Fitch Downgrades TXU's IDR to 'B', Various Actions on Subs; Outlook Stable.

NEW YORK -- Fitch has downgraded the long-term issuer default (IDR) rating of TXU Corp. (TXU) to 'B' from 'BB+' and has taken various rating actions on TXU subsidiaries. The ratings actions reflect the financial structure that will be put in effect to fund the pending acquisition of TXU Corp. in a leveraged transaction. The IDR of Texas Competitive Electric Holdings, LLC (TCEH) is also downgraded to 'B' from 'BBB-'. The IDR of TXU's regulated transmission and distribution utility subsidiary, Oncor Electric Delivery (Oncor) is affirmed at 'BBB-' as a result of the ring-fencing mechanisms that provides a reasonable measure of insulation to Oncor from the rest of the TXU group. However, the senior unsecured rating of Oncor was lowered by one notch to 'BBB-' as a result of management's intent to convert the substantial majority of Oncor's existing unsecured debt to secured debt. The Rating Watch Negative is removed from all TXU group issuers and the Rating Outlook is Stable for TXU, Oncor and TCEH. Approximately $47 billion of debt and credit facilities are affected by today's ratings actions.

The downgrade of TXU and its indirect subsidiary (TCEH) to 'B' reflects the significant debt leverage and weak cash flow coverage ratios that will result from completion of the LBO merger transaction that is scheduled to close on October 10, 2007. TXU is being acquired for approximately $46 billion by a limited partner sponsor group lead by affiliates of Kohlberg, Kravis and Roberts (KKR) and Texas Pacific Group (TPC).

The significant amounts of debt that will result from closing of the LBO and aggressive financial strategy are Fitch's most significant rating concerns. The consolidated ratio of (FFO + Interest)/Interest is forecasted to be approximately 1.4 times (x) as of Dec. 31, 2008, with consolidated debt forecasted at more than 8:1 x trailing 12 months EBITDA at that date. Additional rating concerns include: the risk of retail customer loss or margin reduction; construction risk related to three new lignite plants; commodity price fluctuations to the extent not covered by financial hedges, and risks associated with any adverse changes in the Texas retail or wholesale electric market structure or environmental regulation. Although much of the price risk associated with the expected energy output of baseload generation units is hedged through forward sales of natural gas for the next five years, TCEH retains some commodity price risk associated with the use of gas derivatives to hedge electric power output and fluctuation in the market implied heat rate. Electricity prices in TCEH's market are largely driven by natural gas prices because of the dependence on gas-fired generation. On balance, TXU's business portfolio benefits from high prices; however, in Fitch's view, continuation of high and volatile power prices would increase the risk that politicians may become pressured to pass laws to cap rates or change the market structure.

Post-merger liquidity of TXU and TCEH is considered satisfactory. There is a considerable amount of availability under various long term secured credit facilities at TCEH that may be drawn to supplement internal cash flow. In addition, the pay-in-kind toggle feature of the new TCEH and TXU notes can be utilized to preserve liquidity. TCEH will have approximately $3.95 billion of committed revolving and letter of credit facility availability at closing and also will have a collateral facility to provide 'right-way' collateral support for certain hedge transactions with no dollar cap. In addition, there will be approximately $2.0 billion of availability under the $4.1 billion delayed draw term loan for funding construction costs of the three lignite units that are scheduled to enter commercial operation in 2009 and 2010 as well as environmental compliance investments.

TXU's ratings are supported by: ownership of lignite and nuclear base-load generation assets in the tightening Electric Reliability Council of Texas (ERCOT) market where prices are set by natural gas for approximately 90% of the hours each year: strong wholesale generation and utility operations; above average growth of the market; and the cash flow stability of the regulated transmission and distribution (T&D) operations. Fitch anticipates a continued tightening of capacity reserve margins in Texas, which is favorable for cash flow prospects. The ownership of lignite reserves and mine-mouth production assure relatively stable and low unit costs of production and limit TCEH's dependence on long-distance transportation of fuels.

The individual issue ratings at TXU and TCEH are notched above or below the 'B' IDR of these issuers as a result of their relative recovery prospects based on an enterprise valuation in a hypothetical default scenario. Individual plant valuations were derived using Fitch's wholesale power market model verified by comparison with transaction values per unit of capacity in transactions. The valuations of Oncor and the retail business were based on a stressed EBITDA multiple. Fitch used conservative valuation assumptions for the retail electric provider (Retail) business given the limited history, intense competition, lack of comparable transactions, and weak earnings history of Retail.

Even under Fitch's below-market energy pricing assumptions, ($6 natural gas price) the senior secured credit facilities at TCEH have outstanding recovery prospects and as a result the senior secured issues are rated 'BB', three notches above the IDR. The new unsecured notes at TXU are rated 'B+', indicating above-average recovery prospects, which results from indirect ownership of Oncor's equity and the relatively stable enterprise value of that business. As a result of their respective guarantees, the new unsecured cash-pay and PIK toggle notes at TXU and TCEH are relatively superior to the unsecured debt without guarantees incurred by these issuers prior to the LBO. Consequently, issue ratings for those outstanding issues without guarantees have been profoundly downgraded, reflecting their low recovery prospects in a Fitch's default scenario.

The 'BBB-' IDR of Oncor reflects its investment grade standalone credit metrics. Oncor and its owners will implement several ring-fencing mechanisms to insulate Oncor from the rest of the TXU group. In Fitch's hypothetical TXU default scenario, Fitch did not presume an Oncor default. Oncor creditors would obtain full recovery and the residual equity value would enhance the recovery prospects of TXU creditors. The ring-fencing stems from management policies, regulatory ring-fencing initiatives that are incorporated in a settlement agreement filed with the Public Utilities Commission of Texas, and covenants in Oncor's new $2 billion revolving credit facility. While the ring-fencing is considered sufficient to retain investment grade ratings, it is imperfect; rating linkage stems from shared tax filings, pension, operational linkage and counter-party accounts receivable risk.

New Ratings:

TXU Corp:

--New senior unsecured debt (guaranteed) 'B+'/RR3.

Texas Competitive Electric Holdings (formerly known as TXU Energy Co LLC):

--Various senior secured facilities 'BB/RR1';

--New senior unsecured debt (guaranteed) 'B+/RR3'.

Oncor Electric Delivery Company (formerly known as TXU Electric Delivery Co)

--Secured bank facility and secured notes 'BBB'.

Fitch has downgraded the following ratings:

TXU Corp.

--IDR to 'B' from 'BB+';

--Senior unsecured debt to 'CCC+'/RR6 from 'BB+' (non-guaranteed).

TXU US Holdings Inc.

--IDR to 'B' from 'BB+';

--Secured debt to 'CCC+/RR6' from 'BB+'

--Unsecured debt to 'CCC+'/RR6 from 'BB+'.

Texas Competitive Electric Holdings (formerly known as TXU Energy Co LLC)

--IDR to 'B' from 'BBB-';

--Senior unsecured debt (non-guaranteed) consisting of various pollution control bonds issued by the Brazos River Authority (TX), Sabine River Authority (TX), and Trinity River Authority (TX) for TXU projects to 'B-/RR5' from 'BBB-';

Oncor Electric Delivery Company (formerly known as TXU Electric Delivery Co)

--Senior unsecured notes to 'BBB-' from 'BBB'

Fitch has affirmed the following ratings:

Oncor Electric Delivery Company (formerly known as TXU Electric Delivery Co)

--Long term IDR affirmed at 'BBB-';

--Short term IDR affirmed at 'F3'.

The following ratings have been withdrawn:

TXU Corp:

--Commercial Paper/Short term IDR 'B'.

Texas Competitive Electric Holdings

--Short-term rating downgraded to 'B' from 'F3' and withdrawn.

Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.