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Moody's: Merchant coal plants face 'heightened refinancing risk' amid ESG wave

Moody's warns that as investors zero-in on environmental, social and governance risks during the U.S. energy industry's carbon transition, merchant coal generators face waning prospects for debt refinancing.

"Among the power generation projects that we rate, merchant coal projects are among the most exposed to carbon transition risk because merchant coal plants are the most likely to experience the financial effects of carbon transition," Moody's analysts wrote in an Oct. 9 report.

Electric utilities and power generators throughout the U.S. are adopting emissions reduction goals to align with the interests of customers and shareholders concerned about carbon exposure.

About 9.7 GW of coal capacity is still expected to retire in 2019 despite the Trump administration's scaled-back carbon emissions rule finalized in June, according to an S&P Global Market Intelligence analysis.

"ESG concerns have reduced the number of potential investors in merchant coal projects, leading to higher capital costs and greater credit protections for potential lenders," the analysts wrote. "Future financings are likely to be materially more expensive and difficult, especially compared to recent natural gas-fired project financings."

In addition to an increased investor focus on ESG, "persistently low power prices" and "high leverage relative to sustained cash flow" also present economic challenges for merchant coal plants.

Moody's pointed out that the sponsor of Chief Power Finance LLC pulled a refinancing transaction in August because of market conditions, while Longview Intermediate Holdings C LLC and Sandy Creek Energy Associates LP will likely face challenges as they seek to refinance maturities within the next two years.

The rating agency pointed out that in PJM Interconnection, where the Chief and Longview Power plants are located, "low demand growth and a wave of natural gas combined-cycle generation have exacerbated oversupply, causing sustained downward pressure on power prices."

Meanwhile, prices in the Electric Reliability Council Of Texas Inc. market, where Sandy Creek is located, "have been anemic during most of Sandy Creek's financing term resulting in higher than expected leverage."

The three coal-fired projects, Chief, Longview and Sandy Creek, have a combined $1.7 billion in debt maturing in the next two years, according to Moody's.

"Despite refinancing challenges, projects that we rate own some of the most efficient, environmentally compliant and well-maintained merchant coal plants in the U.S," analysts wrote. "But these factors have not produced enough cash flow generation to fully offset the carbon transition risk."