Colorado Springs Business Journal » Blog Archive » Window for moving away from Drake might be closed

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Tom Hudson, a successful real estate investor in Colorado Springs during the 1980s, had a simple business philosophy.

“You don’t make money when you sell,” he used to say, “but when you buy.”

In 1924, Colorado Springs voters passed a $1.25 million bond issue to buy out the privately owned company providing electric service to the community. Today, 88 years later, Mayor Steve Bach and other community leaders have initiated a community discussion about re-privatizing the city’s electrical service provider.

Last year, Colorado Springs Utilities reported revenue from electrical services of $405 million, amounting to 45.2 percent of total system revenue. Electric plant capital assets were valued at $1.65 billion, not including accumulated depreciation and amortization of $802 million.

The system consists of 221 miles of transmission lines and 2,998 miles of distribution lines, 10 thermal generating units and five hydroelectric units. Coal-fired plants at the Drake and Nixon sites account for 462 megawatts of total capacity, which CSU historically has relied upon for base loads. Natural gas powers the 460-megawatt Front Range Power Plant at the Nixon complex, as well as five small peaking units toaling 115 MW at the Nixon and Birdsall sites.

It’s clear that the city made a spectacularly good investment. since 1924, electrical generation assets have grown from $1.25 million to $1.65 billion. That’s a rate of increase comparable to that of the Dow-Jones Industrial Average, which grew from 100 to 13,000 during the same period.

But just as the Dow lost half its value in the 2009 market meltdown, some utility assets may have declined in recent years.

Did CSU miss the boat? are we stuck with aging, uneconomical facilities that will continue to lose value and reliability? Did we miss the window of opportunity by failing to lock up long-term supplies of natural gas as the fuel became cheap and abundant?

“We have a pretty diversified portfolio,” noted Bruce McCormick, CSU’s chief energy service officer.”About half of our capacity is gas-fired.”

That’s a result of CSU’s 2010 decision to buy out its private partner in the gas-powered Front Range Power Plant, adding 230MW of capacity to the system for a price of approximately $800,000 per megawatt.

And if conditions warranted, the muchdespised Drake plant could be converted to gas.

“We can do that,” McCormick confirmed, “but we’d need a new (gas) pipeline — the existing line isn’t adequate. also, we’d need to secure a (long term) supply source — and that would be a challenge.”

On the positive side

Aging coal-fired power plants at Drake and Nixon may be old (the most recent, Nixon no.1, was constructed in 1980) but they’re reliable and cheap to operate.

Ten years ago, before sophisticated fracking technology unlocked massive reserves of shale gas across the United States, natural gas was rarely used for base load units. Gas prices were notoriously volatile, reserves were shrinking, and coal was cheap.

None of the seven “preferred portfolios” modeled in CSU’s most recent electric integrated resource plan, published in 2008, included new gas-powered generating units. several included additional coal-fired assets.

The analyses that produced the portfolios considered natural gas prices. For 2012, gas prices were forecast at $5.50 per million BTU (low range), $7 (medium) and $8 (high).

The forecasts were wildly wrong. Earlier this week, spot gas at the benchmark “Henry Hub” in Louisiana was $3.15/mmbtu, up from April’s low price of $1.84/mmbtu.

According to an Electric Power Research Institute study, a conventional combined-cycle natural gas plant costs about $1,000 per kilowatt of capacity constructed while a coal-fired plant costs more than $2,500 per KW hour to build.

Given that gas-powered plants are less polluting, less expensive to build and often cheaper to operate, it’s easy to understand why utilities are replacing coal-fired plants.

A 2012 study jointly produced by sustainability advocate Ceres and some of the nation’s leading investor-owned utilities predicted that 12 percent of the nation’s coal power capacity will be retired by 2020.

Five years ago, the Atlanta-based Southern Company, one of the nation’s biggest investor-owned utilities, got 70 percent of its electricity from coal. Today, it’s less than 50 percent. the company projects it will use more natural gas than coal in 2012 for the first time in its century of operation.

McCormick refused to speculate on the cost of conversion for CSU.

“Honestly, I don’t know,” he said. “We’ll be doing a full report on Drake next year, so we’ll have a better idea then.”

Convincing points

Yet arguments for keeping Drake and Nixon as coal-fired facilities remain powerful ones.

For one, as McCormick confirmed, both plants now burn low-sulfur Wyoming coal, which is inexpensive, plentiful and cheap to transport to Colorado Springs. Even if the suddenly controversial Neumann pollution control system has to be abandoned, the cost of bringing the facilities in compliance with present and future EPA mandates is a small fraction of the half billion dollar cost of replacing them.

And there’s another factor in play, one that may doom any attempt to sell the electric system.

CSU has more than $2.2 billion in long-term debt, all of which encumbers the entire system. Selling any substantial part of the system might force the immediate repayment of all such debt.

“I’d suggest that bond covenants would require that any proceeds be used to pay off the bonds,” said Colorado Springs financial analyst Allan Roth, “so they’d better get a pretty good price.”

Even if such a price were attainable, the sale might cripple the city’s ability to finance the water system.

In 2011, CSU’s total operating revenues amounted to $830.5 million. Water brought in $142 million, 17 percent of the total.

“We don’t subsidize one service with revenue from another,” McCormick said. “They all stand on their own.”

That may be, but it’s difficult to believe that an enterprise with such meager stand-alone annual revenue could support the billion-dollar price of Southern Delivery System, especially with lowered demand forecasts.

McCormick indirectly acknowledged the obvious.

“Certainly for the short term,” he said. “Having visited with a number of (bond underwriters), they do value the diversity of our core revenue streams.”

Utilities CEO Jerry Forte does as well.

“We’ll have (Drake) for another 20 years,” said Forte, after City Council’s recent decision to go ahead with the Neumann project. “Maybe we could do something about the plant’s appearance.

Colorado Springs Business Journal » Blog Archive » Window for moving away from Drake might be closed

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