Fitch downgrades Homer City bonds due to scrubber financing issues

In part due to problems by the operator of the coal-fired Homer City power plant in lining up new funding for a couple of SO2 scrubber projects, Fitch Ratings said March 23 that it has downgraded Homer City Funding LLC‘s (HCF) $300m and $530m Pass-Through Bonds to ‘B’ from ‘BB-‘.

“The downgrade reflects ongoing challenges at the project as a merchant coal facility in a low energy price environment as well as the impending $700 million-$750 million of capital needed to fund emissions controls,” said Fitch. “The Negative Watch on the pass-through bonds reflects the uncertainty regarding the outcome of a missed April 2012 equity payment and the possible termination of the senior rent reserve letter of credit (LOC).”

The Pennsylvania plant is operated and leased by EME Homer City Generation, an affiliate of Edison International (NYSE:EIX). The plant is owned by various financial entities. EME Homer City Generation said recently that it has had problems lining up the new funding needed to add SO2 scrubbers to two of the plant’s three coal units. The third unit has had a scrubber for some time.

“Due to the emissions allowances proposed under the Cross-State Air Pollution Rule (CSAPR) and environmental concerns under the Mercury and Air Toxics Standards (MATS), HCF’s economic viability relies on the installation of scrubbers,” Fitch pointed out. “Without these, Units 1 & 2 would likely cease operations under the current low gas and dark spreads environment.”

Homer City has been working towards a plan to obtain third party funding for the roughly $700m-$750m needed for scrubber installation on Units 1-2 due to CSAPR and MATS. The project has yet to receive consent from the existing bondholders to exceed the additional indebtedness provision that limits this number to $300m, Fitch reported. Homer City has been working with the owner-lessor to reach an agreement for financing and plans to meet a 2014 in-service date.

EME Homer City Generation (HCG) leases and operates a single facility with three coal-fired units in western Pennsylvania with an aggregate capacity of 1,884 MW. HCG sells energy and capacity into the PJM Interconnection and New York ISO on a merchant basis. HCG has a contract with Edison Mission Marketing & Trading (EMMT), an affiliated marketing entity, to sell energy and capacity. EMMT engages in forward sales and hedging transactions to manage electricity price exposure.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.