Edison International (NYSE: EIX) is getting ready to turn over its leased, coal-fired Homer City power plant in Pennsylvania to the owner-lessors and is also having trouble with bondholders related to emissions controls needed on its Midwest Generation coal fleet in Illinois.
Ted Craver, Chairman and CEO of Edison International, said during a May 2 earnings call that given the simultaneous need to retrofit the Midwest Generation fleet with emissions controls and meet future debt maturities at a time when power and capacity prices are at a cyclical low, a restructuring or reorganization of Edison Mission Energy’s capital structure may be needed. “Further to this point, we take note of reports that EME bondholders may be seeking to organize themselves,” he added.
Craver said the company continues to work with GE Capital to transfer Homer City to the owner lessors. On March 29, EME Homer City and GE Capital signed an agreement that sets forth a roadmap for completing the transfer. Much of the problem at Homer City relates to the fact that the plant must have new emissions controls installed, including two SO2 scrubbers, to meet new air standards and EME Homer City ran into trouble lining up financing for those projects.
Turning to Midwest Generation, Edison Mission Energy has accelerated the timeline for closure of the coal-fired Fisk and Crawford facilities to September 2012, Craver said. Edison Mission Energy has also requested a one‐year extension, to December 2014, of the compliance deadline for environmental retrofits at the coal-fired Waukegan Unit 7. The closure of Fisk and Crawford stations, and the resulting emission reductions, more than offset any impact of a one‐year extension at Waukegan, and give the company more time to assess capacity market and forward power prices that will affect final retrofit decisions, Craver said.
Midwest Generation swings to loss in Q1
Midwest Generation had a net loss of $9m for the first quarter of 2012, compared to net income of $48m for the first quarter of 2011. The decrease in earnings of $57m was primarily attributable to lower average realized energy prices, lower capacity prices, higher fuel prices, and reduced generation, said Midwest Generation in a May 2 Form 10-Q filing. Reduced generation resulted from lower economic dispatch, increased planned maintenance in 2012 versus 2011 and a weather anomaly seen in March when unseasonably warm weather increased river temperature to levels that impacted the thermal discharge limits of the Joliet and Will County units.
“The abundance of low-priced natural gas has continued to result in increased competition from natural gas-fired generating units in the markets in which Midwest Generation operates, and generation from Midwest Generation’s plants has been correspondingly affected,” said the Form 10-Q. “Effective January 1, 2012, a favorable long-term rail contract that supplied Midwest Generation’s fleet expired and was replaced by a higher priced contract. Midwest Generation expects that its average fuel cost ($/MWh) will increase by approximately one-third in 2012.”
Unless energy and capacity prices increase substantially, Midwest Generation said it expects that it will incur an operating cash flow deficit and operating losses in 2012 and subsequent years. A continuation of these adverse trends coupled with the need to retrofit its plants to comply with governmental regulations will strain Midwest Generation’s liquidity. In order to retrofit its coal-fired plants, Midwest Generation will need to borrow additional funds or receive additional contributions from Edison Mission Energy. Midwest Generation plans to fund operating cash flow deficits through a combination of cash on hand, management of fuel inventories, deferral of operations and maintenance expenses and acceleration of the timing of collections from affiliates.
During the first quarter of 2012, Midwest Generation continued to develop and implement a compliance program that includes the operation of activated carbon injection (ACI) systems, upgrades to particulate removal systems and the use of dry sorbent injection, combined with the use of low sulfur Powder River Basin coal, to meet emissions limits for criteria pollutants, such as NOx and SO2 as well as for hazardous air pollutants, such as mercury, acid gas and non-mercury metals.
Midwest Generation has decided to shut down Fisk and Crawford in September 2012, advancing a schedule announced only in February that would have seen Crawford shut at the end of 2014 and Fisk at the end of 2012. The shut downs have been approved by PJM. Midwest Generation has sold capacity forward through May 31, 2015, for both Fisk and Crawford. However, Midwest Generation said it has not sold its full capacity forward during those periods. Midwest Generation would expect to cover its capacity obligations associated with the Fisk and Crawford units through a combination of improved fleet performance, fleet capacity not previously sold forward and, if necessary, market transactions.
Decisions regarding whether or not to proceed with retrofitting any particular remaining units to comply with state requirements for SO2 emissions, including those that have received permits, are subject to a number of factors, such as market conditions, regulatory and legislative developments, liquidity and forecasted commodity prices and capital and operating costs applicable at the time decisions are required or made. Midwest Generation may also elect to shut down units, instead of installing controls, to be in compliance with the state mandates. Final decisions on whether to install controls, to install particular kinds of controls, and to actually expend capital or continue with the expenditure of capital will be made as required, subject to the requirements of the state mandates and other applicable regulations. Units that are not retrofitted may continue to operate until required to shut down by applicable regulations or operate with reduced output.
Based on work to date, Midwest Generation estimates the cost of retrofitting the large stations (Powerton, Joliet Units 7 and 8 and Will County) using dry scrubbing with sodium-based sorbents to comply with state requirements for SO2 emissions, and the associated upgrading of existing particulate removal systems, would be up to approximately $628m. The cost of retrofitting Joliet Unit 6 is not included in the large unit amounts as it is less likely that Midwest Generation will make retrofits for this unit. The estimated cost of retrofitting Joliet Unit 6, if made, would be approximately $75m, while the estimated cost of retrofitting Waukegan, if made, would be approximately $160m.
Shut downs will cut into Midwest Generation capacity
As of the end of 2011, Midwest Generation operated 5,477 MW of power plants, based on installed capacity acknowledged by PJM, consisting of: six coal-fired plants consisting of 5,172 MW, which include Powerton, Joliet, Will County, Waukegan, Crawford and Fisk; and the Fisk and Waukegan on-site, oil-fired generating peakers consisting of 305 MW.
- Crawford is a 532-MW, coal-fired plant located in Cook County, within the city of Chicago. The operating units are referred to as Units 7 and 8 and began operations in 1958 and 1961, respectively. In February 2012, 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 2012, Midwest Generation decided to shut down Fisk by the end of 2012.
- Joliet is located in Joliet, Will County. The operating units 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 are referred to as Units 5 and 6 and began operations in 1972 and 1975, respectively.
- Waukegan is a 689-MW, coal-fired plant located in Waukegan, Lake County, on Lake Michigan. The operating units are referred to as Units 7 and 8 and began operations in 1958 and 1962, respectively. Midwest Generation shut down permanently Unit 6, with 100 MW of capacity, in December 2007.
- Will County is a 761-MW, coal-fired plant located in Romeoville, Will County. The operating units are referred to as 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.