Homer City Generation LP, which is controlled by General Electric (NYSE: GE), has just posted to its website the financial results for the second quarter of this year, with those results showing significant operating losses for the company and its 1,884-MW, coal-fired plant in Pennsylvania.
The Homer City facility benefits from direct transmission access to PJM Interconnection and also the New York ISO through high voltage lines that interconnect through a switchyard located on the facility site.
Homer City has an Energy Management Agreement with Boston Energy Trading and Marketing LLC (BETM), formerly known as Edison Mission Marketing & Trading Inc., a third-party marketing firm, to provide scheduling of energy from the facility into PJM and NYISO and other related services. Additionally Homer City has:
- an Operations and Maintenance Agreement with NRG Energy (NYSE: NRG); and
- an Asset Management Agreement with PurEnergy Management Services LLC to provide certain asset management, fuel procurement and transportation services.
Said the financial report: “Operating income (loss) from the Homer City plant was $(27,186) thousand and $(10,230) thousand for three months ended June 30, 2016 and 2015, respectively and $(2,165) thousand and $47,217 thousand for the six months ended June 30, 2016 and June 30, 2015, respectively. The gross margin of the Facility (revenues less fuel cost) was $29,445 thousand and $39,688 thousand for three months ended June 30, 2016 and 2015, respectively and $94,289 thousand and $134,309 thousand for the six months ended June 30, 2016 and June 30, 2015, respectively. Revenues for the three and six months ended June 30, 2016 were lower than the three and six months ended June 30, 2015 due to lower realized energy prices. Total operating expenses were lower for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015 due to lower fuel expenses. There were no unusual charges during this period that would have otherwise impacted the operating results.”
The report later added: “The current market environment continues to be challenging due to historically low natural gas prices, lower power generation and unseasonably mild weather. Homer City has taken several liquidity actions to mitigate the impact of the current market environment including enhancing its hedging program, reviewing the scope of its operating budget and rationalizing its plant capital investment program. However, despite these actions, the Facility may not be able to generate sufficient liquidity through its sale of energy and capacity into the local markets to meet its needs for cash in its operations over the next 12 months, including paying its operating expenses and interest and principal on the 8.137% and 8.734% bonds.”
The report also noted: “In May 2016, Moody’s reaffirmed the February 2016 credit rating downgrade of the secured bonds of Homer City, from ‘B3’ to ‘Caa2’. In addition, S&P downgraded the Homer City bonds from ‘B-‘ to ‘CCC-‘. These downgrades were driven primarily by Moody’s and S&P’s views that the Homer City may face liquidity concerns due to lower power prices at PJM as a result of lower natural gas prices, as well as the reduced likelihood of sponsor support from GE Capital. These ratings changes did not impact Homer City’s compliance with all covenants under the indenture agreements.”
Homer City deals with environmental compliance needs
GE Capital, which owns most of the facility (the minority partner is MetLife), entered into an EPC contract in 2012 with Kiewit Corp. to construct Novel Integrated Desulfurization System (NIDs) flue gas desulfurization system on Units 1 and 2. NIDs are designed to reduce various emissions, including SO2 and particulate matter. Construction of the NIDs is continuing to progress as planned. The total estimated cost of constructing and installing the NIDs for Units 1 and 2 of the Homer City plant is expected to be between $700 million to $750 million, which will be funded by GE Capital and contributed as equity to Homer City. FGD construction is wrapping up this year.
Also in the area of environmental compliance, Homer City noted that the Pennsylvania Department of Environmental Protection issued a “draft final” NOx RACT Rule in November 2014, which has since been revised. The revised rule established a presumptive RACT limit for Homer City and other coal-fired facilities with similar boilers at 0.4 lbs/MMBtu when the inlet temperature at the pollution control device is less than 600 degrees Fahrenheit and at 0.12 lbs/MMBtu when the inlet temperature is at 600 degrees Fahrenheit or higher. This rule was expected to be finalized and published in the Pennsylvania Bulletin in May 2016. Electric units are required to comply with the rule by Jan. 1, 2017. Homer City retained Sargent & Lundy to perform a preliminary engineering study to evaluate what upgrades to Units 1 and 2 will be needed to meet this rule. According to the Sargent & Lundy report, upgrades to certain plant components will be needed. Homer City will be seeking an extension from the Pennsylvania DEP for compliance with this rule.
In some other areas of note:
- Homer City had a coal cleaning agreement with Homer City Coal Processing Corp. (HCCP), an unrelated third party, to operate and maintain a coal cleaning plant at the power plant site. On April 6, 2016, Homer City terminated the agreement with HCCP.
- Homer City entered into the operation and maintenance agreement with NRG Energy in 2012. This agreement expires in 2017.
- Homer City entered into an energy management agreement with Boston Energy Trading and Marketing in 2012 to provide scheduling of energy from the facility into PJM and NYISO and other related services. At the end of the initial term (in December 2013) and any subsequent one-year periods, the contract will be extended for an additional one-year term unless either party elects to terminate the agreement prior to the end of the then current term in accordance with the terms of the agreement. The agreement has been extended through 2017. The agreement provides for a base fee of $1,950 thousand per year.
- In April 2013, Homer City entered into another agreement with BETM to provide additional energy management services related to the forward sale contracts entered into between Homer City and a third-party energy supplier in the PJM market area. This agreement provided for a fee of $500 thousand per year payable in monthly increments and had an initial term expiring on April 22, 2014. For all subsequent one year periods, the contract will be extended for an additional one-year term unless either party elects to terminate the agreement prior to the end of the then current term in accordance with the terms of the agreement. The agreement has been extended through 2017.
- Homer City has the Professional Services Agreement with PurEnergy for the provision of certain asset management, fuel procurement and transportation services. In addition to personnel costs, the agreement provides for a fee of $100 thousand per year. At Dec. 31, 2013, the end of the initial term, and on each one-year anniversary, the agreement is automatically extended for an additional one-year period unless either party elects to terminate the agreement prior to end of the current term in accordance with the terms of the agreement. The agreement has been extended automatically for 2016.
Notable is that Homer City Generation said in an August 2016 presentation posted to its website, which is separate from the second quarter financial report, that it has been engaged in a strategic review process to evaluate potential alternatives to address its long-term capital structure, including Homer City’s outstanding secured notes of approximately $606 million (called the “Notes”). As part of this process, Homer City engaged legal and financial advisors and initiated a sale process in the first quarter of 2016 and provided potential third-party bidders with access to confidential information. Homer City said it has received multiple bids with implied total enterprise values ranging from $230 million to $535 million.
The bids vary widely with respect to their terms and include terms such as: a mix of new debt and equity, including in certain cases, first lien secured debt and/or structurally subordinated debt; varying levels of capital contributions; varying levels of third party credit support; andin certain cases, the sale of certain assets or potentially beneficial commercial arrangements.
Homer City said it has been simultaneously engaged in discussions and working collaboratively with certain holders of the Notes who collectively hold a majority of the principal amount of the Notes. The Noteholders have informed Homer City that they do not consent to any of the current bids received and indicated that the total enterprise values do not correlate directly to recoveries that could be realized on the Notes. The Noteholders would, however, be willing to consider modified proposals if they are materially improved. Homer City said it remains in discussions with the advisors to the Noteholders regarding strategic alternatives.