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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \RSHAPIRO (Non-Privileged)\Shapiro, Richard\Deleted Items X-Origin: Shapiro-R X-FileName: RSHAPIRO (Non-Privileged).pst <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/specialpages/Multi_Client.asp< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 <http://secure.scientech.com/images/spacer.gif<; <http://www.thestructu= regroup.com< <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/specialpages/Strategic_Planning.asp< <http://secure.scientech.com/ima= ges/spacer.gif< <http://secure.scientech.com/rci/details.asp?ProductID=3D90= 9< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 November 20, 2001 Asset Sale Between TXU and EDF Supports European Strategies of Both Compani= es By Will McNamara Director, Electric Industry Analysis [News item from PR Newswire] TXU Corp. (NYSE: TXU) has agreed to sell its 2= ,000 MW coal-fired West Burton power station, near Retford, Nottinghamshire= , England, to London Electricity Group for GBP366 million (U.S. $523 millio= n). In another transaction, TXU also announced the sale of Eastern Electric= ity, its U.K. distribution business, and its 50-percent interest in 24seven= , the company that operates and maintains the distribution network, to Lond= on Electricity for GBP 1.31 billion (U.S. $1.873 billion). London Electrici= ty, a distribution company that serves three million customers across Brita= in, is a subsidiary of Electricite de France (EDF), the state-owned and lar= gest energy firm in France. London Electricity already owns the other 50 pe= rcent of 24seven.=20 Analysis: It's rather rare that an asset sale equally benefits the two ener= gy companies involved in the transaction, but that appears to be the case i= n this deal between TXU and EDF. Both companies are pursuing different stra= tegies, but they share a common goal of gaining a leading position in their= respective niches in the European market. The transfer of both TXU's gener= ating station and the entire distribution business in the United Kingdom to= the French conglomerate EDF should help both companies increase market sha= re in their respective markets. The divestiture enables TXU to obtain its g= oal of accumulating a total of about $2 billion in available capital to gro= w its energy merchant business across Continental Europe. For EDF, which ai= ms to gain 20 percent of the market in Britain, the sale solidifies the com= pany's position as a leader in the distribution sector and also expands its= generation assets (both through its London Electricity subsidiary). Althou= gh the deal appears to be a winning transaction for both companies, one stu= mbling block toward obtaining necessary regulatory approval is the lingerin= g frustration over EDF's expansion in other countries while the French mark= et remains comparatively restricted.=20 Before moving on to the individual strategies of TXU and EDF, let's establi= sh what is included in the current transactions. As noted, the sale of the = generation assets includes only the coal-fired West Burton plant, for which= London Electricity has also agreed to complete the installation of a flue = gas desulphurization process. The transaction also includes a long-term con= tract for TXU to supply the station with coal. TXU Europe's distribution bu= siness is actually the largest in the United Kingdom, and includes the asse= ts and wires that deliver electricity through a 56,000-mile network in East= Anglia and southeast England. Both transactions must obtain regulatory app= roval from the European Union, and U.S. regulators may review the sales as = well.=20 Let's now look at the separate gains that the two companies make in these t= ransactions.=20 TXU Corp. First, it is important to note that the European expansion of Dallas-based = TXU Corp. is driven by the company's TXU Europe subsidiary. TXU's divestitu= re of its U.K. power assets is part of a larger strategy that the company h= as been pursuing for over a year. In a nutshell, TXU Corp. has sought to ga= in $2 billion from selling off non-strategic assets owned by TXU Europe to = support further growth of the company's core trading and merchant energy bu= sinesses across the Continent. In February 2001, TXU Europe announced the s= ale of its gas-field assets in the North Sea to Consort Resources, which wa= s the first indication that the company was moving away from a hard-asset s= trategy. TXU believes it only needs to have access to power supply through = various contracts to retain its position as a leading power trader in Europ= e. Toward this end, TXU Europe also recently announced the sale of its 20-p= ercent stake in Spain's Hidroelectrica del Cantabrico. In June, TXU complet= ed the divestiture of its 1,000-MW Rugeley coal-fired power station to Inte= rnational Power. In August, TXU sold two gas-fired power plants in Eastern = England, totaling 705 MW, to Centrica, a British gas and home services supp= lier, for $250 million.=20 Under the current sale of its U.K. assets, TXU exits the regulated pipes an= d wires business in the United Kingdom and gains available capital to suppo= rt further growth in its trading business across the Continent. Specificall= y, from both sales TXU reportedly will reach its total of $2 billion in ava= ilable financial resources and substantially exceed its previously establis= hed GBP 1 billion debt-reduction target. In other words, proceeds from the = sales reportedly will allow TXU to strengthen its financial position by red= ucing debt, and TXU says it expects to cut its net debt-to-capital ratio to= 55 percent by early 2002. However, the sale of the distribution assets inc= ludes a one-time write-off of $150 million that TXU is taking associated wi= th transaction and debt restructuring. The write-off has caused TXU to redu= ce its 2002 earnings by 39 cents a share. The company now expects to earn b= etween $4.35 to $4.45 a share next year.=20 With the divestiture proceeds in hand, TXU Europe's primary business model = will remain focused on energy trading, a market in which the company holds = a top-three position throughout the Continent. Further, the asset sales ext= ricates TXU from the distribution sector, which it acknowledges is a busine= ss that provides lower returns and declining profitability. The bottom line= for TXU in this and related sales is to "recycle capital into the faster g= rowing merchant energy business," in the words of TXU Europe's CEO, enablin= g the company to derive more than three-fourths of its subsequent proceeds = from this business. It is important to note that TXU Europe includes genera= ting, trading and retail operations under the larger umbrella of its energy= merchant operations. TXU Europe will probably remain involved in Britain's= retail market, where the company retains the power-supply contract to serv= e 5.5 million customers, but the company is no longer interested in the dis= tribution sector of this market.=20 Moreover, it is clear that energy trading is now the core of TXU's European= operations. TXU Europe holds a trading volume of approximately 600 GWh, an= d earlier in 2001 the parent company TXU Corp. reported a 75-percent jump i= n its revenue that was attributed in large part to its energy trading busin= ess, both in Europe and the United States. TXU Europe still hopes to contro= l physical assets in Europe, as represented by its purchase this year of a = 51-percent state in Germany's Kiel utility, which in terms of volumes and c= ustomer base is the ninth largest of hundreds of municipalities in Germany.= However, it is clear that TXU is moving out of the U.K. power distribution= market and its sights are more clearly focused on Continental Europe.=20 Upon the word that the sales would drag down its earnings growth for the ne= xt three years, TXU shares fell about 8.5 percent on Nov. 19 to close at $4= 5.59. In early morning trading on Nov. 20, TXU shares were priced at $45.15= . However, Wall Street analysts indicate that the sales should increase TXU= 's long-term attractions because it will presumably be pursuing other acqui= sitions enabled by these sales.=20 Electricite de France As noted, London Electricity is buying the generation and distribution asse= ts from TXU, but it must be understood that these moves are being driven by= the French-government owned Electricite de France, London's Electricity's = parent company. EDF, which still maintains a practical monopoly status in F= rance, purchased London Electricity in 1998 for 1.9 million British pounds = ($2.72 billion) from Entergy Corp. Based on comments from EDF over the last= year, the company plans on expanding its products and services and investi= ng in further strategic alliances to become a multi-energy company.=20 In fact, London Electricity acknowledges that the purchases are part of the= company's strategy to consolidate its position within the United Kingdom. = Thus, while the U.K. market no longer appears to be a core focus of TXU, it= obviously holds appeal for other companies that are attempting to gain a m= arket share in Europe. Upon completion of the transactions, EDF / London El= ectricity will increase its share of the U.K. generation market to 7.5 perc= ent from 4.5 percent, and reduce the gap that currently exists between its = market share of generation versus distribution in the United Kingdom. Londo= n Electricity already owns the Cottam power station, a 2,000-MW coal-fired = generating plant located near the West Burton plant. However, London Electr= icity will still own far less generation capacity in the United Kingdom whe= n compared to the market leaders Powergen (which controls 10,000 MW) and In= nogy (which controls about 8,000 MW).=20 Thus, the true focus of these purchases by London Electricity may be on the= distribution sector. Upon completion of the transactions, London Electrici= ty will own Britain's largest power distribution network and control about = 18 percent of the country's distribution business. Analysts have suggested = that EDF overpaid for TXU's West Burton plant (the buying price represented= a 26-percent premium over the plant's book value), but got a fair price fo= r the distribution assets. The point here may be that EDF was arguably will= ing to pay more for the generation assets as it already holds a solid lock = on distribution in the United Kingdom and is attempting to expand further b= y gaining control over generation assets. Representatives from London Elect= ricity have said that the company and its parent want to be one of the top = five players in the United Kingdom, and have a goal of gaining 20 percent o= f market share in the region. London Electricity has been named as a conten= der for the U.K. supply company Seaboard, which current owner AEP plans to = put for sale next year. Seaboard serves around two million customers in Eng= land (in the towns of Kent, Sussex and Surrey).=20 The involvement in EDF in this U.K. expansion has added a renewed spark to = an old debate, namely the growth of EDF into other European countries while= competition in France remains comparatively restricted. In other words, ED= F has been the target of intense criticism across Europe for the last sever= al years as the governments of other countries and other power firms have a= rgued that EDF has taken advantage of investments abroad while fiercely pro= tecting its own turf. For instance, while Germany has opened 100 percent of= its power market to competition, France has opted for a phased-in approach= , opening a third each of its power and gas markets by February 2003 and Au= gust 2008, respectively. While France remains rather blocked, EDF has freel= y admitted that it plans to acquire other companies in England, Spain, Ital= y, and possibly the United States. This dichotomy may become a factor as th= e current transactions with TXU fall under review of the European Union.=20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer colleagues to receive our fre= e, daily IssueAlert articles, please register directly on our site at secur= e.scientech.com/issuealert <http://secure.scientech.com/issuealert/<;.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to IssueAlert <mailto:IssueAlert@scientech.com<, with "Delete = IA Subscription" in the subject line.=20 _____ =20 SCIENTECH's IssueAlert(SM) articles are compiled based on the independent a= nalysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's Iss= ueAlerts are not intended to predict financial performance of companies dis= cussed, or to be the basis for investment decisions of any kind. SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D11/20/2001<;
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