Bankruptcy risk lingers at US power producers-S&P

NEW YORK, Feb 2 (Reuters)

Some U.S. power producers that avoided bankruptcy in 2003 by refinancing debt could still struggle to survive over the next decade as $65 billion of loans come due, Standard & Poor's said on Monday.

Excess generating capacity, energy-efficient customers and burdensome debt loads will weigh on profits and keep some energy producers in a precarious position for years, S&P said in a report.

"The energy merchants must find a way to reduce their crushing debt burdens and do so fairly quickly if they are to survive," S&P credit analyst Peter Rigby said in the report.

But Rigby says that task is proving formidable. Although energy merchants have been selling assets for the past two years, many still carry too much debt to be strong competitors, he said.

Unlike regulated utilities, which produce power for customers at cost plus a regulated profit, merchant power producers sell power on the open market. Once Wall Street darlings, energy merchants have struggled in the wake of a 2001 recession, tumbling wholesale electricity prices and the bankruptcy of energy trader Enron Corp. in December 2001.

Over the past two years, more than $100 billion of energy merchants' market capitalization has evaporated, Rigby said, and three companies have filed for bankruptcy in the past year.

"Almost every worst-case scenario that these companies and their lenders considered possible, but remote, has become their base-case scenario," Rigby said. "Business positions, always risky, have deteriorated and financial profiles are generally much worse than two years ago."

A key problem is that power companies built more generation capacity than the market could possibly use, Rigby said. While lenders assumed that older coal and nuclear power plants would be retired, reducing competition, many older plants have instead been kept in service and upgraded.

Low credit ratings makes it tough for energy merchants to be competitive, Rigby said. With ratings mostly in the "B" category, a lower junk grade, interest costs are much higher than for investment-grade companies. Companies doing business with energy merchants are reluctant to extend credit and some energy merchants even have to prepay for their fuel, he said.

Companies will have to either grow their way out of debt problems through an improving economy or reorganize under bankruptcy protection, he said.

"Through the remainder of the decade, energy merchants could well have to struggle to remain in business," Rigby said.

Companies with a billion dollars or more of debt maturing over the next four years include Calpine Corp. , Reliant Resources Inc. Allegheny Energy Inc. and El Paso Corp. and Edison International's Edison Mission Energy, according to S&P.

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