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Midwest Generation — which recently closed its two Chicago coal plants and operates four others in Illinois — continues to lose money and could see its parent company Edison Mission Energy (EME) file for Chapter 11 bankruptcy, according to Edison International’s third quarter earnings conference call on Thursday.
Edison International is EME’s parent company, and company documents said an EME bankruptcy filing would mean its removal (deconsolidation) from Edison International and placement into new ownership.
Edison International CEO Ted Craver said he could not discuss any specifics about the Illinois coal plants’ fates because the company is in confidential negotiations with creditors. But environmental and policy analysts said the third quarter announcements bolster predictions that Midwest Generation will close one or more plants or units in coming months or years, and could file for Chapter 11 bankruptcy itself.
Company documents and independent analysis indicate that the most likely plants to close would be the Waukegan plant north of Chicago on Lake Michigan and the Joliet 6 unit, one of three at the Joliet plant 40 miles southwest of Chicago.
To meet federal and state regulations Midwest Generation would need to spend up to $628 million on sulfur dioxide controls on the Illinois plants in the next six years. An Edison International presentation for the conference call notes that “no decisions have been made to retrofit particular units,” and that it is “less likely” retrofits will be made on the 290 MW Joliet 6 unit and the Waukegan plant.
A July financial filing from Midwest Generation noted that environmental retrofits would need to be funded in part by debt repayment and new equity from EME. However, “EME is under no obligation to make such contributions and may be unable to do so,” according to the form.
Deep debts
During the conference call Craver said that “under current projections, EME will not be able to repay” $500 million in bonds that mature in June 2013. He said, “There is also no assurance that EME will pay the $97 million interest due on its bonds on November 15 or during the 30 day grace period that follows.”
Midwest Generation operates its Joliet and Powerton plants under a sale-leaseback agreement, a complicated structure where other investors actually own the physical power plants and the land.
In the July filings, Midwest Generation said that if EME defaults on its bonds due in June, Midwest Generation might not be able to pay the rent on the Joliet and Powerton plants, which could mean termination of the leases. The Powerton plant in Pekin in central Illinois is the newest and largest of Midwest Generation’s Illinois fleet, at 1,538 MW representing about a third of the company’s generating capacity. EME abdicated ownership of its Homer City, Pennsylvania plant under a similar sale-leaseback agreement this fall.
A September report by the International Strategy and Investment Group LLC predicted that Edison International will remove EME from its books through a bankruptcy and focus on its California operations. The report said, “Due to low power prices, subdued capacity prices and environmental compliance obligations, we think EME…is worth less than the face value of the debt.”
EME spokesman Douglas McFarlan responded to questions about the Illinois plants with a statement indicating they will remain open for the near future:
A key goal for EME in any financial restructuring is to position our company for near-term stability and sustainable, long-term growth and success. Our expectation continues to be that throughout this process, our business operations will continue in the normal course, and our electric facilities will continue to generate power safely and reliably. We are operationally healthy and believe that a financial restructuring — coupled with the existing strength of our employees and assets – will preserve our focus on safe, reliable operations, and position us to take advantage of future opportunities. If our financial restructuring does include a Chapter 11 filing, remember that this court-supervised process is designed to let companies operate normally while they restructure their finances.
Low energy demand and high fuel costs
Craver said that Midwest Generation’s losses are due to low energy demand and hence less energy sold on the market, and higher prices for the Powder River Basin coal the Illinois plants burn.
So far this year the plants have sold 17,459 GWh of electricity, compared to 20,987 this time last year. And the average price Midwest Generation has received for its energy this year has been $28.56 per MWh, compared to $35.30 last year. So far in 2012 fuel has cost on average $24.69 per MWh of electricity generated, compared to $18.32 by this point last year.
Mike Johnson, a senior policy analyst for Greenpeace, describes a vicious cycle of escalating fuel costs for struggling coal plants. He said that for a company with an uncertain financial future like Midwest Generation, coal companies are likely to demand higher rates to hedge against the company defaulting on its contracts. And when coal plants run at generation levels much lower than their capacity because of low power demand, they get much less efficiency from their fuel, which essentially equates to higher coal costs per unit of energy generated.
“It’s like if you’re stuck in rush hour traffic, you’re not getting peak fuel economy,” Johnson said. “If you have a 10 percent decrease in fuel efficiency, that’s a 10 percent cost addition per MWh…If you’re talking about a market where there’s a $2 (per MWh) spread between natural gas and coal, that may be the dividing line between a plant running at 50 to 55 percent capacity and 10 to 20 percent capacity.”
The sunset of merchant coal plants?
Environmental and health experts see Midwest Generation’s fleet as symbolic of the plight of other aging merchant generator coal plants around the nation that sell their energy primarily or entirely through competitive auctions.
Craver noted that since deregulation in many states, Edison International’s strategy has been to focus on both regulated and competitive markets. In regulated markets the same company typically generates and distributes power, and the cost of generation is folded into consumer electric rates. In markets like the PJM Interconnection that covers 13 states (including Illinois) and Washington D.C., merchant generators like Midwest Generation’s plants compete to sell power on the open market.
“We are acutely aware that the competitive generation sector has been deeply challenged for some time by cyclically low margins and capacity values,” said Craver on the conference call:
“For the last few years, EME has focused on developing innovative approaches to environmental compliance, and careful capital stewardship, principally as a means to buy time for a recovery in power markets and energy margins and stabilize the company. But despite great efforts and many successes by EME, the adverse power market trends have persisted, and EME’s operating losses this year have increased significantly, and are expected to continue. At the same time, EME has a capital structure and financial leverage created in better times that is no longer workable under current and foreseeable conditions.”
In other words, the company had hoped the money-losing Illinois plants could ride out this difficult period, operating at a loss until demand for power picks up and natural gas prices rise, making coal more competitive. But now it appears the hole they are in may be too deep.
Along with selling power at PJM auctions, companies like Midwest Generation also sell future capacity, basically the promise that they will hold in reserve the ability to generate a certain amount of energy if it is needed at certain times in the future. For the period from October 2012 through May 2013 such reserve capacity went at the low rate of $16.46 per MW-day. During the annual PJM capacity auction in May, capacity in the region that includes Midwest Generation’s plants went for $136 per MW-day for the 2015-2016 year (not counting the summer), which was still considered very low compared to other parts of the country and the increases the industry had hoped for.
Johnson described such capacity sales as “a consolation prize” for companies that don’t sell enough actual power to be lucrative. He said that for companies like Midwest Generation with relatively small, archaic coal plants, rock-bottom capacity prices “really narrow the moat” between financial survival and collapse.
“There’s only so much they can do to control power prices, especially in a zone dominated by Exelon and other low-cost resources,” he said. “[Companies like Midwest Generation] are really hoping the capacity market will let them survive – it’s kind of their meal ticket. When that goes away it doesn’t make sense to invest in controls on these plants. They’re basically generating at a loss.”
A power shift?
The Illinois coal plants run by Midwest Generation account for the majority of EME’s power generation. The company also has what it bills as one of the nation’s largest wind portfolios, with wind projects in 11 states including Illinois, Iowa and Michigan; and natural gas plants in Illinois and California. The company has additional wind and natural gas projects — but no coal plants — in development, according to the third quarter documents.
If EME goes into bankruptcy proceedings, environmental analysts speculate that new owners would emphasize its wind holdings and phase out coal. They point out that Midwest Generation’s coal plants are also still facing legal action, including a lawsuit filed by the U.S. Justice Department and the state of Illinois regarding Clean Air Act violations, and a recent complaint with the Illinois Pollution Control Board filed by four environmental groups, regarding contamination from coal ash holding ponds.
The group Citizens Against Ruining our Environment (CARE) in the Chicago suburbs is a party to the government lawsuit and also the pollution control board complaint. CARE member Ellen Rendulich thinks it’s likely the Joliet and Will County plants in their area will close eventually, but she is angry that Midwest Generation has operated them without pollution controls for this long, and she’s also concerned about what will happen if the plants close.
“I think they’ve dragged out the process long enough at the cost of the public and the environment,” she said. “They’ve made a ton of money, and suddenly when the times have changed they’re just going to walk away and leave it? We’re all hoping that negotiations (with creditors) include other employment opportunities and site remediation rather than leaving it all to taxpayers and leaving the employees jobless.”