Debt-ridden TXU Europe has been placed in administration after defaulting on a power purchase contract. TXU Europe owes its banks £780 million, and bondholders over £2 billion, according to Allan Bloom, head of corporate restructuring at Ernst & Young.
Major generator Scottish & Southern is reported as being "not best pleased" by these moves to wind up TXU Europe as it stands to lose £175 million, according to chief executive Ian Marchant. The company has nine years left to run on its contract to supply TXU Europe with power at prices well above current market rates. It is thought that power was being supplied under the terms of the 15-year contract at £28 per MWh, compared with current prices of about £16 per MWh.
Scottish & Southern had hoped to retain over 50 per cent of the value of the power purchase contract. Marchant declined to comment on speculation that Scottish & Southern might be prepared to merge with Scottish Power to combat the larger continental European energy groups that have bought into the UK market. Scottish Power said that it will maintain an open mind about the possible merger. Both Scottish Power and Scottish & Southern are short of the 5 million customers said by analysts to be necessary for power supply businesses.
The position of the 4000 MWe coal-fired Drax power plant is in some doubt. Innogy, which is owned by RWE of Germany, has expressed interest in buying back Drax, which it originally sold to AES for £1.87 billion in 1999. TXU Europe had a long-term contract to buy 60 per cent of Drax's output. The loss of this contract will leave Drax facing heavy losses.
Executives at International Power said TXU's administration could significantly affect next year's earnings. International Power's UK operating profits fell almost 60 per cent in the third quarter to £13 million.
IP bought the 1000 MWe coal-fired Rugeley plant from TXU last year for £200 million, and it has a contract to operate it until 2005. TXU supplies all the fuel and buys its entire output. It expects the contract to be terminated in the near future.
Analysts estimate that the contract is worth about £40 million to IP's annual earnings, but David Crane, chief operating officer, would not confirm the precise value. He said: "It depends on how much we can sell that power for in the open market, and how much we get as a termination fee."
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