UNS weighs ownership options at San Juan coal station

UNS Energy (NYSE: UNS) subsidiary Tucson Electric Power (TEP) is weighing its ownership options at the San Juan coal plant in New Mexico, company officials said during a Nov. 5 earnings call.

Regulators are considering plans to slash emissions at the coal plant. One option would force owners to install selective catalytic reduction (SCR) controls at all four units to reduce NOx emissions. This is a federal option put forward under the best available retrofit technology or BART standard.

Another option, put on the table by the state of New Mexico, would involve retiring Units 1 and 2 early while agreeing to installation of non-SCR controls on Units 3 and 4.

TEP currently owns 50% of San Juan coal units 1 and 2. If the two units are retired early, TEP could conceivably trade its interests in Units 1 and 2 for an ownership stake in Units 3 and 4.

The 1,800-MW, four-unit coal plant near Farmington, N.M., is operated by PNM Resources (NYSE: PNM). PNM is a 46% owner and runs the plant on behalf of eight other owners, including UNS (formerly known as UniSource Energy).

As a 50% owner of Units 1 and 2, TEP controls about 340 MW of capacity, UNS Chairman and CEO Paul Bonavia said during the recent conference call.

The U.S. EPA wants SCR installed on all four units by September 2016, Bonavia said. TEP’s share of those expenditures for Units 1 and 2 is estimated to be $180m to $200m.

But EPA has postponed the decision date until Nov. 29 to allow for further discussion of the New Mexico option that would involve retirement of the two units by the end of 2017 along with installation of selective non-catalytic reduction (SNCR) controls on Units 3 and 4.

As of Sept. 30, the book value of the TEP share of San Juan Units 1 and 2 was $216m. “If the federal plans compliance day is not extended or the decision to retire San Juan Units 1 and 2 is not made by the end of 2012, TEP may begin funding its share of the capital expenditures to install SCR technology in 2013,” Bonavia said.

“We’re evaluating various replacement service resources in the event San Juan 1 and 2 are retired early. That includes a possibility of exchanging part of TEP’s ownership in San Juan 1 and 2 for a portion of San Juan 3 or San Juan 4 or both,” Bonavia said.

“We might find it attractive to take some of the megawatts from 3 and 4, but it would depend on the cost. We won’t agree without knowing what the EPA would require,” Bonavia said in response to analyst questions.

In addition, there are a number of merchant natural gas plants in Arizona that could help replace the power from San Juan 1 and 2 if necessary.  

The UNS Energy subsidiary also holds an ownership stake in both the Four Corners and Navajo coal plants and would have to help underwrite some new environmental controls at those stations, Bonavia said. The big potential environmental cost remains San Juan, the CEO added.

UNS expects to “blend down” its coal ownership over the next few years, Bonavia said.

Springerville 3 outage hurts quarterly performance

The UNS third-quarter performance was hurt by an unplanned outage at the 400-MW Springerville 3 coal unit in Arizona.

“First in July of this year Springerville Unit 3 had an unplanned outage. As you know, TEP operates that unit on behalf of Tri-State [Generation & Transmission Association], we can earn operating fees and performance bonuses for doing so,” Bonavia said.

“The unplanned outage will cause TEP to miss certain performance targets in the agreements during 2012. And as a result, third quarter earnings per share reflects the reduction of $0.03 per diluted share,” the CEO said.

TEP recorded a pre-tax loss of $2m in July 2012 or $0.03 per diluted share, UNS officials said.

UNS Energy’s net income for the third quarter of 2012 was $50.7m, or $1.21 per share of common stock on a fully-diluted basis, compared with net income of $59.7m, or $1.46 per diluted share in the third quarter of 2011. For the nine months ended Sept 30, UNS Energy’s net income was $83.4m, or $2.03 per diluted share, compared with net income of $101.8m, or $2.53 per diluted share, in the same period last year.

TEP’s retail kWh sales decreased by 3.6% in the third quarter, due in part to a 12.2% decline in cooling degree days compared with the third quarter of 2011. The decrease in retail sales volumes led to a 4%, or $7.3m decrease in TEP’s retail margin revenues compared with the third quarter of 2011.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.