TXU Corp.’s exit from Europe last fall pushed the Dallas-based utility to huge fourth quarter losses, with the write off of $4.2 billion on its failed investments overseas. However, management said it would “aggressively” refocus on North American and Australian assets going forward, estimating its growth “beyond” 2003 would be in the range of 4-6%.

TXU posted a net loss of $4.88 billion (minus $16.44/share), compared with a net loss of $76 million (minus 29 cents) for 4Q01. Besides its charges for discontinuing European operations, TXU’s disclosure Wednesday also included a $328 million charge to write off projects and telecommunications investments, a write off of $134 million for regulatory assets, and a write off of $120 million to restructure under Texas electricity market.

Excluding all of its extraordinary charges, TXU still lost $72 million (minus 24 cents) in the quarter, compared with earnings of $72 million (27 cents) the year before. Thomson First Call analysts were estimating fourth quarter earnings of 27 cents a share, excluding the charges.

CEO Erle Nye, who presided over Wednesday’s conference call with analysts and investors, called the losses in Europe a “tragedy” for the company.

CreditSights analysts Dot Matthews and Andy DeVries said last week that TXU’s operating losses were “disappointing and a bad sign to us.” Calling TXU’s earnings news a “nightmare,” they that the report was “more dismal than we expected.” Not surprised by the TXU Europe write offs, the analysts were more concerned about the other problems with TXU’s latest earnings report. “We were caught off guard, however, by the Q4 operating loss. We have concerns about the nonregulated businesses in Texas and the possible $1 billion in collateral that might be required on further downgrades.”

The analysts believe that a one-notch downgrade by Standard & Poor’s Ratings Service is “likely,” and another drop by Moody’s Investor Services it “not out of the question.” They added, “we would not buy TXU or [subsidiary] Oncor paper at this time, and would consider taking profits in Oncor and lightening up on other TXU paper.”

Last year was an expensive one in several ways for TXU, which had to contend not only with its pathetic European operations, but also increased expenses associated with opening the Texas market to customer choice. However, TXU said some charges were offset by “outstanding” results in Australia, an increased contribution from its North America Energy Delivery business and reduced interest expenses within its Corporate unit. It also has begun several initiatives to reduce expenses “substantially” in 2003, officials said. TXU closed 2002 with more than $2 billion of available liquidity, including approximately $1.6 billion of cash. Net debt to capital was 58%.

Broken down, TXU’s North America Energy segment delivered $536 million of net income in 2002, excluding unusual items, for its generation, portfolio management and retail operations, which are primarily in Texas. Because many of the 2002 expenses will not be repeated this year, TXU said that its contributions from the segment in 2003 are “expected to improve substantially.”

The North America Energy Delivery segment provided $252 million of net income in 2002, excluding unusual items. This segment includes the electric transmission and distribution assets, as well as the company’s natural gas pipeline and distribution business. Segment results reflected strong customer and usage growth in the North Texas area.

Electric delivery results improved, reflecting earnings at or near regulatory authorized levels. Natural gas delivery results also improved, primarily due to increased customer and usage growth, enhanced pipeline revenues and the discontinued goodwill amortization. For 2003, TXU expects this segment to be down slightly because growth is likely to be outweighed by other business expenses and refinancing short-term debt.

Net income contribution from Australia was $74 million in 2002. This year, however, results are expected to be slightly lower because of a mandated 4% decrease in ex-franchise small consumer electricity rates implemented in January 2003, offsetting anticipated continued cost control and customer and sales growth.

With its disappointing European performance behind it, TXU officials said Wednesday they wanted now to concentrate on the future operations, which will be centered in North America and Australia. This year, TXU estimates it will earn between $1.95 and $2.05 a share. Initial expectations for earnings growth beyond this year are 4-6%, the company said. Net income by segment for 2003 is estimated to be $600-$630 million for North America Energy; $230-$240 million for North America Energy Delivery; $65 million for Australia; less net costs at Corporate of approximately $205 million.

Customer and usage growth are expected to drive earnings this year at TXU, which also expects to have reduced operating costs, increased retail electricity prices, increased rates for natural gas distribution to reflect investment, and reduced debt.

However, TXU expects its results to be offset by the increased number of shares outstanding, increased pension and benefits costs, increased natural gas prices and customer switching costs.

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