TXU Europe Ltd. and its European subsidiaries was downgraded to one level above “junk” status Thursday by Standard & Poor’s Ratings Services (S&P), which may drop the TXU Corp. subsidiary below investment grade “in the very near future.” S&P’s action followed that by Moody’s Ratings Service on Wednesday and Fitch Ratings last Friday. S&P did not drop the corporation’s credit rating, however.

S&P cut TXU Europe and its European subsidiaries to “BBB-” from “BBB+” with negative implications, citing deterioration in the UK wholesale power market, liquidity pressures and a “perceived diminution in support from parent TXU Corp.” It said the European unit’s weak financial performance this year resulted from a combination of issues, including the following:

“UK market conditions have significantly weakened the company’s financial performance and prospects,” said S&P’s Infrastructure Finance credit analyst Anthony Flintoff. “Standard & Poor’s does not foresee a sustained recovery in wholesale electricity prices for some years and, although TXU Europe’s retail customer base provides a partial hedge to weak wholesale prices, it has not prevented serious dents in the company’s debt protection measures.”

Flintoff said that the “stand-alone creditworthiness of TXU Europe has deteriorated to the point where it is materially below that of its parent.” Noting that TXU Corp. intended to provide up to $700 million of equity to support restructuring of long-term power contracts or to repurchase existing debt obligations, Flintoff said that “beyond this equity injection, however, TXU Corp. has not committed to further support TXU Europe, which, combined with the latter’s weak stand-alone position, means that rating equalization with TXU Corp. is no longer appropriate.”

The S&P’s analyst noted that the financial performance of TXU Europe this year had been “very poor, and, based on the electricity market outlook, is unlikely to improve over the medium term without tangible support from TXU Corp.” He said, “even after the $700 million injection, TXU Europe’s financial profile will be weak. Funds from operations (FFO) interest coverage is not likely to reach 2.0 times (x) for a few years and FFO to total debt is likely to remain below 10%.”

The negative CreditWatch placement reflects “immediate liquidity concerns” at TXU Europe. “TXU Europe does not face any debt maturities within the next three years. However, the company faces immediate liquidity pressures stemming from rating triggers in borrowing and energy trading contracts,” said Flintoff.

TXU Europe “faces collateral calls from trading counterparties of about GBP110 million ($172 million), and the probable put of the company’s GBP275 million bond due 2030. A non-investment-grade rating has other potential trigger implications, although these are unclear at the moment. Some or all of the $700 million support from TXU Corp. will likely be necessary to shore up liquidity at TXU Europe.”

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