U.S. News

TXU Fourth-Quarter Profit Up 33%


In what could be its last annual earnings report as a publicly-traded company, utility TXU said Tuesday that its fourth-quarter profit rose 33% despite weak revenue that the company blamed on mild winter weather and lost customers.

Electronic Arts Headquarters, Redwood City, California

TXU, which announced Monday it has agreed to be acquired for about $32 billion in the largest private buyout ever, said it earned $475 million, or $1.03 a share in the last quarter, compared to $356 million, or 74 cents a share, a year earlier.

Excluding what TXU termed one-time charges, the company said it would have earned $1.21 a share. Analysts, who usually exclude those items from their estimates, had predicted TXU would earn $1.20 a share.

Operating revenue fell to $2.04 billion from $2.46 billion. TXU said it reduced operating costs to offset weak sales.

For all of 2006, TXU said it earned $2.55 billion, or $5.46 a share, up from $1.71 billion, or $2.50 per share, in 2005.

TXU's board has approved a $69.25 per share buyout led by Kohlberg Kravis Roberts and Texas Pacific Group. The buyers would also assume more than $12 billion in debt. Shareholders and federal regulators would have to approve the sale.

Announcement of the deal sent TXU shares soaring Monday, and briefly reached a 52-week high of $68.45. Shares slipped on Tuesday.

TXU is the state's largest producer of electricity, serving about 2.2 million customers and also selling power on the wholesale market.

The company is strongest in the Dallas-Fort Worth area, where it was once the monopoly utility for electricity and natural gas. Although it has lost some customers since deregulation began in 2002, it has kept enough of them to recover from a $4.2 billion loss that year to earn $1.72 billion in 2005, and analysts expect that 2006 was even better.

The company has been helped by high rates in Texas -- 12.15 cents per kilowatt hour for residential customers, compared with the national average of $10.22 in November, according to the Energy Department.

"It's been a terrific market in Texas," said James Smith, an energy professor at Southern Methodist University in Dallas, who said residential customers often pay higher rates simply because they don't compare the rates charged by different companies.

"If you're not shopping carefully, the companies will charge what they can," he said. "It's the same thing for T-bone steaks."

The price gap in Texas is much smaller for commercial customers, who are more likely to switch electric companies to get a lower rate.

Wary of a possible consumer backlash, buyers -- who also include Goldman Sachs, Lehman Brothers, Citigroup and Morgan Stanley -- said they would cut residential rates 10 percent and freeze them until September 2008 if they get control of TXU.

State Rep. Sylvester Turner said he worried that private buyers will resell the company for a profit, resulting eventually in higher bills that would wipe out the rate freeze.

Michael MacDougall, a principal at Texas Pacific, insisted that the buyers are in for the long haul.

"We're investing in rate cuts and price protection to move along the competitive market for retail electricity in Texas," MacDougall said.

The buyers also promised to drop plans for eight proposed coal-burning plants that were opposed by environmentalists and city leaders in Dallas and Houston.

They will, however, try to go ahead with three other coal-fired plants proposed for central Texas.

The proposal appeared to be splitting the environmental camp, with two prominent groups -- Environmental Defense and the Natural Resources Defense Council -- supporting what their leaders called a compromise, while the Public Citizen vowed to fight all 11 coal plants.

Another source of agitation over the buyout could come from TXU bondholders.

Fitch Ratings downgraded TXU's credit to junk status on Monday, and Moody's Investors Service and Standard & Poor's warned they could also cut ratings for TXU units. The agencies warned that TXU was likely to take on much more debt to finance the sale.

MacDougall said the buyers would not add debt to TXU's regulated transmission business.

TXU officials said the deal must win approval from the federal nuclear regulators, the Federal Communications Commission (TXU is planning to sell high speed Internet over power lines) and the Federal Energy Regulatory Commission.

A spokesman for the energy agency said it wasn't clear whether it would review the deal. That's because utilities belonging to the agency that runs the power grid in most of Texas aren't subject to federal oversight.