in its bank loan agreements. Jan Willem Plantagie, a credit analyst for Standard & Poor’s, said
that the TXU contract could be terminated only under certain conditions, none of which was
evident at the moment.^6
In April AES agreed to sell Cilcorp, a gas and electric utility based in Peoria, Illinois, for
US$540 million. In June the company agreed to sell NewEnergy, a growing player in the
Chicago area’s modest but expanding retail energy market, for US$240 million.^7
Also in June Standard & Poor’s reduced its rating on the company’s senior unsecured
debt from ‘BB’ to ‘BB-’ and its rating on the subordinated debt from ‘B’ to ‘B-’, citing the
company’s increasing challenges in managing its businesses in Latin America. Among the
problems the agency mentioned were political instability in Venezuela and Brazil, and the
weakening currency in Venezuela.
In the same month Moody’s downgraded the company’s senior debt from ‘Ba1’ to ‘Ba3’,
its senior and junior subordinated debt to ‘B2’, and its preferred stock to ‘Caa1’. The agency
cited weakening power prices in the merchant portion of the company’s business and deteri-
orating conditions in several of its international markets. In particular, volatile cash flows
from the company’s Latin American investments were likely to result in reduced dividends.
Because of the combination of these factors, AES would have to rely on increased asset sales
at a time when the market was becoming less favourable. Not only was there an oversupply
of power assets on the market, but prospective buyers had reduced access to capital. Dennis
Bakke had recently stepped down as AES’s CEO and Moody’s noted that his successor, Paul
Hanrahan, appeared to have a strong commitment to reduce costs, debt, and capital spending
while continuing to look for asset sale opportunities.
An article in the Dow Jones Energy Service (June 2002) estimated that about a dozen UK
electricity generators were facing financial difficulties because they had borrowed when elec-
tricity prices were high and were now repaying their debts when prices, often unhedged, were
at unforeseen low levels. Bankers had made an estimated US$5–6 billion in power station
loans since the industry was privatised in 1990 and now many of those assets were worth less
than the sum of their debts. A large part of the problem was the oversupply of generating
capacity, caused by two factors. First, following privatisation the regulators had told the two
non-nuclear generators (National Power and PowerGen) to sell many of their power stations
in order to promote competition. Independent power companies such as AES had bought
plants that were on the verge of closure or infrequently operated and needed to generate elec-
tricity to service their debt. Second, new gas-fired generators had been built to take advan-
tage of low natural gas prices in the mid-1990s.^8
Whether or not AES would want to sell Drax because of the combination of low elec-
tricity prices in the UK market and its own balance sheet problems remained a question
throughout the spring of 2002. Ironically, one of the possible buyers in the market was
International Power, one of two successor companies to Drax’s previous owner, National
Power. (The other successor was nPower, which focused on the UK domestic market.)
In the summer of 2002 Drax continued to benefit from its above-market PPA with TXU
Europe, although its overall profitability was impaired by low market prices for the remain-
ing 40 per cent of its power, which was on a merchant basis. In late August 2002 Drax need-
ed cash support from AES to make payments on its two series of senior secured notes due in
- Drax reportedly had a shortfall of £8 million on a payment of £15 million. At that time
Standard & Poor’s lowered the credit rating on Drax’s senior debt from ‘B+’ to ‘CCC’ and
also put these bonds on CreditWatch with negative implications.
POWER PLANT