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IEEFA U.S.: PNM stance on Four Corners spells danger for NTEC

April 03, 2020

Seth Feaster

Given the economic shock enveloping the global economy, financing for coal-related projects will almost certainly become much harder. On top of that, coal use by power plants had already fallen to unprecedented levels in the first three months of 2020, as utilities across the country rushed to take advantage of ultra-low gas prices, now at their lowest level in two decades.

The economy is in a downturn worse than the financial crisis of 2007-2008, and any recovery may take an extended period of time. Funding problems for coal in general are so bad now that bankrupt Murray Energy, the fourth-largest U.S. coal company in 2018, recently cancelled an auction for its properties after it failed to get any qualifying bids.

ALL OF THIS MAY HAVE BIG IMPLICATIONS FOR NAVAJO TRANSITIONAL ENERGY COMPANY’S ABILITY TO SURVIVE ITS EXPEDITION INTO THE POWDER RIVER BASIN. By buying the Montana and Wyoming assets of bankrupt Cloud Peak Energy—the third-largest U.S. coal company in 2018—NTEC executives made an ill-timed and ill-advised move last year.

IEEFA’s annual coal market outlook (Market trends are pushing U.S. coal closer to a reckoning), published this week, details all the many forces working against the coal industry in general. NTEC, which is having trouble even meeting its tax and royalty obligations and hasn’t been able to put proper reclamation bonding in place, is as vulnerable as any coal company.

NTEC’s problems may be compounded by its dependence on Four Corners

Now, NTEC’s problems may be compounded by its dependence on the Four Corners Power Plant. The plant is the only customer for coal from NTEC’s Navajo Mine, and the company took a 7% ownership stake in Four Corners in 2018. The other 93% of the plant is owned by five utility companies: 63% by Arizona Public Service Co. (APS), 13% by Public Service Co. of New Mexico (PNM), 10% by Salt River Project (SRP), and 7% by Tucson Electric Power (TEP).

First, Four Corners’ biggest stakeholder, APS, announced in January that it was going to retire its stake in the plant by 2031—seven years earlier than planned.

Then, on April 1, PNM, which had just won approval from the New Mexico Public Service Commission to close the nearby San Juan Generating Station by 2022, publicly shifted its attention to Four Corners, saying “While the Four Corners ownership and coal supply agreements currently expire in 2031, PNM recognizes the opportunity for additional customer savings and benefits in taking steps to exit sooner.”

“Our focus will now turn to an early exit of the Four Corners Power Plant, and we will look for the right opportunities to execute on this,” PNM’s chief executive said in response to the PRC’s five-member unanimous approval of the San Juan closure.

In short, NTEC, which used its ownership of the Navajo Mine and in Four Corners as its foundation to purchase the Powder River Basin coal mines, is about to see that foundation crumble away.

How could NTEC executives not see this coming?

How could NTEC executives, with their ownership stake in the plant, and presumably some insight into the other owners’ thinking, not see this coming? And why, if the big utilities in NTEC’s own backyard were preparing to strongly shift away from coal-fired generation, would NTEC executives gamble the entire company on investing further in coal?

IN THE MINDS OF INSURERS AND LENDERS, THE ANNOUNCEMENTS BY PNM AND APS WILL RAISE ALARM in terms of NTEC’s long-term ability to pay its bills—the very financial backers it needs to survive the ongoing downturn in coal markets and the larger fast-moving economic crisis.

One of the takeaways from the decision on San Juan is that it clarifies that utility companies are in the driver’s seat on decisions like these.

PNM is aiming to go carbon free and has the policy framework support of the state of New Mexico to do so. APS ‒ not historically well known for being in step with electricity-generation trends ‒ announced an about-face in January saying that it, too, is getting out of coal-fired generation in a strategy that will also make it become a carbon-free utility.

All of these developments are working collectively in a way that makes NTEC the poster child for an energy investment strategy gone completely awry.

Seth Feaster ([email protected]) is an IEEFA data analyst.