Plunge in coal-plant asset values threatens billions in spending on pollution controls

By Julie Johnsson
24 June 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) and American Electric Power Co. (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. 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) 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) and FirstEnergy Corp. (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. 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 coal-fired 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. 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 operator, has fallen 15 percent this year. GenOn, a smaller generator with coal-fired plants in Maryland, has decreased 44 percent. The Standard & Poor’s 500 Electric Utilities Index has gained 0.8 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. 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. […]

Coal-Plant Plunge Threatens Billions in Pollution Spend via The Oil Drum