Austin Energy to acquire Nacogdoches Biomass Facility

April 23, 2019

Austin Energy announced today it has reached an agreement with Southern Power to acquire the Nacogdoches Generating Facility, a wood waste biomass-fueled power plant in East Texas, for $460 million.

The 115 megawatt plant, which commenced commercial operation in 2012, currently provides 100 megawatts of renewable power to Austin Energy under a 20-year power purchase agreement. The transaction, which is expected to close in mid-2019, will allow Austin Energy to avoid approximately $275 million in additional costs over the remaining term of the agreement.

"Acquiring the biomass plant relieves our obligation to make escalating capacity payments to a third party and, over time, reduces the associated cost impacts to our customers," said Jackie Sargent, Austin Energy’s General Manager. "This transaction is consistent with our efforts to manage our portfolio of generation resources in a responsible and cost-effective manner."

While Austin Energy will take ownership of the plant, no immediate changes to the operation of the facility are expected, and its long-term status will be addressed in Austin Energy’s future resource planning efforts.

"Saving $275 million is a great result!" said Austin Mayor Steve Adler. "We play the hand we're dealt, and here it means we’ll be able to provide value for our customers and maintain leadership on renewable sources of power. We've been working since I got into office to get a better financial deal around the biomass plant."

Austin Energy has a target of offsetting 65 percent of its customers' energy needs with renewable resources by 2027. In 2018, wind, solar and biomass energy combined to offset 38 percent of the energy needed to serve Austin Energy’s customers.

JP Morgan is providing transaction support and Husch Blackwell is serving as outside legal counsel to Austin Energy in connection with the purchase.

More about Austin Energy's Purchase of Nacogdoches Biomass Plant

Southern Power conducted a brokered, negotiated sale of its 115-megawatt biomass wood waste-fueled generator with multiple bidders. Austin Energy was invited to participate in that confidential sale process and welcomed the opportunity to avoid millions of dollars of future costs. Through the sale process, Austin Energy successfully negotiated a purchase of the Nacogdoches Generating Facility for $460 million. Austin Energy anticipates that this purchase will allow it to avoid approximately $275 million in additional costs through 2032, when the 20-year Power Purchase Agreement (PPA) was set to end and will eventually have a positive impact on customer bills.

Austin Energy will transfer all the acquired plant assets to the City of Austin immediately after the close of the transaction and will likely contract operation of the plant to a firm that specializes in this type of work. Austin Energy will achieve significant cost reductions through refinancing, taking control of the plant’s operations, and no longer having to make payments to a third-party.

Background

In 2008, the Austin City Council approved a 20-year Power Purchase Agreement (PPA) to buy 100 megawatts of renewable energy from a 115-megawatt biomass power plant to be constructed near Nacogdoches, Texas. The facility was built to provide renewable energy to help meet newly established goals, mitigate rising energy prices, and diversify Austin Energy’s resource portfolio.

At the time, the price of natural gas, which drives power prices, was at an all-time high and projected to go higher due to supply concerns and the possibility of a cap on carbon emissions. Since then, several factors have changed, dramatically lowering energy prices. The widespread adoption of hydraulic fracturing technology increased natural gas supplies which, in turn, drove prices down. Also, the cost of other forms of renewable energy like wind and solar saw significant reductions. The effect of lower prices for natural gas and renewables has been that energy prices have fallen from their 2008 highs to much lower levels.

While the Nacogdoches PPA was entered at the height of the market, lower overall energy prices since then have been a benefit to our customers. Austin Energy’s strategy of diversifying our energy portfolio across a wide variety of power generation resources has been very successful. Much like a diverse investment portfolio, we spread risk across our energy supply portfolio by fuel type, size, location, and date acquired. As a result, Austin Energy remains highly competitive with some of the lowest rates - and more importantly – some of the lowest bills in the state.

FAQs

Why purchase this plant?

This is the financially prudent thing to do. Austin Energy is constantly looking for opportunities to enhance our system and manage the utility in the most economical way possible. Southern Power conducted a confidential competitive process to sell the Nacogdoches Generating Facility. If we had not participated, another buyer would have stepped in, and we’d continue paying under the existing contract. By taking direct ownership instead, we gain greater control over the operations of the biomass facility while avoiding hundreds of millions of dollars in additional costs over the next 12 years that remained on the PPA.

Is this purchase a way out of the contract?

While Southern Power has been an excellent business partner and has operated the plant in accordance with the PPA since 2012, this City Council has made it a priority to improve our financial position around the biomass plant. This transaction does exactly that by allowing Austin Energy to avoid approximately $275 million of additional costs over the remainder of the contract. Obviously, decisions were made in 2008 based on energy prices and market forecasts at that time. However, thanks to our strategy of diversifying our energy portfolio across a wide variety of power generation resources, Austin Energy customers have continued to enjoy some of the most competitive rates and the second lowest average residential bills in the state.

How is Austin Energy avoiding $275m in costs over the next 13-years by buying the biomass plant?

Austin Energy will no longer be required to make escalating capacity payments which are paid whether the plant runs or not. Southern Power is an investor-owned company and the current owner of the biomass plant. Austin Energy will no longer pay Southern Power a profit allowing us to avoid that cost. We will issue debt with a fixed payment for the next 13-years allowing us to avoid the increasing payments -- like exchanging an expensive escalating lease for a lower cost fixed-rate mortgage. Lastly, Austin Energy will seek operational and fuel management efficiencies which will directly result in lower costs for our customers. Every dollar we save goes directly to our customers.

Is tax revenue being used for this purchase and is this going to cause my property taxes to go up?

No. Property taxes are not being used to buy the Biomass plant and, in fact, the positive value of this deal will be passed on to Austin Energy’s customers in the future. As an enterprise of the City of Austin, Austin Energy operations are funded entirely through electric utility revenues, not property tax dollars, and this transaction is no different. By buying the plant, Austin Energy avoids $275 Million in costs over the next 13 years. While customers won’t see immediate changes to their bills, the value of this purchase will be accounted for and reflected in future rate adjustments.

Are you going to decommission the plant?

It would be premature to speculate about any long term plans. In the near term, we anticipate continuing to use the plant. That being said, we’ll continue to monitor and assess this facility, just as we do all the assets in our system, and will be prepared to make adjustments as the situation warrants. Austin Energy makes long-term decisions on its energy generation resources through the Austin Energy Resource, Generation and Climate Protection Plan. The biomass plant is already in that plan.

How will this affect my bill?

There are far too many variables to provide an individual estimate but, in the aggregate, we anticipate the utility, system-wide, will avoid hundreds of millions of dollars of cost over the next 12 years. So, while customers won’t see an immediate change, the value of this purchase will be accounted for and reflected in future rate adjustments.

Did City Council know Austin Energy was buying the plant?

Yes. As Austin Energy’s governing body we were consulted on this transaction. Due to the competitive nature of Austin Energy’s activities in the electricity market and the confidentiality requirements of the purchase process, we were not able to comment on this particular issue or briefings held in executive session. What we can say is this purchase improves our long-term financial position while providing value to our customers and residents.

Will Council need to approve the contract before it takes place?

The City Council, as the governing body of a public power utility, has already deliberated and approved this competitive matters transaction. The deliberation and vote occurred in executive session, pursuant to state law, because the seller’s competitive bidding process required confidentiality as a condition of participating in the process.

What safeguards are in place to allow us to avoid deals like the 2008 contract in the future?

In the decade since the original biomass plant contract was entered, not only has the market fundamentally changed but Austin Energy has taken a number of steps to improve our processes and lower our overall risk. We have a robust RFP process which is used to scrutinize and evaluate projects. We’ve invested in tools and technology – and made similar investments in our people – to give us the internal analyses and modeling capabilities to more fully understand the potential impact of a project on our portfolio. These analyses now account for more variables, as far more market data is available today. And much like having a diverse investment portfolio, we spread risk across our energy supply portfolio by fuel type, size, location, and date acquired. As a result, Austin Energy has been and remains highly competitive with some of the lowest rates - and more importantly – some of the lowest bills in the state. Finally, we’ve integrated policy direction from the Council, such as Affordability metrics, to help us make decisions that are both financially smart and reflective of our community's values.

About Austin Energy

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Austin Energy, the City of Austin's electric utility, serves more than 490,000 customer accounts and more than one million residents in Greater Austin. The utility’s mission — to safely deliver clean, affordable, reliable energy and excellent customer service — has guided Austin Energy in powering the community and supporting the region’s growth since 1895. 

Last Updated: 5/9/19

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