Coal, Gas

International Power may pull out of US

1 March 2004 – International Power warned yesterday that it might exit from the American market after heavy write-offs in its US electricity generating business sent the group plunging to a £ 219m loss.

The company was forced to write-down the value of five big US power stations last year by £ 404m, or 40 per cent, following a collapse in electricity prices. It is now in talks with a consortium of banks owed $900m about whether to pull out altogether.

A wide-ranging review of the US business, which is based mainly in Texas and New England, has begun and is due to be completed by August at the latest. “We are looking at all options from walking away, to renegotiating the debt, to changing the ownership structure of our US business,” said Philip Cox, International Power’s chief executive. “We haven’t ruled anything out.”

A $20m interest payment on the debt is due in April and although International Power has not yet defaulted on its US loans, Mr Bentley said it could do depending on whether power prices weakened further. The banking consortium, which includes Royal Bank of Scotland, Citigroup, ABN Amro, Societe Generale, Deutsche Bank and ING has already declared International Power in technical default on the credit agreement.

Profits from the US, which accounts for 40 per cent of International Power’s generating capacity, fell from £ 99m in 2002 to just £ 2m last year, due to sharply lower prices and an £ 80m fall in compensation payments from Alstom for poor performance of gas turbines.

Wholesale prices in New England plunged 50 per cent last year because of overcapacity caused by generators building far too many new power stations. Texas alone has 35 per cent surplus capacity. Although wholesale prices have now stabilised, International Power said it would need an increase of about 40 per cent in order to make its US operations profitable after interest once again.

One of the five plants involved in the asset write-down, the 1100 MW gas-fired Hays station in Texas, has already been mothballed due to uneconomic prices, even though it only opened in 2001.

Despite the grim news from the US, investors were reassured that International Power had met its earnings guidance for the year and its shares rose eight per cent to £ 140.25. Profit before interest, tax and write-offs was £ 285m, helped by a strong performance from the group’s European power stations and steady earnings in Australia.

The one blot on the European scene was the UK, where International Power is still loss-making even though it brought the Deeside station out of mothballs in the fourth quarter. The company is still negotiating compensation with administrators of TXU Europe over the ending of a tolling arrangement for power supplies from its Rugeley station.