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TXU, Allegheny Showing New Vigor

Two once-downtrodden energy stocks rebound as results show marked improvement.

The starvation diet is over for at least one energy company.

After trimming its sails through a tough industry downturn,



is now promising to strengthen its asset base and fatten its future earnings stream. The Texas-based utility plans to invest hundreds of millions of dollars into its current assets -- and even launch a new energy-trading venture -- as it powers back into growth mode. Already, the company is promising to increase operational profits by a whopping 60% next year alone.

Just ahead of an investor meeting on Tuesday, TXU issued 2005 earnings guidance of $3.75 to $4.25 per share. Before that, analysts were expecting profits of just $3.04 for the year.

TXU had already delighted investors earlier this month by growing first-quarter profits by 68% and toppling the consensus estimate.

The company's stock surged anew, rocketing 11% to $38.42, on the latest update. It has now almost fully recovered from its plunge to the $10 level in late 2002.

Priority Check

Following a "90-day review" of the company, debt reduction -- a top priority during TXU's lean period -- is now taking a back seat.

The company instead plans to spend most of its free cash flow to upgrade existing assets and invest in new opportunities. It will then use leftover cash to pay down debt and, by 2006, possibly increase the annual dividend.

For now, however, TXU is primarily focused on improving its service to customers "after falling short of desired service levels" last year. To assist with its efforts, TXU has joined forces with Capgemini in a partnership designed to enhance customer support services while creating operational efficiencies. Capgemini, which is investing $100 million in the venture, will own 97% of the partnership and assume control of 2,700 TXU employees. TXU expects to realize $175 million in annual cost savings from the arrangement next year.

In yet another partnership, TXU has strengthened its commitment to an energy-trading business that burned the entire industry during the merchant energy meltdown following


's collapse. TXU will partner with Credit Suisse First Boston in a 50/50 venture that will serve as the exclusive North American trading arm for both parties involved. In an arrangement like many sought -- but failed to secure -- during the industry downturn, TXU is lending the trading expertise and CSFB is the solid credit support to the joint venture.

TXU celebrated its ability to pursue growth, while reducing risk, through the new business. But CSFB clearly welcomed the deal as well.

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"Our proposed new investment with TXU fulfills one of the top priorities for CSFB, which is to enter the energy commodities trading markets with a top-flight physical energy producer," said James Healy, CSFB's global co-head of fixed income. "We are very excited about building this business with TXU, with our mutual goal for this new entity to become a leader in the industry."

TXU has found places to cut back elsewhere. Specifically, the company has decided that it needs only 20% of the 1.7 million square feet of office space it currently pays for. It is, therefore, hoping to consolidate its operations in a more efficient manner.

Going forward, TXU will operate as three core business segments -- one regulated and two unregulated divisions -- under current senior managers. Tom Baker will serve as CEO of the regulated electric delivery business. Mike Greene will manage the company's power assets. And Paul O'Malley will run the retail energy operations.

CFO Dan Farrell, who will now "play a vital role" in the Capgemini partnership, is being replaced by Treasurer Kirk Oliver.

John Wilder will remain as the company's CEO.

"We are excited about these initiatives and the other improvements identified in our 90-day plan," Wilder announced on Tuesday. "We are committed to improving customer service, reliability and safety, and we are targeting industry-leading performance levels."

Recovery Room


Allegheny Energy


continues to pull off a recovery of its own.

This month, the company announced that it had swung to a first-quarter profit, adopted new corporate governance measures and sold another asset to lower its debt burden. And the company promised further progress ahead.

"With the liquidity crises, trading losses and accounting challenges of the past two years substantially behind us, we can now focus on taking Allegheny to the next level," CEO Paul Evanson said at last week's annual meeting. "Our priorities are to strengthen our financial condition, build a high-performance organization and grow the fundamental earnings of the company."

Gimme Credit bond analyst Kimberly Noland, followed up on Tuesday by measuring the company's progress so far.

"Allegheny Energy's recent accomplishments are things that most companies perform without much ado: on-time financial statement filing, renegotiation of a secured bank loan at reasonable terms and the posting of a tiny quarterly profit," Noland wrote.

"But the utility has managed to stem cash outflows that almost sent it into bankruptcy and, despite continuing challenges, it appears to have stabilized operations."

Allegheny's stock, which fell below $3 in 2002, tacked on 1.1% to hit $13.49 on Tuesday.