Powergen gains from TXU woes

Siàƒ¢n Green

TXU Europe has become the latest victim of the UK’s competitive wholesale electricity market, but its woes have brought a reversal of fortune for Powergen.

TXU Europe has agreed to sell its UK generating and retail businesses to E.ON subsidiary Powergen in a deal worth à‚£1.62bn ($2.52bn). The move was widely expected following financial difficulties ” triggered by low wholesale electricity prices in the UK and upheaval in the US markets ” at TXU Europe’s parent company, TXU Corp.

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UK-based energy utility Powergen will buy TXU Europe’s 5.3m gas and electricity customers and some 2.9 GW of capacity in the UK for à‚£1.37bn in cash plus à‚£247m in assumed debt. The deal makes Powergen the largest electricity retailer in the UK and, crucially, will help it to offset the burden of low wholesale electricity prices.

Electricity generators have been feeling the pinch of the competitive wholesale electricity market in England and Wales. Since the introduction of the New Electricity Trading Arrangements (NETA) in March 2001, wholesale prices have fallen by 20 per cent and are below what most generators consider sustainable. Nuclear generator British Energy was the first to fall foul of the market (see PEi October 2002, Analysis p7).

In mid-October, TXU Corp. indicated that its European subsidiary was also struggling with the UK market conditions. Under pressure to maintain its credit ratings in the face of turmoil in the USA’s energy markets, Houston-based TXU Corp. decided to withdraw a planned $700m cash injection into TXU Europe. With its Australian and US-based business units performing well, the company took a number of measures ” including cutting its European business units loose ” to maintain liquidity.

This cash lifeline would have allowed TXU Europe ” whose UK operations account for two thirds of its business ” to stay afloat while renegotiating several contracts under which it was purchasing power at above-market rates. Without it, the company was forced to put its UK business up for sale.

But in spite of the cash injection from the deal with Powergen, TXU Europe remains in a difficult position. It still retains a number of key activities in Europe, as well as operation of the long-term power purchase contracts that were at the heart of its downfall.

TXU Europe is now attempting to renegotiate these power purchase agreements, which it requires some à‚£400m per year to service. The AES-owned Drax power station sells 60 per cent of its output to TXU Europe under long-term contract, but is itself reported to be finding the low wholesale power prices in the UK challenging.

Analysts have estimated TXU Europe’s remaining financial liabilities to be in the region of à‚£3.4-5bn, significantly higher than its cash reserves. The company has said that it has no plans to sell its continental European operations, which include trading and risk management businesses throughout Europe and its German and Nordic generation and distribution holdings, but this may change if it fails to renegotiate its UK contracts and falls into administration. The total value of these businesses is estimated to be no more than à‚£400m.

But TXU Europe’s difficulties have brought opportunity ” and relief ” for Powergen, which in early October announced that it would close two power stations in light of the overcapacity in the UK generation market and the resulting low wholesale prices. The utility has now temporarily reversed this decision in order to ensure supplies to its new customers.

“This is a transforming deal for Powergen. Today we become the UK’s largest electricity supplier and number two in the highly competitive retail energy sector, with 6 million electricity and 2.4 million gas customer accounts,” said Paul Golby, Powergen Chief Executive. “Our immediate priority is to stabilise the TXU retail business and to work to remove any staff uncertainty as soon as possible. We have a good record in managing change during previous acquisitions.”

According to Datamonitor, the deal gives Powergen a 23 per cent share in the UK’s residential power market, where power tariffs have not fallen in line with wholesale prices. It will have just under 8m residential customer accounts ” up from 3m ” giving it cashflow to offset low wholesale prices in the generation sector.

The generation assets that Powergen has agreed to purchase are the 999 MW Drakelow C power station near Burton-on-Trent, High Marnham (945 MW) in Nottinghamshire, the 970 MW Ironbridge plant in Shropshire, and the Citigen City of London CHP scheme. Much of this capacity is already mothballed, however, and could prove a burden for Powergen.

Nevertheless, Powergen is thought to be making a bid for Midlands Electricity, which distributes power in central England and which has been put up for sale by US-based parent company Aquila. Like TXU and other US energy companies, Aquila has come under pressure to sell non-US business units and focus on its home markets.

“We are continuing to focus on our transition back to our roots as a regulated utility company and our exit from the elements of our previous energy merchant strategy that are not consistent with our current business model,” said Aquila chairman, president and CEO Richard C. Green, Jr.

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