Ameren Corp. (NYSE:AEE) has decided to “decelerate” an SO2 scrubber installation program at its coal-fired Newton plant in Illinois due to uncertainty about new U.S. Environmental Protection Agency air rules and low power prices.
During a Feb. 23 earnings call, Ameren Chairman, President, and CEO Tom Voss said: “As we look beyond 2012, we cannot ignore the potential negative impact of lower prices on our cash flows. As most of you are aware, since late 2011, there has been a sharp decline in forward power prices. We attribute this most recent price decline to the U.S. Court of Appeals order staying the Cross-State Air Pollution Rule or CSAPR, as well as the recent decline in natural gas prices.”
An appeals court on Dec. 30, 2011, stayed EPA’s CSAPR rule while the parties to various appeals of that rule prepare for oral arguments to take place in April. CSAPR imposes new NOx and SO2 rules on states in the eastern U.S.
“It is unclear to us exactly when legal and regulatory uncertainties related to CSAPR will be resolved and when natural gas and power prices will recover,” Voss added. “This decline has prompted us to again revise capital spending plans for our merchant generation business. As a result, we have decided to immediately decelerate construction of the Newton scrubber project, postponing installation until such time as the incremental investment necessary for completion is justified by the visible market conditions.”
In addition, Ameren is removing from its five-year expenditure plans an Edwards Unit 3 “helper” electrostatic precipitator project. The coal-fired Edwards plant is also located in Illinois. “We believe that these actions are the best path to ensuring appropriate returns on incremental environmental investments and achieving continued positive free cash flow at our merchant generation business segment during this period of low power prices,” said Voss about the Newton and Edwards Unit 3 decisions.
Ameren estimates that these actions will reduce 2012-2014 capital needs by about $270m compared to prior plans. As the company ramps down the Newton scrubber project, it will preserve the value of work commissioned to-date. It plans to take delivery and place the various completed components and materials into a safe store condition over the remainder of 2012. Ameren has already initiated discussions with partners and vendors on the task, timelines, and cost associated with decelerating the project.
Notable is that the delay in the Newton scrubber project may be bad news for high-sulfur coal producers in the region around the plant and good news for the suppliers of Powder River Basin (PRB) coal to the plant. That is because a scrubber allows a plant to burn higher-sulfur coals and Newton will apparently have to stick to its current low-sulfur coal supply for however long the scrubber delay lasts. Newton is a 1,151-MW plant consisting of two pulverized coal wet bottom boilers. U.S. Energy Information Administration data shows Newton in November 2011 taking only PRB coal, with the supplying mines including the Black Thunder operation of Arch Coal (NYSE:ACI) and the North Antelope Rochelle mine of Peabody Energy (NYSE:BTU).
Ameren has a lot of coal on standby in 2012
Ameren Senior Vice President and Chief CFO Martin Lyons said that in 2012, Ameren anticipates having available generation of up to 32.5 million megawatt hours from its coal-fired merchant generation energy centers in the event power prices rise and support higher generation levels. Its baseload fuel and transportation related costs are about 93% hedged at approximately $24 per megawatt hour.
In answer to an analyst question, Lyons noted that Ameren’s longstanding multi-pollutant reduction agreement with the state of Illinois also comes into play around 2015 when the company has to cut fleetwide SO2 emissions. “Between now and then, we really don’t expect that we would have any forced reductions in generation levels as a result of CSAPR or the multi-pollutant standard or other rules,” Lyons added.
Lyons also addressed a question about compliance with EPA’s new Mercury and Air Toxics Standards (MATS) rule. “When you get onto 2015, as it relates to MATS compliance, absent the Newton scrubber we think we have other ways to comply with activated carbon and precipitators, low-sulfur coal and the like. And as it turns out with the CSAPR rules obviously they’re uncertain right now because they’ve been stayed. But based on the allowances that came out in the final rules, based on our decision to shut down Meredosia and Hutsonville, the CSAPR rules really aren’t seen as a significant limitation either.”
Voss said that the power prices his company has seen in the first quarter don’t look supportive of continuing with the investments at Newton and Edwards. “So the prices did have a significant impact on the decision,” he added. “The other things, though, that also effected the decision where the stay of the CSAPR rules and the final MATS rule that came out as well as our decision last year to shut down Meredosia and Hutsonville. [The] shut down of Meredosia and Hutsonville changed our emissions profile for a fleet, so that impacted our outlook.”
In October 2011, Ameren Energy Resources Co. LLC (AER), the holding company for the merchant generation business of Ameren, announced that Meredosia and Hutsonville would cease operating by the end of 2011. The net generating capacity of Meredosia is 369 MW, including one 203-MW, coal-fired unit, and one 166-MW, oil-fired unit. Hutsonville has two coal-fired units with a net generating capacity of 151 MW.
Lyons was asked if Ameren was seeing any major coal-to-gas switching in the MISO region, since Calpine recently reported a lot of that switching in PJM. “No,” said Lyons. “I think within MISO at least within certainly our part of MISO gas prices being as low as they are, we’re seeing maybe a little bit of gas-fired generation coming into the mix. Certainly as we look ahead ourselves to this coming year, we’ve talked about having about 25 million megawatt hours that we’re going to generate. I think our coal-fired plants are going to produce about 26.5 million megawatt hours and maybe 0.5 million megawatt hours coming from our gas assets, so we’re expecting a little bit more contribution this year from our gas assets. Overall though within MISO, in our part of MISO, the low cost delivered PRB coal is still pretty competitive with the gas assets that exist in our part of the country. So certainly with these low gas prices there will be more gas generation, but I think to a lesser extent than you may be seeing in other parts of the country.”