The once Titanic-like TXU Corp. was bailing water at a furious pace Monday morning, after a devastating collision with European power markets. By 9 a.m., it had squeezed 80% from its once untouchable quarterly dividend, and cast adrift its European subsidiaries, sinking a plan to infuse $700 million in equity in operations, eliminating them from a cross-default provision on its $500 million bank facility and ultimately deciding that “all portions” of the European business are up for sale.

Investors by the thousands appeared to be jumping ship as well; by 10:30 a.m. EST, the company had fallen to $11.84 per share, a loss of almost 37% after starting the week at $18.75. TXU also was downgraded corporate-wide by Standard & Poor’s Ratings Service (S&P), and several financial analysts reduced their outlook on the company as well.

In a pre-dawn statement, TXU Corp. said, “recent actions by credit rating agencies will impact the company’s ability to compete in the European markets and accordingly may impact earnings from that segment. TXU Europe will continue to aggressively address existing plans to reduce costs, restructure purchase power agreements and otherwise improve and maintain the business as an ongoing operation.

“TXU Europe, in parallel, is also offering for sale all or portions of its business. The extent of any possible impairment (write off) of the company’s investment in Europe as a result of these activities cannot be known prior to their conclusion. The company does not expect an impairment, if any, to affect its ability to meet TXU Corp.’s bank facility covenants,” the statement concluded.

Not scheduled to meet until Oct. 23, the TXU board of directors apparently decided over the weekend that “in order to meet the new requirements of the rating agencies for investment grade credit,” it would reduce its quarterly dividend 80% — to 12.5 cents from an expected 60 cents per share, that is to be paid on Jan. 2. “The indicated annual dividend is now 50 cents per share of common stock,” said the company.

CEO Erle Nye said the board’s actions were “the direct result of rating agencies’ concerns as to the company’s liquidity and credit situation. Today’s financial markets and concerns of the rating agencies have forced us to take this dramatic action.” Nye noted that the board’s decision to reduce the dividend “was not taken lightly. The events of the past few days persuaded the board that the dividend reduction was prudent.

“We recognize the importance of the dividend to our shareholders and sincerely regret having to take this action. However, our primary responsibility to the shareholder is to maintain the financial strength and flexibility of the company. The common stock dividend policy will be reviewed on an ongoing basis. The dividend will be increased when there is unquestioned confidence in the company’s liquidity and credit, combined with access to the capital markets on reasonable terms,” Nye added.

TXU also negotiated an amendment to the corporation’s $500 million bank facility, eliminating “foreign subsidiaries from its cross default provision,” referring to the struggle now faced by subsidiary TXU Europe Ltd. and its entities. Also, “contrary to previous plans, the company will limit any necessary equity contributions from its European operations to minimal levels.” TXU had said last week it would provide $700 million in equity to TXU Europe, but TXU Corp. did not elaborate on how much it would give the Euro offices to operate.

Developmental capital expenditures throughout all regions will be significantly reduced, despite CFO Mike McNally’s statement that the corporation’s cash flow and earnings are “strong and stable in our Texas and Australia operations, which are performing very well.” However, “in light of limited attractive investment opportunities, developmental capital expenditures will be reduced significantly. Cash retained from expenditure reductions and the reduced dividend, which totals approximately $850-to-$950 million per year, will be available for debt reduction.”

Standard & Poor’s Ratings Services (S&P) followed TXU’s news by lowering its long-term corporate credit rating on TXU Corp. and its U.S. and Australian subsidiaries to “BBB”, down from “BBB+”. At the same time, the long-term corporate credit ratings on TXU Europe Ltd. and its European subsidiaries (TXU Europe) were lowered to “B+” from “BBB-“.

“The outlook on TXU Corp. and its U.S. and Australian subsidiaries remains negative, and the ratings on TXU Europe remain on CreditWatch with negative implications, where they were placed on Oct. 10, 2002. The short-term ‘A-3’ corporate credit ratings on U.K.-based subsidiary The Energy Group Ltd. have been withdrawn. The commercial paper rating on the U.S. and Australian subsidiaries is affirmed at ‘A-2’.”

S&P analyst Anthony Flintoff said the ratings action followed the corporation’s “material deterioration” in credit quality this year, mostly because of its UK performance, “which has never provided any dividends to the parent.” He said, “the weakness in TXU Corp.’s European operations has applied added pressure to its financial profile, which has been very weak for the triple-‘B’-plus rating in the past few years.”

Noting that TXU’s management intended to “shore up the company’s financial profile in the short term to avoid further ratings downgrades,” Flintoff noted that companies with “similar challenges have cut or significantly reduced their common dividend, limited discretionary capital expenditures significantly, and disposed of assets that are no longer considered strategic to financial goals. Furthermore, TXU Corp. will reduce debt by using cash flow and converting existing securities to common stock, as well as by securitizing $1.3 billion of regulatory assets and converting additional debt to equity. Most importantly, the financial resources of TXU Corp. will not be diverted to propping up TXU Europe.

“The outlook on TXU Corp., however, will remain negative until the company successfully executes short-term steps to stabilize the financial profile at the ‘BBB’ level.” For now, S&P said TXU Corp.’s “strong liquidity position” merits a “BBB” crediting rating, with nearly $2 billion of annual operations funds covering capital expenditures of $600 million to $700 million.

TXU Europe’s downgrade “is a direct result of the actions taken by TXU Corp. in recent days to protect its own creditworthiness. Management has stated that it will not, as it previously anticipated, infuse additional equity into TXU Europe. The lack of this equity infusion of up to $700 million, combined with the contingent liquidity requirements triggered by the non-investment-grade rating, makes TXU Europe’s liquidity position extremely tenuous.

“TXU Europe has cash reserves of about GBP200 million ($312 million), an undrawn bank facility of GBP300 million, and no debt maturities within the next three years. The non-investment-grade rating, however, makes drawing on the bank facility unlikely, and TXU Europe is now required to post collateral for trading counterparties currently estimated at GBP110 million and, possibly, collateral for energy distribution and transmission purposes of about GBP75 million. Several other debt and trading instruments also have rating triggers, although it remains to be seen whether these will be exercised and how TXU Europe will deal with them.”

Said Flintoff, “The negative CreditWatch status reflects the immediate liquidity concerns at TXU Europe. If the position deteriorates further, a negative rating action is likely in the short term. There is the potential, however, for the liquidity pressures to be partially or temporarily alleviated as the banks, bondholders, and energy contract counterparties consider their options and incentives.”

TXU Europe’s “liquidity and counterparty dealings is evolving rapidly and further announcements can be expected in the near future,” Flintoff said. “The ratings on TXU Australia and its wholly owned subsidiary, TXU Electricity Ltd., remain closely aligned to those of TXU Corp. The strength of the underlying creditworthiness of TXU Australia and the ongoing willingness of TXU Corp. to support its Australian subsidiaries mean that it is appropriate to equate the ratings.”

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