EME Homer City might cease doing business, idle coal plant

EME Homer City Generation LP, which operates the coal-fired Homer City power plant in Pennsylvania, may not last much longer as a “going concern” and may have to seek Chapter 11 bankruptcy protection if it can’t work out a deal with bondholders.

EME Homer City, which calls itself simply “Homer City,” said in a May 2 Form 10-Q report: “It is unlikely that Homer City will continue as a going concern throughout 2012.” EME Homer City is an affiliate of Edison International (NYSE: EIX). Without a cash infusion Homer City might not be able to make certain payments due Oct. 1.

Homer City said it has had discussions with the owner-lessors of the plant through General Electric Capital Corp. (GECC), beneficial owner of a majority of the owner-participants, regarding the funding of capital improvements at the Homer City plant and transfer to an affiliate of GECC of the economic benefit and majority ownership of all the operating assets of Homer City. On March 29, Homer City and GECC entered into an implementation agreement with respect to the Homer City plant. As addressed by the agreement, an affiliate of the GECC-controlled owner-lessors of the Homer City plant has entered into an engineering, procurement and construction agreement and is executing related agreements for the construction of environmental improvements, mainly two needed SO2 scrubbers for two of the plant’s three units. The third unit already has a scrubber.

GECC will have discretion over all decisions related to such agreements. Homer City agreed to conduct its business as set forth in the agreement and to use commercially reasonable efforts to provide assistance to GECC and its affiliates in connection with the construction agreements. The Agreement also requires Homer City, at the request of GECC, to enter into one or more implementation transactions, as defined in the Agreement, for the divestiture of its leasehold interest in the Homer City plant (and, under certain circumstances, related assets and liabilities as specified) and to assist GECC in obtaining certain third-party consents or waivers. Homer City and GECC also agreed to enter into a transition services agreement in connection with any implementation transaction. “There is no assurance that Homer City and GECC will actually consummate a divestiture transaction as contemplated by the Agreement,” the Form 10-Q added.

Homer City made the required April 1 senior rent payment of $48m but did not make the April 1 payment of equity rent of $65m. On March 30, Homer City was granted a waiver by the owner-lessors of any rent default event with respect to the payment of the equity rent for all purposes other than restrictions on distributions from Homer City, including repayment of its intercompany loan, and the $48m senior rent reserve letter of credit remains in place.

The estimated cost of installing SO2 and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is $700m to $750m. On April 2, Homer City received the construction permit from the Pennsylvania Department of Environmental Protection.

Net loss from the Homer City plant increased $29m for the first quarter of 2012, compared to the first quarter of 2011. The decrease in earnings was primarily attributable to lower energy margins and the election to treat Homer City as a partnership for income tax reporting purposes in 2012, partially offset by a decline in plant maintenance costs due to outages at Units 1 and 2 during the first quarter of 2011. Lower energy margins were due to lower average realized energy prices and higher coal and emission allowance costs.

“Homer City’s liquidity has continued to deteriorate during the first quarter of 2012,” said the Form 10-Q. “Absent a working capital loan or other infusion of cash, Homer City is not expected to have sufficient cash flow to meet its operating expenses and other obligations either in the near term or during 2012, including the rent payment due on October 1, 2012. This may require Homer City to temporarily suspend plant operations until sufficient working capital is obtained.”

Certain divestitures of Homer City’s leasehold interest in the power plant are subject to consent rights of the holders of the secured lease obligation bonds issued in connection with the original sale-leaseback transaction. GECC is currently engaged in discussions and has reached an agreement in principle on a non-binding restructuring term sheet with certain of the holders of the secured lease obligation bonds regarding amendments to the terms of the 8.137% Senior Secured Bonds due 2019 and the 8.734% Senior Secured Bonds due 2026, each issued by Homer City Funding LLC. Even though an agreement in principle has been reached with certain holders of secured lease obligation bonds, that agreement may not be approved by the secured lease obligation bondholders, the Form 10-Q warned. “If an agreement to modify the terms of the bonds is not approved and consummated in a timely manner, then the protections of Chapter 11 of the U.S. Bankruptcy Code may be necessary,” the company added.

Units 1 and 2 need scrubbers for air emissions compliance

EME Homer City was formed for the purpose of acquiring, owning and operating three coal-fired units and related facilities located in Indiana County, Pa., with an aggregate capacity of 1,884 MW. EME Homer City acquired the Homer City plant in March 1999 and completed a sale-leaseback of its facilities to third parties in December 2001.

The Homer City plant consists of the generating units, a coal cleaning facility 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.

Units 1 and 2 at the plant were placed into commercial operation in 1969, said EME Homer City’s March 28 annual Form 10-K report. 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 NOx 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.

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 NOx 1990 CAA standards, and a supplemental over-fired air system was installed in 1995 to further reduce NOx. In addition, an SO2 scrubber system and selective catalytic reduction were installed on Unit 3 in 2001.

The Homer City plant traditionally takes high-sulfur coal from nearby mines, with the scrubbed unit able to take coal of even higher sulfur. U.S. Energy Information Administration data shows that coal suppliers to the plant in January included Rosebud Mining, Unionvale Coal and Alpha Natural Resources (NYSE: ANR).
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.