Scottish & Southern Energy facing £175m hit if TXU is made bankrupt

Scottish & Southern Energy yesterday disclosed that it could face a loss of £175m if the troubled energy group TXU Europe goes under.

The financial exposure relates to a long-term contract under which S&SE has to supply TXU Europe with electricity from its Keadby gas-fired plant at prices well in excess of current spot market rates.

The disclosure of S&SE's potential losses came as TXU Europe said it would fight an attempt by the rival electricity group, Innogy to force it into bankruptcy proceedings.

Innogy, which is now part of the German utility group RWE, petitioned the High Court for a winding-up order against TXU Europe Energy Trading on Wednesday. A TXU spokesman said it had applied for a hearing next week and was working to get Innogy's petition denied.

Ian Marchant, S&SE's chief executive, said that provided TXU was not forced into bankruptcy, he was confident of recovering at least half the £175m now at risk. S&SE may make a provision this year to cover its remaining exposure.

Mr Marchant added that he was "not best pleased" at Innogy's move, which is thought to be a tactic to get its hands on Drax, Britain's biggest power station. TXU is the biggest customer for the 4,000 megawatt plant in Yorkshire and if it goes under, then AES, the owner of Drax, could become a forced seller. Innogy originally sold Drax to AES for £1.9bn two years ago although it is now worth less than £1bn.

Mr Marchant refused to comment on a possible £12bn merger between S&SE and ScottishPower. But he insisted that S&SE did not need to do a deal as it was the fastest growing electricity and most efficient energy company in the UK.

He did confirm, however, that S&SE would be interested in buying the distribution network of Midlands Electricity, which has been put up for sale by its US parent Aquila.

Mr Marchant said S&SE had up to £2bn to spend on acquisitions but added that any takeover deal would be judged on whether it produced better value for shareholders than a share buyback. The group has the capacity to return £1.2bn to £1.3bn in equity to investors.

Pre-tax profits for the six months to the end of September rose 8 per cent to £254.7m.