Independent power producer Edison Mission Energy (EME), which has been in financial trouble lately and has hinted at a possible Chapter 11 bankruptcy filing, said Dec. 17 that it has reached an agreement with the holders of a majority of its $3.7bn of outstanding public indebtedness and its parent company, Edison International (NYSE: EIX).
The agreement, pursuant to a plan of reorganization and pending bankruptcy court approval, would transition Edison International’s equity interest to EME’s creditors, retire existing public debt and enhance EME’s access to liquidity. As EME implements its financial restructuring, which will ultimately result in a substantial deleveraging of the company’s balance sheet, its operations are expected to continue in the normal course without interruption, EME noted.
Under the agreement, Edison International will, among other things, consensually transfer its 100% equity interest in EME to unsecured creditors, including the noteholders, and continue certain tax sharing agreements through Dec. 31, 2014. The continuation of the tax sharing agreements results in the potential recognition of a substantial amount in tax sharing payments to EME.
As part of the restructuring process, Edison International and EME will begin immediately to negotiate agreements to ensure EME’s smooth and effective transition to operating as an independent entity following its separation from Edison International, anticipated to occur by December 2014.
To implement the restructuring, EME and several of its subsidiaries on Dec. 17 filed voluntary petitions with the U.S. Bankruptcy Court for the Northern District of Illinois under Chapter 11 of the United States Bankruptcy Code. The company’s agreement with the noteholders and Edison International is subject to bankruptcy court approval.
“We are pleased to have reached this agreement, which we believe reflects the long-term value potential of our organization,” said Pedro Pizarro, president of EME. “This is an important first step in the process to reduce our debt, enhance our liquidity profile and position EME for continued operation and future success while preserving our ability to generate power safely and reliably at our electric facilities across the country. Throughout this process, business operations will continue in the normal course, and we will continue to support our customers, suppliers and employees.”
Company hit by new EPA mandates, slack power markets
Like other independent power generators, EME has been challenged by depressed energy and capacity prices and high fuel costs affecting its coal-fired facilities, combined with pending debt maturities and the need to retrofit its coal plants to comply with environmental regulations.
EME has taken numerous actions to address these external challenges, including retiring uneconomic power plants, implementing labor reductions, significantly reducing expenses without compromising safety and compliance, diversifying its portfolio of power generation assets, and developing a cost-effective environmental compliance program. The company believes that these efforts, together with its financial restructuring, will position EME for profitability and long-term success.
“EME is operationally healthy, and with the support of the Noteholders, we plan to emerge from our restructuring as a recapitalized company separate from Edison International,” Pizarro said. “We believe this financial restructuring—coupled with the existing strength of our employees and assets—will position us to take advantage of new opportunities while preserving our focus on safe, reliable operations. We appreciate the ongoing dedication of all our employees, whose commitment, focus and expertise is essential to our success, and look forward to continuing to work with our suppliers and project partners.”
The company filed a number of customary first-day motions with the court requesting authority to continue operations in the ordinary course. The motions include requests to make wage and salary payments and provide other normal-course benefits to employees, as well as to pay all suppliers for goods and services delivered post-petition. The company expects to receive court approval for these requests, and said it has ample liquidity to fund its business as it enters the restructuring process.
The EME subsidiaries that filed for Chapter 11 protection include Midwest Generation, which manages the company’s fleet of coal-fired plants in Illinois. Certain other subsidiaries—including Edison Mission Marketing & Trading, Edison Mission Operation & Maintenance, and the company’s wind energy projects—were not included in the filings.
Kirkland & Ellis LLP is serving as legal counsel to EME, Perella Weinberg Partners LP is acting as financial advisor and McKinsey Recovery & Transformation Services U.S. LLC is acting as restructuring advisor.
EME’s companies own, operate and lease a portfolio of more than 40 electric generating sites that are powered by wind, natural gas, biomass and coal, as well as an energy marketing and trading operation based in Boston.
Edison Mission wants to delay retrofit, gives up Homer City
In a major effort to save money in the short term as it reworks its finances, Midwest Generation on Nov. 30 asked the Illinois Pollution Control Board for a variance from provisions of the Combined Pollutant Standard (CPS) for the two-year period beginning Jan. 1, 2015, and from another CPS section for a period of five months, delaying that requirement until May 31, 2015.
“This request for a variance is an option of last resort that is intended to enable the company to manage through exceptionally difficult economic circumstances and financial hardship that could not have been foreseen when the CPS was adopted in 2007,” said the company in the Nov. 30 filing. “Midwest Generation does not seek changes to the CPS program for reducing SO2 emissions in 2013 or 2014 or in 2017 or thereafter but, rather, proposes a ‘pause’ in the pace of the decline of SO2 emission rates in the middle of the program (2015-2016), accompanied by enforceable commitments to ensure that total SO2 tons of emissions are less than projected under the CPS during the period from 2013 through 2016. This request follows Midwest Generation’s significant efforts to date to comply with the CPS, including major investments for pollution controls that now enable full compliance with CPS mercury and nitrogen oxide (‘NOx’) emission reduction requirements. Installation of such controls at Midwest Generation’s Crawford Station in late 2011, only to cease operation of that station by the end of August 2012, provides clear evidence of the unforeseen economic circumstances now facing the company.”
The two-year delay would basically save Midwest Gen $210m for that 2015-2016 period by delaying the installation of flue gas desulfurization equipment on the coal-fired Waukegan Unit 8.
Another recent move by an EME affiliate was to give up leases on and operational control of the coal-fired, 1,884-MW Homer City power plant in Pennsylvania, which is now under the control of the owners, which are affiliates of General Electric. New SO2 scrubbers are being installed on two of Homer City’s three coal units due to new U.S. Environmental Protection Agency mandates.