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28 May 2020

Private equity not taking a long view to the coal crash

A US bankruptcy judge has put Longview Power back in the game, a private equity owned coal plant that plans to invest almost nothing in renewables, and throw a lot more good money after bad, by investing big in gas turbines.

The judge could do little other than approve a plan of reorganization, but its new ideas are likely to keep its relationship with the court intact – it will be back in bankruptcy before you know it.

Longview bills itself as the most efficient coal plant on the PJM market, based in West Virginia and having spent $2.2 billion to build the plant in 2011, the fact that it is now just one stranded asset, seems to be lost on all of its investors who are just refusing to give up on coal.

The deal was a prepack, in and out of bankruptcy on the back of unnamed private equity investors. We say unnamed, because over the years these have included Bain Capital, KKR, Centerbridge Partners, Ascribe and Third Avenue and they may not all be involved with the deal, but at least some of them are. Typically the private equity group has squashed the previous equity holders in a debt for equity swap, and then given it some money to be going along with.

That was the $350 million of debt extinguished, existing equity cancelled, and senior secured debt holders taking 100% of equity. Longview will get a $40 million term loan which is meant to last it for next five years.  But it still owes trade debtors.

Free of debt it will be slightly more competitive, but it could run out of money rapidly. It is the second time that Longview has gone bankrupt, having previously claimed that it was down to design, construction, and equipment defects which it eventually sorted out with suppliers by 2015.

Now it is saying it is the fault of Covid-19, but also some debt was about to mature and there is the small matter of low market energy prices and not being able to keep the plant sufficiently active (it can operate above 80% capacity all the time) and it has had loans from the Small Business Administration for a federal emergency-stimulus Payroll Protection Loan.

Its modern 700 MW plant is supposed to remain competitive, but the design of its plant is that it can be run cheaply at high capacity – but of courese no coal plants are running at high capacity right now.

Prices are operating close to $15 MWh on PJM and this market has been under pressure to remove the downward pressure on energy pricing, by introducing a Minimum Offer Price Rule for most renewables so they cannot outbid coal.

The idea is to add a natural gas plant at Longview, along with a pipeline to feed it and a few solar panels, and take the company up to 2 GW of what it is laughingly calling “clean energy.” We just know that this is not a facility that will be able to invest in Carbon Capture research, so it is almost certain to go bankrupt again. That can be delayed about 6 or 7 years, by the introduction of a large gas turbine, but there is the small matter of someone paying for it, and at $1.2 billion, that’s a tough ask, given that the coal plant never repaid its debts. It will need a 6.2 mile $30 million pipeline to feed its new gas plant, which will not come into service until 2022. Longview will also add a 50 MW solar farm at Greene County, Pennsylvania.

Well here is the thing. It may not get approval for a natural gas plant. Ironically West Virginia is so predominantly coal fired, that it had to take the West Virginia Supreme Court to end opposition to a new gas plant there in a fight that took three years. Big coal argued that the gas was too polluting and that wasn’t laughed out of court.

Which means this new entity will have to survive on coal economics for some time to come.

What we do not understand is why private equity companies like KKR, Bain and Centerbridge, don’t understand that a new gas turbine will be obsolete, just in time to lose money as soon as it is built. Who is it that these guys are listening to who completely don’t get how solar plus battery will overtake the economics of gas in the 2030 timeframe in the US. This coal firm is probably saying to them, “Gas made us go broke, if only we had a gas turbine.”

Rethink Energy recently produced a conclusive economic model that shows that even in the US, where natural gas is cheap from the fracking revolution, gas turbines will be unable to compete with solar or wind plus battery for generation, by 2030. That doesn’t give them much time to get back the $1.2 billion they have not spent yet, never mind the $2 billion they lost on the coal plant.

One of the worrying things about this case is that if every bankrupt coal firm can get a private equity buy out, and then go back into business, and then as renewables gain parity with gas, the same process is repeated with gas turbines, then private equity is going to lose a fortune, and renewables will never take hold. How do you break a cycle like that? Surely the judge has a duty to protect future investors from making the same mistakes over and over again.