Based on current emissions rules, technology and plans, NRG Energy has estimated that environmental capital expenditures from 2012 through 2016 to meet NRG’s environmental commitments will be about $553m, NRG said in its Feb. 28 annual Form 10-K filing.
These costs are primarily associated with mercury controls to satisfy the U.S. Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) on the company’s coal-fired Big Cajun II, W.A. Parish and Limestone facilities and a number of intake modification projects across the fleet under state or proposed federal 316(b) water quality rules. NRG said it continues to explore cost effective compliance alternatives to reduce costs and so these plans aren’t set in stone.
A table in the Form 10-K lays out installations of past air controls, and NRG’s current plans for future ones. For Big Cajun II Unit 1 in Louisiana, fabric filters are planned for 2015 for both SO2 and particulate control, with activated carbon injection planned for 2015 for mercury control. For Big Cajun II Unit 2, the plan calls for activated carbon injection in 2015. For Big Cajun II Unit 3, the plan is for fabric filters and activated carbon injection in 2015. Big Cajun II in total has 1,495 MW (net) of coal capacity within NRG’s 86% ownership stake in the plant.
For Limestone Units 1-2 in Texas, both selective non-catalytic reduction for NOx control and activated carbon injection are planned for 2014. And for W.A. Parish Unit 5-8 in Texas, the plans call for activated carbon injection in 2014. Limestone has a total of 1,690 MW (net) of coal capacity, while W.A. Parish has 2,490 MW (net) of coal capacity.
The coal-fired Indian River Unit 4 in Delaware in 2011 got a circulating dry scrubber for SO2, selective catalytic reduction for NOx and fabric filters for particulates. Indian River Unit 1 was retired in May 2011 and Indian River Unit 3 will be retired by Dec. 31, 2013. The plant in total currently has 580-MW (net) of coal capacity, which is a figure that includes the two operating coal units and doesn’t include the recently retired unit.
NRG noted in the Form 10-K that it is completely hedged for its domestic coal consumption for 2012. As of the end of 2011, NRG had purchased forward contracts to provide fuel for about 42% of the company’s expected coal requirements from 2012 through 2016, excluding inventory. NRG arranges for the purchase, transportation and delivery of coal for the company’s baseload coal plants via a variety of coal purchase agreements, rail/barge transportation agreements and rail car lease arrangements. NRG purchased about 27 million tons of coal in 2011, of which 98% was Powder River Basin coal and Texas lignite.
The lignite used to fuel the Limestone plant in Texas is obtained from the adjacent Jewett surface mine under a long-term contract with Texas Westmoreland Coal Co. The contract is based on a cost-plus arrangement with incentives and penalties to ensure proper management of the mine. NRG has the flexibility to increase or decrease lignite purchases from the mine within certain ranges, including the ability to suspend or terminate lignite purchases with adequate notice. The mining period extends through 2018 with an option to further extend the mining period by two five-year intervals.
NRG expands CO2 capture project at Limestone plant
In March 2010, NRG was selected by the U.S. Department of Energy to receive up to $167m, including funding from the American Recovery and Reinvestment Act, to build a 60 MW-equivalent post-combustion carbon capture demonstration unit at NRG’s W.A. Parish plant southwest of Houston. The plan is to use the captured CO2 in enhanced oil recovery operations in oil fields on the Texas Gulf Coast.
In the first half of 2011, an application was submitted to and approved by the U.S. DOE to conduct a front-end engineering and design, or FEED, study for an up-to 250 MW sized project at W.A. Parish, which would allow for larger volumes of CO2 production, leading to increased oil production through enhanced recovery efforts. The FEED study has been completed, and 50% of the costs of this phase were reimbursed by the U.S. DOE, NRG reported. To further the project’s enhanced oil recovery operations, in October 2011, Petra Nova LLC, a wholly-owned subsidiary of NRG, acquired a 50% interest in Texas Coastal Ventures LLC, which owns a 100% working interest in the West Ranch oil field in Jackson County, Tex.
Due to recent downward trends in market natural gas prices, NRG said it performed a sensitivity scenario by using the quoted natural gas prices on the New York Mercantile Exchange, or NYMEX, as of Dec. 31, 2011, and changes to the implied heat rate that would support new build of combined cycle gas plant in the Texas markets, coal and transportation charges, variable operations and maintenance costs, and the impact on forecasted generation for the baseload plants during the budget period. Under this sensitivity scenario, the fair value of NRG Texas was 16% below its carrying value at Dec. 31, 2011.
While not required, NRG said it further performed a high-level hypothetical step two analysis for this sensitivity scenario. Step two requires an allocation of fair value to the individual asset and liabilities using a hypothetical purchase price allocation in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recorded. Under the hypothetical step two for the sensitivity scenario it was determined that no goodwill impairment was necessary as of Dec. 31, 2011. If long-term natural gas prices remain depressed for an extended period of time, the company’s goodwill may become impaired in the future, which would result in a non-cash charge, not to exceed $1.7bn, related to the NRG Texas reporting unit.