Fitch Ratings said May 30 that the acquisition last year by San Antonio City Public Service, which operates as CPS Energy, of a gas-fired power plant is helping the municipal utility to get ready for the 2018 shutdown of the coal-fired Deely plant.
Fitch was assigning ratings to various city electric and gas systems junior lien revenue bonds. The rating outlook is stable.
CPS provided exclusive electric service to 735,801 primarily residential electric customers and to 329,712 primarily residential gas customers in fiscal 2013 (Jan. 31 fiscal year). CPS is the sole supplier of electricity in its service area and is not subject to retail competition unless city council determines that CPS will opt into retail electric competition.
In addition to its retail customer base, CPS sells wholesale electricity to a number of regional cities and cooperatives under contracts ranging from two to seven years and through short-term economic sales within ERCOT. Wholesale sales increased in fiscal 2012 and 2013 to 24%-27% of total sales, up from 13%-15% previously, Fitch noted. Wholesale activity is expected to increase in fiscals 2014 through 2017, following the acquisition of the Rio Nogales Power Plant in fiscal 2013.
CPS owns and operates roughly 6,565 MW of generating capacity. The J.K. Spruce II unit, a 780-MW coal-fired facility, was brought on line in May 2010 and 190 MW of natural-gas peaking units came on line in December 2010. The new resources are replacing older, less efficient units, which are being retired. In addition, CPS continues to acquire a significant amount of renewable energy through long-term purchase power agreements. Of the 1,113 MW of purchased power renewable resources, about 95% is wind resources, Fitch said.
In April 2012, CPS purchased a 10-year-old natural gas-fired combined-cycle plant (Rio Nogales) from Tenaska. The plant has a maximum capacity of 750 MW and is located in Seguin, Tex., which is adjacent to CPS’ service area. CPS will own and operate the plant along with its fleet of 21 non-nuclear generating units.
The Rio Nogales plant capacity will replace the Deely plant once the Deely plant closes in 2018. In June 2011, CPS announced it would deactivate Deely by 2018, 15 years ahead of schedule, in lieu of spending the estimated $565m to install SO2 scrubbers to bring it into compliance with U.S. Environmental Protection Agency emissions standards. In overall cost planning, the purchase of the Rio Nogales plant replaces the anticipated cost of environmental improvements at Deely, Fitch said.
However, in the years leading up to Deely’s closure, CPS will take additional power supply risk, since the plant is now in excess to its native demand, Fitch pointed out. In order to mitigate the financial risk of this position, CPS has entered into a heat-rate call option for a portion of the plant’s capacity. The remaining capacity will be kept for native demand in case of an outage of another plant but, as is the case with the rest of the generation fleet, may be dispatched in the ERCOT market on a day-ahead basis, when economical.
CPS has identified about $2.66bn of capital improvement projects that it will undertake over the next five years, Fitch reported. Much of the capital program will be to make improvements to the electric distribution system. CPS is pursuing an ambitious energy conservation program called Save for Tomorrow Energy Plan (STEP) which is expected to reduce load growth through energy efficiency projects. Even with its STEP program, CPS still anticipates electric load growth of around 1% annually. The capital improvement program identifies various transmission and generation projects.
Currently, coal comprises almost 47% of the CPS daily generation mix, followed by nuclear at 32%. Renewable energy account for 9%, while natural gas and purchased power comprise the remaining 12%, said the CPS website. Between two Spruce units and two Deely units, CPS has a total of 2,184 MW of coal-fired capacity. CPS ships low-sulfur coal by train from Wyoming to the Calaveras Power Station in south Bexar County for use by J.K. Spruce and Deely.
“In addition to equipping our new coal plant with the latest in emissions-control systems, CPS Energy has upgraded existing coal units at a cost of $245 million,” said the CPS website. “The Spruce 1 & 2 units are some of the nation’s best environmentally controlled coal-fired power plants. The Deely coal-fired units are scheduled to be mothballed by the end of 2018.”