Talen Energy sees value in PJM coal assets

OREANDA-NEWS. June 05, 2015. Newly established independent power producer Talen Energy is betting on a large coal and gas portfolio in the PJM Interconnection power market to drive growth and enable future acquisitions in Texas, Montana and the northeast US.

Talen started trading independently this week. It is the product of a merger of utility holding company PPL's merchant generating business and energy investment firm Riverstone Holdings subsidiary RJS Power Supply. Coal and natural gas-fired generation each account for 40pc in Talen's 15GW portfolio, which also includes the 2,245MW Susquehanna nuclear power plant in Pennsylvania.

PJM's mid-Atlantic segment accounts for 83pc of Talen's generation fleet, with another 12pc in Texas' primary power grid. "We like our portfolio's mix," especially in PJM where coal plant retirements are squeezing installed capacity margins, Talen chief executive Paul Farr told investors this week. Farr previously headed PPL's merchant generation unit.

Talen hopes the pending reform of PJM's capacity market will boost revenue for its coal and nuclear fleet. Most of its PJM fleet would qualify as "capacity performance" resources, according to Farr. The PJM capacity performance plan will reward power plants with firm fuel supply arrangements and a good performance record, while under-performing plants will be penalized. Talen is spending money to upgrade its PJM coal fleet, with Farr saying the company has the know-how for reducing capital and operating costs at its coal plants.

Talen has to sell 1.3GW of mostly gas-fired generation in PJM to comply with merger approval conditions that federal regulators imposed. In turn, the company is eyeing potential acquisitions in PJM, New England and New York state, as well as the Electric Reliability Council of Texas, where it holds almost 2GW of gas generation. "Texas absolutely continues to be a bright spot [for load growth] despite the drop in oil prices," Farr said.

Pressure on Pacific northwest utilities to dispose of coal assets is presenting buying opportunities. Talen owns 529MW at the 2,090MW Colstrip coal plant in Montana, sharing ownership with Puget Sound Energy, Portland General Electric, Avista, PacifiCorp and NorthWestern Energy. Legislators in Washington state and Oregon are considering measures to force utilities to give up stakes in coal plants, so "there is always an opportunity in that context to do something creative," Farr said.

Talen faces tough competition for assets with larger independent power producers, in part because its power plants are primarily baseload and coal plants require more financial resources to maintain, analysts with Tudor Pickering Holt wrote in a research note yesterday. But the analysts suggested that American Electric Power's 7.9GW of merchant plants in PJM, on the block since January, could be an opportunity for Talen.

Talen has hedged 100pc of its coal fuel costs in 2015 and more than 80pc for 2016, albeit at costs higher than the present prices. Northern Appalachian and Powder River basin coal prices have dropped in the past year. Talen's hedge arrangements allow re-pricing supply once a year, Farr said.