Ameren Corp. (NYSE: AEE) has decided to write down the value of the coal-fired Duck Creek power plant in Illinois due to a fall in electricity markets and margins, Chairman, President and CEO Tom Voss said during the company’s May 4 earnings call.
Duck Creek is in the company’s merchant generation business. “We have sold forward or hedged all of our expected 2012 merchant generation output at prices above current market levels,” Voss said. “As a result, we continue to expect our merchant generation segment to be free cash flow positive this year and for Ameren Energy Generating Co., or Genco, to provide for its own cash needs with the benefit of existing money pool receivables. However, as we look beyond 2012, we cannot ignore the potential negative impact of low energy and capacity prices on our cash flows. As you are aware, in early 2012 there was a sharp decline in forward power prices. In response, in February we announced an approximately $270m reduction in capital spending plans for our merchant generation business for the years 2012 through 2014. In the first quarter, a decline in power prices also led to the write-down of our Duck Creek energy center, which I mentioned earlier.”
In a second recent action, Ameren’s merchant generation business filed a request for a variance from the Illinois Multi-Pollutant Standard (MPS) with the Illinois Pollution Control Board. In that petition, Ameren is seeking additional time to comply with SO2 emission levels, currently set to become effective Jan. 1, 2015. “In exchange for delaying compliance with these levels through 2020, we have proposed a plan that restricts our sulfur dioxide emissions through 2014 to levels lower than those required by the existing MPS, offsetting any environmental impact from the variance,” Voss noted. “We have indicated to the Pollution Control Board that if we are not granted the variance, or power prices do not materially increase, there is a significant risk that we’ll have to mothball some of our unscrubbed merchant generation coal-fired energy centers beginning in 2015. The Pollution Control Board is expected to rule on our request by late summer 2012.”
Senior Vice President and CFO Marty Lyons noted how environmental decisions at the Illinois coal plants are largely being driven by the tough MPS, not the in-flux and in-litigation U.S. Environmental Protection Agency programs like the Cross-State Air Pollution Rule (CSAPR) and the Mercury and Air Toxics Standards (MATS). “You may recall as a result of our compliance with the Illinois multi-pollutant standard, we’ve made significant investments in environmental controls,” Lyons said. “We burn low-sulfur Powder River Basin coal. We control mercury through the use of activated carbon. We’ve got a lot of controls on our plants, and those controls, those investments are positioning us well in our merchant business for compliance with MATS, and then we’ll see how CSAPR evolves, although we feel like we were positioned well for compliance with the CSAPR rules.” He said helping Ameren comply with the rules is a decision last year to shut down a couple of older, uncontrolled coal plants.
Lyons then answered a question about why Duck Creek, a 410-MW coal plant, was singled out for a writedown. “When you do an impairment test from an accounting perspective, first you look at the expected gross cash flows undiscounted over the remaining lives of the generating assets and then compare it to the carrying values,” he said. “The Duck Creek facility did have a high book value or carrying value per megawatt, and that was really a function, as you mention, of the environmental equipment that is on that plant and that we invested in. But also, you might recall, that generating unit was actually acquired when Ameren acquired CILCORP years ago, and as a result at that time in purchase accounting, that plant was written up to its then fair value. So it had a higher book value as a result of that purchase accounting, and then on top of that the investments were made for environmental controls, so it had a fairly high book value compared to our other plants.”
Asked whether, if the CSAPR rules are not changed, Ameren can get to 2020 without having to scrub, Voss said: “I think we’re positioned pretty well for those rules. I guess I don’t have the data here in front of me to say whether we’re well positioned all the way out through 2020 or what some of the impacts may be, but we are positioned well for it, again for the reasons I mentioned earlier. When we looked at the emission allowances or the credits that we had as a result of the shutdown of the Meredosia and the Hutsonville facilities we did last year, as well as the pollution control equipment we have in place and the use of the Powder River basin coal, we’re positioned well.”
Said Lyons in answer to a question about current plans for a Newton scrubber project, which is a project the company a few months ago decided to “decelerate”: “[W]hen we looked out to 2015 absent the Newton scrubber and if the multi-pollutant standard wasn’t in place, we believe we were positioned well for compliance with CSAPR and don’t believe the Newton scrubber would be needed to meet the CSAPR requirements. That’s why we’re very focused on the multi-pollutant standard variance and relief. Your question about the considerations around the Newton scrubber – obviously we’re pursuing this relief from the Pollution Control Board relative to the MPS. Absent that relief, we would be sort of back to where we were, I would say, when we last talked on our year-end earnings call, which would be that we believe that if we reaccelerate the scrubber project, it would take about 20 to 24 months to complete that; and again, the way the multi-pollutant standard currently works, there’s a ratchet down in terms of SO2 emissions out in the 2015 timeframe. So sometime in the first half of next year is sort of the point that is critical, and if we decided to reaccelerate sometime in the first half of next year, we’d be in a position to have the scrubbers in place the first half of 2015. But again, there are a lot of factors we’ll consider in making that evaluation and making that decision.”