EME Homer City Generation, due largely to problems raising new money to install SO2 scrubbers on two of the three units at coal-fired Homer City plant in Pennsylvania, may cease to exist, said EME Homer City in a delayed March 28 annual Form 10-K report.
EME Homer City, which leases the Homer City plant from financial entities, is controlled by Edison International (NYSE:EIX). EME Homer City normally files its Form 10-Ks and Form 10-Q quarterly reports the same day as Edison International, but this time it took an extra month to file the EME Homer City report, since the Edison International Form 10-K was lodged on Feb. 29.
EME Homer City, called simply “Homer City” in the filing, was formed for the purpose of in 1999 acquiring, owning and operating three coal-fired units and related facilities located in Indiana County with an aggregate capacity of 1,884 MW.
The consolidated financial statements in the Form 10-K were prepared assuming that EME Homer City will continue as a going concern. “The reduction in energy prices experienced in the fourth quarter of 2011 and into 2012 has adversely impacted cash flow, and Homer City is not expected to be able to generate sufficient cash flow from operations necessary to meet its obligations, including the obligations under the Homer City lease,” said the filing. “As described further below under Homer City Lease, it is unlikely that Homer City will continue as a going concern throughout 2012.”
During the fourth quarter of 2011, EME Homer City failed to obtain sufficient interest from market participants necessary to fund the capital needed to make environmental improvements under the current lease arrangement. “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 approximately $700 million to $750 million,” said the Form 10-K. “Homer City does not currently have sufficient capital and does not expect to generate sufficient funds from operations to complete retrofits. 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.”
The Form 10-K added: “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 agreements 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.”
Homer City has access to both PJM and NYISO markets
The Homer City plant is located on a 2,413-acre site about 45 miles northeast of Pittsburgh within Indiana County. The plant consists of the three coal units, a coal cleaning facility, water supply provided by a 1,800-acre reservoir site known as Two Lick Dam, which is not part of the 2,413-acre site, and associated support facilities. The Homer City generating units benefit from direct transmission access to both PJM and the New York ISO through seven high voltage lines which interconnect through a switchyard located on the site.
Homer City Units 1 and 2 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 Unit 1 and 2 boilers have been retrofitted with low-NOx burners to meet Phase I 1990 Clean Air Act standards. In addition, both boilers have supplemental over-fired air systems to further reduce NOx emissions to satisfy Pennsylvania Title I (ozone) requirements. Selective catalytic reduction units have been installed on Units 1 and 2 for further reduction of NOx. These are the units needing the new scrubbers.
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 which satisfied Phase I 1990 CAA standards, and a supplemental over-fired air system was installed in 1995 to further reduce NOx emissions. In addition, a scrubber and a selective catalytic reduction system were installed on Unit 3 in 2001.
Scrubbed unit can burn higher-sulfur coal
Homer City Units 1 and 2 have historically consumed 2.8 million to 3.3 million tons of mid-range sulfur coal per year. Two types of coal are purchased; ready-to-burn and raw coal. Ready-to-burn coal can be burned directly in Units 1 and 2, while the raw coal must be cleaned in the Homer City coal cleaning facility, which has the capacity to clean up to 5 million tons of coal per year.
Unit 3 has historically consumed 1.5 million to 2 million tons of coal per year and can consume either raw or ready-to-burn coal. Coal consumption in the current low natural gas price environment may be lower than the historical range, the Form 10-K noted. A wet scrubber system for Unit 3 enables this unit to burn less expensive, higher sulfur coal, while still meeting environmental standards for emission control. In general, the coal purchased for all three units is acquired locally.
As of the end of 2011, EME Homer City had 3.3 million tons of 2012 coal under contract and 0.8 million tons of 2013 coal. The amount of coal under contract in equivalent tons is calculated based on contracted tons and applying a 13,000 Btu/lb equivalent.
Homer City is subject to price risk for purchases of coal that are not under contract. Market prices of Northern Appalachia (NAPP) coal, which are related to the price of coal purchased for the Homer City plant, increased during the past two years. The market price of NAPP coal based on 13,000 Btu/lb heat content and less than 3 lbs of SO2 per MMBtu sulfur content was $73.30/ton at the end of 2011, compared to a price of $70/ton and $52.50/ton at the end of 2010 and 2009, respectively, as reported by the U.S. Energy Information Administration. In 2011, the price of NAPP coal ranged from $70/ton to $78.20/ ton, as reported by the EIA. The 2011 increase in NAPP coal prices was primarily driven by the export market demand and global coal pricing.
U.S. Energy Information Administration data shows that coal suppliers to Homer City in January included Alpha Natural Resources (NYSE:ANR), Rosebud Mining, RFI Energy and Unionvale Coal.