Performance of the coal-fired power plants in Illinois of Dynegy Inc. (NYSE: DYN) slipped a bit in the first quarter of this year due to various factors, including power market issues and the retirement last year of the Vermilion plant, said Dynegy in its May 10 Form 10-Q report.
The coal segment consists of six plants, all located in the Midwest ISO region, and totaling 3,132 MW. Out of the six, Oglesby and Stallings are gas-fired. The coal units and their net ratings are: Baldwin, 1,800 MW; Havana Unit 6, 441 MW; Hennepin, 293 MW; and Wood River Units 4-5, 446 MW.
At the Illinois plants, called CoalCo for short, both on-peak and off-peak power prices were lower in the first quarter of 2012 compared to the first quarter 2011 while generation volumes decreased period over period. Energy revenue and the corresponding cost of sales decreased by $65m and $5m, respectively, for a net decrease in energy margin of $60m.
Energy revenues decreased due to lower power prices in the Midwest ISO market associated with warmer than normal weather and lower load demand. Generation volumes were down due to lower demand as a result of a mild winter which resulted in fewer day-ahead commitments at Hennepin and lower day-ahead commitment levels at Havana and Wood River in the first quarter 2012 compared to the first quarter 2011, as well as the mothballing and subsequent retirement of Vermilion in 2011. The retirement of Vermilion also contributed to a lower cost of sales as Vermilion had a higher delivered fuel cost.
Dynegy is up-to-date on consent decree needs
At the Illinois plants, a 2005 consent decree reached with the U.S. Environmental Protection Agency requires substantial emission reductions from these coal-fired power plants and the completion of several supplemental environmental projects in Illinois. Dynegy said it has achieved all emission reductions scheduled to date under the consent decree and only Baldwin Unit 2 has material outstanding decree work yet to be performed, which is scheduled for completion by the end of 2012.
Dynegy expects costs associated with the remaining decree projects as of March 31 to be approximately $54m and $3m for the remainder of 2012 and 2013, respectively. This estimate includes a number of assumptions about uncertainties beyond its control, such as costs associated with labor and materials.
Dynegy’s expected coal requirements in Illinois are 99% contracted and priced in 2012. Its forecasted coal requirements for 2013 are 62% contracted and 29% priced. The remaining contracted volumes are unpriced but are subject to a price collar structure. Coal transportation requirements are 100% contracted and priced through 2013. Coal transportation rates will be renewed in 2014 at levels higher than current rates. “We continue to explore various alternative contractual commitments and financial options, as well as facility modifications, to ensure stable and competitive fuel supplies and to mitigate further supply risks for near- and long-term coal supplies,” Dynegy noted.
Dynegy’s New York assets also slip in Q1
Dynegy Northeast Generation, which is a Dynegy affiliate that has been in bankruptcy since November 2011, has coal-fired generation at the Danskammer plant in New York, plus gas-fired generation at the Roseton plant in the same state. While Dynegy Inc. doesn’t count earnings anymore from Dynegy Northeast Generation (DNE) and DNE’s in-bankruptcy parent, Dynegy Holdings (DH), it did report some financial details for those operations in the Form 10-Q.
During the first quarter, average spark spreads were flat year over year and dark spreads at Danskammer were compressed by lower Zone G power prices and increased coal prices. Gross margin for DNE decreased by $15m from $16m for the first quarter of 2011, to $1m for the first quarter of this year. Energy revenue and the corresponding cost of sales both decreased by $30m and $16m respectively for a net decrease in energy margin of $14m. Energy margin decreased due to lower power prices and lower generation volumes. The decrease in volumes is due to generation costs associated with Roseton and Danskammer being higher than what could have been realized in the market for longer periods of time in the first quarter 2012 compared to the first quarter 2011.
DNE is made up of the Roseton and Danskammer facilities located in Newburgh, N.Y., with a total capacity of 1,693 MW. A total of 1,570 MW of generation capacity relates to leased units at the two facilities. In connection with the Chapter 11 cases, DH and related companies rejected these long-term leases. But they have continued to operate the leased facilities to the extent necessary to comply with applicable federal and state regulatory requirements until operational control of the facilities is permitted to be transitioned.
A substantial portion of expected physical coal supply and delivery requirements for 2012 for Danskammer is fully contracted and priced for the forecasted run throughout the remainder of the year. Any coal shortfall due to unexpectedly high burn rates will be purchased in the spot market from domestic suppliers.
Notable is that Dynegy Danskammer LLC on March 23 got the bankruptcy court to reject two short-term contracts with Patriot Coal (NYSE: PCX). Since entering into the contracts in 2011, the price of coal has significantly decreased resulting in Dynegy Danskammer being “out-of-the money” with respect to the Patriot contracts, the March 5 rejection motion said.
“For example, Dynegy Danskammer believes that if it were to purchase the same quality coal in the ‘spot’ market, it could do so at an approximate 20% savings to the pricing set forth in the executory contracts,” the rejection filing said. “Moreover, due to the unseasonably mild winter, Dynegy Danskammer’s demand for coal has decreased and, as a result, Dynegy Danskammer no longer believes that it requires the full amount of the coal shipments contemplated under the executory contracts. In light of these factors, the debtors engaged in conversations with Patriot in an attempt to modify the executory contracts to bring the terms in line with the market and needs of the debtor’s estates. It is only after these discussions failed, that Dynegy Danskammer made the decision to seek rejection of the executory contracts….”