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Thursday, Sept. 19, 2013 05:15 pm

Shell game

Expert claims Dynegy won’t control pollution from old coal plants


A Texas-based energy company wants to take over several coal plants in Illinois, but environmental groups claim the company is planning to skip pollution controls and use a shell company to avoid taking on any risk.

Dynegy Inc. of Houston, Texas, is planning to acquire five coal plants in central and southern Illinois from Ameren Energy Resources of St. Louis. Ameren sought to divest itself of the aging plants, in part because of low natural gas prices that have lowered demand for coal power and because the company was running out of time to install required pollution controls on the plants. Ameren already spent hundreds of millions of dollars outfitting some plants with pollution controls, but the terms of the deal have Ameren essentially giving Dynegy subsidiary Illinois Power Holdings $226 million to take over the five coal plants, with IPH taking on Ameren’s $825 million debt and providing $25 million in “indemnity support”– essentially Ameren providing protection against lawsuits or other potential liabilities. IPH plans to take over the plants only if the Illinois Pollution Control Board grants the company a “variance” to delay installing the pollution controls on the five plants: Coffeen Energy Center, Duck Creek Energy Center near Canton, E.D. Edwards Energy Center in Bartonville, Joppa Energy Center and Newton Energy Center.

A report by David Johnson, a financial expert at ACM Partners in Chicago, blasts the proposed deal, saying Illinois Power Holdings is a “dangerously undercapitalized acquisition vehicle.”

“Among other things, the coal plants are losing money, and absent an unexpected turnaround in energy prices – something even IPH and Dynegy do not forecast – IPH will run out of capital and be unable to fund its operations and obligations within the next several years,” Johnson wrote in his report, which was commissioned by Illinois Sierra Club.

Johnson notes that IPH claimed financial hardship as an explanation for why it needs to delay installing pollution controls, but Johnson says that hardship is intentionally “self-imposed.”

“It would basically give future buyers of environmentally problematic assets a ‘blueprint’ for how to structure an acquisition so as to manufacture a perception of ‘financial hardship’ and thereby avoid environmental compliance costs,” Johnson wrote.

“In other words, Ameren is paying millions of dollars to rid itself of unwanted and over-encumbered coal plants,” Johnson continued, “and Dynegy appears to be agreeing to the transaction because it is basically getting paid to take the assets and not investing any cash of its own, it has carefully shielded itself for the likely possibility that the experiment will fail and IPH will end up in a bankruptcy or other restructuring, and it believes that by routing the acquisition through its undercapitalized IPH subsidiary it will be able to shield the underlying coal plants from existing environmental regulations, in essence obtaining a public subsidy for its acquisition.”

Katy Sullivan, spokeswoman for Dynegy, says IPH expects to make “substantial investments in these facilities in the coming years to meet new environmental requirements.” She said IPH is indeed structured to protect Dynegy from risk, but it’s also structured to survive even if natural gas power remains more economical than coal power. Where Ameren saw volatility and falling profit from the coal plants in question, Dynegy sees an opportunity for more cost-effective management because of the company’s experience and purchasing power, Sullivan said.

She said the deal also provides certainty for employees at the coal plants. Johnson disagreed, claiming IPH would be at “significant risk” of bankruptcy in the deal, “putting pensions and jobs at even greater risk and quite possibly leaving behind major environmental issues.”

The Illinois Pollution Control Board met Sept. 17 for a public hearing. The board must decide whether the financial hardship argued by Ameren also applies to Illinois Power Holdings and Dynegy. Most of the public comments submitted to the board oppose the deal on environmental grounds.

Joyce Blumenshine, a resident of Peoria and chairwoman of Heart of Illinois Group Sierra Club, said Dynegy CEO Robert Flexon visited with her group in Peoria to discuss their concerns, but Blumenshine says she was not satisfied.

“It really reaffirmed our position that this company is a polluter that will continue the bad legacy Ameren has of no plans for cleaning up our air and water and no real cleanup commitment to our community,” she said.

Contact Patrick Yeagle at pyeagle@illinoistimes.com.

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