ML17299B185

Application in Respect of Sale & Leaseback Transactions by El Paso Electric Co

ML17299B185
Person / Time
Site:	Palo Verde
Issue date:	04/15/1986
From:	Van Brunt E ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR
To:
Shared Package
ML17299B184	List: ML17299B185
References
NUDOCS 8604170442
Download: ML17299B185 (37)

Text

UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION X

In the matter of ARIZONA PUBLIC SERVICE COMPANY, et al DOCKET NO. STN 50-529 (Palo Verde Nuclear Generating Station, Unit 2)

X APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTIONS BY EL PASO ELECTRIC COMPANY April 15, 1986

TABLE OF CONTENTS

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Pacae Section l. RELIEF REQUESTED .. 1 Section 2. BACKGROUND AND PURPOSE OF THE PROPOSED TRANSACTIONS ~ ~ ~ ~ ~ ~ 0 0 3 Section 2.1 .. Background. . . . . . . . . . . . . . 3 Section 2.2. Purpose of the Proposed Transactions. 4 Section 3. DESCRIPTION OF THE PROPOSED SALE AND LEASEBACK TRANSACTIGNS ~ . ~ . ~ . 5 Section 3.1. Sale of Unit 2. 6 Section 3 ~2 ~ Purchase Price. ~ ~ 8 Section 3 ~3 ~ Lease Term and Renewal Option. ~ ~ 8 Section 3.4. Purchase Option. ~ ~ ~ ~ 8 Section 3.5. Quiet Enjoyment; Rights of El Paso 9 Section 3.6. Net Lease. 9 Section 3.7 ~ Capital Improvements. .10 Section 3.8. Support Agreements. .10 Section 3.9 ~ Debt Matters. ~ ~ .11 Section 3.10. The ANPP Participation Agreeme nt. .12 Section 4. CONDITIONS PRECEDENT TO THE TRANSACTIONS 14 Section 5. SCHEDULE OP THE SALE AND LEASEBACK TRANSACTIONS e, e o o o . o o o o o o ..15 Section 6. SUPPORTING INFORMATION . . . . . . . . .16 Section 7. ENVIRONMENTAL CONSIDERATIGNS . . . . . .17

TABLE OF CONTENTS, Continued Pacae Section 8. ANTITRUST CONSIDERATIONS . . . . . . . .17 Section 9. NO SIGNIFICANT HAZARDS CONSIDERATION . .18 Section 10. FOREIGN OWNERSHIP CONSIDERATIONS . . . .19 Section 11. RESPONSIBILITY FOR MANAGEMENT OF UNIT 2 .20 Section 12. BASIS FOR RELIEF REQUESTED . . ... . . .21 Exhibit Desi nation Descri tion A General Information concerning El. Paso "

Electric Company Attachment A: 1985 Annual Report of El Paso Electric Company and Annual Report on Form 10-K f or the Fiscal year Ended December 31, 1985.

B General Information concerning The First National. Bank of Boston Attachment A: 1985. Annual Report of Bank of Boston Corporation and Annual Report on.

Form 10-K for the Fiscal Year Ended December 31, 1985

UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the matter of ARIZONA PUBLIC SERVICE DOCKET NO STN 50-529 COMPANY, et al.,

(Palo Verde Nuclear Generating Station, Unit 2)

APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTIONS BY EL PASO ELECTRIC COMPANY Arizona Public Service Company (APS), as Project Manager and Operating Agent of Palo Verde Nuclear Generating Station (PVNGS)

Units 1, 2 and 3, submits this application on behalf of El Paso Electr ic Company (El Paso), a licensee under Facility Operating License No. NPF-46 (the Unit 2 License).

l. Relief Requested P

4 El Paso proposes to refinance its construction financing for PVNGS Unit 2 (Unit 2) by entering into one or more sale and leaseback transactions relating to all or a portion of El Paso's 15.8% undivided ownership interest in Unit 2 and a portion of El Paso' undivided ownership interest in certain PVNGS common facilities (said interest in Unit 2 and such portion of the common

facilities being hereinafter collectively referred to as the Unit 2 Facilities) .1 The relief requested by this Application is the issu-ance of an order (i) consenting to the sale and leaseback transac-tions described in this Application and (ii) authorizing the Director of the Office of Nuclear Reactor Regulation to amend the Unit 2 follows:

License by adding a new paragraph< 2.B(7), as (7) Pursuant to an Order of the Nuclear Regulatory Commission dated 1986, El Paso Electric Company (El Paso) is authorized to transfer and El Paso may transfer portions of its ownership share in Palo Verde Unit 2 to certain institutional investors and concurrently may lease back each such interest. The basic term of each lease will expire in January, 2014, subject to a right of renewal. The sale and leaseback transactions are subject to the representations and conditions set forth in the April 15, 1986 Application by ArizonaTransactionsPublic Service Company. in Respect of Sale and Leaseback by El Paso and the Commission' Order of 1986 i consenting to such transactions. Specifically, the lessors and anyone else who may acquire an interest under these transactions are prohibited from exercising directly or indirectly any control over the licensees of Palo Verde limitations in Unit 2. For purposes of this condition, the 10 CFR 50. 81 "Creditor Regulations" as now in effect and as they may be subsequently amended are fully applicable to the lessors and any successor in interest to such lessors as long as the license for Palo Verde Unit 2 remains in effect. These transactions shall have no effect on the of the license for Palo Verde Unit 2 throughout the term license.

l. El Paso will also sell an undivided interest in certain real property interests associated with the Unit 2 Facilities. El Paso will retain its entire 15.8$ ownership interest in all so-called "section 1250 property" such as the administration building< the administration annex building, the technical .support center and the visitor center. El Paso will also retain its entire interest in all nuclear fuel and transmission facilities associated with PVNGS.

Further, the licensees are required to notify the Commission in writing (1) prior to any change in (i) the terms or conditions of any lease agreements executed as part of such transactions, (ii) the ANPP Participation Agreement or (iii) the existing insurance for Palo Verde Unit 2 and (2) of any action by any lessor or others that may have an adverse effect on the safe operation of Palo Verde Unit 2.

This paragraph 2.B(7) will become effective as to any sale and leaseback transaction only upon receipt by the Office of Nuclear Reactor Regulation of supplemental infor-mation concerning the institutional investors which are parties to such transaction and the expiration of 10 days (or any shorter period permitted by such Office) without notice to El Paso of Commission objection to any such institutional investor.

2. Background and Purpose of the Proposed Transactions 2.1. Background. By application dated October 18, 1985 (the'NM Unit 1 Application), APS, on behalf of Public Service Company of New Mexico (PNM) < requested approval for PNM to sell and lease back all or a portion of PNM's 10.2 percent ownership interest in PVNGS Unit 1 (Unit 1), and all or a proportionate share of one-third of PNM's 10.2 percent ownership interest in certain Palo Verde common facilities (collectively, the PNM Unit 1 Facilities) . On December 12, 1985, the Nuclear Regulatory Commission issued an Order2 (i) consenting to sale and leaseback transactions with respect to PNM's interest in the PNM Unit 1 Facilities and (ii) authorizing the Director of the Of f ice of Nuclear Reactor Regulation to amend Facility Operating License NPF-41 (the Unit 1 License) to reflect

2. Arizona Public Service Company (Palo Verde Unit 1), Docket No. STN-50-528, December 12, 1985.

PNM's position as lessee in respect of Unit 1. On December 26, 1985<

the Unit 1 License was so amended.

By Application dated February 14, 1986, APS, on behalf of PNM< requested approval for PNM to sell and leaseback all or a por-tion of PNM' 10.2 percent ownership in Unit 2, and all or a propor-tionate share of one-third of PNM' 10 .2 percent ownership interest in certain PVNGS common facilities (collectively, the PNM Unit 2 Facilities).

As shown below, the tr'ansactions described in this Application are similar in all significant respects to the transac-tions entered into by PNM with respect to the PNM Unit 1 Facilities and proposed to be entered into by PNM with respect to the PNM Unit 2 Facilities. In addition, the relief requested in this Application by APS, on behalf of El Paso, is the same relief (based upon similar facts) as was granted by the Nuclear Regulatory Commission in its Order of December 12, 1985.

2.2. Purpose of the Proposed Transactions. The proposed sale and leaseback financing transactions will provide benefits to El Paso's customers through two channels. First, the net present value of capital costs (and the total nominal costs) will be reduced by the transf er of tax benef its and by the recapitalization of the plant financing with greater debt leverage. Second< the revenue require-ments associated with El Paso's capital costs in Unit 2 will be if level ized over the 1 e of Unit 2. Because the lessors in the proposed sale and leaseback transactions will recapitalize Unit 2

with greater debt leverage, the required lease payments represent a lower cost of capital than would El Paso's composite cost of capital. Also, El Paso's tax situation is such that it cannot take full advantage of tax benefits at the present time. The sale will transfer the benefits of the investment tax credit and tax deprecia-tion to such lessors.

The leveling of revenue requirements over time yields sev-eral benefits. Under conventional utility regulation, carrying charges are determined by the asset's net book value which declines over time as the asset is depreciated. This produces so-called "front-end" loading the familiar situation in which the stream of revenue requirements falls over time while the actual value of the plant output rises over time. Front-end loading is eliminated with the proposed sale and leaseback transaction because a fixed lease payment replaces the conventional "high front-end" revenue require-ments stream< thus benefitting El Paso's ratepayers and insulating them from potential "rate shock".

3. Description of the Proposed Sale and Leaseback Transactions El Paso proposes to sell to a grantor trust or trusts, the beneficiaries of which will be institutional equity investors (the Equity Xnvestors) the Unit 2 Facilities, including without limita-tion all or a portion of El Paso's 15.8%, generation entitlement share in Unit 2. Each such investor will enter into a trust agreement with The First National Bank of Boston (hereinafter< in such capacity< the

Owner Trustee) who will take and hold title to the Unit 2 Facilities sold by El Paso. The Owner Trustee will in turn lease the Unit 2 Facilities, and assign the acquired generation entitlement share<

back to El Paso for a basic term of approximately 27-1/2 years for a stipulated .basic rent.

At the time of filing of this Application, the forms of documents relating to the proposed transactions have not been prepared. In light of such circumstances', the following description is offered as a summary of certain significant aspects of the transaction.

3.1. Sale of Unit 2. El Paso proposes to ref inance its construction financing for Unit 2 by entering into one or more sale and leaseback transactions relating to all or a portion of the Unit 2 Facilities. Each lease agreement will be with the Owner Trustee (in auch capacity, the Lessor) acting for the related Equity Investor.

Trusts formed by the Equity Investors will hold title to the respec-tive purchased interests in the Unit 2 Facilities. The Lessors will lease the Unit 2 Facilities to El Paso under separate leases (the Leases) . If the sale and leaseback transactions are completed as to less than all of El Paso's interest in the Unit 2 Facilities< El Paso will retain an undivided interest in the Unit 2 Facilities.

It is typical in sale and leaseback transactions involving large investments to have multiple Equity Investors. Because of this structure< there will be multiple sets of documents (including the

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Leases) in substantially the same form, with one set for each of the Equity Investors.

Because discussions with potential Equity Investors have only recently been initiated, the identity of the actual Equity Investors who will participate in the proposed transactions is not yet known. Over the last several years, affiliates and subsidiaries of electric utilities (singly or in joint-venture with other equity investors and/or financial intermediaries) have become an increas-I ingly important source of equity investment for sale and leaseback transactions of all types. Although it might seem anomalous that electric utilities would be involved both as lessee and, through an affiliate or subsidiary< as equity investor< this is not surprising in view of the different financial situations of utilities. Like other investors, some utilities are in the enviable position of seek-ing tax-advantaged investments. El Paso and its financial advisor, Babcock & Brown Financial Corporation, believe that participation by such Equity Investors may be essential to the successful sale and leaseback by El Paso of its entire interest in the Unit 2 Facilities. Aff iliates and subsidiaries of electric utilities would be purely passive investors and would have the same investment pur-pose as any other Equity Investor. Because participation by such I

entities in the proposed sale and leaseback transactions would have no effect whatsoever to the operation of PVNGS, or the generation of electricity or transmission thereof, the presence of such entities as Equity Investors should have no impact on the requested relief.

3.2. Purchase Price. The Unit 2 Facilities will be sold to the Lessors at a fair market price which may be approximately $ 700 million if all of El Paso's interest in the Unit 2 Facilities is sold. Prior to the closing of the lease transactions, an appraisal will confirm that the purchase price is a reasonable estimate of fair market value. The appraisal< to be conducted by an appraiser selected by the Equity Investors, will also determine that< after the expiration of the basic lease term and permitted fixed rate renewal terms, the estimated remaining economic life of the Unit 2 Facilities will be long enough and their estimated value will be great enough to establish the Leases as true leases for Federal tax purposes.

3.3. Lease Term and Renewal Option. The basic term of each of the Leases is expected to be approximately 27-1/2 years. El paso will seek an option, at the end of the basic term, to renew each of the Leases at a rental payment equal to 50 percent of the original rent for a renewal term or terms equaling the lesser of (a) the maxi-mum fixed rate renewal term permitted by Federal tax law without dis-qualifying the Leases as true leases for Federal tax purposes and (b) 15 years. Additionally, El Paso will seek from the Equity Investors the option, but no obligation, to continue renewing each of the Leases at fair market rentals for the remaining economic life of the Unit 2 Facilities.

3.4. Purchase Option. El Paso will have the'ption, but no obligation, at the end of the basic term and at the end of each

renewal term to purchase the Unit 2 Facilities at their fair market value at that time.

3.5. Quiet Enjoyment; Rights of El Paso. During the term of the Leases, the Lessors will warrant that, so long as El Paso is in compliance with the terms of the Leases, El Paso's sole possession and use of, and rights with respect to, the Unit 2 Facilities shall not be interrupted by the Lessors or any person claiming through the Lessors. El Paso will be empowered with respect to the Unit 2 Facilities to be and act as the "Participant" under the ANPP Participation Agreement with full and exclusive authority to exer-cise and perf orm all of the rights and duties of a Participant thereunder. Additionally, El Paso will retain the exclusive right to sell and dispose of the power and energy derived from the generation entitlement share in Unit 2 associated wi'th the Unit 2 Facilities.

3.6. Net Lease. The Leases will be "net leases" under which El Paso will be responsible for paying all taxes< insurance premiums, operating and maintenance costs, and all other similar costs associated with the Unit 2 Facilities (including obligations as the Participant in respect of the Unit 2 Facilities under the ANPP Participation Agreement) .4 The purpose of these provisions is to ensure that the Lessors are subject only to normal financing risks and not to operational risks or responsibilities.

3. See 3.10 below.

4. See 3.10 below.

3.7. Capital Improvements. Any addition, betterment or enlargement of the Unit 2 Facilities', or replacement of units of property within the Unit 2 Facilities (a Capital Improvement) will be El Paso's obligation under the Leases. El Paso may, but will not be obligated to, request that the Lessors provide financing under the Leases (a Supplemental Financing) for their respective shares of Capital Improvements. The terms and conditions of any Supplemental Financing and the aggregate amount of all Supplemental Financings in which an Equity Investor will participate will be subject to mutual agreement between El Paso and each Equity Investor. If requested by El Paso, each Equity Investor may make additional equity investments in Capital Improvements which are the subject of Supplemental I

Financings. Concurrently with any Supplemental Financing, the rent payments will be adjusted to support the amortization of the addi-tional debt issued in connection with the Supplemental Financing and to preserve the Equity Investors'et economic return.

3.8. Support Agreements. El Paso and the Lessors will enter into support agreements which will provide the Lessors with such rights in parts of El Paso's interest in PVNGS not constituting Unit' Facilities as may be necessary to enable them to realize the residual value of their interests. In particular, effective upon termination of each Lease (unless El Paso shall have exercised its option to purchase the Unit 2 Facilities subject to such Lease), cer-tain rights in nuclear fuel, transmission facilities to the ANPP

Switchyard and other retained assets5 will be made available to the Lessors for the remaining economic life of such Unit 2 Facilities to satisfy Internal Revenue Service guidelines for a "true lease" characterization, particularly with regard to negating any "limited use" characteristics of the Unit 2 Facilities-3.9. Debt Matters. The Lessors will borrow 70 percent to 78 percent of the purchase price of the Unit 2 Facilities from a funding corporation (the Funding Corporation) created for that purpose. The Funding Corporation, in turn, will borrow the debt por-tion of the purchase price by issuing public debt that will be non-recourse to the Lessors and the Equity Investors. The public debt<

which must be issued on terms acceptable to El Paso< will be indi-rectly secured by and be payable from the rentals due from El Paso under the Leases. The public debt will be structured to have princi-pal and interest payments that correspond to the receipt of rental I

payments under the Leases. The public debt will be issued in serial form, i.e., obligations with different maturities and principal amounts. Privately-placed interim financing may be required pending the issuance of such debt.

The details of the debt funding arrangements of the pro-posed sale and leaseback transaction are fully described in the application of the Funding Corporation filed with the Securities and Exchange Commission on April ll, 1986, requesting an order exempting 5- For a description of the retained assets, -

see footnote 1 above.

such Corporation from the provisions of the Xnvestment Company Act of 1940. A copy of such application is attached hereto as Exhibit C.

3.10. The ANPP Participation Agreement. The construction<

operation and maintenance of PVNGS and the rights and duties of the joint owners of and participants in PVNGS are governed by the ANPP Participation Agreement dated August 23, 1973's amended (the ANPP Participation Agreement) . Under the ANPP Participation Agreement, APS< as agent for all of the ANPP Participants, has been appointed as the project manager responsible for the construction of PVNGS and as the operating agent responsible for the operation and maintenance of PVNGS. The ANPP Participation Agreement provides the delegations of authority to APS necessary to permit APS to carry out such functions in a manner which complies with all laws, regulations, permits and licenses (including the Unit 2 License).

The ANPP Participation Agreement also establishes the rights and obligations of the ANPP Participants. One of the primary obligations assumed by the ANPP Participants under the ANPP Participation Agreement is the obligation to share the costs of con-I struction, operation, maintenance, decommissioning and capital improvements of PVNGS, in accordance with their respective generation entitlement shares. So long as an ANPP Participant is not in default in its obligations under the ANPP Participation Agreement, such Participant is entitled to schedule power based on its generation entitlement share of the generating capability of such unit available at the time of such scheduling.

The ANPP Participation Agreement provides the ANPP Participants with oversight of PVNGS and the actions of APS as project manager and operating agent through participation in three standing committees: the Administrative Committee, the Engineering and Operating Committee and the auditing Committee. Generally< all actions which each of the committees is authorized to take must be approved by the unanimous vote of all members entitled to vote on such committee. In the event any committee is unable to agree on any matter (with certain limited exceptions) which the committee is authorized to determine, the project manager/operating agent is authorized and obligated to take such action and expend such funds as in its discretion is necessary to the proper construction, operation and maintenance of PVNGS, pending resolution of such inability or

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failure to agree. Additionally, in the.event of an operating emer-gency, the operating agent is authorized and obligated to take such action as it< in its sole discretion, may deem prudent and necessary.

Amendment No. 10 to the ANPP Participation Agreement per-H mits the proposed sale and leaseback transactions, subject to the satisfaction of certain criteria. As with the transactions described in the PNM Unit 2 Application, the transactions described in this Application will meet such criteria. El Paso will request that the ANPP Administrative Committee make the determinations necessary to permit consummation of the proposed transactions.

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4. Conditions Precedent to the Transactions The proposed transactions are subject to the following con-ditions precedent, in addition to others commonly associated with any financial transaction of this nature:

(a) The approval of the transactions by the New Mexico Public Service Commission (NMPSC) as required by the laws of the State of New Mexico, such approve to be in form and substance satis-factory to all parties to such transactions; (b) Receipt of an order or orders from the Federal Energy Regulatory Commission (FERC) (i) disclaiming jurisdiction under section 203 of the Federa'1 Power Act over the sale of El Paso's interest in the Unit 2 Facilities, (ii) to the effect that the Equity Investors and the Owner Trustee will noti as a result of their hold-ing title to the Unit 2 Facilities, become "public utilities" as def ined in section 203 (a) of the Federal Power Act and (iii) authorizing the issuance of securities under section 204 of the Feder al Power Act in connection with the proposed transactions; (c) The actions of the Commission requested in this Application; and The

'd) determinations required to be made in respect of the transactions by the ANPP Administrative Committee.

5. Schedule of the Sale and Leaseback Transactions If the proposed sa'le and leaseback transactions are to include the economic benefit to El Paso of transferring to the Lessors the investment tax credit available with respect to Unit 2 (which results in lower annual rent payments), such transactions must be consummated within three months of the date on which Unit 2 is first synchronized (utilizing its nuclear'team supply system) with the main transmission grid< the latter date being the date on which Unit 2 is first "placed-in-'service" for purposes of the investment tax credit under section 46 of the Internal Revenue Code. Under cur-rent schedules, first synchronization is expected to be completed on or about April 29, 1986. If this schedule is met, sales of interests in the Unit 2 Facilities must occur not later than July 29, 1986 in order to permit the Equity Investors to claim the investment tax credit with respect to Unit 2.

To meet the projected deadline it is planned that prelimi-nary conditional, commitments will be obtained from, the Equity Investors in a timely manner. The First National Bank of Boston has already committed to act as Owner Trustee under each Lease. It is expected that approval of the proposed transactions by the NMPSC and FERC will also be obtained in a timely manner and that the proposed transactions will themselves be consummated on or before July 29, 1986 (assuming synchronization on April 29, 1986) .

To achieve this schedule it will be necessary that:

(i) notice of this Application be published in the Pedera1 Register not later than May 1, 1986, thereby allowing 40 days to elapse prior to the making by the Commission of a determination in respect of this Application; and the requested order and amendment to the Unit 2 License be issued and become effective not later than June 10, 1986.

6. Supporting Information The general information respecting applicant El Paso required by 10 CFR 50.33 (a) through (d) is provided by Exhibit A to this Application.

The general inf ormation respecting the Owner Trustee required by 10 CFR 50.33 (a) through (d) is provided by Exhibit B to this Application.

The Equity Investors have yet to be identified. Upon El Paso's accepting a proposal from a potential Equity Investor, El Paso will, as promptly as possible, provide to the Commission (i) the pur-chase price of the portion of the Unit 2 Facilities in respect of which each Equity Investor will make its initial commitment to invest and (ii) the most recent publicly-available annual and interim finan-cial statements for such Equity Investor or its parent company.

El Paso will in due course file with the Commission the anticipatory response of El Paso based upon the expectation that a request similar to the November 7, 1985 Request for Additional Inf ormation made by George W. Knighton, Chief, Licensing Branch No. 3, Division of Licensing to PNM in 'connection with its sale and leaseback of the PNM Unit 1 Facilities will be made to El Paso with respect to the Unit 2 Facilities transactions.

7. Environmental Considerations The proposed conveyances of the Unit 2 Facilities to the Owner Trustees and the lease of the Unit 2 Facilities to El Paso by the Lessors do not involve any design or physical change to Unit 2g any change in the transmission or other facilities associated with Unit 2,,any change in types or amounts of effluents from Unit 2, any change in the potential for accidental releases from Unit 2 or any change in the authorized power level of Unit 2. Accordingly< the grant of the relief requested by this Application does not present an unreviewed environmental impact. Pursuant to 10 CFR 51.5(d) (4), no environmental impact statement, negative declaration or environmental impact appraisal need be prepared in connection with this Application.

8. Antitrust Considerations As noted above,6 among the Equity Investors from which El Paso may receive proposals are affiliates and/or subsidiaries of electric utilities. These utilities may be in any geographic region of the country, including Arizona and California. These entities are an important potential source of equity investment for

6. See 3.1 above.

sale/leasebacks of El Paso's interest in PVNGS. 'hese entities< like any other Equi ty Investor, will not have, so long as the related Leases are in effect, any right to power or energy generated at PVNGS<7 and such power and energy will be distributed in the manner as is now set forth in the ANPP Participation Agreement as though no sale and leaseback transactions had been consummated. The transac-tions described in this Application do not present any unreviewed antitrust considerations not previously addressed in connection with issuance of the Unit 2 License. To the extent that antitrust con-siderations could be affected by an Equity Investor which is an affiliate or subsidiary of an electric utility entering into posses-sion of an interest in the Unit 2 Facilities upon termination of its Lease, the restrictions imposed by the requested amendment to the Unit 2 License will give the Commission an opportunity to make fur-ther determinations concerning antitrust and other licensing concerns in light of the circumstances at the time such change in possession takes place.

9. No Significant Hazards Consideration The consummation of the proposed sale and leaseback transactions will not involve any increase in the probability or

7. See 3.5 above.

8. A similar determination was made by the Staff of the Commission in connection with the PNM Unit 1 Application. See Policy Paper SECY-85-367'. 9.

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consequences of an accident previously evaluated< or create the possibility of an accident that is new or that is different from" any accident previously evaluated, or involve any reduction in any margin of safety. Accordinglyi the consummation of the transfers of the Unit 2 Facilities as contemplated by the proposed sale and leaseback transactions does not involve a "significant hazards consideration" within the meaning of that phrase as defined in 10 CFR 50.92. A sim-ilar determination was made by the Commission in connection with the PNM Unit 1 Application.

10. Foreign Ownership Considerations Certain Equity Investors may be "owned", "controlled" or "dominated" by a f oreign corporation within the meaning of Section 103d of the Atomic Energy Act. In Policy Paper SECY-85-367, the Staff took the position that, if a licensing requirement were not imposed on the Equity Investors, then the prohibition of Section 103d need not be addressed. In its Order of December 12, 1985i the Commission concurred in the "no license" position. It is respect-fully submitted, therefore, that possible foreign control of an Equity Investor should not prohibit the license amendment requested by this Application. This conclusion is only reinforced by the'act that the proposed transactions will not subject El Paso to the will

9. Policy Paper SECY-85-367, pp. 9-10, fn. 7. See 8 above.

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of the Equity Investors or otherwise give the Equity Investors the power to direct El Paso's actions with respect to Unit 2.

ll. Responsibility for Management of Unit 2 The consummation of the proposed sale and leaseback trans-actions will not result in any change in the responsibilities, obli-gations or authorities of APS as the licensee under the Unit 2 License authorized to operate and maintain Unit 2, or as Operating Agent under the ANPP Participation Agreement. Under the terms of the proposed Leases and pursuant to the ANPP Participation Agreement, El Paso will continue throughout the term of the Leases to be a Par ticipant under the ANPP Participation Agreement, entitled to a 15.8% generation entitlement share of the power and energy generated by Unit 2, entitled to a full vote on all significant determinations relating to Unit 2 and obligated to pay 15.8$ of the costs of operat-ing and maintaining Unit 2.

It is not necessary to issue a license to the Owner Trustee and/or Equity Investors since, only APS, as Operating Agent, and the other Unit 2 licensees, including El Paso, are able to insure that Unit 2's operation is consistent with the Commission's licensing responsibilities. APS and the other Unit 2 licensees alone have con-trol of and responsibility for the Operating Agent with respect to the operation and maintenance of Unit 2. The limited nature of the ownership rights of the Owner Trustee and/or the Equity Investors makes it unnecessary for the Commission to license them. Neither the

Owner Trustee nor any of the Equity Investors will have (i) any ability to restrict or inhibit compliance with the security, safety or other regulations of the Commission, (ii) any capacity to control the use or disposal of Unit 2 nuclear fuel, or (iii) any right to use or direct the use of the Unit 2 Facilities or any other part of PVNGS. Although legal title to the Unit 2 Facilities will reside with the Owner Trustee, the current regime of control, supervision and responsibility will be unaltered by the. proposed transactions.

APS is and will remain responsible to the Commission for the proper operation and maintenance of Unit 2.

12. Basis for Relief Requested The sale and leaseback transactions described in this Application are the same in all respects material to the Commission's consideration of this Application as the transactions described in the PNM Unit 1 Application. In both cases, the basic term of each applicable lease agreement is a'ubstantial portion of the estimated useful life of the generating facility, subject to certain renewal options, and is joined with a fair market value purchase option at the end of the basic lease term and each renewal term. All the Leases will provide that, so long as El Paso is in compliance with the terms of the lease agreements, El Paso's sole possession and use of, and rights with respect to the leased f acilities, will not be interrupted by the Lessors or any person claiming through the Lessors. In addition, El Paso will be empowered with respect to the Unit 2 Facilities (whether or not subject to a sale and leaseback transaction) to be and act as the "Participant" under the ANPP Par ticipation Agreement, which sets f orth the rights and duties of each of the owners of PVNGS.10 Additionally, El Paso will retain the exclusive right to sell and dispose of its share of power and energy from PVNGS without limitation arising f rom any lease agreement. All such lease agree-ments are or will be "net leases" under which El Paso will be respon-sible for paying all taxes, insurance premiums, operating and mainte-nance costs, costs related to capital improvements and decommission-ing and all other similar costs and expenses associated with El Paso's share of the leased facilities. Although provisions may be made for the Equity Investors to make a limited initial contribution toward decommissioning, such an approach would not diminish El Paso's primary and unconditional obligations with respect to decommissioning. Under each lease agreement El Paso will be obli-gated to make lease payments to the Lessor which will repay and pro-vide a return on each Equity Investor's investment in the Unit 2 Facilities and which will pay principal and interest on debt obliga-tions issued to finance a portion of the purchase price of the Unit 2 Facilities. The rights acquired by the Lessors, the Equity Investors and their respective successors and assigns in and to the Unit 2 Facilities may, in each case, be exercised only in compliance with

10. See 3.10 above.

and subject" to the same requirements and restrictions as would apply to El Paso pursuant to the provisions of the applicable Commission license, the Atomic Energy Act and the Commission' regulations.

Lastly, the Lessors and the Equity Investors will acknowledge that before taking possession of any part of PVNGS, they will be subject to applicable requirements concerning (i) the issuance of a license by the Commission authorizing such possession or (ii) the transfer of the Commission license authorizing El Paso to possess an interest in PVNGS upon application for transfer of such license filed pursuant to applicable law.

This application is motivated by the fact that Texas and New Mexico ratepayers will experience substantial long-term savings both from the lower cost of capital made available thereby and from the levelized revenue requirements inherent in the sale and leaseback transaction.>> El Paso's preliminary estimate is that the proposed transactions will reduce the ratepayer revenue requirements associ-ated with Unit 2 by approximately $ 500 million over the life of Unit 2. In present value terms, this would represent savings of approximately $ 300 million over continued traditional financing.

Additionally, El Paso's overall financial stability will be further enhanced.

ll . See Policy Paper SECY-85-367, p. 4 .

WHEREFORE, APS requests on behalf of El Paso that the Commission grant the relief requested in Section 1 hereof or in such other form and/or subject to such conditions'n addition to those stated in such Section as the Commission may deem appropriate.

Respectf ully submitted, ARIZONA PUBLIC SERVICE COMPANY By Edwin E. Van Brunt, Jr.

Executive Vice President-ANPP Dated: April 15, 1986 STATE OF ARIZONA )

) ss.

COUNTY OF MARICOPA )

I, Edwin E. Van Brunt, Jr. represent that I am the Executive Vice President-ANPP, that the foregoing document has been signed by me on behalf of Arizona Public Service Company with full authority to do so, that I have read such document and know its con-tents, and that to the best of my knowledge and belief, the state-ments made therein are true.

cCX u Edwin E. Van Brunt< Jr.

Sworn before me this ~/th day of April, 1986 i

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Notary Public

,, yCi My Commission Bplres April 6, 1987 r'

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