Closing of Navajo Coal-Fired Plant Called Positive for Operator

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DALLAS – A decision to close the coal-fired Navajo Generating Station is a positive credit factor for operator Salt River Project, according to Moody's Investors Service.

Phoenix-based SRP co-owns the plant with the U.S. Bureau of Reclamation and three other utilities: Arizona Public Service Co., NV Energy, and Tucson Electric Power Co.

Last June, the Los Angeles Department of Water and Power sold its 21% stake in the plant as part of a plan to end its use of coal. The LADWP still has a stake in one coal-fired plant.

The four remaining owners of the plant decided Feb. 13 to close the plant when the lease expires in 2019. The plant sits near Page, Ariz., in the Navajo Nation that straddles northeast Arizona and parts of New Mexico and Utah.

Coal-supplier Peabody Energy hopes to find a way for the Navajo Nation or another agency to operate the plant beyond 2019.

Low-cost coal has faced a recent run for its money as cleaner and cheaper natural gas led utilities to convert, sell or close their coal-fired plants. Environmental regulation has added to the risk of operating the plants, though President Trump has promised to increase the use of coal.

Moody's analyst Dan Aschenbach called the decision to close Navajo credit positive for SRP because it reduces risks for the operator.

"Additionally, coal-fired generation has become increasingly less competitive owing to low natural gas prices and an influx of renewable resources," Aschenbach said.

"The decision to close the plant has been difficult, considering the various regional stakeholders," Aschenbach noted. "NGS has a long-standing role in providing local employment and tax revenue for the Navajo Nation and local community. Further, NGS has supplied 90% of the power needed to pump water through the Central Arizona Project, which serves 80% of Arizona's water needs."

The owners could have voted to close the plant this year but decided to wait until the current lease ends in December 2019.

SRP said delaying the closure would preserve jobs and revenues for the Navajo Nation and Hopi Tribe for almost three years. The decision also provides the Nation or others with the potential to operate the plant beyond 2019 should they so choose.

"The utility owners do not make this decision lightly," said Mike Hummel, deputy general manager of SRP, the plant's operator. "NGS and its employees are one reason why this region, the state of Arizona and the Phoenix metropolitan area have been able to grow and thrive. However, SRP has an obligation to provide low-cost service to our more than 1 million customers and the higher cost of operating NGS would be borne by our customers."

According to a recent study by the National Renewable Energy Laboratory, electricity produced at NGS is currently more expensive than electricity purchased on the wholesale spot market.

"Price trends examined suggest a turnaround might be years away, especially if natural gas prices remain low," the study said.

SRP needs to reach an agreement with the Navajo Nation that would allow the plant to continue to run through the end of its lease on Dec. 22, 2019 and allow removal and restoration activities, which could take up to two years. Hummel said the discussions are critical because without an agreement between the owners and the Navajo Nation, the plant would be required to cease operations in 2017.

"We are committed to work with the Navajo Nation on several fronts, including transmission and water rights, developing gas reserves and partnering on renewable energy projects like the Kayenta Solar Project," Hummel said.

The Central Arizona Project that channels water to southern Arizona from the Colorado River expects power supplies to compensate for the loss of the NGS.

"NGS has been a reliable source of pumping energy for CAP [Central Arizona Project] for more than three decades and sales of surplus NGS energy have provided millions of dollars to assist in repaying the costs of the CAP," said Thomas McCann, deputy general manager, Central Arizona Project.

"But the electric market has fundamentally changed over the last few years to the point that NGS is now significantly more expensive than other energy alternatives," McCann said.

Aschenbach said that closing NGS benefits SRP ratepayers in the Phoenix area.     

"Low natural gas prices have weakened the competitive position of older coal-fired generation facilities," Aschenbach said. "In that vein,
the public power industry is moving to close coal-fired plants or convert them to natural gas facilities."

Utah's Intermountain Power Agency has decided to close the two-unit 1,800 MW Intermountain Power Project and build a natural gas fired generation facility nearby. San Antonio's CPS Energy plans to close its J.T. Deeley Unit 1 and 2 coal-fired generation units in 2018, Aschenbach noted.

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