France’s EDF to buy TXU Europe’s UK assets for $2.4bn

State-owned Electricite de France (EDF) Monday said it agreed to buy TXU Europe’s UK electric distribution business for $1.9 billion and through its London Electricity Group PLC will buy TXU’s UK West Burton power plant for $523 million.

Proceeds from the sale of Eastern Electricity Ltd. and the 2,000 Mw Burton power plant will be used to restructure the debt of TXU Europe Ltd., a unit of TXU Corp., Dallas, Tex., and to support growth opportunities in Europe, company officials said. The company has raised about $2 billion through assets sale, the bulk of which will be used to repay debt and support the company’s credit rating, said Paul Marsh, chief operating officer for TXU Europe.

The company’s debt-to-equity ratio will fall to 48.5% after the sale from 63% with a target of 45-50%. Marsh told financial analysts TXU Europe is dedicated to maintaining BBB-plus and Baa1 ratings. Moody’s Investors Service confirmed TXU Europe Ltd. and TXU Europe Group PLC ratings, while Fitch put TXU Europe Ltd. on ratings watch negative.

Bruno Lescoeur, CEO of London Electricity Group, said the acquisition of the Burton plant will give the company added flexibility. It will raise London Electricity’s share of the UK generation market to 7.5% from 4.5%.

TXU Europe’s distribution business is the largest in the UK and consists of the assets and wires that deliver electricity through a 90,000 km network in East Anglia and southeast England. London Electricity also is acquiring the other 50% of 24seven, its network management joint venture with TXU Europe, which operates and maintains the networks for TXU and London Electricity Group.

In mid-day trading on the New York Stock Exchange TXU shares were down $2.45 to $44.95 on heavy volume.

TXU said it will take a one-time after-tax charge of $150 million and revised downward to $245 million from $350 million 2002 net income expectations as a result of the sale. Earnings per share will be reduced by 39à‚¢/share, it said. The company said 2002 earnings are now expected to be $4.35-$4.45.

Merchant energy emphasis
Marsh said TXU Europe will now be positioned as a pure merchant energy business. He said the company has shifted away from its original UK strategy of investing in distribution and other more predictable businesses because the market has since become more liquid. “There is a much wider range of counterparties,” he said, and it has become less necessary to own physical assets to buy and sell electricity. “There are much more effective means to do it,” he said.

With the recent legal separation of the retail business from the distribution business in the UK and the lower returns and declining profitability of the distribution business, Marsh said now was the right time to recycle capital into the faster growing merchant energy business.

He said the sale also will remove regulatory uncertainty associated with the distribution business. He noted UK regulators recently asked for comment on how consumers should be compensated for acquisition and mergers in the distribution business.

TXU said London Electricity Group will complete installation of flue gas desulphurization plant at the West Burton plant already under way and reimburse TXU $86 million for costs to date. The transaction also includes a long-term contract for TXU to supply the station with coal.

Fitch said the rating watch negative reflected a “step change” in TXU Europe’s credit profile to a predominantly unregulated business with a very small regulated asset component. The company’s skills in the merchant market compare favorably with peers, but Fitch said the transition to a deregulated market in Europe still remains prone “to transition risk on the counterparty, systemic, and basis risk levels that cannot be entirely eradicated through the group’s contractual and physical hedges.”

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