Fitch Places TXU Gas on Rating Watch Evolving; Affirms TXU & Subsidiaries

Business Wire,  April 26, 2004  

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Business Editors

NEW YORK--(BUSINESS WIRE)--April 26, 2004

Fitch Ratings has placed the 'BBB-' senior unsecured debt rating of TXU Gas Co. on Rating Watch Evolving and affirmed the senior unsecured ratings of TXU Corp. at 'BBB-' and of TXU Energy Co. LLC at 'BBB'. The Rating Outlook for TXU Corp and TXU Energy Co. LLC is Stable. The rating actions follow TXU Corp.'s announcement of an agreement to sell TXU Australia and the assets of TXU Fuel Company and its intention to sell TXU Gas Company. Ratings for the Australian subsidiaries are detailed in a companion press release, which will be published later today.

TXU has agreed to sell TXU Australia Holdings to Singapore Power Co for $3.7 billion and the assets of TXU Fuel Company to Energy Transfer Partners for $502 million. Additionally, TXU Corp announced its plans to put up for sale TXU Gas Company. The sale of Australia assets and TXU Gas are subject to execution risk. Both transactions require regulatory approval and a definitive buyer for TXU Gas has not been identified.

TXU Corp's senior unsecured rating of 'BBB-' assumed a decrease in consolidated leverage from a partial sale of the Australian assets and other sources of cash including the proceeds of TXU's Oncor Electric Delivery's issuance of $800 million in stranded asset securitization bonds in 2004. The transactions, signed and potential, announced today, if completed, should improve the credit profile of TXU Corp., as Fitch expects that some portion of the proceeds from the entire restructuring plan will be used to pay down debt at the parent.

Although consolidated debt will be reduced with the assumption of US$1.7 billion in subsidiary level debt in Australia, consolidated leverage will not immediately improve given the deconsolidation of Australian cash flows. In addition, the cash proceeds received by the parent from the Australian sale will be deployed to redeem convertible securities treated as equity in Fitch's analysis (and thus in a manner which does not reduce parent company leverage). Other funds -- including additional divestments and securitization proceeds -- are still anticipated to delever the parent company. The parent company had also not benefited from cash dividends from the Australian operations, and Fitch had not included any dividend flow in its parent company projections, thus Fitch's expectations for the parent company profile are largely unchanged by the Australian disposal. On a consolidated basis, TXU's leverage remains high for the ratings category with debt-to-EBITDA at 5.1 times (x) for the twelve months-ending Dec. 31, 2003, although the group credit profile continues to benefit from the strong cash flow streams generated by its regulated and non-regulated electric and gas operations in Texas.

The ratings of TXU Gas take into consideration the company's business risk profile as a regulated gas distribution company and adequate cash flow. Credit concerns relate to the company's high albeit declining leverage and the delays and uncertainties created by a regulatory process that has required the company to apply for delivery rate changes with almost each municipality in which it operates in addition to state wide approval from the Texas Railroad Commission for gas commodity pricing. The company's ratings has historically been strongly linked to the credit quality of the parent, TXU Corp., especially as Gas has no credit facilities and is reliant upon the system money pool for short term financings. The Rating Watch Evolving indicates the possibility that a change in ownership may lead to a (potentially material) change in credit quality in either a positive or negative direction.

TXU Corp. is a holding company that is engaged in the generation, delivery and sale of electricity to both the wholesale and retail customers, as well as the sale and delivery of natural gas in the US, primarily in Texas. The company is also engaged in the generation, distribution and sale of electricity, and the sale and distribution of natural gas in Australia.

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