<Page>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------
Commission File Number 1-11668
TXU ELECTRIC COMPANY
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK OUTSTANDING AT AUGUST 8, 2001: 58,802,600 shares, without par
value.
================================================================================
<Page>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<Table>
<Caption>
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Income and Comprehensive Income -
Three and Six Months Ended June 30, 2001 and 2000........................ 1
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2001 and 2000.................................. 2
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000...................................... 3
Notes to Financial Statements............................................ 4
Independent Accountants' Report.......................................... 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................... 15
SIGNATURE....................................................................................... 16
</Table>
(i)
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
MILLIONS OF DOLLARS
Operating revenues................................................... $1,930 $1,684 $3,758 $3,035
------ ------ ------ ------
Operating expenses
Energy purchased for resale and fuel consumed................... 806 684 1,663 1,118
Operation and maintenance....................................... 375 327 708 638
Depreciation and amortization................................... 153 151 308 303
Income taxes.................................................... 110 94 179 152
Taxes other than income......................................... 151 130 298 264
------ ------ ------ ------
Total operating expenses.................................. 1,595 1,386 3,156 2,475
------ ------ ------ ------
Operating income..................................................... 335 298 602 560
Other income (deductions)
Allowance for equity funds used during construction............. 1 2 2 3
Other income (deductions) -- net................................ (5) (5) (8) (8)
Income tax benefit (expense).................................... 3 7 3 (1)
------ ------ ------ ------
Total other income (deductions)........................... (1) 4 (3) (6)
------ ------ ------ ------
Income before interest and other charges............................. 334 302 599 554
------ ------ ------ ------
Interest income...................................................... -- -- -- 1
Interest expense and other charges
Interest........................................................ 93 99 184 189
Distributions on TXU Electric Company obligated, mandatorily
redeemable, preferred securities of subsidiary trusts holding
solely junior subordinated debentures of TXU Electric Company. 17 17 34 34
Allowance for borrowed funds used during construction and
capitalized interest.......................................... (4) (2) (7) (4)
------ ------ ------ ------
Total interest expense and other charges.................. 106 114 211 219
------ ------ ------ ------
Net income .......................................................... 228 188 388 336
Preferred stock dividends............................................ 3 2 5 5
------ ------ ------ ------
Net income available for common stock................................ $ 225 $ 186 $ 383 $ 331
====== ====== ====== ======
</Table>
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
MILLIONS OF DOLLARS
Net income........................................................... $ 228 $ 188 $ 388 $ 336
----- ----- ----- -----
Other comprehensive loss --
Net change during period, net of tax effects:
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001..... -- -- -- --
Net change in fair value of derivatives.................... (1) -- (2) --
----- ----- ----- -----
Total.................................................. (1) -- (2) --
----- ----- ----- -----
Comprehensive income................................................. $ 227 $ 188 $ 386 $ 336
===== ===== ===== =====
</Table>
See Notes to Financial Statements.
1
<Page>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2001 2000
---- ----
MILLIONS OF DOLLARS
Cash flows -- operating activities
Net income..................................................................... $ 388 $ 336
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization................................................ 349 363
Deferred income taxes and investment tax credits -- net ..................... (5) 5
Reduction in revenues for earnings in excess of earnings cap................. 23 100
Changes in operating assets and liabilities.................................. (254) 81
----- -----
Cash provided by operating activities.................................. 501 885
----- -----
Cash flows -- financing activities
Issuances of long-term debt.................................................... 121 14
Retirements/repurchases of securities:
Long-term debt............................................................... (153) (110)
Common stock................................................................. (420) (372)
Change in notes payable -- affiliates.......................................... 385 (32)
Preferred stock dividends paid................................................. (5) (5)
Debt premium, discount, financing and reacquisition expenses................... (10) (3)
----- -----
Cash used in financing activities...................................... (82) (508)
----- -----
Cash flows -- investing activities
Capital expenditures........................................................... (409) (318)
Nuclear fuel .................................................................. (11) (38)
Other.......................................................................... (11) (10)
----- -----
Cash used in investing activities...................................... (431) (366)
----- -----
Net change in cash and cash equivalents.......................................... (12) 11
Cash and cash equivalents -- beginning balance................................... 21 4
----- -----
Cash and cash equivalents -- ending balance...................................... $ 9 $ 15
===== =====
</Table>
See Notes to Financial Statements.
2
<Page>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------- -----------
ASSETS MILLIONS OF DOLLARS
Current assets:
Cash and cash equivalents........................................................... $ 9 $ 21
Accounts receivable................................................................. 383 287
Inventories -- at average cost...................................................... 212 217
Other current assets................................................................ 71 38
------- -------
Total current assets..................................................... 675 563
Investments............................................................................ 662 662
Property, plant and equipment -- net................................................... 15,403 15,324
Regulatory assets...................................................................... 2,314 2,206
Deferred debits and other assets....................................................... 82 61
------- -------
Total assets............................................................. $19,136 $18,816
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- affiliates......................................................... $ 687 $ 302
Long-term debt due currently........................................................ 543 220
Accounts payable:
Affiliates....................................................................... 183 278
Trade............................................................................ 232 256
Taxes accrued....................................................................... 332 243
Deferred income taxes............................................................... 318 268
Other current liabilities........................................................... 336 344
------- -------
Total current liabilities................................................ 2,631 1,911
Accumulated deferred income taxes...................................................... 3,238 3,237
Investment tax credits................................................................. 482 493
Other deferred credits and noncurrent liabilities...................................... 409 407
Long-term debt, less amounts due currently............................................. 4,686 5,039
TXU Electric Company obligated, mandatorily redeemable, preferred securities
of subsidiary trusts holding solely junior subordinated debentures of
TXU Electric Company................................................................ 829 829
Preferred stock subject to mandatory redemption........................................ 21 21
Contingencies (Note 5)
Shareholders' equity:
Preferred stock not subject to mandatory redemption................................. 115 115
------- -------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: 2001 -- 65,757,600 and 2000 -- 79,749,600................... 2,001 2,421
Retained earnings................................................................... 4,726 4,343
Accumulated other comprehensive loss................................................ (2) --
------- -------
Total common stock equity....................................................... 6,725 6,764
------- -------
Total shareholders' equity............................................... 6,840 6,879
------- -------
Total liabilities and shareholders' equity............................... $19,136 $18,816
======= =======
</Table>
See Notes to Financial Statements.
3
<Page>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Electric Company (TXU Electric) is an electric utility engaged in the
generation, purchase, transmission, distribution and sale of electric energy in
the north-central, eastern and western parts of Texas. As an integrated electric
utility, TXU Electric has only one reportable segment. TXU Electric is a
wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global
energy services company that engages in electric and natural gas services,
electricity generation, merchant energy trading, energy marketing, energy
delivery, telecommunications, and other energy-related services.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The condensed consolidated financial statements
of TXU Electric and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and, except for the adoption of the new accounting standard for
derivatives discussed below, on the same basis as the audited financial
statements included in its Annual Report on 2000 Form 10-K. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results of operations and financial position have
been included therein. Certain information and footnote disclosures normally
included in annual consolidated financial statements prepared in accordance with
US GAAP have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations for an interim
period may not give a true indication of results for the full year. Certain
previously reported amounts have been reclassified to conform to current
classifications. All dollar amounts in the financial statements and tables in
the notes are stated in millions of US dollars unless otherwise indicated.
CHANGES IN ACCOUNTING STANDARDS -- On January 1, 2001, TXU Electric
adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as extended by SFAS No. 137
(June 1999) and amended by SFAS No. 138 (June 2000).
In accordance with the transition provisions of SFAS No. 133, TXU Electric
recorded, as of January 1, 2001, $.6 million of derivatives as liabilities with
a cumulative effect of $.4 million after-tax as a decrease to other
comprehensive income to recognize the fair value of all derivatives effective as
cash-flow hedging instruments. At June 30, 2001, none of these amounts have been
reclassified into earnings.
The terms of TXU Electric's interest rate derivatives match the terms of
the underlying hedged item. As a result, TXU Electric experienced no hedge
ineffectiveness during the period.
As of June 30, 2001, it is expected that $2.2 million of net losses
included in the net gains/losses from derivative instruments that are
accumulated in Other Comprehensive Income will be reclassified into earnings
during the next twelve months. This amount is not a forecasted loss incremental
to normal operations, but rather it demonstrates the extent to which volatility
in earnings (which would otherwise exist) is mitigated through the presence of
cash flow hedges.
Capacity Auction -- Legislation was passed during the 1999 session of the
Texas Legislature to restructure the electric utility industry in Texas (1999
Restructuring Legislation). Pursuant to the requirements of the 1999
Restructuring Legislation, in the third quarter of 2001, TXU Electric and most
other electric utility companies in Texas that own generation production assets
will auction 15 percent of the output of that generation effective January 1,
2002. The form of contract that will be entered into as a result of that auction
will be a derivative pursuant to SFAS No. 133. The capacity auction for periods
ended prior to December 31, 2003 will directly affect amounts ultimately
recovered from or returned to customers under the Texas deregulation
legislation. The amount TXU Electric will finally recover from the auction
process is a function
4
<Page>
of the regulatory process and not of interim movements in the fair value of
the contracts. As a result, regulatory assets/liabilities will be established
for movements in the fair value of the derivatives.
Ongoing implementation issues being addressed by standard-setting groups
may affect the application of SFAS No. 133. In June 2001, the Financial
Accounting Standards Board approved a number of implementation issues regarding
the normal purchase and sale exception. One of the issues applied exclusively to
the electric industry. TXU Electric will apply the new guidance from July 1,
2001 and does not expect the guidance to have a material effect.
SFAS No. 141, "Business Combinations", is effective for TXU Electric
beginning July 1, 2001. SFAS No. 141 requires the purchase method of accounting
for business combinations initiated and completed after June 30, 2001 and
eliminates the use of the pooling-of-interests method.
SFAS No. 142, "Goodwill and Other Intangible Assets", is effective for TXU
Electric beginning January 1, 2002. SFAS No. 142 requires, among other things,
the discontinuance of goodwill amortization. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized.
In addition, SFAS No. 142 requires TXU Electric to complete a transitional
goodwill impairment test within six months from the date of adoption. It
establishes a new method of testing goodwill for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. Any goodwill
impairment loss during the transition period will be recognized as the
cumulative effect of a change in accounting principle. Subsequent impairments
will be recorded in operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Electric beginning January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets. The offset to any liability recorded is added to the
recorded asset where the additional amount is depreciated over the same period
as the long-lived asset for which the retirement obligation is established. SFAS
No. 143 also requires additional disclosures. TXU Electric will change its
accounting for nuclear decommissioning to conform with the new standard.
TXU Electric is evaluating the impact the adoption of these standards will
have on its financial position and results of operations.
3. CAPITALIZATION
COMMON STOCK -- During the six months ended June 30, 2001, TXU Electric
purchased and retired 13,992,000 shares of its issued and outstanding common
stock from TXU Corp. at a cost of $420 million.
5
<Page>
TXU ELECTRIC OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS, HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TXU ELECTRIC
(TRUST SECURITIES) -- The statutory business trust subsidiaries had Trust
Securities and Trust Assets outstanding as follows:
<Table>
<Caption>
TRUST SECURITIES TRUST ASSETS MATURITY
-------------------------------------------------- ------------------------ --------
UNITS (000'S) AMOUNT AMOUNT
---------------------- ----------------------- ------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
TXU Electric Capital I
(8.25% Series)........... 5,871 5,871 $ 141 $ 141 $ 155 $ 155 2030
TXU Electric Capital III
(8.00% Series)........... 8,000 8,000 194 194 206 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Series)(a)............... 100 100 98 98 103 103 2037
TXU Electric Capital V
(8.175% Series).......... 400 400 396 396 412 412 2037
------ ------ ----- ----- ----- -----
Total............... 14,371 14,371 $ 829 $ 829 $ 876 $ 876
====== ====== ===== ===== ===== =====
</Table>
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring in May 2002, effectively fixes the rate at 7.183%.
TXU Electric owns the common Trust Securities issued by its subsidiary
trusts and has effectively issued a full and unconditional guarantee of each
such trust's Trust Securities.
LONG-TERM DEBT -- Certain variable rate debt of TXU Electric requires
periodic remarketing. Because TXU Electric intends to remarket these
obligations, and has the ability to refinance if necessary, they have been
classified as long-term debt. TXU Electric's first mortgage bonds are secured by
a mortgage and deed of trust with a major financial institution. Electric plant
of TXU Electric is generally subject to the lien of its mortgage.
On April 12, 2001, the Brazos River Authority issued for TXU Electric
$120,750,000 aggregate principal amount of Pollution Control Revenue Refunding
Bonds, Series 2001A, due October 1, 2030. The Brazos River Authority 2001A bonds
bear interest at a rate of 4.95% per annum until the mandatory tender date of
April 1, 2004. Proceeds from the issuance and sale of the Brazos River Authority
2001A bonds were used to refund the entire principal amount of the 7-7/8% Brazos
River Authority Series 1991A bonds and $20,750,000 of the Brazos River Authority
Taxable Series 1993 bonds.
On July 2, 2001, TXU Electric issued $400 million aggregate principal
amount of Floating Rate First Mortgage Bonds due June 15, 2003. The initial
interest rate, based on LIBOR plus a spread, is 4.39%. The rate will be reset
quarterly. Proceeds from the issuance were used for general corporate purposes.
4. REGULATION AND RATES
REGULATION AND RATES -- TXU Electric has ongoing proceedings outstanding
with the Public Utility Commission of Texas (PUC) as of June 30, 2001 that are
in different stages of completion. TXU Electric is unable to predict the outcome
of these proceedings. The status of these proceedings as of June 30, 2001 is not
significantly different from their status as set forth in Note 13 to Financial
Statements, Regulation and Rates, included in the TXU Electric 2000 Form 10-K
except as presented below.
DOCKET NO. 22350 -- Legislation was passed during the 1999 session of the
Texas Legislature that will restructure the electric industry in Texas (1999
Restructuring Legislation). As required by the 1999 Restructuring Legislation,
in January 2000, TXU Electric filed its business separation plan with the PUC.
In March 2000, TXU Electric filed its application for approval of its unbundled
cost of service rates with the PUC. This plan and application lay the foundation
for TXU Electric to take part in retail competition to begin in the Texas
electricity market. Under TXU Electric's business separation plan, the
generation business unit
6
<Page>
and the retail business unit will become unregulated entities and will be
allowed to compete for customers. The transmission and distribution (T&D)
business units will be separated into regulated entities and will together
represent the regulated part of the business. In addition to the actual T&D
charges for delivering electricity, these rates include nuclear decommissioning
fund charges, system benefit fund charges and stranded cost recovery charges.
In the March 2000 filing, stranded costs were estimated to be approximately
$3.7 billion, including the regulatory assets that were part of the Docket
No. 21527 proceedings and amounts related to the remand of Docket No. 9300,
addressed below. TXU Electric filed an updated stranded cost estimate on
August 28, 2000 to reflect various determinations made by TXU Electric since
Docket No. 22350 was filed. In the August 28, 2000 filing, stranded costs
were estimated to be $2.8 billion. Subsequent to the August 2000 filing, the
PUC has required TXU Electric to revise the stranded cost estimate to remove
amounts related to regulatory assets, certain environmental expenditures, and
the remand of Docket No. 9300, which resulted in a revised estimate of $14
million, including displaced worker costs. On March 7, 2001, the PUC issued
an Interim Order requiring TXU Electric to file a revised stranded cost
estimate using mandated assumptions. On March 28, 2001, TXU Electric filed
such revised stranded cost estimate of negative $2.2 billion pursuant to that
order. On April 9, 2001, the PUC issued another Interim Order that required
TXU Electric to file a further revised stranded cost estimate. On April 18,
2001, TXU Electric filed that required revised estimate, which reflected
stranded costs of negative $2.7 billion. The stranded cost estimate established
in Docket No. 22350 is subject to a future market-based "true-up" in 2004.
The PUC is expected to issue a final order on these matters in August 2001.
TXU Electric strongly disagrees with the methodology required by the PUC
pursuant to which these stranded costs were calculated as being inconsistent
with the 1999 Restructuring Legislation and has appealed certain of the PUC's
decisions related to this matter to the Travis County, Texas District Court.
On June 5, 2001, the PUC issued an Interim Order that addressed TXU Electric's
charges for T&D service that will become effective when retail competition
begins. Among other things, that order requires TXU Electric to reverse the
effects of the T&D depreciation reclassifications and to refund, over the
period from 2002-2008, both the actual 1998-2000 earnings in excess of the
earnings cap and estimated earnings for 2001 in excess of the earnings cap.
On June 20, 2001, TXU Electric filed a Petition for Writ of Mandamus with the
Texas Supreme Court, requesting that the Court issue a writ of mandamus
compelling the PUC to vacate the portions of its orders that require TXU
Electric to halt mitigation of stranded costs and reverse the stranded cost
mitigation already taken.
DOCKET NO. 9300/DOCKET NO. 22652 -- The PUC's final order (Order) in
connection with TXU Electric's January 1990 rate increase request (Docket No.
9300) was ultimately reviewed by the Texas Supreme Court. As a result, an
aggregate of $909 million of disallowances with respect to TXU Electric's
reacquisitions of minority owners' interests in Comanche Peak, which had
previously been recorded as a charge to TXU Electric's earnings, was remanded to
the District Court with instructions that it be remanded to the PUC for
reconsideration on the basis of a prudent investment standard. On remand, the
PUC also was required to reevaluate the appropriate level of TXU Electric's
construction work in progress included in rate base in light of its financial
condition at the time of the initial hearing. In connection with the settlement
of Docket No. 18490, proceedings in the remand of Docket No. 9300 had been
stayed through December 31, 1999. In April 2000, TXU Electric requested that the
District Court enter an order remanding Docket No. 9300 to the PUC. On June 9,
2000, the District Court's order of remand was filed with the PUC, and the PUC
has assigned the remand proceeding Docket No. 22652. Hearings are currently
scheduled for December 2001, and a final decision is expected in 2002.
DOCKET NO. 21527 -- On June 6, 2001, the Supreme Court of Texas issued a
ruling in connection with the appeal by TXU Electric of the September 7, 2000
judgment of the Travis County, Texas District Court. The District Court judgment
was issued pursuant to an appeal by TXU Electric of a financing order of the PUC
rejecting TXU Electric's request for authorization to issue $1.65 billion of
transition bonds secured by payments designed to enable TXU Electric to
securitize generation-related regulatory assets and other qualified costs in
accordance with the 1999 Restructuring Legislation. The PUC's order had
authorized the issuance of only $363 million in transition bonds.
TXU Electric believes this favorable ruling should allow it to securitize
$1.3 billion or more of its generation-related regulatory assets and other
qualified costs. The Supreme Court ruled in favor of TXU Electric's contention
that the PUC must consider regulatory assets in the aggregate, rather than
individually, in determining the amount of securitization. In addition, the
Supreme Court affirmed the District Court's ruling
7
<Page>
that the PUC's statements concerning the future impact of securitization of
loss on reacquired debt constituted an advisory and premature finding. The
Supreme Court also affirmed the District Court's judgment which reversed that
part of the PUC's order that utilized a longer regulated asset life for
purposes of present-valuing the benefits of securitization saying that the
statute contemplates a "far shorter recovery period for regulatory assets."
The Supreme Court's order, unless modified in response to pending motions
for rehearing, remands the case to the PUC for determination of the final amount
of permitted securitization. TXU Electric is unable to predict what this amount
will be or when the PUC will act, but TXU Electric is prepared to move quickly
to issue transition bonds once a final financing order is issued by the PUC.
In a related matter, also on June 6, 2001 in a case in which the
constitutionality under the Texas Constitution of the securitization provisions
of the 1999 Restructuring Legislation had been challenged in connection with a
securitization request made by Central Power and Light Company, the Texas
Supreme Court affirmed a judgment of the Travis County, Texas District Court
denying this appeal and finding that the securitization provisions are
constitutional.
PROJECT NO. 23806 -- On July 31, 2001, the staff of the PUC notified TXU
Electric and the PUC that it disagreed with TXU Electric's computation of the
level of earnings in excess of the earnings cap for calendar year 2000. The PUC
staff disagrees with TXU Electric's adjustment that removed $298 million of
deferred federal income tax liability associated with under-recovered fuel.
DOCKET NO. 22880/DOCKET NO. 23153 -- Because natural gas prices exceeded
those in the base fuel factor, on August 4, 2000, TXU Electric filed a request
with the PUC in Docket No. 22880 to surcharge the cumulative under-collection of
fuel cost revenues that existed as of June 30, 2000, together with interest
through November 2000, in the amount of $167 million, and to increase its
current fuel factors by 27.6%. On August 31, 2000, the Administrative Law Judge
entered an Interim Order, implementing an agreement of the parties, providing
for an interim increase in fuel factors of 13.8%, effective September 6, 2000,
and a surcharge of TXU Electric's cumulative under-recovery of fuel cost
revenues that existed as of July 31, 2000, together with interest through
November 2000, in the amount of $315 million to be collected over the
fourteen-month period beginning November 2000. On October 13, 2000, TXU Electric
filed a Supplemental Application with the PUC requesting its initial 27.6% fuel
factor increase instead of the interim increase. On January 11, 2001, the PUC
approved the requested fuel factor increase, effective that date. Also on
October 13, 2000, TXU Electric filed a request with the PUC in Docket No. 23153
for a surcharge to recover a $231 million under-collection of fuel cost revenues
for the months of August and September 2000. The proposed surcharge was to be
collected from January 2001 through December 2001. Docket No. 23153 was
subsequently consolidated into Docket No. 22880. On January 11, 2001, the PUC
approved TXU Electric's requests in Docket No. 22880 and Docket No. 23153. The
PUC also approved the surcharge request filed in Docket No. 23153, effective
January 11, 2001 through December 31, 2001.
DOCKET NO. 23640 -- In February 2001, TXU Electric filed with the PUC a
request for a surcharge to recover under-collected fuel cost revenues of $351
million for the months of October 2000 through December 2000, plus estimated
under-recoveries of $238 million for the period January 2001 through March 2001
and to increase its current fuel factor by 26.4% over the increase approved in
Docket 22880. On March 19, 2001, the Administrative Law Judge struck TXU
Electric's request to surcharge the estimated under-recoveries for the January
2001 through March 2001 period. On May 8, 2001, the PUC approved the amount of
the surcharge for October 2000 through December 2000, but ruled that surcharging
the under-recovery incurred during that period will be deferred for
consideration until TXU Electric's true-up proceeding in 2004. The PUC also
affirmed the action of the Administrative Law Judge and refused to consider the
surcharge for the months of January 2001 through March 2001. On May 24, 2001,
the PUC issued a final order approving TXU Electric's proposed fuel factor
request with one change that slightly increased the level of the fuel factor.
TXU Electric began applying the new fuel factor on bills rendered after May 24,
2001.
8
<Page>
5. CONTINGENCIES
FINANCIAL GUARANTEES -- TXU Electric has entered into contracts with
public agencies to purchase cooling water for use in the generation of electric
energy and has agreed, in effect, to guarantee the principal, $22 million at
June 30, 2001, and interest on bonds issued to finance the reservoirs from which
the water is supplied. The bonds mature at various dates through 2011 and have
interest rates ranging from 5-1/2% to 7%. TXU Electric is required to make
periodic payments equal to the principal and interest, including amounts assumed
by a third party and reimbursed to TXU Electric, of $4 million annually for the
years 2001 through 2003, $7 million for 2004 and $1 million for 2005. In
addition, TXU Electric is obligated to pay certain variable costs of operating
and maintaining the reservoirs. TXU Electric has assigned to a municipality all
contract rights and obligations of TXU Electric in connection with $42 million
principal amount of bonds outstanding at June 30, 2001, that had been issued for
similar purposes and previously guaranteed by TXU Electric. TXU Electric is,
however, contingently liable in the unlikely event of default by the
municipality.
GENERAL -- TXU Electric is involved in various legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management,
should not have a material effect upon its financial position, results of
operations or cash flows.
6. SUPPLEMENTARY FINANCIAL INFORMATION
ACCOUNTS RECEIVABLE -- At June 30, 2001 and December 31, 2000, accounts
receivable are stated net of uncollectible accounts of $10 million and $7
million, respectively.
SALE OF RECEIVABLES -- At June 30, 2001, TXU Electric had facilities to
sell to financial institutions, on an ongoing basis, undivided interests in up
to an aggregate of $500 million of customer accounts receivable. At June 30,
2001, $500 million of interests in customer receivables had been sold. On July
30, 2001, that arrangement was terminated and TXU Electric entered into a
facility with a bankruptcy remote subsidiary of TXU Gas Company, Receivables
Company, which purchases customer receivables from TXU Gas Company and TXU
Electric and sells undivided interests in receivables of up to $600 million to
financial institutions. TXU Gas Company is a wholly-owned subsidiary of TXU
Corp. and an affiliate of TXU Electric.
9
<Page>
INVENTORIES BY MAJOR CATEGORY --
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- -----------
Materials and supplies...................................................... $148 $147
Fuel stock.................................................................. 64 70
---- ----
Total inventories..................................................... $212 $217
==== ====
</Table>
PROPERTY, PLANT AND EQUIPMENT --
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- -----------
In service
Production.............................................................. $15,669 $15,658
Transmission............................................................ 1,768 1,760
Distribution............................................................ 5,850 5,723
General................................................................. 510 506
------- -------
Total............................................................... 23,797 23,647
Less accumulated depreciation........................................... 8,240 7,958
------- -------
Net of accumulated depreciation..................................... 15,557 15,689
Construction work in progress............................................... 504 271
Nuclear fuel (net of accumulated amortization: 2001 -- $750; 2000 -- $716).. 156 178
Held for future use......................................................... 22 22
Reserve for regulatory disallowances........................................ (836) (836)
------- -------
Net property, plant and equipment..................................... $15,403 $15,324
======= =======
</Table>
10
<Page>
INDEPENDENT ACCOUNTANTS' REPORT
TXU Electric Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Electric Company and subsidiaries (TXU Electric) as of June 30, 2001, and the
related condensed statements of consolidated income and comprehensive income for
the three-month and six-month periods ended June 30, 2001 and 2000 and of
consolidated cash flows for the six-month periods ended June 30, 2001 and 2000.
These financial statements are the responsibility of TXU Electric's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Electric as of December 31, 2000, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report dated February 1, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 9, 2001
11
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIGNIFICANT HIGHLIGHTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues (millions):
Base rate........................... $ 1,134 $ 1,145 $ 2,112 $ 2,081
Transmission service................ 45 41 89 84
Fuel................................ 728 580 1,512 938
Earnings in excess of earnings cap.. (10) (100) (23) (100)
Other............................... 33 18 68 32
------- ------- ------- -------
Total operating revenues.... $ 1,930 $ 1,684 $ 3,758 $ 3,035
------- ------- ------- -------
Electric energy sales (gigawatt-hours).. 25,592 25,245 49,799 47,560
Degree days (% of normal):
Cooling............................. 110% 115% 106% 121%
Heating............................. 41% 79% 105% 64%
</Table>
THREE MONTHS ENDED JUNE 30, 2001
TXU Electric Company (TXU Electric) had net income of $228 million for the
three months ended June 30, 2001 compared with net income of $188 million for
the three months ended June 30, 2000. The improvement reflects customer growth
and lower earnings in excess of the regulatory earnings cap which more than
offset increased operation and maintenance expense and higher taxes other than
income.
Operating revenues increased by $246 million from the 2000 period to the
2001 period primarily due to a $148 million increase in fuel revenues resulting
from higher fuel cost and energy sales and a $90 million reduction in the amount
of earnings in excess of the regulatory earnings cap recorded in the 2001 period
compared to the 2000 period. The change in mitigation is due to the impact of
higher revenue related taxes and the timing of other operating expenses.
Energy purchased for resale and fuel consumed increased by $122 million in
the 2001 period compared to the 2000 period primarily due to increased purchased
power and natural gas costs.
Operation and maintenance expense was $48 million higher in the second
quarter of 2001 compared to the second quarter of 2000 reflecting expected
increased generation maintenance, higher transmission costs and costs related to
transitioning to deregulation in the electricity markets in Texas commencing
January 1, 2002. Annual total operation and maintenance expense is expected to
be within levels allowed in connection with establishing the regulatory earnings
cap.
Taxes other than income increased by $21 million from the 2000 period to
the 2001 period due to higher state and local gross receipts taxes as a result
of higher revenues.
12
<Page>
SIX MONTHS ENDED JUNE 30, 2001
TXU Electric had net income of $388 million for the six months ended June
30, 2001 compared with net income of $336 million for the six months ended June
30, 2000. The improvement reflects increased revenues and margin which more than
offset increased operation and maintenance expense and higher taxes other than
income.
Operating revenues increased by $723 million from the 2000 period to the
2001 period primarily due to a $574 million increase in fuel revenues resulting
from higher fuel cost and energy sales and a $77 million reduction in the amount
of earnings in excess of the regulatory earnings cap recorded in the 2001 period
compared to the 2000 period. The change in mitigation is due to the impact of
higher revenue related taxes and the timing of other operating expenses.
Energy purchased for resale and fuel consumed increased by $545 million in
the current period over the same period of the prior year primarily due to
increased purchased power costs and generation costs for gas and oil.
Operation and maintenance expense was $70 million higher in the first six
months of 2001 compared to the first six months of 2000 reflecting expected
increased generation maintenance, higher transmission costs and costs related to
transitioning to deregulation of the electricity markets in Texas commencing
January 1, 2002. Annual total operation and maintenance expense is expected to
be within levels allowed in connection with establishing the regulatory earnings
cap.
Taxes other than income increased by $34 million from the 2000 period to
the 2001 period due to higher state and local gross receipts taxes and higher
regulatory assessments as a result of higher revenues.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities before changes in operating
assets and liabilities for the six months ended June 30, 2001 were $755 million
compared with $804 million for the same period last year. Changes in operating
assets and liabilities used $254 million in the first six months of 2001
compared to providing $81 million in the first six months of 2000. Payment of
accounts payable required $122 million in the first six months of 2001 and the
increase in under-recovered fuel revenues used an additional $97 million.
Cash flows of $82 million were used in financing activities in the first
six months of 2001 compared with cash flows used of $508 million in the first
six months of 2000. Financing activities in the first six months of 2001
included advances from TXU Corp. of $385 million, the net reduction of $31
million in long-term debt and the repurchase of $420 million of common stock
from TXU Corp.
Cash flows used in investing activities for the first six months of 2001
totaled $431 million versus $366 million for the same period in 2000. Capital
expenditures were $409 million and $318 million for the first six months of 2001
and 2000, respectively.
Legislation was passed during the 1999 session of the Texas Legislature to
restructure the electric utility industry in Texas (1999 Restructuring
Legislation). The 1999 Restructuring Legislation provided for a Pilot Project
(Pilot) to begin limited competition on June 1, 2001. It allowed up to five
percent of retail electric customers of electric utilities transitioning to
competition to choose to participate in the Pilot and select a competing retail
electric provider. Customers were not required to participate in the Pilot but
were able to elect to participate through an application process established by
the Public Utility Commission of Texas. The Pilot started on July 31, 2001 after
several delays and is scheduled to run until the end of 2001.
13
<Page>
At June 30, 2001, TXU Electric had no borrowings outstanding under the US
Credit Agreements described in Note 4 of TXU Electric's 2000 Form 10-K. Letters
of credit outstanding under the US Credit Agreements totaled $251 million for
TXU Electric. The US Credit Agreements primarily support commercial paper
borrowings of TXU Corp.
On July 2, 2001, TXU Electric issued $400 million aggregate principal
amount of Floating Rate First Mortgage Bonds due June 15, 2003. The initial
interest rate, based on LIBOR plus a spread, is 4.39% and will be reset
quarterly. Proceeds from the issuance were used for general corporate purposes.
FINANCING ARRANGEMENTS -- TXU Electric may issue and sell additional debt
and equity securities as needed, including the possible future issuance and sale
of up to $25 million of Cumulative Preferred Stock and up to an aggregate of
$924 million of additional Cumulative Preferred Stock, First Mortgage Bonds,
debt securities and/or preferred securities of subsidiary trusts, all of which
are currently registered with the Securities and Exchange Commission pursuant to
Rule 415 under the Securities Act of 1933.
REGULATION AND RATES
Although TXU Electric cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in the TXU
Electric 2000 Form 10-K, the TXU Electric March 31, 2001 Form 10-Q and this Form
10-Q, which might significantly alter TXU Electric's financial position, results
of operations or cash flows. See Note 4 to Financial Statements.
CHANGES IN ACCOUNTING STANDARDS
CHANGES IN ACCOUNTING STANDARDS -- See Note 2 to Financial Statements for
discussion of changes in accounting standards.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Electric contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Electric believes that in making
any such statement its expectations are based on reasonable assumptions, any
such statement involves uncertainties and is qualified in its entirety by
reference to factors contained in the Forward-Looking Statements section of Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Electric's 2000 Form 10-K, as well as general industry trends;
implementation of the 1999 Restructuring Legislation and other legislation;
power costs and availability; changes in business strategy, development plans or
vendor relationships; availability of qualified personnel; changes in, or the
failure or inability to comply with, governmental regulations, including,
without limitation, environmental regulations; changes in tax laws; and access
to adequate transmission facilities to meet changing demands, among others, that
could cause the actual results of TXU Electric to differ materially from those
projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Electric undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for TXU
Electric to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
14
<Page>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information as set forth in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk included in the TXU Electric 2000 Form 10-K and is therefore
not presented herein. Changes in the fair value of TXU Electric's cash flow
hedges for interest rate swaps, that were discussed in the TXU Electric 2000
Form 10-K, are recorded as a component of Comprehensive Income as a result of
implementation of SFAS No. 133. Other than as described therein, since December
31, 2000 there has been basically no change in the contractual terms and
notional amounts of interest rate contracts as disclosed in the TXU Electric
2000 Form 10-K.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
4(a) Sixty-second Supplemental Indenture, dated as of July 1, 2001, to a
Mortgage and Deed of Trust, dated December 1, 1983, between TXU
Electric and The Bank of New York.
15 Letter from independent accountants as to unaudited interim financial
information.
99 Condensed Statements of Consolidated Income -- Twelve Months Ended
June 30, 2001 and 2000.
(b) Reports on Form 8-K filed since March 31, 2001:
<Table>
<Caption>
DATE OF REPORT ITEM REPORTED
-------------- -------------
April 27, 2001 Item 5. Other Events.
June 12, 2001 Item 5. Other Events and Regulation FD disclosure.
</Table>
15
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU ELECTRIC COMPANY
By /s/ BIGGS C. PORTER
--------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: August 10, 2001
16