Monday, December 29, 2014

Deflation: Ship, power plant values sunk

Banks are "seizing ships"; Exelon faces markdown sales

Deflation: Ship, power plant values sunk

Real estate isn't the only asset whose value has plunged, and stayed low, since the 2008 financial crisis.

1) "Bankers are putting to sea and seizing ships to protect the value of their loans to struggling shipowners," reports Reuters here.

"The nominal resale value of a supertanker, used to transport crude oil, has fallen to around the $90 million level from $162 million in 2008.

"The value of a Cape-size ship," a big dry-bulk carrier shipping commodities like iron ore or coal, "has also slumped to $44 million from just under $100 million in 2008."

No wonder loans to shipping firms by global bank syndicates "slumped to $245 million in the second quarter of this year, down from over $1.6 billion in the first quarter and over $3.9 billion in the second quarter of 2011, Thomson Reuters LPC data showed."

2) "The coal-fired power industry in the U.S. is facing the biggest plunge in asset values in a decade, risking billions of dollars in pollution-control spending by utilities such as Exelon Corp.," writes Bloomberg here.

Cheap natural gas and expensive federal clean-air rules "have hammered the value of coal-burning generation ... Exelon, the largest U.S. power company, may have to take a 40 percent discount for three Maryland plants it’s seeking to sell by the end of August.

"Bidders including NRG Energy Inc. have offered $600 million to $700 million for the units ... Constellation Energy Group, which Exelon bought this year, spent $1 billion on the plants to keep them in compliance with pollution rules." Now Exelon has to sell -- at a highly inconveneint time -- to avoid triggering government monopoly limits.

The price Exelon gets "may help American Electric, GenOn Energy Inc. (GEN) and FirstEnergy Corp. (FE) determine whether the cost of added pollution controls to keep coal plants operating is worth it. U.S. utilities are switching to burning gas for electricity and preparing to retire 33,000 megawatts of coal-fired generation" after the EPA moved to limit air discharge of mercury and other toxic materials. If the utilities cancel more plants it will reduce demand for coal from Pennsylvania and other mining states. American Electric has already "cancel(ed) plans to spend $1 billion to reduce emissions from a Kentucky coal-fired plant...

"Edison International, which paid about $1.8 billion in 1999 for the Homer City coal-fired power plant in Pennsylvania, this year surrendered control of the facility after being unable to get financing for pollution controls. “Low natural-gas prices have been a major driver of lower power prices and have diminished Homer City’s competitive position,” Moody’s Investors Service reported May 11.

Shares of Exelon, the biggest U.S. nuclear-power plant operator, are down 15% this year on fears the company's bet on uranium-fueled reactors won't pay off soon thanks to cheaper gas. Coal plant values also tumbled in the late-1990s-early 2000s after deregulation sparked new plant construction, David Herr, a Philadelphia-based energy anaylst for Duff & Phelps, told Bloomberg. Coal plants sold cheap but regained value when gas prices soared in the mid-2000s.

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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