Potomac River from Washington, DC. The company was started in 1981 by Roger Sant and
Dennis W. Bakke, who had been colleagues in the administration of Gerald R. Ford. It was
one of the first companies to adopt a strategy of buying power plants and electricity distribu-
tion facilities, and selling in competitive markets, as the electricity utility business around the
world gradually began to be deregulated. In 1993 AES made its first acquisition outside the
United States, a power plant in Argentina.
When it acquired Drax, in 1999, AES had assets in excess of US$20 billion and employed
approximately 54,000 people around the world. The company had grown rapidly from nine
power plants with 2,479 MW generating capacity in 1994 to 111 plants with 36,675 MW capac-
ity in 1999. In addition, it had acquired majority and minority ownership interests in 15 distri-
bution companies around the world. As a result AES’s revenues had grown at a compound
annual rate of 44 per cent from US$533 million in 1994 to US$3.25 billion in 1999. AES had
broad experience of working in liberalised power markets and of operating coal-fired plants.
Before acquiring Drax AES already owned six other power stations in the United
Kingdom. The Drax power station represented AES’s largest acquisition to date and its largest
equity contribution to a single project. In order to maximise its return AES wanted to struc-
ture the project financing with the highest possible leverage, subject to debt placement and
risk management constraints.
How the financing was arranged
The financing was arranged in two phases:
- an original £1.3 billion bank financing at the time of purchase in 1999; and
•a subsequent bond financing in 2000.
Bank financing
The lead arrangers for the original bank financing were Chase Manhattan, acting as book man-
ager, ratings adviser and financial modelling bank; Deutsche Bank, as loan documentation bank,
technical bank and facility agent; and the Industrial Bank of Japan, the project documentation and
insurance bank. The lead arrangers faced three main challenges: the size of the financing was
unprecedented; the plant was partially subject to merchant power risk; and the project had high
leverage. Co-arrangers, earning underwriting fees of 35 bps for commitments of US$50 million
or more, were Abbey National, Bank of Scotland, Bank of Tokyo Mitsubishi, Bankgesellschaft
Berlin, Fortis Bank, HSBC, MeesPierson, National Australia Bank and Rabobank.
One of the factors that justified Drax’s high leverage was a 15-year hedging contract, a
financial instrument that had the effect of a power purchase agreement (PPA) and provided
for a fixed stream of capacity payments. The contract protects approximately 60 per cent of
the power plant’s forecasted revenues until 2007 and then the proportion of revenues pro-
tected was to decrease over time, such that over the life of the contract about 40 per cent of
the plant’s revenues would be protected.
Drax signed the hedging contract with Texas Utilities (TXU), the owner of Eastern Electric.
Before it was purchased by TXU, Eastern had been one of the country’s 14 regional electricity
companies. At this point TXU was one of the major power distributors on the eastern side of
England, a large generator through its PowerGen subsidiary and a rising player in power trad-
DRAX, UNITED KINGDOM