Credit analyst likes TXU equity injection, but concerns still linger

By Ronda Fears

Nashville, Nov. 26 - Carol Levenson, director of research at Gimme Credit, likes the effects of TXU Corp.'s stock offering Monday but said overall concerns about the company are far from being addressed.

"You don't want to turn your back on TXU Corp. (Baa3/BBB) for a minute," Levenson said in a report Tuesday, noting its drive-by equity offering that sent the stock down as much as 10%.

"But don't get us wrong. TXU's recent actions to improve its liquidity may have disappointed its stockholders because of potential dilution, but we believe they are imperative for this company to keep its head above water.

"We like the 'real' equity and the additional liquidity, but our fears are far from being laid to rest."

Even assuming TXU can make a clean break from TXU Europe, which is now in administration, the equivalent of bankruptcy, Levenson said the company's margin for error is pretty slender on the liquidity front.

After deconsolidating TXU Europe, at Sept. 30 TXU carried just $100 million in cash against $3.2 billion in short-term debt on its balance sheet and was maxed out on all its credit lines as of Nov. 5, excluding the new $1 billion secured facility at the Oncor level.

Not until recently, in its third quarter conference call and subsequent 10-Q filing, did TXU disclose the potential cash consequences of ratings downgrades at all levels of this complex company, the analyst said.

"Although the potential $800 million obligation for an Enron lookalike off-balance-sheet venture called Pinnacle was previously disclosed, the company also revealed another $900 million in possible cash calls if its TXU Energy subsidiary is downgraded below investment grade," Levenson said.

"In addition, as we suspected, TXU's accounts receivable program will terminate and wind down if ratings fall below investment grade. This will probably result in the obligation moving to TXU's balance sheet, but should alleviate most of the immediate cash consequences of a downgrade to BB."

TXU is working on removing the ratings triggers related to Pinnacle, and up until last week, TXU was relying mostly on its free cash flow to meet its maturity schedule.

"Now, with the private placement of $750 million in convertible securities [last week] and yesterday's proposed $450 million common equity issuance, the company's free cash flow projections have become slightly less crucial," Levenson said.

"This is a good thing, because we think it will take a remarkable turnaround to meet these projections."

In the first nine months, TXU's free cash flow was negative by $400 million, although it was slightly positive excluding TXU Europe. Cash flow from operations excluding TXU Europe was roughly $1 billion.

Yet, the analyst added, management projects TXU will generate cash flow of $2 billion to $2.2 billion from November through the end of 2003.

"TXU's quasi earnings warning yesterday, when management claimed they weren't giving earnings guidance but said EPS for 2003 would be closer to the low end of Street estimates, seemed to be prompted by the higher projected share count and not by fears of lower absolute earnings," Levenson said.

"Nevertheless, given the high proportion of unregulated businesses in TXU's portfolio and the regulatory transition in Texas, we'd rather not rely too much on earnings or cash flow predictability for the company to meet its liquidity needs."

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