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Bondholders may sell British Energy plant option

The bondholders plan to sound out interest in buying the option among both financial bidders and other utilities, the sources said, adding they were keen to evaluate the market but have not firmly decided to sell the stake.

Sky-high power prices and good returns from coal-fired generation have boosted the value of Britain’s coal-fired plants in recent years, leading to several takeover approaches to buy Drax, Europe’s largest coal-fired power station, last year.

“If the opportunity is there for bondholders to reap a big payback for that option, why not take it here and lock it in?” said Angelos Anastasiou, an analyst at Williams de Broe in London. “Coal-fired generation at this juncture is worth a lot.”

Investment bank Greenhill is advising the bondholders, who were granted the option to buy the power station in March 2010 after British Energy was restructured in 2005 after running into financial difficulties due to a low power price.

The price has been cut to reflect uncertainty on markets between now and 2010, as well as possible pre-emption by British Energy, which may have first-rights on any deal as part of the restructuring agreement that gave bondholders the option.

Greenhill plans to send a letter to prospective bidders, inviting them to detail potential interest, as early as in the next couple of weeks after receiving several unsolicited approaches, the sources said.

Drax successfully listed on the London Stock Exchange after spurning the approaches, which were from a variety of bidders including hedge fund Perry Capital, energy trader Constellation Energy as well as private equity firms including the Blackstone Group and Hellman and Friedman.

The story of Drax, which was almost penniless more than two years ago after its US owner withdrew support, illustrates the turn-around in the coal-fired power generation industry which Eggborough’s bondholders hope to cash in on.

British Energy is unlikely however to want to sell Eggborough, which is its only non-nuclear power station and gives it all its flexibility in generation; unlike coal plants, nuclear plants can’t be quickly ramped up and down to meet demand.

One possibility would be for British Energy to agree on a contract with any buyer for the plant which would give it access to some of its production, the sources said.

British Energy said in February it had decided not to fit additional units aimed at cutting air pollution at Eggborough.

The 2,000-megawatt Eggborough facility in northern England is used by the firm to help balance an electricity portfolio that is dominated by nuclear power.

The utility had already installed expensive Flue Gas Desulphurisation (FGD) equipment -- designed to cap the amount of sulphur dioxide reaching the atmosphere -- to two of the four units at the York-based plant.

But British Energy has decided against upgrading the remaining two units.As a result, tough EU environment rules will mean British Energy will be forced to shut down those units by 2015, or after 20,000 hours of use.

British Energy declined to comment.