Energy Future Takes Nearly $2 Billion in Impairment Charges Over Coal-Fired Capacity

 Energy Future Takes Nearly $2 Billion in Impairment Charges Over Coal-Fired Capacity

Energy Future Holdings, currently pursuing a bankruptcy reorganization plan, said in a Nov. 3 Form 10-Q filing at the SEC that it has lately taken impairments charges on coal-fired capacity due to tough power markets in the Electric Reliability Council of Texas (ERCOT) region.

"We evaluated our generation assets for impairment during September 2015 as a result of an impairment indicator related to the continued decline in forecasted wholesale electricity prices in ERCOT," said the company. "Our evaluation concluded that impairments existed at our Martin Lake, Sandow 4 and Sandow 5 generation facilities, and the carrying value for those facilities and related mining facilities were reduced in total by $1.295 billion. Our fair value measurement for these assets was determined based on an income approach that utilized probability-weighted estimates of discounted future cash flows, which were Level 3 fair value measurements. Key inputs into the fair value measurement for these assets included current forecasted wholesale electricity prices in ERCOT, forecasted fuel prices, capital and operating expenditure forecasts and discount rates.

"We evaluated our generation assets for impairment during March 2015 as a result of an impairment indicator related to lower forecasted wholesale electricity prices in ERCOT. Our evaluation concluded that an impairment existed at our Big Brown generation facility, and the carrying value for that facility and related mining facility was reduced by $676 million. Our fair value measurement for these assets was determined based on an income approach that utilized probability-weighted estimates of discounted future cash flows, which were Level 3 fair value measurements. Key inputs into the fair value measurement for these assets included current forecasted wholesale electricity prices in ERCOT, forecasted fuel prices, capital and operating expenditure forecasts and discount rates.

"In July 2015, we filed notice with ERCOT that we intend to seasonally suspend operations at a second of the three units at our Martin Lake generation facility, with the units returning to service for the peak demand months of summer. In June 2015, we also assessed whether this planned notice constituted an impairment indicator for the Martin Lake generation facility and concluded that since the decision is expected to result in improved cash flows for the plant, it was not an indicator of impairment.

"In the three and nine months ended September 30, 2014, we wrote off previously incurred and deferred costs totaling $9 million and $30 million, respectively, for mining projects not expected to be completed due to economic forecasts and regulatory uncertainty. These charges have been recorded in impairment of long-lived assets in the Competitive Electric segment's results.

"Additional material impairments may occur in the future with respect to these assets or other of our generation facilities if forward wholesale electricity prices continue to decline or forecasted costs of producing electricity at our generation facilities increase."

The reference to mining is to the fact that much of the company's coal-fired capacity gets fuel from captive lignite mining operations. The company also burns a fair amount of Powder River Basin coal out of Wyoming.

The three referenced power plants are:

  • Big Brown - Fuel source is lignite supplemented by Powder River Basin coal. It is a 1,150-MW, two-unit plant located in Freestone County.
  • Martin Lake - Fuel source is lignite supplemented by Powder River Basin coal. It is a 2,250-MW, three-unit plant located in Rusk and Panola counties.
  • Sandow - Fuel source is lignite. This is a 1,137-MW plant made up of Unit 4 and Unit 5, located Milam, Lee and Bastrop counties.

The Form 10-Q noted about one piece of pending litigation: "In July 2012, the EPA sent us a notice of violation alleging noncompliance with the CAA's New Source Review Standards and the air permits at our Martin Lake and Big Brown generation facilities. In July 2013, the EPA sent us a second notice of violation alleging noncompliance with the CAA's New Source Review Standards at our Martin Lake and Big Brown generation facilities, which the EPA said 'superseded' its July 2012 notice.

"In August 2013, the US Department of Justice, acting as the attorneys for the EPA, filed a civil enforcement lawsuit against Luminant Generation Company LLC and Big Brown Power Company LLC in federal district court in Dallas, alleging violations of the CAA at our Big Brown and Martin Lake generation facilities. In August 2015, the district court issued its ruling on our motion to dismiss and granted the motion as to seven of the nine claims asserted by the EPA in the lawsuit. Two claims remain before the district court, and those are currently scheduled for trial in October 2017. We believe that we have complied with all requirements of the CAA and intend to vigorously defend against the remaining allegations. The lawsuit requests the maximum civil penalties available under the CAA to the government of up to $32,500 to $37,500 per day for each alleged violation, depending on the date of the alleged violation, and injunctive relief, including an order requiring the installation of best available control technology at the affected units. An adverse outcome could require substantial capital expenditures that cannot be determined at this time and could possibly require the payment of substantial penalties. We cannot predict the outcome of these proceedings, including the financial effects, if any."

The Form 10-Q said about a separate U.S. EPA initiative, which is a proposed regional haze plan for Texas called a Federal Implementation Plan (FIP): "The EPA's proposed emission limits assume additional control equipment for specific coal fueled generation units across Texas, including new flue gas desulfurization systems (scrubbers) at seven generation units and upgrades to existing scrubbers at seven generation units. Specifically for Luminant, the EPA's emission limitations are based on new scrubbers at Big Brown Units 1 and 2 and Monticello Units 1 and 2 and scrubber upgrades at Martin Lake Units 1, 2 and 3, Monticello Unit 3 and Sandow Unit 4. Luminant is continuing to evaluate the requirements and potential financial and operational impacts of the proposed rule, but new scrubbers at the Big Brown and Monticello units necessary to achieve the emission limits required by the proposed FIP (if those limits are even possible to attain) would likely challenge the long-term viability of those units.

"Luminant, the State of Texas, and many others filed comments on the EPA's proposal in April 2015, and the rule is expected to be finalized in December 2015. As discussed in detail in these comments, we and others believe this proposed rule is unlawful and must be withdrawn. As proposed, the scrubber upgrades would be required three years after the rule is finalized, and the new scrubbers would be required five years after the rule is finalized. Assuming the proposed rule is finalized in December 2015, compliance would be required beginning in December 2018 and December 2020, respectively. While we cannot predict the outcome of the final rule, the result may have a material impact on our results of operations, liquidity or financial condition."

This article was republished with permission.

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