The American Electric Power Co. coal burning plant in Conesville, Ohio. Photographer: by Michael
Williamson/The Washington Post
Bloomberg News
Coal-Plant Plunge Threatens Billions
in Pollution Spend
By Julie Johnsson on June 25, 2012
The coal-fired power industry in the U.S. is facing the biggest plunge in asset values in
a decade, risking billions of dollars in pollution-control spending by utilities such as
Exelon Corp. (EXC) (EXC) and American Electric Power Co. (AEP) (AEP)
An indication of how much new emissions rules and cheaper natural gas have
hammered the value of coal-burning generation will come when Exelon announces the
results of the first big sale of U.S. coal-fired power plants in four years.
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Exelon, the largest U.S. power company, may have to take a 40 percent discount for
three Maryland plants it’s seeking to sell by the end of August. Bidders including NRG
Energy Inc. (NRG) (NRG)have offered $600 million to $700 million for the units, which
have a fair value of $1 billion, said Travis Miller, Chicago-based director of utilities
research for Morningstar Inc.
“This is going to be the first meaningful transaction for coal assets since the downturn,”
Julien Dumoulin-Smith, a New York-based analyst with UBS AG, said in a phone
interview. “You can get a little anxious about what the repercussions are.”
Constellation Energy Group, which Exelon bought this year, spent $1 billion on the
plants to keep them in compliance with pollution rules. Their sale, the biggest since
2008, comes in an era of more stringent pollution rules and competition from facilities
burning gas, a fuel cost that is near 10-year lows.
The transaction may help American Electric, GenOn Energy Inc. (GEN) (GEN) and
FirstEnergy Corp. (FE) (FE) determine whether the cost of added pollution controls to
keep coal plants operating is worth it. U.S. utilities are switching to burning gas for
electricity and preparing to retire 33,000 megawatts of coal-fired generation after the
U.S. Environmental Protection Agency tightened rules for mercury and other toxins,
Dumoulin-Smith said.
Misjudging Power Prices
Lower-than-expected power prices for the coming years caused American Electric on
May 30 to cancel plans to spend $1 billion to reduce emissions from a Kentucky coalfired plant. The Columbus, Ohio-based company has announced plans to shut coal
plants capable of generating thousands of megawatts.
Edison International, which paid about $1.8 billion in 1999 for the Homer City coal-fired
power plant in Pennsylvania, this year surrendered control of the facility after being
unable to get financing for pollution controls.
“Low natural-gas prices have been a major driver of lower power prices and have
diminished Homer City’s competitive position,” Moody’s Investors Service said in a May
11 downgrade note.
Selling Plants
Exelon fell 1 percent to $36.53 at 12:23 p.m. in New York. American Electric fell 0.4
percent to $39.08.
Investors have priced in coal-plant losses and the threat of new gas-fired competitors in
mid-Atlantic states, said Dumoulin-Smith. Exelon, the largest U.S. nuclear power plant
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operator, has fallen 16 percent (EXC) this year. GenOn, a smaller generator with coalfired plants in Maryland, has decreased 41 percent. The Standard & Poor’s 500 Electric
Utilities Index has dropped 1 percent this year.
The last time that coal plants were so cheap was in the late 1990s and early 2000s,
when deregulation brought a spate of coal-fired plants on to the market, said David
Herr, a Philadelphia-based managing director of the energy and mining practices for
Duff & Phelps Corp.
“The utilities were able to sell their coal plants to their non-regulated, merchant
operations at phenomenally low prices,” Herr said in a phone interview. “Those assets
increased tremendously” in value when gas prices rose in 2005.
Constellation Spending
Before the commodity boom collapsed in 2008, large coal plants typically sold for
$1,000 a kilowatt, Daniele Seitz, an independent power industry consultant, said in a
phone interview. By that measure, the plants owned by Exelon would have fetched $2.5
billion, less any added environmental compliance costs.
Exelon must sell the plants as part of its $7.3 billion takeover of Constellation.
Constellation Energy spent $1 billion from 2008 through 2010 to add pollution-control
equipment to Brandon Shores, its largest coal-fueled plant, and the two other sites in
Maryland. Brandon Shores spewed the biggest amount of hazardous material from any
U.S. plant in 2008 until an $885 million investment cut emissions 90 percent.
Utilities can hire Shaw Group Inc. or Babcock & Wilcox Co. to install scrubbers and
other equipment to keep coal plants running. James Bernhard, chairman and chief
executive officer of Baton Rouge, Louisiana-based Shaw, said in a June 7 speech that
the company gets work if a coal plant is cleaned up, converted to gas or shut, since it
will help build a replacement.
Shutting Capacity
Coal-plant operators have announced plans to shut 14,000 megawatts of capacity in the
next three years within the 13-state wholesale power market overseen by PJM
Interconnection LLC. The retirements come in lieu of installing equipment to comply
with federal emissions limits slated to take effect in 2015.
The retirement announcements haven’t sent power prices in PJM soaring for 2015 and
2016 in part because of gas plants proposed to be built in Maryland and New Jersey,
Hugh Wynne, a New York-based utilities analyst with Sanford C. Bernstein & Co., said in
a May 21 report.
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State intervention in support of new plants has also spooked investors trying to
determine values for the Exelon facilities, Dumoulin-Smith said. “It throws a wrench in
your underlying thesis,” Dumoulin-Smith said. “I think clearly the price talk is down.”
Power Contracts
Maryland and New Jersey require utilities sign long-term power purchase agreements
with certain proposed plants, giving the owners a revenue stream and the state some
assurance of cheaper power supplies.
Some sellers have tested the market for coal plants only to abandon the idea after bids
were lower than anticipated.
“A lot have withdrawn assets,” said Jeff Bodington, president of Bodington & Co., a San
Francisco, California-based firm that specializes in advising power industry mergers.
Selling plants “wasn’t easy in good times, now it’s even less easy.”
The number of potential bidders for Exelon’s plants is skewed by the fact that it can’t
sell to some of the largest power companies, including American Electric, FirstEnergy,
GenOn, Dominion Resources Inc. and Calpine Corp. Under an agreement with federal
regulators, Exelon is barred from selling to any company that owns 3 percent or more
of the installed capacity in the PJM wholesale market.
Strategic Buyers
The three plants generate enough power to light 2.1 million homes, according to U.S.
Energy Department estimates. The plants would once have commanded a premium for
their low emissions, especially from strategic buyers hoping to gain a foothold in PJM,
the largest U.S. wholesale electricity market, Seitz said.
Their value has been hurt by an unprecedented shift by U.S. utilities to
burning gas that is cheaper than coal mined east of the Mississippi River,
Robert Zabors, director of the energy practice for Bridge Strategy Group, a
Chicago-based management consulting firm, said in a phone interview.
The U.S. is expected to get 13 percent less power from coal this year as gas-fired
generation rises 22 percent, the Energy Department said in its June 12 short-term
energy outlook. Coal accounted for 36 percent of U.S. electricity generated during the
first quarter, down from 45 percent a year ago.
Gas Prices
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Gas prices reached a 10-year low on the New York Mercantile Exchange of $1.902 per
million British thermal units in April. Central Appalachian coal prices have dropped 17
percent this year. Returns from each of the five members of the Bloomberg Americas
Coal Index (BUSCOAL) have declined by 25 percent or more in 2012.
To make the case to buy the Exelon plants, “you have to believe Appalachian
coal prices are going to fall by half, other coal plants will retire, capacity
markets will stay rich, EPA rules will stay in place, distributed generation
including solar will not proliferate and load growth will return,” Zabors said.
Exelon Studying Bids
Exelon is studying bids and expects to close the sale by August, Chief Strategy Officer
William Von Hoene Jr. said on June 7. The company agreed to complete the sale within
150 days of the March 12 close of its Constellation purchase.
Paul Elsberg, a company spokesman, declined to say how much Exelon expects to
receive from the auction or identify bidders for the plants.
Lori Neuman, a spokeswoman for NRG, declined to comment on whether the Princeton,
New Jersey-based power producer bid on Exelon’s plants.
At a heavily discounted price, the plants may be a smart investment for a strategic
buyer betting that gas prices will rise later this decades as the U.S. exports the fuel and
more utility consumption boosts demand, said Sam Brothwell, a senior utility analyst for
Bloomberg Industries.
“As gas prices go up, the value of an installed coal plant could go up to a greater
extent,” Brothwell said. “This basket of coal plants could be a leveraged play betting on
a rebound of coal.”
To contact the reporter on this story: Julie Johnsson in Chicago at
[email protected]
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