Public Service Enterprise Group’s (NYSE: PEG) PSEG Energy Holdings LLC unit, which has investments in domestic energy, has had a rough time lately due to a potential coal plant shutdown and the bankruptcy of some Dynegy Inc. (NYSE: DYN) affiliates.
Energy Holdings owns these stakes in these coal plants, said PSEG in its May 2 quarterly Form 10-Q report:
- Powerton Units 5-6, Illinois, 64% owned, 1,538 MW total, with Edison Mission Energy as the counterparty.
- Joliet Units 7-8, Illinois, 64% owned, 1,044 MW total, coal, Edison Mission Energy as counterparty.
- Keystone Units 1-2, Pennsylvania, 17% owned, 1,711 MW total, coal, GenOn REMA LLC as counterparty.
- Conemaugh Units 1-2, Pennsylvania, 17% owned, 1,711 MW, coal, GenOn REMA LLC.
- Shawville Units 1-4, Pennsylvania, 100% owned, 603 MW, coal, GenOn REMA LLC.
Of the facilities under lease to GenOn REMA, a subsidiary of GenOn Energy (NYSE: GEN), PSEG believes Keystone has adequate environmental controls installed and Conemaugh has flue gas desulfurization controls and mercury controls, with the final component, selective catalytic reduction equipment for NOx scheduled to be installed in 2014.
“GenOn recently disclosed its intention to place the coal-fired units at the Shawville facility in a ‘long-term protective layup’ effective April 2015,” the PSEG Form 10-Q said. “GenOn has indicated that it plans to continue paying the required rent and maintaining the facility in accordance with the lease terms. The lessee is evaluating its options under the lease including termination for economic obsolescence or continuing to keep the facility in ‘long-term protective layup.’ In the event of an early termination for obsolescence, the lessee would be required to pay the pre-determined termination value structured to recover Energy Holdings’ lease investment as specified in the lease agreement, and may have additional liability under the relevant documents.”
With respect to Edison Mission Energy’s Midwest Generation leases on the Powerton and Joliet coal units in Illinois, the lessees completed investments in low-NOx burners and selective non-catalytic reduction systems and plan to utilize a Trona system to reduce sulfur. Edison Mission Energy is a unit of Edison International (NYSE: EIX).
EME and these units remain in litigation with the U.S. Environmental Protection Agency (EPA) and the state of Illinois regarding certain environmental matters, but EME has announced that the above actions should enable compliance with pending environmental rules. The federal district court has dismissed new source review claims in reference to Powerton and Joliet, but certain opacity claims remain active and under appeal by the EPA and the state of Illinois. The federal district court has stayed proceedings in connection with the opacity claims until the appeal is resolved. During the first quarter of 2012, the credit ratings of EME and Midwest Generation were lowered and continue to carry a negative outlook, PSEG noted.
In December 2011, affiliates of Energy Holdings and Dynegy reached a settlement agreement resolving disputes that had arisen with regard to Dynegy Holding’s (DH) rejection of the Dynegy leases in a bankruptcy case. The settlement agreement resolves certain disputes regarding the Dynegy leases, including claims under PSEG’s Tax Indemnity Agreement with DH. The original terms of the settlement agreement included a cash payment of $7.5m, which was received on Jan. 4, and the allowance of a $110m claim against DH payable through a mix of cash, senior secured notes and mandatorily convertible notes.
On May 1, a settlement agreement entered into by DH, Dynegy and many of the creditors was filed with the bankruptcy court, which could change the method of payment to cash and stock in Dynegy on the PSEG claim against DH following confirmation of the DH plan of reorganization by the bankruptcy court. The settlement agreement provides that it must be made effective by the bankruptcy court by June or it could terminate.
On Dec. 30, 2011, the effective date of the court order authorizing the Dynegy lease rejections, the leases no longer qualified for leveraged lease accounting treatment under GAAP since the lease agreements were effectively terminated. As a result, Energy Holdings wrote off the $264m gross lease investment against the previously recorded reserve. As the owner of assets at the two affected power plants, Danskammer and Roseton, Energy Holdings’ lessor entities ceased leveraged lease accounting, and recorded the generation assets and related nonrecourse project debt on their balance sheets at their respective fair values. DH remains responsible for the operations, including the financial obligations, of these lessor entities.
Incidentally, in a May 2 Form 8-K filing with the SEC, Dynegy described the May 1 bankruptcy settlement mentioned by PSEG.