Albuquerque, NM, Jan. 18, 2006 — PNM Resources announced it has reached an agreement with Sempra Generation to purchase one of Texas’ cleanest-burning coal power plants for $480 million in cash.
The Twin Oaks Power facility, a 305-megawatt plant located 150 miles south of Dallas, is the latest step in implementing the company’s strategy of expanding its merchant generation fleet to serve a growing wholesale market in the Southwest and in Texas’ competitive electricity market, also known as the Electric Reliability Council of Texas, or ERCOT. The facility will be held in a newly formed subsidiary of PNM Resources.
Hugh Smith, senior vice president of Energy Resources, said Twin Oaks provides the company lower-cost coal generation in a market that is driven by natural gas. He said the majority of the plant’s output is sold for the next five years under two existing contracts. According to the first off-take agreement that is currently under-market, 100 percent of the plant’s capacity is committed through September 2007. When that contract expires, it will be replaced with another contract for 75 percent of the plant’s capacity through 2010, which is at current market prices. PNM Resources will market the excess energy and capacity within ERCOT, Smith said.
The Twin Oaks purchase agreement also includes the development rights for a possible 600-megawatt expansion of the plant. Sempra has been obtaining necessary permits, which are expected in 2007. If the permits are granted and PNM Resources begins construction to expand the plant, an additional $5 million payment will be made to Sempra.
Chuck Eldred, PNM Resources chief financial officer, said PNM Resources has arranged for bridge financing to close the transaction. The permanent financing will come from the issuance of debt and equity, structured to maintain the company’s investment grade rating.
Eldred said the purchase of the Twin Oaks facility includes the acquisition of certain contracts, which will be recorded at fair market value under purchase accounting and amortized into income. While the acquisition of the Twin Oaks facility is expected to be neutral to slightly accretive to earnings in the first 18 months of ownership, approximately 15 percent to 20 percent of earnings during this period will include the amortization of these items into income. The acquisition is expected to be fully accretive after the first 18 months. The purchase accounting valuation is subject to final adjustments at close. Eldred also said the plant is expected to be neutral to cash flow in 2006 and accretive thereafter.
The plant uses fluidized bed combustion technology and limestone injection to reduce nitrogen oxide and sulfur dioxide emissions. Fully operational in 1991, Twin Oaks has an average equivalent availability factor of 91.5 percent the past four years and is fueled by lignite from a nearby mine.
The plant has access to water and transmission, being cooled by water from three wells and connected to a nearby substation by a 345-kilovolt transmission line capable of carrying 1,200 megawatts.
Upon completion of construction of the Luna Energy Facility in southern New Mexico and closing of the Twin Oaks transaction, combined with long-term wholesale purchase contracts and owned generation capacity serving retail and wholesale loads, PNM Resources and its subsidiaries will have a total generation capacity of 2,873 megawatts produced by coal, nuclear, wind and natural gas generating plants in three states. The company provides wholesale power to customers throughout the Southwest and serves more than 744,000 retail electric customers in Texas and New Mexico.
The transaction is expected to close on or after April 17, subject to third-party consents and anti-trust clearance under the Hart-Scott-Rodino Act. Sempra Generation, a Sempra Energy subsidiary, acquired the Twin Oaks plant in October 2002 when Texas-New Mexico Power sold the plant to abide by Texas’ electric deregulation law.