NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Merchant Power Projects Under Stress: http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681999
U.S. natural gas price declines have dramatically altered the merchant generation sector, which in turn is placing longer-term financial strain on merchant power projects, according to Ratings in a new Fitch report.
The gas price declines stand to affect projects that were structured when gas prices ranged from $6 to $13/million British thermal units (MMBtu)
Facilities of all types have been affected with coal facilities feeling the impact first. This led to many coal plants being mothballed, retired or defaulting on debt. This was primarily due to the inability to compete with natural gas-fired generators, along with rising environmental restrictions. Even some gas units built on higher gas price projections are challenged by needing to be more selective about dispatch to maximize profit potential.
Power prices have reached levels so low that hydro facilities are also challenged. Fitch reviews the recent performance of three hydro projects. These hydro facilities have suffered margin compression, or expect to, due to the reduced power pricing. The effects are not uniform because differences in debt structure and leverage ultimately determine financial resilience.
Even so, investors with patient capital can realize value with well-maintained hydropower assets. Favorable dispatch, long asset life and solid base load generation drive their competitive market position.
Merchant power projects don't have the revenue protections of fully contracted projects. Therefore, they need to minimize their exposure to unpredictable market downturns with lower revenue expectations, lower leverage and or faster debt payment. Even with a new baseline of gas priced below $5/mmbtu, merchant power projects should be structured to endure sharp but temporary pricing declines below this level. This is particularly true when the debt burden is greatest.
Additional information is available in Fitch's special report, 'Merchant Power Projects Under Stress', available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'