City may try to buy biomass plant
Published: Wednesday, September 25, 2013 at 4:04 p.m.
Last Modified: Wednesday, September 25, 2013 at 4:04 p.m.
The Gainesville City Commission will not agree to the contract changes the biomass plant owner sought in order to ease the possible sale of the power station to another electric company.
Instead, commissioners have started weighing the expected benefits and risks of the city owning the plant in advance of making a potential offer to purchase the facility.
The Gainesville Renewable Energy Center notified the city in August that it was seeking tax equity investors or the outright sale of the plant and asked the city to waive its contractual right of first offer for a 120-day period in order to allow such a sale to happen.
If the city agreed and a deal went through, the company offered to reimburse the city for $1.5 million in legal fees associated with their recently concluded arbitration fight.
Citing a tight timeline to finalize a transaction, GREC President Jim Gordon sent the city a letter on Sept. 6 saying the city needed to grant the company its requests by Sept. 23 or the offer to cover legal expenses was off the table.
Late last Thursday evening, commissioners decided not to give GREC what it sought by not voting on the company's request.
"Taking no action is essentially saying no, we don't accept their offer," Mayor Ed Braddy said.
Instead, the commission forged ahead with the process of reviewing projected financial savings and any increased risk associated with owning and operating the plant.
That process will continue into October. The commission will have a special meeting to continue discussions on Oct. 2. The 60-day window for the city to make an offer on the plant expires on Oct. 22.
As it stands, the city is locked into a 30-year contract with estimated annual costs in the range of $100 million. That includes $70 million in fixed costs as long as the plant is available to run 90 percent of the time, whether it is actually producing power or not.
In early discussions on a possible offer to buy, Gainesville Regional Utilities General Manager Bob Hunzinger said the city potentially could find savings to those fixed costs. As a government, the city could get a lower interest rate on borrowing than GREC. That presumes a projected downgrade in the utility's bond rating to an A as GRU assumes at least $400 million in additional debt, and possibly more, on top of its current $1 billion in debt.
Under private ownership, the plant would be on the tax rolls, and GREC would collect the millions it pays each year in property taxes from GRU and, ultimately, its electric customers. Under public ownership, the plant would not pay property taxes, another source of savings, Hunzinger said.
There are also risks, including whether public ownership of the plant would keep it eligible for a $120 million stimulus grant for renewable energy projects. There is also the expected debt downgrade.
Last Thursday, GRU staff showed various scenarios based on purchase prices ranging from $500 million to $800 million. Hunzinger said the $500 million price likely would not bring GREC much in the way of profit.
"That would pay their loan off but not much else," he said.
Under the biomass contract, if the city makes an offer to buy the plant, GREC is required to negotiate with Gainesville for a minimum of 30 days.
"We will consider any offer the city makes, and we will consider it seriously," said GREC Chief Financial Officer Albert Morales. "But I don't believe we're going to be in a position to sell the plant to the city at below market value."
Morales said GREC has a dollar amount it considers to be the plant's sale value, but declined to discuss the figure publicly. As for the commission's decision not to grant the contract changes GREC requested in order to sell the plant to another company, Morales said it "does not completely rule out a transaction — but it doesn't make it any easier."
The 100-megawatt plant's projected date to be in commercial operation, which means all commissioning and testing is complete, has been pushed back from Nov. 17 to Dec. 2.
The plant faces an end-of-the-year deadline to be eligible for stimulus grant funding. Morales said the construction threshold to be eligible for that grant is to have the plant "placed into service," meaning GREC has taken over control of operations from its construction company and the facility is feeding power to the electric grid.
That is expected to happen in October, Morales said.
Christopher Curry is a Gainesville Sun staff writer.