Independent power producer Edison Mission Energy (EME), crushed by factors like high costs for little-used coal plants and low power market prices, is nearing a possible bankruptcy filing, the Edison International (NYSE: EIX) subsidiary reported in a Nov. 1 Form 10-Q quarterly financial report filed at the SEC.
“EME continues to experience operating losses due to low realized energy and capacity prices, high fuel costs and low generation at the Midwest Generation plants,” said the Form 10-Q. “Forward market prices indicate that these trends are expected to continue for a number of years. As a result, EME expects that it will incur further reductions in cash flow and losses in the current year and in subsequent years. A continuation of these adverse trends coupled with pending debt maturities and the need to retrofit its Midwest Generation plants to comply with governmental regulations will exhaust EME’s liquidity. Consequently, EME has been considering all options available to it, including potential sales of assets, restructuring, reorganization of its capital structure, or conservation of cash that would be applied otherwise to the payment of obligations.”
Midwest Generation is made up largely of coal-fired power plants in Illinois. EME recently agreed to sever the agreements it had, through an affiliate, to lease the coal-fired, 1,884-MW Homer City plant in Pennsylvania, which is also facing heavy expenses due to ongoing installations of two new SO2 scrubbers.
In June, EME entered into non-disclosure and engagement agreements with advisors representing holders of a majority in principal amount of its unsecured bonds for the purpose of engaging in discussions with such advisors and Edison International regarding EME’s financial condition. In October, EME and Edison International entered into non-disclosure agreements with certain of the clients of such advisors to facilitate further discussions. Discussions with the bondholders’ advisors have been ongoing. In addition, EME and Midwest Generation have entered into a non-disclosure agreement with an advisor representing a majority in principal amount of Midwest Generation’s senior lease obligation bonds.
Based on current projections, EME said it is not expected to have sufficient liquidity to repay the $500m debt obligation due in June 2013. On Nov. 15, 2012, $97m of interest payments are due on unsecured EME bonds maturing in 2017, 2019 and 2027, and there is no assurance payment will be made. EME’s unsecured bonds generally provide for a 30-day grace period for interest payments.
“EME’s failure to pay indebtedness under its unsecured bonds will likely result in EME’s filing for protection under Chapter 11 of the U.S. Bankruptcy Code, which would trigger cross defaults under EME’s guarantee of the lease obligations of Midwest Generation, as well as Midwest Generation’s own obligations under the lease and under instruments governing the senior lease obligation bonds, and which could potentially give rise to counterparty rights and remedies under other documents,” the Form 10-Q noted.
On Sept. 21, EME’s EME Homer City Generation LP affiliate and an affiliate of General Electric Capital Corp. (GECC) entered into the Homer City Master Transaction Agreement (MTA) for the divestiture by EME Homer City of substantially all of its remaining assets and certain specified liabilities. On Oct. 3, GECC entered into a Plan Support Agreement (the PSA) with the holders of about 76% of the outstanding principal amount of the secured lease obligation bonds issued by Homer City Funding LLC as part of the original sale-leaseback transaction.
Under the PSA, the parties committed to support and implement a reorganization plan of Homer City Funding LLC and to solicit votes on a prepackaged plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. On Oct. 5, GECC commenced the solicitation. Homer City Funding LLC is an affiliate of GECC and not related to EME Homer City or any other EME affiliate.
Completion of the Homer City MTA is subject to the satisfaction of a number of closing conditions, including the successful restructuring and reorganization of Homer City Funding LLC and receipt of the regulatory approvals required for the transfer of the Homer City plant to GECC. If an agreement to modify the terms of the bonds is not approved and consummated or if other closing conditions of the Homer City MTA are not met, EME Homer City may become the subject of bankruptcy proceedings.
Fisk and Crawford shut, other coal plants at risk
During the third quarter of 2012, Midwest Generation’s coal-fired Fisk and Crawford plants ceased operations. Midwest Generation expects the decommissioning and permanent retirement of the units to occur during the fourth quarter of 2012.
Midwest Generation is largely dependent on EME to fund cash flow deficits and environmental retrofits. EME noted in the Form 10-Q that it has no obligation to make capital contributions to Midwest Generation and may be unable to do so. Furthermore, Midwest Generation had $1.323bn of notes receivable from EME at Sept. 30, 2012, with payments used to meet its rent obligations under the Powerton and Joliet sale-leaseback agreements.
If EME is unable to make payments on its notes, Midwest Generation may in turn be unable to make rent payments under the Powerton-Joliet leases. Failure to pay rent would be an event of default under the Powerton-Joliet leases that could result in termination of the leases, loss of control over the use of the coal-fired Powerton and Joliet plants and a claim for termination value under the lease agreements.
Accordingly, if Midwest Generation is unable to obtain financial support from EME or other sources, Midwest Generation may need to file for protection under Chapter 11 bankruptcy. A bankruptcy of either EME or Midwest Generation would also be an event of default under the Powerton-Joliet leases.
Midwest Gen eyes pared-back air emissions program
During the third quarter of 2012, Midwest Generation continued to develop and implement a compliance program that includes the operation of activate carbon injection (ACI) systems for mercury removal, 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.
Apart from Fisk and Crawford, which ceased operations in September, decisions whether or not to proceed with retrofitting of any particular remaining units to comply with the Illinois Combined Pollutant Standard (CPS) 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 units instead of installing controls to be in compliance with the CPS. Final decisions on whether to install controls, what 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 CPS and other applicable regulations. Units that are not retrofitted may continue to operate for as long as regulations and law allow, the filing said.
Based on work to date, Midwest Generation estimates the remaining cost of retrofitting Powerton Units 5-6, Joliet Units 7-8 and Will County Units 3-4, using dry scrubbing with sodium-based sorbents and upgrading particulate removal systems, to be about $619m as of Sept. 30. It is less likely that retrofits will be made to Joliet Unit 6 and Waukegan. During the third quarter of 2012, the Illinois Pollution Control Board granted Midwest Generation’s request to extend Waukegan Unit 7’s unit specific retrofit requirements from Dec. 31, 2013, to Dec. 31, 2014. The estimated cost of retrofitting Joliet Unit 6, if made, would be about $75m, while the estimated cost of retrofitting Waukegan, if made, would be around $160m.
The Midwest Generation plants purchase coal primarily from the southern PRB. As of Sept. 30, the company was contracted to buy 4.9 million tons of coal in the fourth quarter of this year, 11.1 million tons in 2013 and 9.8 million tons in 2014. The amount of coal under contract in equivalent tons is calculated based on contracted tons and applying an 8,800 Btu/lb equivalent.
Midwest Generation is subject to price risk for purchases of coal that are not under contract. The Form 10-Q filing noted that the market prices of PRB coal based on 8,800 Btu/lb and 0.8 pounds of SO2 per MMBtu decreased to a price of $9.20 per ton as of Sept. 28, compared to a price of $12.75 per ton at the end of 2011, as reported by the U.S. Energy Information Administration.
On July 11, Midwest Generation agreed to sell one million tons of coal scheduled to be delivered in the second half of 2012 in order to better manage coal inventories.This transaction resulted in a loss of about $6m recorded in the third quarter of 2012.