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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 MARCH 31, 2002
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-11668
TXU US Holdings Company
A Texas Corporation I.R.S. Employer Identification
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___
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Common Stock outstanding at May 13, 2002: 52,817,862 shares, without par value.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income-
Three Months Ended March 31, 2002 and 2001........................ 1
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2002 and 2001........................ 2
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001.............................. 3
Notes to Financial Statements..................................... 4
Independent Accountants' Report................................... 14
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations......................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 29
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 32
SIGNATURE...................................................................................... 33
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2002 2001
---- ----
Millions of Dollars
Operating revenues................................................................... $3,580 $4,120
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Operating expenses
Energy purchased for resale, fuel consumed and delivery costs................... 2,246 3,088
Operation and maintenance....................................................... 523 393
Depreciation and amortization................................................... 178 161
Taxes other than income......................................................... 154 151
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Total operating expenses.................................................. 3,101 3,793
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Operating income..................................................................... 479 327
Other income (deductions)-- net...................................................... (2) (1)
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Income before interest, other charges and income taxes............................... 477 326
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Interest income...................................................................... 1 11
Interest expense and other charges
Interest........................................................................ 107 117
Distributions on TXU US Holdings Company obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding solely junior
subordinated debentures of TXU US Holdings Company.......................... - 17
Allowance for borrowed funds used during construction and capitalized interest (3) (5)
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Total interest expense and other charges................................. 104 129
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Income before income taxes .......................................................... 374 208
Income tax expense .................................................................. 121 60
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Net income .......................................................................... 253 148
Preferred stock dividends............................................................ 2 2
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Net income available for common stock................................................ $ 251 $ 146
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CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2002 2001
---- ----
Millions of Dollars
Net income........................................................................... $ 253 $ 148
Other comprehensive income (loss) --
Net change during period, net of tax effects:
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001..................... - (1)
Net change in fair value of derivatives.................................... (48) (1)
Amounts realized in earnings during the period............................. 3 -
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Total.................................................................. (45) (2)
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Comprehensive income................................................................. $ 208 $ 146
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See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2002 2001
---- ----
Millions of Dollars
Cash flows -- operating activities
Net income...................................................................... $ 253 $ 148
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................. 210 190
Deferred income taxes and investment tax credits -- net ................... 12 56
Net effect of unrealized mark-to-market valuation losses/(gains)........... 146 (17)
Equity in losses of affiliate and joint ventures........................... 1 1
Other...................................................................... 10 16
Changes in operating assets and liabilities................................ (347) (161)
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Cash provided by operating activities......................... 285 233
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Cash flows -- financing activities
Retirements/repurchases of securities:
Long-term debt............................................................. (328) (31)
Common stock............................................................... - (209)
Change in notes payable -- affiliates........................................... 256 217
Preferred stock dividends paid.................................................. (2) (2)
Debt premium, discount, financing and reacquisition expenses.................... (2) (2)
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Cash used in financing activities............................... (76) (27)
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Cash flows -- investing activities
Capital expenditures............................................................. (228) (193)
Nuclear fuel .................................................................... (10) (11)
Other ........................................................................... 8 (5)
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Cash used in investing activities............................... (230) (209)
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Net change in cash and cash equivalents.............................................. (21) (3)
Cash and cash equivalents -- beginning balance....................................... 55 41
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Cash and cash equivalents -- ending balance.......................................... $ 34 $ 38
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See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2002 December 31,
(Unaudited) 2001
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Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 34 $ 55
Accounts receivable............................................................ 1,228 940
Inventories -- at average cost................................................. 295 297
Prepayments.................................................................... 116 48
Energy trading and commodity derivative assets................................. 630 848
Other current assets........................................................... 72 107
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Total current assets................................................... 2,375 2,295
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Investments.......................................................................... 728 721
Property, plant and equipment -- net................................................. 16,211 16,156
Goodwill ............................................................................ 558 558
Regulatory assets.................................................................... 1,621 1,607
Energy trading and commodity derivative assets....................................... 443 389
Derivative assets.................................................................... 26 31
Deferred debits and other assets..................................................... 110 81
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Total assets........................................................... $22,072 $21,838
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- affiliates................................................... 1,846 1,300
Long-term debt due currently.................................................. 378 374
Accounts payable:
Affiliates............................................................... 61 64
Trade.................................................................... 798 669
Energy trading and commodity derivative liabilities........................... 540 630
Taxes accrued................................................................. 294 309
Interest accrued.............................................................. 88 77
Other current liabilities..................................................... 266 328
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Total current liabilities............................................... 4,271 3,751
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Accumulated deferred income taxes.................................................... 3,290 3,331
Investment tax credits............................................................... 470 476
Energy trading and commodity derivative liabilities.................................. 307 236
Derivative liabilities............................................................... 75 2
Other deferred credits and noncurrent liabilities.................................... 730 738
Long-term debt, less amounts due currently........................................... 5,488 5,819
Preferred stock subject to mandatory redemption...................................... 21 21
Contingencies (Note 6)
Shareholders' equity (Note 4)........................................................ 7,420 7,464
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Total liabilities and shareholders' equity............................. $22,072 $21,838
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See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
As of January 1, 2002, TXU US Holdings Company (US Holdings) is a holding
company for TXU Energy Company LLC (TXU Energy) and Oncor Electric Delivery
Company (Oncor). US Holdings is a wholly-owned subsidiary of TXU Corp., a Texas
corporation. Through December 31, 2001, US Holdings was directly engaged in the
generation, purchase, transmission, distribution and sale of electric energy in
the north-central, eastern and western parts of Texas. Through December 31,
2001, as an integrated electric utility, US Holdings had no reportable operating
segments.
Business Restructuring -- Legislation was passed during the 1999 session of
the Texas Legislature that restructures the electric utility industry in Texas
(1999 Restructuring Legislation). Among other matters, the l999 Restructuring
Legislation required that by January 1, 2002, each electric utility separate
(unbundle) its business into the following: power generation operations, a
retail electric provider (REP) and a transmission and distribution (T&D) company
or separate T&D companies. As a result, TXU Corp. restructured certain of its
businesses effective January 1, 2002.
As required by the 1999 Restructuring Legislation, US Holdings filed its
business separation plan with the Public Utility Commission of Texas
(Commission). This business separation plan and the March 2000 application to
the Commission laid the foundation for US Holdings to take part in retail
competition in the Texas electricity market as planned on January 1, 2002. In
order to satisfy its obligations to unbundle its business pursuant to the 1999
Restructuring Legislation and consistent with its business separation plan as
approved by the Commission, as of January 1, 2002, US Holdings transferred:
... its electric T&D assets to Oncor, which is a utility regulated by the
Commission,
... its electric power generation assets to subsidiaries of TXU Energy, which
is the new competitive business, and
... its retail customers to a subsidiary REP of TXU Energy.
The T&D assets of TXU SESCO Company (TXU SESCO), a subsidiary of TXU
Corp., also were transferred to Oncor. In addition, as of January 1, 2002, US
Holdings acquired the following businesses from within the TXU system and
transferred them to TXU Energy: the REP of TXU SESCO; the energy trading
business and the unregulated commercial/industrial retail gas operations of TXU
Gas Company (TXU Gas); and the energy management services businesses and other
affiliates of TXU Corp., including the fuel procurement business, TXU Fuel
Company (TXU Fuel), and coal mining business, TXU Mining Company LP (TXU Mining)
that service the generation operations.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a Master Separation Agreement executed in
December 2001.
4
The diagrams below summarize the principal United States (US) legal
entities and their relationships before and after the restructuring.
[FLOW CHART]
(a) Formerly TXU Electric Company.
In connection with the restructuring of certain of TXU Corp.'s businesses
effective January 1, 2002 in preparation for deregulation, the energy trading
business and the unregulated commercial/industrial retail gas operations of
TXU Gas were transferred to TXU Energy. Included in the balance sheet of TXU Gas
at December 31, 2001 was $773 million of goodwill, net of amortization, arising
from TXU Corp.'s 1997 acquisition of ENSERCH Corporation (renamed TXU Gas
Company). The energy trading business and the unregulated commercial/industrial
retail gas operations were originally part of ENSERCH Corporation. As a result
of the transfer, $468 million of that goodwill, net of amortization, has been
allocated to TXU Energy and reflected in the December 31, 2001 balance sheet of
US Holdings.
On April 25, 2002, TXU Energy completed the sale of its Handley and
Mountain Creek steam electric generating plants in the Dallas-Ft. Worth area for
$443 million in cash. The transaction includes a tolling agreement for TXU
Energy to purchase power during summer months for the next five years. A pretax
gain on the sale of $146 million will be deferred and recognized over the five
years.
5
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- In accordance with accounting principles
generally accepted in the United States of America (US GAAP), the above
transactions have been accounted for as a change in reporting entity. As such,
the consolidated financial statements of US Holdings give retroactive effect to
the above transactions which have been accounted for in a manner similar to that
in a pooling of interest for the prior period. The retroactive restatement
resulting from the change in reporting entity decreased net income of US
Holdings by $12 million for the three months ended March 31, 2001.
Additionally, Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets", became effective for US Holdings on
January 1, 2002. SFAS No. 142 requires, among other things, the allocation of
goodwill to reporting units. As a result of the allocation process, TXU Energy
was allocated $468 million of goodwill, related to the energy trading business
and the unregulated commercial/industrial retail gas operations previously
reported in the consolidated balances of TXU Gas. The allocated goodwill has
been retroactively reported in the December 31, 2001 balance sheet in accordance
with the above noted restatement criteria. US Holdings now has two separate
reportable operating segments: North America Energy and North America Electric
Delivery (See Note 7).
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 from
these quarterly financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission. The results of operations for an interim
period may not give a true indication of results for 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.
Derivative Instruments -- US Holdings and its energy trading subsidiaries
enter into derivative instruments, including options, swaps, futures, forwards
and other contractual commitments, for trading and non-trading purposes in order
to manage market risks related to changes in interest rates and commodity
prices.
The impact of changes in the market value of the effective portion of any
derivative instruments designated and documented as accounting hedges is
deferred in the balance sheet and recognized in earnings when the hedged
transactions are realized, and the ineffective portion is recognized in
earnings.
Prior to adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", in January 2001, gains and losses on non-trading
derivative instruments effective as hedges were deferred and recorded as a
component of the underlying transaction when settled. Also, the energy trading
business used mark-to-market accounting for its trading activities, which is
consistent with the required accounting under SFAS No. 133 for trading
transactions that are derivatives. If a non-trading derivative contract meets
the criteria for the normal purchase or sale exception, US Holdings can elect
not to treat it as a derivative. The use of the normal purchase or sale
exception and the hedge accounting designation are elections that can be made by
management if certain strict criteria for derivatives are met and documented.
US Holdings enters into physical and financial contracts to hedge market
risks and exposures to prices of electricity, natural gas and fuel utilized for
its generation assets and certain forecasted purchases and sales of power. US
Holdings uses hedge accounting for these non-trading commodity transactions.
In 2001 US Holdings began entering into contracts with large commercial
and industrial customers for electricity deliveries following deregulation of
the electricity markets in Texas which began January 1, 2002. The contracts for
such deliveries are derivatives; accordingly, these contracts were accounted for
on the mark-to-market accounting method in 2001. Due to the derivative nature of
these contracts, unrealized gains of $11 million were recognized in 2002 on
origination, pursuant to SFAS No. 133, and have been included with energy
6
trading assets. An additional $2 million in origination gains were recorded in
2002 primarily related to commercial and industrial retail contracts for sales
of natural gas.
Financial Summary -- US Holdings formally documents all relationships
between accounting hedge instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various accounting hedge
transactions. This process includes linking all derivatives that are designated
as fair-value or cash-flow hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions. The
maximum term over which US Holdings hedges its exposure to the variability of
future cash flows (for all forecasted transactions, excluding interest payments
on variable-rate debt) is six years.
In accordance with the transition provisions of SFAS No. 133, US Holdings
recorded, as of January 1, 2001, a cumulative effect of $1.0 million after-tax
as a decrease to other comprehensive income to recognize the fair value of all
derivatives effective as cash-flow hedging instruments.
During the first quarter of 2002, existing accounting hedges of
anticipated sales from baseload generation became less effective due to changes
in ERCOT market rules and conditions. US Holdings experienced net hedge
ineffectiveness of $8 million, reported as a loss in revenues, for the period
ended March 31, 2002, primarily related to these contracts. Accounting hedges of
interest rate risk remained highly effective during the period.
As of March 31, 2002, it is expected that $5 million after-tax of net
losses 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 use of cash flow
hedges.
Mark-to-Market Accounting -- In accordance with Emerging Issues Task Force
(EITF) Issue No. 98-10, US Holdings accounts for its energy trading activities
using the mark-to-market method of accounting. SFAS No. 133 also requires
mark-to-market accounting for derivatives unless the normal purchase or sale
exception or hedge accounting are elected. Under the mark-to-market method,
energy-related trading contracts and derivative instruments are recorded at
current fair value on the balance sheet as either energy trading assets or
liabilities, and any unrealized gains or losses resulting from period-to-period
changes in the current fair values are recorded net in revenues. US Holdings
values its portfolio of energy-related trading contracts, which include
volumetric forecasts, and derivative instruments at current market prices,
commonly referred to as forward price curves. Such market prices normally are
based on independent broker quotes and other trading information and are
validated routinely under applicable risk management control policies. The
availability of quoted market prices is dependent on the type of commodity
(e.g., natural gas, electricity, etc.), time period specified and location of
delivery. In the absence of quoted market prices, forward price curves are
developed based on the available trading information or through the use of
standard accepted modeling techniques based on market fundamentals (e.g.,
supply/demand, replacement cost, etc.).
All trading positions are marked initially to the mid-point of the bid/ask
spread (the mid-market value) discounted using a risk-free interest rate.
Liquidity valuation adjustments are recorded as reductions of the mid-market
value of open positions and increase as liquidity decreases. In computing the
liquidity valuation adjustments, each market (or curve) is split into liquid and
illiquid portions. The liquid portion varies by region, time period and
commodity. Generally, the liquid period is supported by broker quotes and
frequent trading activity. In illiquid periods, normally little or no market
information exists, and the fair value is generally estimated through market
modeling techniques. However, as a matter of policy, US Holdings generally does
not recognize any income or loss from these illiquid periods.
A performance reserve is also established for costs to complete
transactions and for various administrative and overhead costs associated with
settling the contracts in the future, such as risk management, scheduling and
accounting. In addition, a credit reserve is recorded to allow for the risk that
the value of contracts may not be
7
collected from the counterparties. Mark-to-market valuation adjustments and
reserves (liquidity, performance and credit) are reflected in US Holdings'
balance sheet as a reduction in the value of the energy trading asset.
Changes in Accounting Standards -- SFAS No. 142 became effective for US
Holdings on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units and the discontinuance of goodwill amortization. The
amortization of US Holdings' existing goodwill ceased effective January 1, 2002.
Net income would have been $15 million higher, or $163 million, in the 2001
period, but for the amortization expense related to goodwill that was recognized
in that period.
In addition, SFAS No. 142 requires completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Any goodwill impairment
loss during the transition period will be recognized as the cumulative effect of
a change in accounting principle. Subsequent impairments, if any, will be
recorded in operations. As part of its effort to implement SFAS No. 142, US
Holdings is in the process of completing the transitional impairment test. Based
on information gathered to date, US Holdings does not anticipate an impairment
of its goodwill.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for US Holdings on 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
previously recorded asset and 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. US Holdings will
change its reporting for nuclear decommissioning costs to conform to the new
standard.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for US Holdings on January 1, 2002. SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by
sale and resolves significant implementation issues related to SFAS No. 121. The
adoption of SFAS No. 144 by US Holdings has not affected its financial position
or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections", was issued in April 2002
and is applicable to fiscal years beginning after May 15, 2002. One of the
provisions of this technical statement is the rescission of SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", whereby any gain or
loss on the early extinguishment of debt that was classified as an extraordinary
item in prior periods in accordance with SFAS No. 4, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, shall be
reclassified.
For accounting standards not yet adopted or implemented, US Holdings is
evaluating the potential impact on its financial position and results of
operations.
3. FINANCING
At March 31, 2002, TXU Corp. and US Holdings had two joint US
dollar-denominated lines of credit under revolving credit facility agreements
(Credit Agreements) with a group of banking institutions that supported TXU
Corp.'s commercial paper program. The Credit Agreements consisted of a 364-day
facility that terminated in April 2002 and a 5-year credit facility that
terminates February 25, 2005. The 5-year facility provides for borrowings
aggregating up to $1.4 billion outstanding at any one time at variable interest
rates. The 5-year facility also provides for issuance of up to $500 million of
letters of credit. At March 31, 2002, US Holdings had no borrowings outstanding
under the Credit Agreements. Letters of credit outstanding under the 5-year
facility totaled $497 million at March 31, 2002. In April 2002, US Holdings,
Oncor and TXU Energy entered into a joint $1.0 billion 364-day revolving credit
facility with a group of banks. The new facility provides for short-term
borrowings aggregating up to $1.0 billion outstanding at any one time at
variable interest rates and terminates
8
April 22, 2003. US Holdings' borrowings under both facilities are limited to an
aggregate of $2.0 billion outstanding at any one time.
During the second quarter of 2002, each of TXU Energy and Oncor expect to
begin selling commercial paper to fund their short-term liquidity requirements.
The new commercial paper programs will allow TXU Energy and Oncor to sell up to
$2.4 billion and $1.0 billion of commercial paper, respectively. The existing
TXU Corp. commercial paper program will be discontinued once the TXU Energy and
Oncor commercial paper programs have been established and outstanding TXU Corp.
commercial paper has been repaid. After its commercial paper program is
discontinued, TXU Corp. expects to borrow under its 3-year credit facility to
fund its working capital needs.
The new 364-day credit facility discussed above, the existing 5-year $1.4
billion credit facility and TXU Corp.'s new 3-year $500 million credit facility
will provide back-up for outstanding commercial paper under the TXU Energy and
Oncor programs and the TXU Corp. program until it is discontinued. TXU Corp.,
TXU Energy and Oncor do not expect to sell commercial paper that, in the
aggregate, is in excess of aggregate available capacity under the back-up credit
facilities.
On May 6, 2002, Oncor issued $1.2 billion aggregate principal amount of
Senior Secured Notes in two series in a private placement. One series of $700
million is due May 1, 2012 and bears an interest rate of 6.375%, and the other
series of $500 million is due May 1, 2032 and bears an interest rate of 7.0%.
Each series is secured by Oncor first mortgage bonds. Proceeds from the issuance
were used by Oncor to repay advances from US Holdings. US Holdings used the
repayments of advances from Oncor to repay advances from TXU Energy and TXU
Corp. TXU Energy used the repayments to redeem $865 million of the floating rate
debentures due May 20, 2003. TXU Corp. used the repayments to repay $335 million
of short-term borrowings.
In February 2002, TXU Mining redeemed $70 million of its 6.875% senior
notes due 2005 and $53 million of its 7.0% senior notes due 2003.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to a wholly-owned bankruptcy remote subsidiary of TXU Corp.
(TXU Receivables Company) which sells undivided interests in accounts receivable
it purchases to financial institutions. As of January 1, 2002, the facility
includes TXU Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor
and TXU Gas as qualified originators of accounts receivable under the program.
TXU Receivables Company may sell up to an aggregate of $600 million in undivided
interests in the receivables purchased from the originators under the program.
As of March 31, 2002, subsidiaries of US Holdings had sold $1.075 billion face
amount of receivables to TXU Receivables Company under the program in exchange
for cash of $544 million and $526 million in subordinated notes, with $5 million
representing costs of the program. Annualized costs of the program approximated
3.7% of the cash proceeds from the receivables sales. The subordinated notes
receivable from TXU Receivables Company are included in accounts receivable in
the consolidated balance sheet.
4. SHAREHOLDERS' EQUITY
March 31, December 31,
2002 2001
--------- ------------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption............................ $ 115 $ 115
------ ------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: 2002-- 52,817,862 and 2001-- 51,122,600 2,248 2,248
Retained earnings................................................................ 5,087 5,086
Accumulated other comprehensive income (loss).................................... (30) 15
------ ------
Total common stock equity.............................................. 7,305 7,349
------ ------
Total shareholders' equity............................................. $7,420 $7,464
====== ======
9
US Holdings issued 1,695,262 shares to TXU Corp. and affiliates on January
1, 2002 in connection with the transfer of businesses described in Note 1.
5. REGULATION AND RATES
On December 31, 2001, US Holdings filed a settlement plan with the
Commission that, if approved, will resolve all major pending issues related to
US Holdings' transition to competition and will supersede certain ongoing
proceedings that are related to the 1999 Restructuring Legislation. The
settlement plan has the endorsement of the major customer groups in the State of
Texas. Parties to the settlement include the Commission staff, the Office of
Public Utility Counsel, the coalition of cities served by Oncor, Texas
Industrial Energy Consumers, Texas Retailers Association, and a new retail
electric provider for the state. The settlement does not remove regulatory
oversight of Oncor's business nor does it eliminate TXU Energy's price-to-beat
rates and related possible fuel adjustments. US Holdings recorded the effects of
the settlement plan at December 31, 2001. The settlement plan must be approved
by the Commission, which has held hearings, has received briefs and has
requested additional evidence from the parties. The hearings are currently
scheduled to continue on May 30, 2002. US Holdings is unable to predict the
outcome of these proceedings. For additional discussion of the settlement plan
and related items, see Note 4 to Financial Statements in the US Holdings 2001
Form 10-K.
On April 23, 2002, TXU Energy filed a request with the Commission to
increase the fuel factor component of its price-to-beat rates. The request, if
approved, would increase price-to-beat rates for residential and small
commercial customers by an average of 5%. Under a Commission rule, affiliated
REPs of utilities are allowed to petition the Commission for an increase in the
fuel factor component of its price-to-beat rates if an average of natural gas
futures prices increases more than 4% from the level used to set the previous
price-to-beat fuel factor rate. An evidentiary hearing on TXU Energy's request
was held before an administrative law judge on May 9, 2002. Commission action
has not been scheduled on TXU Energy's request. The Commission must act on the
application within 45 days unless the Commission finds good cause to extend its
decision beyond that time period. TXU Energy is unable to predict the outcome of
this proceeding.
6. CONTINGENCIES
Financial Guarantees -- US Holdings 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, $19 million at March 31,
2002, and interest on bonds issued by the agencies 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%. US Holdings is required to
make periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings, of $4 million annually
for the years 2002 through 2003, $7 million for 2004 and $1 million for each of
2005 and 2006. In addition, US Holdings is obligated to pay certain variable
costs of operating and maintaining the reservoirs. US Holdings has assigned to a
municipality all contract rights and obligations of US Holdings in connection
with $30 million remaining principal amount of bonds at March 31, 2002, issued
for similar purposes which had previously been guaranteed by US Holdings. US
Holdings is, however, contingently liable in the unlikely event of default by
the municipality.
Legal Proceedings -- In September 1999, Quinque Operating Company
(Quinque) filed suit in the State District Court of Stevens County, Kansas
against over 200 gas companies, including TXU Gas (named in the litigation as
ENSERCH Corporation). The suit was removed to federal court; however, a motion
to remand the case back to Kansas State District Court was granted in January
2001, and the case is now pending in Stevens County, Kansas. The plaintiffs
amended their petition to join TXU Fuel, a subsidiary of TXU Energy, as a
defendant in this litigation. Quinque has dismissed its claims and a new lead
plaintiff has filed an amended petition in which the plaintiffs seek to
represent a class consisting of all similarly situated gas producers, overriding
royalty owners, working interest owners and state taxing authorities either from
whom defendants had purchased natural gas or who received economic benefit from
the sale of such gas since January 1, 1974. No class has been certified. The
petition alleges that the defendants have mismeasured both the volume and heat
content of natural gas delivered into their pipelines resulting in underpayments
to plaintiffs. No amount of damages has been specified in the petition. While
TXU Energy and TXU Fuel are unable to estimate any
10
possible loss or predict the outcome of this case, TXU Energy and TXU Fuel
believe these claims are without merit and intend to vigorously defend this
suit.
General -- US Holdings is involved in various legal and administrative
proceedings not described herein of which the ultimate resolution, in the
opinion of management, should not have a material effect upon its financial
position, results of operations or cash flows.
7. SEGMENT INFORMATION
Through December 31, 2001, US Holdings had no separate reportable
operating segments. As a result of TXU Corp.'s reorganization as of January 1,
2002, of certain of its businesses in accordance with the 1999 Restructuring
Legislation, US Holdings realigned its operations into two reportable segments:
North America Energy and North America Electric Delivery. Prior quarter amounts
have been restated to conform to the new segments. See Note 1 regarding the
restructuring of US Holdings.
(1) North America Energy (Energy) - operations involving electricity
generation, wholesale trading of energy (electricity and natural gas), risk
management and retail energy sales and services in the US and parts of Canada
(primarily TXU Energy); and
(2) North America Electric Delivery (Electric Delivery) - operations
involving the transmission and distribution of electricity in Texas (Oncor).
The prior year financial information for the Energy segment and the
operations included in the Electric Delivery segment includes information
derived from the historical financial statements of US Holdings. Reasonable
allocation methodologies were used to unbundle the financial statements of US
Holdings. Allocation of revenues between TXU Energy and Oncor reflected
consideration of return on invested capital, which continues to be regulated for
Oncor. US Holdings maintained expense accounts for each of its component
operations. Costs of energy and expenses related to operations and maintenance
and depreciation and amortization, as well as assets, such as property, plant
and equipment, materials and supplies and fuel, were specifically identified by
component operation and disaggregated. Various allocation methodologies were
used to disaggregate common expenses, assets and liabilities between US
Holding's generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
Effective January 1, 2002, TXU Energy incurs an electricity delivery fee
charged by Oncor, which TXU Energy passes on to its customers. This fee is
reflected in TXU Energy's revenues and cost of energy for the three months ended
March 31, 2002. For comparability purposes, affiliated electricity delivery fees
have been included in TXU Energy's revenues and cost of energy for the three
months ended March 31, 2001. TXU Energy's gross margin is not affected by the
inclusion of the electricity delivery fees.
11
Three Months Ended
March 31,
---------------------------
2002 2001*
---- -----
Operating revenues -
Energy................................... $3,502 $4,117
Electric Delivery........................ 78 3
------ ------
Consolidated....................... $3,580 $4,120
====== ======
Affiliated revenues -
Energy.................................. $ 1 $ --
Electric Delivery....................... 416 473
Eliminations............................ (417) (473)
------ ------
Consolidated..................... $ -- $ --
====== ======
Net income
Energy.................................. $ 182 $ 124
Electric Delivery....................... 71 24
------ ------
Consolidated..................... $ 253 $ 148
====== ======
*See footnotes to tables on pages 20 and 23.
12
8. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts receivable -- At March 31, 2002 and December 31, 2001, accounts
receivable are stated net of uncollectible accounts of $86 million and $28
million, respectively.
Energy trading assets -- At March 31, 2002 and December 31, 2001, energy
trading assets are stated net of applicable credit and performance reserves of
$38 million and $25 million, respectively.
Inventories by major category--
March 31, December 31,
2002 2001
---------- ------------
Materials and supplies............................................................... $191 $186
Fuel stock........................................................................... 62 62
Gas stored underground............................................................... 42 49
---- ----
Total inventories................................................................ $295 $297
==== ====
Property, plant and equipment--
March 31, December 31,
2002 2001
---------- ------------
In service:
Production.............................................................. $16,601 $15,739
Transmission............................................................ 1,978 2,193
Distribution............................................................ 6,181 6,110
General................................................................. 872 1,346
------- -------
Total............................................................. 25,632 25,388
Less accumulated depreciation.................................................... 9,249 9,074
------- -------
Net of accumulated depreciation........................................ 16,383 16,314
Construction work in progress................................................... 504 509
Nuclear fuel (net of accumulated amortization: 2002- $805; 2001 - $787) 138 147
Held for future use............................................................. 22 22
Reserve for regulatory disallowances............................................ (836) (836)
------- -------
Net property, plant and equipment...................................... $16,211 $16,156
======= =======
Goodwill -- At March 31, 2002, and December 31, 2001, goodwill is stated
net of accumulated amortization of $67 million.
Derivatives and Hedges -- During the first quarter of 2002, existing
accounting hedges of anticipated sales from baseload generation became less
effective due to changes in ERCOT market rules and conditions. US Holdings
experienced net hedge ineffectiveness of $8 million, reported as a loss in
revenues, for the period ended March 31, 2002, primarily related to these
contracts. Accounting hedges of interest rate risk remained highly effective
during the period.
As of March 31, 2002, it is expected that $5 million of after-tax net
losses 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 use of cash flow
hedges.
13
INDEPENDENT ACCOUNTANTS' REPORT
TXU US Holdings Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU US
Holdings Company (US Holdings) and subsidiaries as of March 31, 2002, and the
related condensed statements of consolidated income, comprehensive income and
cash flows for the three-month periods ended March 31, 2002 and 2001. These
financial statements are the responsibility of US Holdings' management. The
condensed consolidated financial statements give retroactive effect to the
acquisition of affiliated businesses which have been accounted for as a
combination of entities under common control as described in the Notes to the
financial statements.
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 US
Holdings of December 31, 2001, 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 January 31, 2002, 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, 2001, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived, after giving retroactive effect to the combination discussed
in the first paragraph.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 9, 2002
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
TXU US Holdings Company (US Holdings) is a holding company for TXU Energy
Company LLC (TXU Energy) and Oncor Electric Delivery Company (Oncor). US
Holdings is a wholly-owned subsidiary of TXU Corp., a Texas corporation. Through
December 31, 2001, US Holdings was directly engaged in the generation, purchase,
transmission, distribution and sale of electric energy in the north-central,
eastern and western parts of Texas. Effective January 1, 2002, as a result of
legislation passed during the 1999 session of the Texas Legislature that
restructured the electric utility industry in Texas (1999 Restructuring
Legislation), US Holdings transferred to Oncor its transmission and distribution
(T&D) business and to TXU Energy its generation assets and retail customers. In
addition, as of January 1, 2002, TXU Energy acquired the following businesses
from within the TXU Corp. system: the retail electric provider (REP) of TXU
SESCO Company (TXU SESCO); the energy trading business and the unregulated
commercial/industrial retail gas operations of TXU Gas Company (TXU Gas); and
the energy management services businesses and other affiliates of TXU Corp.,
including the fuel procurement (TXU Fuel Company) and coal mining businesses
that service the generation operations. Also, the T&D business of TXU SESCO was
transferred to Oncor. The historical financial statements for 2001 have been
restated to reflect these acquisitions of entities under common control and
management.
As of January 1, 2002 US Holdings is an energy services company and
engages in electricity generation, wholesale energy trading, retail energy
marketing, energy delivery and other energy-related services in North America.
CRITICAL ACCOUNTING POLICIES
US Holdings follows accounting principles generally accepted in the United
States of America (US GAAP). In applying these accounting policies in the
preparation of US Holdings' consolidated financial statements, management is
required to make estimates and assumptions about future events that affect the
reporting and disclosure of assets and liabilities at the balance sheet dates
and revenue and expense during the periods covered. The following is a summary
of certain critical accounting policies of US Holdings that are affected by
judgments and uncertainties and for which different amounts might be reported
under a different set of conditions or using different assumptions.
Derivatives and financial instruments -- US Holdings accounts for
derivatives in accordance with Statement of Financial Accounting Standards
(SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires the recognition of derivatives in the balance sheet and
the measurement of those instruments at fair value. Changes in the fair value of
derivatives are recorded in earnings, unless (i) the normal purchase or sale
exception or (ii) hedge accounting is elected.
US Holdings and its subsidiaries enter into derivative instruments,
including options, swaps, futures, forwards and other contractual commitments
for both non-trading (i.e., hedging) and trading purposes. US Holdings and its
subsidiaries enter into derivative instruments for non-trading purposes in order
to manage market risks related to changes in interest rates and commodity
prices.
US Holdings has designated, documented and assessed accounting hedge
relationships which mostly resulted in cash flow hedges that require US Holdings
to record the derivative assets or liabilities at their fair value on its
balance sheet with an offset in other comprehensive income. Hedge
ineffectiveness is recorded in earnings. Amounts are removed from other
comprehensive income as the underlying transactions occur and realized gains and
losses are recorded.
Although the amounts that ultimately would be recognized in the income
statement over the term of the derivatives are the same under any of the methods
used, it is the timing of the recognition of these amounts that
15
is the main difference in these methods. The determination of fair value is
dependent upon certain assumptions and judgments, as discussed in Energy trading
contracts and mark-to-market accounting below.
The use of the normal purchase or sale exception from derivative
classification and the hedge accounting designation are elections that can be
made by management if certain strict criteria are met and documented. These
elections can reduce the volatility in earnings resulting from fluctuations in
fair value. Results of operations could be materially affected by elections of
normal purchase or sale or hedge accounting for qualifying derivative contracts.
Energy trading contracts and mark-to-market accounting -- All energy
trading contracts, whether or not derivatives under SFAS No. 133, are accounted
for under the mark-to-market method of accounting as required by US GAAP. Energy
trading portfolios, which may include volumetric forecasts, are valued at
current market prices. This marking-to-market process recognizes changes in the
values of trading portfolios associated with market price fluctuations. Under
mark-to-market accounting, the current values of energy-related contracts are
recorded as assets or liabilities on the balance sheet and any period-to-period
change in the current value of such contracts is recognized in the statement of
income.
In the energy trading market, the availability of quoted market prices is
dependent on the type of commodity (e.g., natural gas, electricity, etc.), time
period specified and location of delivery. In computing the mark-to-market
valuations, each market segment is split into liquid and illiquid portions. The
liquid portion varies by region, time period and commodity. Generally, the
liquid period is supported by broker quotes and frequent trading activity. In
illiquid periods, little or no market information may exist, and the fair value
is estimated through market modeling techniques.
For those periods where quoted market prices are not available, forward
price curves are developed based on the available trading information or through
the use of industry accepted modeling techniques and practices based on market
fundamentals (e.g., supply/demand, replacement cost, etc.). As a matter of
policy, however, US Holdings generally does not recognize any income or loss
from the illiquid periods.
In accounting for energy trading contracts, settlements of positions under
which energy ownership is exchanged (physical contracts) are recorded gross as
revenues and purchases. Gains and losses from settlements of financial positions
are recorded net as revenues. For energy trading contracts not yet settled,
whether financial or physical, changes in fair value are recorded net as
revenues. Such fair value changes are referred to as unrealized gains and losses
from mark-to-market valuations. When positions are settled and gains and losses
are realized, the previously recorded unrealized gains and losses from
mark-to-market valuations are reversed.
Revenue recognition -- US Holdings generally records revenue for generation
and retail and other energy sales and services under the accrual method. Sales
contracts with large commercial/industrial customers that are determined to be
derivative instruments and not designated as normal sales under SFAS No. 133 are
fair valued upon inception, and the related unrealized mark-to-market valuations
are recorded net as revenues. Retail electricity sales revenues are recognized
when services are provided to customers on the basis of periodic cycle meter
readings and include an estimated accrual for the value of electricity provided
from the meter reading date to the end of the period. Earnings in excess of the
regulatory earnings cap are recorded as reductions of revenue.
The historical financial statements included adjustments made to revenues
for over/under recovered fuel costs. To the extent fuel costs incurred in
generation operations exceeded regulated fuel factor amounts included in
customer billings, US Holdings recorded revenues on the basis of its ability and
intent to obtain regulatory approval for rate surcharges on future customer
billings to recover such amounts. Conversely, to the extent fuel costs incurred
have been less than amounts included in customer billings, revenues have been
reduced since US Holdings has been required to adjust rates in future customer
billings. Following deregulation of the Texas market effective January 1, 2002,
any fuel factor adjustments will be reflected in revenues after approval by the
regulatory body and as reflected in customer billings
16
Under regulation, earnings in excess of the regulatory earnings cap were
recorded as reductions of revenue. The regulatory earnings cap was based largely
on invested capital, and to the extent calculated earnings were above allowed
returns on invested capital, revenues were reduced with a corresponding credit
to a regulatory liability account.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
- -------------------------------------------------------------------------------
US Holdings' operating revenues decreased $540 million, or 13%, to $3.6
billion in 2002. The decrease in revenue was driven primarily by declines in the
Energy segment resulting from lower natural gas prices and volumes. Higher
Electric Delivery segment revenues partially offset the decrease.
Gross margin (operating revenue less energy purchased for resale, fuel
consumed and delivery costs) increased $302 million, or 29%, to $1.3 billion in
2002. The gross margin increase reflected higher margins in the Energy segment,
driven by the electric commercial/industrial retail operations. Consolidated
revenues and gross margins in 2002 were negatively impacted by a $146 million
net effect of mark-to-market valuations of trading positions, compared to a
positive impact of $17 million in 2001.
Operation and maintenance expense increased $130 million, or 33%, to $523
million in 2002. The increase was driven by the Energy segment, reflecting
higher bad debt expense and costs of retail operations and expansion of
wholesale trading activities in connection with deregulation of the Texas
electricity market.
Other operating expenses increased $20 million, or 6%, to $332 million in
2002, primarily driven by increased depreciation and amortization expense due to
administrative facility expansion and investments in computer systems.
Operating income increased $152 million, or 46%, to $479 million in 2002,
reflecting higher gross margin partially offset by higher operating expenses, as
discussed above.
Interest income declined $10 million, or 91%, to $1 million in 2002, due
largely to the recovery of under-collected fuel revenue on which interest income
had been accrued under regulation, and lower interest rates.
Interest expense and other charges decreased $25 million, or 19%, to $104
million in 2002, reflecting lower debt levels and lower interest rates.
The effective income tax rate was 32% in 2002 compared to 29% in the 2001
period. The increase was due to several unrelated items, including the
discontinuance of amortization of excess deferred taxes related to deregulation
and higher state income taxes.
Net income available for common stock rose $105 million, or 72%, to $251
million. Net income increased in both the Energy and Electric Delivery segments.
These performances are discussed below under Segments.
17
ENERGY TRADING ACTIVITIES
The table below summarizes the changes in energy trading assets and
liabilities for the period ended March 31, 2002. The net change, excluding
"other activity" as described below, of $146 million represents the net
unfavorable effect of mark-to-market accounting on earnings for the three months
ended March 31, 2002 (in millions).
Balance of net trading assets/(liabilities) at December 31, 2001 ............ $371
Settlements of positions included in the opening balance (1) ................ (91)
Unrealized mark-to-market valuations of positions held at period-end (2)..... (55)
Other activity (3)........................................................... 1
----
Balance of net trading assets/(liabilities) at March 31, 2002 ............... $226
====
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of December 31, 2001.
(2) Includes unrealized gains of $13 million associated with large commercial
and industrial retail sales contracts, recognized upon origination in
accordance with SFAS No. 133. There were no significant changes in fair
value attributable to changes in valuation techniques.
(3) Represents net option premiums paid/(received) in the current period and a
commodity contract transferred from TXU Gas. This activity has no effect on
unrealized mark-to-market valuations.
The above table includes all commodity contracts that are marked to
market in net income, for both trading and non-trading purposes.
Of the net trading asset balance above at March 31, 2002, the amount
representing unrealized mark-to-market net gains that have been recognized in
current and prior years' earnings is $211 million. The remaining $15 million of
the March 31, 2002 balance represents net option premiums paid in the current
and prior periods. The following table presents the unrealized mark-to-market
balance at March 31, 2002 scheduled by contractual settlement dates of the
underlying positions (in millions).
Maturity dates of unrealized net mark-to-market balances at March 31, 2002
----------------------------------------------------------------------------
Maturity Maturity in
less than Maturity of 1- Maturity of 4- Excess of
Source of fair value 1 year 3 years 5 years 5 years Total
- ---------------------------- --------- -------------- -------------- ----------- -----
Prices actively quoted........ $ (3) $-- $-- $-- $ (3)
Prices provided by other
external sources.......... 100 82 28 7 217
Prices based on models........ (8) (5) 5 5 (3)
----- --- --- --- ----
Total......................... $ 89 $77 $33 $12 $211
----- --- --- --- ----
Percentage of total .......... 42% 36% 16% 6% 100%
18
As the above table indicates, approximately 78% of the unrealized
mark-to-market valuations at March 31, 2002 mature within three years. This is
reflective of the terms of the positions and the conservative methodologies
employed in valuing positions in periods when there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2004. The "prices provided by
other external sources" category represents forward commodity positions at
locations for which over-the-counter (OTC) broker quotes are available. OTC
quotes for natural gas and power generally extend through 2010 and 2008,
respectively. This category also includes values of large commercial and
industrial retail sales contracts. The "prices based on models" category
contains the value of all non-exchange traded options, valued using industry
accepted option pricing models. In addition, this category contains other
contractual arrangements which may have both forward and option components. In
many instances, these contracts can be broken down into their component parts
and modeled by US Holdings as simple forward and option contracts based on
prices actively quoted. As the modeled value is ultimately the result of a
combination of prices from two or more different instruments, it has been
included in this category.
19
SEGMENTS
Energy
Three Months Ended
March 31,..
-------------------------------
2002 2001*
---- -----
Millions of Dollars
Operating revenues................................................................... $3,503 $4,117
------ ------
Operating expenses
Energy purchased for resale, fuel consumed and delivery costs................... 2,650 3,561
Operation and maintenance....................................................... 358 208
Depreciation and amortization................................................... 114 101
Taxes other than income......................................................... 59 27
------ -------
Total operating expenses.................................................. 3,181 3,897
------ -------
Operating income..................................................................... 322 220
Other income (deductions) -- net.................................................... (1) (1)
------ -------
Income before interest, other charges and income taxes............................... 321 219
------ -------
Interest income...................................................................... 14 22
Interest charges..................................................................... 67 67
------ -------
Income before income taxes .......................................................... 268 174
Income tax expense .................................................................. 86 50
------ -------
Net income .......................................................................... $ 182 $ 124
====== =======
*The Energy segment was created as a result of the deregulation of the
electric utility industry in Texas, which became effective January 1,
2002. The Energy segment includes the generation and certain retail
operations of US Holdings, the former energy trading business and
unregulated commercial/industrial retail gas operations of TXU Gas and
other energy related businesses of TXU Corp., which were combined to form
the Energy segment effective January 1, 2002.
Prior period data is included above for the purpose of providing
historical combined financial information about the Energy segment after
giving effect to the electric restructuring transactions and allocations
described in the Notes to Financial Statements included in the US Holdings
2001 Form 10-K. Had the Energy segment existed as a separate segment, its
results of operations and financial position could have differed
materially from those reflected above. Additionally, future results of the
Energy segment's operations and financial position could differ materially
from the historical information presented.
20
Segment Highlights
Three Months Ended
March 31,
-------------------
2002 2001*
---- -----
Operating Statistics:
Retail sales volumes:
Electric (gigawatt-hours - GWh)................................. 22,386 23,256
Large commercial and industrial gas (billion cubic feet - Bcf).. 50 66
Wholesale energy sales volumes (physically settled):
Electric (GWh)................................................ 40,884 6,529
Gas (Bcf)..................................................... 159 208
Customers (end of period and in thousands):
Electric...................................................... 2,756 2,689
Gas........................................................... 3 4
------ ------
Total customers......................................... 2,759 2,693
Physical and financial wholesale trades
Electric (GWh)............................................... 582,717 14,976
Gas (Bcf)..................................................... 4,613 1,341
Three Months Ended
March 31,
--------------------
2002 2001*
---- -----
Operating revenues (millions of dollars):
Electric:
Residential.......................................................... $ 689 $ 765
Commercial and industrial............................................ 1,021 910
Other............................................................... 7 93
----- -----
Total electric................................................ 1,717 1,768
Large commercial and industrial gas...................................... 207 506
Wholesale energy sales (gas and electric)................................ 1,570 1,764
Other revenues........................................................... 9 79
------ ------
Total operating revenues....................................... $3,503 $4,117
====== ======
Weather(average for service area)
Percent of normal
Cooling degree days......................................... 94% 18%
Heating degree days......................................... 101% 109%
---------------------------
*See footnote on previous page.
Effective January 1, 2002, TXU Energy incurs an electricity delivery fee
charged by Oncor, which TXU Energy passes on to its customers. This fee is
reflected in TXU Energy's revenues and cost of energy for the three months ended
March 31, 2002. For comparability purposes, affiliated electricity delivery fees
have been included in TXU Energy's revenues and cost of energy for the three
months ended March 31, 2001. TXU Energy's gross margin is not affected by the
inclusion of the electricity delivery fees.
The Energy segment's operating revenues decreased $614 million, or 15%, in
2002. Retail natural gas revenues from large commercial and industrial customers
declined $299 million, or 59%, on both lower prices and volumes. Retail gas
sales volumes declined 24% as certain geographical markets were exited. Retail
electricity revenues declined $51 million, or 3%, on a 3.7% decline in overall
volumes, which reflected the opening of the Texas market to competition.
Wholesale sales of gas and electricity declined $194 million, or 11%, as lower
gas prices and volumes traded were partially offset by increased electricity
volumes traded.
21
Gross margin increased $297 million, or 53%, to $853 million in 2002. This
growth was due primarily to higher average prices in the electric
commercial/industrial retail business and low fuel costs in generation
operations in the early part of the quarter. As competition intensifies in the
Texas deregulated market, gross margins may come under increasing pressure.
Revenue and gross margins in 2002 were negatively impacted by a $146 million net
effect of mark-to-market valuation of commodity positions, compared to a
positive impact of $17 million in 2001.
Net income for the segment increased $58 million, or 47%, to $182 million
in 2002. The improvement was driven by the higher gross margin, partially offset
by growth in operating expenses. Higher operation and maintenance (O&M) expense
reflected increased bad debt expense ($66 million) and increased staffing and
other administrative and marketing costs ($57 million) related to the
development of retail sales operations and expansion of trading activities, all
reflective of the opening of the Texas electricity market to competition.
Increased depreciation and amortization expense was primarily due to expansion
of administrative facilities and investments in computer systems. Taxes other
than income rose due to state gross receipts taxes that were reported in the
Electric Delivery segment in 2001. Interest income declined $8 million due to
the recovery of undercollected fuel revenue, on which interest income had been
accrued under regulation. The effective income tax rate increased to 32% in 2002
from 29% in 2001, due to, among other items, the discontinuance of amortization
of excess deferred taxes related to deregulation and higher state income taxes.
22
Electric Delivery
- -----------------
Three Months Ended
March 31,
-------------------------
2002 2001*
---- -----
Millions of Dollars
Operating revenues....................................................... $ 494 $476
----- -----
Operating expenses
Operation and maintenance........................................... 178 185
Depreciation and amortization....................................... 64 60
Taxes other than income............................................. 95 124
----- -----
Total operating expenses...................................... 337 369
----- -----
Operating income......................................................... 157 107
Other income (deductions)-- net.......................................... (1) --
----- -----
Income before interest, other charges and income taxes................... 156 107
----- -----
Interest income.......................................................... 12 --
Interest expense and other charges....................................... 62 73
----- -----
Income before income taxes .............................................. 106 34
Income tax expense ...................................................... 35 10
----- -----
Net income .............................................................. $ 71 $ 24
===== =====
------------------------------
*The Electric Delivery segment was created as a result of the deregulation
of the electric utility industry in Texas, which became effective January
1, 2002. The Electric Delivery segment includes the electric transmission
and distribution business of US Holdings and TXU SESCO.
Prior period data is included above for the purpose of providing
historical combined financial information about the Electric Delivery
segment after giving effect to the electric restructuring transactions
described in the Notes to Financial Statements included in the US Holdings
2001 10-K. Had the Electric Delivery segment existed as a separate
segment, its results of operations and financial position could have
differed materially from those reflected above. Additionally, future
results of the Electric Delivery segment's operations and financial
position could differ materially from the historical information
presented.
Segment Highlights
Three Months Ended
March 31,
------------------------
2002 2001*
---- -----
Electric energy delivered (GWh)........................................ 23,909 23,239
====== ======
Electric points of delivery (end of period and in thousands)........... 2,955 2,805
Operating revenues (millions of dollars):
Energy............................................................. $ 416 $ 476
Non-affiliated..................................................... 78 --
------ ------
Total electric energy delivery............................. $ 494 $ 476
====== ======
23
Operating revenues for the Electric Delivery segment increased by $18
million, or 4%, to $494 million in 2002, reflecting a 3% increase in volumes
delivered. The increase was due to deliveries to other REPs serving the
historical territory.
The Electric Delivery segment does not buy and sell electricity; its
revenues consist primarily of T&D fees. There is, therefore, no gross margin for
this segment.
Net income increased by $47 million, or 196%, to $71 million in 2002. The
improvement was driven by the effect of state gross receipts taxes that are
reflected in the Energy segment effective 2002, interest income on
regulatory-related assets charged to the Energy segment effective 2002 and
reduced interest expense due to lower average debt balances and rates.
Comprehensive Income
- --------------------
US Holdings has historically used, and will continue to use, derivatives
that are highly effective in offsetting future cash flow volatility in interest
rates and energy commodity prices. The fair value of derivatives that are
effective as cash flow hedges are recorded as derivative assets or liabilities
with an offset in other comprehensive income.
The amounts included in other comprehensive income reflect the value of
the cash flow hedges, based on current market conditions, to be used in the
future to offset the impact on related payments of expected changes in prices.
The effects of the accounting hedges will be recorded in the statement of income
as the related transactions are actually settled.
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 US Holdings' 2001 10-K. No significant changes or events that
might affect the financial condition of US Holdings have occurred subsequent to
year-end other than as disclosed herein.
Cash Flows -- Cash flows provided by operating activities for the first
quarter of 2002 were $285 million compared to $233 million for 2001. The
increase in 2002 of $52 million, or 22%, was primarily driven by the increase in
income, after adjusting for the noncash effect of unrealized mark-to-market
valuations, partially offset by an increase of accounts receivable in 2002 due
to the impact of temporary transitional issues regarding customer switching and
billing in connection with the opening of the Texas electricity market to
competition.
Cash flows used in financing activities for 2002 were $76 million.
Retirements and repurchases of debt securities totaled $328 million. Borrowings
from TXU Corp. totaled $256 million.
Issuances and Retirements -- During the three months ended March 31, 2002,
US Holdings redeemed, reacquired or made scheduled principal payments on
long-term debt as follows:
Issuances Retirements
--------- -----------
Oncor
First mortgage bonds................ $ -- $150
Medium term notes................... -- 55
TXU Energy
Senior notes........................ -- 123
---- ----
$ -- $328
==== ====
24
Cash flows used in investing activities for 2002 totaled $230 million
compared to $209 million used for investing purposes in 2001. Capital
expenditures were $228 million for 2002, compared with $193 million for 2001.
On April 25, 2002, TXU Energy completed the sale of its Handley and
Mountain Creek steam electric generating plants in the Dallas-Ft. Worth area for
$443 million in cash. The transaction includes a tolling agreement for TXU
Energy to purchase power during summer months for the next five years. A pretax
gain on the sale of $146 million will be deferred and recognized over the five
years.
The capitalization ratios of US Holdings at March 31, 2002 consisted of
approximately 42% long-term debt, less amounts due currently, 1% preferred stock
and 57% common stock equity, compared to December 31, 2001 capitalization ratios
of approximately 44% long-term debt, 1% preferred stock and 55% common stock
equity.
Short-term Financing and Liquidity Facilities -- At March 31, 2002, TXU
Corp. and US Holdings had two joint US dollar-denominated lines of credit under
revolving credit facility agreements (Credit Agreements) with a group of banking
institutions that supported TXU Corp.'s commercial paper program. The Credit
Agreements consisted of a 364-day facility that terminated in April 2002 and a
5-year credit facility that terminates February 25, 2005. The 5-year facility
provides for borrowings aggregating up to $1.4 billion outstanding at any one
time at variable interest rates. The 5-year facility also provides for issuance
of up to $500 million of letters of credit. At March 31, 2002, US Holdings had
no borrowings outstanding under the Credit Agreements. Letters of credit
outstanding under the 5-year facility totaled $497 million at March 31, 2002. In
April 2002, US Holdings, Oncor and TXU Energy entered into a joint $1.0 billion
364-day revolving credit facility with a group of banks. The new facility
provides for short-term borrowings aggregating up to $1.0 billion outstanding at
any one time at variable interest rates and terminates April 22, 2003. US
Holdings' borrowings under both facilities are limited to an aggregate of $2.0
billion outstanding at any one time.
During the second quarter of 2002, each of TXU Energy and Oncor expect to
begin selling commercial paper to fund their short-term liquidity requirements.
The new commercial paper programs will allow TXU Energy and Oncor to sell up to
$2.4 billion and $1.0 billion of commercial paper, respectively. The existing
TXU Corp. commercial paper program will be discontinued once the TXU Energy and
Oncor commercial paper programs have been established and outstanding TXU Corp.
commercial paper has been repaid. After its commercial paper program is
discontinued, TXU Corp. expects to borrow under its 3-year credit facility to
fund its working capital needs.
The new 364-day credit facility discussed above, the existing 5-year $1.4
billion credit facility and TXU Corp.'s new 3-year $500 million credit facility
will provide back-up for outstanding commercial paper under the TXU Energy and
Oncor programs and the TXU Corp. program until it is discontinued. TXU Corp.,
TXU Energy and Oncor do not expect to sell commercial paper that, in the
aggregate, is in excess of aggregate available capacity under the back-up credit
facilities.
During 2002, US Holdings and its subsidiaries will have financing needs to
fund ongoing working capital requirements and maturities of long-term debt and
to refinance bridge facilities entered into in connection with the financial
restructuring of US Holdings in 2001. As discussed below, US Holdings and its
subsidiaries have funded or intend to fund these financing needs through the
issuance of long-term debt. Other sources of funding include proceeds from asset
sales, issuance of commercial paper, bank borrowings, and loans from other
subsidiaries. If these options become unavailable for any reason, US Holdings
and its subsidiaries could borrow under their credit facilities. During 2002, US
Holdings may repurchase certain debt securities classified as long-term as of
March 31, 2002. Such classification is based on US Holdings' ability and intent
to fund such repurchases through issuances of long-term debt.
On May 6, 2002, Oncor issued $1.2 billion aggregate principal amount of
Senior Secured Notes in two series in a private placement. One series of $700
million is due May 1, 2012 and bears an interest rate of 6.375%, and the other
series of $500 million is due May 1, 2032 and bears an interest rate of 7.0%.
Each series is secured by Oncor first mortgage bonds. Proceeds from the issuance
were used by Oncor to repay advances
25
from US Holdings. US Holdings used the repayments of advances from Oncor to
repay advances from TXU Energy and TXU Corp. TXU Energy used the repayments to
redeem $865 million of the floating rate debentures due May 20, 2003. TXU Corp.
used the repayments to repay $335 million of short-term borrowings.
US Holdings' goal is to continue to maintain credit ratings necessary to
allow US Holdings or its subsidiaries to access the commercial paper market. If
US Holdings or its subsidiaries were to experience a substantial downgrade of
their respective credit ratings, which they do not anticipate, access to the
commercial paper markets might no longer be possible, resulting in the need to
borrow under committed bank lines or seek other liquidity sources.
In order to borrow under its 3-year credit facility, TXU Corp. must be in
compliance with the applicable covenants, including financial covenants, and
certain other conditions. In order for TXU Corp. or US Holdings to borrow under
the 5-year credit facility, both must be in compliance with the applicable
covenants, including financial covenants applicable to TXU Corp., and certain
other conditions. In the case of both of these facilities, the financial
covenants consist of a total debt to capitalization ratio and a fixed charge
coverage ratio. In order for US Holdings, TXU Energy or Oncor to borrow under
the 364-day credit facility, the relevant borrower must be in compliance with
the covenants applicable to it, including financial covenants, and certain other
conditions. The financial covenants consist principally of a total debt to
capitalization ratio (applicable to all three borrowers) and a fixed charge
coverage ratio (applicable to US Holdings only). In addition, for US Holdings to
be able to borrow, certain events of default relating to TXU Energy or Oncor
cannot have occurred or be continuing, and, for TXU Energy to borrow, US
Holdings must be in compliance with its fixed charge coverage ratio.
Under all three facilities, incremental borrowings that would increase the
outstanding principal amount borrowed would be prohibited if a material adverse
change, as defined in the applicable agreements, occurred. Each of TXU Corp., US
Holdings, TXU Energy and Oncor are in compliance with the applicable financial
covenants as of March 31, 2002 and meet the required conditions and anticipate
that they will remain in compliance. In the event that any of TXU Corp., US
Holdings, TXU Energy or Oncor were not in compliance with the applicable
covenants and other conditions, they may need to pursue alternative sources of
funding.
US Holdings and its subsidiaries also may utilize from time to time these
short-term facilities to temporarily fund maturities and early redemptions of
long-term debt and other securities, as well as its short-term requirements. If
US Holdings and its subsidiaries were unable to access the capital markets to
refund these short-term borrowings, additional liquidity sources would be
necessary.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to a wholly-owned bankruptcy remote subsidiary of TXU Corp.
(TXU Receivables Company) which sells undivided interests in accounts receivable
it purchases to financial institutions. As of January 1, 2002, the facility
includes TXU Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor
and TXU Gas as qualified originators of accounts receivable under the program.
TXU Receivables Company may sell up to an aggregate of $600 million in undivided
interests in the receivables purchased from the originators under the program.
As of March 31, 2002, subsidiaries of US Holdings had sold $1.075 billion face
amount of receivables to TXU Receivables Company under the program in exchange
for cash of $544 million and $526 million in subordinated notes, with $5 million
representing costs of the program. Annualized costs of the program approximated
3.7% of the cash proceeds from the receivables sales. The subordinated notes
receivable from TXU Receivables Company are included in accounts receivable in
the consolidated balance sheet.
Regulatory Asset Securitization -- The regulatory settlement plan filed
with the Commission, if approved, would provide for Oncor to receive a financing
order authorizing it to issue securitization bonds in the aggregate amount of
$1.3 billion to monetize and recover generation-related regulatory assets. The
settlement plan provides that there will be an initial issuance of
securitization bonds in an amount of up to $500 million upon approval of the
settlement followed by a second issuance for the remainder after 2003.
26
CONTINGENCIES
See Note 6 to Financial Statements for a discussion of contingencies.
REGULATION AND RATES
On December 31, 2001, US Holdings filed a settlement plan with the
Commission that, if approved, will resolve all major pending issues related to
US Holdings' transition to competition and will supersede certain ongoing
proceedings that are related to the 1999 Restructuring Legislation. The
settlement plan has the endorsement of the major customer groups in the State of
Texas. Parties to the settlement include the Commission staff, the Office of
Public Utility Counsel, the coalition of cities served by Oncor, Texas
Industrial Energy Consumers, Texas Retailers Association, and a new retail
electric provider for the state. The settlement does not remove regulatory
oversight of Oncor's business nor does it eliminate TXU Energy's price-to-beat
rates and related possible fuel adjustments. US Holdings recorded the effects of
the settlement plan at December 31, 2001. The settlement plan must be approved
by the Commission, which has held hearings, has received briefs and has
requested additional evidence from the parties. The hearings are currently
scheduled to continue on May 30, 2002. US Holdings is unable to predict the
outcome of these proceedings. For additional discussion of the settlement plan
and related items, see Note 4 to Financial Statements in the US Holdings Form
10-K.
On April 23, 2002, TXU Energy filed a request with the Commission to
increase the fuel factor component of its price-to-beat rates. The request, if
approved, would increase price-to-beat rates for residential and small
commercial customers by an average of 5%. Under a Commission rule, affiliated
REPs of utilities are allowed to petition the Commission for an increase in the
fuel factor component of its price-to-beat rates if an average of natural gas
futures prices increases more than 4% from the level used to set the previous
price-to-beat fuel factor rate. An evidentiary hearing on TXU Energy's request
was held before an administrative law judge on May 9, 2002. Commission action
has not been scheduled on TXU Energy's request. The Commission must act on the
application within 45 days unless the Commission finds good cause to extend its
decision beyond that time period. TXU Energy is unable to predict the outcome of
this proceeding.
Although US Holdings 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 this
report, which might significantly alter its basic financial position, results of
operations or cash flows.
CHANGES IN ACCOUNTING STANDARDS
Changes in Accounting Standards -- See Note 2 to Financial Statements for
discussion of changes in accounting standards.
27
FORWARD-LOOKING STATEMENTS
This report and other presentations made by US Holdings contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although US Holdings 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 US Holdings' 2001 10-K, as well as general industry trends;
implementation of the Texas electricity deregulation 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; access to
facilities to meet changing demands; competition for new business opportunities;
legal and administrative proceedings and settlements; significant changes in
critical accounting policies; and actions of rating agencies, among other
factors, that could cause the actual results of US Holdings 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 US Holdings 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 US
Holdings 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.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss US Holdings and its subsidiaries may
incur as a result of changes in the market or fair value of a particular
instrument or commodity. US Holdings and its subsidiaries are exposed to market
risks associated with interest rates and commodity prices in both energy trading
activities and non-trading operations. US Holdings' exposure to market risk is
affected by a number of factors, including the size, duration and composition of
its energy portfolio, the absolute and relative levels of interest rates and
commodity prices, as well as volatility and liquidity of markets. US Holdings
and its subsidiaries enter into derivative instruments for non-trading purposes
in order to manage exposures to changes in interest rates and commodity prices.
US Holdings assumes certain market risks in an effort to generate gains from
market price differences. It does so through the use of derivative instruments,
including exchange traded and over-the-counter contracts, as well as through
other contractual commitments in its energy trading activities.
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 US Holdings' 2001 Form 10-K unless presented below.
RISK OVERSIGHT
US Holdings manages the market, credit and operational risk of the
portfolio and its trading activities within limitations imposed by its Boards of
Directors and in accordance with TXU Corp.'s overall risk management policies.
Market risks are monitored daily by risk management groups that operate and
report independently of the trading operations, utilizing industry accepted
mark-to-market techniques and analytical methodologies. These techniques value
the portfolio of contracts and the hypothetical effect on this value from
changes in market conditions and include, but are not limited to, sensitivity
analyses and value at risk (VAR) methodologies.
Energy trading subjects US Holdings to some inherent risks associated with
future contractual commitments, including market and operational risks, credit
risk associated with counterparties, product location (basis) differentials and
market liquidity. US Holdings continuously monitors the valuation of identified
risks and adjusts the portfolio based on current market conditions. Valuation
adjustments or reserves are established in recognition that certain risks exist
until full delivery of energy has occurred, counterparties have fulfilled their
financial commitments and related financial instruments have either matured or
are closed out. Price and credit risks are further managed within the
established trading policies and limits.
US Holdings assesses trading risk using a VAR methodology. This
methodology is used to measure the amount of prospective risk that exists within
a portfolio under a variety of market conditions given a portfolio's current
position, net mark-to-market value, term and location. VAR is a mathematical
estimate of a portfolio's maximum potential for loss or gain within a specified
level of confidence (i.e., 95% certainty) due to market movements utilizing
standard statistical techniques and given historical and projected market prices
and volatilities. Stress testing of market variables is also conducted to
simulate and address abnormal market conditions.
TXU Corp. and its subsidiaries have a corporate risk management
organization that is headed by a global chief risk officer. The chief risk
officer through his designees, establishes and enforces the VAR limits by
region, including the respective policies and procedures to ensure compliance
with such limits and evaluates the risks inherent in the various businesses of
TXU Corp. and their associated transactions. Key risk control activities
include, but are not limited to, credit review and approval, operational and
market risk measurement, validation of transactions, portfolio valuation and
daily portfolio reporting, including mark-to-market valuation, VAR and other
risk measurement metrics.
29
COMMODITY PRICE RISK
US Holdings is subject to the inherent risks of market fluctuations in the
price of electricity, natural gas and other energy-related products marketed and
purchased. US Holdings actively manages its portfolio of owned generation, fuel
supply and retail load to mitigate the impacts of changing energy prices on its
results of operations. As part of managing the volatility inherent in these
market risks, US Holdings enters into hedging transactions to mitigate a
significant portion of the remaining exposures as part of its risk management
program.
NON-TRADING OPERATIONS -- US Holdings engages in commodity-related
marketing and price risk management activities in order to hedge market risk and
exposure to prices of electricity, natural gas and fuel. For financial reporting
purposes, non-trading operations are defined as the normal generation (including
fuel consumed), purchase, sale and delivery of electricity and natural gas for
ultimate resale to residential and small commercial retail customers. The
objective of risk management related to non-trading operations is the limiting
of price risk related to the traditional asset-based generation, distribution
and transmission activities of US Holdings.
The financial instruments used for non-trading purposes include primarily
forwards, futures, swaps and options. The gains and losses related to these
derivatives, to the extent effective as accounting hedges, are deferred in the
balance sheet and recognized in the income statement in the same period as the
settlement of the underlying physical transaction. US Holdings' residential and
small commercial retail customer arrangements are not derivatives or trading
contracts; therefore, US Holdings uses accrual accounting for those
transactions.
Prior to deregulation of the electricity markets in Texas as of January 1,
2002, US Holdings did not use derivative instruments to hedge price risk of
non-trading activities.
TRADING OPERATIONS -- For financial reporting purposes, trading operations
are defined as those activities with the objective of generating profits on or
from exposure to shifts or changes in market prices of electricity, natural gas,
fuel and other energy-related products. For US Holdings, this consists of
non-regulated energy trading in electricity, natural gas, fuel and other
energy-related products as a commodity. US Holdings uses mark-to-market
accounting for energy trading operations.
The contractual agreements and derivatives held by the energy trading
operations are exposed to losses in fair value due to changes in the price of
the underlying commodities. On a limited basis in 2001, US Holdings entered into
derivative contracts for the sale of electricity beginning in 2002 in connection
with generation capacity auctions required by the 1999 Restructuring
Legislation. These contracts did not result in significant mark-to-market
valuations as of December 31, 2001. See "RESULTS OF OPERATIONS" for a discussion
of the impact of these transactions during the three months ended March 31,
2002.
VAR -- The quantification of market risk using value-at-risk methodologies
provides a consistent measure of risk across diverse energy markets and
products. The use of this method requires a number of key assumptions, such as
use of (i) a 95% confidence level; (ii) an estimated one- to five-day holding
period, depending on the commodity and duration of the position (this is the
time needed to liquidate different commodity and term positions); and (iii)
historical estimates of volatility or other simulation based volatility
estimates (such as the Monte Carlo simulation).
At March 31, 2002 and December 31, 2001, the total VAR for US Holdings was
$29 million and $17 million, respectively, based on a 95% confidence level and a
one-day holding period. Comparable information on a VAR basis is not available
for interim periods of 2001.
The hypothetical loss in fair value, arising from an adverse movement in
future prices of at least 10%, of US Holdings' derivatives and other contracts
entered into for trading purposes in existence at December 31, 2001 and 2000,
using standard sensitivity analysis techniques was $13 million and $1 million,
respectively.
30
CREDIT RISK
US Holdings' energy trading counterparties include major energy companies,
financial institutions, gas and electric utilities, independent power producers,
oil and gas producers and other energy trading companies. The net exposure to
credit risk from these counterparties as of March 31, 2002 is $940 million using
standardized master netting contracts and agreements that provide for the right
of offset of positive and negative credit exposures with individual
counterparties. Of this amount, approximately 76% of the associated credit
exposure is with investment grade counterparties, as determined using publicly
available information including major rating agencies' published ratings and TXU
Corp's internal credit evaluation. Those counterparties without a Standard &
Poor's (S&P) rating of a least BBB- or a similar rating from another major
rating agency, are rated using internal credit methodologies and credit scoring
models to determine an S&P equivalent rating. Approximately 24% of the credit
exposure is considered to be below investment grade or not rated. US Holdings
routinely monitors and manages its exposure to credit risk to these
counterparties on this basis.
US Holdings had no exposure to any one unaffiliated customer that
represented more than 5% of the gross fair value of US Holdings' trade accounts
receivable, energy trading assets and derivative assets at March 31, 2002. Based
on US Holdings' policies for managing credit risk, its exposures and its credit
and other reserves, US Holdings does not anticipate a materially adverse effect
on its financial position or results of operations as a result of
non-performance by any counterparty.
31
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
3 Restated bylaws of US Holdings.
4* Sixty-fourth Supplement and Indenture, dated as of May 1,
2002, to the Oncor Mortgage and Deed of Trust, dated
December 1, 1983, filed as Exhibit 4 to TXU Corp. Form 10-Q
for the quarter ended March 31, 2002.
10(a)* Amendment to US Facility B, dated as of April 24, 2000, filed
as Exhibit 10(a) to TXU Corp. Form 10-Q for the quarter ended
March 31, 2002.
10(b)* 364-Day Revolving Credit Agreement, dated as of April 24,
2002, among TXU Energy, Oncor, US Holdings, JP Morgan Chase,
as Administrative Agent, and the financial institutions named
therein, filed as Exhibit 10(b) to TXU Corp. Form 10-Q for the
quarter ended March 31, 2002.
15 Letter from independent accountants as to unaudited interim
financial information.
99 Condensed Statements of Consolidated Income - Twelve Months
Ended March 31, 2002.
---------------------
*Incorporated by reference
(b) Reports on Form 8-K filed since December 31, 2001:
Date of Report Item Reported
- -------------- -------------
January 16, 2002 Item 2. Disposition or Acquisition of Assets.
Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
January 24, 2002 Item 5. Other Events and Regulation FD Disclosure.
April 17, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
April 17, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
32
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 US HOLDINGS COMPANY
By /s/ Biggs C. Porter
--------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: May 14, 2002
33