Despite affirming its “BBB+” rating on Dallas-based TXU Corp., Standard & Poor’s Ratings Services (S&P) said that it has revised the outlook for the electricity and gas provider and its subsidiaries to “negative” from “stable.” The rating agency pointed out that the company has about $18.7 billion in debt outstanding.

“The outlook change primarily reflects deterioration in TXU Europe Limited’s creditworthiness through 2002, to a point where its stand-alone credit profile is materially weaker than that expected of a company having a triple-‘B’-plus corporate credit rating,” said S&P credit analyst Judith Waite in the agency’s note.

TXU Europe, which represents about one-third of TXU Corp.’s global income, has more than half of all the corporation’s customers. TXU Australia Holdings LP., which represents a much smaller percentage of assets and customers, is also highly leveraged. S&P said the ratings of both subsidiaries benefit from the relatively strong cash flow and improving financial profile of TXU US Holdings, which owns the electric and gas distribution businesses in Texas. TXU US Holdings is expected to reduce debt by over $1 billion when securitized in 2003 and 2004.

S&P said debt is also being reduced using the proceeds from the sale of generating plants in the United Kingdom and Texas, and from the issuance of common stock and convertible debt. The agency added that debt will continue to be reduced using cash flow and the conversion of existing securities. “However, with the diminished prospects for profitability in Europe, and the likelihood of limited returns from the Australian operations in the short-to-medium term, it is less likely that strengthening financials in the U.S. will be sufficient to support the current triple-‘B’-plus corporate credit rating for the consolidated company,” S&P said.

As a result, S&P said it is undertaking a full review of TXU and its subsidiaries. The review will incorporate steps management will take to strengthen its European operations.

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