Bloomberg News

Energy Future Sues to Block EPA Cross-State Pollution Rules

September 12, 2011

(Updates with comments from EPA starting in fifth paragraph.)

Sept. 12 (Bloomberg) -- Energy Future Holdings Corp. units in Texas filed a lawsuit challenging Environmental Protection Agency rules aimed at curbing cross-state pollution, saying the measure would cost it $1.5 billion through 2020 and at least 500 jobs.

The Dallas-based power company, which was taken private in 2007 in the largest buyout in history, today asked the U.S. Court of Appeals in Washington to review the rule, which mandates that 27 states reduce emissions of sulfur dioxide and nitrogen oxide.

Energy Future said it will ask the court to delay enforcement of the rule, set to begin in January, while the case is being decided. The company said it would be forced to shutter 1,200 megawatts of coal-fired generation to comply with the new standard, and would halt mining operations that provide coal to the idled power plants.

“Meeting this unrealistic deadline also forces us to take steps that will idle facilities and result in the loss of jobs,” David Campbell, chief executive officer of Luminant Holding Co., an Energy Future unit, said in a statement.

‘Bait-and-Switch’

The EPA has been working with Luminant to explore options that would allow the company to meet new standards and avoid firing workers and shutting facilities, Gina McCarthy, an assistant administrator for the EPA, said in an e-mailed statement.

“It is unfortunate that the company leadership rushed to a decision that needlessly puts their workers’ jobs at risks,” McCarthy said.

Energy Future said it objected to the inclusion of Texas power plants in the final EPA rule. The state had been excluded from a preliminary version of the regulation.

“The EPA has pulled a ‘bait-and-switch’ on Texas by not including our state in the most draconian portions of this rule until the final publication,” Barry Smitherman, a commissioner with the Railroad Commission of Texas, said in a statement. The three-member commission regulates the state’s oil and gas industries, natural-gas utilities and coal mining.

Texas Governor Rick Perry, a Republican who is running for the party’s presidential nomination, appointed Smitherman to the railroad commission in July. Smitherman is the former chairman of the Public Utility Commission of Texas, which regulates the state’s electric utilities.

AEP, NRG

Today’s announcement on plant closings won’t affect Energy Future’s debt covenants, the company said in an e-mailed statement. In July, Energy Future said the new power plant standards will lead to a $400 million non-cash charge in the third quarter.

The charge, to write down the value of pollution allowances, won’t cause a default on any of its debt agreements or have a material impact on liquidity, the company said at the time.

American Electric Power Co. is deciding whether to join with other parties or to file its own lawsuit, said Pat Hemlepp, a company spokesman. The Columbus, Ohio-based power producer operates coal-fired plants that generate about 2,650 megawatts of electricity in Texas.

NRG Energy, the largest U.S. independent power producer, doesn’t plan to join the lawsuit, said David Knox, a spokesman for the Princeton, New Jersey-based company. NRG owns about 11,000 megawatts of generation in Texas, enough to power about 8.8 million homes. Of that total, about 4,180 megawatts is generated by coal-fired plants.

“We continue to evaluate all of our options, but we feel we can comply with the new rules,” Knox said in a telephone interview.

Energy Future faces significant new costs as it struggles with debt resulting from its going-private transaction.

Pollution Investments

The holding company said today it expects to invest $280 million in new pollution controls by the end of 2012 and $1.5 billion by 2020. Energy Future posted a net loss of $705 million during the second quarter as sales fell 16 percent to $1.68 billion.

Facing a decline in natural-gas and power prices, Energy Future has sought to reduce its risk of default by extending debt maturities and asking bondholders to swap their holdings at discounted prices for new securities. In April, lenders agreed to refinance about $17.8 billion of the company’s debt.

Contracts protecting against Energy Future’s default for five years increased 1.8 percentage points to 54.8 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $5.48 million initially and $500,000 annually to protect $10 million of Energy Future’s debt.

Credit-Default Swaps

Contracts on the company’s Texas Competitive unit added 0.7 percentage point to 65.4 percent upfront, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

The case is Luminant Generation Co. LLC v. Environmental Protection Agency, 11-1315, U.S. Court of Appeals for the District of Columbia (Washington).

--With assistance from Mary Childs in New York. Editors: Charles Siler, Michael Hytha

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Susan Warren at susanwarren@bloomberg.net.


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