The deactivation on Oct. 9 by FirstEnergy (NYSE: FE) of two coal-fired power plants in Pennsylvania is part of a broader program of coal plant shutdowns for the company, FirstEnergy said in its Nov. 5 Form 10-Q quarterly report.
On July 8, officers of FirstEnergy and its unregulated Allegheny Energy Supply Co. LLC (AE Supply) subsidiary committed to deactivating the following units by Oct. 9:
- Hatfield’s Ferry Units 1-3, 1,710 MW, Masontown, Pa.; and
- Mitchell Units 2-3, 370 MW, Courtney, Pa.
“As a result of this decision, in the second quarter of 2013, FirstEnergy recorded a pre-tax impairment of approximately $473 million to continuing operations, which also includes pre-tax impairments of $13 million related to excessive inventory at these facilities,” the Form 10-Q said.
Notable is that while these coal plant shutdowns are described as “deactivations” at some points in the Form 10-Q, they are listed under a category for “retirements,” which indicates the plants are unlikely to be reactivated.
Under a section for 2012 plant retirements, FirstEnergy said that as of Sept. 1, 2012, Albright, Armstrong, Bay Shore Units 2-4, Eastlake Units 4-5, R. Paul Smith, Rivesville and Willow Island were deactivated.
FirstEnergy Generation LLC (FG) entered into reliability must-run (RMR) arrangements with PJM Interconnection for Eastlake Units 1-3, Ashtabula Unit 5 and Lake Shore Unit 18 through the spring of 2015, when they are scheduled to be deactivated.
In December 2012, FERC approved the transfer by FG to FirstEnergy’s American Transmission Systems Inc. (ATSI) of certain deactivated generation assets associated with Eastlake Units 1-5 and Lakeshore Unit 18 to facilitate their conversion to synchronous condensers to provide voltage support on the ATSI system. The transfer of Eastlake Units 4 and 5 was completed on Jan. 31, 2013, and ATSI completed the conversion of Eastlake Unit 5 in July 2013 and is expected to complete Eastlake Unit 4 by June 1, 2014. The transfer of each of the remaining units and conversion to synchronous condensers will occur when the use of the unit for RMR purposes is no longer required.
Continued weak power markets trigger FirstEnergy decisions
FirstEnergy said that it continues to be exposed to weak economic conditions across its multi-state utility service territory, as evidenced by relatively flat distribution sales over the last three years. “This prolonged decrease in demand, coupled with excess generation supply in the region, has caused a period of protracted low power and capacity prices,” the company noted. “Further, the PJM RPM Auction for 2016/2017 capacity that was conducted in May 2013 produced prices in the regions served by FirstEnergy’s Competitive Energy Services Segment that were lower than expected. This result is a broader indication of an underlying supply/demand imbalance that is expected to continue to affect power producers in this region, adding pressure on already depressed energy prices and potentially pushing any significant power price recovery further into the future than FirstEnergy, or the industry at large, previously expected.”
Over the course of 2013, FirstEnergy said it has taken a number of actions designed to reposition the Competitive Energy Services Segment, including adjusting its hedging strategy by slowing forward sales in order to capture any potential future improvements in power prices, being more selective in the customers targeted and focusing more on customers with higher profit margins.
With the deactivation of Hatfield’s Ferry and Mitchell, and the Harrison/Pleasants coal plant swap among FirstEnergy subsidiaries in October 2013, as well as the proposed sale of 527 MW of hydro assets, FirstEnergy said it will have reduced the size of its competitive fleet and changed the mix of its assets.
“While these actions will result in the competitive fleet being about the same size as before the [Allegheny Energy] merger, FirstEnergy believes it is a much stronger, more efficient, and environmentally controlled platform of units,” the company said. “After the transactions discussed above, the remaining competitive fleet will be less than 50% coal, over 30% nuclear, and more than 20% natural gas, hydro, wind and solar. Capital reductions, primarily over the next four years, of approximately $1 billion have been announced with the remaining capital investments over the next several years expected to primarily support the nuclear fleet life extensions at Davis-Besse tied to the steam generator replacement in 2014 and a new reactor vessel head and steam generator at Beaver Valley 2 in 2017. This capital reduction includes reduced [Mercury and Air Toxics Standards] spending that is now anticipated to be approximately $465 million, including approximately $240 million at the Competitive Energy Services segment.”
Asset sales and swaps are part of broader financial plan
Earlier this year, FirstEnergy announced the 2013 financial plan intended to strengthen the balance sheet of the Competitive Energy Services Segment by reducing its debt by about $1.5bn.
This plan included the net transfer of 1,476 MW between AE Supply and the regulated Monongahela Power subsidiary of the Harrison and Pleasants coal plants, and the proposed sale of up to 1,240 MW of unregulated hydro assets. Finally, as part of the 2013 financial plan, FirstEnergy announced earlier this year that it expected to issue a modest amount of equity in late 2013.
In line with these efforts, FirstEnergy continued to execute its 2013 financial plan with moves that include:
- In August, Monongahela Power and Potomac Edison, along with the majority of the parties to the companies’ generation transaction proceedings involving the Harrison Power Station, filed a comprehensive settlement agreement with the West Virginia Public Service Commission (WVPSC). On Oct. 7, the WVPSC authorized the transaction with certain conditions and on Oct. 9, MP sold its 8% share of Pleasants at its fair market value of $73m to AE Supply, and AE Supply sold its 80% share of Harrison to Monongahela Power at its book value of $1.2bn. The transaction resulted in AE Supply receiving net consideration of $1.1bn and MP’s assumption of a $73.5m pollution control note. In connection with the closing, in the fourth quarter of 2013, MP recorded a pre-tax impairment charge of about $330m to reduce the net book value of the Harrison Power Station to the amount that was permitted to be included in jurisdictional rate base.
- On Sept. 4, FirstEnergy Service Co. (FESC), on behalf of FG, AE Supply and Green Valley Hydro LLC, applied for authorization from the FERC to sell eleven hydroelectric stations in Pennsylvania, Virginia and West Virginia to subsidiaries of Harbor Hydro, a subsidiary of LS Power, for about $400m. The stations included in this proposed sale have a total generating capacity of about 527 MW, which represents less than 3% of FirstEnergy’s competitive generation fleet output. Subject to receiving the required regulatory authorizations and the resolution of the potential competing license application from the Seneca Nation and other claims and matters regarding the Seneca Pumped Storage Project in Pennsylvania, this transaction is expected to close in the fourth quarter of 2013.