Entergy Texas Inc. applied Dec. 30 at the Texas Public Utility Commission for approvals needed for it to acquire a piece of the Union Power Station in Arkansas.
Sallie T. Rainer, employed by Entergy Texas Inc. (ETI) as President and Chief Executive Officer, testified about the proposed purchase of the electric generating unit known as Power Block 1 of the Union Power Station (UPS) and related assets from Union Power Partners LP. Under the overall deal, other Entergy Corp. (NYSE: ETR) subsidiaries would acquire the other three power blocks at UPS.
ETI is seeking from the Texas commission:
- An amendment to its Certificate of Convenience and Necessity (CCN) to include Power Block 1 and associated assets and common facilities;
- A determination, via a sales, transfer, merger application (STM), that the Power Block 1 Acquisition is consistent with the public interest; and
- A determination that, for ratemaking purposes, the entire investment to acquire Power Block 1 Acquisition, including transaction costs, is eligible for inclusion in ETI’s rate base.
UPS is located in southern Arkansas on more than 300 acres in Union County. The facility began operation in July 2003 and is comprised of four combined-cycle gas turbine (CCGT) power blocks. Each power block has the same design and capacity rating, which are 495 MW (summer) and 538 MW (nominal).
“Overall, Power Block 1 is expected to generate over $100 million in net benefits for ETI customers over the assumed remaining life of the resource (2014$ NPV) and, since it is an existing resource, will be available for service to customers immediately after the closing of the Power Block 1 Acquisition,” said Rainer.
“ETI projects that its owned and contracted capacity will be approximately 22% short of its capacity requirements in 2016 (roughly 900 MW), with a resource deficiency that grows each year thereafter,” Rainer added. “By 2023, ETI is estimated to be approximately 37% short of its capacity requirement (roughly 1,700 MW). … A CCGT resource such as Power Block 1 is well suited for such a supply role because it is reliable, capable of flexible operation, and runs efficiently. Including Power Block 1 in the Company’s generation fleet will reduce ETI’s projected capacity deficit, fulfill an important base-load and load-following supply function and enhance ETI’s current generation fleet with efficient technology.”
This deal would push back need for a new plant until 2021
Anthony P. Walz, employed by Entergy Services Inc. (ESI) as Director, Planning Analysis, wrote about the Union plant: “Currently, the facility has only 1,450 MW of Network Resource Interconnection Service (‘NRIS’) transmission service and 1,250 MW of Energy Resource Interconnection Service (‘ERIS’). NRIS determines the amount of capacity that can be used to satisfy MISO’s Resource Adequacy Requirements. Mr. Andrew O’Brien explains that, under the Asset Purchase Agreement, UPP is contractually committed to obtain from MISO 500 MW of NRIS for each power block and 2,000 MW of NRIS for UPS overall. UPP has a pending request in MISO’s Generation Interconnection queue to obtain that additional NRIS transmission service.”
Walz added: “The acquisition price of UPS, $479/kW, is less than half the cost of constructing a new CCGT, which I estimate to cost between $1000 and $1200/kW. The cost range for constructing a new CCGT is based on information from Electric Power Research Institute’s Technology Assessment Guide, conceptual engineering studies, and actual costs for construction of the Ninemile 6 CCGT.
“The situation does not present a choice between building a new resource in Texas and acquiring UPS. As explained in the Direct Testimony of Mr. Stuart Barrett, ETI needs approximately 0.9 GW of additional capacity by 2016 and 1.7 GW of additional capacity by 2023. Based on this need, ETI currently plans on adding a new build CCGT in Texas in 2021. UPS Power Block 1 is not being considered as an alternative to this 2021 resource in Texas. Instead, it is being considered as an alternative to a second new resource in Texas. Stated differently, the comparison being made is between a resource plan with both UPS and a new resource in Texas versus a resource plan with two new resources in Texas.
“At this time, given its attractive price, UPS represents an economic and efficient means of meeting a portion of ETI’s long-term needs compared to the prospect of constructing a second new CCGT facility. As I indicated above, the cost of building a new CCGT would be much higher than the acquisition price of UPS. These investment requirements would immediately affect customers’ rates, whether the new resource is added in the form of an owned resource or a purchased power agreement. Consequently, as compared to a second new build alternative, UPS starts with the advantage of a lower base rate increase. Any energy benefits associated with locating a second new resource closer to load would not overcome the fixed cost advantage of UPS for many years. Also, as market conditions tighten, the opportunity to add long-term capacity at prices below the cost of building new resources will decline. It is not expected that ETI will have an opportunity to acquire long-term resources at cost equivalent to UPS in the coming years.”
Stuart Barrett, Director of Resource Planning and Market Operations for Entergy Texas, said about the Union power block buy: “ETI understands that the PB1 Acquisition will not address the entire capacity shortfall that ETI is facing, but will go a long way in meeting ETI’s long-term capacity needs. ETI continues to explore other long-term options to meet its capacity needs such as additional purchased power capacity and new-build generation, including ~800 MW of incremental new build generation in Texas planned for 2021.”
Andrew J. O’Brien, the Director, Commercial Operations at Entergy Services, wrote in his testimony: “UPS consists of four power blocks (designated power blocks 1, 2, 3, and 4), each of which has a summer rating of 495 MW and a nominal rating of 538 MW, and related equipment, systems, and infrastructure. Major components of the UPS power blocks include, in total, eight General Electric Company (“GE”) Frame 7241FA combustion turbines (“CTs”), eight Alstom Power Inc. heat recovery steam generators (“HRSGs”), four GE D-11 condensing steam turbines (“STs”), and other items. Each of the four power blocks is configured in a 2 x 1 arrangement (two CT/HRSG trains each and one ST each).”
O’ Brien added: “The Facility is owned by UPP. UPP is a Delaware limited partnership and a wholly-owned subsidiary of Entegra TC LLC (“Entegra”). Entegra is a Delaware limited liability company that is the functional successor to Entegra Power Group LLC (“Entegra Power Group”), which was dissolved as part of a bankruptcy reorganization approved by the U.S. Bankruptcy Court for the District of Delaware in September 2014. UPP is an exempt wholesale generator under the Public Utility Holding Company Act, with market-based rate authority for the sale of energy, capacity, and ancillary services.”
This transaction came about as a result of an unsolicited offer Entergy Corp. received (through ESI) from UPP (through Entegra Power Group) in June 2014. Said O’Brien: “The unsolicited June offer superseded a prior unsolicited offer from UPP in May 2014. Negotiations surrounding the June offer ensued and culminated in the execution of a letter of intent with Entegra and UPP (“LOI”) on October 14, 2014. The LOI contained a binding exclusivity provision, which prevented UPP and Entegra from negotiating with other prospective purchasers until January 31, 2015. Negotiations among the parties continued after the execution of the LOI until the [asset purchase agreement] was signed on December 8, 2014.”
One of the UPP facility’s power blocks is committed to EAI through May 31, 2017, under a tolling agreement dated October 2012, between UPP and EAI.
Three Entergy subsidiaries wuld buy the four power blocks
The transaction contemplates four distinct asset purchases, one by ETI, one by Entergy Arkansas Inc. (EAI), and two by Entergy Gulf States Louisiana (EGSL), with the possibility that EGSL may succeed to the rights of ETI or EAI under certain circumstances. UPP, Entegra, and the Entergy companies have executed a single acquisition agreement, the APA, under which EAI, EGSL and ETI will acquire the facility’s four power blocks and associated assets from UPP for an aggregate purchase price of $948m, subject to adjustments prescribed by the agreement.
The identified Purchaser in the APA for each of the power blocks is:
- Power Block 1: ETI;
- Power Block 2: EAI;
- Power Block 3: EGSL; and
- Power Block 4: EGSL.
Sections 2.22(d) and (e) of the APA obligate EGSL to replace EAI and/or ETI as power block purchasers should either EAI or ETI not obtain satisfactory final regulatory approvals, subject to EGSL’s receipt of required regulatory approval to acquire the additional power block(s).
John F. Harrison, employed by Entergy Louisiana LLC as Manager of the Ouachita power plant, said that the UPS facility is well maintained, adding: “The due diligence process indicated that UPP has managed maintenance on the CTs and STs using various parts suppliers (and parts reconditioning services) and technical support by the Original Equipment Manufacturer (“OEM”) and other providers. UPP has generally adhered to the gas turbine maintenance inspection intervals recommended by the OEM. UPP has utilized non-OEM suppliers to extend the service intervals of some major hardware.”
Harrison added: “Facility-wide, the majority of major maintenance gas turbine parts in service at the time of acquisition (end of 2015) will be at the end of the OEM’s stated parts life when removed at the next gas turbine maintenance outage. The terms of the Asset Purchase Agreement exclude gas turbine major maintenance spare parts from the sale, although the contract grants the purchasers the option to buy those parts. Major maintenance parts that are at end of life and cannot be refurbished will require replacement with new parts as turbine maintenance outages become due over 2016-2021 and rotational spare parts are needed. The outage scope in general will include new Hot Gas Path and combustion parts installed in the gas turbines. In addition, all three generators at each power block will have major inspections that may include removal of the generator rotor for detailed inspection. The steam turbine will also undergo the first major inspection since the units were commissioned.”