Duke Energy Progress to buy 701 MW of coal and nuclear

Duke Energy Progress applied Oct. 10 at the Federal Energy Regulatory Commission for approval of a transaction under which it will purchase from the North Carolina Eastern Municipal Power Agency ownership interests in certain coal and nuclear generating units that are jointly-owned with Duke Energy Progress.

The “Joint Units” include three nuclear units and two coal-fired units, which total approximately 701 MW. Duke Energy Progress is a subsidiary of Duke Energy (NYSE: DUK). The parties had first announced this deal on July 28.

“DEP’s acquisition of the Joint Units is part of a broader arrangement designed to enable Power Agency to reduce its debt burden by applying the proceeds from the sale to retire approximately 70% of Power Agency’s approximately $2.1 billion of debt,” Duke Energy Progress said in the Oct. 10 application. “DEP will use the Joint Units, in combination with its existing fleet, to meet Power Agency’s full electrical needs. The addition of the unique mix of the Joint Units – including three low operating cost nuclear units – to DEP’s generating fleet will produce substantial fuel cost savings for DEP, which will result in overall reductions to DEP’s cost-based wholesale and retail rates.”

DEP’s analysis of the energy-related savings resulting from the transaction shows that under a number of fuel-price scenarios, the transaction is prudent and provides measurable, demonstrable benefits to ratepayers, even with the recovery of the full acquisition adjustment.

Power Agency is a municipal joint action agency. Since 1982, it has served as the all-requirements bulk power supplier to 32 cities and towns in eastern North Carolina that formerly were wholesale electric service customers of Carolina Power & Light or Virginia Electric and Power. Power Agency participants own and operate their electric systems and serve nearly 270,000 retail customers. Power Agency was formed in 1978 and is managed by ElectriCities of North Carolina, headquartered in Raleigh.

The five generating units, each of which is operated by DEP, that are subject to this application are:

Nuclear Units

  • 18.33% in Brunswick Unit 1, which began operations in 1977. The Nuclear Regulatory Commission license for Brunswick Unit 1 expires in 2034. This unit has a generating capacity of approximately of 938 MW, and Power Agency’s nominal share is 171.9 MW.
  • 18.33% in Brunswick Unit 2, which began operations in 1975. The NRC license for Brunswick Unit 2 will expires in 2036. This unit has a generating capacity of 932 MW, and Power Agency’s nominal share is 170.8 MW.
  • 16.17% in Harris Unit 1, which began operations in 1987. The NRC-issued license for Harris Unit 1 expires in 2046. This unit has a generating capacity of 928 MW, and Power Agency’s nominal share is 150.1 MW.

Coal Units

  • 16.17% in Mayo Unit 1, which began operations in 1983. This unit has a generating capacity of 727 MW, and Power Agency’s nominal share is 117.6 MW.
  • 12.94% in Roxboro Unit 4, which began operations in 1980, and 3.77% in the Roxboro Plant common facilities. This unit has a generating capacity of 698 MW, and Power Agency’s nominal share is 90.3 MW.

Under an Operating and Fuel Agreement between DEP and Power Agency, DEP operates, maintains, and is responsible for fueling the Joint Units. That agreement also provides for DEP to make replacements and capital additions to the Joint Units (with approvals from Power Agency), and makes DEP responsible for the ultimate decommissioning or retirement of the Joint Units at the end of their useful lives.

“As of December 31, 2013, Power Agency’s total indebtedness had grown to over $2 billion, resulting in annual debt service costs in excess of $260 million,” said the application. “This has resulted in high rates for Power Agency’s Participants, which in turn has resulted in high rates for the Participants’ retail customers. In addition to the high electricity costs faced by these customers, the high retail rates have made it very difficult to attract new industries and businesses to the areas served by Power Agency’s Participants, which still have not fully recovered from the economic recession. Power Agency concluded that its only viable option to substantially reduce its debt costs and thereby reduce its rates was to sell the Joint Units.”

The $1.2bn purchase price, with agreed upon adjustments, was the “sweet spot” that enabled this transaction to move forward through the negotiation phase with substantial benefits for both parties, the application noted. The Power Agency had wanted a purchase close closer to its $2bn debt level.

Under the terms of the transaction, Power Agency will no longer own any generation, with the exception of about 14 MW of diesel generators (growing to 20 MW by Jan. 1, 2016) that are connected to certain members’ distribution systems.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.