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Powergen pounces on TXU’s failing business

POWERGEN, THE UK electricity company owned by Germany's E.on, has snapped up its local rival, TXU Energi, which was on the brink of collapse. Powergen paid the US' TXU £1.37bn ($2.1bn) for TXU Energi's retail business and three coal-fired power stations, in High Marnham, Drakelow and Ironbridge.

Powergen's chief executive, Paul Golby, says the acquisition of TXU's 5.5 million electricity and gas customers in the UK is a 'transforming deal' for Powergen, allowing it to "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. This is a good day for all our customers and employees." 

Golby has reassured TXU's customers that Powergen had "acted swiftly to safeguard" their interests. "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 and look forward to talking to staff and their trade union representatives in the near future." 

Paul March, TXU's chief operating officer, Europe, says the transaction is "good for all involved". He adds: "With the proceeds of the sale and the continued support of creditors, we believe we are well placed to restructure the remainder of the UK and European operations to promote their future viability. It has been a hectic time since the events that led to a credit-rating downgrade, but we have made great progress in stabilising the business. There is much more to do, but we are moving solidly towards our goal."

The deal does not include TXU's continental European businesses, which Elizabeth McClymont-Mortensen, a spokeswoman for TXU, says are no longer up for sale. "The focus of the whole deal has been the UK," she adds.

TXU will continue to trade electricity and gas across central Europe from its regional headquarters in Geneva. It recently took a major stake in Stadtwerke Kiel, one of northern Germany's municipal energy companies. The company has operated in the Nordic region since 1997 and trades on NordPool. It owns generating capacity in Finland and Norway.

However, whether Powergen's move will help lift the gloom that has settled on the UK's power sector is debatable. Taking three old power stations from TXU seems strange, given that earlier in the month Powergen mothballed two of its own plants, saying spare capacity in the market was making wholesale prices unsustainably low. And last month, the company's chairman, Ed Wallis, was said by a local newspaper to have warned the government that up to 10 power plants must be closed to save the sector.

Moreover, TXU will keep the long-term bilateral supply contracts that brought the UK retail business to its knees, and forced the parent company to cut a $0.7bn cash line to its UK and European subsidiaries. The company will continue to operate a trading operation in the UK on the strength of the contracts, according to one of its spokesmen, Christian Judge.

Those long-term contracts, signed by TXU and a handful of generators, were at the root of TXU's problems in the UK. Low short-term electricity prices made the contracts unsustainable. One source close to the company said the discrepancy had cost the company £400m a year above the equivalent short-term cost of the electricity. Daniele Seitz, an analyst from Salomon Smith Barney, says that prior to the sale TXU had slashed its expectation for earnings from its European businesses in 2002 from $350m to $50m. Judge says the bilateral agreements signed with suppliers will continue to be renegotiated.

Following British Energy's near collapse last month, which prompted the government to bail out the country's largest generator with a £0.65bn loan, TXU's UK collapse has again highlighted the difficulties faced by operators in the country.

Since the introduction of the New Electricity Trading Arrangements (Neta) last year, wholesale UK electricity prices have fallen by 40%.

Valuations for generators have consequently fallen. The lack of investor confidence following the Enron collapse has also hit operators.

Despite the complaints of generators, the UK's energy regulator, Ofgem, says Neta is "fulfilling the objective set by the [Department of Trade and Industry] and Ofgem to replace the former, flawed Electricity Pool, which produced artificially high prices for electricity, with a competitive electricity wholesale market". Neta, says Ofgem, has led to savings of £1.5bn for industrial and commercial customers and £0.5bn for domestic customers.

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