US MERCHANT POWER SECTOR NOT ON A FAST TRACK TO RECOVERY

Some recovery theorists point to increased asset sale activity, rising coal prices and significant refinancing activity as indications of a rapid recovery for the US merchant power sector. However, fundamental problems still face the industry. And although some companies have reestablished financial stability, a substantial recovery is not expected for at least five years.

- Growth in asset sales at high discounts is not a reflection of a turnaround, but rather of continued weakness in US power markets, which is attracting new buyers looking for discounts, particularly financial buyers with lots of capital.
- Despite rising coal prices, gas prices would need to fall to less than $4 per million British thermal units (MMBtu) while average contracted coal prices would need to reach $2 per MMBtu delivered for gas to gain a real cost advantage over coal.
- Debt refinancings have bought time for beleaguered energy merchants, but total debt burdens remain largely intact for most companies, and capital structures do not support investment grade ratings.

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