting 9

Participants' interest in the fuel inventory for San Juan. As explained by PNM 10

1 1 Witness Thomas Sategna, this fuel inventory has significant monetary value

which will provide benefits to PNM that are commensurate with benefits provided 12

13 to the other Remaining Participants.

14

15 Q. PLEASE PROVIDE MORE DETAIL ABOUT SECTION 3.B OF THE

16 REMAINERS' TERM SHEET UNDER WHICH FARMINGTON IS TO BE

17 PAID $6.5 MILLION.

On the Exit Date, Farmington will acquire an additional 65 MW of Unit 4 and its 18 A.

responsibility for O&M costs will increase by a commensurate percentage. As 19

part of the agreement to restructure San Juan, PNM agreed to credit Farmington 20

up to $6.5 million for these increased O&M costs against future capital 21

improvement invoices related to San Juan, allowing Farmington to avoid 22

immediate cash outlays for these increased costs. The $6.5 million represents the 23

17



net present value of Farmington's reduced share of plant common O&M costs. 1

Again, this was part of the consideration for Farmington's forgoing any right to 2

the Exiting Participants' interest in the fuel inventory for San Juan in favor of 3

PNM acquiring all of this interest. 4

5

6 Q. IF PNM IS CREDITING THIS PAYMENT TO FARMINGTON AGAINST

7 CAPITAL IMPROVEMENT INVOICES FOR SAN JUAN UNIT 4, IS THIS

8 PAYMENT BEING BOOKED BY PNM AS A CAPITAL COST?

No. These are O&M costs and they will be booked as such. The credit against 9 A.

the capital improvement invoices to Farmington is merely the method of payment. 10

The specific details of this arrangement are documented in the Farmington Letter 1 1

If there is any balance remaining on the $6.5 million credit to 12 Agreement.

Farmington as of January 1, 2015, Farmington will be entitled to a cash payment 13

from PNM in the amount of the remaining balance. 14

15

16 Q. WE HAVE DISCUSSED O&M COSTS. HOW ARE THE COSTS FOR

17 CAPITAL IMPROVEMENTS TO BE ALLOCATED AMONG THE

18 REMAINING PARTICIPANTS FOLLOWING THE OWNERSHIP

RESTRUCTURE? 19

Capital improvements are to be allocated among the Remaining Participants in 20 A.

proportion to their ownership interests in the individual San Juan units, the Unit 21

22 3 and Unit 4 common plant and the overall San Juan common plant.

18



IV. RESTRUCTURING FEES, DEMAND CHARGES AND FUEL INVENTORY

1 2

3 Q. DOES THE RESOLUTION REQUIRE ANY PAYMENTS AMONG THE

4 SAN JUAN PARTICIPANTS?

Yes. Under the Resolution there is a Restructuring Fee and a Demand Charge 5 A.

6 that are to be paid by the Exiting Participants to certain of the Remaining

Participants. 7

8

9 Q. PLEASE DISCUSS THE RESTRUCTURING FEE.

Section 2.a. of the Resolution provides that the Exiting Participants will pay the 10 A.

sum of $8.8 million as a Restructuring Fee in consideration of the cost to 11

12 restructure the ownership interests in San Juan. The Restructuring Fee is to be

paid by each Exiting Participant as follows: 13

14 M-S-R 33.22%

15 Anaheim 11.48%

16 SCPPA 47.08%

17 Tri-State 9.22%

Section 2.b. clarifies that there will be no actual monetary payment to the 18

Remaining Participants, but rather the Restructuring Fee will be netted against the 19

20 shared fuel inventory that is addressed in Section 5 of the Resolution.

2 1

22 Q. WHICH PARTICIPANTS WILL RECEIVE THE RESTRUCTURING

23 FEE?

19



Under Section 2.b. of the Resolution and Section 2 of the Remainers' Term Sheet, 1 A.

the Remaining Participants will receive a percentage of the Restructuring Fee as 2

follows:

4 PNM 00.00%

5 TEP 00.00%

6 Farmington 55.6%

7 Los Alamos 22.20%

8 22.20% UAMPS

9

10 Q. WHAT IS THE DEMAND CHARGE AND ITS PURPOSE?

The Demand Charge is addressed in Section 4 of the Resolution relating to capital 11 A.

costs and voting. This section of the Resolution provides that, for the cost of any 12

capital improvements invoiced after July 1, 2014, the Remaining Participants will 13

assume all responsibility. Section 4.b. confirms that the Exiting Participants 14

won't bear any costs for the installation of SNCR and balanced draft on SJGS 15

Units 1 and 4. However, for the period from July 1, 2014, through the Exit Date, 16

the Exiting Participants will still have their respective rights to generation 17

capacity in San Juan. The Demand Charge in the agreed amount of $6.2 million 18

is intended to serve as compensation from the Exiting Participants for use of the 19

capital improvements to Unit 4 and the common facilities for Units 3 and 4 for the 20

period between July 1, 2014, and the Exit Date. This provision of the Resolution 21

became effective July 1, 2014. 22

20



1 Q. WHICH OF THE PARTICIPANTS WILL RECEIVE THE DEMAND

CHARGE? 2

3 A. The Demand Charge will be paid to the same Remaining Participants and in the

4 same percentages as the Restructuring Fee discussed above.

5

6 Q. WHY IS IT THAT PNM WILL NOT RECEIVE ANY PROCEEDS FROM

EITHER THE RESTRUCTURING FEE OR THE DEMAND CHARGE? 7

As discussed above, PNM is receiving all of the Exiting Participants' interest in 8 A.

the fuel inventory. This is reflected in Section 5 of the Resolution. Again, the 9

financial benefits associated with the fuel inventory offset any benefits that PNM 10

is forgoing in not sharing in the Restructuring Fee and the Demand Charge. 1 1

12

13 Q. PLEASE EXPLAIN HOW SECTION 5 RELATING TO FUEL SUPPLY IS

14 RELATED TO PNM FORGOING A PORTION OF THE

RESTRUCTURING FEE AND THE DEMAND CHARGE. 15

Section 5.a. of the Resolution details that there are various types of fuel inventory 16 A.

associated with San Juan as described in more detail in the July 15 Supplemental 17

18 Testimony of Mr. Sategna. Each of the SJGS participants presently has a

proportional interest in the fuel inventory and there is a significant monetary value 19

associated with these interests. Under Section 5.b. of the Resolution, the Exiting 20

Participants are relinquishing their respective interests in the SJGS fuel inventory 21

under a specified pricing structure effective January 1, 2015. Under Section 4 of 22

the Remainers' Term Sheet, PNM is acquiring the entire Exiting Participants fuel 23

2 1



inventory and the other Remaining Participants are relinquishing any right to 1

2 acquire any portion of this inventory. As detailed by Mr. Sategna, PNM estimates

the monetary benefit of its acquisition of the Exiting Participants' fuel inventory 3

to be approximately $28.6 million. As also detailed by Mr. Sategna, the financial 4

benefit of the fuel inventory will more than offset PNM forgoing its proportionate 5

share of the Restructuring Fee and the Demand Charge. It will also offset PNM's 6

7 temporary increased share of common plant O&M costs and PNM's $6.5 million

payment to Farmington under Section 3.b of the Remainers' Term Sheet for 8

increased O&M costs as discussed previously. C)

10

11 Q. BOTH THE RESOLUTION AND THE REMAINERS' TERM SHEET

12 REFER TO A FUEL AND CAPITAL FUNDING AGREEMENT. PLEASE

13 EXPLAIN THE PURPOSE OF THAT AGREEMENT.

A formal agreement among the San Juan participants is being finalized to 14 A.

implement the provisions of the Resolution and the Remainers' Term Sheet with 15

16 respect to fuel issues and the funding of capital improvements. Its primary

17 purpose is to have an agreement in a format that can be filed with the Federal

Energy Regulatory Commission ("FERC"). It tracks the pertinent provisions of 18

the Resolution and the Remainers' Term Sheet. The Fuel and Capital Funding 19

20 Agreement is near completion and is being circulated for final review and

21 approval by the participants. Upon full execution, PNM will file a copy of the

executed Fuel and Capital Funding Agreement in this docket. 22

23

22



1 Q. WILL THE FUEL AND CAPITAL FUNDING AGREEMENT CONTAIN

2 ANY ADDITIONAL INFORMATION THAT MAY BE NEEDED BY THE

3 COMMISSION BEFORE PROCEEDING WITH THIS CASE?

No. As I indicated above, the Fuel and Capital Funding Agreement is the formal 4 A.

agreement for filing with FERC. The material provisions the Fuel and Capital 5

Funding Agreement will implement are contained in the Resolution and the 6

7 Remainers' Term Sheet.

8

9 Q. DO THE RESOLUTION AND THE REMAINERS' TERM SHEET

10 ADDRESS THE ISSUE OF A FUTURE FUEL SUPPLY FOR SAN JUAN?

Yes. All of the San Juan participants recognize the importance of securing a fuel 11 A.

supply after 2017 when the current Underground Coal Sales Agreement expires. 12

The Remaining Participants require some level of certainty in regard to the cost 13

and availability of fuel for SJGS for the period after January 1, 2018, before 14

executing any final restructuring agreements. In fact, efforts are already 15

16 underway to obtain a secure and economical fuel supply for post-2017 operations

17 and progress is being made in this regard. It is anticipated that there will be

sufficient certainty on the issue of San Juan fuel supply by the end of this year for 18

the Remaining Participants to proceed with the agreements necessary for 19

restructuring. PNM's analysis shows that implementation of the Revised SIP is 20

the most economical way of complying with EPA's Regional Haze Rule under 21

any of the various fuel supply alternatives that are available to the Remaining 22

Participants. Based on fuel supply analyses to date, it is anticipated that the 23

23



Remaining Participants will be able to secure a post-2017 fuel supply for San 1

Juan at a cost consistent with the inputs utilized in PNM's models in this case. 2

3

4 Q. HOW ARE THE COSTS FOR OBTAINING A NEW SAN JUAN FUEL

SUPPLY TO BE ALLOCATED? 5

The San Juan participants have already done considerable analysis and work 6 A.

related to post-2017 coal supply issues. Under Section 5.d of the Resolution, the 7

Remaining Participants are responsible for all costs of securing a new fuel supply 8

in excess of the $1.2 million already incurred for coal supply consultants and 9

10 related costs. Under Section 7 of the Remainers' Term Sheet, the costs to

evaluate a long-term fuel supply are to be shared by the Remaining Participants in 11

accordance with their respective new plant common interests described in Section 12

3. However, when a decision has been made regarding a long-term fuel supply, 13

14 the costs of implementing the fuel supply strategy will be based on a 2018 MW

share as follows: 15

16 PNM 58.671%

17 TEP 20.068%

Farmington 18 12.749%

Los Alamos 19 4.309%

20 UAMPS 4.203%

24



V. LIABILITY AND INDEMNITY PROVISIONS 1

2 Q. SECTION 3 OF THE RESOLUTION ADDRESSES WHAT ARE CALLED

3 "LEGACY LIABILITIES." PLEASE EXPLAIN WHAT THESE ARE.

As parties to the SJPPA and co-owners of SJGS, the participants have certain 4 A.

existing contractual and other obligations. A number of these obligations will 5

continue after the Exit Date. These obligations fall into three broad categories: 6

coal mine reclamation obligations, potential environmental obligations, and plant 7

decommissioning obligations. Section 3 represents the participants' process for 8

9 addressing how these obligations will be dealt with considering the fact that four

10 of the nine participants will be exiting San Juan at the end of 2017.

1 1

12 Q. HOW ARE THE COAL MINE RECLAMATION COSTS TO BE

13 ADDRESSED UNDER THE RESOLUTION?

Section 3.a of the Resolution addresses coal mine reclamation costs. The San 14 A.

Juan participants are all presently parties to the Mine Reclamation and Trust 15

Funds Agreement dated June 1, 2012 ("Trust Funds Agreement"), which provides 16

a mechanism for them to fund future coal mine reclamation obligations. 17 In

1 8 general terms, Section 3 of the Resolution provides that the participants will

19 amend the Trust Funds Agreement to apportion mine reclamation obligations on

20 pre- and post-exit bases. Consistent with the guiding principles discussed above,

2 1 the basic understanding is that the Exiting Participants will retain reclamation

obligations for mining and related activities incurred prior to the Exit Date. 22

25



However, they will have no obligation for the costs associated with mining or ash 1

disposal activities after the Exit Date. Section 3.a. also provides for certain 2

actions to help assure that the required mine reclamation is undertaken in a cost-3

effective manner. 4

5

6 Q. HAS ANY EFFORT BEEN MADE TO QUANTIFY THE ANTICIPATED

7 FUTURE MINE RECLAMATION COSTS?

8 A. Yes. As I noted on page 16 of my December 20 Direct Testimony, a mine

reclamation study has been performed. Mr. Sategna addresses future estimated 9

mine reclamation costs in his July 15 Supplemental Direct Testimony. 10

1 1

12 Q. HOW DOES THE RESOLUTION ADDRESS ONGOING AND FUTURE

ENVIRONMENTAL OBLIGATIONS RELATED TO SAN JUAN? 13

14 A. Environmental liabilities are addressed in Section 3.b. of the Resolution. As with

the coal mine reclamation obligations, the participants distinguish between pre-15

and post-exit environmental obligations. 16 As a general rule, the Exiting

Participants will not have any responsibility for environmental obligations that 17

arise wholly after the Exit Date but will retain all existing liabilities incurred or 18

19 arising before the Exit Date. In order to help better define the environmental

status of San Juan on a pre- and post-exit basis, the participants will engage an 20

environmental contractor to conduct a baseline environmental study, and any 21

necessary follow-up or related studies, to identify any existing environmental 22

26



conditions at San Juan. The environmental studies will serve as a baseline for 1

identifying whether a given environmental condition pre-dates the Exit Date. 2

3

For environmental conditions that arise prior to the Exit Date, all participants are 4

responsible in accordance with their current Participation Shares under the 5

If a previously unknown environmental condition is identified, the SJPPA. 6

participants will engage an independent environmental consultant to assess if the 7

condition pre-dated the Exit Date. If it did, then again, all participants are 8

responsible. For environmental issues that arise wholly after the Exit Date, then 9

only the Remaining Participants will be responsible. 10

1 1

12 Q. HOW ARE PLANT DECOMMISSIONING OBLIGATIONS ADDRESSED

UNDER THE RESOLUTION? 13

14 A. Section 40 of the SJPPA contemplates that the participants will negotiate in good

faith with respect to plant decommissioning issues. This concept is carried 15

forward under Section 3.c. of the Resolution and Section 8 of the Remainers' 16

Term Sheet. With the imminent departure of the Exiting Participants, the 17

participants are working to reach final agreement on decommissioning issues in 18

the near future. Section 8 of the Remainers' Term Sheet requires PNM, as 19

operating agent for SJGS, to pursue a participant agreement on decommissioning 20

no later than three months after the execution date of the Resolution. 21 If the

22 participants are unable to reach agreement on decommissioning, then arbitration

is to be invoked under Section 37 of the SJPPA for final resolution of this issue. 23

27



1 Q. WHAT DO THE RESOLUTION AND THE REMAINERS' TERM SHEET

2 PROVIDE WITH RESPECT TO INDEMNITY?

3 A. Section 6 of the Resolution addresses indemnity issues and ties to Section 3 of the

4 Resolution relating to the previously described "Legacy Liabilities." Section 6

reaffirms the general concept that the Exiting Participants are not financially 5

responsible for events at SJGS after the Exit Date and that all participants are 6

financially responsible for events that took place before the Exit Date. 7 It is

contemplated that the San Juan participants will continue to develop contractual 8

9 arrangements relating to issues of liability, indemnity and defense issues. In

addition, because PNM is contemplating the placement of a natural gas peaking 10

1 1 plant at San Juan, the other participants want assurance that they will not be held

responsible for any matters related to that facility. Section 9 of the Remainers' 12

13 Term Sheet provides that the obligations of the Remaining Participants with

14 respect to liability and indemnity are to be consistent with the Resolution and that

any such obligations will be several and not joint. The Remaining Participants 15

will develop additional contractual language to address liability and indemnity 16

17 issues as among themselves.

18

19 VI. MISCELLANEOUS PROVISIONS

20 Q. WHAT ARE THE MISCELLANEOUS PROVISIONS OF THE

21 RESOLUTION AND THE REMAINERS' TERM SHEET THAT YOU

22 WISH TO ADDRESS IN THIS SECTION OF YOUR TESTIMONY?

28



My reference to "miscellaneous provisions" is to those provisions of the 1 A.

Resolution and the Remainers' Term Sheet that don't readily fall within the 2

general topics covered in other sections of my testimony. For example, Section 8 3

of the Resolution is an express acknowledgement that separate agreements 4

between or among some individual or groups of participants may be necessary to 5

implement the terms of the Resolution. The Farmington Letter Agreement is an 6

example of such an agreement. 7

8

Section 10 of the Resolution and Section 11 of the Remainers' Term Sheet (J

confinn the participants' intent that the negotiations leading to the Resolution and 10

Remainers' Term Sheet are and should remain confidential. These sections also 11

allow the participants to disclose the Resolution and the Remainers' Term Sheet, 12

and their respective terms, in the context of necessary regulatory filings and 13

14 reports.

15

16 Section 6 of the Remainers' Term Sheet addresses changing the voting rights

among the Remaining Participants under the SJPPA effective January 1, 2018. 17

Individual capital projects of greater than $50 million will require unanimous 18

approval which is a departure from the existing terms of the SJPPA. 19

20

Section 13 of the Remainers' Term Sheet provides that it may be executed in 21

22 counterparts.

23

29



1 Q. WHAT IS EXHIBIT "A" TO THE RESOLUTION?

2 A. The participants have preliminarily identified specific sections of the Trust Funds

Agreement that will need to be amended as part of the restructuring. 3 These

sections have been listed in Exhibit "A" to the Resolution. 4

5

6 VH. REQUIRED CONSENTS AND APPROVALS

7 Q. SECTIONS 7 AND 9 PROVIDE THAT THE RESOLUTION IS NON-

BINDING AND SUBJECT TO EXECUTION OF FINAL AGREEMENTS 8

9 AND APPLICABLE REGULATORY APPROVALS. SIMILARLY,

SECTION 10 OF THE REMAINERS' TERM SHEET PROVIDES THAT 10

1 1 IT IS NON-BINDING AND SUBJECT TO ESSENTIALLY THE SAME

12 CONDITIONS. IN LIGHT OF THE NON-BINDING NATURE OF THESE

13 AGREEMENTS, IS THERE SUFFICIENT ASSURANCE OF A FINAL

14 AGREEMENT ON THE SAN JUAN OWNERSHIP RESTRUCTURING

FOR THE COMMISSION TO ACT ON PNM'S APPLICATION IN THIS 15

16 PROCEEDING?

Yes. Although the Resolution and the Remainers' Term Sheet are non-binding 17 A.

and conditioned upon execution of a final definitive agreement or agreements and 18

19 necessary regulatory approvals, PNM has approved these agreements, and

believes that the other participants have entered into the Resolution and the 20

2 1 Remainers' Term Sheet, in good faith and with the intent to successfully

implement their terms. Moreover, portions of the participants' agreement on 22

30



restructuring issues, such as Section 4 of the Resolution relating to capital costs, 1

are already being implemented. The negotiations over the Resolution and the 2

Remainers' Term Sheet have resulted in a very comprehensive set of documents 3

that form a detailed framework for the necessary final and binding agreements. 4

The level of detail in these documents should greatly facilitate the final

restructuring agreement or agreements. 6 It is in the best interests of all the

participants to proceed diligently to effectuate the terms of the ownership 7

restructuring. 8

9

10 Q. WHAT ASSURANCES HAVE THE PARTICIPANTS MADE WITH

RESPECT TO PROCEEDING TO A FINAL RESTRUCTURING 11

12 AGREEMENT OR AGREEMENTS?

Under Section 11 .b. of the Resolution, the participants have committed to 13 A.

14 "proceed with prompt drafting of necessary definitive agreements" to implement

the terms of the Resolution. Similarly, under Section 12.b. of the Remainers' 15

16 Term Sheet, the Remaining Participants are to "enter into timely negotiations

17 among themselves toward the execution of one or more agreements, including

further amendments to the SJPPA ... to reflect the restructuring of the ownership 18

and operation of SJGS after the Exit Date." Under Section 7.b of the Resolution, 19

all of the participants have committed to "promptly pursue such filings and 20

[regulatory] approvals, and Participants will either support each other's filings or 2 1

22 not oppose any such filings or approvals."

31



1 Q. HOW LONG DOES PNM ANTICIPATE THAT IT WILL TAKE FOR THE

2 FINAL FORM OF THE NECESSARY AGREEMENT OR AGREEMENTS

3 FOR THE SAN JUAN RESTRUCTURING TO BE COMPLETED?

There are a number of new agreements that will have to be drafted and a number 4 A.

of existing agreements that will have to be amended to effect the terms of the 5

Resolution and the Remainers' Term Sheet. While I can't provide a specific date

by when all necessary agreements will be finalized, the participants believe that 7

the principal restructuring-related agreements should be completed by year-end. 8

Other project-related agreements will need to be reviewed for possible 9

10 amendment or termination in light of the San Juan restructure, and some of these

11 agreements may only need to be completed prior to the Exit Date.

12

13 Q. IN LIGHT OF THE FACT THAT THERE IS PRESENTLY NO FINAL

14 AGREEMENT AMONG THE SAN JUAN PARTICIPANTS

15 CONCERNING OWNERSHIP RESTRUCTURING, SHOULD THE

16 COMMISSION DELAY ACTION ON PNM'S APPLICATION IN THIS

17 PROCEEDING?

18 A. No. The Commission's approval of the abandonment of San Juan Units 2 and 3 is

an essential element for the implementation of the Revised SIP. The proposed 19

20 approval of the Revised SIP by EPA remains on schedule. It is important that this

proceeding also remain on schedule so that the necessary abandonment approval 21

22 is obtained in a timely manner. Moreover, PNM believes that the Resolution and

23 the Remainers' Term Sheet provide sufficient detail concerning PNM's proposed

32



acquisition of the additional 132 MW of capacity in San Juan Unit 4 for issuance 1

2 of the requested CCN for this resource.

3

4 Q. ASIDE FROM THE TIMELINE CALLED FOR UNDER THE REVISED

5 SIP, ARE THERE OTHER REASONS WHY PNM NEEDS A TIMELY

6 DETERMINATION ON THE CCNs REQUESTED IN THIS

7 PROCEEDING?

8 A. Yes. PNM is seeking CCNs for a total of 266 MW of generation capacity in this

g case to replace a substantial portion of the capacity in San Juan Units 2 and 3

10 which will be retired at the end of 2017. A significant delay on PNM's

application for CCNs will hamper PNM's ability to deploy other replacement 11

12 generation resources in the event the Commission determines that the proposed

13 132 MW in San Juan Unit 4 and the 134 MW of PVNGS Unit 3 are unsuitable

14 replacement generation. And, if PNM is unable to timely deploy suitable

15 replacement power, it puts the public interest in abandoning SJGS Units 2 and 3

in question. The process of planning, permitting, procuring and construction of 16

17 generation resources on the scale necessary to replace the retired San Juan

capacity takes significant time. Therefore, it is important that this case stays on 18

19 the current schedule so that a timely determination can be made on PNM's

application. 20

33



1 VIIL CONCLUSION

2 Q. DO YOU HAVE ANY CLOSING OBSERVATIONS WITH RESPECT TO

3 THE RESOLUTION AND THE REMAINERS' TERM SHEET AND YOUR

4 SUMMARY DISCUSSION OF THEIR TERMS?

I want to reiterate that the Resolution and the Remainers' Term Sheet are the 5 A.

product of lengthy negotiations among nine participants, each with its own 6

individual interests and objectives, over some very complicated issues. The terms 7

of the San Juan ownership restructuring have to be considered in the context that 8

the restructuring is indispensible to implementation of the Revised SIP. The 9

Revised SIP provides the lowest cost alternative for PNM and its customers for 10

compliance with the visibility protection requirements under the federal Clean Air 1 1

12 Act.

13

DOES THIS CONCLUDE YOUR JULY 15 SUPPLEMENTAL DIRECT 14 Q.

TESTIMONY? 15

Yes, it does. 16 A.

17

18 #518383

34

PNM EXHIBIT CMO-1 (July 15 Supplemental)

Consisting of 25 Pages

PNH tldabft CMO l (July 13 6uppJeiiefll«J|

RESOLUTION OF SAN JUAN GENERATING STATION COORDINATION COMMITTEE REGARDING SAN JUAN PROJECT

RESTRUCTURING

WHEREAS, the Participants are co-owners of the San Juan Project ("Project"). The Project is a four-unit, coal-fired electric generation plant located in San Juan County, near Farmmgton, New Mexico, also known as the San Juan Generating Station ("SJGS"). The Participants' respective rights and obligations in regard to the Project are set out in the Amended and Restated San Juan Project Participation Agreement, dated March 23, 2006 ("SJPPA") and in certain other Project-related agreements; and

WHEREAS, as specified in Sections 6.2.1, 6.2.2 and 6.2.3 of the SJPPA, SJGS Unit 1 and Unit 2 are owned by PNM (50%) and TEP (50%); Unit 3 is owned by PNM (50%), SCPPA (41.8%) and Tri-State (8.2%); and Unit 4 is owned by PNM (38.457%), M-S-R (28.8%), Farmington (8.475%), Los Alamos (7.2%), Anaheim (10.04%) and UAMPS (7.028%). Equipment and facilities associated with more than one Unit are owned in other ownership percentages, as specified in Sections 6.2.4, 6.2.5 and 6.2.6 of the SJPPA. As provided in the SJPPA, such ownership interests are undivided interests; and

WHEREAS, on February 15, 2013, PNM, the New Mexico Environment Department and the federal Environmental Protection Agency ("EPA") entered into a Term Sheet reflecting the terms of a non-binding "tentative agreement" for certain actions intended to address pollution control requirements for the SJGS under the federal Clean Air Act's requirements for regional haze and interstate transport for visibility. The Term Sheet, if implemented, will result in the retirement of Unit 2 and Unit 3 by December 31, 2017, and the installation of selective non-catalytic reduction ("SNCR") technology on Unit 1 and Unit 4 by the later of January 31, 2016 or fifteen (15) months after EPA approval of a revised State Implementation Plan ("Revised SIP"); and

WHEREAS, the California legislature has enacted statutes, and the California Energy Commission has promulgated implementing regulations, which may prevent the California Participants (SCPPA, M-S-R and Anaheim) from agreeing to enter into certain life extension projects for coal-fired power plants, including the SJGS; and

WHEREAS, as the result of, among other things, the developments described above, the Participants desire to enter into arrangements with respect to the restructuring of their respective rights and obligations in the Project. In particular, several of the Participants desire to divest or terminate their ownership of the Project while other Participants are willing to acquire additional ownership interests in portions of the Project; and

WHEREAS, the Participants desire, by this Resolution, to set out certain non-binding principles regarding the restructuring of their respective Project ownership rights and cost responsibilities, including a schedule for final resolution of such restructuring arrangements.

NOW, THEREFORE, be it resolved that the Participants agree in principle to this non-binding Resolution:

i

Exit Date and Ownership Transfers:

The Exiting Participants ("Exiting Participants" refers to Tri-State Generation and Transmission Association, Inc. ("Tri-State"), M-S-R Public Power Agency ("M-S-R"), Southern California Public Power

a.

Authority ("SCPPA"), and City of Anaheim, California ("Anaheim")) will exit active involvement in the operation of SJGS on or about December 31, 2017 ("Exit Date") by transferring their Unit 3 and 4 ownership interests to the Remaining Participants.

The Remaining Participants ("Remainmg Participants" refers to Public Service Company of New Mexico ("PNM"), Tucson Electric Power Company ("TEP"), The City of Fannington, New Mexico ("Farmington"), The Incorporated County of Los Alamos, New Mexico ("Los Alamos"), and Utah Associated Municipal Power Systems ("UAMPS")) will acquire all of Exiting Participants' ownership interests in Units 3 and 4 on the Exit Date. For the sake of clarification, PNM and Farmington will acquire the Participation Shares in SJGS Unit 4 currently owned by M-S-R and Anaheim equivalent to 132 MW in the case of PNM and 65 MW in the case of Farmington; and PNM will also acquire the Participation Shares in Unit 3 currently owned by SCPPA and Tri-State. TEP, Los Alamos and UAMPS will not be acquiring any ownership of Unit 3 or any additional ownership of Unit 4; and Farmington will not be acquiring any ownership of Unit 3.

b.

All Participants will jointly waive rights-of-first-refusal and grant requisite consents under the SJPPA to allow these transfers to occur on the Exit Date.

c.

Restructuring Fee: 2.

The Exiting Participants will pay to the Remaining Participants a restructuring fee of $8.8 million ("Restructuring Fee") in consideration of costs to restructure the ownership interests in the San Juan Project. The Restructuring Fee will be paid by the Exiting Participants in the following percentages: M-S-R - 32.22%; Anaheim - 11.48%; SCPPA - 47.08%; and Tri-State - 9.22%. The Restructuring Fee will be allocated to the Remaining Participants in the following percentages: PNM - 0%; TEP -0%; Farmington - 55.6%; LAC - 22.2%; and UAMPS - 22.2%.

cL

The Restructuring Fee will be netted against the total sum of Common Participation Shares of Shared Inventory as set forth in Section 5 of this Resolution.

b.

2

Legacy Liabilities: 3.

Coal Mine Reclamation: a.

The SJPPA and/or the Mine Reclamation and Trust Funds Agreement among the San Juan Project Participants dated June 1, 2012 ('Trust Funds Agreement") will be modified to address the following:

The Exiting Participants' obligations for Reclamation Costs (as defined in the Trust Funds Agreement) will be limited to the SJCC Site Area (as defined in the Underground Coal Sales Agreement ("UG-CSA"), and no other mining locations. The Exiting Participants' obligations for Reclamation Costs are limited to reclamation obligations for mining or related activities that have occurred through the Exit Date and not thereafter ("Pre-Exit Reclamation Obligations");

The Trust Funds Agreement will be amended to reflect the division between Pre-Exit Reclamation Obligations and all other reclamation or other obligations that will be incurred by Remaining Participants as a result of mining and other activities after the Exit Date ("Post-Exit Reclamation Obligations"). The Trust Funds Agreement amendments will also include items listed in Exhibit "A" to this Resolution.

ii.

It is the intent of all the Participants that Exiting Participants will have no obligation for costs associated with mining and related activities or ash disposal post-Exit Date at the SJCC Site Area as a result of agreements entered into between Remaining Participants and third parties. As Exiting Participants will not have approval rights over those agreements, so as to ensure that such post-Exit Date agreements do not unfairly shift costs to Pre-Exit Reclamation Obligations, Exiting Participants will have appropriate audit rights and an established method for dispute resolution for any commercially unreasonable charges for Pre-Exit Reclamation Obligations as a result of fuel or ash disposal agreements between Remaining Participants and third parties. Exiting Participants will be represented on the Reclamation Oversight Committee (as that term is now or may be defined in the Trust Funds Agreement) to be established as of the Exit Date under the Trust Funds Agreement and, ihrough that committee, will have voting rights under the Trust Funds Agreement related to Pre-Exit Reclamation Obligations;

iii.

The Remaining Participants will work diligently and in good faith to contract for coal supply and ash disposal services separately from reclamation services.

iv.

Reclamation services shall be 3

appropriately allocated between Pre-Exit and Post-Exit Reclamation Obligations. Any new contracts or amendments to the existing UG-CSA for unbundled reclamation services will be subject to approval by the Reclamation Oversight Committee. If costs attributable to Pre-Exit Reclamation Obligations continue to be billed and embedded in post-Exit Date invoices from SJCC or another San Juan Mine fuel supplier, Remaining Participants will develop a commercially reasonable method for the timely, full, and accurate disembedding and appropriate allocation of costs for ash or waste disposal, pre and post-Exit Date reclamation services, and post-Exit Date mining and related costs at the SJCC Site Area. Such allocations and disembedding will be subject to reasonable rights of verification and audit by the Exiting Participants for so long as costs are billed to Exiting Participants for Pre-Exit Reclamation Obligations, subject to the limitations, if any, of the existing UG-CSA. A method for dispute resolution regarding such allocations will also be included in the Trust Funds Agreement;

All Participants will use their trust funds only for the purpose for which intended in the Trust Funds Agreement, i.e., to fund SJCC Site Area reclamation activities;

y

Other modifications to the Trust Funds Agreement will be necessary given the restructuring of the ownership interests in the San Juan Project; and

vi.

All Participants will use commercially reasonable efforts to limit Pre-Exit Reclamation Obligations.

vii.

Environmental Liabilities: b.

In furtherance of their common interest with respect to environmental liabilities, the Participants will engage an independent, third-party environmental consultant ("Consultant") to complete a confidential baseline multi-media environmental self-evaluation ("Baseline Environmental Study" or "BES") of SJGS and its operations. The purpose of the BES is to establish a baseline of environmental conditions in anticipation of the Exiting Participants' exit from active involvement in the operation of SJGS on the Exit Date. Ft is the intent of the Participants that the Consultant's work and communications be protected by the attorney-client privilege and/or the work product doctrine to the maximum extent permitted by law. The Consultant will be selected by agreement of all Participants and will be engaged and directed by counsel jointly representing the Participants. The Consultant's work and communications, including but not limited to the Draft Report and Final Report and Further Audit addressed

4

below, will be treated as privileged and confidential, and will be included as Defense Materials pursuant to the Joint Defense and Confidentiality Agreement effective December 9, 2009 and the Addendum to Joint Defense and Confidentiality Agreement effective January 31, 2010.

The scope of work for the BES will be developed by agreement of all Participants and will include, but not be limited to: (A) review and analysis of data, documents and information, such as monitoring data for air emissions, surface and groundwater discharges, to identify potential or actual emissions, spills or leaks related to SJGS and (B) interviews of key past or present Operating Agent personnel (as identified and agreed upon by all Participants) with knowledge of past and present SJGS operations. The BES may identify environmental issues that require further assessment or investigation. To the extent possible (based upon regulatory requirements) and by agreement of all the Participants, additional environmental assessments such as, without limitation, document review, studies, data collection, sampling, analysis of soil, surface water, and groundwater sampling and similar activities may be conducted with a desired completion date of December 31, 2014. Issues of concern that are already identified and are the current subject of monitoring, investigative and remediation activities in accordance with regulatory, permitting or other legal requirements will be excluded from further assessment in the BES; provided, however, that such issues will be identified and listed in the Final Report and on a schedule attached to the Restructuring Agreement.

ii.

The Consultant will prepare and provide a draft confidential baseline environmental report ("Draft Report") setting forth the Consultant's findings and recommendations, which Draft Report will be distributed to all the Participants for review and comment.

After receiving and considering the Participants' comments, the Consultant will prepare a confidential final baseline environmental report for SJGS and its operations ("Final Report") setting forth the Consultant's findings and recommendations, if any, to address any environmental issues in accordance with any applicable environmental laws. The Final Report will be directed to all the Participants and each and all of the Participants may rely on the Final Report.

iv.

If the Final Report identifies any environmental issues at SJGS that require remediation or corrective action or similar activities that are not being currently addressed then, as part of Operating Work,

y

5

the Operating Agent will to the extent possible (given the constraints and/or schedule that may be imposed by the regulatory agency overseeing the remediation) on or before 30 days prior to the Exit Date remediate, or commence the remediation of, any and ali environmental issues identified in the Final Report, with responsibility for the cost of such remediation, corrective action, or similar activities to be bome by Participants in accordance with their respective Participation Shares as set forth in the SJPPA, subject to the right of each Participant to seek contribution from or otherwise make claims against other potentially responsible parties. For purposes of this section 3(b) "respective Participation Shares" means consistent with the ownership in the plant property that gave rise to the environmental liability.

Prior to the Exit Date, the Operating Agent will complete an additional environmental audit of SJGS (the "Further Audit") to identify environmental issues, if any, that may have arisen subsequent to the completion of the Final Report. The scope of work for the Further Audit will be developed by agreement of all the Participants. The Further Audit will be treated as confidential and will be directed to all the Participants (all of whom may rely on the Further Audit). The Further Audit and any remediation undertaken pursuant to the Further Audit will be deemed Operating Work, the cost responsibilities for which shall be borne by all Participants in accordance with their respective Participation Shares as set forth in the SJPPA, subject to the right of each Participant to seek contribution from or otherwise make claims against other potentially responsible parties. The Final Report may be supplemented to the extent updates are required by the Further Audit.

vi.

The Participants understand that the BES, the Final Report and the Further Audit may not discover or report all environmental issues that existed prior to the date thereof. Without agreeing, admitting or conceding that any of them bears any contractual or legal responsibility for any undiscovered environmental issues that existed prior to the Exit Date, the Participants agree that if environmentai issues are discovered after the date of the Final Report or the Further Audit (including after the Exit Date), and (A) if in the opinion of an independent, third-party environmental consultant to be agreed upon by all the Participants, such environmental issues result from operations and activities that occurred at SJGS prior to the Exit Date, and (B) if such environmental issues are not wholly or in part the result of Willful Action of the Operating Agent, then all Participants are responsible for the costs of any remedial or corrective activities to address Pre-

vii.

6

Exit Date environmental issues in accordance with their respective Participation Shares as set forth in the SJPPA, subject to the right of each Participant to seek contribution from or otherwise make claims against other potentially responsible parties.

All Participants acknowledge that there may be exposure to claims for environmental liabilities for future changes in laws and regulations. To the extent such claims relate to operations and activities that occurred at SJGS prior to the Exit Date, without agreeing, admitting or conceding that any of them bears any contractual or legal responsibility for any such claims, the Participants agree: (A) if in the opinion of an independent, third-party environmental consultant to be agreed upon by all the Participants, such claims result in whole or in part from operations and activities that occurred at SJGS prior to the Exit Date, and (B) if such claims are not wholly or in part the result of Willful Action of the Operating Agent, then all Participants are responsible for such claims and the costs of any resulting remedial or corrective activities to the extent resulting from Pre-Exit Date SJGS operations and activities in accordance with their respective Participation Shares as set forth in the SJPPA, subject to the right of each Participant to agree to, dispute or seek contribution from or otherwise make claims against other potentially responsible parties with respect to any such claims should they arise in the future.

viii.

The Exiting Participants will have no responsibility for any environmental liabilities (arising under any environmental laws, whether federal, state or local), including, without limitation, remedial or response costs, fines or penalties to the extent arising or resulting from (A) the operation of SJGS on or after the Exit Date; (B) the operation of any gas-fired generating facility located or to be located at or adjacent to the SJGS plant site; or (C) any other operations at or adjacent to the SJGS plant site engaged in by PNM, the Remaining Participants or any third parties on or after the Exit Date; provided, that nothing herein shall operate to relieve any Participant from decommissioning costs, if any, associated with SJGS for which a Participant would otherwise be responsible nor establish any decommissioning liability where one does not already exist. For purposes of this Resolution, "SJGS plant site" refers to what are identified as Parcels A, B, D, E and F in Exhibit I to the SJPPA.

ix.

Decommissioning: As soon as practicable after adoption of this Resolution, the Participants will continue to develop a method for funding decommissioning of SJGS.

c.

7

Capita] Cost items and Voting:

The Remaining Participants will assume all responsibility for the costs of Capital Improvements invoiced after July 1, 2014 (the "Effective Date") and Exiting Participants shall have no ownership interest in such Capital Improvements. Responsibility for Capital Costs invoiced prior to the Effective Date shall be based on existing ownership of plant or common

a.

property.

The Unit 3 Exiting Participants (SCPPA, Tri-State) will have no responsibility after the Effective Date for costs of the SNCR/balanced draft project to be placed on Units 1 and 4.

b.

The Participants desire to implement the provisions of this Section 4 and Section 5, Fuel Supply, as soon as possible to allocate the now ongoing costs of the construction and installation of the "BART Alternative" under the Revised SIP and other ongoing fuel, capital and restructuring costs, and PNM will file an agreement with FERC seeking such approval (the "Fuel and Capital Funding Agreement").

c.

The Exiting Participants will pay a Demand Charge for the use of new Capital Improvements implemented on Unit 4, facilities common to Units 3 and 4, and facilities common to all units, and will continue to pay all operation and maintenance charges associated with their Participation Shares through the Exit Date.

d.

The Demand Charge will be $6,200,000 ("Demand Charge") and will be paid equally over the forty-two (42) month period between the Effective Date and the Exit Date. The Demand Charge will be paid regardless of the output of Unit 3 or 4.

The Exiting Participants shall pay the Demand Charge as follows: ii.

71.65% 25.00% 2.80% 0.55%

(A) M-S-R (B) Anaheim (C) SCPPA (D) Tri-State

The Remaining Participants shall be paid the Demand Charge as follows:

iii.

(A) PNM (B) TF.P (C) Farmington (D) LAC (E) UAMPS

0.00% 0.00% 55.6% 22.2% 22.2%

8

Voting for Capital Budget Items for Unit 4, for facilities common to Units 3 and 4 and for facilities common to all Units, shall be in accordance with Section 6.2 of the Fuel and Capital Funding Agreement.

Fuel Supply: 5.

For purposes of this Resolution and the Restructuring Agreement, the Participants will agree that there are the following types of inventory available for use at SJGS:

a.

Coal tons stockpiled on San Juan Coal Company's ("SJCC") property are "SJCC Inventory";

Coal tons stockpiled on SJGS property, excluding tons in the stack-out piles and in process at the plant, as of the Agreed Date (defined below) are "Force Majeure Inventory";

ii.

iii. Coal tons in stack-out piles and in process at the plant as of the Agreed Date are "Live Inventory";

iv, SJCC Inventory, Force Majeure Inventory, and Live Inventory, collectively defined as "Shared Inventory," are those tons that exist as of the Agreed Date that will be allocated by Common Participation Share under the SJPPA (regardless of the status of the current Inventory Allocation Agreement) and relinquished by the Exiting Participants to PNM;

Coal tons stockpiled on SJGS property after the Agreed Date as a result of Exiting Participants' inability to bum their remaining 60% share of the allocated share of the take or pay base tons delivered by SJCC due to unit outages are "Exiting Participants' New Force Majeure Tons"; and

y

vi. Coal tons stockpiled on SJGS property after the Agreed Date and prior to the Exit Date that are excess tons delivered by SJCC and not purchased by Exiting Participants are "PNM Transition Inventory". PNM Transition Inventory, the Exiting Participants' New Force Majeure Tons and the Force Majeure Inventory will physically be commingled.

Relinquishment of Inventory: Exiting Participants will relinquish their Common Participation Shares of Shared Inventory that exists as of

b.

January 1, 2015 ("Agreed Date"), at agreed upon values of: (i) S22.69/ton for Force-Majeure Inventory and Live Inventory and $6,573 million for SJCC Inventory, the total sum of which will be allocated pursuant to

9

Section 5 of the Fuel and Capital Funding Agreement and netted against the cash portion of the Restructuring Fee. In structuring these inventory arrangements the Participants do not intend to create new royalty or tax obligations by any Participant.

From the Agreed Date through the Exit Date, Exiting Participants will transfer coal from PNM at the Base Price (as defined in Section 23.4.2.1 of the SiPPA), such Base Price to be trued up annually (credits or debits to be allocated pro rata between base and incremental dollars) and will be relieved of 40% of Exiting Participants' take or pay base obligations under the SJPPA;

ii. The Base Price will also contain a true-up to reflect a per ton credit dollar-for-dollar as provided to PNM under the Refined Coal Agreements once the Refined Coal Project becomes operational;

Prior to the Exit Date Remaining Participants will nominate to SJCC or its replacement supplier a maximum delivery of 6.8 million tons annually. Additional tons may be nominated by Remaining Participants if the fuel supplier's invoiced cost to deliver the additional tons does not increase the costs assigned to the nomination of 6.8 million tons;

iv. Exiting Participants will retain voting rights to approve IIA Pricing prior to the Exit Date; and

Exiting Participants will agree to dispatch their respective shares of the units subject to unit availability at a minimum of 85% of net availability, mathematically expressed as Minimum Annual Generation = Net Effective Generating Capacity multiplied by Participation Share multiplied by 0.85 multiplied by (Unit 3 Equivalent Availability Factor ("EAF") for SCPPA and Tri-State or the Unit 4 EAF for M-S-R and Anaheim) multiplied by 8760 hours.

y

All Participants will support invoking the Force Majeure provisions under the UG-CSA; and PNM/TEP will pursue through timely arbitration, if necessary. Force Majeure claims if either Unit 3 or 4 has catastrophic or extended outages. PNM will be obligated to purchase New Force Majeure Tons, if any, from Exiting Participants on the Exit Date at a price of $37.50/ton (plus escalation).

c.

New Fuel Supply: The Remauting ParticipanLs are responsible for all costs of procuring and developing a post-2017 fuel supply for SJGS and for all associated administrative/consultant costs over the amount of $1.2 million already incurred.

d.

10

Except as specified in this provision the following practices will remain unchanged:

Utility Payment Scream ("UPS"): Exiting Participants will continue to pay UPS through the Exit Date at Common Participation Share;

Allocation of any other fuel-related cost chargeable to FERC Account 501 through the Exit Date, including but not limited to, limestone, fuel oil, CCB disposal, fuel handling, or start-up or auxiliary power and energy, will not be modified by the terms of this provision; and

Allocation by Common Participation Shares of final reclamation costs billed by SJCC through the Exit Date to the extent that such costs are disembedded from fuel costs in the SJCC Invoices. PNM will work diligently to achieve this as accurately as possible.

ii.

iii.

Mine Force Majeure: In the event of a mine disruption resulting in SJCC being unable or unwilling to meet the delivery requirements in Section 4.2A of the UG-CSA, each Participant agrees to take all commercially reasonable actions to mitigate any related fuel and inventory cost impacts which may include complete curtailments of Unit generation and waiving of obligations to meet Minimum Net Generation requirements under Section 14.3 of the SJPPA. All Participants agree to negotiate in good faith to determine whether or how any remaining fuel and related costs are fairly allocated. If after a commercially reasonable period of negotiations, not to exceed 60-days, the Participants are unable to agree, the provisions of Section S.b.i through S.b.v of this Resolution will be amended as follows for the period of the disruption:

Shared Inventory and any other SJCC Inventory existing at the time of the disruption will be allocated based on Common Participation Share in a manner substantially similar to the terms of the 2011 Coal Source Allocations Agreement and coal pricing reverts to the provisions of the SJPPA except for the specific pricing provisions below;

To the extent thai Exiting Participants have relinquished rights to Shared Inventory pursuant to Section 5.b, such rights to inventory will be reinstated;

ii.

If Exiting Participants require delivery of SJCC Inventory, in addition to any applicable charges from SJCC associated with such deliveries they will pay to PNM $16.88/ton for their allocated share of the first 1.442 million tons delivered, and $i 1.25/ton for

hi.

U

any tons required above that;

If Exiting Participants require delivery of Force Majeure iv. Inventory, they will pay PNM $22.69/ton; and

Exiting Participants' New Force Majeure Tons may be used by Exiting Participants without payment to PNM.

V

Termination or Assignment of UG-CSA: In the event the UG-CSA is terminated or assigned to a third party prior to the Exit Date, the Participants will negotiate in good faith to amend this Section 5 to preserve the balance of benefits and burdens described above.

g

6. Indemnification Arrangements:

In conjunction with the resolution of decommissioning issues, the Participants will continue to develop appropriate liability, indemnity and defense provisions (pertaining to environmental and general liability) to allocate cost responsibilities between the Exiting Participants and the Remaining Participants, with the guiding principle that Exiting Participants are not financially responsible for events taking place at SJGS after the Exit Date and that all Participants are financially responsible for events taking place at SJGS before the Exit Date. These provisions will also address PNM's indemnification responsibilities with regard to any future natural gas plant at or adjacent to the SJGS plant site.

Regulatory Approvals:

All binding agreements reached among the Participants are subject to requisite regulatory filings and approvals from NMPRC, FERC and RUS.

a.

All Participants will promptly pursue such filings and approvals, and Participants will either support each other's filings or not oppose any such filings and approvals.

b.

Approval by the EPA of the Revised SIP in substantially the form submitted by the State of New Mexico in October 2013 and subsequent amendments, if any, is a condition precedent to the Participants' obligations under this Resolution or the Restructuring Agreement.

c.

8- Separate Agreements Among Participants:

If necessary, in connection with this Resolution, the Exiting Participants may enter into an appropriate term sheet or other agreement among themselves addressing each Exiting Participant's responsibility for the Restructuring Fee, and any other relevant matters.

a.

If necessary, m connection with this Resolution, the Remaining b. 12

Participants will enter into an appropriate term sheet or other agreement among themselves addressing, among other things, each Remaining Participant's share of the Restructuring Fee received from the Exiting Participants and commitments to take and pay for costs associated with Units 3 and 4,

g Non-Binding Resolution:

The terms of this Resolution are non-binding, but this Resolution is being adopted to further and support the principles set out herein, said principles to be reflected in definitive agreements to be drafted as set forth in Sections 11(a) and (b) hereof and presented to and subject to the approval of each Participant's board or other decision-making body (collectively "Board" or "Boards") prior to executing any binding agreements, and final binding agreements are further subject to requisite regulatory filings and approvals from the EPA, NMPRC, FERC and RUS, if applicable.

The negotiations leading to the development of this Resolution are, Subject to these obligations concerning

confidentiality and representation, this Resolution and its individual terms may be disclosed by any Participant in connection with any governmental or regulatory filing or reporting requirement (including with the EPA, NMPRC, FERC, SEC and RUS) or other legally binding disclosure obligation. For the avoidance of doubt, even though this Resolution and its individual terms may be disclosed as agreed herein, no information regarding the negotiations and development of this Resolution may be disclosed.

Disclosure: and will continue to be, confidential.

10.

11. Next Steps:

The Participants will draft a definitive agreement or agreements based on the principles contained in this Resolution (collectively, "Restructuring Agreement"); it is understood, however, that each Participant must obtain appropriate approvals from its Board prior to executing any binding agreements.

The Participants will proceed with prompt drafting of necessary definitive agreements to reflect and incorporate these principles, including amendments to the SJPPA to reflect the Project restructuring arrangement and amendments to the Trust Funds Agreement.

b.

It is recognized that numerous project-related agreements to which one or more Participants are parties will need to be reviewed and evaluated for amendment or termination in light of the agreed Project restructuring.

c.

13

d. Participants will incorporate in the Restracturing Agreement appropriate alternative dispute resolution provisions and appropriate definitions of terms.

It is understood that prior to executing the Restructuring Agreement, the Remaining Participants will need to have greater certainty in regard to the economic cost and availability of fuel for the SJGS in the period after January 1, 2018.

e.

(Signature pages follow]

14

APPROVAL OF RESOLUTION

PUBLIC SERVICE COMPANY OF NEW MEXICO

/ Ct/z-"? /{A— By: Date:

Chris Olson Its: Vice President, Generation

TUCSON ELECTRIC POWER COMPANY

By: Date: Mark Mansfield

Its: Vice President, Generation

CITY OF FARMINGTON, NEW MEXICO

By: Date: Michael R. Sims

Its: Electric Utility Director

M-S-R PUBLIC POWER AGENCY

By: Date: Martin Hopper

Its: General Manager

INCORPORATED COUNTY OF LOS ALAMOS, NEW MEXICO

By: Date: John Arrowsmith

Its: Utilities Manager

is



Date: By: Chris Olson



Date: By: Mark Mansfield



Date: By: Michael R. Sims



Date: By: Martin Hopper



Date: By: „ John Ar rowsmi th

I t s : U t i l i t i e s Manager

is



By: Date: Chris Olson



By: Date : Mark Mansfield



/ f; /? • I ^ ' ' h i ^ ^ V | . | f n •

Michael R. Sims Its: Elcctific Utility Director

Date : By:


By: Date : Martin Hopper



By: Da te : John Ar rowsmi th

I t s : U t i l i t i e s Manager

is















Dale: By: John Arrowsmith


15




Us: Vice President, Generation











Date: X By: Z: Jobs Arrowsmith


15

SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY

I'p By. Date: Steven L. Homer

Its: Director, Project Administration

CITY OF ANAHEIM, CALIFORNIA

By: Date: Graham Bowcn

Its: Integrated Resources Manager

UTAH ASSOCIATED MUNICIPAL POWER SYSTEMS

By: Date: Douglas O. Hunter


TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

By: Date: Don Russell

Its: Plant Manager, Escalante

16


By: Date: Steven L. Homer

Its. Director, Project Administration

CITY OF HEIM, CALIFORNIA

By: Date: Graham Bowen



By: Date: Douglas 0, Hunter



Date: By-Don Russell


16


By: Date: Steven L. Homer

Its: Director, Project Administration

CITY OF ANAHEIM, CALIFORNIA

Date: By: Graham Bowen



"2 1! 2-cD|t-( Jti Date: By: Douglas Oi Hunter

Its: General {Njanager


Date: By: Don Russell


16

SOI THHRN CALIFORNIA PUBLIC POWER AUTHORITY

BN : Dale ; S teven L . Homer

l i s : D i rec to r . P ro jec t Admims t ra l ion

CI FY OF ANAHEIM. CALIFORNIA

Date : B>: . . . G raham Bowen

I t s : In t eg ra ted Resources Manager


Dale: Douglas O . Hunte r

I t s : Genera l Manager

TRI-S ' l ATI : GENERA 1 ION AND TRANSMISSION ASSOC1A HON. INC.

\ -vn i ( 4~ i-':'*" J Date :

Don Russe l l i t s : P lan t Manager . Esca lan le

16

Exhibit A to Resolution Revisions to the

Mine Reclamation and Trust Funds Agreement

Issue Impacted Sections

Reclamation Costs to be defined as comprising Pre-YE2017 Disturbance and Post-YE2017 Disturbance. Disturbance being SJCC decommissioning or reclamation liability associated with mine pits, mining activity, facilities, roads, ponds, or other item causing Utility Reimbursement Obligation. Describe the assignment of costs to appropriate cost centers for reclamation, waste disposal, and coal production.

2.0

New ID Funding Curve for Exiters 3.3; 6.3.3; Exhibit 4

Costs of the Trust Funds Operating Agent's Work and A&G to be allocated pro rata by the total Reclamation Costs to be paid by each Participant in the Annual Budget. However, for long term projects (such as bidding out a new service provider) such costs to be allocated by the sum of remaining real Reclamation Costs.

3.4; 8.3.9; 8.6; 8.7

Redefine Shares such that Reclamation Costs responsibility will be determined by Pre- and Post-2017 Disturbance.

3.5

Costs of a Reclamation Costs Review to be paid for pro rata by the real sum of each Participant's remaining Reclamation Costs. Detail provided by Pre- and Post-2017 Disturbance.

5.4

Exiters to be released from stepping up to the obligations of defaulting Participants after 2017.

6.4.2; 6.4.6; 9.3; 11.1; 11.3

Voting in Investment Committee by Pre-2017 Disturbance Shares 6.5

Reclamation Oversight Committee to be initiated 1/1/2018. 7.1.2

Voting in Reclamation Oversight Committee by Pre-2017 Disturbance Shares

7.4

Commitment to work diligently to disembed Reclamation Costs from other services and between Pre- and Post-2017 Disturbance Costs

8.3.6

Commitment to work diligently to disembed Work and A&G Expenses 8.3.7

17

Impacted Sections Issue

from other services

Allow Exiters may withdraw funds from their Trusts to pay for their Reclamation Costs invoices after 12/31/2017.

8.5; Exhibit 4(i)

Participant Representatives will be permitted one each from the Non-Utility Exiters and Remainers.

9.1

For Exiters, the Contract Expiration Date shall be Fixed as 12/31/2017. Exhibit 4

For Exiters, the Funding Curves are to be developed using their share of Pre-YE2017 Disturbance.

Exhibit 4

Redefine Scope and Membership of Reclamation Oversight Committee

18


Consisting of 11 Pages

PNM Exfrbit CMO 2 (Jidy IS Supplemeatal)

EXECUTION VERSION

SAN JUAN GENERATING STATION RESTRUCTURING NON-BINDING TERM SHEET OF REMAINING PARTICIPANTS

All capitalized terms not defined in this Remaining Participant Non-Binding Term Sheet ("Term Sheet") have the meanings as defined in the Amended and Restated San Juan Project Participation Agreement dated March 23, 2006 ("SJPPA"). This Term Sheet is being entered into by Public Service Company of New Mexico ("PNM"), Tucson Electric Power Company ("TEP"), The City of Farmington, New Mexico ("Farmington"), The Incorporated County of Los Alamos, New Mexico ("LAC") and Utah Associated Municipal Power Systems ("UAMPS" and together with PNM, TEP, Farmington and LAC, the "Remaining Participants"). The purpose of this Term Sheet is to address matters specific to the Remaining Participants arising out of the transfers of ownership interests, the sharing of restructuring fees and other relevant matters to be addressed in a San Juan Coordination Committee Resolution regarding restructuring dated June 26, 2014 ("Resolution") and in a Restructuring Agreement among the Remaining Participants and Tri-State Generation and Transmission Association, Inc., M-S-R Public Power Agency, Southern California Public Power Authority and City of Anaheim, California (collectively, the "Exiting Participants"). The Remaining Participants and the Exiting Participants are sometimes referred to herein as the "Participants".

Transfers of Ownership Interests: On or about December 31, 2017 (the "Exit Date"), PNM (132 MW) and Farmington (65 MW) will acquire the 197 MW in San Juan Generating Station ("SJGS") Unit 4 currently owned by M-S-R and Anaheim. On the Exit Date, PNM also will also acquire the 248 MW in Unit 3 currently owned by SCPPA and Tri-State. As a result of these acquisitions, as of the Exit Date the Remaining Participants will hold the following ownership interests in Units 3 and 4 and in plant common equipment and facilities:

Unit 3&4 Plant Unit 4 Unit 3 Common Common

PNM 100.000% 0.000% 0.000% 0.000% 0.000% 0.000%

64.482% 0.000%

21.290% 7.200% 7.028% 0.000%

64.482% 0.000%

21.290% 7.200% 7.028% 0.000%

58.671% 20.068% 12.749% 4.309% 4.203% 0.000%

TEP Farmington LAC UAMPS Exiters Total 100.000% 100.000%, 100.000% 100.000%

Restructuring Fee and Demand Charge Payment: The $8.8 million restructuring fee payment by the Exiting Participants provided for in Section 2 of the Resolution, in consideration of costs to restructure San Juan Project ownership interests, and (he demand charge payment of $6.2 million to be paid by the Exiting Participants for the installation of new Capital Improvements, will be allocated as follows:

PNM 0.0% 0.0% TEP

EXECUTION VERSION

Farmington 55.6% 22.2% LAC

UAMPS 22.2% Exiters 0.0%

100.0% Total

The manner of payment and netting associated with the Restructuring Fee shall be as provided in Section 2 of the Resolution.

3. Plant Common O&M and Capital Improvement Allocations:

For the period starting with the Exit Date and ending on July 1, 2022, operation and maintenance ("O&M") expenses for facilities and equipment common to all units will be allocated as shown below.

a.

PNM 61.311% 19.800% 12.749% 3.123% 3.017% 0.000%

TEP Farmington LAC UAMPS Exiters

Total 100.000%

PNM will pay $6.5 million to Farmington as net present value of a reduced share of plant common O&M. Under specific terms to be defined in a separate agreement between Farmington and PNM, Farmington will receive up to $6.5 million in credits against future invoices for Capital Improvements. The credit will be applied to Farmington's 12.815% increase in Unit 4 cost responsibilities that result from Farmington's acquisition of an additional 65 MW ownership interest in Unit 4. The credit will be applied to invoices issued after the Effective Date of the Fuel and Capital Funding Agreement. Any credits remaining after January 1, 2015, will be paid in cash on the date of the payments described in Section 2 of this Term Sheet and will be subject to refund as provided in the separate agreement. PNM will be solely responsible for payment of this credit, and no other Remaining Participant will be responsible for payment of this credit.

b.

Fuel Supply: As provided for in Section 5 of the Resolution, PNM will buy the Exiting Participants' 27% share of fuel inventor)' on an agreed date (assumed to be approximately January 1, 2015) and will sell fuel to the Exiting Participants. None of the other Remaining Participants will purchase any of the Exiting Participants' fuel inventors' nor have any obligations under Section 5 of the Resolution, except as expressly stated therein.

4

Consents: The Remaining Participants: (a) acknowledge that PNM has a right-of-first-refusal ("ROFR") with respect to the additional ownership interests it and Farmington

2

EXECUTION VERSION

will acquire in Units 3 and 4; (b) agree to waive any ROFR they have, if any, with respect to the additional ownership interests PNM will acquire in Unit 3 and that PNM and Farmington will acquire in Unit 4; and (c) consent, pursuant to Section 10.3 of the SJPPA, to transfers of ownership interests in Unit 3 and Unit 4 from Exiting Participants to PNM and Farmington as provided for in the Resolution.

6. Voting Rights: Voting percentage requirements under the SJPPA will be changed effective January 1, 2018 to require unanimous approval for individual capital projects with a cost greater than $50 million ("Large Capital Improvement"). Prior to presenting a capital budget item ("CBI") for a Large Capital Improvement, the Operating Agent will agree to provide timely financial analysis to the Remaining Participants justifying the proposed capital expenditure. In the event the Remaining Participants do not unanimously approve the Large Capital Improvement:

The Remaining Participant(s) that voted against the Large Capital Improvement shall work in good faith with the Remaining Participants that voted in favor of the Large Capital Improvement, in order to assure the continued successful and proper operation and maintenance of the San Juan Project, including commercially reasonable efforts by the Remaining Participant(s) that voted against the Large Capital Improvement to sell or transfer its/their rights, titles and interests in the San Juan Project to other Remaining Participants or to third parties in a manner consistent with the New Project Agreement. No Remaining Participant shall unreasonably fail to grant any requisite approval to such a sale or transfer by a Remaining Participant that voted against the Large Capital Improvement.

a.

If the Remaining Participants cannot agree on a sale or transfer of their respective rights, titles and interests in the San Juan Project, then the Remaining Participant that voted against the Large Capital Improvement may notify the other Remaining Participants of its intent to exit the San Juan Project. The exiting Remaining Participant shall receive no payments from the other Remaining Participants. Other arrangements regarding the departure of the exiting Remaining Participant shall be negotiated among all of the Remaining Participants.

b.

Upon receiving a notice of intent to exit the San Juan Project, the Remaining Participants that voted in favor of the Large Capital Improvement shall:

c.

Hold a second vote on the CBI to determine if they wish to continue with the Large Capital Improvement.

If the Large Capital Improvement is unanimously approved by the second vote, then the Large Capital Improvement will be made, and SJGS will be owned and operated under appropriate terms negotiated by the Remaining Participants.

I I .

3

EXECUTION VERSION

If the Large Capital Improvement is not unanimously approved by the second vote, then all Remaining Participants (including the Remaining Participant that gave notice of its intent to exit the San Juan Project) shall retain their existing ownership shares in the San Juan Project and the Large Capital Improvement shall not be made.

If one or more of the Remaining Participants abstains from voting on the CBI for any Large Capital Improvement, approval of such CBI shall require the affirmative vote of all of the Remaining Participants that have voted.

d.

Long-Term Fuel Supply: The Remaining Participants have agreed to an allocation of the costs to evaluate long-term fuel supply, subject to true-ups based on a final Restructuring Agreement. The costs to evaluate long-term fuel supply will be shared among the Remaining Participants based on the new plant common shown in Section 3 of this Term Sheet. When a decision is made to pursue a long-term fuel supply, then such costs of implementing the agreed strategy will be shared based on 2018 MW share (see table below).

New Plant Common

2018 MW Share

May 23 Allocation

58.671% 20.068% 12.749%

4.309% 4.203% 0.000%

63.896% 21.736% 5.498% 4.667% 4.203% 0.000%

61.311% 19.800% 12.749%

3.123% 3.017% 0.000%

PNM TEP Farmington LAC UAMPS Exiters

100.000% TotaJ 100.000% 100.000%

Decommissioning: Promptly, but in any event no later than three (3) months after the execution date of the Resolution, the Operating Agent will pursue the process described in Section 40 of the SJPPA to determine the decommissioning liability of each Participant, with any inability to agree upon decommissioning responsibilities to be resolved by arbitration pursuant to Section 37 of the SJPPA.

8.

Liability and Indemnification Issues: The obligations of the Remaining Participants with respect to liability and indemnification shall be consistent with the principles set forth in the Resolution. In addition, the Remaining Participants acknowledge and agree that their obligations under this Section 9 will be several and not joint and that the Remaining Participants will develop appropriate language consistent with this concept for inclusion in the Restructuring Agreement and other appropriate instruments.

10 Non-Binding Agreement; Regulatory Approvals:

This Term Sheet is non-binding; it is executed in an effort to further and support the principles set out herein, said principles to be reflected in definitive

a.

4

EXECUTION VERSION

agreements to be drafted as set forth in Sections 12(a) and (b) hereof and presented to each Remaining Participant's board or other decision-making body (collectively "Board" or "Boards") prior to executing any binding agreements. It is further understood that such binding agreements are subject to requisite regulatory filings and approvals from the regulatory agencies having jurisdiction over relevant aspects of the San Juan Project restructuring, including the Environmental Protection Agency, the New Mexico Public Regulation Commission and the Federal Energy Regulatory Commission.

This Term Sheet, together with the Resolution, fairly represents the principles agreed to by the Remaining Participants relating to the restructuring of the ownership of the San Juan Project.

b.

It is understood that prior to executing the Restructuring Agreement referenced below, the Remaining Participants will need to have greater certainty in regard to the economic cost and availability of fuel for the SJGS in the period after January

c.

1,2018.

Disclosure: The negotiations leading to the development of this Term Sheet are, and will continue to be, confidential. This Term Sheet is subject to any necessary approvals of the Participants' respective Boards. Subject to these obligations concerning confidentiality, this Term Sheet and its individual terms may be disclosed by any Remaining Participant in connection with any governmental or regulatory filing or reporting requirement or other legally binding disclosure obligation. For the avoidance of doubt, even though this Term Sheet and its individual terms may be disclosed as agreed herein, no information regarding the negotiations and development of this Term Sheet may be disclosed.

1 1 .

12. Next Steps:

The Remaining Participants will work with the Exiting Participants to draft a definitive agreement or agreements (collectively, "Restructuring Agreement") based on the principles contained in this Term Sheet and in the Resolution; it is understood, however, that each Remaining Participant must obtain appropriate approvals from its Board prior to executing any binding agreements.

a.

To implement the provisions of this Term Sheet and of the Resolution, the Remaining Participants will enter into timely negotiations among themselves toward the execution of one or more agreements, including further amendments to the SJPPA (collectively, the "New Project Agreement") to reflect the restructuring of the ownership and operation of SJGS after the Exit Date.

b.

It is recognized that numerous project-related agreements to which one or more Remaining Participants are parties will need to be reviewed and evaluated for amendmen! or termination in light of the agreed restructuring.

5

EXECUTION VERSION

Counterparts: This Term Sheet may be executed in counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. This Term Sheet may be signed and delivered by facsimile or electronic means, either of which shall be effective as an original. The Operating Agent shall maintain the original of this Term Sheet and each signature page with an original signature.

13.

The undersigned signatories, being the lead negotiating representatives of the Remaining Participants, concur in the terms of this Term Sheet.

[Signatures appear on the following page.]

6

EXECUTION VERSION

LPANY OF NEW MEXICO PUBLIC s:

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EXECUTION VERSION


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TUCSON ELECTRIC PO OMPANY

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EXECUTION VERSION


By: Date:


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jrf CITY OF FA: INGTON, NEW ME CO

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7

EXECUTION VERSION


By: Dale:


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EXECUTION VERSION


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UTAEhASSOClATED MUNICIPAL POWER SYSTEMS

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7


Consisting of 2 pages

PMM fiAOsil CMO S

(M; 15 $up(^ient^

Chns Ofson Vice Pre'Munt, PHM Gerttifalton Public Service Company of Mew Mexico 2401 Artec Road >NF. til-Jg. A - MS /t.'u Albuquerque, NM 87107 PMM June 26, 2014

Michael R. Sims Electric Utility Director Farmington Electric Utility System City of Farmington 101 Browning Parkway Farmington, NM 87401-7995

Re: San Juan Generating Station ("San Juan") Restructuring Capital Improvement Credit

Dear Mr. Sims:

Public Service Company of New Mexico ("PNM") is providing this letter agreement to the City of Farmington ("Farmington") in connection with the mediated settlement of the restructuring of ownership of San Juan. The settlement is intended to accommodate the construction and installation of Best Available Retrofit Technology at San Juan, consisting of installation of selective non-catalytic reduction equipment with balanced draft conversion on Units 1 and 4 ("BART Project") and retirement of Units 2 and 3. To effectuate the settlement, the Exiting Participants (Anaheim, M-S-R, SCPPA and Tri-State) and Remaining Participants (PNM, Farmington, Los Alamos County, Tucson Electric Power Company, and UAMPS) anticipate approving (i) a non-binding resolution defining the principal terms and conditions to retire San Juan Units 2 and 3 and restructure the ownership configuration of San Juan Unit 4 ("Resolution"), (ii) a Fuel and Capital Funding Agreement ("Funding Agreement") to implement certain provisions of the Resolution as soon as possible to allocate the now ongoing costs of installation of the BART Project on Unit 4, and (iii) a Non-Binding Term Sheet among the Remaining Participant to address related issues specific to the Remaining Participants.

As part of the settlement, and provided decommissioning and fuel issues are resolved to the Remaining Participants' satisfaction, the Remaining Participants have agreed to a non-binding term sheet under which Farmington will acquire 65 additional MWs in San Juan Unit 4 ("Additional MWs"). In addition, and subject to the conditions in Item 3 below, PNM has agreed that Farmington shall receive from PNM $6.5 million less credits against future invoices for capital improvements on Unit 4 ("Capital Improvement Credit"), to help Farmington avoid cash flow issues that could be caused by Farmington's acquisition of the Additional MWs and the resulting proportionate increase in Farmington's capital improvement cost obligations. The Capital Improvement Credit will be applied as follows:

1. PNM, as Operating Agent, will apply the Capital Improvement Credit to Farmington's 12.815% increase in Unit 4 cost responsibilities that result from Farmington's acquisition of the Additional MWs.

The Capital Improvement Credit will be applied to invoices issued by PNM, as Operating Agent, after the effective date of the Funding Agreement. Any Capital Improvement Credit remaining after January I, 2015, will be paid by PNM in cash to Farmington on the date of the $8.8 million restructuring fee payment by the Exiting Participants.

The obligation of PNM to fund the Capital Improvement Credit is contingent upon acceptance for filing of the Funding Agreement by the Federal Energy Regulatory Commission and terminates upon termination of the Funding Agreement. If the Funding Agreement is terminated before the Capital Improvement Credit is fully applied, Farmington will not be obligated to return any of the credited amounts, but any cash payments received by Farmington in excess of invoices described in Item 1 above must be refunded by Farmington to PNM within thirty (30) days of the termination of the Funding Agreement. PNM will have no obligation to apply any unused Capital Improvement Credit or make additional payments as of the effective date of termination of the Funding Agreement.

Please indicate your acceptance of these terms by your signature below, questions or concerns, please let me know.

If you have any

Sincerely,

f I / ( -V

Chris Olson Vice President, PNM Generation

Agreed to and accepted this 'Z 1 day of • J , .,/ <•' , 2014, on behalf of Farmington.

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By: ^ ' U • ( . , U . U, Michael R. Sims Electric Utility Director Farmingtoh Electric Utility System

4. >

BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF THE APPLICATION OF ) PUBLIC SERVICE COMPANY OF NEW MEXICO FOR APPROVAL TO ABANDON SAN JUAN GENERATING STATION UNITS 2 AND 3, ISSUANCE OF CERTIFICATES OF PUBLIC CONVENIENCE AND NECESSITY FOR REPLACEMENT POWER RESOURCES, ) ISSUANCE OF ACCOUNTING ORDERS AND DETERMINATION OF RELATED RATEMAKING PRINCIPLES AND TREATMENT )

) ) ) ) )

) Case No. 13-00390-UT )

) PUBLIC SERVICE COMPANY OF NEW MEXICO,

) ) )

Applicant )

AFFIDAVIT

STATE OF NEW MEXICO ) ) ss

COUNTY OF BERNALILLO )

CHRIS M. OLSON, Vice President, Generation for Public Service Company of New

Mexico, upon being duly sworn according to law, under oath, deposes and states: I have read the

foregoing July 15 Supplemental Testimony of Chris M. Olson and it is true and accurate based

on my own personal knowledge and belief.

A SIGNED this ay of July, 2014.

7

sivoEsoN

j -* day of July, 2014. SUBSCRIBED AND SWORN to before me this

NOTARY PUBLIC IN AND FOR THE STATE OF NEW MEXICO

OFFICIAL SEAL pda Morehead fe^PUBUC

STATE OF NEW MEXICO

S

R ! Ro sion

My Commission Expires: Hi

GCG t 518348

before the new mexico public regulation commission …/media/files/p/pnm... · 7/15/2014 · 1...

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