EME Homer City Generation LP has failed to come up with needed financing for new emissions controls for the coal-fired Homer City power plant and efforts have begun to possibly turn effective control of the plant over to several financial entities that own the Pennsylvania facility and lease it to EME Homer City.
EME Homer City, a unit of Edison International (NYSE:EIX), described the situation in a Feb. 29 Form 8-K filing with the SEC, which took the place of an annual Form 10-K report that it would have normally filed at this time.
EME Homer City and its indirect parent, Edison Mission Energy, engaged a financial advisor and conducted a bidding process to obtain capital funding from third parties during the second half of 2011 to partially finance the installation of the environmental improvements at Homer City. During the fourth quarter of 2011, these efforts failed to obtain sufficient interest from market participants necessary to fund the capital needed to make the improvements under the current lease arrangement.
“Homer City does not currently have sufficient capital and does not expect to generate sufficient funds from operations to complete retrofits,” said the Form 8-K. “Restrictions under the agreements entered into as part of Homer City’s 2001 sale-leaseback transaction affect, and in some cases significantly limit or prohibit, Homer City’s ability to incur indebtedness or make capital expenditures. Consequently, Homer City’s ability to install environmental compliance equipment will be dependent on funding from the owner-lessors or third parties. Homer City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City’s loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City’s default under the lease agreement giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both.”
There is no assurance that a deal will be reached with the owner-lessors or the existing secured lease obligation bondholders on funding the capital improvements, the Form 8-K added. EME Homer City believes it is unlikely to meet the covenant requirements of its sale-leaseback documents relating to the payment of equity rent at April 1 and will be unable to make the required equity rent payment. There is no assurance that subsequent rent payments will be made.
A failure to pay equity rent does not entitle the owner-lessors to foreclose upon Homer City’s leasehold interest, but it does result in the suspension of Homer City’s ability to make permitted distributions, the Form 8-K added. Moreover, Homer City would be permanently restricted in its ability to make permitted distributions if a failure to pay equity rent when due was not cured within nine months, or even if cured, occurred more than one additional time during the term of the lease.
EME Homer City is now scheduled to file its annual Form 10-K by March 30. In connection with the preparation of the financial statements to be included in such filing, Homer City concluded that certain long-lived assets were impaired in the fourth quarter of 2011. An impairment charge will be recognized in Homer City’s year-end financial statements because Homer City concluded that the future undiscounted cash flows through the period in which Homer City expects to continue to have significant economic interest and material control of the Homer City plant were insufficient to recover the carrying amount of Homer City’s property, plant and equipment. The amount of the charge has not yet been finalized. However, it is expected to be about $500m.
“Homer City is currently engaged in discussions with the owner-lessors through General Electric Capital Corporation (‘GECC’), one of the owner participants, regarding the funding of capital improvements at the Homer City plant,” said the Form 8-K. “If these discussions are successful, it is expected that an affiliate of GECC will obtain the economic benefit and majority ownership of all the operating assets of Homer City. The transfer of ownership would be effected on a consensual basis.”
In addition, GECC is engaged in discussions with certain of the holders of the secured lease obligation bonds regarding amendments to the terms of the 8.137% Senior Secured Bonds due 2019 and the 8.734% Senior Secured Bonds due 2026, each issued by Homer City Funding LLC.
The estimated cost of installing SO2 and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is expected to be $700m to $750m. In order for this emissions control equipment to be operational by early 2014, which is the expected deadline under current federal environmental regulations, construction would need to begin in the second quarter of 2012. A contractor for engineering, procurement and construction services has been selected to install and construct the emissions control equipment, the Form 8-K said.
GECC is prepared to provide the capital in the form of an equity contribution to complete the installation of this emissions equipment under certain circumstances that are part of the ongoing discussions with the restricted holders.
Units 1-2 at Homer City, located in Indiana County, Pa., were placed into commercial operation in 1969. Unit 1 has an installed capacity of 620 MW and Unit 2 has an installed capacity of 614 MW. The Units 1-2 boilers have already been retrofitted with low NOx burners, supplemental over-fired air systems and selective catalytic reduction (SCR) for NOx control.
Unit 3 commenced commercial operation in 1977 and has an installed capacity of 650 MW. The boiler for Unit 3 was originally constructed with low NOx burners, and then a supplemental over-fired air system was installed in 1995 to further reduce NOx. SO2 scrubber and SCR systems were installed on Unit 3 in 2001.
The plant burns mid- to high-sulfur coal from coal suppliers in the region around the plant site, with a coal cleaning facility located at the plant to process some of that coal.