U.S. power plant writedowns may hit banks

Declining values of new U.S. electricity plants forced several power companies to write down assets in the last year and that could hurt the banks that financed the plants, industry experts say.

The wave of new power plant construction over the past five years led to an oversupply of generation, squeezing wholesale power price margins and raising doubts about whether the plants can generate enough money to repay the banks behind the projects' financing.

"It was really bound to happen if you observe what the energy sector had been doing in the past five to seven years," said Michael Ong, former chief risk officer of Credit Agricole Indosuez in New York and former head of enterprise risk management for ABN AMRO in Chicago.

Major U.S. banks and investment banks such as Citigroup, Morgan Stanley and Goldman Sachs, as well as European banks Societe Generale, ABN AMRO, UBS AG and BNP Paribas, helped finance the billions of dollars of construction, Ong said.

The banks, however, do not publicly disclose their power-plant loans. They would not comment on possible writedowns.

"It is very difficult to know the totality of the exposure of the banks," said Ong, who is now executive director of the Center for Financial Markets at Illinois Institute of Technology's Stuart Graduate School of Business.

An estimated 200,000 megawatts of power generation, mostly fired by natural gas, was built from 1998 through 2003, bringing the total U.S. capacity to about 900,000 MW.

The new plants were expected to push many of the older, less efficient plants into retirement. But surging natural gas prices and price pressure from the additional generation on wholesale power markets forced owners to shut many of the plants or operate them at a fraction of their capacity.

"At the time the loan is granted, you don't project partial operation," Ong said. "You project full operation."

NEW MEANING TO "TURN KEY"

Duke Energy Co., AES Corp., and Reliant Resources, have all written down power plant values in recent months and are among many companies that have put plants up for sale.

Other energy companies, including PG&E Corp., El Paso Corp., and Exelon Corp., have even handed over power plants to the banks that financed their construction and operation.

The banks, whose finances have improved with the economy, may be more willing now to address the power plant project loans than a few years ago during the international economic downturn and the telecom sector's loan problems.

"We've been waiting to see if the remaining collateral values on the (power plant) project loans hold," said Tanya Azarchs, credit analyst with Standard & Poor's.

"If regulators are not satisfied with the collateral values, they are going to force them to do something," she said.

But the banks would not face significant financial troubles even if forced to take writedowns, she said, adding:

"They can absorb it."

But Fitch Ratings credit analyst Denise Furey said unless there's "evidence of possible defaults, the banks are not going to write them down."