Panda Temple bankruptcy could chill new gas plant buildout in ERCOT market
here is a cloud hanging over the Texas wholesale power market.
The cloud is cast by the Chapter 11 bankruptcy filing of Panda Temple Power LLC in a Delaware court.
To be clear, the Panda bankruptcy is not a cause of market conditions in the Electric Reliability Council of Texas (ERCOT) region — it is a symptom.
Panda Temple Power is a modern 758 MW gas-fired combined-cycle power plant in Temple, Texas, that began construction in 2012 and entered service in 2014.
The plant has been losing money since 2015, and according to a court filing now has $400 million of outstanding debt and only about $2,000 of cash.
The plant features quick response gas turbines and a competitive heat rate — a measure of how efficiently it can convert fuel to power — of below 7,000 British thermal units/kW.
The project won accolades when it hit the market in 2012, winning Americas Power Deal of the Year from Project Finance International for its A/B loan financing facility with Morgan Stanley and Ares Capital.
The project, which has since been refinanced, was financed with about $377 million of secured debt and $375 million of equity, including about $100 million from affiliated parent company Panda Power Funds. The remaining equity contributions came from third party co-investors, including the Employees Retirement System of Texas, Ohio Teachers’ Pension Plan and duPont Testamentary Trust.
Five years later, the plant is in bankruptcy.
“It is pretty cut and dried,” says Andrew DeVries, a senior analyst at CreditSights, an independent research firm. The plant cannot generate enough cash to pay off its debt, he says.
With 2018 natural gas prices at around $3.10 per million BTU, a 7,000 BTU/kW plant could earn around $21/MWh. Add in $8 to $9/MWh for operations and management, and there is very little is room left for debt repayment with forward peak prices in ERCOT at about $32/MWh.
When Panda entered into the Temple deal – called Temple 1 because there is a nearly identical plant, Temple 2, at the same location — the expectation was that more coal plants would be retiring in Texas, and ERCOT would run short of capacity. At the time, ERCOT was also debating whether or not to adopt a capacity market.
Panda was eager to build the Temple project and have it online in time to reap the profits from the higher power prices and spark spreads it saw coming.
But power purchase agreements are hard to come by in competitive power markets, and merchant power plants are difficult and expensive to finance.
Instead of a PPA, Panda entered into a four-year revenue put option with the 3M Employee Retirement Income Plan for 600 MW of the project’s output.
The put is basically a hedge in which Panda pays a fee and the financial institution absorbs some of the volatility associated with natural gas and power prices.
In this case, it allowed Panda Temple to benefit from cash flow upside while placing a floor on annual gross margins through 2018. In essence the put secures a steady income stream that smooths the path to financing.
But the expectations of Panda and its investors and bankers did not work out.
In a lawsuit filed with the 15th District Court in Grayson County, Texas, Panda Temple is suing ERCOT for misrepresentation, fraud and breach of duty. The company says ERCOT changed the forecasting methodology it uses in its capacity demand and reserves (CDR) report and that moved the ERCOT market outlook from undersupply to oversupply.
That move “had the effect of depressing the price of power in the spot market, which also had the effect of depressing prices in the forward market. As a result, large commercial purchasers of power had less need to hedge against higher energy prices by locking in a price for future power with generators like Temple I,” Panda claims in its bankruptcy filing.
It is worth noting, though, that Panda’s Sherman plant was financed at the same time as Temple 1, but Sherman is still operating and is not being put into bankruptcy.
According to published material, the Sherman plant enjoys some advantages over Temple 1. The Sherman revenue put has a $45 million strike price compared with Temple 1’s $41 million strike price, giving Sherman a wider band in which it could operate profitably. Sherman also benefitted from lower fees and cheaper financing. And Sherman has the ability to source gas from multiple points, allowing it to lock in a price lower than the price Temple 1 pays, which is based on the Katy benchmark.
Panda spokesman Bill Pentak declined to comment on the bankruptcy, the pending lawsuit or the financial performance of the company’s assets.
Low gas, lots of wind
Forecasting methodology aside, the basic economics of gas fired generation in ERCOT are challenging. In March, S&P Global Ratings lowered its rating on several merchant generators in ERCOT, citing low natural gas prices and the influx of low priced wind power.
