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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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Commission File Number 1-12833
TXU CORP.
A Texas Corporation I.R.S. Employer Identification No.
75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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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: 257,382,549 shares, without par
value.
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2001 and 2000 ................ 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2001 and 2000 ................ 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2001 and 2000 .......................... 3
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 .............................. 4
Notes to Financial Statements .................................... 5
Independent Accountants' Report .................................. 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .. 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ........................................... 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 33
SIGNATURE ................................................................. 34
(i)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU CORP. 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, EXCEPT PER SHARE AMOUNTS
Operating revenues ..................................... $ 6,127 $ 4,592 $14,502 $ 9,368
------- ------- ------- -------
Operating expenses
Energy purchased for resale and fuel consumed ..... 4,145 2,902 10,537 5,798
Operation and maintenance ......................... 896 658 1,715 1,443
Depreciation and other amortization ............... 248 257 505 521
Goodwill amortization ............................. 54 48 109 97
Taxes other than income ........................... 200 159 382 319
------- ------- ------- -------
Total operating expenses .................... 5,543 4,024 13,248 8,178
------- ------- ------- -------
Operating income ....................................... 584 568 1,254 1,190
Other income (deductions)--net ......................... 61 121 58 133
------- ------- ------- -------
Income before interest, other charges and income taxes . 645 689 1,312 1,323
------- ------- ------- -------
Interest income ........................................ 26 31 54 67
Interest expense and other charges
Interest .......................................... 345 368 717 728
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding
solely junior subordinated debentures of the
obligated company:
TXU obligated ........................... 7 8 15 15
Subsidiary obligated .................... 20 19 39 39
Preferred stock dividends of subsidiaries ......... 4 3 7 7
Distributions on preferred securities of subsidiary
perpetual trust of TXU Europe ................ 3 4 7 5
Allowance for borrowed funds used during
construction and capitalized interest ......... (7) (3) (12) (5)
------- ------- ------- -------
Total interest expense and other charges .... 372 399 773 789
------- ------- ------- -------
Income before income taxes ............................. 299 321 593 601
Income tax expense ..................................... 92 94 185 181
------- ------- ------- -------
Net income ............................................. 207 227 408 420
Preference stock dividends ............................. 6 -- 11 --
------- ------- ------- -------
Net income available for common stock .................. $ 201 $ 227 $ 397 $ 420
======= ======= ======= =======
Average shares of common stock outstanding (millions) .. 256 263 257 268
Per share of common stock:
Basic earnings .................................... $ 0.78 $ 0.87 $ 1.55 $ 1.57
Diluted earnings .................................. $ 0.78 $ 0.87 $ 1.55 $ 1.57
Dividends declared ................................ $ 0.60 $ 0.60 $ 1.20 $ 1.20
</Table>
See Notes to Financial Statements.
1
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TXU CORP. AND SUBSIDIARIES
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 .......................................................... $ 207 $ 227 $ 408 $ 420
----- ----- ----- -----
Other comprehensive income (loss) --
Net change during period, net of tax effects:
Investments classified as available for sale:
Unrealized holding gains ............................. -- 11 55 61
Reclassification of net gain realized on sale of
investments to other income (deductions) - net .... (50) -- (52) --
Cumulative currency translation adjustment .................. 9 (162) (247) (240)
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001 -- -- (132) --
Net change in fair value of derivatives .............. (47) -- (89) --
Discontinued cash flow hedges ........................ 10 -- 10 --
Amounts realized in earnings during the period ....... 103 -- 109 --
----- ----- ----- -----
Total ........................................ 25 (151) (346) (179)
----- ----- ----- -----
Comprehensive income ................................................ $ 232 $ 76 $ 62 $ 241
===== ===== ===== =====
</Table>
See Notes to Financial Statements.
2
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TXU CORP. 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 .................................................................. $ 408 $ 420
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization ........................................... 675 697
Deferred income taxes and investment tax credits - net .................. 102 (35)
Gains from sale of assets ............................................... (88) (119)
Other ................................................................... 25 65
Changes in operating assets and liabilities ............................. (530) (234)
------- -------
Cash provided by operating activities ..................... 592 794
------- -------
Cash flows - financing activities
Issuances of securities:
Long-term debt ........................................................... 1,125 761
Preferred securities of subsidiary perpetual trust of TXU Europe ......... -- 150
Preference stock ......................................................... -- 300
Common stock ............................................................. 1 1
Retirements/repurchases of securities:
Long-term debt/obligations ............................................... (1,386) (1,433)
Common stock ............................................................. (44) (414)
Change in notes payable:
Commercial paper ......................................................... 204 528
Banks .................................................................... (346) 338
Cash dividends paid:
Common stock ............................................................. (309) (321)
Preference stock ......................................................... (11) --
Other ........................................................................ (12) (20)
------- -------
Cash used in financing activities ............................ (778) (110)
------- -------
Cash flows - investing activities
Capital expenditures ......................................................... (796) (615)
Acquisitions of businesses ................................................... (217) (339)
Proceeds from sale of assets ................................................. 630 627
Nuclear fuel ................................................................. (11) (38)
Other ........................................................................ (118) (211)
------- -------
Cash used in investing activities .............................. (512) (576)
------- -------
Effect of exchange rates on cash and cash equivalents ............................ (45) (39)
------- -------
Net change in cash and cash equivalents .......................................... (743) 69
Cash and cash equivalents - beginning balance .................................... 1,039 560
------- -------
Cash and cash equivalents - ending balance ....................................... $ 296 $ 629
======= =======
</Table>
See Notes to Financial Statements.
3
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TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- ------------
ASSETS MILLIONS OF DOLLARS
Current assets:
Cash and cash equivalents .................................. $ 296 $ 1,039
Accounts receivable ........................................ 2,294 2,817
Inventories -- at average cost ............................. 593 492
Merchant energy trading assets ............................. 1,445 2,187
Other current assets ....................................... 398 618
------- -------
Total current assets ............................... 5,026 7,153
------- -------
Investments ...................................................... 2,605 3,005
Property, plant and equipment -- net ............................. 23,300 23,301
Goodwill ......................................................... 7,182 7,508
Regulatory assets ................................................ 2,395 2,290
Merchant energy trading assets ................................... 885 555
Derivative assets ................................................ 505 --
Deferred debits and other assets ................................. 902 1,178
------- -------
Total assets ....................................... $42,800 $44,990
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper ..................................... $ 2,092 $ 1,906
Banks ................................................ 849 1,266
Long-term debt due currently .............................. 2,829 2,894
Accounts payable .......................................... 2,025 2,752
Merchant energy trading liabilities ....................... 1,212 2,132
Other current liabilities ................................. 1,753 1,849
------- -------
Total current liabilities .......................... 10,760 12,799
------- -------
Accumulated deferred income taxes ................................ 3,991 3,963
Investment tax credits ........................................... 490 501
Merchant energy trading liabilities .............................. 676 369
Derivative liabilities ........................................... 271 --
Other deferred credits and noncurrent liabilities ................ 2,086 2,406
Long-term debt, less amounts due currently ....................... 15,130 15,281
Mandatorily redeemable, preferred securities of subsidiary trusts,
each holding solely junior subordinated debentures of the
obligated company:
TXU obligated ........................................ 368 368
Subsidiary obligated ................................. 976 976
Preferred securities of subsidiary perpetual trust of TXU Europe . 150 150
Preferred stock of subsidiaries:
Not subject to mandatory redemption .................. 190 190
Subject to mandatory redemption ...................... 21 21
Common stock repurchasable under equity forward contracts,
at settlement value ......................................... -- 190
Contingencies (Note 8)
Shareholders' equity (Note 5) .................................... 7,691 7,776
------- -------
Total liabilities and shareholders' equity ......... $42,800 $44,990
======= =======
</Table>
See Notes to Financial Statements.
4
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TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Corp. (TXU), a Texas corporation, is a global energy services company
whose principal United States (US) operations are conducted through TXU Electric
Company (TXU Electric), TXU Gas Company (TXU Gas), TXU Energy Services Company
and TXU Energy Trading Company (TXU Energy Trading). TXU's principal
international operations are conducted through TXU International Holdings
Limited (TXU International Holdings), which in turn indirectly owns TXU Europe
Limited (TXU Europe) and TXU Australia Holdings (Partnership) Limited
Partnership (TXU Australia).
TXU engages in electric and natural gas services, electricity generation,
merchant energy trading, energy marketing, energy delivery, telecommunications,
and other energy-related services.
ACQUISITIONS
On January 8, 2001, TXU Europe completed the acquisition of 51% of
Stadtwerke Kiel AG (Kiel AG), a German municipal utility, for (pound)145 million
($217 million). The acquisition of Kiel AG was accounted for as a purchase
business combination. At the date of acquisition, Kiel AG had sterling
equivalent assets of (pound)121 million ($182 million) and liabilities of
(pound)82 million ($123 million). The process of determining the fair value of
assets and liabilities of Kiel AG continues but is expected to be completed
within one year of the acquisition date. The preliminary estimate of goodwill is
(pound)106 million ($150 million) which is being amortized over 40 years. This
amount is subject to further revision as additional information on the fair
value of assets acquired and liabilities assumed becomes available. The results
of operations of Kiel AG are reflected in the consolidated financial statements
from the January 8, 2001 acquisition date. Pro forma information for the six
months ended June 30, 2001 and 2000, reflecting the acquisition of Kiel AG,
would not be significantly different from reported amounts.
In August 2000, TXU Europe purchased United Utilities plc's retail energy
supply business, Norweb Energi (a division of Norweb plc), for total
consideration, including direct costs of the acquisition, of (pound)340 million
($496 million). In the transaction, TXU Europe assumed certain of Norweb
Energi's obligations. These include Norweb Energi's power purchase agreements,
which have been integrated into TXU Europe's energy portfolio.
The acquisition of Norweb Energi was accounted for as a purchase business
combination. The latest estimate of goodwill is (pound)622 million ($881
million) which is being amortized over 20 years. This amount is subject to
further revision as additional information becomes available, primarily relating
to exit costs and other liabilities assumed at acquisition. The final
determination of the purchase accounting adjustments is expected to be completed
within the first part of the third quarter of 2001.
The results of operations of Norweb Energi are reflected in the
consolidated financial statements of TXU from the August 3, 2000 effective date
of the acquisition. The following summary of unaudited pro forma consolidated
results of TXU's operations reflect the acquisition of Norweb Energi as though
it had occurred at the beginning of the comparable period of 2000.
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30,
2000
----------
Operating revenues ........................... $10,211
Operating income ............................. 1,279
Net income ................................... 485
</Table>
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The pro forma results above are not necessarily indicative of what the
actual results would have been had the acquisition actually occurred at the
beginning of the period. Further, the pro forma amounts are not intended to be a
projection of future results of the combined companies. In particular, the above
amounts do not take into account the expected impact Norweb Energi would have on
the timing of earnings from the UK electricity portfolio across the year such
that profits in the first and fourth quarters are expected to be reduced, with a
more than offsetting increase in the second and third quarters. This arises from
constant retail customer prices throughout the year compared with more seasonal
wholesale contracts and spot prices.
DISPOSITIONS
On July 12, 2001, TXU Europe completed the sale of its Rugeley generating
stations for approximately (pound)200 million ($280 million). Cash received at
closing was (pound)67 million ($94 million) with the remaining cash proceeds
from the sale to be received in January 2002. A letter of credit has been
received to secure the remaining cash proceeds. The transaction includes a
medium-term tolling contract under which TXU Europe will provide coal for the
plant and purchase its output, thus preserving TXU Europe's ability to
participate fully in the New Electricity Trading Arrangements (NETA) balancing
market. The sale followed TXU Europe's review of its UK generating portfolio
that was announced last year and is in line with its flexible portfolio
management strategy. No significant gain or loss is expected in the third
quarter of 2001 from the sale.
In April 2001, TXU Europe received net proceeds of (euro)522 million ($469
million) from the sale of its 19.2% interest in Hidroelectrica del Cantabrico,
SA (Hidrocantabrico), and recorded a pre-tax gain of (pound)50 million ($73
million) in other income (deductions)-net.
In February 2001, TXU Europe finalized the sale of its interest in the
North Sea gas fields for (pound)138 million ($196 million) as a result of its
ongoing review of its program to reposition its energy portfolio. From the date
of the sale through June 30, 2001, TXU Europe has received net cash proceeds of
(pound)102 million ($142 million) after settlement of certain outstanding
issues, and recorded a net pre-tax gain of (pound)7 million ($9 million) in
other income (deductions) - net ((pound)5 million ($7 million) after-tax).
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The condensed consolidated financial statements
of TXU 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 in the first quarter of 2001 of the new accounting
standard for derivatives discussed below, on the same basis as the audited
financial statements included in its 2000 Annual Report on 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 US Securities and Exchange Commission. The results of
operations for an interim period may not give a true indication of results for a
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, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
CHANGE IN ACCOUNTING STANDARDS -- On January 1, 2001, TXU 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
recorded, as of January 1, 2001, a cumulative effect of $132 million after-tax
as a decrease to Other Comprehensive Income to recognize the fair value of all
derivatives effective as cash-flow hedging instruments. For the period from
transition to June 30, 2001, $82 million of this cumulative transition net loss
has been reclassified into earnings.
FINANCIAL SUMMARY -- Essentially all of the terms of TXU's derivatives
match the terms of the underlying hedged items. As a result, TXU experienced
minimal hedge ineffectiveness of $0.1 million, mainly from treasury hedges, for
the six months ended June 30, 2001. This was reported as interest expense and
represented the total ineffectiveness of all cash-flow hedges. Also, $0.7
million of net derivatives losses were realized as a
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result of the discontinuance of cash-flow hedges related to certain forecasted
treasury transactions that are not likely to occur.
As of June 30, 2001, it is expected that $133 million after-tax of net
losses now 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 represents the projected value of the
hedges over the next twelve months relative to what would be recorded if the
hedge transactions had not been entered into. The amount expected to be
reclassified 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. The
amount as of June 30, 2001 includes $12 million of amortization expense from
contracts de-designated as cash-flow hedges on interest rate swaps on TXU's $500
million floating rate senior notes that matured in June 2001.
CAPACITY AUCTION -- Pursuant to the requirements of the Texas deregulation
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
ultimate amount TXU Electric will recover from the auction process is a function
of the regulatory process and not 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 April 2001, the Financial
Accounting Standards Board (FASB) finalized a conclusion that volume option
contracts do not qualify for the normal purchase and sale exception. As a
result, TXU's gas option contracts will be accounted for as derivatives
commencing July 1, 2001 in accordance with the transition provisions of such
revised guidance. Previously, the gas option contracts were classified as normal
purchase and sale contracts pending final resolution of the issue. TXU is
evaluating the financial impact resulting from the implementation of this issue.
In June 2001, the FASB approved a number of implementation issues
regarding the normal purchase and sale exception. One of the issues applied
exclusively to the electric industry and provided for the normal purchase and
sale exception under specific circumstances. TXU Europe evaluated electricity
contracts under the new guidance and determined that they will qualify for the
normal purchase and sale exception from July 1, 2001, thus removing them from
SFAS No. 133 classification as derivatives. As a result, amounts for these
contracts will be removed from Other Comprehensive Income concurrent with the
timing of the original forecasted transaction that was being hedged. These
contracts represent a cumulative balance of $7 million of accumulated net losses
in Other Comprehensive Income. TXU Electric does not expect the guidance to have
a material effect.
SFAS NO. 141 -- SFAS No. 141, "Business Combinations", is effective for
TXU beginning July 1, 2001. SFAS No. 141 requires the use of 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 -- SFAS No. 142, "Goodwill and Other Intangible Assets", is
effective for TXU beginning January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. The amortization of TXU's
existing goodwill (approximately $218 million on an annualized basis) will cease
after December 31, 2001. Any goodwill resulting from acquisitions completed
after June 30, 2001 will not be amortized.
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In addition, SFAS 142 requires TXU to complete a transitional goodwill
impairment test within six months from the date of adoption and 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 -- SFAS No. 143, "Accounting for Asset Retirement
Obligations", will be effective for TXU 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 will change
its accounting for nuclear decommissioning to conform with the new standard.
TXU is evaluating the impact the adoption of these standards will have on
its financial position and results of operations.
EARNINGS PER SHARE -- Basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
period reported. Diluted earnings per share include the effect of potential
issuance of common shares resulting from the assumed exercise of all outstanding
stock options and settlement of forward stock purchase agreements. TXU has
outstanding certain instruments that are convertible into common stock or that
may be settled with common stock but do not qualify as dilutive securities for
computation of earnings per share. The number of shares of common stock added to
the average shares outstanding for the purpose of calculating diluted earnings
per share were 237 thousand and 216 thousand for the three and six months ended
June 30, 2001, respectively, and 426 thousand and 594 thousand for the three and
six months ended June 30, 2000, respectively.
3. SHORT-TERM FINANCING
In January 2001, TXU Europe borrowed (euro)182 million ($160 million) at
5.54% per annum under its (pound)300 million 364-day revolving credit facility
as part of the financing to acquire Kiel AG.
During the six months ended June 30, 2001, TXU Europe repaid and allowed
to expire (pound)181 million ($253 million) of short-term facilities. Also in
January 2001, a (pound)150 million ($210 million) Eastern Electricity revolving
credit balance was repaid.
ACCOUNTS RECEIVABLE SECURITIZATION -- During the six months ended June 30,
2001, TXU Europe sold (pound)1.2 billion ($1.7 billion) in receivables under a
program with a commercial bank to replace those receivables that have been
collected. Such sales resulted in no gain or loss. Under the program, TXU Europe
has a receivables servicing obligation but does not incur a measurable asset or
liability. At June 30, 2001, accounts receivable of TXU Europe were reduced by
(pound)181 million ($256 million) under the program and (pound)6 million ($8
million) of future receivables sold were reflected as other short-term loans on
the balance sheet. These amounts bear interest at an annual rate, which was 5.3%
at June 30, 2001, based on commercial paper rates plus a margin. 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
customer accounts receivable. At June 30, 2001, $500 million of customer
receivables had been sold. TXU Gas continually sells customer accounts
receivable to a wholly-owned bankruptcy-remote subsidiary, (Receivables
Company), which sells undivided interests in these accounts receivable to
financial institutions. At June 30, 2001, $100 million of interests in TXU Gas
accounts receivable had been sold. On July 30, 2001, the Receivables Company
facility was amended to add TXU Electric as a party and to increase to $600
million the aggregate amount of interests in receivables that Receivables
Company can sell. The separate TXU Electric accounts receivable arrangement was
terminated.
4. LONG-TERM DEBT
US -- On April 12, 2001, the Brazos River Authority issued $120,750,000
aggregate principal amount of Pollution Control Revenue Refunding Bonds, Series
2001A, due October 1, 2030 for TXU Electric. The Brazos
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River Authority 2001A bonds will 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 its Floating Rate First Mortgage Bonds due June 15, 2003. The 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.
On June 15, 2001, TXU issued $800 million aggregate principal amount of
its 6.375% Series J Senior Notes due June 15, 2006. On the same date, TXU
entered into an interest rate swap which is being accounted for as a fair value
hedge. At June 30, 2001, the mark-to-market effect on this swap is a reduction
of $6 million on the principal amount of the debt with a corresponding amount
recorded as a derivative liability. Proceeds from the issuance were used to
repay outstanding commercial paper and for general corporate purposes.
EUROPE -- At June 30, 2001, TXU Europe and TXU Finance (No.2) Limited had
a joint sterling-denominated line of credit with a group of banking institutions
under a credit facility agreement (Sterling Credit Agreement). As of June 30,
2001, the Sterling Credit Agreement provided for borrowings of up to
(pound)1.075 billion ($1.5 billion) and has two facilities: a (pound)750 million
($1.1 billion) term facility and a (pound)325 million ($460 million) revolving
credit facility (Tranche B), both of which terminate on March 2, 2003. The
Sterling Credit Agreement allows for borrowings in various currencies with
interest rates based on the prevailing rates in effect in the countries in which
the borrowings originate. In January 2001, in connection with the acquisition of
Kiel AG, TXU Europe borrowed an additional (euro)47 million ($41 million) under
Tranche B. As of June 30, 2001, (pound)750 million ($1.1 billion) of borrowings
was outstanding under the term facility at an interest rate of 6.0% per annum.
Outstanding Tranche B borrowings and weighted average interest rates in effect
at June 30, 2001 consisted of 700 million Norwegian kroner (NOK) ($77 million)
at 8.2% per annum and (euro)258 million ($219 million) at 5.3% per annum.
TXU Europe has a (euro)2.0 billion Euro Medium Term Note (EMTN) program.
Under the EMTN program, TXU Europe may from time to time issue notes on a
continuing basis to one or more dealers in an aggregate principal amount
outstanding of (euro)2.0 billion. At June 30, 2001, there were (pound)676
million ($957 million) of various borrowings outstanding under this program with
an aggregate weighted average interest rate of 7.1% per annum.
In January 2001, the outstanding balance of the TXU Europe rent factoring
loans due to banks of (pound)190 million ($269 million) was repaid.
In July 2001, TXU Europe purchased approximately $45 million of US
Treasury securities with various maturities to match the required interest and
principal repayments to maturity on a subsidiary's junior subordinated
debentures held by another subsidiary. These amounts are included in
investments.
5. SHAREHOLDERS' EQUITY
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- ------------
Shareholders' equity:
Preference stock ...................................................... $ 300 $ 300
------- -------
Common stock without par value:
Authorized shares -- 1,000,000,000
Outstanding shares: 2001 -- 257,384,322 and 2000 -- 258,108,897.. 6,333 6,360
Common stock repurchasable under equity forward contracts ............. -- (190)
Retained earnings ..................................................... 1,915 1,817
Accumulated other comprehensive loss .................................. (857) (511)
------- -------
Total common stock equity ................................... 7,391 7,476
------- -------
Total shareholders' equity .................................. $ 7,691 $ 7,776
======= =======
</Table>
9
<Page>
COMMON STOCK -- At December 31, 2000, TXU had two equity purchase
agreements with separate financial institutions to purchase shares of TXU's
common stock. On April 16, 2001, TXU purchased 1,252,500 shares of its common
stock for $44 million on one of the equity purchase agreements. Following such
purchase, TXU closed these contracts without purchasing additional shares.
Settlement of these agreements had no effect on earnings.
6. TRUST SECURITIES
TXU OR SUBSIDIARY OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS, EACH HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TXU
OR RELATED SUBSIDIARY (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
TXU Capital I
(7.25% Series) .......... 9,200 9,200 $ 223 $ 223 $ 237 $ 237 2029
TXU Capital II
(8.7% Series) ........... 6,000 6,000 145 145 155 155 2034
------ ------ ------ ------ ------ ------
Total TXU ............... 15,200 15,200 368 368 392 392
------ ------ ------ ------ ------ ------
TXU ELECTRIC
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
Securities)(a) .......... 100 100 98 98 103 103 2037
TXU Electric Capital V
(8.175% Trust Securities) 400 400 396 396 412 412 2037
------ ------ ------ ------ ------ ------
Total TXU Electric ...... 14,371 14,371 829 829 876 876
------ ------ ------ ------ ------ ------
TXU GAS
TXU Gas Capital I
(Floating Rate Trust
Securities)(b) .......... 150 150 147 147 155 155 2028
------ ------ ------ ------ ------ ------
Total ................... 29,721 29,721 $1,344 $1,344 $1,423 $1,423
====== ====== ====== ====== ====== ======
</Table>
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring 2002, effectively fixes the rate at 7.183%.
(b) Floating rate is determined quarterly based on LIBOR. Related interest rate
swaps, expiring 2003, effectively fix the rates at 6.629% on $100 million
and at 6.444% on $50 million.
Each parent company owns the common trust securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's Trust Securities.
10
<Page>
7. REGULATION AND RATES
REGULATIONS AND RATES -- Certain of TXU's subsidiaries have ongoing
proceedings outstanding with various regulatory agencies as of June 30, 2001
that are in different stages of completion. TXU cannot 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 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 Public
Utility Commission of Texas (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 the business
separation plan, the generation business unit 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
since Docket No. 22350 was filed. In the August 28, 2000 filing, TXU Electric's
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 1998-2000 earnings in excess of the earnings cap and an estimate of the
2001 earnings 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
11
<Page>
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 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 issuance 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
12
<Page>
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.
OTHER -- TXU Gas employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. Rate relief amounting to
approximately $19.8 million in annualized revenue increases, exclusive of
changes in gas costs, was granted in 2000. During 2001, rate cases supporting
$34 million in annualized revenue increases have been filed in 336 Texas cities.
8. CONTINGENCIES
LEGAL PROCEEDINGS -- UK -- In February 1997, the official government
representative of pensioners (Pensions Ombudsman) made a final determination
against the National Grid Company plc (National Grid) and its group trustees
with respect to complaints by two pensioners in National Grid's section of the
Electricity Supply Pension Scheme (ESPS). The determination related to the use
of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from the
payment of pensions on early retirement upon reorganization or downsizing. This
determination was set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision to the Court
of Appeal, and judgment was received. The judgment endorsed the Pensions
Ombudsman's determination that the corporation was not entitled to unilaterally
deal with any surplus. National Grid appealed the decision to the House of Lords
and, on April 4, 2001, the appeal was allowed. The House of Lords found that
National Grid was entitled to use the surplus funds as they had done. As a
result of the decision of the House of Lords, TXU Europe considers that the
likelihood of a claim of this nature being made against it to be remote.
On January 25, 1999, the Hindustan Development Corporation (HDC) issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against The
Energy Group PLC (TEG) (now Energy Holdings (No.3) Limited), claiming damages of
(pound)255 million ($361 million) for breach of contract following the
termination of a Joint Development Agreement dated March 20, 1997 relating to
the construction, development and operation of a lignite based thermal power
plant at Barsingsar, Rajasthan. On November 21, 2000, the Arbitrators issued
their decision and dismissed HDC's claim in full, and TEG was liable only for
its own legal costs involved in the case, an estimated (pound)1 million ($1.4
million). On December 21, 2000, HDC filed a Request for Clarification of the
Arbitrators' decision (Request) under Section 33 of the Arbitration and
Conciliation Act, the purpose of which is to entitle a party to arbitration to
seek clarification of language used in the Arbitrators' decision. TEG filed its
response to the Request on January 15, 2001, asserting that the Request was
untimely made and that the language used by the Arbitrators needed no
clarification. TXU Europe believes that the Arbitrators will have no alternative
but to dismiss the Request. The effect of filing the Request, however, has been
to stay the time HDC has to file an appeal of the Arbitrators' decision.
In August 2000, the Spanish Stock Market Commission announced it was
opening an investigation as to whether TXU Europe and Electrabel acted in
concert over share purchases of Hidrocantabrico in order to avoid making a
formal takeover bid. TXU was originally named as a party but is seeking its
removal from these proceedings. If the two utilities are found to be in
violation of Spanish securities law, they could face a substantial fine and
other restrictions. The investigation could last until February 2002. TXU Europe
is unable to determine what impact there may be, if any, as a result of the
investigation. TXU Europe and TXU believe there has been no violation of Spanish
securities laws and are fully cooperating with the investigation.
GENERAL -- In addition to the above, TXU and its subsidiaries are involved
in various other legal and administrative proceedings which, in the opinion of
management, should not have a material effect upon their financial position,
results of operations or cash flows.
13
<Page>
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 such 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.
TXU Europe has guaranteed up to $110 million at June 30, 2001 of certain
liabilities that may be incurred and payable by the purchasers of TEG's US and
Australian coal business and US energy marketing operations sold in 1998 prior
to the acquisition of TEG by TXU. These guarantees are with respect to the
Peabody Holding Company Retirement Plan for Salaried Employees, the Powder River
Coal Company Retirement Plan and the Peabody Coal UMWA Retirement Plan and are
subject to certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of its
former subsidiary, Citizens Power LLC, arising under power purchase agreements
and note purchase agreements in connection with various Citizens Power energy
restructuring projects, as well as various indemnity agreements in connection
with such projects. TXU Europe and TEG continue to be either the guarantor or
the indemnifying party, as the case may be, under these various agreements.
14
<Page>
9. SEGMENT INFORMATION
TXU has five reportable operating segments.
(1) US ELECTRIC - operations involving the generation, purchase,
transmission, distribution and sale of electric energy in the north central,
eastern and western portions of Texas;
(2) US GAS - operations involving the purchase, transmission, distribution
and sale of natural gas in Texas;
(3) US ENERGY - operations involving the purchase and sale of natural gas
and electricity and the provision of risk management and retail energy services
for the energy industry throughout the US and parts of Canada;
(4) EUROPE - operations involving the generation, purchase, distribution,
marketing and sale of electricity; the purchase, marketing and sale of natural
gas; and merchant energy trading; within the UK and throughout the rest of
Europe; and
(5) AUSTRALIA - operations involving the generation, purchase,
distribution, trading and retailing of electricity and the purchase, retailing,
storage and distribution of natural gas and merchant energy trading, primarily
in the States of Victoria and South Australia.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Operating revenues -
US Electric ............... $ 1,945 $ 1,698 $ 3,784 $ 3,061
US Gas .................... 167 148 847 472
US Energy ................. 1,109 1,215 3,390 2,254
Europe .................... 2,706 1,259 6,071 3,108
Australia ................. 167 209 347 357
All Other ................. 33 63 63 116
-------- -------- -------- --------
Consolidated ...... $ 6,127 $ 4,592 $ 14,502 $ 9,368
======== ======== ======== ========
Affiliated revenues -
US Gas .................... $ 4 $ 9 $ 8 $ 17
US Energy ................. 3 (2) 4 (3)
All Other ................. 133 99 243 181
Eliminations .............. (140) (106) (255) (195)
-------- -------- -------- --------
Consolidated .... $ -- $ -- $ -- $ --
======== ======== ======== ========
Net income (loss) -
US Electric ............... $ 226 $ 186 $ 383 $ 331
US Gas .................... (40) 13 (1) 43
US Energy ................. (5) (3) (15) (11)
Europe .................... 73 49 140 116
Australia ................. 13 26 21 37
All Other ................. (60) (44) (120) (96)
-------- -------- -------- --------
Consolidated ...... $ 207 $ 227 $ 408 $ 420
======== ======== ======== ========
</Table>
15
<Page>
10. RESTRUCTURING CHARGES AND OTHER COSTS
During the six months ended June 30, 2001 and 2000, TXU Europe recorded
restructuring charges and other costs of $40 million and $87 million pre-tax
($29 million and $64 million after-tax), respectively. Included in the costs for
2000 was $10 million of costs associated with the offer for Hidrocantabrico. The
majority of the remaining costs consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under voluntary retirement
programs and related pension benefits), primarily as a result of contracting TXU
Europe's customer service operations to Vertex Data Science Limited, the
creation of the joint venture 24seven and certain other staff reorganizations.
For the six months ended June 30, 2001, pre-tax restructuring charges
consisted of redundancy costs of $7 million related to termination benefits for
55 employees that had accepted the benefits, $22 million of asset writedowns and
$11 million of other exit costs. For the six months ended June 30, 2000, pre-tax
restructuring costs consisted of redundancy costs of $35 million related to
voluntary termination benefits for 442 employees that have accepted the
benefits, $25 million for asset writedowns and $17 million of other exit costs.
All of these costs, except the asset writedowns which were charged to
depreciation expense, have been recorded in operation and maintenance expense.
During the six months ended June 30, 2001 and 2000, $11 million and $15
million of redundancy costs and $7 million and $13 million of other exit costs
charged during the six months then ended have been paid, respectively.
11. SUPPLEMENTARY FINANCIAL INFORMATION
ACCOUNTS RECEIVABLE -- At June 30, 2001 and December 31, 2000, accounts
receivable are stated net of uncollectible accounts of $74 million and $75
million, respectively.
INVENTORIES BY MAJOR CATEGORY--
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- ------------
Materials and supplies ..................... $230 $218
Fuel stock ................................. 186 141
Gas stored underground ..................... 177 133
---- ----
Total inventories ...................... $593 $492
==== ====
</Table>
16
<Page>
PROPERTY, PLANT AND EQUIPMENT --
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- ------------
United States (US):
Electric ............................................... $ 24,271 $ 24,121
Gas distribution and pipeline .......................... 1,574 1,509
Other .................................................. 800 730
-------- --------
Total .......................................... 26,645 26,360
Less accumulated depreciation .......................... 9,114 8,750
-------- --------
Net of accumulated depreciation ............... 17,531 17,610
Construction work in progress .......................... 754 425
Nuclear fuel (net of accumulated amortization:
2001 -- $750; 2000 -- $716) ....................... 156 179
Held for future use .................................... 22 22
Reserve for regulatory disallowances ................... (836) (836)
-------- --------
Net US property, plant and equipment .......... 17,627 17,400
Europe - Electric and other (net of accumulated
depreciation: 2001 -- $616; 2000 -- $594) .............. 4,079 4,153
Australia - Electric and gas distribution and generation
(net of accumulated depreciation: 2001 -- $235;
2000 -- $226) 1,594 1,748
-------- --------
Net property, plant and equipment ............. $ 23,300 $ 23,301
======== ========
</Table>
GOODWILL -- At June 30, 2001 and December 31, 2000, goodwill is stated net
of accumulated amortization of $587 million and $504 million, respectively.
CREDIT RISK -- Credit risk relates to the risk of loss that TXU would
incur as a result of non-performance by counterparties. TXU maintains credit
policies with regard to its counterparties that management believes
significantly minimize overall credit risk. These policies include an evaluation
of potential counterparties' financial condition (including credit rating),
guarantees and collateral requirements and the use of standardized agreements
that allow for the netting of positive and negative exposures associated with a
single counterparty.
CALIFORNIA -- The State of California continues to work through its
transition to deregulation in an environment of insufficient energy supply
compounded by volatile natural gas prices. This situation has financially
distressed California's utilities. TXU has essentially no exposure to the
California Independent System Operator or the regulated utilities. However, due
to the uncertainties surrounding the California power situation, management
cannot predict the effects of the California situation on merchant energy
trading counterparties, legislation and the capital markets.
CONCENTRATION OF CREDIT RISK -- During the six months ended June 30, 2001,
TXU's global merchant energy trading activity and retail operations grew
substantially. Systems and procedures have been implemented to continually
monitor the counterparty risk exposure throughout its various trading regions.
Price and credit risk are evaluated daily within the established trading
policies and limits established for the various regions.
TXU's regional gross exposure to trading and non-trading credit risk
(before any netting agreements or reserves) as of June 30, 2001 is as follows:
<Table>
<Caption>
REGION GROSS EXPOSURE
------ --------------
US .......................................... $2,044
Europe ...................................... 2,678
Australia ................................... 481
------
Consolidated ................................ $5,203
======
</Table>
These regional concentrations have the potential to affect TXU's overall
exposure to credit risk, either positively or negatively, in that the customer
base and counterparties may be similarly affected, both regionally and globally,
by changes in economic, regulatory, industry, weather or other conditions.
17
<Page>
The majority of TXU's counterparties are major energy companies and
financial institutions that are considered to be of investment grade, determined
using publicly available information including a Standard & Poor's rating of at
least BBB-. TXU's global exposure from transactions with one customer
represented 3% of the gross fair value of TXU's accounts receivable, merchant
energy trading assets and derivative assets at June 30, 2001. (This customer
represented 6% of TXU Europe's credit risk balance as of the same date.) This
customer is an investment grade major energy company. The risk of loss to TXU
arising from non-performance by these counterparties is considered unlikely. In
the event a counterparty's credit rating declines, TXU may apply certain
remedies, if considered necessary.
Based on TXU's policies for managing credit risk, its exposures and its
credit and other reserves, TXU does not anticipate a materially adverse effect
on its financial position or its results of operations as a result of
non-performance by a counterparty.
18
<Page>
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. (TXU) and subsidiaries as of June 30, 2001, and the related condensed
statements of consolidated income and of 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'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
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
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars, unless they were determined using exchange
rates on the date of a specific event:
<Table>
<Caption>
INCOME STATEMENTS
(AVERAGE RATES)
BALANCE SHEET ----------------------------------------------
-------------------- THREE MONTHS SIX MONTHS
JUNE 30, DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
------- ------- -------------------- --------------------
2001 2000 2001 2000 2001 2000
------- ------- ------- ------- ------- -------
UK pounds sterling (pound).. $1.4152 $1.4935 $1.4228 $1.5333 $1.4413 $1.5698
Australian dollars (A$) .... $0.5106 $0.5599 $0.5142 $0.5895 $0.5233 $0.6106
Euro (euro) ................ $0.8495 $0.9421 $0.8747 $0.9350 $0.8995 $0.9616
</Table>
THREE MONTHS ENDED JUNE 30, 2001
Net income available for common stock for the second quarter of 2001 was
$201 million ($0.78 per share) compared with $227 million ($0.87 per share) for
the second quarter of 2000. Results for the 2001 quarter reflect improved
contributions over the 2000 quarter from the US Electric and Europe segments.
The US Electric Segment benefited from continued strong revenue and customer
growth and lower earnings in excess of the regulatory earnings cap, partially
offset by increases in generation maintenance expenses and higher third party
transmission tariffs. Operation and maintenance expense for the year are
expected to be within levels allowed in connection with establishing the
regulatory earnings cap. Earnings in excess of the earnings cap reduced net
income by $7 million in the 2001 period and $65 million in the 2000 period. The
change in mitigation is due to the impact of higher revenue related taxes and
the timing of other operating expenses. Results for the Europe segment benefited
primarily from the acquisition of Norweb Energi in August 2000, the acquisition
of 51 percent of Stadtwerke Kiel AG (Kiel AG) in January 2001 and the $73
million pre-tax ($51 million after-tax) gain on sale of its investment in
Hidroelectrica del Cantabrico (Hidrocantabrico) in April 2001. Partially
offsetting these items were costs associated with the outsourcing of customer
service operations in the UK. The US Gas segment results declined compared to
the prior year quarter primarily due to the $34 million after-tax gain from the
sale of substantially all of its gas processing assets in the 2000 period,
increases in revenue-related taxes and increases in maintenance expenditures
necessary to improve distribution reliability. The US Energy segment's improved
margins were offset by anticipated higher operating expenses related to the
development of retail energy services operations in advance of the deregulated
Texas electricity market and the expansion of trading operations. Australia
segment results were lower than the prior year quarter due to the distribution
rate reset, lower merchant trading results due to higher energy prices and
better than normal results of portfolio operations in the prior year quarter. In
addition to the gain from the sale of substantially all of the assets of the
natural gas processing business discussed above, results for the 2000 quarter
included a $44 million pre-tax ($31 million after-tax) gain from the sale of TXU
Europe's metering business. Partially offsetting were after-tax costs of $15
million, mostly restructuring charges associated with the implementation of the
joint venture to operate TXU Europe's UK electric distribution network with that
of London Electricity plc and other corporate reorganizations, as well as costs
associated with the acquisition bid for Hidrocantabrico.
Operating revenue of $6.1 billion for the second quarter of 2001 increased
33% from $4.6 billion for the second quarter of 2000. The increase in revenue is
the result of increases in merchant energy trading activities from the Europe
segment and increased revenues from the US Electric and US Gas segments due to
higher fuel prices, customer growth and a revenue enhancement program for the US
Gas segment. Revenues for the 2001 period also reflect TXU Europe's acquisitions
of Norweb Energi and Kiel AG.
20
<Page>
Energy purchased for resale and fuel consumed for the second quarter of
2001 were 43% greater than in the prior-year quarter due to higher prices and
sales volumes in the US Electric, US Gas and Europe segments and the
acquisitions of Norweb Energi and Kiel AG. Operation and maintenance expense was
higher in the second quarter of 2001 than in the same period of 2000, primarily
due to Norweb Energi and Kiel AG operations acquired by the Europe segment,
generation maintenance expenses and higher third-party transmission tariffs for
the US Electric segment, maintenance expenditures for the US Gas segment to
improve distribution reliability and costs to develop and support retail energy
services operations and growth in trading operations for US Energy. Depreciation
and amortization expense remained relatively flat for the second quarter of 2001
compared to the second quarter of 2000 primarily reflecting the Norweb Energi
and Kiel AG acquisitions, which were more than offset by the change in
depreciation and depreciable lives of the distribution assets in the third
quarter of 2000 by TXU Europe. The increase in goodwill amortization primarily
reflects the acquisitions of Norweb Energi and Kiel AG.
The effective tax rate for the second quarter of 2001 was 30% compared to
29% for 2000. Differences in effective tax rates are primarily attributable to
foreign tax credits, partially offset by the effect of non-deductible goodwill
amortization, state income taxes and other tax expense associated with non-US
operations.
SIX MONTHS ENDED JUNE 30, 2001
Net income available for common stock for the six months ended June 30,
2001 was $397 million ($1.55 per share) compared with $420 million ($1.57 per
share) for the prior six-month period. The US Electric, Europe and Australia
segments contributed positively to results for the 2001 period. The US Electric
segment benefited from continued strong revenue and customer growth and earnings
in excess of the regulatory earnings cap partially offset by increases in
generation related expenses and higher third party transmission tariffs.
Earnings in excess of the earnings cap reduced net income by $16 million in the
2001 period and $65 million in the 2000 period. The change in mitigation is due
to the impact of higher revenue related taxes and the timing of other operating
expenses. Operation and maintenance expense for the year are expected to be
within levels allowed in connection with establishing the earnings cap. Results
for the Europe segment reflects a continued strong performance in merchant
energy trading activities, the timing of earnings from Norweb Energi and Kiel AG
and a $73 million pre-tax ($51 million after-tax) gain on sale of its investment
in Hidrocantabrico, as well as lower levels of restructuring costs. The US Gas
segment results declined compared to the prior year quarter primarily due to the
sale of substantially all of the assets of its natural gas processing business
recorded in the 2000 period, increases in revenue-related taxes and maintenance
expenditures necessary to improve distribution reliability. The US Energy
segment's improved margins were offset by anticipated higher costs to develop
and support retail energy services operations and growth in trading operations.
The Australia segment results for the 2001 period were lower than in the prior
year period due to the distribution rate reset, lower merchant energy trading
results due to higher energy prices and better than normal results of portfolio
operations in the prior year period, which includes the sale of Enetech in
January 2000.
Operating revenue of $14.5 billion for the six months ended June 30, 2001
increased 55% from $9.4 billion for the six months ended June 30, 2000. The
increase in revenue is the result of increases in merchant energy trading
activities from the US Energy and Europe segments and increased revenues from
the US Electric and US Gas segments due to higher fuel prices, customer growth
and a revenue enhancement program for the US Gas segment. Revenues for the six
months ended June 30, 2001 also reflect revenues of Norweb Energi and Kiel AG
since their acquisition.
Energy purchased for resale and fuel consumed for the six months ended
June 30, 2001 were 82% greater than the prior-year period due to higher prices
and sales volumes in the US Electric, US Gas and Europe segments and the
acquisitions of Norweb Energi and Kiel AG. Operation and maintenance expense was
higher in the six months ended June 30, 2001 than in the same period of 2000,
primarily due to Norweb Energi and Kiel AG operations acquired by the Europe
segment, generation maintenance expense and higher third-party transmission
tariffs for the US Electric segment and costs to develop and support retail
energy services operations and growth in trading operations for US Energy. These
increases were partially offset by a decrease in operation and maintenance
expense for the US Gas segment due to the sale of the gas processing business in
May 2000. Depreciation and amortization expense remained relatively flat for the
2001 period compared to the 2000 period, primarily reflecting the Norweb Energi
and Kiel AG acquisitions, which were more than offset by the exchange rate
impact and change in depreciation method and depreciable lives of the
distribution assets in
21
<Page>
the third quarter of 2000 by TXU Europe. The increase in goodwill amortization
primarily reflects the acquisitions of Norweb Energi and Kiel AG.
Differences in effective tax rates are primarily attributable to foreign
tax credits, partially offset by the effect of non-deductible goodwill
amortization and other tax expense associated with non-US operations.
SEGMENTS
Revenues and net income by operating segment are shown in Note 9 to
Financial Statements.
US ELECTRIC
SEGMENT HIGHLIGHTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues (millions):
Base rate ............................. $ 1,153 $ 1,162 $ 2,147 $ 2,113
Transmission service .................. 45 41 89 84
Fuel .................................. 725 577 1,505 931
Earnings in excess of earnings cap .... (10) (100) (24) (100)
Other ................................. 32 18 67 33
-------- -------- -------- --------
Total operating revenues ...... $ 1,945 $ 1,698 $ 3,784 $ 3,061
======== ======== ======== ========
Electric energy sales (gigawatt-hours -- GWh) .. 25,874 25,507 50,337 48,050
Degree days (% of normal):
Cooling ............................... 110% 115% 106% 121%
Heating ............................... 41% 79% 105% 64%
</Table>
The US Electric segment had net income of $226 million for the three
months ended June 30, 2001 compared with net income of $186 million for the
three months ended June 30, 2000. Margin for the segment increased by $124
million primarily due to customer growth and lower earnings in excess of the
regulatory earnings cap. Following the 1999 Restructuring Legislation, earnings
in excess of the regulatory earnings cap have been recorded as a reduction of
revenues, with a corresponding regulatory liability recorded. The change in
mitigation is due to the impact of higher revenue related taxes and the timing
of other operating expenses. Operation and maintenance expense increased by $48
million from the 2000 period to the 2001 period due to expected increased
generation maintenance, higher transmission costs and costs related to
transitioning to deregulation of the electricity markets in Texas commencing
January 1, 2002. Operation and maintenance expense is expected to be within
levels provided in association with the regulatory earnings cap. Taxes other
than income increased by $20 million from the 2000 period to the 2001 period
primarily due to higher state and local gross receipts taxes as a result of
higher revenues.
The US Electric segment had net income of $383 million for the six months
ended June 30, 2001 compared with net income of $331 million for the six months
ended June 30, 2000. Margin for the segment increased by $174 million primarily
due to customer growth and lower earnings in excess of the regulatory earnings
cap. Operation and maintenance expense increased by $69 million for the 2001
period compared with the 2000 period due to expected increased generation
maintenance, higher transmission costs and costs related to transitioning to
deregulation of the electricity markets in Texas commencing January 1, 2002. The
change in mitigation is due to the impact of higher revenue related taxes and
the timing of other operating expenses. Operation and maintenance expense is
expected to be within levels provided in association with 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.
22
<Page>
US GAS
SEGMENT HIGHLIGHTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Gas distribution:
Sales volumes (billion cubic feet -- Bcf) . 18 19 92 68
Margin (millions) ......................... $ 42 $ 57 $194 $179
Pipeline transportation:
Transportation volumes (Bcf) .............. 122 133 280 274
Revenues (millions) ....................... $ 22 $ 24 $ 60 $ 59
Heating degree days (% of normal) ............... 41% 79% 105% 64%
</Table>
For the three months ended June 30, 2001, the US Gas segment had a net
loss of $40 million compared with net income of $13 million for the three months
ended June 30, 2000. Substantially all of the natural gas processing assets of
the US Gas segment were sold in May 2000, resulting in a pre-tax gain of $53
million ($34 million after-tax). Excluding the gas processing results of
operations and gain on sale, the segment had a net loss of $20 million for the
three months ended June 30, 2000. Although volumes decreased due to warmer
weather, margin for the segment increased by $2 million from the 2000 period to
the 2001 period, excluding gas processing operations. Operation and maintenance
expense increased from $49 million in the 2000 period to $65 million in the 2001
period, excluding gas processing operations. The increase in maintenance expense
in the 2001 period primarily reflects increased maintenance costs to improve
reliability. Taxes other than income increased by $21 million from the 2000
period to the 2001 period, excluding gas processing operations, primarily
reflecting higher state and local gross receipt taxes resulting from higher
revenues.
For the six months ended June 30, 2001, the US Gas segment had a net loss
of $1 million compared with net income of $43 million for the six months ended
June 30, 2000. Excluding the gas processing results of operations and gain on
sale, the segment had net income of $5 million for the six months ended June 30,
2000. Excluding the gas processing operations, margin for the segment increased
by $39 million from the 2000 period to the 2001 period due to colder winter
weather in the first quarter of 2001 and the effects of rate relief granted for
gas distribution operations. Operation and maintenance expense increased from
$103 million in the 2000 period to $132 million in the 2001 period, excluding
gas processing operations. The increase in the 2001 period primarily reflects
increased maintenance costs to improve reliability. Taxes other than income
increased by $28 million from the 2000 period to the 2001 period, excluding gas
processing operations, primarily reflecting higher state and local gross receipt
taxes resulting from higher revenues.
US ENERGY
SEGMENT HIGHLIGHTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
Trading and marketing volumes:
Gas (Bcf) ............. 182 306 454 626
Electric (GWh) ........ 2,431 6,836 7,790 10,540
</Table>
The US Energy segment had a net loss of $5 million for the three months
ended June 30, 2001 compared with a net loss of $3 million for the three months
ended June 30, 2000. A significant margin improvement of $17 million for the
segment was slightly exceeded by an $18 million increase in operation and
maintenance expense for the 2001 period compared to the 2000 period. Margin for
the segment increased for the second quarter of 2001 over the 2000 period
primarily due to favorable proprietary trading activities and forward trading
activities associated with the deregulation of the Texas electricity market
beginning in 2002. The retail energy services business continued signing large
commercial and industrial customers for electricity deliveries following
deregulation of the electricity markets in Texas commencing January 1, 2002. The
contracts for such
23
<Page>
deliveries are derivatives; accordingly, the retail energy services business
recognized the value of such derivatives, net of related reserves, of $6 million
in earnings in the second quarter of 2001. The increase in operation and
maintenance expense from the 2000 period to the 2001 period was primarily due to
the development of retail energy services and to support the growth in trading
operations in preparation for the deregulated market in Texas beginning in 2002.
The US Energy segment had a net loss of $15 million for the six months
ended June 30, 2001 compared with a net loss of $11 million for the six months
ended June 30, 2000. A significant margin improvement of $38 million for the
segment was slightly exceeded by a $40 million increase in operation and
maintenance expense for the 2001 period compared to the 2000 period. Margin for
the segment increased for the current period primarily due to favorable
proprietary trading activities and forward trading activities associated with
the deregulation of the Texas electricity market beginning in 2002. The value of
retail energy services derivatives for electricity deliveries following
deregulation of the electricity markets in Texas, net of related reserves,
recognized in earnings in the 2001 period was $8 million. The increase in
operation and maintenance expense from the 2000 period to the 2001 period was
primarily due to the development of retail energy services and to support the
growth in trading operations in preparation of the deregulated market in Texas
beginning in 2002.
EUROPE
SEGMENT HIGHLIGHTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001* 2000 2001* 2000
--------- --------- --------- ---------
Sales volumes:
Electric (GWh) ....................... 11,468 6,001 24,497 14,164
Gas (Bcf) ............................ 29 21 93 59
Electricity units distributed (GWh) .. 7,404 7,621 17,308 16,825
Wholesale energy sales:
Electricity (GWh) ............... 31,605 33,263 75,355 57,698
Gas (Bcf) ....................... 345 275 724 461
Revenues (millions):
Electric ............................. $ 734 $ 501 $ 1,679 $ 1,173
Gas .................................. 156 93 427 276
Distribution ......................... 99 114 226 302
Wholesale energy sales ............... 1,576 564 3,399 1,408
Intra-segment eliminations and other . 141 (13) 340 (51)
-------- -------- -------- --------
Total ..................... $ 2,706 $ 1,259 $ 6,071 $ 3,108
======== ======== ======== ========
</Table>
*Includes results of Norweb Energi acquired on August 3, 2000 and Kiel AG
acquired on January 8, 2001.
Net income for the three months ended June 30, 2001 was $73 million
compared with $49 million for the same period in 2000. Excluding the effects of
the disposal of the metering business and restructuring costs, net income in the
2000 period was $33 million. The improvement in net income for 2001 reflects a
continued strong performance in merchant energy trading in the UK and
continental Europe, the inclusion of the results of Norweb Energi and Kiel AG
since their acquisition on August 3, 2000 and January 8, 2001, respectively, and
gains from the sale of a previous investment in Spain. These were somewhat
offset by the strength of the US dollar.
During the three months ended June 30, 2001 and 2000, TXU Europe recorded
restructuring charges and other costs of approximately $17 million and $20
million pre-tax ($12 million and $15 million after-tax), respectively. Most of
these costs consisted of asset writedowns and other exit and redundancy costs
(severance benefits paid to staff under voluntary retirement programs and
related pension benefits), primarily a result of contracting TXU Europe's
customer service operations to Vertex Data Science Limited, the creation of the
24seven joint venture and certain other staff reorganizations.
24
<Page>
Net income for the six months ended June 30, 2001 was $140 million
compared with $116 million for the same period in 2000. The improvement in net
income for 2001 reflects a continued strong performance in merchant energy
trading activities across Europe, the timing of earnings from the Norweb Energi
business and a gain from the sale of Hidrocantabrico as well as lower levels of
restructuring costs. These favorable factors offset the effect of lower networks
revenues resulting from price reductions following the April 1, 2000 OFGEM
distribution price review, higher interest and related charges and the strength
of the US dollar. Excluding the effects of the disposal of the metering business
and restructuring costs, net income in the 2000 period was $149 million compared
with $169 million for the 2001 period after deducting restructuring costs.
During the six months ended June 30, 2001 and 2000, TXU Europe recorded
restructuring charges and other costs of $40 million and $87 million pre-tax
($29 million and $64 million after-tax), respectively. Included in the costs for
2000 was $10 million of costs associated with the offer for Hidrocantabrico. The
majority of the remaining costs consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under voluntary retirement
programs and related pension benefits), primarily as a result of contracting TXU
Europe's customer service operations to Vertex Data Science Limited, the
creation of the joint venture 24seven and certain other staff reorganizations.
The expected effect of the Norweb Energi acquisition on income before
interest is to alter the timing of earnings from the UK electricity portfolio
across the year such that profits in the first and fourth quarters are reduced
with a more than offsetting increase in the second and third quarters. This
arises from constant retail customer prices throughout the year compared with
more seasonal wholesale contracts and spot prices.
AUSTRALIA
SEGMENT HIGHLIGHTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
------ ------ ------ ------
Sales volumes:
Electric (Gwh) ........ 1,334 1,440 2,585 2,783
Gas (Bcf) ............. 20 21 33 35
Revenues (millions):
Electric .............. $ 79 $ 91 $ 156 $ 179
Gas ................... 47 53 77 86
Other ................. 41 65 114 92
------ ------ ------ ------
Total ........ $ 167 $ 209 $ 347 $ 357
====== ====== ====== ======
</Table>
Net income for the quarter ended June 30, 2001 was $13 million compared
with $26 million for the same period in 2001. The decrease in net income is
primarily due to lower merchant energy trading results in 2001 compared to the
favorable results of 2000, resulting from higher electricity energy prices in
2001 and the effects of competitive pressures experienced with customer contract
renewals. These decreases were partially offset by the addition of the Torrens
Island generation station (Optima Energy Pty.) in May 2000. Net income for the
six months ended June 30, 2001 was $21 million compared with $37 million for the
same period in 2000. The decrease in net income is primarily due to the items
discussed above for the three month period and the $6 million gain on the sale
of Enetech recorded in January 2000.
COMPREHENSIVE INCOME
The losses from currency translation adjustments reflect the substantial
movement in exchange rates between the US dollar and the UK pound sterling and
the Australian dollar. The unrealized holding gains on investments are primarily
related to market changes in the value of investments held by TXU Europe and
TXU.
25
<Page>
The implementation of Statement of Financial Accounting Standards (SFAS)
No. 133 "Accounting for Derivative Instruments and Hedging Activities" resulted
in a cumulative effect reduction of $132 million net of tax in Other
Comprehensive Income (OCI) as of January 1, 2001. During the six months ended
June 30, 2001 the change in fair value of cash-flow hedges was a reduction of
$88 million after tax while $109 million after tax of the deferred amount was
recognized in earnings. See Note 2 to Financial Statements for additional
information.
The implementation of SFAS No. 133 has had minimal effect on TXU's results
of operations. The merchant energy trading businesses in the US, Europe and
Australia use mark-to-market accounting for their trading activities. Merchant
energy trading transactions which are derivatives pursuant to SFAS No. 133 also
are required to be accounted for using mark-to-market accounting. Therefore,
SFAS No. 133 has not affected merchant energy operating results. Retail energy
services contracts which commenced to be written in 2001 are derivatives as
discussed previously.
TXU has historically used, and will continue to use, other derivatives
which are highly effective in offsetting future cash flow volatility in interest
rates, currency exchange rates and energy commodities, essentially converting
variable arrangements to fixed arrangements. The fair value of derivatives that
are effective as cash-flow hedges are recorded as derivative assets or
liabilities with an offset in OCI. Accordingly, the principal impact of SFAS No.
133 has been on the balance sheet.
The balance sheet value of these derivative assets or liabilities can
change significantly from quarter to quarter based on changes in market
expectations of economic events, such as the recent drop in US interest rates
and changes in actual and expected natural gas and electricity prices. The fair
value of these cash-flow hedge derivatives is determined each quarter based on
actual and forecasted interest rates, currency rates and commodity prices.
Consistent with the above, the effect of changes in fair value is reflected in
the derivative asset or liability and in OCI.
The amounts included within OCI reflect the value of the cash-flow hedges
based on current market conditions and therefore the amount for which the hedge
will be used in the future to offset the impact of expected changes in variable
prices. Consistent with hedge accounting prior to SFAS No. 133, the effects of
the hedged transaction will be recorded in the statement of income as the
related transaction is actually settled.
The disclosure in Note 2 to the Financial Statements of the amount of
derivative gains and losses "expected to be reclassified into earnings during
the next twelve months" represents the projected value of the hedge over the
next twelve months relative to what would be recorded had the hedge transaction
not been entered into. The 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.
CREDIT RISK
See Note 11 to Financial Statements for information on credit risk.
26
<Page>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU's 2000 Form 10-K. No significant changes or events that might
affect the financial condition of TXU have occurred subsequent to year-end other
than as disclosed herein.
CASH FLOWS -- Cash flows provided by operating activities before changes
in operating assets and liabilities for the six months ended June 30, 2001 were
$1.1 billion compared with $1.0 billion for the comparable period in 2000.
Changes in operating assets and liabilities for the six months ended June 30,
2001 used $530 million compared with $234 million for the same period of 2000.
Changes in operating assets and liabilities were primarily caused by
fluctuations in working capital.
Cash flows used in investing activities for the six months ended June 30,
2001 were $512 million compared to $576 million for the 2000 period. Cash of
$217 million was used in the six-month period ended June 30, 2001 for
acquisitions, primarily Kiel AG by TXU Europe, compared with $339 million for
the same period in 2000, primarily for the acquisitions of the Torrens Island
generation facility in Australia and Fort Bend Communications Company in Texas.
Capital expenditures were $796 million for the current six-month period compared
with $615 million for the comparable period in 2000. The increase is related to
the expansion of construction expenditures primarily for the US Electric and US
Gas segments.
On January 8, 2001, TXU Europe completed the acquisition of 51% of Kiel
AG, for (pound)145 million ($217 million).
On July 12, 2001, TXU Europe completed the sale of its Rugeley generating
stations for approximately (pound)200 million ($280 million). Cash received at
closing was (pound)67 million ($94 million) with the remaining cash proceeds
from the sale to be received in January 2002. A letter of credit has been
received to cover the remaining cash proceeds. The transaction includes a
medium-term tolling contract under which TXU Europe will provide coal for the
plant and purchase its output, maintaining full access to the new NETA balancing
market. The sale followed TXU Europe's review of its UK generating portfolio
announced last year and is in line with its flexible portfolio management
strategy.
On April 20, 2001, TXU Europe received net proceeds of (euro)522 million
($468 million) from the sale of its 19.2% interest in Hidrocantabrico.
In February 2001, TXU Europe finalized the sale of its interest in the
North Sea gas fields for (pound)138 million ($196 million) as a result of its
ongoing review of its program to reposition its energy portfolio. TXU Europe
received net cash proceeds of approximately (pound)102 million ($144 million).
TXU will pursue potential investment opportunities from time to time when
it concludes that such investments are consistent with its business strategies
and will dispose of nonstrategic assets to allow redeployment of resources into
faster growing opportunities in an effort to enhance the long-term return to its
shareholders.
TXU or its predecessor has declared common stock dividends payable in cash
in each year since incorporation in 1945. TXU paid a quarterly dividend of $0.60
a share in April and July 2001. Future dividends may vary depending upon TXU's
profit levels and capital requirements as well as financial and other conditions
existing at the time.
TXU anticipates that, in connection with the business separation plan
required by legislation passed in 1999 to restructure the electric utility
industry in Texas, its subsidiaries will refinance certain outstanding
securities in the capital markets in order to properly capitalize the separated
businesses.
27
<Page>
TXU had two equity purchase agreements with separate financial
institutions to purchase shares of TXU's common stock. On April 16, 2001, TXU
purchased 1,252,500 shares of its common stock for $44 million on one of the
equity purchase agreements. Following such purchase, TXU closed the contracts
without purchasing additional shares. Settlement of these agreements had no
effect on earnings.
External funds of a permanent or long-term nature are obtained through the
issuance of common stock, preference and preferred stock, trust securities and
long-term debt by TXU and subsidiaries. The capitalization ratios of TXU at June
30, 2001 consisted of approximately 62% long-term debt, 6% preferred securities
of subsidiary trusts, 2% preference and preferred stock and 30% common stock
equity. Restricted cash of $1,032 million pledged against TXU Europe lease
obligations is included in other investments. Applying the cash pledged against
related lease obligations, the capitalization ratios consisted of 60% long-term
debt, 6% preferred securities of subsidiary trusts, 2% preference and preferred
stock and 32% common stock equity.
ISSUANCES AND RETIREMENTS -- During the six months ended June 30, 2001,
TXU issued, redeemed, reacquired or made scheduled principal payments on
preference stock, long-term debt and trust securities, as follows:
<Table>
<Caption>
ISSUANCES RETIREMENTS
--------- -----------
TXU Corp:
Senior notes .............................. $ 800 $ --
Long-term debt ............................ -- 538
TXU Electric:
Long-term debt ............................ 121 153
TXU Europe:
Revolving Credit Facility (Tranche B) .... 120 124
Long-term debt ............................ 33 566
TXU Australia:
Long-term debt ............................ 51 --
All Other Subsidiaries .......................... -- 5
------ ------
Total .................................... $1,125 $1,386
====== ======
</Table>
At June 30, 2001, TXU, TXU Electric and TXU Gas had no borrowings
outstanding under the US Credit Agreements described in Note 4 of TXU's 2000
Form 10-K. Letters of credit outstanding under the agreements were $366 million
as of June 30, 2001. The US Credit Agreements primarily support commercial paper
borrowings. At June 30, 2001, outstanding commercial paper borrowings supported
by both facilities totaled $1.9 billion.
FINANCING ARRANGEMENTS -- TXU, TXU Electric, TXU Gas and other
subsidiaries of TXU may issue and sell additional debt and equity securities as
needed, including the possible future issuance and sale: (i) by TXU Electric 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 and (ii) by TXU Gas
of up to an aggregate of $400 million of debt securities and/or preferred
securities of subsidiary trusts.
No other substantive changes to financing arrangements have occurred
subsequent to December 31, 2000 except as described in Notes 3 and 4 to
Financial Statements. See Notes 3, 4, 5 and 6 to Financial Statements for
further details concerning financing and capitalization.
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<Page>
REGULATION AND RATES
UK -- NEW ELECTRICITY TRADING ARRANGEMENTS (NETA) -- NETA was implemented
in the UK on March 27, 2001, replacing the Pooling and Settlement Agreement (the
Pool) arrangements for wholesale electricity trading in England and Wales. NETA
provides those companies wishing to buy and sell electricity the freedom to
enter into directly negotiated contracts instead of having to trade through the
Pool. Under the new arrangements, bulk electricity is traded through a variety
of bilateral and physical contracts. Market participants include not only
generators and suppliers but also traders, such as energy wholesalers, with
physical positions. Accordingly, implementation of NETA has eliminated the Pool.
The new arrangements provide mechanisms for near real-time clearing and
settlement of differences between contractual and physical positions of those
buying, selling, producing and consuming electricity. A balancing mechanism
enables the system operator (National Grid Company) to change levels of
generation and demand to near real-time; and a mechanism for imbalance
settlement provides for the settling of the differences between net physical and
net contractual position of parties.
The first three months of NETA have been characterized by market
participants adapting their operations and systems to accommodate new processes
and requirements; furthermore, market participants have experienced either
charges or credits from the balancing mechanism. TXU Europe has had positive
results to date. Requests for the modification to the NETA rules have been made
by some participants, but TXU Europe expects these will be resisted. The
long-term effect of NETA will become clearer over coming months when many
business customers negotiate power contracts with suppliers in the new
environment. Prices could be reduced, but volatility in the NETA Balancing
Mechanism could put upward pressure on end prices.
NEW LICENSING ARRANGEMENTS -- Under the UK Utilities Act 2000, which
became effective in April 2001, the concept of a company holding a "Public
Electricity Supply Licence" (a PES company) will be abolished when the relevant
commencement orders are laid before Parliament. This is likely to take place in
the autumn of 2001, and a significant feature is that one entity will not be
able to have legal ownership of both an electricity distribution business and an
electricity supply business. Currently, the legal entity Eastern Electricity Ltd
(a subsidiary company of TXU Europe Group plc) is a PES license holding company.
In accordance with the legislation, the electricity supply business included in
Eastern Electricity Ltd will be transferred to an affiliate company (another
wholly owned subsidiary of TXU Europe Group plc) leaving only the electricity
distribution business within Eastern Electricity Ltd. TXU Europe does not
anticipate these new arrangements having any significant financial impact on the
consolidated financial statements.
The UK Utilities Act 2000 includes provision for the Gas and Electricity
Markets Authority (the Regulator) to impose on a license holder a financial
penalty where the license holder has contravened or is contravening a condition
or requirement, or has failed to achieve any standard of performance prescribed
under the legislation. The financial penalties regime is scheduled for
commencement later this year. Such penalties will be subject to a maximum limit.
The current proposal presently undergoing public consultation is for the maximum
limit to be set at 10% of the revenue of the company, generated within Great
Britain, which is the holder of the relevant license. In addition it is
currently proposed that the maximum penalty at the rate of 10% should apply to
that revenue for each year in which the breach or failure took place, up to a
maximum of three years. TXU Europe is not presently aware of any matters that
would make it subject to significant penalties.
AUSTRALIA -- TXU Australia is subject to regulation by the Office of the
Regulator General (ORG). On September 21, 2000, the ORG published its final
decision in the 2001 Electricity Distribution Price Review. The decision will
cause TXU Australia's electricity distribution revenue for 2001 to be
approximately A$16 million ($9 million) lower than for 2000. TXU Australia
appealed the decision to the ORG Appeal Panel on October 2, 2000. The price path
for TXU Australia's electricity distribution tariffs effective from January 1,
2001 until at least December 31, 2005 was redetermined on December 1, 2000. TXU
Australia appealed the ORG's price path redetermination to the Victorian Supreme
Court, which dismissed the proceeding and assessed TXU Australia costs of the
proceeding. TXU Australia filed a Notice of Appeal with the Court of Appeal on
June 8, 2001.
Retail prices for customers whose usage is above 160 MWh/year are subject
to competitive forces and are not regulated. Customers who use 40 MWh/year or
more have been able to choose their retailer since January 1,
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<Page>
2001. The government has the power to regulate retail prices for electricity
customers with a usage below 160 MWh/year until 2003. TXU Australia and other
Victorian retailers have submitted to the government their proposals for price
increases. The government has used its reserve powers to keep the retail prices
at the current levels, and has requested the ORG to review the submissions.
The distribution tariffs applicable to TXU Australia's gas distribution
network are effective until December 31, 2002, at which time a price review
process will occur prior to new tariffs being approved by the ORG for the next
five-year period. After the next period, prices will be set for periods
nominated by TXU Australia and approved by ORG.
Gas retail customers with loads above 9,200 Mcf/year are currently subject
to competition. Customers with loads between 4,600 Mcf/year and 9,200 Mcf/year
will be able to choose their retailers after September 1, 2001 and, the
remaining customers at a date yet to be confirmed, currently expected to be
October 1, 2002.
Although TXU 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 2000 Form
10-K and this Form 10-Q, which might significantly alter its financial position,
results of operations or cash flows. See Note 7 to the Financial Statements for
discussion of rates and regulation related to US Electric Segment.
30
<Page>
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 contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although TXU believes that in making 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's 2000 Form
10-K, as well as general industry trends; implementation of the Texas
electricity deregulation 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 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 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed below, 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
2000 Form 10-K and is therefore not presented herein. Changes in the fair value
of TXU's cash flow hedges for foreign currency, interest rate and energy related
derivative contracts that were discussed in the 2000 Form 10-K, are recorded as
a component of Other Comprehensive Income as a result of implementation of SFAS
133. Other than as described therein, since December 31, 2000 there has been no
significant change in the contractual terms and notional amounts of such as
disclosed in the TXU 2000 Form 10-K.
TXU Energy Trading uses market-implied volatilities to determine its
exposure to market risk. Market risk is estimated as the potential loss in fair
value resulting from at least a 15% change in market factors, which may differ
from actual results. Using a two standard deviation change, the most adverse
change in fair value at June 30, 2001 and December 31, 2000, as a result of this
analysis, was a reduction of $11.5 million and $1.3 million, respectively. This
change is a result of expansion in the energy marketing business in accordance
with the TXU merchant energy strategy in preparation for deregulation of the
electricity markets in Texas commencing January 1, 2002.
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<Page>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS -- UK -- In February 1997, the official government
representative of pensioners (Pensions Ombudsman) made a final determination
against the National Grid Company plc (National Grid) and its group trustees
with respect to complaints by two pensioners in National Grid's section of the
Electricity Supply Pension Scheme (ESPS). The determination related to the use
of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from the
payment of pensions on early retirement upon reorganization or downsizing. This
determination was set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision to the Court
of Appeal, and judgment was received. The judgment endorsed the Pensions
Ombudsman's determination that the corporation was not entitled to unilaterally
deal with any surplus. National Grid appealed the decision to the House of Lords
and, on April 4, 2001, the appeal was allowed. The House of Lords found that
National Grid was entitled to use the surplus funds as they had done. As a
result of the decision of the House of Lords, TXU Europe considers that the
likelihood of a claim of this nature being made against it is remote.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TXU Corp. held its Annual Meeting of Shareholders on May 11, 2001. The
following items were presented to the shareholders with the following results:
<Table>
<Caption>
Votes
Withheld or
Election of Directors Votes for Against Abstentions
- ----------------------------------- ----------- ----------- -----------
Derek C. Bonham 220,331,456 2,474,742 None
J. S. Farrington 220,335,192 2,471,006 None
William M. Griffin 220,040,165 2,766,033 None
Kerney Laday 220,337,608 2,468,590 None
Jack E. Little 220,256,489 2,549,709 None
Margaret N. Maxey 219,782,220 3,023,978 None
Erle Nye 220,377,684 2,428,514 None
J. E. Oesterreicher 220,269,087 2,537,111 None
Charles R. Perry 220,115,904 2,690,294 None
Herbert H. Richardson 220,120,838 2,685,360 None
Selection of Deloitte & Touche LLP
As Independent Accountants 220,648,507 911,687 1,246,004
</Table>
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<Page>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as 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 the New York, as Trustee,
previously filed with File No. 1-11668 Form 10-Q for the
quarter ended June 30, 2001.
4(b) Indenture (For unsecured Debt Securities Series J), dated as
of June 1, 2001 between TXU Corp. and The Bank of New York, as
Trustee.
4(c) Officer's Certificate establishing the terms of the 6.375%
Series J Senior Notes due June 15, 2006.
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:
Date of Report Item Reported
-------------- -------------
June 12, 2001 Other Events and Regulation FD Disclosure.
July 26, 2001 Other Events and Regulation FD Disclosure.
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<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 CORP.
By /s/ Biggs C. Porter
--------------------------
Biggs C. Porter
Controller and Principal
Accounting Officer
Date: August 10, 2001
34