GenOn Energy currently expects to deactivate various coal-fired power plants and units over the next few years, including Niles unit 2 and Elrama units 1-3 in June.
GenOn offered this deactivation timeline in its May 10 Form 10-Q filing:
- Niles unit 2 (108 MW), June 2012, plant located in Ohio;
- Elrama units 1-3 (289 MW), mothball June 2012 and retire in March 2014, Pa.;
- Portland (401 MW), January 2015, Pa.;
- Avon Lake (732 MW), April 2015, Ohio;
- New Castle (330 MW), April 2015, Pa.;
- Titus (243 MW), April 2015, Pa.;
- Shawville (597 MW), place in long-term protective layup in April 2015, Pa.; and
- Glen Gardner (160 MW), May 2015, New Jersey, fires gas and oil.
GenOn said it will operate Niles unit 1 (109 MW) and Elrama unit 4 (171 MW) under reliability must run (RMR) arrangements until Oct. 1, then expects to deactivate them in the same manner as the other units at those facilities. While it continues to work with PJM to ensure that any reliability concerns regarding these deactivations are addressed, GenOn said it thinks that the units identified for deactivation will be deactivated at the times referenced. These eight generating facilities contributed 13% to GenOn’s realized gross margin during 2011.
“We expect industry retirements of coal-fired generating facilities to contribute to a tightening of supply and demand fundamentals and higher prices for the remaining generating facilities will more than offset reduced earnings from our unit deactivations,” said the company. “Consequently, we expect the resulting higher market prices to provide adequate returns on investment in environmental controls necessary to meet promulgated and anticipated requirements. Accordingly, we expect to invest approximately $611 million to $750 million over the next ten years for selective catalytic reduction emissions controls and other major environmental controls to meet certain air and water quality requirements, which we expect to fund from existing sources of liquidity.”
In addition to the deactivations of the these facilities, GenOn plans to retire its 482-MW Potomac River facility in Alexandria, Va., in October, and its 674-MW Contra Costa gas facility in California in May 2013.
During 2011, GenOn entered into an agreement with the city of Alexandria to permanently shut the Potomac River plant. The agreement provides for the retirement of the Potomac River on Oct. 1, subject to the receipt of needed consents. PJM has determined that this retirement will not affect reliability. GenOn must now receive consent from local utility Potomac Electric Power (PEPCO), which used to own the plant. If the PEPCO consent has not been received by July 3, the Potomac River plant will be retired within 90 days after the receipt of that approval.
At Contra Costa, GenOn entered into an agreement with PG&E in September 2009 for 674 MW at Contra Costa for the November 2011-April 2013 period. At the end of the agreement, and subject to any necessary regulatory approvals, it has agreed to retire the facility.
GenOn battles in court with Stone & Webster over scrubber costs
In January 2011, Shaw Group (NYSE: SHAW) subsidiary Stone & Webster, the engineering, procurement and construction (EPC) contractor for the scrubber projects at the Chalk Point, Dickerson and Morgantown coal units in Maryland, filed three suits against GenOn in the U.S. District Court for the District of Maryland. The scrubber work was done late last decade under Mirant, a GenOn predecessor company.
Stone & Webster claims that it has not been paid under the EPC agreements for the scrubber projects and sought $143.1m in liens against the properties. In March 2011, the court granted these liens. In June 2011, Stone & Webster filed a motion to amend its lien claims at these facilities by an additional $90.5m. In August 2011, the court granted these additional liens. In September 2011, GenOn Mid-Atlantic paid $68m to Stone & Webster for achieving substantial completion under the EPC agreements, which reduced the outstanding liens to $165.6m.
As a result of certain lien restrictions in its lease documentation, GenOn Mid-Atlantic has reserved $165.6m of cash related to the liens. The liens are interlocutory only and will not become final unless and until Stone & Webster is successful in prosecuting its contractual claims. In February 2011, GenOn filed a related action against Stone & Webster in the U.S. District Court for the Southern District of New York. The proceedings in Maryland have been stayed pending resolution of the case in New York.
Assuming GenOn is successful in in the New York proceeding, the total estimated capital expenditures for compliance with the Maryland Healthy Air Act, which had triggered the need for the scrubbers in the first place, would not exceed $1.674bn. However, if the costs were to equal the amount claimed by Stone & Webster in the litigation, the total capital expenditures would exceed $1.674bn by about 5%. The New York proceeding has a trial date set for June.
In another clean-air-related dispute, in November 2011 the U.S. Environmental Protection Agency published a final rule that requires GenOn to reduce maximum allowable SO2 emissions from the two coal units at the Portland plant in Pennsylvania by about 60% starting in January 2013 and by about 80% starting in January 2015. In January, GenOn challenged the rule in the U.S. Third Circuit Court of Appeals.
In 2013 and 2014, GenOn has several compliance options at Portland that include using lower sulfur coals (although this may at times reduce how much it is able to generate) or running just one unit at a time. Starting in January 2015, these units will be subject to more stringent rate limits, which will require either material capital expenditures and higher operating costs or the retirement of these two units. Portland is due for retirement in January 2015 under the plan.