TXU Corp.’s investors continued to sell off their stock in record numbers on Wednesday, despite the third conference call in four business days by the executive management team. The hour-plus conference call offered a lot of plain speaking, but to no avail, and by the market’s close, the shares had tumbled another 15% and the European subsidiary had been downgraded by Moody’s Investors Service.

TXU ended the day at $14.65, with more than 26.5 million shares trading hands. TXU Corp.’s U.S. credit rating was held steady by Moody’s but TXU Europe Ltd. was downgraded, though it still is at investment grade.

TXU was not the only energy company to drop on Wednesday. Nearly every single stock, be it marketer, gas or power utility or producer, retreated, with the biggest losers including American Electric Power, which dropped almost 23% to close at $17.69; Calpine Corp., which lost more than 16% to close at $1.66; Dynegy Inc., barely holding on after suffering a 15% loss to close at 68 cents; Dominion Resources Inc., which lost big for a second day in a row, down almost 13% to close at $36.49; Williams Cos. down another 11-plus% to close at $1.48; and Xcel Energy losing almost 10% to close at $7.56.

Only two energy marketers showed any gains: Allegheny Energy Inc., which was up 25 cents to close at $4.05, and El Paso Corp., which added six cents to end at $5.51. In the natural gas utility sector, most also lost, but at most, they were held to about 6%, with only one gaining, CHN Global NV, up 9 cents to end at $3.30. Only Beacon Power Corp., an electric utility, gained in that sector, up 2 cents to end at 16 cents.

During TXU’s conference call, CFO Michael McNally said that despite the downgrade by Fitch Ratings last week of the entire corporation and subsidiaries, TXU soon will have the credit problems resolved. McNally said TXU is negotiating with six banks to remove the provision requiring the parent corporation to repay more than $454 million in a loan linked to a debt default by TXU Europe. Under the covenant as it now stands, the parent corporation (TXU Corp.) would be required to repay the bond holders.

“I’m confident we will have written confirmation in the next few days to remove the cross-default,” McNally said of the bonds. TXU is working with six banks on the covenant, and he said already, three have said they would have no problem in waiving it. Also, TXU will sell about $400 million of its European assets to cut $4.54 billion in debt, and will cut back the jobs overseas.

McNally also pointed out that TXU actually has three levels of “contingency plans” that “hold a lot of certainty” within TXU’s financial planning. He said TXU can use the capital market for additional financing of its regulated facilities; it could use its funded capital to pay off commercial paper; or it can use its current bank facilities — all which offer the corporation strong liquidity options.

TXU is not expecting any substantial earnings for the rest of the year from its European operations, and McNally said the “focus is on North America.” He reminded analysts that the utility’s major earnings appear in the third quarter, mostly because of operations in Texas, and he said that materially, there should be a “substantial” gain in earnings. TXU will formally announce quarterly earnings at the end of October.

CEO Erle Nye, 65, who has worked for TXU or its predecessors for 42 years, again apologized for the “unfortunate” and what he has called “unacceptable” developments within TXU in recent days. Long considered a conservative utility, the price of TXU shares have rarely veered off of a slow but steady rise in price. It was trading for more than $56 a share in April, and he said the current environment is “in effect sort of a panic situation.” He said the problems in the United Kingdom are a “setback,” not a calamity.

However, Nye has come under fire for a stock sale in early September, when he sold 45,000 shares of TXU through his incentive compensation plan. He realized about $2.2 million in the sale, but he said this week that the timing was not based on UK problems, but rather a plan to buy a home in California. He added that he still holds around half a million shares of TXU stock, “so the idea that I took undue advantage just doesn’t square with the facts.” Nye said it was “hurtful” because “you can’t stop everybody and give them this whole story.”

From Sept. 30 through Tuesday’s market close, Nye said his TXU shares have declined in value from more than $20 million to about $8 million. “I have a substantial exposure to TXU stock.”

In closing the call, Nye stated that if there was “any information that concerns you, please call us. If there are any doubts, please call us. We are available at all hours of the day. We want to get information on the streets. This is a strong company, we have ample control, and the prospects are very good. The underlying business is very good.”

Reacting to the plummet in companies that until now had escaped the backlash from Enron Corp.’s bankruptcy, many analysts also are scratching their heads. “Most damaging to investor confidence was the fact that utilities, such as Dominion, Duke Energy and TXU, that up until recently were considered fairly immune to the more extreme pressures on earnings or a liquidity crisis, have come under intense pressure in the last several weeks,” said Christopher R. Ellinghaus an analyst with The Williams Capital Group LP. “While credit and earnings concerns have long been pressuring the energy merchants, earnings and liquidity concerns have now more generically spread to the ‘safer’ utilities.

“The list of stocks we would consider absolutely immune to significant financial strain is growing precariously short,” Ellinghaus continued. “Therefore, the increasing financial risk in the sector further narrows the investable universe for many investors and should lead to continuing pressure on industry valuations.”

Ellinghaus said Williams Capital expects “available credit to tighten further as once perceived stronger companies are financially stress-tested. The access to capital throughout the sector is likely to diminish. Further credit rating downgrades also are likely as financial flexibility is further reduced for many utilities and energy merchants, particularly as stock prices continue their step-change lower. Unfortunately, this is likely to create a continuation of the seemingly unending perpetual circuit of credit rating downgrades and liquidity concerns that have yielded ever lower stock prices.”

Regarding Moody’s downgrade, it cut the European entities to “Baa3” from “Baa1”; downgraded preferred stock issued by TXU Europe Capital 1 to “Ba2” from “Baa3,” and left all of the Euro ratings on review for another downgrade. Moody’s noted that it had first placed the European subsidiary on review in late July because of the weak UK operational performance. TXU Corp. plans to inject $700 million of equity into the subsidiary, which Moody’s said is expected to be used to shore up liquidity and buy back some debt.

“The company’s business model, involving the hedging of its generation output and power purchase contracts through its retail customer base, is a logical one,” said Moody’s senior analyst Chetan Modi. “However, the company is currently encumbered with a number of long-term electricity purchase contracts that are out of the money.

“Additionally, with the collapse in wholesale generation prices and the high margins in the competitive supply business, the company has suffered higher than expected erosion of its retail customer base. These events have led to a significantly reduced operating cash flow this year and a weakened credit profile, which the company is looking to stabilize via the equity injection.”

TXU Europe is still negotiating with various counterparties to restructure contracts, and Modi noted that the final decisions on contract buy down and debt buy down have not yet been made. However, Modi wrote that “even after contract buy downs, the company will retain a significant out of money exposure to power purchase contracts. Should power prices remain at current low levels for a protracted period, pressure may again build on the company’s operational cash flow.”

Previously, Moody’s had assumed that TXU Corp. would provide “considerable support to the company should this prove necessary. This support has been evidenced in the [Great Britain Pound] GBP390 million equity already injected this year to help TXU Europe fund acquisitions, as well as the additional US$700 million that it is expected to provide. Going forward, Moody’s expects the parent to continue to remain supportive of TXU Europe’s strategy, as well as showing support through not requiring dividends.”

However, said Modi, Moody’s “believes that the parent is unlikely to provide additional equity, for example for further contract restructurings or debt buy backs.” The primary liquidity issues “concern contingent calls, in particular through the activation of its various rating triggers. Should the company’s senior unsecured ratings fall below investment grade from either Moody’s or another rating agency, a number of triggers may be invoked which could cause significant liquidity problems for the company and result in significantly lower ratings.”

Modi noted that TXU Europe’s commercial expectations are that “the immediate impact would be limited to approximately GBP110 million, notwithstanding the significantly greater amounts that might theoretically be called.

“Moody’s believes that the company is fully aware of the commercial and liquidity issues that it faces. It has announced a significant change in focus, cutting back on virtually all development expenditure in Europe, reducing other costs and focusing on initiatives to reduce the rate of customer attrition. The company has also indicated its intent to remove all rating triggers as soon as possible.”

Moody’s plans to monitor TXU Europe on its prospects for improvement in UK cash flow, as well as how it uses TXU Corp.’s $700 million equity infusion, and has kept the ratings on review for downgrade.

TXU Corp.’s senior unsecured rating was kept at “Baa3″ with a negative outlook, and Moody’s assumes that TXU Europe won’t impact U.S. operations.”This assumption is premised upon two factors: 1) that additional equity will not be sent from TXU Corp. to TXU Europe; and 2) that no further cross default or cross collateral language exists beyond that in the $500 million working capital facility available to TXU Corp.,” which it plans to remove as soon as possible.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.