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Risks Seen For Coal Plant Refinancing in PJM Market Crowded With Gas-Fired Projects

Moody's Investors Service warned in a report released on Monday that merchant coal-fired power generators operating in PJM Interconnection continue to face increased refinancing risks as wholesale electricity prices remain low and more natural gas-fired facilities come online.

The credit rating firm said it expects $3 billion of rated debt to mature between 2019 and 2022, during a period in which another 20 GW of gas-fired power are scheduled to enter service in the market. Coal-fired refinancing is only expected to become more challenging as the new gas-fired facilities vie for permanent financing of their own. Moody's expects investors to put up $8-10 billion of debt to help fund those projects, which could crowd out refinancing for merchant coal generators.

"Since their original financings, merchant coal-fired projects in PJM have made little or no incremental debt repayments aside from mandatory requirements," said Moody's analyst Jennifer Chang. "Given forward power price curves and capacity additions, this is unlikely to change in the near future.”

The wholesale electricity market is undergoing a dramatic shift. Since the 1980s, when the sector was liberalized, power generators have faced stiff competition, but that has only intensified in recent years with an increasing resource mix and the technological developments that have undermined some fuels. Shale production has also pushed the cost of natural gas down and put a dent in the cost-competitiveness of coal.

As North America's largest wholesale market, PJM serves more than 65 million people in all or parts of 13 states, including shale-rich Ohio, Pennsylvania and West Virginia, along with the District of Columbia. There are more than 50 gas-fired power projects underway in the market that include maintenance, expansions and newbuilds, according to the PJM queue. In 2005, coal and nuclear resources generated 91% of the electricity in PJM. But over time, the mix has become more evenly balanced, with coal's share cut to that of natural gas at 33% from 2010-2016.

During that time, coal-fired units made up 79% of the megawatts retired in the PJM footprint, according to the grid operator. Natural gas and renewables made up 87% of capacity additions.

Debt repayments, Moody's said, have been limited in part due to low cost natural gas, which has helped to drive down power prices and suppress margins. Some coal-fired plants that just years ago operated at more than 80% capacity now operate around 60%, according to Moody’s.

The market has taken a toll on some coal-fired plants. Homer City Generation in southwest Pennsylvania, which is owned by GE Capital, recently emerged from its second filing of bankruptcy with a modest amount of debt still on the books. Other facilities have been turned over to regulated utilities, face restructuring or have been slated for divestment in broader noncore asset sales. The environment has prompted policymakers in Ohio and Pennsylvania, for instance, to consider subsidies for both coal-fired and nuclear facilities, which have already been implemented in other states.

Chang noted that the trend could again accelerate following PJM's annual capacity auction scheduled for next month. Depending on the results, she said, that could lead to "the early retirement of less efficient coal-fired generation."

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