TXU Corp., which so far had remained unscathed in either rumor, innuendo or loss of investor confidence, saw the lights dim Friday after drastically revising downward its earnings forecasts through 2003. By midday, credit ratings agencies were re-evaluating the company’s operations, and investors were selling off their stocks in record numbers.

TXU CEO Eric Nye told analysts during a Friday morning conference call that the company and its European subsidiaries had become “victims of undue optimism,” announcing that all of its project development in Europe has been stopped amid plunging UK electricity prices. TXU now estimates third-quarter earnings, which will be officially released on Wednesday, will be off more than 25% and warned fourth-quarter profits also will be lower than first forecast.

“As we’ve looked into what happened there, it seems to me that the planning process, which includes the budgeting process, was deficient,” Nye said. He said it’s likely the company will be selling off some of its European assets and pulling back from a region in which it has made a strong investment in the past few years. TXU entered the European market in 1998.

TXU also is considering some reductions in its workforce that could affect all of its business units, and as many as 200 could lose their jobs overseas, according to a TXU spokesman. However, when the cuts will be made and where had not yet been determined.

Investors responded as expected in midday trading, with the company’s stock value falling to its lowest level in more than a year to $27.82, a loss of more than $5. More than 12 million shares had exchanged hands by noon; average daily trading is about 2.18 million shares.

For the third quarter, TXU expects earnings per share (EPS) to range between 90-95 cents, drastically off its end-of-July prediction of $1.55-$1.65. Wall Street had expected earnings to average $1.54 a share. The fourth quarter will fare no better, with EPS forecast now between 60-65 cents, a huge drop from a previous forecast of $1.05-$1.10. Analysts were estimating an average 99 cents EPS.

For the year, TXU expects EPS to fall between $3.20 to $3.25, off more than a dollar in its earlier forecast of $4.35 and $4.45 EPS. Analysts had forecast average earnings for the year of $4.31 a share. TXU also expects to earn more than a dollar less than earlier forecasts for 2003, with new estimates of $3.45-$3.55 a share, down from its earlier prediction of $4/.80-$4.90. Next year, analysts had predicted TXU would earn about $4.66 EPS. The adjustment to expectations, said TXU, “is driven by the effect of pressures from continued low wholesale prices and aggressive retail competition in the United Kingdom.”

Nye added the “depth and length of the depression of wholesale electricity prices in the UK power markets have resulted in intense retail competition that has continued to erode margins. We have put an aggressive plan in place to address this pressure. We will focus on enhancing retail margins, especially with our in-territory customers, ceasing development activities in Europe, restructuring the business and taking out costs accordingly, and restructuring purchase power contracts and physical generation positions.”

He said the company’s Texas and Australian operations were performing well. “We continue to compete effectively in the Australia and Texas markets and the implementation of the increase in retail electricity rates (known as Price to Beat) in our historic territory in Texas further improves margins that had been pressured by increased gas prices.” Noting he was “very disappointed with these results,” Nye added that he remained convinced that TXU was on the right path in terms of strategy and its business model.

CFO Mike McNally noted TXU’s liquidity and cash flows “remain strong with cash flows from operations targeted for 2002 at $2 billion and for 2003 at $2.3 billion. This will provide ample funding for the strong dividend, continued debt reduction, and capital expenditures. Currently, TXU has $6.4 billion of bank facilities that have over $2.6 billion of unused capacity.”

Following the revised forecast, Credit Suisse First Boston (CSFB) analysts, led by Curt Launer, said the news was “worse than expected” by the market. “We expect the significant decline in TXU recently to continue on this news because as recently as Sept. ’02, TXU maintained its previous guidance and expected third quarter ’02 EPS of $1.60.” The analysts said that their analysis “detected earnings risks at TXU…but we were far short in the magnitude of the issues as indicated.”

CSFB said, “we have also identified balance sheet risk for TXU, in light of $700 million at risk in UK power renegotiations and previously ‘unfunded’ acquisitions that shows an additional $1 billion in common equity reduces TXU EPS by about $0.15 per share.” Pending further information from the company, the analysts reduced their 2002 estimate on the company to $3.25 from $4.45, and next year, to $3.50 from $4.90.

Morgan Stanley analysts also dropped their estimates on the Dallas-based utility for 2003 to $4.05 from $4.80. “While the core Texas operations remain attractive, the UK situation now looks like a bridge too far for TXU. The structural weaknesses in the bearish commodity market are rapidly eroding earnings in the UK. Any restructuring there might involve significant capital injection from the parent,” analysts noted. Merrill Lynch analysts also downgraded the company to “neutral” from “buy.”

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