Pinnacle One $810MM Issu Of Sr Sec Notes Rtd `BBB-' By Fitch.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 11, 2000

Fitch has assigned a `BBB-' credit rating to Pinnacle One Partners, LP/Pinnacle I, Inc.'s (Pinnacle One) $810 million issuance of 8.83% senior secured notes (notes) due 2004, issued and sold under Rule 144A.

Proceeds will be used to distribute cash to TXU Corp. (TXU) and fund an overfund account.

The support for the rating comes from an overfund account (pre-funded interest) and equity commitment from TXU. The overfund account will be invested in TXU debt securities (rated `BBB'), with payments used to service interest to noteholders. Fitch considers the cash flow stream to repay interest representative of a `BBB' credit profile. Payment of principal relies on the remarketing of TXU's mandatorily convertible preference securities. Fitch currently rates TXU's preference securities `BBB-'.

TXU Corp., through its wholly owned subsidiary TXU Communications (TXUC), is entering into a joint venture with a third-party investor to monetize its telecommunications investments. The new joint venture (Pinnacle One) will be a special-purpose Delaware-limited partnership, formed exclusively for the purpose of this transaction and restricted to activities of only holding its interests in TXU Communications Ventures (AssetCo) and an Overfund Trust.

The monetization of telecom assets will be funded through an $810 million issuance of senior secured notes backed by an equity commitment in the form of mandatorily convertible preference stock from TXU Corp. and a $150 million contribution from a third-party investor in exchange for a 50 percent ownership interest (Class A Common Equity Interest) in Pinnacle One. Meanwhile, TXU (through TXUC) will contribute telecommunication assets with a current market value of approximately $760 million to Pinnacle One in exchange for a cash distribution of approximately $600 million and a 50 percent equity interest (Class B). The remaining capital raised will be earmarked to pre-funded interest ($337 million) and pay transaction costs. These proceeds will be invested in TXU debt securities or higher- rated government securities, with semi-annual amortizing payments used to service interest to noteholders and the preferred yield to Class A interest holders (investor).

While multiple principal repayment sources are available, such as an Initial Public Offering (IPO), the sale of AssetCo or the sale of Pinnacle One's equity, noteholders should view TXU's support and equity commitment as the fundamental components of this transaction.

Upon a Note Trigger Event and subject to certain standstill periods, the Share Trustee will cause the remarketing of TXU Mandatorily Convertible Preference Stock on terms that are designed to generate an amount sufficient to redeem the notes in full. In the event that the issuance of the preference securities yields less than $810 million, under the Share Settlement Agreement, TXU is required to deliver additional shares until at least $810 million has been raised. If TXU cannot or does not deliver on this obligation, then the difference between $810 million and the amount raised becomes a payment obligation to TXU. This obligation would represent a general unsecured claim of TXU.

The issuance of additional shares to make noteholders whole in a downside scenario includes the following trigger events: an event of default on the Pinnacle One notes occurs and notes are accelerated; 120 days prior to maturity on Pinnacle One notes if amounts sufficient for 100 percent principal repayment have not been received by the trustee as a result of the sale of TXU equity or other equity (which may include the mandatorily convertible preference stock); downgrade of TXU's senior unsecured debt below `BB+/ Ba1' by Fitch, S&P or Moody's; and a decline in TXU's stock price by 30 percent over three consecutive days prior to the date of pricing of the notes (based on the average ten day closing price).

Additional security for the notes is in the form of TXU's telecom portfolio (equity interest in AssetCo). If an event of default occurs and notes are accelerated and a 120-day standstill period has passed, at the direction of at least 25% of the then outstanding principal amount of the notes, Pinnacle One noteholders may force the sale of the telecommunications assets. Importantly, the ultimate net proceeds from the sale will vary depending on the price received less any debt obligations held at the operating companies (under AssetCo, including the revolver). Initially, TXU will act as a lender to assist with the telecom growth strategy, establishing a $200 million revolver (between TXU and AssetCo) to fund working capital needs, capital expenditures and any modest acquisitions.

This transaction provides TXU with an efficient vehicle to monetize its telecom portfolio, effectively accelerate the process for capital redeployment and de-consolidate TXUC, while maintaining flexibility for future telecom growth. Besides supporting TXU's telecommunications growth strategy, the joint venture financing structure provides a modest enhancement to the credit quality of TXU. Proceeds from this issuance (Pinnacle One) will be used to reduce TXU's outstandings under its commercial paper program, thus improving short-term financial flexibility and lowering debt levels (reducing debt/capital ratio by 1 percent to approximately 61 percent). Fitch does not expect the success/failure of TXU's telecommunication activities to materially impact TXU's consolidated credit quality. Currently, the telecommunication business represents a small portion of TXU's asset portfolio and provides minimal contribution to consolidated cash flows.

TXU is a holding company whose credit support is primarily derived from the strong cash flow and healthy credit profile of its subsidiaries TXU Electric (rated `A-' on a senior secured basis) and TXU Europe (rated `BBB+' on a senior unsecured basis). Other strengths include a geographically diverse mix of utilities businesses, more than $40 billion in assets globally, and substantial customer franchises in Texas, UK and Australia. While TXU's capital structure has been stable over the last two years, parent company leverage and consolidated financial ratios are weaker than other `BBB' rated peers.

TXU currently provides telecommunications services, which include telephone, telecom and transport businesses, through its wholly owned subsidiary, TXUC. Services being offered by TXUC include local, long distance, cellular, paging, Internet access, web hosting and development, and network and data services. Additionally, TXUC leases out capacity on its fiber-optic network to other communications carriers as well as TXU. Management believes the company is well positioned to capitalize on telecommunication growth opportunities specifically in Texas. One of the strategies the company is pursuing is to leverage the significant customer base and name recognition associated with the energy business (sister companies). This relationship should provide TXUC with many cross-selling opportunities including the bundling of energy and telecom services. TXUC expects its growth in Texas to be diversified, with a focus on building the transport and telecom businesses. TXUC plans to build customer share in the top 20 Texas markets, with heavy emphasis on small-to-medium business customers.

Based on current industry multiples, the business (whose primary operations consist of two incumbent local exchange carriers and a CLEC) has an implied equity market valuation of approximately $760 million. TXU anticipates that this business will experience a significant increase of market value over the next few years as its competitive communications business grows.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Corporates, Structured Finance, Insurance, Sovereigns and Public Finance Markets worldwide.