Do Illinois' coal-fired plants have a future?

Aug 11 - McClatchy-Tribune Regional News - Julie Wernau Chicago Tribune

Workers at the state's coal-fired power plants are all worried about the same thing: whether they will lose their jobs.

Collectively, the 13 plants employ about 2,000 people and contribute more than a billion dollars to the Illinois economy in the form of their payrolls as well as the taxes they pay and the purchases they make from suppliers. The impact on local economies where the plants are located could be significant because they often are major employers.

Billy McDaniel, mayor of the city of Metropolis -- which facetiously bills itself as the home of Superman -- said closing the nearby Joppa plant would be devastating for the southern Illinois city of 6,500. The plant employs 125 people, according to a company filing.

It's much the same story over in Peoria County, where workers are waiting to learn the fate of the Edwards coal plant.

"Virtually every coal plant in Illinois right now is owned by companies that are either in bankruptcy, have recently emerged from bankruptcy or whose bond ratings are approaching junk," said Howard Learner, executive director of the Chicago-based Environmental Law and Policy Center.

Owners of the plants have been squeezed by regulations forcing expensive pollution control upgrades at the same time cheaper sources of fuel have rendered the plants unprofitable. In the next two years, legal decisions affecting roughly two-thirds of the state's coal-fired power plants are expected to determine whether those plants have any future.

Ameren Corp. has already determined it no longer wants its five operating coal plants in the state, and it is attempting to hand them over at no cost to Houston-based Dynegy Inc. But there's a catch: The deal hinges on regulators' extending a deadline for cleaning up the plants' air pollution, and the total cost is estimated at about $1.25 billion. Missouri-based Ameren says that if regulators can't guarantee Dynegy the extension, the deal could unravel, which would mean shutting down plants.

Meanwhile, Edison Mission Energy, the parent company of Midwest Generation, the owner of four Illinois coal plants, has been floundering in bankruptcy court, and some analysts expect its unprofitable plants to be shuttered.

Midwest Generation's plants face significant obstacles to complying with heightening environmental regulations, said Julien Dumoulin-Smith, director of equity research for electric utilities at UBS Securities. "These coal plants are very likely retirement candidates," he said.

Dumoulin-Smith also said he doubts that Midwest Generation could sell them. "I don't see any real appetite for an acquisition. If there was not cash paid for the Ameren assets and the Ameren assets were materially better than the (Midwest Generation) assets, what are the (Midwest Generation) assets worth?"

Doug McFarlan, a spokesman for Midwest Generation, said employees at the company's four remaining plants have shown tremendous fortitude in light of the uncertainty that hangs over their future, setting records for safety and performance in the first half of the year.

The company filed to reorganize under Chapter 11 of the federal bankruptcy code in December 2012 and has "no firm timetable" to emerge or any idea what the company will look like or who might own it. Edison International used to be its parent company but severed ties as well as financial support.

"No decisions have been made about retiring additional plants because we're focused on operating them," McFarlan said.

On a recent investor call, Robert Flexon, Dynegy president and chief executive, was coy about whether his company would be interested in snatching up the Midwest Generation plants, saying, "We have our hands full" with the Ameren transaction.

Dynegy's strategy is to expand its coal-fired generating base to take advantage of economies of scale, said Flexon, and he confirmed his company wants the Ameren plants as badly as Ameren wants to get rid of them.

"It's time to get big or get out," said Dumoulin-Smith. "That is really what's going on here."

Dynegy is expecting to save $75 million annually by scaling up, savings the company says it desperately needs to stay afloat for the next couple of years. Much of the savings would come from increased purchasing clout.

"In the coal generation business, short term, it's a matter of survival," Flexon said in an interview Thursday. "The market now is as tough as any market has ever been."

For now, the company is making money from its small cadre of natural gas-fired plants while trying to stem losses from its coal plants for the next three years. If it can make it through until 2016, Dynegy is betting it will be one of the few big coal operators left as tightened federal laws governing mercury and air toxics take effect and coal plant operators shut down rather than invest in pricey pollution controls.

In December, Dynegy completed $1 billion in environmental upgrades at its Baldwin plant and three sister plants in Wood River, Havana and Hennepin.

The company is also betting that the U.S. will begin exporting significant amounts of natural gas, tightening domestic supply and increasing pricing. For Dynegy, a dollar increase in natural gas prices would double its earnings, said Flexon.

In March, Dynegy announced it would become Illinois' largest owner of coal-fired power plants when it said it would acquire Ameren's five Illinois coal plants.

With the Ameren transaction, Dynegy would be the third-largest independent power producer in the U.S., according to Dynegy. It would also give the company a route to sell a portion of its power into a more lucrative power market than it operates in today.

Ameren's plan was to hand over the plants to Dynegy by the end of the year, along with a newly minted five-year extension granted to Ameren to complete those upgrades.

In earning the waiver from the Illinois Pollution Control Board late last year, Ameren argued that it couldn't complete the upgrades because of financial hardship.

Three months after being granted the extension, Ameren announced it would walk away from the plants altogether; shortly thereafter it announced the deal with Dynegy.

Dynegy had been a vocal opponent of such extensions.

Last year it objected to Midwest Generation's request for more time to install pollution controls at its four coal plants, saying such extensions create "an unlevel playing field between power generators in Illinois, such as Dynegy, that committed to and made the significant financial investment on or ahead of schedule needed to comply with Illinois environmental regulations."

In objecting to Midwest Generation's request for two extra years to install emissions controls on its Illinois plants by 2015 and 2016, Dynegy cited a 2006 press release in which then-Gov. Rod Blagojevich explained the benefits that would come by cleaning up those plants, including cleaner air and water and fewer health problems for children and pregnant women.

"Granting this variance would delay those benefits to the citizens of Illinois," Dynegy wrote in its December 2012 objection to a waiver its competitor said it needed because of stressful market conditions.

A year and half later, Dynegy's arguments are the same as its competitors'. The company says lower electricity prices, driven in large part by competition from cheap natural gas, make such large capital outlays untenable. Like Edison International with Midwest Generation and Ameren with its Illinois generating arm -- both parent companies cut off financial support last year to those units -- Dynegy says that, as owner of the new plants, it would not financially support the upgrades.

A newly formed subsidiary, to be called Illinois Power Holdings, will run the plants and take over $850 million in debt. Dynegy said Illinois Power's balance sheet will be independent from the parent company.

The company said $220 million in cash on hand at Illinois Power upon closing will not be available for installing pollution equipment because that money will be needed to provide working capital and credit support to keep the business running until power prices recover.

Dynegy said it was turned down in its efforts to secure lines of credit.

The company reported operating losses of $104 million for the fourth quarter of 2012, $142 million for the first quarter of 2013 and $111 million for the second quarter and said it is not a "deep pocket" for capital projects and would risk its credit rating by investing in upgrades. The parent company could provide working capital for day-to-day operations but nothing more, Dynegy said.

Installation of sulfur-dioxide scrubbers at the company's Newton plant is already behind schedule, and completing the job in time would be "virtually impossible," the companies said. The lung-damaging pollutant also creates acid rain.

"Market prices for power cannot support the necessary capital expenditure to complete the Newton (scrubbing) project in time," according to a filing.

Health and environmental groups who oppose the extension aren't buying that argument.

"Dynegy doesn't have to buy these plants," said Learner from the Environmental Law and Policy Center. "Dynegy is a willing, voluntary purchaser. If Dynegy believes that buying the plants would create serious financial hardship for the company, there's a very simple solution, which is to not buy the plants."

Flexon says that's the wrong choice for Illinois.

Without the extension, Ameren and Dynegy said in a joint filing, "plant closures are inevitable." Specifically, both the Edwards and Joppa coal plants would undergo "near immediate shut down" to meet pollution limits for the Ameren fleet, the companies said.

"We were the only ones who came forward with a plan that could keep all of these plants going," said Flexon.

McDaniel, the Metropolis mayor, says regulators need to give the plants' owners a break considering the circumstances.

"We're not saying turn your back and let them pollute everything," McDaniel said. "But give them some leeway to make adjustments. At least give them the opportunity to do better. Don't just lock the door and send them home."

Ameren's plants -- Coffeen, Duck Creek, Newton, E.D. Edwards and Joppa -- collectively employ more than 600 people in the state and have a total economic impact of $1.4 billion, according to state filings.

"No one wants to ruin the air we breathe," said McDaniel. "But coal has been a viable part of southern Illinois a lot longer than I've been around. Even if it's 100 jobs, that's well-paying jobs in the $20- to $30-per-hour bracket plus benefits and retirement."

A public hearing on the matter is scheduled for 9 a.m. Sept. 17 at the Illinois Environmental Protection Agency in Springfield.

The developments mean the state could see coal plants closing in rapid succession and hundreds of layoffs in struggling parts of the state.

John Johnson, assistant business manager for International Brotherhood of Electrical Workers Local 51, which represents about 75 workers at Ameren's Edwards plant in Peoria County, said workers are anxious about their futures.

"They're concerned. They know that the plant's longevity may be shortened due to conditions beyond their control," he said.

Those who can, he said, have left for jobs elsewhere. But not everyone has that option, he said. And when people move out of the area, that's less money being spent.

People quitting their jobs at power plants is a big change. "That used to never happen," he said. "Once you went to work at a power plant, you stayed there for life."

jwernau@tribune.com

Twitter @littlewern

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