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SEC Wants Details on TXU's Exit from Europe, Dividend Cut in 2002

TXU Corp. said Wednesday that it received a subpoena from the Securities and Exchange Commission (SEC) on March 18, requiring the company to provide detailed information about the implosion of its European retail energy operations, TXU Europe, and its dividend cut in fall of 2002.

TXU said the subpoena covers the period from Jan. 1, 2001 to March 31, 2003 and relates to three items: the financial distress at TXU Europe and its impact on the entire company; TXU's 80% reduction of its quarterly dividend on Oct. 12, 2002; and the two claims against the company.

A lawsuit was filed against TXU in April 2003 by William J. Murray, a former employee of TXU Portfolio Management Company LP, and involves claims related to employee termination and alleged breach of contract regarding bonus payments. The case is set for trial in June. The other lawsuit includes several shareholder complaints from late 2002 to January 2003 that were consolidated. The company executed a memorandum of understanding regarding a settlement of the litigation and expects to complete the settlement during the second quarter.

TXU Europe, which eventually was sold for $2.9 billion to Powergen, collapsed in 2002 as profit margins were wiped out by market competition and low wholesale power prices. TXU Corp.'s exit from Europe led the Dallas-based utility to write off $4.2 billion on its failed investments overseas.

TXU posted a net loss of $4.88 billion (minus $16.44/share) for the fourth quarter of 2002. The company's stock price plummeted from nearly $50/share at the beginning of September 2002 to a low of $10.10/share on Oct. 14, 2002, an 80% drop. CEO Erle Nye called the losses in Europe a "tragedy" for the company.

The company said on Wednesday that although it cannot predict the outcome of the SEC inquiry, it does not believe that there is "any merit to the claims made in the Murray litigation" and it expects to settle the other litigation soon. TXU also said it intends to cooperate with the SEC and is in the process of responding to the subpoena.

"Areas covered in the subpoena all related to prior management and are mostly being settled," said Merrill Lynch analyst Steven Fleishman. He said even a negative decision regarding the Murray litigation is "unlikely to represent a material financial hit for TXU."

He pointed to the likely positive impact TXU could receive from making a "price to beat" gas cost adjustment in its retail utility business in Texas. Such an adjustment could boost TXU's earnings per share by 70 cents, given the current 12-month gas futures strip on the New York Mercantile Exchange, according to Fleishman.

"We continued to recommend TXU with a price objective of $85 and do not consider the SEC subpoena to be a material issue for our investment case at this time," he added. "The information requested is related to well known items which occurred under prior management, and which TXU has made good progress towards resolving."

TXU shares ended the day at $76.90, down 65 cents.

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