US parent puts TXU Europe on the block

Bidders were yesterday lining up to pick over the bones of TXU Europe as the beleaguered energy company was cut adrift by its US parent and its credit rating was cut to junk status.

Bidders were yesterday lining up to pick over the bones of TXU Europe as the beleaguered energy company was cut adrift by its US parent and its credit rating was cut to junk status.

The decision by TXU Corporation in Dallas to withdraw $700m (£449m) of financial support and invite offers for all or parts of its European operation means that TXU Europe almost certainly has no independent future.

Powergen, which is owned by Germany's Eon, ScottishPower and Scottish & Southern Energy are all now eyeing up the company, one of the UK's biggest electricity suppliers with 5.25 million domestic customers, mainly in the old Eastern Electricity and Norweb regions.

The main interest centres on its UK energy supply business, TXU Energi, which could be worth £1.2bn to £1.3bn. TXU Europe also operates an energy trading division and three UK power stations but these are of less interest, given the massive fall in wholesale electricity prices which lies partly behind TXU's troubles.

The move by TXU Corp to cut off its European operation and slash its dividend by 80 per cent had been expected in view of the acute financial squeeze facing the parent company.

It triggered a second credit downgrade of TXU Europe to junk status – this time by Standard & Poor's – which in turn leaves the company in default on £555m of bonds. A £235m sterling bond now becomes repayable in 60 days while a $500m Yankee bond is repayable by April, 2003.

A TXU Europe spokesman said that it would now enter discussions with bond holders and their trustees to agree a way forward. He added, however, that the company was continuing to trade and had the support of its key counterparties.

These are the five UK generators with which TXU has long-term contracts to buy 5,000 megawatts of capacity a year at prices well in excess of current spot prices. Scottish & Southern, which sells 80 per cent of the output from its Keadby gas-fired station in north-west England to TXU, is estimated to have an exposure of £160m to £170m while International Power, which sells all of the output of its 1,000-megawatt Rugeley plant in the Midlands, has an exposure of about £40m. AES, which owns the 4,000-megawatt Drax station in Yorkshire, supplies 60 per cent of its output to TXU and is also heavily exposed.