Fitch Ratings said April 24 that in part due to concerns about paying for new emissions controls on coal-fired power plants, it has lowered Edison Mission Energy’s (EME) and Midwest Generation LLC‘s (MWG) long-term Issuer Default Ratings (IDRs) to ‘CC’ from ‘B-‘.
At the same time, Fitch has lowered EME and MWG’s individual securities ratings. While EME’s recovery rating remains unchanged at ‘RR5’, MWG’s recovery rating for its secured working capital facility has been revised to ‘RR3’ from ‘RR1’. More than $4bn of long-term debt is affected by the rating actions. Fitch also issued a statement detailing rating actions taken regarding EME’s ultimate parent, Edison International (NYSE: EIX) and Edison International subsidiary Southern California Edison.
Key rating drivers for EME and MWG include:
- Low power prices represent a continuing and substantial challenge to EME and MWG’s long-term financial viability.
- Margin deterioration has exceeded Fitch’s expectations and EBITDA is expected to be negative in 2012 and 2013, owing to sharply lower power prices.
- EME debt leverage is unsustainably high relative to cash flows given the outlook for commodity prices and impact of environmental retrofit on operating margins.
- Operating losses, environmental capex requirements and pending debt maturities in 2013 and 2016 are significant challenges to EME’s long-term viability, in Fitch’s view.
- The termination of EME’s revolving credit facility and inability to attract third party funding for the coal-fired Homer City generating station in Pennsylvania underscores, in Fitch’s opinion, the severity of the challenges facing the company.
- Sufficient liquidity exists near term; however, a bankruptcy filing is a distinct possibility in the coming 12-24 months, in Fitch’s opinion.
“The lower IDRs for EME and MWG reflect the challenges to the companies’ future solvency and liquidity caused primarily by a prolonged decline in historic and forward power price curves, rising operating and capital costs due to environmental regulations and an unsustainably high debt burden,” Fitch said. “Fitch believes recent developments including EME’s termination of its bank facility, the lack of interest in third party funding for the Homer City generating station and announced plans not to retrofit two of its Illinois generating stations and cease operations underscore the challenging economics facing the company.”
The ratings downgrade reflects EME’s high debt levels, scheduled maturities totaling $2.2bn during 2013-2017 and expectations for a modest recovery in power prices off a low base in 2014-2015. The ratings also consider environmental rules regarding SO2, NOx and mercury, which pose significant long-term challenges for EME, in Fitch’s opinion.
As of Dec. 31, 2011, EME had $1.3bn of consolidated cash and cash equivalents on its balance sheet and asset sales and project financings are likely to provide additional sources of cash. But, operating losses in 2012 and 2013, combined with capital expenditures to complete non-discretionary projects will, in Fitch’s estimation, cause EME’s cash position to erode significantly during 2012-2015. While EME’s liquidity position appears adequate in the near term, the merchant generation company’s prospects for continued solvency in the intermediate-to-longer term based on Fitch’s outlook for market pricing for energy and capacity and operating cost projections appear poor.
The ratings and outlook for MWG reflect its position within the EME corporate family. MWG has little debt outstanding and nominally strong stand-alone coverage and debt leverage ratios. However, MWG’s debt ratings are linked to EME through an inter-company loan of proceeds from the Powerton and Joliet sale/leaseback agreement by MWG to EME. Powerton and Joliet are coal plants in Illinois. In addition, EME provides a guarantee (which is pari passu, or on equal footing, with its senior unsecured notes) to MWG rent payments under the Powerton and Joliet lease agreement. The lease debt is secured by a perfected first lien on the Powerton and Joliet Units 7 and 8 facilities.
“Environmental challenges loom large on the horizon,” Fitch wrote. “EME and MWG continue to evaluate whether to install emission control technologies to comply with existing state and federal regulations in the near-to-intermediate term or close non-compliant facilities. EME announced recently that it will close the Fisk and Crawford generating stations by the end of 2012 and 2014, respectively. In addition, the company identified Waukegan and Joliet 6 as plants that it is ‘less likely to be retrofit’ for environmental equipment and thus are likely candidates for future closings.”
In the fourth quarter, EME booked a $1.032bn pretax charge to reduce the carrying value of the Homer City plant to zero. EME is in negotiations to transfer its beneficial interest in the 1,884-MW, coal-fired plant to the owner-lessor. EME also booked a $640m pretax charge to reflect the write-down of three Illinois coal-fired generating stations (Fisk, Crawford and Waukegan) to zero.
Two of six Illinois coal plants targeted for closure
Crawford is a 532-MW, coal-fired plant located in Cook County, within the city limits of Chicago. The operating units are referred to as Units 7 and 8 and began operations in 1958 and 1961, respectively. In February, Midwest Generation decided to shut down Crawford by the end of 2014.
Fisk is a 326-MW, coal-fired plant located in Cook County, within the city limits of Chicago. The operating unit is referred to as Unit 19 and began operations in 1959. In February, Midwest Generation decided to shut down Fisk by the end of 2012.
Joliet is located in Joliet, Will County, about 40 miles southwest of Chicago. The operating units comprising Joliet are referred to as Units 6, 7 and 8. The operation of Units 6, 7 and 8 began in 1959, 1965 and 1966, respectively. Joliet Unit 6 is a 290-MW, coal-fired unit located adjacent to, but across the Des Plaines River from, Joliet Units 7 and 8. Joliet Units 7 and 8 are coal-fired and have a combined capacity of 1,036 MW.
Powerton is a 1,538-MW, coal-fired station located in Pekin, Tazwell County. The operating units comprising the Powerton are referred to as Units 5 and 6 and began operations in 1972 and 1975, respectively.
Waukegan is a 689-MW coal plant located in Waukegan, Lake County, on Lake Michigan. The operating units at Waukegan are Units 7 and 8 and began operations in 1958 and 1962, respectively. Midwest Generation shut down permanently Unit 6, representing 100 MW of capacity, in December 2007.
Will County is a 761-MW coal plant located in Romeoville, Will County. The operating units are Units 3 and 4 and began operations between 1955 and 1963. Midwest Generation shut down permanently Units 1 and 2 representing 299 MW of capacity in December 2010.
Chicago Mayor Rahm Emanuel and Midwest Generation announced Feb. 29 the planned retirement of Fisk and Crawford. According to an agreement signed by Midwest Generation, the Clean Power Coalition and the city of Chicago, Fisk will be retired by the end of 2012 and Crawford will retire by the end of 2014.
Edison International said in its Feb. 29 earnings statement: “Reflecting low power prices and required retrofits which are less economical for some smaller coal-fired generation stations, [Edison Mission Group] decided to shut down Midwest Generation’s Fisk by the end of 2012 and Crawford by the end of 2014. It also concluded it was less likely to retrofit Waukegan than the remaining larger stations, though no final decision has been made.”