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In PJM and CAISO, power plant prospects diverge

As reported the first week of December, FirstEnergy Corp. entered negotiations to sell a portfolio of merchant generation in the PJM region. The reported sale price for the generation is $885 million, including assumption of $305 million in debt attributed to subsidiary Allegheny Energy Supply Co.

Allegheny Energy Supply's portfolio consists of nearly 1,600 MW of gas-fired and hydroelectric generation within PJM. This includes an ownership share in Bath County Pumped Storage of approximately 713 MW.

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The anticipated purchase price for the generating assets themselves is $580 million when assumed debt is subtracted. The reported price falls within the range of S&P Global Market Intelligence valuation estimates for the portfolio, with the highest valued piece attributed to the baseload natural gas generator Allegheny Energy 3, 4 and 5.

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While known and expected capacity revenue streams provide a basis around which FirstEnergy and its potential buyer can negotiate, significant uncertainty exists. The value of Bath County Pumped storage, in particular, may be substantially reduced under PJM's Capacity Performance (CP) revenue formula. For a buyer willing to assume some of these risks, the SNL Power Forecast indicates potential for a reasonable upside.

Gas-fired generation in California faces far worse prospects, as indicated by last week's bankruptcy filing of La Paloma Generating Co. LLC. While La Paloma Generating is a highly efficient combined-cycle plant projected to run at baseload capacity factors over its operating life, penetration of renewable generation has kept wholesale power prices low. Combined with carbon emissions pricing in the CAISO market, spark spreads to the plant have been and are projected to remain unsustainably low.

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Absent a comprehensive capacity market, capacity revenues to the plant are low and sporadic, while earnings from energy sales are very nearly zero. The SNL Power Forecast's estimated earnings for the plant ranging from $6 million to $15 million per year would be inadequate to service reported debt of $524 million. A filing of bankruptcy under Chapter 11 provides the owners an opportunity to restructure the debt and seek firmer sources of revenue in the CAISO market.