Ameren Corp. (NYSE: AEE) has been able to cut some of its estimated environmental expenditures in the near term due to an August decision by an appeals court to vacate the Cross-State Air Pollution Rule, leaving the less-stringent Clean Air Interstate Rule (CAIR) in its place.
The estimates for Ameren, Ameren Energy Generating Co. (Genco) and AmerenEnergy Resources Generating Co. (AERG) have decreased from the estimates in the parent company’s Feb. 28 Form 10-K report. That decrease is due primarily to the vacated CSAPR and the impacts of the Illinois Multi-Pollutant Standard (MPS) variance granted to Ameren Energy Resources Co. LLC (AER) in September by the Illinois Pollution Control Board, said Ameren’s Nov. 9 Form 10-Q quarterly report. Also, AERG canceled plans for major precipitator upgrades at its E.D. Edwards coal plant in Illinois.
The vacated CSAPR did not significantly impact Ameren Missouri’s estimated capital expenditures, the Form 10-Q added.
“The decision to make pollution control equipment investments at our Merchant Generation business depends on whether the expected future market price for power reflects the increased cost for environmental compliance,” the Form 10-Q noted about plants in Illinois. “During early 2012, the observable market price for power for delivery in the current year and in future years sharply declined below 2011 levels primarily because of declining natural gas prices, as well as the impact from the stay of the CSAPR. As a result of this sharp decline in the market price for power, as well as uncertain environmental regulations, Genco decelerated the construction of two scrubbers at its Newton energy center. These scrubbers were originally expected to be installed in late 2013 and early 2014. The ultimate installation of these scrubbers, now estimated to occur by the end of 2019, has been postponed until such time as the incremental investment necessary for completion is justified by visible market conditions.”
In addition to Genco’s reduction in estimated capital expenditures, AERG canceled plans for major precipitator upgrades at E.D. Edwards. AERG is pursuing advanced technology and enhanced operating techniques that have the potential to achieve similar pollution control effects as the precipitator upgrades, the Form 10-Q noted. Based on the MPS variance granted by the Illinois Pollution Control Board in September, AER is currently scheduled to complete the Newton scrubbers by the end of 2019.
Ameren Missouri relies mostly on PRB coal for near-term air needs
Ameren Missouri’s current environmental compliance plan for air emissions from its energy centers includes burning ultra-low-sulfur coal and installing new or optimizing existing pollution control equipment. In July 2011, Ameren Missouri contracted with Peabody Energy (NYSE: BTU) to procure significantly higher volumes of lower-sulfur-content Powder River Basin coal than Ameren Missouri’s energy centers have historically burned. This allowed Ameren Missouri to eliminate or postpone capital expenditures for pollution control equipment.
In 2010, Ameren Missouri completed the installation of two scrubbers at its Sioux coal plant to reduce SO2 emissions. Currently, Ameren Missouri’s compliance plan assumes the installation of two scrubbers within its coal-fired fleet, mercury control technology, and precipitator upgrades at multiple energy centers during the next 10 years. Ameren Missouri is currently evaluating its options to determine how to comply with the Mercury and Air Toxics Standards (MATS) and other recently finalized or proposed U.S. Environmental Protection Agency regulations.
On Sept. 20, the Illinois Pollution Control Board granted AER the variance to extend compliance dates for SO2 emission levels contained in the MPS through Dec. 31, 2019, subject to certain conditions. The board approved AER’s proposed plan to restrict its SO2 emissions through 2014 to levels lower than those required by the existing MPS to offset any environmental impact from the variance. The board’s order also included the following provisions:
- A schedule of milestones for completion of various aspects of the installation and completion of the scrubber projects at Newton. The first milestone relates to the completion of engineering design by July 2015 while the last milestone relates to major equipment components being placed into final position on or before Sept. 1, 2019.
- A requirement for AER to refrain from operating the Meredosia and Hutsonville coal plants through Dec. 31, 2020. However, this restriction does not impact Genco’s ability to make the Meredosia site available for any parties that may be interested in repowering one of its units to create an oxy-fuel combustion, coal-fired plant designed for permanent CO2 capture and storage. Just such a project is planned at the site under the FutureGen 2.0 program.
AER proposed during the proceeding to meet an overall SO2 annual emission rate of 0.35 lb/mmBtu from 2013 through 2019, lowered from 0.38 lb/mmBtu. AER will meet this revised rate by not operating the Hutsonville and Meredosia stations during the variance term. AER will also operate FGD systems at the Duck Creek and Coffeen stations at a higher level of control. Specifically, AER will operate the FGD systems at a 98%-99% SO2 removal rate rather than 95%.
Under the MPS, as amended by the recent variance, AER is required to reduce mercury and NOx emissions by 2015 and SO2 emissions by the end of 2019. The board’s Sept. 20 variance gives AER additional time for economic recovery and related power price improvements necessary to support scrubber installations and other pollution controls at some of AER’s energy centers in Illinois. To comply with the MPS and other air emissions programs, Genco and AERG are installing equipment designed to reduce emissions of mercury, NOx, and SO2. Genco and AERG have installed a total of three scrubbers at two plants. Two additional scrubbers are being constructed at Newton, though at a much slower pace than before due to the board-approved variance.
Duck Creek, so far, the only coal plant to get a writedown
In light of the depressed power markets, the Ameren companies looked at the book values of the Illinois merchant plants. Under the applicable accounting guidance, if undiscounted future cash flows from these long-lived assets exceed their carrying values, the assets are deemed unimpaired, and no impairment loss is recognized, even if the carrying values of the assets exceed estimated fair values. Only AERG’s Duck Creek coal plant’s carrying value exceeded its estimated undiscounted future cash flows. As a result, Ameren earlier this year recorded a noncash pretax asset impairment charge of $628m to reduce the carrying value of Duck Creek to its estimated fair value. Key assumptions used in the determination of estimated undiscounted cash flows of the Merchant Generation and Genco long-lived assets tested for impairment included the forward price projections for energy and fuel costs, the expected life of the energy center, environmental compliance costs and strategies, and operating costs.
After the impairment of the Duck Creek energy center, Merchant Generation and Genco believed the carrying value of their energy centers exceeded their estimated fair values by an amount significantly in excess of $1bn. “Merchant Generation and Genco will continue to monitor the market price for power and the related impact on electric margin and other events or changes in circumstances that indicate that the carrying value of their energy centers may not be recoverable as compared to their undiscounted cash flows,” the Form 10-Q said. “Merchant Generation and Genco could recognize additional, material long-lived asset impairment charges in the future as a result of factors outside their control, such as changes in power or fuel costs, administrative action or inaction by regulatory agencies and new environmental laws and regulations that could reduce the expected useful lives of Merchant Generation’s and Genco’s energy centers, and also as a result of factors that may be within their control, such as a failure to achieve forecasted operating results and cash flows, unfavorable changes in forecasted operating results and cash flows, or decisions to shut down, mothball or sell their energy centers.”
The Merchant Generation segment expects to have available generation from its coal-fired plants of 32.5 million megawatthours in any given year (Genco – 24.5 million). However, based on currently expected power prices, the Merchant Generation segment expects to generate about 26 million (Genco – 19 million) megawatthours, which includes generation from non-coal-fired energy centers, in 2012.
Merchant Generation is a financial reporting segment consisting primarily of the operations or activities of AER, including Genco and AERG.