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UK Power Generation: King Coal Brings Creditors Back to the Table

Posted on: Friday, 2 June 2006, 12:00 CDT

British Energy's (BE) creditors are looking to cash in their option on the Eggborough plant in Yorkshire. While BE reserves the legal right to usurp any potential bidder, the UK's largest power producer must ultimately decide whether to become a nuclear specialist or maintain its portfolio generator status.

Bondholders in BE's Eggborough plant have hired investment bank Greenhill to explore strategies to monetize their claim on the 2GW power station. Following the introduction of new trading electricity arrangements (Neta) to England and Wales in 2002, an initial fall in wholesale power prices - below the costs of production - drove BE to the brink of bankruptcy.

Under a Whitehall-led restructuring deal, bondholders were awarded an option to buy the Eggborough power station in March 2010. The conditions of the deal, pivotally, afford BE a pre-emptive right to buy the option back at 105% of the price offered by a third party. Should the bondholders find a buyer for their right to ownership, BE will be forced to show its strategic hand.

Coal-fired generation is undoubtedly back in vogue. Consistently high wholesale gas prices have bolstered the financial benefit of burning coal for power, increasing investor's focus on Britain's ageing coal fleet. Eggborough bonds are currently trading at over three times their face value.

With last year's scramble for Drax, Europe's largest coal-fired power station, ending in flotation, a number of large potential bidders are still in the marketplace. Massive uncertainties remain, however, over the long-term viability of Eggborough. Any potential buyer (including BE) would have to pay GBP75 million to install the remaining filters required to meet the EU's Large Combustion Plant Directive - beginning in 2008 - to keep the facility in operation beyond 2015.

While the volatile price of carbon in Europe's emission trading scheme (ETS) is currently too low to be overly prohibitive to coal generators, future quotas may see this change. BE may, in fact, let Eggborough go to new owners, instead choosing to become a nuclear specialist as the groundswell behind new atomic builds grows ahead of this summer's energy review.

With a 113% surplus of supply over the demand of its I&C customer base, BE does not ultimately need to the plant. In contrast, the move by Eggborough's bondholders provides further evidence, if more were needed, that coal is back on the investment agenda with a vengeance.

Source: Datamonitor

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