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Moody's: Fall in natural gas prices may lead to large-scale plant retirements

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Moody's: Fall in natural gas prices may lead to large-scale plant retirements

Moody'swarns that "persistently low natural gas prices" have placed severalcoal and nuclear power plants at risk of closure, with merchant generatorsscrambling to cut costs.

"Gasprices by far have the most dominant effect on the unregulated power sector inthe US," Moody's said in a March 31 report.

"Lownatural gas prices have devastated most of the US merchant power sector becausegas-fired power plants often serve as the marginal plant during times of peakpower demand," Moody's said. "Lower natural gas prices haveeffectively driven down wholesale power prices for all generators, regardlessof whether they are using natural gas, coal, nuclear power or renewableresources to generate their electricity."

"Theway we kind of look at it is, the forward curve assumes things will improve,"Moody's Vice President and Senior Credit Officer Toby Shea said in an April 7interview. "In the past, over six years, every time the forward becomesthe spot, the prices have fallen, except for 2014. So, it's not clear that theforward prices that we see right now [are] going to still be where [they are]by the time we get there."

Whilethis trend is harmful to all merchant generators, the rating agency said it is " to coal-basedgenerators and to a lesser extent nuclear-based generators."

"Inthe current commodity price environment, most unregulated coal and nuclearplants are generating little or negative cash flows," Moody's said. "Webelieve that if the current gasprice environment of $2/MMBtu to $3/MMBtu does not improve in thenext 12-18 months, there could be more large-scale coal and nuclear plantclosures, especially in regions without a forward capacity market, such asTexas and the Midwest."

Sheasaid the "area with the highest risk" is the ,especially for coal plants.

Coalplants in the Illinois part of the MidcontinentIndependent System Operator Inc. are at risk as well, he said.

"Also,all the single-unit nuclear power plants, no matter where they are … if you'rea single unit, you're at risk," Shea added, attributing the risk toeconomies of scale.

"Ifyou have two or three units, it's a lot bigger, so your cost goes down [on a]per unit basis," he noted. "All the things I'm talking about,obviously, are unregulated. Texas, there's some risk, but not so bad in termsof nuclear."

Moody'ssaid coal plants such as NRGEnergy Inc.'s 1,689-MW Limestoneplant in Texas and Dynegy Inc.unit Illinois Power GeneratingCo.'s 1,230-MW Newtonplant in Illinois are "particularly vulnerable because the market is designedwithout a forward capacity payment from the independent system operator."

Somecoal plants in Pennsylvania and Maryland are at risk of either shutting down orbeing converted to natural gas, according to Shea.

Potentialcandidates for conversion include NRG affiliate 's 668-MW unitsand 519-MW Dickersoncoal plant in Maryland. TalenEnergy Corp's 1,515-MW Montourcoal plant in Pennsylvania may also be converted to gas or a combination ofcoal and gas, according to Moody's.

Ratings revisions

Moody'srevised its ratingson several independent power producers in late March based on concerns ofpersistently low commodity prices in the sector.

WhileCalpine Corp.'sratings were revised upward based on its stronger financial profile, ,Illinois Power Generating Co. and GenOn Energy were downgraded by the ratingagency.

NRGEnergy itself was unaffected, with its corporate family and probability ofdefault ratings affirmed at Ba3 and Ba3-PD, respectively.

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Combatting prices

Sheasaid there are "several things" merchant generators have done tocombat the low natural gas prices. The associated chart uses HenryHub figures.

"Alot of coal plants and nuclear power plants … they're cutting costs like crazy,"he said.

Oneway they are cutting these costs is through consolidation to reduce overheads,and also through negotiating with coal transportation suppliers and coalproducers.

"Coalprices have gone down a lot," Shea said. "Even nuclear costs, we seethem coming down significantly. When you're not making any money, you find waysto cut costs. [Companies] have a significant amount of cost-cutting in store."

Acquisitionsalso have played a big role in combatting prices.

"Ithink the best example is Dynegy," Shea said.

in April 2015completed its acquisitionof 12,500 MW of coal- and natural gas-fired generation assets from and .

"Thoseare actually pretty good coal assets," Shea said, adding that the companyalso has been "diversifying into gas."

Dynegyand Energy Capital Partners also announced in February that they formed AtlasPower to acquire Frenchutility Engie's net8,731-MW portfolio of primarily gas-fired power plants in ERCOT, the andISO New England Inc.for $3.3 billion.

Talenalso has been diversifying its fleet, Shea said.

Moody's,largely, has viewed these moves "positively," he said.

"Interms of getting assets that are less vulnerable to falling gas prices, wedefinitely see them as positive. It's a significant positive," Shea said. "IfDynegy still had its whole portfolio of mainly coal assets and some gas assetsthat are not in good markets, then I think their credit story would be verydifferent."

Ohio PPA impact

The analyst also said the recent of a for 'smerchant plants in Ohio is "huge."

"[FirstEnergyCorp.] and FirstEnergy Solutions' rating is heavily driven by thefact that they got the PPA," Shea said. "If FirstEnergy failed to getthe PPA, they would have to do something to avoid a downgrade or a negativeoutlook."

ThePPA is "very important to [FirstEnergy's] credit quality."

FirstEnergy'sDavis-Bessenuclear plant is not as much at risk of early closure because it's protected bythe PPA, Shea said. However, there are challenges to the agreement.

"So,I wouldn't say FE or Davis-Besse [or] all those coal plants are out of thewoods. They're not," he said.