Last Monday, a fire led to the outage of Colorado Springs Utilities System’s (Utilities, Aa2 stable) 254-MW coal-fired Martin Drake Power Plant in downtown Colorado Springs. Although the fire resulted in the shutdown of the Drake plant, Moody’s expect Utilities’ automatic cost adjustment mechanism and ample liquidity to mitigate the effects of the outage.
Moody’s expects Utilities to use its monthly electric cost adjustment mechanism to recover higher fuel and replacement purchased power costs; however, there will be a short-term mismatch in cash flows, whereby the cost recovery will lag the immediately incurred costs. The electric cost adjustment allows for recovery of variable fuel and purchased power costs. The utility also has a history of passing through timely rate increases, which have helped support its strong financial position. Utilities also has strong internal liquidity (200 days of cash on hand as of December 2013) that it can use to absorb the higher replacement power costs while Drake undergoes repairs and a change in the electric cost adjustment is made; however, if Utilities waits to use the electric cost adjustment or decides to absorb some of the higher replacement power costs, liquidity levels and debt service coverage would decline.
The severity of the credit effect is small now but could grow depending on the magnitude of the damage, the repair costs and time and the public’s perception of the plant and Utilities response to the incident. Increased public scrutiny and outcry might negatively affect Utilities’ willingness to pass through higher short-term costs to customers, and environmental activists might view this as an opportunity to build support against the coal-fired plant.
Loss of the Drake plant is material because the coal-fired plant is one of Utilities’ lowest-cost baseload power resources, providing about one-third of its annual power needs and 22 percent of its power capacity.
The plant outage will force Utilities to replace the cheaper coal-fired power generated from Drake with more expensive power generated from Utilities’ gas plants or purchased from other electric providers in the region. Liquidity and debt service coverage for 2014 will weaken if Utilities does not recover the higher energy costs before Dec. 31. Moreover, if the outage extends through the summer, replacement power costs could spike given the increase in demand tied to the summer.
Based on data compiled by SNL Financial, Drake’s total variable cost during 2010-12 was around $25 per megawatt-hour at a 68 percent average capacity factor, while total variable cost at Utilities’ 480-MW combined-cycle natural-gas-fired Front Range facility was approximately $36 per megawatt-hour at a 31 percent average capacity factor. Given that Utilities generated 1.5 million MWh of electricity from Drake in 2013, the financial effect could be substantial under a protracted outage.
Although the Colorado Springs Fire Department blamed the fire on lubricating oil coming in contact with high temperature steam pipes, the fire’s root cause remains under investigation. The repair costs likely will be covered by insurance, although insurance payments are not generally timely. If insurance proceeds are not adequate, Utilities must pay the repair costs from cash on hand because these costs are not automatically recoverable through the electric cost adjustment mechanism. These costs can be recovered from a base rate increase that requires city council approval and takes longer to implement. Given the downtown location of the plant, the fire was highly publicized and the investigation is likely to attract significant public attention.
The plant also was undergoing upgrades to comply with the Environmental Protection Agency’s Mercury and Air Toxics Standards ruling; however, Moody’s understand that the fire did not damage the new technology.