On 17 October TXU paid Drax £20 million for power purchased in September, three days
late. Garry Levesley, the manager of the Drax plant, publicly called the late payment ‘reck-
less behaviour’, thus adding to concern that creditors might force TXU Europe into adminis-
tration (the British equivalent of Chapter 11 bankruptcy proceedings).^9 On the same day UK
Coal, which was facing its own financial difficulties, cut off supplies to Drax. Drax, which
had a two-month supply of coal, had delayed a £12 million payment due to UK Coal largely
because of the delayed receipt of funds from TXU. Drax made a partial payment on 21
October and agreed to pay the rest on 25 October. Supplies from UK Coal remained tem-
porarily suspended but were expected to be resumed in November.
On 21 October TXU agreed to sell its British retail business and power generation
plants to PowerGen, Britain’s third largest generator, for £1.37 billion (US$2.1 billion). In
the summer of 2002 PowerGen had been purchased by E.ON of Germany for just under £10
billion. TXU Europe’s retail business had reportedly been on the verge of collapse because
of unfavourable power purchase contracts and Ofgem, the power regulator, had been pre-
pared to step in if TXU Europe had become incapable of buying or generating enough
power to supply its customers. Under the Utilities Act of 2000 the regulator had the author-
ity to direct a competitor to become a supplier of last resort to prevent blackouts. Following
the sale of its British retail operations, TXU Europe still owned profitable Nordic and
German electricity and gas supply businesses, a shrinking energy trading business, and sev-
eral loss-making PPAs, including the contract with Drax. Because of difficulty in renegoti-
ating those contracts, TXU Europe was reportedly moving toward administration (or
bankruptcy).
TXU was the last US company to exit the British electricity supply market, following the
recent departures of American Electric Power, Aquila and Mirant. At one point in the 1990s
nine of the 14 regional electricity supply businesses in Great Britain had been controlled by
US companies. Now the market would be controlled by continental European utilities, includ-
ing RWE, Éléctricité de France and E.ON.
On 24 October AES’s CEO, Paul Hanrahan, said during a webcast of third-quarter earn-
ings that: ‘depending on the outcome of recent events, AES might have to write off some or
all of the assets of Drax’. On the same day Standard & Poor’s published a research report,
written by Jan Willem Plantagie, entitled ‘Drax Recovery Prospects: Hope for Senior Debt
but Bleak Prospects for Subordinated Debt’. Plantagie noted that after TXU Europe sold its
assets to PowerGen it was likely that Drax’s energy sales contract with TXU Europe Energy
Trading Ltd would be ended soon, because TXU no longer had retail customers for the power
purchased from Drax. If TXU Energy went into administration Drax could terminate the con-
tract, making TXU Energy liable for a termination payment of about £270 million (US$420
million), as mentioned above. However, the ranking of Drax’s claim against TXU Energy, and
eventually against TXU Europe, was difficult to ascertain at that point.
Plantagie also pointed out that the future of Drax following the termination of the ener-
gy sales contract lay somewhere in between operating as a pure merchant plant and oper-
ating with a new power sales contract. The plant was likely to be able to sell at least a
portion of its power under three-to-twelve-month contracts at rates above the current low
spot prices, but of course well below the rate in the TXU Energy contract. The termination
of that contract would be an event of default for the senior bonds if the credit rating on
those bonds was not reaffirmed within 30 days of termination, and that would give the
senior bondholders the right to accelerate their debt in 90 days. However, Plantagie con-
POWER PLANT