El Paso sells Four Corners coal stake, putting more gas capacity into operation

El Paso Electric (NYSE:EE) said Aug. 3 in a quarterly earnings statement that recent highlights included the sale of its stake in the coal-fired Four Corners power plant in New Mexico and that lowlights included “regulatory lag” in recovering costs for new capacity at its gas-fired Montana power plant in Texas.

“We are pleased with our second quarter results and the progress that we have made. Although the impact of regulatory lag continues to adversely affect our operating results, our performance for the second quarter exceeded last year’s performance,” said Mary Kipp, Chief Executive Officer. “Our region continues to experience solid growth, and we set a new native system peak of 1,892 MW on July 14, 2016, which is 5.5%, or 98 MW, higher than the peak established in 2015. In fact, we have already experienced eight days this summer in which our peak exceeded last year’s peak. In addition, the recent sale of our interest in Four Corners means the Company no longer owns any coal-fired generation, and we expect to have final resolution of our pending Texas rate case soon.”

The completion of Montana Power Station (MPS) Units 1 & 2 (including common plant, transmission lines and substation) and the Eastside Operations Center (EOC) continues to have a negative impact on the company’s second quarter financial results, due to regulatory lag associated with the placement in service of these assets without a corresponding increase in revenues. The placement in service of MPS Unit 3 in May 2016 and the anticipated completion of MPS Unit 4 in September 2016 will continue the negative impact of regulatory lag until new and higher rates become effective.

In Texas, interim rates subject to refund or surcharge were implemented on April 1, 2016. However, due to the uncertainties surrounding the rate case, the company did not recognize the effects of the increased interim rates in its Statements of Operations. The company believes rates reflecting the recovery of the investment in and related costs of MPS Units 1 & 2 and the EOC will be in place in the second half of 2016 in Texas and New Mexico. The company anticipates filing new rate cases in Texas and New Mexico in early 2017 to reflect MPS Units 3 & 4 in rate base.

Income for the six months ended June 30, when compared to the six months ended June 30, 2015, was negatively affected by factors including:

  • Decreased AFUDC due to a reduction in the AFUDC rate effective January 2016 and lower balances of construction work in progress (CWIP”, primarily due to MPS Units 1 & 2 and the EOC being placed in service in March 2015, partially offset by AFUDC earned on construction costs related to MPS Units 3 & 4 in 2016.
  • Increased O&M expenses related to fossil-fuel generating plants, primarily due to maintenance outages on Four Corners Units 4 & 5 and Rio Grande Unit 7 during the first six months of 2016. These increases were partially offset by a maintenance outage at Newman Unit 5 in 2015, with no comparable expense in the same period in 2016.
  • Increased depreciation and amortization related to an increase in depreciable plant, primarily due to MPS Units 1 & 2 and the EOC being placed in service in March 2015 and MPS Unit 3 being placed in service on May 3, 2016, partially offset by a change in the estimated useful life of certain intangible software assets.
  • Decreased deregulated Palo Verde Unit 3 revenues, primarily due to a 21.8% decrease in proxy market prices reflecting a decline in the price of natural gas, partially offset by increased generation due in part to a Palo Verde Unit 3 planned 2015 spring refueling outage that was completed in May 2015 with no comparable outage in 2016.

On May 3, the company placed into commercial operation the third generating unit at MPS and the related common facilities and transmission systems at a cost of approximately $81.3 million. The 88-MW simple cycle aero-derivative combustion turbine is fueled by natural gas and has quick-start capabilities which allows the unit to go from off-line to full output in less than 10 minutes, thus increasing overall power grid stability, and work in concert with the company’s renewable energy sources. MPS Unit 4, identical to the other three MPS units, is expected to reach commercial operation September 2016.

El Paso Electric issued a separate Aug. 3 statement saying it had hit a milestone as the only utility in Texas and New Mexico to generate electricity 100% coal-free. This announcement comes at the end of a 50-year contract and sale of EPE’s 7% ownership of the coal-fired Four Corners Generating Station, located near Farmington, New Mexico. EPE decided that it would not extend its contract due to the uncertainty of significant economic and environmental impacts, and EPE’s ownership of Four Corners was sold to a subsidiary of Pinnacle West Capital Corp., which is also the parent company of Arizona Public Service (APS), based in Phoenix, Arizona, on July 6.

“This decision was not only the best environmental decision for our community, but it was also beneficial financially for all of our customers,” said Kipp. “El Paso Electric has a firm commitment toward providing safe, reliable, and clean energy that is also cost-effective, and as we analyzed our production of electricity, we began to see the ways in which we could make efficient use of new technologies that would be more economically viable for our operations.”

In recent years, the use of coal has become a contentious issue with many environmental groups which have worked together to take action to eliminate or severely limit its use in electric power generation. As more utilities try to do their part in reducing harmful emissions, EPE said it believes that the elimination of coal generation for the region is the right step forward.

Since 2009, El Paso Electric has been making significant investments in local generating facilities and in 2014, EPE doubled its utility-scale solar. That same year, EPE was recognized by the Solar Electric Power Association for its significant advances in renewable energy technologies.

“We remain committed to building a portfolio that includes renewable technologies that complement our local, quick-start, clean-burning natural gas units,” Kipp added.

As of July 27, El Paso Electric has a generation mix consisting of nuclear energy from Palo Verde Nuclear Generating Station located near Tonopah Arizona; local clean-burning natural gas plants; and a combination of ownership and power purchase agreements of large-scale solar facilities, which includes the largest solar facility in the state of New Mexico and the largest solar facility in El Paso County.

EPE continues to make advancements in solar energy with a new Community Solar Program launching in 2017, pending Texas regulatory approval. This program will provide all of EPE’s customers in Texas the option to subscribe to solar energy from a local solar facility in east El Paso County.

El Paso Electric is a regional electric utility providing generation, transmission and distribution service to approximately 400,000 retail and wholesale customers in a 10,000 square mile area of the Rio Grande valley in west Texas and southern New Mexico. El Paso Electric has a net dependable generating capability of 1,990 MW.

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.