therefore that there was a high probability that the plant would be dispatched virtually all of
the time. Finally, the consultant concluded that the hedging contract with TXU was a well-
structured agreement that reduced risks for both parties.
Fuel Consultant’s Report
The Fuel Consultant expressed the opinion that:
- there were sufficient coal reserves, either developed or capable of being developed, to
supply UK coal-fired power plants for the life of the project debt; - the Drax power station was capable of burning a wide variety of coals traded on the inter-
national market with sulphur contents up to 2.8 per cent; and - coal prices were likely to fall by an average of 1 per cent per annum in real terms until
2010, because of the worldwide abundance of coal supplies.
The report noted that, although there was no longer a political mandate to support the UK coal
industry through electricity pricing, the government had indicated that it would provide sub-
sidies to some mines that were operating at a loss.
Finally, the Fuel Consultant said that:
- the Drax power station was served by a well-developed road and rail infrastructure capa-
ble of handling more than the required coal tonnages; - the company’s fuel supply strategy balanced long-term supply security with some abi-
lity to take advantage of market opportunities; and - the recent coal-supply contract with RJB Mining was consistent with the company’s
strategy of providing secure supplies over an extended period at favourable prices.
Initial credit ratings
In 1999 Duff & Phelps issued a preliminary ‘BBB’ credit rating for the original bank
financing, and Standard & Poor’s issued a preliminary ‘BBB-’ rating. In July 2000
Standard & Poor’s rated the £400 million senior secured bond issue that would repay part
of the bank loan ‘BBB-’ and the £250 million deeply subordinated bond ‘BB-’, both with
a stable outlook.
After the issuance of the senior bonds and subordinated notes, Standard & Poor’s said
that lenders and bondholders would be subject to the following risks:
- volatile and possibly lower electricity prices;
- regulatory and politically driven changes in the generation market, such as changes in the
current preferences given to coal-generating units, which could distort the balance
among various fuel sources and adversely affect generation prices; - uncertainty concerning the effect of NETA, which could adversely affect Drax’s com-
petitive position; and - merchant risk, particularly after 2007.
Offsetting those risks, Standard & Poor’s noted the following points.
POWER PLANT