Duke reaches costs settlement for Edwardsport coal gasification power plant

Source: Duke Energy

Duke Energy Indiana, a unit of Duke Energy (NYSE:DUK), announced a settlement agreement with some of the state's key consumer groups involved in regulatory proceedings dealing with the company's Edwardsport coal gasification power plant. 

The proposal, which was filed with state regulators, is subject to Indiana Utility Regulatory Commission (IURC) approval. 

Participants in the settlement, which covers all phases of the Edwardsport subdocket proceedings, are the Indiana Office of Utility Consumer Counselor, the Duke Energy Indiana Industrial Group and Nucor Steel-Indiana. 

The joint intervenor group, consisting of the Citizens Action Coalition, Sierra Club, Save the Valley and Valley Watch, is not part of the settlement. 

"If approved, this agreement achieves two important objectives: It reduces what Duke Energy Indiana customers will pay for an advanced technology power plant, and it resolves uncertainty for Duke Energy shareholders," said Duke Energy Indiana President Doug Esamann. 

"We're now in the home stretch of completing a facility that will modernize our electric system and provide Indiana with cleaner power to meet increasingly strict federal environmental regulations," he added. 

Construction on the Edwardsport coal gasification plant near Vincennes, Ind., is nearly complete and due to begin serving customers this fall. Current plant costs are estimated at $3.3 billion, including financing charges. 

Key provisions of the proposed settlement include: 

• A cap on project costs to be included in electric rates of $2.595 billion, which includes estimated financing costs through June 30, 2012. If a commission order placing the project into customer rates comes after June 30, Duke Energy Indiana will be able to recover additional financing costs until customer rates are revised. 

• Customers will not pay the full cost of the project. Overall customer rates will rise, on average, an additional 9.6 percent above the approximately 5 percent already in rates. The increase will be implemented over two years (3.2 percent upon settlement approval and then a 6.4 percent increase in mid-2013). 

• Without the settlement, the project would have increased customer rates by approximately 22 percent, compared to approximately 14.5 percent as a result of this agreement. 

• Other settlement terms, effective upon commission approval, that help limit the rate impact to 14.5 percent, include:
o reduced annual depreciation expense of $35 million on assets other than Edwardsport, and
o elimination of approximately $22 million in annual deferred tax incentives. 

• The settlement also stipulates a $32 million annual reduction in customer rates related to depreciation expense on pollution control investments in the company's next electric base rate case. 

• The agreement stipulates that the earliest the company can file a new base rate increase request with state regulators is March 2013, with rates effective no earlier than April 1, 2014. 

• The agreement also designates approximately $20 million to reimburse consumer group attorney fees, litigation expenses and other funding commitments, including $3.5 million of contributions over five years to Indiana's Low Income Home Energy Assistance Program and $1 million to fund a collaborative clean energy initiative by Duke Energy Indiana and the Office of Utility Consumer Counselor. 

As a result of the settlement provisions, Duke Energy expects to take pretax charges of approximately $420 million (20 cents per share) in the first quarter of 2012. These charges will be reflected as a "special item" and, therefore, excluded from adjusted diluted earnings per share. The company had previously recorded pretax charges of $265 million related to the project. 

Background on the Edwardsport Project

The Edwardsport plant will use state-of-the-art technology to gasify coal, strip out pollutants, and then burn that cleaner gas to produce electricity. This advanced, integrated gasification combined cycle (IGCC) technology significantly improves plant efficiency and reduces carbon emissions per megawatt-hour by nearly half. 

Regulators authorized the company in 2007 to construct the technologically advanced clean coal power plant in Edwardsport, Ind. It is the first time a plant this size using this advanced clean coal technology has been built. 

The approximately 618-megawatt plant is a critical part of Duke Energy Indiana's efforts to modernize its generation fleet and an initial step toward replacing older, coal-fired generation expected to be retired due to pending EPA regulations. The Edwardsport plant will: 

• Produce 10 times as much power as the former plant at Edwardsport, yet with significantly less environmental impact than the much smaller plant it replaces. 

• Be the first major new coal-fired power plant built in Indiana in more than two decades. The plant is a key step in modernizing the state's aging electric system. 

• Generate marketable byproducts. This plant will produce sulfur and slag for agricultural and construction materials. Any revenues from marketable byproducts will go to customers. 

• Replace a 160-megawatt, 60-plus-year-old power plant with state-of-the-art efficiency. Because of its efficiency, Edwardsport will be one of the first plants called on when power is needed, which reduces the need to run older, less efficient units. 

• Create jobs. As one of the largest construction projects ever undertaken in Indiana, about 3,500 construction workers and other professionals worked on site during peak construction. The plant will employ about 130 full-time workers. In addition, the 1.7 million to 1.9 million tons of coal the plant will use each year will support an estimated 170 mining jobs.

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