AES Corp. officials said Monday they expect electricity prices in the UK to remain flat with little improvement for as long as 3 years.
Excess generating capacity is taking a toll on the profitability of Drax, a large coal-fired power plant in the UK owned by an AES unit.
On Friday, ratings agencies downgraded the long-term debt of the unit, AES Drax Holdings Ltd., to “junk bond” status. Moody’s Investors Service downgraded the long-term bonds and bank debt. The ratings agency attributed the downgrade to an overall reduction in credit quality because of the long-term price expectations, the dependence of Drax on a contract with TXU, a tightening of credit procedures, and problems with insurance policies.
“The combination has led to an overall risk profile that is inconsistent with investment grade status,” Moody’s said.
Barry Sharp, chief financial officer at AES, Arlington, Va., acknowledged on a conference call with investors that UK electricity prices had fallen since 1999 because of excess capacity. Also, there were only three coal generation companies in the UK market in 1999 when AES unit acquired Drax, the largest coal-fired power plant in Europe with a capacity of 4,000 Mw. Today, the UK has six individual coal generators that are pressuring UK prices, company officials said.
AES Drax bonds are trading at about 40¢ on the dollar. The common shares of the parent, AES, plunged since the downgrade of its unit’s debt Friday. Shares were down almost $2 to $14.54 in midday trading on the New York Stock Exchange.
AES suggests that the excess capacity will be driven out of the market over the next several years because prices don’t support new entrants. The electricity price has to be above £21 for new plants to be announced. Current prices of £18.50 do not support new generation.
Officials said the ratings downgrade, however, doesn’t trigger any additional payments or new cash upfront from Drax or the parent.
The downgrade does require that Drax get the parent to put up a guarantee for physical delivery of power for the TXU Europe contract. The guarantee is a performance obligation and not additional cash or a letter of credit, Sharp said.
Officials see no problem with Drax performing and delivering the physical power as promised. There will be an additional outage next summer when adjustments are made to accommodate the insurance companies. But the contract with TXU allows for such outages, called “unplanned call reductions.”
Barry said, “There is no danger that Drax will burn through these during that outage.”
Meanwhile, AES Drax officials are taking steps to reduce costs at the plant by cutting staff, the power used to operate the plant, and operation and maintenance costs.