Taking into account TXU Corp.’s already high leverage and the added debt burden from its newest financial deals, Fitch Ratings and Moody’s Investors Service downgraded the Dallas utility giant and its subsidiaries on Friday. However, Fitch revised the outlook to “stable” from “negative”; Moody’s kept its “negative” outlook. Standard & Poor’s Ratings Services (S&P), meanwhile, praised TXU’s fast action to bulk up its liquidity, and the credit analysts believe the company has adequate liquidity for any problems that may arise in 2003.

In revising its outlook on the company to stable, Fitch said that TXU had “sufficient liquidity to meet expected refinancing and potential collateral requirements,” which resulted from the “painful but necessary decision to terminate support for TXU Europe.” Fitch’s stable rating also factors in the ratings agency’s view that the corporate parent will not have a material liability for its European obligations.

“Ample liquidity has been put in place to meet and exceed all anticipated needs of the parent and U.S. affiliates,” said Fitch. “Management estimates that collateral for contractual counterparties would be on the order of $635 million if TXU Energy were downgraded by any one or two rating agencies to below investment grade and $905 million in the event of such action by all three rating agencies. A substantial portion of the collateral relates to non-trading obligations, including leases and long-term power contracts that are not sensitive to commodity price risk.”

Analysts noted that even with a downgrade of TXU Corp. to below investment grade by any one agency to the equivalent of “BB” or lower, which in turn would allow a put of $810 million of notes of subsidiary Pinnacle One Partners, the parent would still have enough liquidity to meet the needs with a $200 million cushion. “TXU management forecasts indicate that additional liquidity, derived from operating cash flow and tax rebates, will be sufficient to cover maturities in 2003, in the event that refunding or remarketing is not possible for any units other than [subsidiary] Oncor.”

Higher ratings for TXU and its affiliates could result following the company’s “ability to reduce consolidated debt and leverage measures during 2003-2004; sustained improvement in operating performance of TXU Gas and TXU Australia; and stable operating performance and margins continuing at TXU Energy despite the constrained credit and business environment. Ratings could be lowered from the current level in the event of substantial, unanticipated erosion in TXU Energy’s margins, possibly as a result of more aggressive price competition evolving in the retail supply market, or unexpected liability for material obligations of TXU Europe.”

Moody’s also downgraded the company on Friday and kept its outlook on TXU Corp. and TXU Gas at negative, while moving Oncor, TXU Energy and TXU U.S. Holdings to stable. The TXU Australia unit also was kept at negative. It downgraded the secured ratings for Oncor to “Baa1” from “A3,” and lowered to “Ba1” from “Baa3” the senior unsecured rating of TXU Corp. and Pinnacle to “Ba2.”

Despite the downgrades, Moody’s said it made note of “management’s intent to focus on debt repayment at the holding company over the medium term. In addition, the liquidity situation throughout the system is reasonable.”

Meanwhile, S&P was upbeat in its description of TXU’s ability to “move quickly” to strengthen its balance sheet and liquidity. Analyst Judith Waite noted that TXU has placed $750 million of its convertible preferred stock and sold $516 million of common stock to pay down debt and improve its liquidity. The added leverage will be “skewed” by the $4.2 billion write-off for TXU Europe, “offset somewhat” by its European debt deconsolidation, Waite said, adding that as the company’s convertible debt and convertible preferred stock become common equity, and $1.3 billion of debt is repaid, “the capital structure is expected to come into line with targets” for the current credit rating of “BBB.”

More important, she said, “TXU’s management is taking significant steps to assure adequate liquidity.” The $1 billion back-up facility at Oncor is providing secured loans to service debt in the event that Oncor is unable to refinance any of its $700 million first mortgage bonds maturing in the next six months. She said they also have begun talks on renewing a $1 billion bank facility that expires in April 2003, which also has a one-year term-out. A $1.4 billion facility matures in February 2005, and a $500 million facility matures in May 2005.

On Nov. 1, 2002, TXU had $1.5 billion in cash available, as well as another $300 million in the Oncor facility for general purposes. Waite said that TXU expects to have more than $2.5 billion available for “most” of 2003. The company’s U.S. operations produce about $1.5 billion annually in cash, and of that, about $700 million is available cash flow “after required capital spending and significantly reduced dividends,” said Waite. “This cash cushion would be large enough to cover all potential additional obligations if any debt triggers were tripped.”

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