Dynegy (NYSE: DYN), the prospective new owner of five coal-fired power plants in Illinois, plans to continue with the slowed construction of SO2 scrubbers at one of them, the Newton facility.
That is according to a May 2 petition filed by plant seller Ameren Energy Resources (AER) at the Illinois Pollution Control Board. The board had in September 2012 granted a variance from a state air mandate that allowed a slowdown of the Newton flue gas desulfurization (FGD) construction program and AER now wants to transfer that variance to Illinois Power Holdings LLC (IPH), the Dynegy affiliate that would buy the plants.
On March 14, Ameren Corp. (NYSE: AEE), the parent of AER, reached an agreement to convey AER’s equity interest in five operating coal-fired energy centers to IPH. A copy of the asset purchase deal is attached to the May 2 filing.
In describing the financial circumstances that drove it to sell these plants, AER told the board: “Mindful of its employees and all those who have come to rely on the continuing operation of the energy centers, Ameren had sought to keep the merchant business viable. However, the drag down faced by Ameren left it with little choice but to make a difficult and fundamental decision regarding its future business operations. Accordingly, on December 20, 2012, Ameren announced its intent to exit, within five years, the merchant generation business in Illinois so as to focus on its regulated electric, natural gas and transmission businesses. In its Form 8-K filed with the Securities and Exchange Commission (‘SEC’), Ameren affirmed that ‘a change in circumstance had occurred regarding its expected duration of ownership of its Merchant Generation business segment’s energy centers’ and that cash flow would be insufficient to recover the total costs of the energy centers. As a consequence, under applicable accounting guidance, Ameren recorded impairment charges in excess of $1.95 billion in connection with the merchant business segment.”
Although the specific method of divestiture was not identified at that time, the options available to Ameren included either conveyance of the merchant business or restructuring of the debt. Shortly after Ameren’s public announcement of its intent to exit the merchant business, Dynegy contacted Ameren regarding the potential acquisition of the AER merchant generating business segment, AER told the board. “Dynegy, through its subsidiaries Dynegy Midwest Generation, LLC (‘DMG’) and Dynegy Kendall Energy LLC, owns and operates five coal- and natural gas-fired power plants in Illinois,” AER pointed out. “Dynegy has for years enjoyed a strong and meaningful presence in the State, and the prospect of a strategic sale to a company like Dynegy was attractive to Ameren, especially since such a sale could possibly increase the likelihood that the energy centers will continue to operate.”
Overall, the planned transaction contemplates the conveyance to IPH, of an entity owning, among other things, the five operating coal-fired energy centers: Newton, Coffeen, Duck Creek, E.D. Edwards and Joppa. Two shuttered energy centers, Meredosia and Hutsonville, will not be acquired by IPH.
Plant operations to be status quo after the sale deal is done
The variance granted by the board last September was under the state’s Multi-Pollutant Standard (MPS) and the Ameren coal plants are collectively known as the “Ameren MPS Group.”
“Through the variance period, the Ameren MPS Group will remain as currently composed and IPH will, upon closing, notify the Agency of its assumption of MPS compliance responsibility for the Group,” AER told the board. “In order to satisfy the variance condition within the Board Order relating to the operation of Hutsonville and Meredosia, Medina Valley has agreed to not operate these plants and will provide an annual certification to IPH regarding its compliance with Condition so that both the Board and the Agency can be assured the condition will continue to be met in the future. The operation of the five operating energy centers will not change as a result of the transaction. The energy centers will continue producing electricity as currently expected. Environmental compliance will remain a top priority for each energy center. Indeed, Dynegy and its subsidiaries have a strong commitment to operate safely and in an environmentally responsible manner in Illinois. The energy centers will continue to meet t environmental obligations, including SO2, nitrogen oxide (‘NOx’) and mercury control, and more specifically, the overall SO2 annual emission rates set forth in the [variance] Order.”
AER continued: “Dynegy, as the ultimate parent of IPH, will also continue to take action to voluntarily reduce greenhouse gas emissions. Operation of the FGD systems at the Coffeen and Duck Creek Energy Centers will continue to be maximized so as to comply with the SO2 mitigation rate set forth in the Order. IPH, through its operating subsidiaries, will also honor the commitment made by AER to limit the use of higher sulfur coal to the Duck and Coffeen Energy Centers and to use ultra-low sulfur coal at the Edwards, Newton and Joppa Energy Centers.”
After closing of this deal, IPH will continue the construction of the Newton FGD project, AER told the board. IPH will also comply with the terms of the board’s order relating to the Newton FGD project construction milestones and reporting requirements.
The board in its September 2012 variance order imposed the following conditions:
- From the date of the order through Dec. 31, 2012, AER must comply with an overall SO2 annual emission rate of 0.38lb/mmBtu.
- From January 2013 through December 2019, AER must comply with an overall SO2 annual emission rate of 0.35 lb/mmBtu.
- Beginning Jan. 1, 2020, AER must comply with an overall SO2 annual emission rate of 0.23 lb/mmBtu.
- From the date of the order through Dec. 31, 2020, AER must not operate the generating units at Meredosia and Hutsonville. The in-the-works FutureGen 2.0 repowering project at the Meredosia Energy Center Unit 4 is exempt from this restriction.
Regarding the FGD project at Newton, the variance order said:
- On or before July 1, 2015, AER must complete engineering work on the Newton FGD. On or before Dec. 31, 2017, AER must obtain a new or extended construction permit, if needed, for the installation of the FGD equipment at Newton.
- On or before Dec. 31, 2018, AER must complete construction of the absorber building on the Newton FGD project.
- On or before July 1, 2019, AER must complete steel fabrication of ductwork and insulation activities on the Newton FGD project.
- On or before July 1, 2019, AER must complete installation of electrical systems and piping on the Newton FGD project.
- On or before Sept. 1, 2019, AER must set major equipment components into final position on the Newton FGD project.
- Beginning with calendar year 2012 and continuing through 2019, AER must file annual progress reports with the Illinois Environmental Protection Agency as to the status of construction activities relating to the Newton FGD project.