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Pension funds investing indirectly in Ohio’s Gavin coal plant are at risk as financial, environmental disadvantages mount

October 14, 2021
Dennis Wamsted and Seth Feaster and Tom Sanzillo
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Key Findings

The major pension and retirement funds that own a piece of the General J.M. Gavin (Gavin) coal plant in Ohio face increasing challenges from their investment.

Gavin’s continued operation faces a series of challenges borne of a rapidly changing financial landscape, heightening the risks for pension fund investors.

The financial community is moving rapidly away from fossil fuels, but many retirement and pension funds still are invested in the sector, even those that have publicly committed to moving toward a low-carbon future. That discrepancy is a growing problem.

Executive Summary

The 2,680-megawatt (MW) Gen. J.M. Gavin coal plant in Ohio faces serious environmental, energy market and financial challenges that call its longterm viability into question. This report examines a series of potential problems that should concern community leaders, bankers, pension funds, private equity investors and credit agencies.

The starting point for this analysis is Gavin’s significant carbon dioxide emissions: Since 2017 it has been the fourth-largest power plant CO2 emitter in the country, according to Environmental Protection Agency monitoring data.1 This is likely to continue in 2021 as well; the two-unit facility emitted just over 7.3 million tons of CO2 during the first six months of the year, retaining its fourth-place status among U.S. coal plants.

Unlike the investor-owned utility plants that occupy the top three spots—Southern Company’s 2,780MW James H. Miller plant, DTE Electric’s 3,086MW Monroe plant and Ameren’s 2,464MW Labadie plant—Gavin is owned by two major private equity firms, ArcLight Capital Holdings LLC and The Blackstone Group, which created Lightstone Generation LLC to purchase Gavin and three gas-fired power plants from American Electric Power (AEP). The sale, announced in September 2016, was finalized January 30, 2017.2 These two firms collectively manage almost $700 billion in assets, which to date have largely been shielded from rising investor sentiment that fossil fuel investments in general, and coal-related assets in particular, are no longer financially viable. More than 100 institutions have placed restrictions on fossil fuel financing, and IEEFA is tracking a growing number of asset managers that are following suit.3

This shift in the financial sector could soon lead to a reckoning at Gavin, and perhaps at other fossil fuel-focused private equity assets, as the ArcLight and Blackstonefunds that own Lightstone include significant investments from some major pension and retirement funds that have aggressive coal exit policies. As pension funds move toward low carbon investment strategies, will private equity funds remain invested in large CO2-emitting projects like Gavin? The rapid change in the financial landscape for coal asset investments is highlighted by a series of specific risks that threaten Gavin’s continued operation:

  • The term loan taken out by Lightstone LLC to buy the four plants comes due in January 2024. The outstanding balance on the loan is $1.736 billion (current as of March 31, 2021). Growing public pressure already has prompted many banks to restrict lending to the coal sector, a trend that is likely to accelerate in the next couple years. Given that, what bank is going to want to lead this significant refinancing effort?
  • The ratings firms that cover the debt issued by entities such as Lightstone, currently rated B2 with a negative outlook by Moody’s, are increasingly worried about environmental, social and governance (ESG) issues and the credit threats confronting coal assets. How long can Lightstone expect to keep a rating that will enable it to borrow money from the market at affordable levels?
  • Finally, it is clear from Lightstone’s financials that the investment is likely underperforming. Blackstone and ArcLight have benefitted from distributions from the project (funded by adding to the original term loan), but Lightstone’s revenues have declined significantly since the purchase, and revenue from the PJM capacity market will tumble next year and looks likely to remain constrained in the years ahead with new renewable energy resources entering the market.

The latest data from IEEFA shows that just since March, the generating capacity of coal plants slated to retire or convert to gas from 2021-2030 has risen by 10.5 gigawatts (GW), to a total of 81.3 GW—more than double the level of March 2020, when only 37.4GW of coal capacity was scheduled to close through 2030. Given these headwinds, refinancing the debt associated with Gavin would create significant stranded asset risks for its owners and serious financial and reputational risks for the pension and retirement funds currently backing the investment. A more economic and environmentally sensible option, and one that would allow time to draft a strategy for local transition needs, would entail developing plans now to close Gavin.

This paper issues a financial warning to all stakeholders in the private equity economic chain, including host communities. Communities need to plan for coal plant closures. Pension funds can stop any future investments and review their current holdings. Private equity managers need to offer investment portfolios that are fossil free if they are to meet the demand of a growing group of large investors. There are practical steps that can be taken now.

1 Environmental Protection Agency. Air Markets Program Data. September 30, 2021.
2 American Electric Power. AEP Completes Sale of Four Competitive Power Plants. January 30, 2017.
3 IEEFA. Finance is leaving thermal coal. Also: Asset managers are leaving coal.

Dennis Wamsted

At IEEFA, Dennis Wamsted focuses on the ongoing transition away from fossil fuels to green generation resources, focusing particularly on the electric power sector.

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Seth Feaster

Seth Feaster is an Energy Data Analyst whose work focuses on the coal industry and the U.S. power sector.

Before joining IEEFA, he created visual presentations at the New York Times for 25 years with a focus on complex financial and energy data; he also worked at The Federal Reserve Bank of New York. 

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Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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