What's Driving The U.S. Merchant Power Sector's Credit Outlook For 2012?

January 11, 2012
What's Driving The U.S. Merchant Power Sector's Credit Outlook For 2012?
Primary Credit Analyst: Aneesh Prabhu, New York (1) 212-438-1285; aneesh_prabhu@standardandpoors.com Secondary Contact: Andrew J Giudici, New York (1) 212-438-1659; andrew_giudici@standardandpoors.com
Table Of Contents
The U.S. Economic Outlook Remains Shaky Domestic Power Demand Appears Weak Near-Term Fundamentals Remain Daunting For Merchant Power Lower Bituminous Coal Prices Provide Limited Benefit This Downturn Has Hit Independent Power Producers Harder Environmental Regulations Will Kick In, But Will Likely Provide Uplift Down The Road The Lone Star State Remains The Lone Pocket Of Resilience Darkest Before The Dawn Related Criteria And Research
www.standardandpoors.com/ratingsdirect
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Legend has it that in picking a design for the jacket of "American Beauty," the 1970 music album by the Grateful Dead, the band's co-founder, Jerry Garcia, chose an ambigram--a typographical design that lets a reader discern more than one word in the same image--and more than one meaning. On a second look, for example, the Dead's jacket reads "American Reality," as well. Four decades later, this two-in-one image also seems to apply to the U.S. economy. This beautiful engine of past robust growth faces a reality check. And as goes the economy, so often goes the power sector. In 2012, it will confront yet another year of declining electricity demand, in our opinion. In conjunction with low natural gas prices, which have kept downward pressure on gross margins, we see significant headwinds particularly for unregulated generation in 2012. For these reasons, among others, Standard & Poor's Ratings Services' 2012 outlook for the U.S. merchant power and independent power producers (IPP) sector is negative. Overview Weakness in overall U.S. economic activity has hurt demand in the power sector. Low natural gas prices, subdued electricity demand, declining but still high eastern coal prices, and no significant coal plant retirements until 2014 pose problems for the merchant power sector in the near term. We expect weaker credit quality for some merchant generators and have assigned those issuers negative rating outlooks.
The U.S. Economic Outlook Remains Shaky

While our economists expect GDP in the fourth quarter of 2011 to have grown at 2.9%, they expect the pace to slow in the first quarter of 2012 to 1.5%. The economy still faces domestic obstacles as households recover from their spending binge, and government debt remains a concern. But given the better recent domestic news, our economists have increased their 2012 growth estimate to 1.8%--still a significant correction from the 2.9% forecast in April (see "U.S. Economic Forecast: As Good As It Gets?," published Dec. 12, 2011, and "Economic Research: U.S. Risks To The Forecast: Choppy Seas," published Dec. 21, 2011 ). However, downside risks remain substantial. The eurozone is at high risk of recession, with a significant chance of a deep downturn and with the potential to trigger financial market contagion. Standard & Poor's believes the risk of a U.S recession is now about 35%. In this environment, a cautious outlook, especially for the most cyclically sensitive sectors, seems warranted still.
Table 1
Alternative Forecasts - September 2011

2009 Baseline (% change) Real GDP Consumer spending (3.5) (1.9) 3 2 1.8 2.3 1.8 2.2 2.5 1.9 3.5 2.1 2010 2011e 2012e 2013e 2014e
Standard & Poors | RatingsDirect on the Global Credit Portal | January 11, 2012
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Table 1
Alternative Forecasts - September 2011 (cont.)

Equipment investment Real nonresidential construction Residential construction Federal government purchases State and local purchases Total exports Total imports CPI Core CPI Nonfarm unit labor costs Nonfarm productivity Exchange rate with major trading partners State and local receipts State and local outlays (excluding gross investment) (Level) Unemployment rate (%) Payroll employment (mil.) Federal funds rate (%) 10-year Treasury note yield (%) 'AAA' bond yield (%) 30-year fixed mortgage rate (%) Three-month Treasury bill rate (%) S&P 500 common stock index S&P 500 operating earnings ($/share) Current account balance (Bil. $) Oil price (WTI, $/barrel)) Household saving rate (%) Housing starts (mil.) Unit sales light vehicles (mil.) Unified federal budget surplus (fiscal year; bil. $) Recession Real GDP Consumer spending Equipment investment Real nonresidential construction Residential construction Federal government purchases State and local purchases Total exports Total imports CPI Core CPI (16) (21.2) (22.5) 6 (0.9) (9.4) (13.6) (0.3) 1.7 (0.7) 2.3 4.3 0.5 0.7 14.6 (15.8) (4.6) 4.5 (1.8) 11.3 12.5 1.7 1 (2) 4.1 (3) 5.7 2.9 10.2 4.7 (2.1) (1.8) (2.2) 6.7 4.7 3.2 1.7 1 1 (6.1) 1.1 2.9 6.8 1.8 4 (2.8) (2.5) 3.5 2.6 1.5 1.6 1.1 1.1 3.8 1 0.4 7.4 (0.2) 18.4 (3.6) (0.8) 7.6 3.4 1.7 1.7 1.9 1 (2.4) 3.8 2.4 7.8 10.7 26.4 (2.9) 0.5 8.7 4.1 2.1 2.1 1.7 1.5 (1.5) 6 5.3
9.3 130.8 0.2 3.3 5.3 5 0.2 947 56.9 (377) 61.69 5.2 0.55 10.4 (1,416)
9.6 129.8 0.2 3.2 4.9 4.7 0.1 1,139 83.8 (471) 79.41 5.3 0.58 11.6 (1,294)
9 131.1 0.1 2.8 4.6 4.5 0.1 1,270 98.9 (450) 94.32 4.3 0.6 12.7 (1,296)
9 132.7 0.1 2.3 4.2 4 0 1,329 105.4 (467) 3.7 0.7 13.3 (1,047)
8.7 134.8 0 2.8 4.5 4.3 0 1,443 113.4 (435) 2.8 1 14.8 (775)
8 137.5 1.2 3.5 5.1 5 1.2 1,524 121.7 (445) 3.5 1.3 15.6 (628)
86.32 103.29 112.09
(3.5) (1.9) (16) (21.2) (22.5) 6 (0.9) (9.4) (13.6) (0.3) 1.7
3 2 14.6 (15.8) (4.6) 4.5 (1.8) 11.3 12.5 1.7 1
1.7 2.2 9.9 4.7 (2.2) (1.8) (2.3) 6.6 4.6 3.1 1.6
(0.2) 0.9 2.5 (0.6) (5.5) (2.8) (3.1) (0.2) 0.1 0.4 1.3
0.8 0.6 3.7 (6.9) 6.3 (3.6) (2) 3.7 (1.1) 1.7 1.4
3.1 0.8 7.5 13.1 21.8 (3.2) (0.3) 9.2 1.1 3 2.3
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Table 1

Nonfarm unit labor costs Nonfarm productivity Exchange rate with major trade partners State and local receipts State and local outlays (excluding gross investment) (Level) Unemployment rate (%) Payroll employment (Mil.) Federal funds rate (%) 10-year Treasury note yield (%) 'AAA' bond yield (%) 30-year fixed mortgage rate (%) Three-month Treasury bill rate (%) S&P 500 common stock index S&P 500 operating earnings ($/share) Current account balance (Bil. $) Oil price (WTI, $/barrel) Household saving rate (%) Housing starts (Mil.) Unit saleslight vehicles (Mil.) Unified federal budget surplus (fiscal year, Bil. $) Optimistic Real GDP Consumer spending Equipment investment Real nonresidential construction Residential construction Federal government purchases State and local purchases Total exports Total imports CPI Core CPI Nonfarm unit labor costs Nonfarm productivity Exchange rate with major trade partners State and local receipts State and local outlays (excluding gross investment) (Level) Unemployment rate (%) Payroll employment (mil.) (0.7) 2.3 4.3 0.5 0.7 (2) 4.1 (3) 5.7 2.9 1 0.9 (5.9) 1.1 2.9 2.1 0 10.1 (0.6) (0.4) 1.7 0.9 (8.1) 2.4 1.2 1 1.5 (4.5) 5.9 4.6
9.3 130.8 0.2 3 5 5 0 947 56.9 (377) 61.69 5.2 0.55 10.4
9.6 129.8 0.2 3 5 5 0 1,139 83.8 (471) 79.41 5.3 0.58 11.6
9 131.1 0.1 3 5 4 0 1,264 98.3 (448) 94.07 4.3 0.6 12.7
9.6 131.2 0.1 2 4 4 0 1,022 86.5 (366) 68.51 3.7 0.54 12.1
10.1 131.5 0.1 2 5 4 0 1,106 83.4 (367) 2.5 0.68 13.1
9.6 133.2 0.1 3 5 5 0 1,163 94.8 (423) 3.2 1 14.1
93.29 119.13
(1,415.70) (1,294.20) (1,295.60) (1,014.70) (787.5) (714.9)
(3.5) (1.9) (16) (21.2) (22.5) 6 (0.9) (9.4) (13.6) (0.3) 1.7 (0.7) 2.3 4.3 0.5 0.7
3 2 14.6 (15.8) (4.6) 4.5 (1.8) 11.3 12.5 1.7 1 (2) 4.1 (3) 5.7 2.9
1.8 2.3 10.5 5 (2) (1.8) (2.2) 6.8 4.8 3.2 1.7 1 1 (6.2) 1.2 3
3.5 3 11.3 4.9 15.2 (2.8) (2.1) 7.1 4.3 2.4 2.2 0.6 1.8 (2.4) 2.2 1
3.7 2.7 11.3 4.9 25 (3.6) 0.1 10.2 6.6 1.5 2 1.8 1.2 2.7 4.3 3.2
4 3.5 9.5 10.5 24.1 (2.9) 0.9 8 6.7 1.4 1.8 1.5 1.6 2.1 6 5.6
9.27 131
9.63 130
8.96 131
8.16 134
7.26 138
6.28 141
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Table 1

Federal funds rate (%) 10-year Treasury note yield (%) 'AAA' bond yield (%) 30-year fixed mortgage rate (%) Three-month Treasury bill rate (%) S&P 500 common stock index S&P 500 operating earnings ($/share) Current account balance (Bil. $) Oil price (WTI, $/barrel) Household saving rate (%) Housing starts (mil.) Unit sales light vehicles (mil.) Unified federal budget surplus (fiscal year, Bil. $)
e--Estimate. WTI--West Texas Intermediate.
0.16 3.3 5.31 5 0 947 56.86 (376.6) 61.69 5.2 0.55 10.4
0.18 3.2 4.94 4.7 0 1,139 83.77 (470.9) 79.41 5.3 0.58 11.55
0.1 2.8 4.65 4.5 0 1,273 99.35 (454) 95.25 4.3 0.6 12.76
0.13 3.4 4.7 4.8 0 1,426
1.22 4.2 5.1 5.5 1 1,457
3.29 4.5 5.4 5.9 3 1,571
122.5 140.48 145.16 (556.6) (509.8) (515.7) 96.15 105.29 3.7 0.85 14.57 3.1 1.22 16.09 108.5 3.9 1.59 16.78
(1,415.70) (1,275.10) (1,295.60) (1,053.60)
(718) (568.1)
Domestic Power Demand Appears Weak

Historically, a weakness in overall economic activity has hurt demand in the power sector. Although the sector continues to benefit from low natural gas prices the concern is that demand may go down significantly. In 2011, weather-normalized demand was below expectation, but favorable weather in some parts of the country modestly helped absolute demand levels. Although cumulative cooling degree-days (days warmer than average for the period) for 2011 through September for the entire U.S. were just 2.8% higher than during the same period in 2010, some regions had extreme weather during the past few months. For instance, a lengthy heat wave in Texas led to record-setting power demand. Absolute (nonweather-normalized) power output--a proxy for demand--was up 6.6% year over year in Texas, but was about 3.2% and 1.6% lower year over year for New England and the Mid-Atlantic, respectively. Industrial demand has recovered well since the recession of 2008-2009. With a 6% increase in demand for power in 2010, industrial demand has been back at prerecession levels since mid-2010. The strong industrial demand likely stems from low U.S natural gas prices relative to other regions and a weaker U.S. dollar during that time. As of September 2011, residential and small commercial demand registered modest year-over-year declines, offset by an almost 2.2% uptick in industrial demand. However, differences in weather patterns are a significant driver of changes in electricity consumption in the residential and commercial sectors. The National Oceanic and Atmospheric Administration expects a normal summer in 2012 compared with 2011's hotter-than-normal summer. The U.S. Energy Information Administration (EIA) projects residential and commercial electricity consumption to fall 2% and 0.4%, respectively. Moreover, slower growth in manufacturing production should translate to lower year-over-year growth in industrial electricity sales of about 0.7% in 2012. As a result of the projected lower level of economic activity in the U.S., in its latest estimate announced on Dec. 6, 2011, the EIA now expects growth in total consumption of electricity to be down 0.5% in 2012. The EIA's demand growth expectation for 2012 is a meaningful downward revision from the 2.4% growth it expected as recently as May 2011 (see charts 1 and 2).
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Chart 1
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Chart 2
Near-Term Fundamentals Remain Daunting For Merchant Power

Low natural gas prices, subdued electricity demand, declining but still high eastern coal prices, and no significant coal plant retirements until 2014 pose problems for the merchant power sector in the near term. Accentuating the natural gas price decline were large shale gas discoveries and resurgent natural gas production through new drilling techniques such as horizontal drilling and multistage fracturing. In isolation, the downward revision in electricity consumption in 2012 is not that significant. However, combined with expectations of higher natural gas production it means that natural gas prices will likely decline in 2012. Since the last quarter of 2008, power prices have fallen dramatically and stayed low, and they have dropped more than 50%, on average. Around-the-clock power prices in the Pennsylvania-Jersey-Maryland (PJM) region's West Hub, for instance, had declined to about $39 per megawatt-hour (MWh) by December 2011 from about $87 in the first quarter of 2008 as power prices followed the decline in natural gas prices. Given record gas-storage levels of about 3.85 trillion cubic feet (tcf), continuing oversupply from the shale-gas gathering regions, and expectations for a milder summer, natural gas prices are clearly not cooperating. We expect natural gas prices to remain below $4.00 per thousand cubic feet over the next two years. The correction was particularly sharp in fourth-quarter 2011. This is because natural gas prices continue to ease despite an already low pricing environment due to gas production
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continuing to increase in liquid-rich (natural gas liquids, condensates, and oil) regions. The marginal costs of production for natural gas continue to trend down and the milder winter hasn't helped. While market heat rates (the market price of power in a particular region divided by the market gas price for that region) have actually expanded, the disproportionate impact of sharply lower natural gas prices continues to weigh on power prices. Around-the-clock power prices have declined about 10% since September 2011 for 2012 and 2013 delivery. We expect the impact to be higher on the larger merchant generators that burn coal because coal-burning output is still declining. U.S coal generation-historically at about 48% of total generation through 2008--has declined to about 43% in 2009 through 2011 (see chart 3).
Lower Bituminous Coal Prices Provide Limited Benefit

Still, lower expected prices for bituminous coal (from northern and central Appalachia and the Illinois basin) should provide some upside, although not enough to offset the impact of lower natural gas prices. Increasingly stringent environmental regulations have meant that domestic demand for Appalachian coal has declined. Yet, Appalachian coal prices have been in contango (i.e., futures prices are higher than spot prices) since the second half of 2010 because of China's insatiable demand for coal. Miners in the eastern U.S. have increasingly exported their
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production--up to an estimated 100 million tons in 2011 compared with 40 million tons in 2004 (see "Changes Are Coming For U.S. Coal Markets And Coal-Burning Power Generators As New Environmental Rules Loom," published Sept. 20, 2011). Eastern coal forward prices for 2012 and 2013 have dropped significantly from their July 2011 levels. Year 2012 forwards are down to $73 per ton from $82 per ton (an 11% decline). Similarly, forwards for 2013 are down $5.50 per ton (7%) to about $77 per ton in December 2011 compared with July 2011. Industry participants are speculating that Asian traders are curtailing coal purchases because of concerns of a European (and U.S) economic slow-down that may put financial stress on global trading channels. Apart from economic considerations, environmental concerns are likely to dampen coal prices. For instance, we expect practically no new coal capacity to emerge if new rules go into effect. The proposed source performance hurdles that the Environmental Protection Agency (EPA) recently finalized in the Mercury and Air Toxins Standards (MATS--formerly the Maximum Available Control Technology rule) pose substantial impediments. The mercury-reduction requirements for new coal plants (0.02 pounds per trillion Btu for new units versus 1.2 pounds per trillion Btu for existing units) are such that procuring an engineering-procurement-construction guarantee at this emission rate will be difficult.
This Downturn Has Hit Independent Power Producers Harder

We expect weaker credit quality for some merchant generators and have assigned those issuers negative rating outlooks. One reason is that integrated merchant generators that have regulated cash flows or have transferred generation assets at book value from utility operations, and also hedge more of their expected production, have become somewhat insulated from market forces. We see the confluence of languishing demand, continuing low prices for natural gas, and a trough in pricing in capacity pricing markets as factors that can hurt all merchant generators, and especially independent power producers (IPP) that have not hedged future generation at adequate prices. A number of IPPs are in distress. For instance, we view Energy Future Holdings Corp.'s multiple distressed exchanges and credit facility extensions as tantamount to default. Similarly, despite a restructuring, Dynegy Inc. announced an exchange offer and subsequently defaulted in November 2011. Project-financed AES Eastern Energy L.P. is also in the midst of restructuring after filing for bankruptcy. However, all IPPs haven't been hurt. We expect Calpine Corp., a large natural gas generator, to benefit from higher dispatch as environmental regulations curtail coal generation and because of lower fuel costs. Beyond the details about these issuers, what interests us is whether the IPP/coal-fired project finance space is headed for a spate of bankruptcies similar to the one merchant power went through from 2001 to 2004 (although an overbuild of gas-fired capacity caused that downturn). The sector is overleveraged, since companies aligned their capital structures to expectations of $7 to $9 per million Btu for gas over the long term. Companies such as NRG Energy Inc. that have significant high-priced hedges still outstanding can only postpone the inevitable before they need to realign capital structures with cash flow projections. The expected bottoming of the merchant cycle in 2012 also coincides with significant debt and revolving credit maturities.
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Environmental Regulations Will Kick In, But Will Likely Provide Uplift Down The Road
On Dec. 30, 2011, a federal appeals court halted implementation of the EPA's Cross-State Air Pollution Rule (or "Casper") , pending the outcome of a challenge to the rule. The decision stays the implementing of Casper that requires fossil fuel-fired power plants in 27 states to sharply reduce their emissions of sulfur dioxide (SO2) and nitrogen oxide (NOx). However, the court's decision means that the less stringent Clean-Air Interstate Rule for S02 and NOx that came into effect in 2005 will stand for the time being. The order from a three-judge panel of the D.C. Circuit Court granted the industry's request to stay the rule pending the court's resolution of the petitions for review. The court ordered parties in the case to submit briefing schedules by Jan. 17, 2012. That would allow oral arguments in the case to be heard by April. We expect the court's stay to moderate forward prices, especially in 2013 and 2014. And, in addition to the gas price decline, the latest round of lower power prices in the last quarter of 2011 was partly due to the moderation of Casper's impact after some implementation aspects of the rule were pushed out to later years on Oct. 6, 2011. Still, we expect both Casper and the MATS to have a major bearing on how much power markets tighten beyond 2014. Although MATS mainly focuses on mercury and acid gases, we expect it to become the constraining rulemaking for SO2 beyond 2015. This is because, unlike a cap-and-trade program like Casper--which allows operating flexibility to uncontrolled generation units through market-based mechanisms (allowance trading, controlling dispatch, etc) -the MATS has developed as a "command and control" environmental regulation. It is key to the future of inefficient coal units because these units will have to either meet control standards or shut down if installing pollution-control equipment proves to be uneconomic. Nearly 40% (or 130 gigawatts [GW]) of all U.S coal plants are currently unscrubbed, although 40 GW are in various stages of construction and development. The MATS rule still requires uncontrolled coal units to shut down by 2015, but generators that are retrofitting plants expect to receive an additional year for compliance from state-level EPA authorities. Some units may also get exemptions for longer periods on a case-by-case basis. However, we expect environmental regulations to result in higher capacity and energy prices as reserve margins (i.e., the cushion of excess energy available to meet higher demand) shrink due to coal unit retirements and as power prices begin to reflect higher marginal costs. While the impact of higher environmental costs will be varied for market participants, we see coal plant retirements starting slowly and increasingly only after 2013, up to 2018. Already, market participants have announced about 28 GW of retirements through 2020. In total, we expect regulations to result in retirements of about 40 GW of vintage, small, and inefficient coal plants, eventually reducing reserve margins and favorably affecting prices. Indeed, some expect the tightening to affect prices set in PJM's May 2012 reliability pricing mechanism (RPM) auction for 2015 and 2016. The electric industry also expects that it can meet substantial environmental hurdles by the widespread use of a technology called dry sorbent injection (DSI). However, we think variable costs associated with DSI usage is in the $6 per MWh to $7 per MWh range, which will significantly raise marginal variable costs and influence market heat rates. We're already seeing a substantial expansion in market heat rates in the PJM because of expected tightening and upwards creep in variable costs (see chart 4).
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Chart 4
From a credit perspective, we expect companies with a diverse asset mix and a relatively clean portfolio to benefit from environmental regulations. Specifically, we see Exelon Corp., PPL Corp., and PSEG Energy Holdings LLC, all with a mix of nuclear generation and environmentally controlled coal plants, as beneficiaries. However, PSEG will likely benefit less because New Jersey has less exposure to inefficient or uncontrolled coal generation compared with other Mid-Atlantic states. However, we expect credit quality to suffer for companies such as Edison Mission Energy, GenOn Energy Inc., and Ameren Generation because many units in their portfolios lack pollution-control equipment.
The Lone Star State Remains The Lone Pocket Of Resilience

We expect the Electric Reliability Council of Texas (ERCOT) market to remain relatively resilient. On Dec. 1, 2011, ERCOT released its reserve margin forecast, which projected reserve margins to be significantly lower than its projections earlier in 2011 (see table 2). And ERCOT projects reserve margins to be meaningfully below the 15% that grid operators typically consider reliable.
Table 2
ERCOT Reserve Margin Estimates

(%) Dec. 2011 May 2011 2012 12.11 17.5 2013 12.07 14.25 2014 7.64 11.10 2015 3.55 11.30
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The tightening in margins not only reflects additional announced mothballing of generating units (Green Bayou, etc.), delays in planned units (Sandy Creek etc.), but also factors in higher demand. Market indicators reflect this tightening with market heat rates even further backwardated (i.e., having future prices that trade below spot prices) for on-peak delivery, with 2012 on-peak market heat rates materially higher than 2014 rates. For instance, the current ERCOT-North peak heat rate is 12,300 Btu per kilowatt-hour (kWh) for 2012 and 11,250 Btu per kWh for 2013. Similarly, the ERCOT-Houston on-peak market heat rate is now about 1,750 Btu per KWh higher than for 2014. To be clear, power prices have still declined in ERCOT because lower gas prices have overwhelmed expansion in heat rates. Still, ERCOT power prices have been more sticky due to the offsetting impact of improving market heat rates. The two companies that should benefit from a tighter ERCOT market are NRG Energy and Calpine, with Calpine benefiting more due to its exposure to on-peak power pricing.
Darkest Before The Dawn

As the economy stumbles along, weather-adjusted demand for electricity has declined nationally. We expect significant headwinds for the merchant sector in 2012 due to continuing downward bias on commodity prices. We think demand will remain subdued, and the capital markets could become less accessible to these issuers due to prospects of a slowdown. While investment-grade diversified energy companies are somewhat insulated from market forces because they hedge their expected generation, speculative-grade issuers (those we rate 'BB+' and lower) could witness rating pressures, in our view. And a number of speculative-grade IPPs already have negative outlooks. That said, the power markets will likely start turning once coal plant retirements start in earnest. With about 15 GW of retirements expected in the PJM, declining reserve margins should start affecting medium-term capacity prices. We think the first harbinger of tightening market conditions--a prerequisite for higher capacity prices (and subsequently energy prices)--could come as early May 2012 when the RPM prices are set for 2015 and 2016. As new realities continue to set in, the U.S. merchant power sector has little choice but to keep on truckin' and hope for better times ahead.
Related Criteria And Research

U.S. Merchant Power Sector's Near-Term Economic Prospects Overshadow Longer-Term Environmental Upside, Oct. 12, 2011 Changes Are Coming For U.S. Coal Markets And Coal-Burning Power Generators As New Environmental Rules Loom, Sept. 20, 2011 Why Casper, The EPAs Cross-State Air Pollution Rule, Is Spooking the Electricity Sector, Sept. 12, 2011
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What's Driving The U.S. Merchant Power Sector's Credit Outlook For 2012?

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January 11, 2012

The U.S. Economic Outlook Remains Shaky

Alternative Forecasts - September 2011

Alternative Forecasts - September 2011 (cont.)

86.32 103.29 112.09

3 2 14.6 (15.8) (4.6) 4.5 (1.8) 11.3 12.5 1.7 1

Alternative Forecasts - September 2011 (cont.)

9 131.1 0.1 3 5 4 0 1,264 98.3 (448) 94.07 4.3 0.6 12.7

10.1 131.5 0.1 2 5 4 0 1,106 83.4 (367) 2.5 0.68 13.1

9.6 133.2 0.1 3 5 5 0 1,163 94.8 (423) 3.2 1 14.1

(1,415.70) (1,294.20) (1,295.60) (1,014.70) (787.5) (714.9)

Alternative Forecasts - September 2011 (cont.)

0.13 3.4 4.7 4.8 0 1,426

1.22 4.2 5.1 5.5 1 1,457

3.29 4.5 5.4 5.9 3 1,571

(1,415.70) (1,275.10) (1,295.60) (1,053.60)

Domestic Power Demand Appears Weak

Near-Term Fundamentals Remain Daunting For Merchant Power

Lower Bituminous Coal Prices Provide Limited Benefit

This Downturn Has Hit Independent Power Producers Harder

The Lone Star State Remains The Lone Pocket Of Resilience

ERCOT Reserve Margin Estimates

Darkest Before The Dawn

Related Criteria And Research

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