Avenue Capital, Middle River Eye Purchase of Navajo Coal Plant

By Stephen Lee

Avenue Capital Group, a New York investment company, and Middle River Power, a private equity company from Deerfield, Ill., have emerged as potential buyers of the biggest coal-fired power plant west of the Mississippi, according to emails obtained by Bloomberg Environment.

It’s the first time any potential buyers have been identified.

Navajo Generating Station, situated on tribal land near Page, Ariz., is on track to close when its lease expires at the end of 2019. Unless a new lease is signed, the plant will start to be dismantled at that time.

Both Avenue Capital and Middle River Power, which have track records of buying distressed energy businesses, were named as possible suitors for the plant in a March 30 email from Ali Taqi, an investment banking associate at investment company Lazard Ltd., to Ted Cooke, general manager of the Central Arizona Project water authority.

Lazard has been hired by Peabody to find a new buyer for NGS. The Central Arizona Project buys most of its power from the plant, although it wants to get out of that obligation when the plant’s lease expires Dec. 23, 2019.

Taqi suggested, in one email, meeting with Cooke and “the interested counterparty (Middle River Power/Avenue Capital).” In an earlier email sent the same day, he referred to the two companies as “a very reputable and experienced counterparty that is interested in NGS.”

No Certainty Established

The two potential buyers wanted to discuss a power purchase agreement with CAP, Taqi said. But the email exchange doesn’t indicate how serious Middle River or Avenue Capital are about taking over the plant, raising the possibility that the companies may simply be curious to see NGS’ books.

The emails were provided to Bloomberg Environment by the Institute for Energy Economics and Financial Analysis, which has long argued that NGS is economically unsustainable. Their authenticity was confirmed to Bloomberg Environment by DeEtte Person, a Central Arizona Project spokeswoman.

“Ted [Cooke] did receive an email on this subject but we have no way to know whether it is a serious inquiry,” Person wrote.

A Lazard spokeswoman declined to comment, as did a representative of Salt River Partners, which owns the biggest share of NGS under the current lease.

Seeking a Taker

Navajo’s supporters—most prominently Peabody Energy, which supplies all of its coal—have been trying for months to find a taker. During that time, both Peabody and Salt River Partners, which owns the biggest stake in NGS under the current lease, have publicly said that as many as 14 entities have shown interest in taking over. But no names have been made public until now.

Avenue Capital, one of the biggest hedge funds in the world, controls some $12 billion in assets. According to its website, it seeks “good companies with bad balance sheets.”

Its subsidiary, Middle River Power, owns three gas power plants in California, Virginia, and West Virginia; one geothermal plant in California; and a coal plant near Baltimore. At 385 megawatts, that plant, known as C.P. Crane, is less than one-fifth the size of the 2,250 megawatt Navajo Generating Station. C.P. Crane is scheduled for closure in June, meaning Middle River will only have owned it for a little more than two years.

Environmental Concerns

Critics have said NGS isn’t economically viable under any ownership. Coal as a fuel source is more expensive than natural gas and renewables. Navajo’s current leaseholders have signaled they can’t make it work financially, and the challenge will become even harder if CAP follows through on its vow to stop buying power from Navajo.

Environmentalists also worry about the pollution created by both the power plant and the nearby Kayenta Mine, owned by Peabody. They question whether the $235 million bond Peabody has taken out will be enough to reclaim the 35.8 square miles that have been mined at Kayenta once the mine shuts down.

But to those supporting the plant, it plays a critical role in delivering water to 80 percent of Arizona and boosting the state’s economy.

“For more than four decades, the Navajo Generating Station has been a major economic engine in Northern Arizona, supporting over 3,000 direct and indirect jobs in the local community, as well as stimulating job creation throughout the state,” Rep. Paul Gosar (R-Ariz.) said in an April 12 House hearing.