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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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TXU Electric Company
A Texas Corporation I.R.S. Employer Identification
Commission File Number 1-11668 No. 75-1837355
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 May 12, 2000: 101,249,700 shares, without par
value.
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TABLE OF CONTENTS
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Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Twelve Months Ended March 31, 2000 and 1999......... 3
Condensed Statements of Consolidated Comprehensive Income -
Three and Twelve Months Ended March 31, 2000 and 1999......... 3
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2000 and 1999.................... 4
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999.......................... 5
Notes to Financial Statements................................. 7
Independent Accountants' Report............................... 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signature................................................................. 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
Millions of Dollars
OPERATING REVENUES....................................... $1,351 $1,285 $6,273 $6,441
------ ------ ------ ------
OPERATING EXPENSES
Energy purchased for resale and fuel consumed....... 434 413 2,102 2,085
Operation and maintenance........................... 311 315 1,329 1,313
Depreciation and amortization....................... 152 147 646 752
Income taxes........................................ 58 45 375 460
Taxes other than income............................. 134 132 543 535
------ ------ ------ ------
Total operating expenses...................... 1,089 1,052 4,995 5,145
------ ------ ------ ------
OPERATING INCOME......................................... 262 233 1,278 1,296
------ ------ ------ ------
OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction. 1 1 8 6
Other income (deductions) -- net.................... (3) (4) (2) (22)
Income tax benefit (expense)........................ (8) 1 (3) 7
------ ------ ------ ------
Total other income (deductions)................ (10) (2) 3 (9)
------ ------ ------ ------
INCOME BEFORE INTEREST AND OTHER CHARGES................. 252 231 1,281 1,287
------ ------ ------ ------
INTEREST INCOME.......................................... 1 1 3 4
INTEREST EXPENSE AND OTHER CHARGES
Interest............................................ 91 112 404 464
Distributions on TXU Electric Company obligated,
mandatorily redeemable, preferred securities
of subsidiary trusts holding solely junior
subordinated debentures of TXU Electric Company.. 17 17 68 69
Allowance for borrowed funds used during construction
and capitalized interest......................... (2) (3) (8) (9)
------ ------ ------ ------
Total interest expense and other charges...... 106 126 464 524
------ ------ ------ ------
NET INCOME............................................... 147 106 820 767
PREFERRED STOCK DIVIDENDS................................ 2 3 9 12
------ ------ ------ ------
NET INCOME AVAILABLE FOR COMMON STOCK.................... $ 145 $ 103 $ 811 $ 755
====== ====== ====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------- -------------------
2000 1999 2000 1999
------ ----- ------ ------
Millions of Dollars
NET INCOME............................................... $ 147 $ 106 $ 820 $ 767
OTHER COMPREHENSIVE INCOME (LOSS) --
Net change during period in minimum pension
liability adjustment............................ -- -- 1 (1)
----- ----- ----- -----
Total....................................... -- -- 1 (1)
----- ----- ----- -----
COMPREHENSIVE INCOME $ 147 $ 106 $ 821 $ 766
===== ===== ===== =====
See Notes to Financial Statements.
3
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------
2000 1999
---------- ---------
Millions of Dollars
CASH FLOWS -- OPERATING ACTIVITIES
Net income............................................................................... $ 147 $ 106
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization........................................................ 181 186
Deferred income taxes -- net......................................................... 43 81
Investment tax credits -- net........................................................ (6) (6)
Allowance for equity funds used during construction.................................. (1) (1)
Changes in operating assets and liabilities:
Accounts receivable............................................................ 75 109
Inventories.................................................................... (1) 7
Accounts payable............................................................... (2) 1
Interest and taxes accrued..................................................... (4) (82)
Other working capital.......................................................... (31) (12)
Over/(under) -- recovered fuel revenue -- net of deferred taxes................ 20 40
Other -- net................................................................... (2) 2
----- -----
Cash provided by operating activities................................... 419 431
----- -----
CASH FLOWS -- FINANCING ACTIVITIES
Issuances of long-term debt............................................................... -- 111
Retirements/repurchases of securities:
Long-term debt........................................................................ (82) (209)
Common stock.......................................................................... (158) (148)
Change in notes payable -- affiliates..................................................... (10) (15)
Preferred stock dividends paid............................................................ (4) (3)
Debt premium, discount, financing and reacquisition expenses.............................. (1) (10)
----- -----
Cash used in financing activities....................................... (255) (274)
----- -----
CASH FLOWS -- INVESTING ACTIVITIES
Construction expenditures................................................................ (150) (135)
Nuclear fuel............................................................................. -- (19)
Other investments........................................................................ (6) (7)
----- -----
Cash used in investing activities....................................... (156) (161)
----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................................ 8 (4)
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE................................................. 4 5
----- -----
CASH AND CASH EQUIVALENTS -- ENDING BALANCE.................................................... $ 12 $ 1
===== =====
See Notes to Financial Statements.
4
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2000 December 31,
(Unaudited) 1999
----------- -----------
Millions of Dollars
ELECTRIC PLANT
In service:.......................................................................
Production................................................................... $15,535 $15,533
Transmission................................................................. 1,683 1,681
Distribution................................................................. 5,489 5,390
General...................................................................... 501 498
------- -------
Total.................................................................. 23,208 23,102
Less accumulated depreciation................................................ 7,558 7,409
------- -------
Electric plant in service, less accumulated depreciation............... 15,650 15,693
Construction work in progress..................................................... 231 191
Nuclear fuel (net of accumulated amortization: 2000 -- $657; 1999 -- $635)........ 150 171
Held for future use............................................................... 22 24
------- -------
Electric plant, less accumulated depreciation and amortization......... 16,053 16,079
Reserve for regulatory disallowances.............................................. (836) (836)
------- -------
Net electric plant..................................................... 15,217 15,243
------- -------
INVESTMENTS........................................................................... 618 612
------- -------
CURRENT ASSETS
Cash and cash equivalents........................................................ 12 4
Accounts receivable (net of allowance for uncollectible accounts: 2000 -- $1; 87 162
1999 -- $4).....................................................................
Inventories -- at average cost:
Materials and supplies...................................................... 159 158
Fuel stock.................................................................. 84 84
Deferred income taxes............................................................ -- 21
Prepayments and other current assets............................................. 53 38
------- -------
Total current assets.................................................. 395 467
------- -------
OTHER ASSETS
Regulatory assets -- net......................................................... 1,681 1,680
Under-recovered fuel revenue..................................................... 8 39
Deferred debits.................................................................. 73 67
------- -------
Total other assets.................................................... 1,762 1,786
------- -------
Total......................................................... $17,992 $18,108
======= =======
See Notes to Financial Statements.
5
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
March 31,
2000 December 31,
(Unaudited) 1999
----------- -----------
Millions of Dollars
CAPITALIZATION
Common stock without par value:
Authorized shares -- 180,000,000
Outstanding shares -- 2000 -- 101,249,700 and 1999 -- 103,874,700...................... $ 3,066 $ 3,145
Stock of parent held for long-term incentive plan trust..................................... (10) (10)
Retained earnings........................................................................... 3,602 3,536
------- -------
Total common stock equity...................................................... 6,658 6,671
Preferred stock:
Not subject to mandatory redemption..................................................... 115 115
Subject to mandatory redemption......................................................... 21 21
TXU Electric Company obligated, mandatorily redeemable, preferred securities of subsidiary
trusts holding solely junior subordinated debentures of TXU Electric Company........... 829 824
Long-term debt, less amounts due currently................................................. 4,655 4,684
------- -------
Total capitalization........................................................... 12,278 12,315
------- -------
CURRENT LIABILITIES
Notes payable -- affiliates................................................................ 311 321
Long-term debt due currently............................................................... 457 509
Accounts payable:
Affiliates............................................................................. 113 116
Other.................................................................................. 120 119
Customers' deposits........................................................................ 79 79
Taxes accrued.............................................................................. 152 139
Interest accrued........................................................................... 96 113
Deferred income taxes...................................................................... 22 --
Other current liabilities.................................................................. 108 130
------- -------
Total current liabilities..................................................... 1,458 1,526
------- -------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes.......................................................... 3,336 3,340
Investment tax credits..................................................................... 509 515
Other deferred credits and noncurrent liabilities.......................................... 411 412
------- -------
Total deferred credits and other noncurrent liabilities....................... 4,256 4,267
------- -------
CONTINGENCIES (Note 5)
------- -------
Total.................................................................... $17,992 $18,108
======= =======
See Notes to Financial Statements.
6
TXU ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Electric Company (TXU Electric) is an electric utility engaged in the
generation, purchase, transmission, distribution and sale of electric energy
solely within the State of Texas. TXU Electric is a wholly-owned subsidiary of
TXU Corp., a Texas corporation. TXU Corp. is a holding company that, through
its subsidiaries, is engaged in the generation, purchase, transmission,
distribution and sale of electricity; the gathering, processing, transmission
and distribution of natural gas; energy services; and telecommunications and
other businesses primarily in the United States (US), Europe and Australia. As
an integrated electric utility, TXU Electric currently has only one reportable
segment.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements of
TXU Electric and its subsidiaries have been prepared on the same basis as those
in its 1999 Form 10-K and, in the opinion of management, all adjustments
(constituting only 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 generally accepted
accounting principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain previously reported amounts
have been reclassified to conform to current classifications. All dollar
amounts in the condensed financial statements and tables in the notes are stated
in millions of dollars unless otherwise indicated.
The financial statements of TXU Electric reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." As a result of the restructuring legislation
passed by the Texas Legislature in 1999 (1999 Restructuring Legislation), the
electricity generation portion of TXU Electric's business no longer meets the
criteria to apply regulatory accounting principles. Accordingly, application of
SFAS No. 71 to the generation portion of TXU Electric's business was
discontinued as of June 30, 1999. TXU Electric's transmission and distribution
operations continue to meet the criteria for recognition of regulatory assets
and liabilities.
3. CAPITALIZATION
Common Stock -- During the three months ended March 31, 2000, TXU Electric
purchased and retired 2.6 million shares of its issued and outstanding common
stock from TXU Corp. at a cost of $158 million. The cost of the repurchased
shares, to the extent it exceeded the estimated amount received upon their
original issuance, has been charged to retained earnings.
7
TXU Electric Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts, Holding Solely Junior Subordinated Debentures of TXU Electric
(Trust Securities) -- At March 31, 2000 and December 31, 1999, the statutory
business trust subsidiaries had Trust Securities outstanding as follows:
Trust Securities Trust Assets Maturity
------------------------------------------------ ------------------------ ----------
Units (000's) Amount Amount
------------------------ ------------------------ ------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
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 97 103 103 2037
TXU Electric Capital V
(8.175% Trust
Securities)................. 400 400 396 392 412 412 2037
------ ------ ----- ----- ----- -----
Total............... 14,371 14,371 $ 829 $ 824 $ 876 $ 876
------ ------ ----- ----- ----- -----
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring in May 2002, effectively fixes the rate at 7.183%.
TXU Electric owns the securities issued by its subsidiary trusts and has
effectively issued a full and unconditional guarantee of such trust's
securities.
Long-Term Debt -- Certain variable rate debt of TXU Electric requires
periodic remarketing. Because TXU Electric intends to remarket these
obligations, and has the ability to refinance if necessary, they have been
classified as long-term debt. TXU Electric's first mortgage bonds are secured
by a mortgage and deed of trust with a major financial institution. Electric
plant of TXU Electric is generally subject to the lien of its mortgage.
Other -- On April 20, 2000, the holders of approximately $340 million of TXU
Electric's Floating Rate Debentures due April 24, 2000 agreed to extend the
maturity date of those debentures to December 1, 2000. In connection with the
extension, the quarterly interest rate calculation, based on LIBOR plus a
margin, was changed. The interest rate through July 23, 2000 is 6.68%.
4. REGULATION AND RATES
In October 1999, TXU Electric filed a petition with the Public Utility
Commission of Texas (PUC) for a financing order (Docket No. 21527) to permit the
issuance by a special purpose entity of $1.65 billion of transition bonds
secured by payments designed to enable TXU Electric to recover its generation-
related regulatory assets and other qualified costs in accordance with the 1999
Restructuring Legislation. The proceeds received by TXU Electric are to be used
solely for the purposes of retiring utility debt and equity. On May 1, 2000,
the PUC signed a final order rejecting TXU Electric's request for the $1.65
billion and authorized only $363 million. TXU Electric believes this final
order is inconsistent with the 1999 Restructuring Legislation and filed an
appeal on May 2, 2000 with the Travis County, Texas District Court. TXU
Electric expects that any difference between the $1.65 billion and the amount
finally authorized will continue to be deferred until securitization of
generation-related assets is again addressed by the PUC, most likely in 2002.
TXU Electric is unable to predict the outcome of these proceedings.
Docket No. 21950 -- In January 2000, TXU Electric filed with the PUC its
business separation plan as required by the 1999 Restructuring Legislation. The
plan describes how TXU Electric proposes to separate, by September 1, 2000, the
provision of competitive energy services from its regulated business activities,
and how it proposes to unbundle its business by January 1, 2002 in accordance
with the 1999 Restructuring Legislation. Only the transmission and distribution
functions will continue to be regulated. An independent organization certified
by the
8
PUC will oversee transmission system planning and reliability in the State of
Texas. Beginning January 1, 2002, retail electric customers in Texas will be
able to select their electricity providers. The portion of this plan that
describes how TXU Electric proposes to separate the provision of competitive
energy services from its regulated business activities has been severed by the
PUC from Docket No. 21950 and assigned Docket No. 21987. The remainder of Docket
No. 21950 has been merged with Docket No. 22350 described below.
Docket No. 22350 -- As required by the 1999 Restructuring Legislation, on
March 31, 2000, TXU Electric filed its transition to competition plan with the
PUC, which lays the foundation for retail competition to begin in the North
Texas electricity market. Under the plan as filed, the generation business unit
and the retail business unit of TXU Electric will become unregulated entities
and will be allowed to compete for customers. The transmission and distribution
business units of TXU Electric will be separated into regulated entities and
will together represent the regulated part of the business. The filing also
includes proposed transmission and distribution delivery rates to be charged to
retail electric providers. In addition to the actual transmission and
distribution charges for delivering electricity, these rates include nuclear
decommissioning fund charges, system benefit fund charges, and stranded cost
recovery charges. TXU Electric's stranded costs are 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. This estimate is subject to a future "true-up" in 2004.
TXU Electric is unable to predict the outcome of these proceedings.
Docket No. 9300 -- 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. TXU Electric cannot predict the
outcome of the reconsideration of the Order on remand by the PUC.
5. CONTINGENCIES
Financial Guarantees --TXU Electric has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric
energy and has agreed, in effect, to guarantee the principal, $24 million at
March 31, 2000, 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 has assigned to a
municipality all contract rights and obligations of TXU Electric in connection
with $53 million remaining principal amount of bonds at March 31, 2000, issued
for similar purposes which had previously been guaranteed by TXU Electric. TXU
Electric is, however, contingently liable in the unlikely event of default by
the municipality.
General -- TXU Electric is involved in various legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management,
should not have a material effect upon its financial position, results of
operations or cash flows.
9
INDEPENDENT ACCOUNTANTS' REPORT
TXU Electric Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Electric Company and subsidiaries (TXU Electric) as of March 31, 2000, and the
related condensed statements of consolidated income and of comprehensive income
for the three-month and twelve-month periods ended March 31, 2000 and 1999, and
of consolidated cash flows for the three-month periods ended March 31, 2000 and
1999. These financial statements are the responsibility of TXU Electric's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Electric as of December 31, 1999, and the related statements of consolidated
income, comprehensive income, cash flows and common stock equity for the year
then ended (not presented herein); and in our report dated February 16, 2000,
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, 1999, 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
May 15, 2000
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. Due to recent action
by the Texas Natural Resource Conservation Commission, which would require
emission reductions for TXU Electric's power plants, TXU Electric has extended
the bid process to allow prospective buyers time to evaluate this action. TXU
Electric anticipates completion of the plant sales in 2001.
RESULTS OF OPERATIONS
Significant Highlights
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
Revenues (millions):
Base rate .......................... $ 936 $ 899 $ 4,415 $ 4,473
Transmission service................ 43 34 157 130
Fuel................................ 358 336 1,775 1,777
Fuel reconciliation settlement...... -- -- (52) --
Earnings in excess of earnings cap.. -- -- (92) --
Other............................... 14 16 70 61
------- ------- -------- --------
Total operating revenues....... $ 1,351 $ 1,285 $ 6,273 $ 6,441
======= ======= ======== ========
Electric energy sales (gigawatt-hours)...... 22,315 21,384 100,416 101,822
Degree days (% of normal):
Cooling............................... 254% 57% 115% 129%
Heating............................... 63% 75% 65% 81%
Three Months Ended March 31, 2000
- ---------------------------------
Net income of $147 million for the three months ended March 31, 2000 was 39%
higher than the same period of 1999. The improvement reflects higher revenues
resulting primarily from customer growth and a 16% reduction in interest expense
due to reacquisition of long-term debt and remarketing of certain debt to lower
interest rates.
Base rate revenues for the first quarter of 2000 were up from the prior first
quarter primarily due to a 4.4% increase in sales volumes resulting primarily
from a 2.7% increase in customers. Fuel revenues in the 2000 period were higher
than in the 1999 period, primarily as a result of the higher energy sales. A
slight decrease in operation and maintenance expense in the 2000 period
virtually offset increases in depreciation expense and taxes other than income.
11
Twelve Months Ended March 31, 2000
- ----------------------------------
Net income of $820 million for the twelve months ended March 31, 2000
increased approximately 7% from the twelve months ended March 31, 1999.
Comparisons of net income were impacted by both a fuel reconciliation settlement
that reduced net income in the 2000 period by $31 million and a rate settlement
agreement that became effective in 1998 and was modified by the 1999
Restructuring Legislation, which reduced customer rates and introduced an
earnings cap.
From January 1, 1998 through June 30, 1999, earnings in excess of the
earnings cap were recorded as additional depreciation of nuclear production
assets. Effective July 1, 1999, following the 1999 Restructuring Legislation,
earnings in excess of the earnings cap were recorded as a reduction of revenues,
with a corresponding regulatory liability recorded. Mitigation as a result of
the earnings cap reduced net income by $86 million in the 2000 period and $143
million in the 1999 period.
Additionally, from January 1, 1998 through June 30, 1999, depreciation
expense was reclassified from transmission and distribution (T&D) to nuclear
production assets. Effective July 1, 1999, following the 1999 Restructuring
Legislation, T&D depreciation expense was no longer transferred to nuclear
production assets; instead an amount equivalent to T&D depreciation was recorded
as a regulatory asset, with an offsetting amount recorded as a regulatory
liability. The regulatory asset will be amortized as it is recovered through
the distribution portion of the business, while the regulatory liability will be
applied against stranded generation assets. For the twelve months ended March
31, 2000, accelerated nuclear mitigation was $339 million, including $144
million to reduce earnings to the earnings cap, $47 million of depreciation
expense reclassified from T&D to nuclear production assets and an amount
equivalent to $148 million of T&D depreciation expense recorded as a regulatory
asset. Since January 1998, regular nuclear depreciation and additional nuclear
mitigation total approximately $1.4 billion.
Excluding the reduction of revenues as a result of the earnings cap and fuel
reconciliation settlement, operating revenues for the current twelve-month
period were slightly lower than for the 1999 period. Revenues for the 1999
period include the effect of the exceptionally hot summer weather in 1998, which
more than offset the effects of strong core retail revenue growth in 2000
period.
Operation and maintenance expenses for the current twelve-month period were
relatively flat compared with the prior twelve-month period, with higher Public
Utility Commission of Texas third party transmission tariffs for the most part
offset by reductions in other operating costs. Depreciation and amortization
expense was $106 million lower in the 2000 period versus the 1999 period due to
less mitigation depreciation being recorded in the current period.
The 11% reduction in interest expense in the current twelve-month period
compared to the 1999 period was primarily due to the reacquisition of long-term
debt and remarketing of certain debt to lower interest rates.
The effective income tax rate for TXU Electric was lower for the current
twelve-month period compared to the same period last year due primarily to the
discontinuation of amortization of prior-period flow-through amounts and other
tax-related regulatory assets and liabilities resulting from the impact of the
1999 Restructuring Legislation.
12
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flows provided by operating activities before changes in operating
assets and liabilities for the three months ended March 31, 2000 were $364
million compared with $366 million for the same period last year. Changes in
operating assets and liabilities in the first quarter of 2000 provided $55
million versus $65 million in the prior period.
Cash flows used in financing activities were $255 million in the first
quarter this year compared with $274 million for the first quarter last year.
Financing activities in the first quarter of 2000 included the retirement of $82
million of long-term debt and the repurchase of $158 million of common stock
from TXU Corp.
Cash flows used in investing activities for the first quarter of 2000 totaled
$156 million versus $161 million for the same period last year. Construction
expenditures were $150 million and $135 million for the first quarter of 2000
and 1999, respectively.
No other substantive changes to financing arrangements have occurred
subsequent to December 31, 1999. Early redemptions of preferred stock, long-term
debt and trust securities may occur from time to time in amounts presently
undetermined.
Regulation and Rates
Although TXU Electric cannot predict future regulatory or legislative actions
or any changes in economic and securities market conditions, no changes are
expected in trends or commitments, other than those discussed in the 1999 Form
10-K and this Form 10-Q, which might significantly alter its financial
position, results of operations or cash flows. See Note 4 to Financial
Statements.
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133 , "Accounting for
Derivative Instruments and Hedging Activities", as extended, is effective for
TXU Electric beginning January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires the recognition of derivatives as either assets or liabilities in the
statement of financial position and the measurement of those instruments at fair
value. TXU Electric is currently evaluating the impact the adoption of this
standard will have on its financial position and results of operations.
13
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Electric contain forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. Although TXU Electric believes that in making any such
statement its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Electric's 1999 Form 10-K, as well as general industry trends;
implementation of the 1999 Restructuring Legislation; power costs and
availability; changes in business strategy, development plans or vendor
relationships; availability of qualified personnel; changes in, or the failure
or inability to comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; and access to
adequate transmission facilities to meet changing demands, among others, that
could cause the actual results of TXU Electric to differ materially from those
projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Electric undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for TXU
Electric to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information set forth in Item 7A. Quantitative and Qualitative Disclosures About
Market Risk included in TXU Electric's 1999 Form 10-K and is therefore not
presented herein.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 Letter from independent accountants as to unaudited interim financial
information
27 Financial Data Schedule
(b) Reports on Form 8-K filed since December 31, 1999:
Date of Report Item Reported
-------------- -------------
March 13, 2000 Item 5. Other Events
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU ELECTRIC COMPANY
By /s/ Jerry W. Pinkerton
----------------------
Jerry W. Pinkerton
Vice President,
Principal Accounting Officer
Date: May 15, 2000
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