TXU shares soared 13% Monday after it announced the sale of its Australian energy assets and its Texas midstream gas business for $4.2 billion. The two deals are among several transactions proposed in a major corporate restructuring orchestrated by new CEO John Wilder to put TXU back on solid financial ground.

TXU also will repurchase preferred shares and sell its Texas gas distribution and transmission business. In total, the restructuring program will cut its debt by 42%, or $5.8 billion. By comparison, TXU reduced debt by $1.8 billion last year.

Standard & Poor’s said the moves are “a strong statement of management’s commitment to solid investment-grade ratings.”

Wilder called the transactions a “good first step to unlock value and reduce risks.”

“The board said, ‘Get the company fixed,'” he said in explaining the rationale for the plan to reporters during a conference call. Wilder joined TXU in February after having served as Entergy Corp.’s CFO.

The largest transaction announced Monday is the sale of TXU Australia to Singapore Power for $3.72 billion. The deal results in a reduction of $1.7 billion in consolidated TXU debt and proceeds to TXU of $1.8 billion after taxes and transaction costs. It is expected to close in the third quarter, subject to regulatory approvals. The pre-tax gain related to the sale is expected to be $375 million.

Wilder said TXU determined that it was too difficult for management to run an international business that was 5,000 miles away. “We’re a local, kind of Texas-based company,” he said.

However, TXU also is getting out of many of its natural gas operations. It has agreed to sell the assets of TXU Fuel Co., the gas transportation subsidiary of TXU Energy with 1,900 miles of intrastate pipeline and a total system capacity of 1.3 Bcf/day, to Energy Transfer Partners LP for $502 million.

As part of the deal, TXU Energy will have an eight year transportation agreement with Energy Transfer to transport gas to TXU Energy’s generating assets. The assets, known as the TUFCO System, also serve 80 large volume gas customers in the state. The transaction is expected to close on June 1, subject to federal approval. The pre-tax gain related to the sale is expected to be $390 million recognized over eight years.

In addition, TXU announced plans to sell its TXU Gas Co. subsidiary, which includes regulated natural gas transmission and distribution operations in Texas. It expects the sale to at least draw the book value amount of $1.37 billion, excluding debt. The transaction is expected to be completed by the end of the year.

Wilder also said the company determined that mixing regulated gas and power operations simply didn’t produce the synergies TXU had expected.

Like many in the battle-scarred energy sector, TXU’s rebuilding program follows credit rating downgrades, a power supply glut, and a dividend cut. In 2002, TXU reported a net loss of $4.2 billion after the company wrote off its UK assets following a sale to German-based utility Powergen. Its European operations collapsed in late 2002 (see Daily GPI, Oct. 9, 2002; Oct. 15, 2002). Then last year the company sold its communications business.

The deals announced on Monday will support TXU’s plan to refocus on its core Texas power operations by leaving it with power generation and trading business TXU Energy and regulated energy delivery unit Oncor.

In total, TXU will receive $3.36 billion in net proceeds from the sales, and 2004 operational earnings are expected to be $1.85 per share, or a 14% reduction compared to 2004 earnings guidance of $2.15 per share. The discontinued operations treatment reclassifies out of operational earnings the full year results of TXU Australia and TXU Gas. The estimated full year impact would be $0.30 per share.

As part of this restructuring, TXU also announced plans to repurchase 100% of TXU Energy’s exchangeable preferred membership interests for $1.84 billion, eliminating $750 million of 9% securities and 57.1 million diluted common shares outstanding.

Guidance for income from continuing operations for 2004 is $1.74-1.84/share compared to Wall Street estimates of $2.00-2.28/share. However, its guidance for 2004 operational earnings increased to $2.45-2.55/share.

Income from continuing operations is expected to be 59 cents/share for the first quarter compared to Wall Street analysts’ estimates of 44 cents/share, the company said. TXU expects first quarter 2004 operational earnings of at least 60 cents per share, exceeding previous guidance of 45 cents per share.

TXU shares were up 13% Monday to $33.56. Paul B. Fremont, an analyst with Jefferies & Co., noted the company already has regained financial health. He also said TXU got a good price for its Australian business. “We see this as another in a series of positive steps.”

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