A June 27 hearing is coming up at Edison Mission Energy’s bankruptcy court that will decide whether EME affiliate Midwest Generation LLC keeps control of the leased facilities at the Powerton and Joliet coal-fired power plants.
EME, Midwest Generation (MWG) and related companies have been in Chapter 11 protection since December 2012 at the U.S. Bankruptcy Court for the Northern District of Illinois.
The EME companies are in arrears on lease payments for the coal-fired Powerton and Joliet (units 7 and 8) facilities, known collectively as the PoJo Facilities. These plants also face heavy emissions control spending, which the EME companies can ill-afford right now.
“Although MWG and EME and their stakeholders remain hopeful that the parties will ultimately agree on the terms of a comprehensive restructuring of the underlying lease obligations, such an agreement has not yet been reached,” said the companies in a June 10 filing. “Moreover—given the size and complexity of the PoJo Lease structure, the number of parties involved, and the short timeframe before the deadline to assume or reject the PoJo Leases—the Debtors will not reach a final agreement, if at all, before the July 1, 2013 deadline under section 365(d)(4) of the Bankruptcy Code to assume or reject the PoJo Leases.”
The three choices offered by the bankrupt companies are:
- First, MWG can assume the PoJo Leases. Assumption of the leases on their current terms, however, is not feasible because assumption would impair stakeholder value in the face of MWG’s adjusted operating loss of $253m in 2012, scheduled rent payments in 2013 totaling $151.3m (and $560.1m during the remaining terms of the facility leases), and MWG’s obligation to fund about $445m in capital expenditures at the facilities beginning in the summer of 2013 (or consider shutting down units) to comply with certain environmental regulations.
- Second, MWG can allow the PoJo Leases to be rejected on July 1, 2013. Like assumption of the leases, their rejection is an undesirable outcome because rejection impairs—if not conclusively forecloses—the debtors’ ability to facilitate continued discussions and analysis among all stakeholders to determine whether a restructuring of the MWG lease obligations can be achieved.
- Third, MWG and its stakeholders can agree on an extension of the deadline to assume or reject the PoJo Leases to facilitate continued restructuring discussions in a manner that does not prejudice the debtors’ estates or the rights of their stakeholders. To date, the parties have been unable to reach agreement on all of the terms for a consensual extension that does not prejudice the debtors’ estates.
Bankrupt companies offer terms to plant owners
MWG and EME are prepared to offer consideration to the certificate holder group and owner lessors in return for an extension of the deadline to assume or reject the PoJo Leases, the bankrupt companies said. They want an extended deadline of Nov. 1, 2013, to accept or reject the leases.
MWG said that in the meantime, it would continue to make presently scheduled environmental retrofit capital expenditures for the PoJo Facilities from July 2, 2013, through any rejection of the facility leases.
In anticipation of the possibility that the PoJo leases would be rejected, MWG has engaged in various contingency planning measures, including the filing of an application with the Federal Energy Regulatory Commission under which MWG seeks to effectuate the transfer of the PoJo Facilities to the owner lessors in accordance with applicable federal law.
The plants sell power on the PJM market
Effective in August 2000, MWG entered into leveraged sale-leaseback transactions pertaining to the Powerton Generating Station in Pekin, Ill.,. and Units 7 and 8 of the Joliet Generating Station in Joliet, Ill.
The PoJo Facilities earn revenue principally through the sale of electricity and capacity and related services in the PJM Interconnection region. PJM dispatches power generated at the PoJo Facilities to meet real-time electricity demand in the states in which PJM operates. Pricing for the electricity is generally determined by the least efficient unit that PJM needs to meet demand for a respective zone. For MWG to earn revenue from generating electricity, its costs for fuel and operations must remain lower than the least efficient unit needed by PJM.
To sell capacity, non-debtor affiliate Edison Mission Marketing & Trading Inc. (EMMT) markets its commitment for the units to be available as needed during future market periods. Pricing for these sales is calculated as a function of PJM’s annual required reserve margin, the estimated net cost of “new entrant” generation, estimated peak demand, and the actual amount of capacity bid into the market at or below the demand curve.
“At present, uncertainty regarding future energy and capacity prices coupled with the need to install environmental retrofits in excess of $400 million presents a challenging economic situation for the PoJo Facilities,” said the June 10 motion. “Overall, MWG projects negative adjusted earnings before interest, taxes, depreciation, and amortization (‘EBITDA’) under a range of future price scenarios. Further, the economic performance and capital expenditure requirements surrounding the PoJo Facilities and MWG’s coal fleet more generally, have materially affected, and will continue to materially affect, the economic performance of the Debtors’ broader business enterprise. Importantly, between 2006 and 2012, MWG’s adjusted EBITDA fell from $631 million to negative $152 million—a decline of approximately $783 million. MWG’s poor performance, in turn, has affected EME’s overall performance during the same period, with EME’s adjusted EBITDA falling from $993 million in 2006 to $80 million in 2012. MWG and EME anticipate that these trends will continue unabated unless power markets stabilize and strengthen.”
The involved plants are:
- Joliet – These coal-fired facilities went online between 1959 and 1966. Midwest Gen operates five coal-fired boilers at Joliet that have the capability to fire at various modes that include the combination of coal or natural gas as principal fuels. Joliet 6 has a capacity of 290 MW, and Units 7-8, across the Des Plaines River from Unit 6, have a combined 1,036 MW.
- Powerton – This 1,538-MW facility went online between 1973 and 1976. Midwest Gen operates four coal-fired boilers and an auxiliary boiler at Powerton that have the capability to fire at various modes that include the combination of coal and/or natural gas as their principal fuels.
EME, together with its debtor (bankrupt) and non-debtor (non-bankrupt) affiliates, is a leading independent power producing enterprise specializing in developing, operating, and selling energy and capacity from approximately 40 generating facilities in 12 states and the Republic of Turkey.