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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( / ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 1-12833
TXU Corp.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / No____
---
Common Stock outstanding at November 8, 2002: 287,136,570 shares, without par
value.
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TABLE OF CONTENTS
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Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Nine Months Ended September 30, 2002 and 2001 ............... 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Nine Months Ended September 30, 2002 and 2001 ............... 2
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2002 and 2001 ......................... 3
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 .............................. 4
Notes to Financial Statements ......................................... 5
Independent Accountants' Report ....................................... 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............ 59
Item 4. Controls and Procedures ............................................... 60
Part II. Other Information
Item 1. Legal Proceedings ..................................................... 61
Item 6. Exhibits and Reports on Form 8-K ...................................... 62
Signature ........................................................................... 63
Certifications ...................................................................... 64
(i)
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars, Except per Share Amounts
Operating revenues (Note 2) ..................................................... $ 4,276 $ 3,967 $ 11,925 $ 12,393
-------- -------- -------- --------
Operating expenses
Energy purchased for resale,fuel consumed and delivery costs (Note 2) ......... 2,384 1,903 6,303 6,586
Operation and maintenance ..................................................... 853 1,011 2,516 2,502
Depreciation and other amortization ........................................... 244 245 716 750
Goodwill amortization ......................................................... -- 56 -- 165
Taxes other than income ....................................................... 173 195 534 577
-------- -------- -------- --------
Total operating expenses ................................................... 3,654 3,410 10,069 10,580
-------- -------- -------- --------
Operating income ................................................................ 622 557 1,856 1,813
Other income .................................................................... 33 10 65 125
Other deductions ................................................................ 31 60 86 119
Interest income ................................................................. 8 48 31 121
Interest expense and other charges .............................................. 301 384 892 1,176
-------- -------- -------- --------
Income from continuing operations before income taxes and
extraordinary items .......................................................... 331 171 974 764
Income tax expense (benefit) .................................................... 104 (168) 274 17
-------- -------- -------- --------
Income from continuing operations before extraordinary items .................... 227 339 700 747
Loss on discontinued operations, net of tax effect (Note 1) ..................... (15) -- (15) --
Extraordinary items, net of tax effect .......................................... (1) -- (18) --
-------- -------- -------- --------
Net income ...................................................................... 211 339 667 747
Preference stock dividends ...................................................... 5 5 16 16
-------- -------- -------- --------
Net income available for common stock ........................................... $ 206 $ 334 $ 651 $ 731
======== ======== ======== ========
Average shares of common stock outstanding (millions) ........................... 282 260 272 258
Per share of common stock:
Basic and diluted earnings
Income from continuing operations before extraordinary items .................. $ 0.78 $ 1.28 $ 2.52 $ 2.83
Loss on discontinued operations, net of tax effect ............................ $ (0.05) $ -- $ (0.05) $ --
Extraordinary items, net of tax effect ........................................ $ -- $ -- $ (0.07) $ --
Net income available for common stock ......................................... $ 0.73 $ 1.28 $ 2.40 $ 2.83
Dividends declared ............................................................. $ 0.60 $ 0.60 $ 1.80 $ 1.80
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Income from continuing operations before extraordinary items ................... $ 227 $ 339 $ 700 $ 747
----- ----- ----- -----
Other comprehensive income (loss)--
Net change during period, net of tax effects
Cumulative foreign currency translation adjustments .................... 47 127 297 (120)
Investments classified as available for sale:
Unrealized holding gains (net of tax expense of $24) .............. - - - 55
Reclassification of net gain realized on sale of
investments to other income (net of tax benefit of $22) ........... - - - (52)
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001
(net of tax benefit of $58) ..................................... - - - (132)
Net change in fair value of derivatives
(net of tax benefit of $25, $19, $122 and $58) .................. (61) (43) (236) (132)
Amounts realized in earnings during the period
(net of tax expense of $5, $14, $64 and $65) .................... 27 36 144 155
----- ----- ----- -----
Total ................................................... 13 120 205 $(226)
----- ----- ----- -----
Comprehensive income from continuing operations ................................ 240 459 905 521
----- ----- ----- -----
Loss on discontinued operations, net of tax effect ............................. (15) - (15) -
Extraordinary items, net of tax effect ......................................... (1) - (18) -
----- ----- ----- -----
Comprehensive income ........................................................... $ 224 $ 459 $ 872 $ 521
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------
2002 2001
---- ----
Millions of Dollars
Cash flows - operating activities
Net income .................................................................. $ 667 $ 747
Adjustments to reconcile net income to cash provided by operating activities:
Loss on discontinued operations, net of tax effect ...................... 15 --
Extraordinary items, net of tax effect .................................. 18 --
Depreciation and amortization ........................................... 791 1,011
Deferred income taxes and investment tax credits - net .................. 140 (265)
Loss/(Gain) from sales of assets ....................................... (30) 148
Net effect of unrealized mark-to-market valuation gains ................. (43) (341)
Equity in losses of affiliates and joint ventures ....................... 32 36
Other ................................................................... 45 116
Changes in operating assets and liabilities .................................. (682) 155
------- -------
Cash provided by operating activities .......................... 953 1,607
------- -------
Cash flows - financing activities
Issuances of securities:
Long-term debt ........................................................... 3,842 1,580
Common stock ............................................................. 717 353
Retirements/repurchases of securities:
Long-term debt ........................................................... (3,761) (2,285)
Common stock ............................................................. -- (44)
Change in notes payable:
Commercial paper ......................................................... 284 (352)
Banks .................................................................... (1,859) 55
Cash dividends paid:
Common stock ............................................................. (496) (463)
Preference stock ......................................................... (16) (16)
Debt premium, discount, financing and reacquisition expenses ................. (107) (21)
------- -------
Cash used in financing activities .............................. (1,396) (1,193)
------- -------
Cash flows - investing activities
Capital expenditures ......................................................... (840) (1,186)
Acquisitions of businesses ................................................... (606) (230)
Proceeds from sale of assets ................................................. 1,354 755
Nuclear fuel ................................................................. (51) (11)
Other ........................................................................ (47) (62)
------- -------
Cash used in investing activities ............................... (190) (734)
------- -------
Effect of exchange rates on cash and cash equivalents ............................ 65 (12)
------- -------
Net change in cash and cash equivalents .......................................... (568) (332)
Cash and cash equivalents - beginning balance .................................... 1,161 1,039
------- -------
Cash and cash equivalents - ending balance ....................................... $ 593 $ 707
======= =======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS Millions of Dollars
Current assets
Cash and cash equivalents ............................................................. $ 593 $ 1,161
Accounts receivable ................................................................... 3,057 2,555
Inventories -- at average cost ........................................................ 571 522
Prepayments ........................................................................... 255 370
Commodity contract assets ............................................................. 1,779 1,680
Other current assets .................................................................. 307 253
------- -------
Total current assets .......................................................... 6,562 6,541
------- -------
Investments
Restricted cash ....................................................................... 633 520
Other investments ..................................................................... 1,691 1,586
Property, plant and equipment -- net ........................................................ 20,949 22,480
Goodwill .................................................................................... 7,671 7,247
Regulatory assets -- net .................................................................... 1,817 1,734
Commodity contract assets ................................................................... 1,106 795
Cash flow hedges and other derivative assets ................................................ 458 448
Deferred debits and other assets ............................................................ 957 881
------- -------
Total assets .................................................................. $41,844 $42,232
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable
Commercial paper .............................................................. $ 1,144 $ 853
Banks ......................................................................... 509 2,369
Long-term debt due currently .......................................................... 1,695 1,308
Accounts payable ...................................................................... 2,447 2,466
Commodity contract liabilities ........................................................ 1,563 1,545
Other current liabilities ............................................................. 1,644 1,440
------- -------
Total current liabilities ..................................................... 9,002 9,981
------- -------
Accumulated deferred income taxes ........................................................... 3,500 3,708
Investment tax credits ...................................................................... 459 479
Commodity contract liabilities .............................................................. 722 521
Cash flow hedges and other derivative liabilities ........................................... 672 317
Other deferred credits and noncurrent liabilities ........................................... 2,508 2,221
Long-term debt, less amounts due currently .................................................. 14,830 16,173
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of the obligated company
TXU Corp. obligated ................................................................... 368 368
Subsidiary obligated .................................................................. 147 147
Preferred securities of subsidiary perpetual trust of TXU Europe ............................ 150 150
Preferred stock of subsidiaries
Not subject to mandatory redemption ................................................... 190 190
Subject to mandatory redemption ....................................................... 21 21
Contingencies (Note 8)
Shareholders' equity (Note 5) ............................................................... 9,275 7,956
------- -------
Total liabilities and shareholders' equity .................................... $41,844 $42,232
======= =======
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS
TXU Corp. is an energy services company that engages in electricity
generation, wholesale energy sales, trading and risk management activities,
retail energy sales, energy delivery, other energy-related services and, through
a joint venture, telecommunications services. TXU Corp. is a holding company
whose principal United States (US) operations are conducted through TXU US
Holdings Company (US Holdings, formerly TXU Electric Company) and TXU Gas
Company (TXU Gas). TXU Corp.'s principal international operations are conducted
through TXU Australia Holdings Limited Partnership (TXU Australia) and have also
been conducted through TXU Europe Limited (TXU Europe).
Exit of TXU Europe Business - In October 2002, TXU Corp. made a
determination to exit its TXU Europe business. See Note 3 regarding recent
events related to TXU Europe.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of
its businesses effective 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 Public Utility
Commission of Texas (Commission), as of January 1, 2002, US Holdings
transferred:
. its electric transmission and distribution (T&D) assets to Oncor Electric
Delivery Company (Oncor), which is a utility regulated by the Commission
and a wholly-owned subsidiary of US Holdings,
. its electric power generation assets to subsidiaries of TXU Energy Company
LLC (TXU Energy), which is the new competitive business and a wholly-owned
subsidiary of US Holdings, and
. its retail customers to a subsidiary retail electric provider (REP) of TXU
Energy.
The T&D assets of TXU SESCO Company, 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 Corp. system and transferred them
to TXU Energy: the REP of TXU SESCO Company; the wholesale trading and risk
management operations and the unregulated commercial and industrial retail gas
business of TXU Gas; and the energy management services businesses and other
affiliates of TXU Corp., including the fuel procurement and coal mining
businesses that service the generation operations.
At December 31, 2001, TXU Corp. had five reportable operating segments as
reflected in TXU Corp.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (2001 Form 10-K). Concurrent with TXU Corp.'s reorganization
as of January 1, 2002, TXU Corp. realigned its operations into three reportable
segments: North America Energy, North America Energy Delivery and International
Energy, effective with reporting of 2002 results. (See Note 9 for further
information concerning reportable business segments.)
Discontinued Operations -- TXU Corp. intends to sell its 60% interest in a
gas distribution business in Mexico and recorded a charge of $15 million
after-tax in the third quarter of 2002 to write-down its investment in the
business. The charge was reported as discontinued operations.
5
Business Acquisitions and Dispositions -- On October 21, 2002, TXU Europe
sold certain of its operations, including the retail electric and gas business
in the United Kingdom (UK) and certain generation plants in the UK, to Powergen
UK plc (Powergen), a unit of Germany's E.ON AG, for approximately $2.1 billion
in cash. See Note 3 regarding recent events related to TXU Europe.
On April 24, 2002, TXU Energy acquired a cogeneration and wholesale energy
production business in New Jersey for $36 million in cash. The acquisition
included a 122 megawatt combined-cycle power production facility and various
contracts, including electric supply and gas transportation agreements.
Generation Plant Acquisitions and Dispositions -- On May 31, 2002, TXU
Energy acquired a 260 megawatt combined-cycle power production facility in
northwest Texas through a settlement agreement which dismissed a lawsuit
previously filed related to the plant, and included a nominal cash payment. TXU
Energy previously purchased all of the electrical output of this plant under a
long-term contract.
On April 25, 2002, TXU Energy completed the sale of its Handley and
Mountain Creek generating plants in the Dallas-Fort Worth area with total plant
capacity of 2,334 megawatts for $443 million in cash, including the assumption
of an above-market price tolling agreement with a fair value of $190 million
reflected in other liabilities. The tolling agreement provides for TXU Energy to
purchase power during summer months for the next five years. A pretax gain on
the sale of $146 million, net of the effects of the above-market tolling
agreement, was deferred and included in other liabilities, and is being
recognized in other income during summer months over the five-year term of the
tolling agreement.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements
of TXU Corp. and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and, except for reclassifications made in accordance with the Emerging
Issues Task Force (EITF) Issue 02-3, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" and the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets" discussed below, on the same basis as the audited financial statements
included in its 2001 Form 10-K. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results of operations and financial position have been included therein.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with US GAAP have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). 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.
The financial information of TXU Europe has been included in the
consolidated results of TXU Corp. on the basis that TXU Europe was a continuing
operation of TXU Corp. as of September 30, 2002. However, as a result of the
events subsequent to September 30, 2002, TXU Corp. has made a determination to
exit the TXU Europe operations. TXU Corp. expects to report the results of TXU
Europe as discontinued operations beginning in the fourth quarter of 2002.
Changes in Accounting Standards -- In June 2002, the EITF reached a
consensus on certain aspects of Issue 02-3 regarding the presentation of trading
activities in the statement of income. The new rules were effective for TXU
Corp. on July 1, 2002, and require that all trading contracts, whether or not
physically settled, be recorded net upon settlement, rather than gross as a sale
and cost of sale. TXU Corp. has historically recorded financial contracts net,
but has recorded those contracts that provide for physical delivery gross upon
settlement. Prior period amounts have been reclassified to conform to this new
reporting requirement. The table below summarizes the impact on TXU Corp.'s
operating revenues and energy purchased for resale, fuel consumed and delivery
costs of the new reporting requirements. Transactions affected by the new
reporting requirements represent contracts that provided for physical delivery
but were settled financially without delivery, as well as contracts physically
settled but classified as trading activities. The new reporting requirements
have no impact on TXU Corp.'s gross margin, net income or cash provided by
operating activities.
6
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Operating revenues before reclassification ........................... $9,582 $6,603 $24,884 $21,105
Less: Energy purchased for resale, fuel consumed and delivery
costs netted with revenues ..................................... 5,306 2,636 12,959 8,712
------ ------ ------- -------
Operating revenues after reclassification ............................ $4,276 $3,967 $11,925 $12,393
====== ====== ======= =======
Energy purchased for resale, fuel consumed and delivery costs
before reclassification ....................................... $7,690 $4,539 $19,262 $15,298
Less: Energy purchased for resale, fuel consumed and delivery
costs netted with revenues ..................................... 5,306 2,636 12,959 8,712
------ ------ ------- -------
Energy purchased for resale, fuel consumed and delivery costs
after reclassification ......................................... $2,384 $1,903 $ 6,303 $ 6,586
====== ====== ======= =======
On October 25, 2002, the EITF rescinded EITF Consensus No. 98-10, which
required mark-to-market accounting for all trading activities. Pursuant to this
rescission, only contracts that are derivatives under SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" will be subject to
mark-to-market accounting. Trading contracts that may not be derivatives under
SFAS No. 133 consist primarily of gas storage, power tolling, full requirements
and capacity contracts. This new accounting rule will be effective for new
contracts entered into after October 25, 2002. The cumulative effect of the
change on all existing contracts will be recorded no later than the first
quarter of 2003. TXU Corp. has not determined the impact this change in
accounting method will have on its results of operations.
SFAS No. 142 became effective for TXU Corp. 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 TXU Corp.'s existing goodwill
($220 million annually) ceased effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established 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. TXU Corp. completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill. The annual impairment test date will be as
of October 1 each year.
The table below reflects what reported income from continuing operations
and net income (including basic and diluted earnings per share amounts) would
have been in the 2001 periods, exclusive of goodwill amortization expense
recognized in those periods compared to the 2002 periods.
7
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2002 2001 2002 2001
-------- -------- -------- ---------
Millions of Dollars, Except per Share Amounts
Reported income from continuing operations ..................... $ 227 $ 339 $ 700 $ 747
Add back: goodwill amortization ............................... -- 56 -- 165
-------- -------- -------- ---------
Adjusted income from continuing operations ..................... 227 395 700 912
Loss on discontinued operations, net of tax effect ............. (15) -- (15) --
Extraordinary items, net of tax effect ......................... (1) -- (18) --
-------- -------- -------- ---------
Adjusted net income ............................................ 211 395 667 912
Preference stock dividends ..................................... 5 5 16 16
-------- -------- -------- ---------
Adjusted net income available for common stock.................. $ 206 $ 390 $ 651 $ 896
======== ======== ======== =========
Basic and diluted earnings per share:
Reported income from continuing operations ..................... $ 0.78 $ 1.28 $ 2.52 $ 2.83
Add back: goodwill amortization ............................... -- 0.22 -- 0.64
-------- -------- -------- ---------
Adjusted income from continuing operations ..................... 0.78 1.50 2.52 3.47
Loss on discontinued operations, net of tax effect ............. (0.05) -- (0.05) --
Extraordinary items, net of tax effect ......................... -- -- (0.07) --
-------- -------- -------- ---------
Adjusted net income available for common stock-basic ........... $ 0.73 $ 1.50 $ 2.40 $ 3.47
======== ======== ======== =========
Adjusted net income available for common stock-diluted ......... $ 0.73 $ 1.49 $ 2.40 $ 3.47
======== ======== ======== =========
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be
effective on January 1, 2003. SFAS No. 143 requires the recognition of a fair
value liability for any retirement obligation associated with long-lived assets.
SFAS No. 143 also requires additional disclosures. TXU Corp. will change its
reporting for nuclear decommissioning costs to conform to the new standard, as
well as conform its accounting for all other asset retirement obligations to the
new standard effective with 2003 reporting.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective 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, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued 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 will be effective on January 1, 2003. One of the provisions of this
statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." 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 will be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and will be effective on January 1, 2003.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
initially at fair value.
For accounting standards not yet adopted or implemented, TXU Corp. is
evaluating the potential impact on its financial position and results of
operations.
Earnings Per Share -- Basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
period reported. Diluted earnings per share include the effect of potential
issuances of common shares resulting from the assumed exercise of all
outstanding stock options and settlement of dilutive forward stock purchase
agreements. TXU Corp. has outstanding certain instruments that may be settled
with common stock that are considered in computing diluted earnings per share.
The number of shares of common stock added to the average shares outstanding for
the purpose of calculating diluted earnings per share was 137,485 and 275,556
for the three months ended September 30, 2002 and 2001, respectively, and
215,429 and 248,233 for the nine months ended September 30, 2002 and 2001,
respectively.
8
During 2002, TXU Corp. also had outstanding certain common stock forward
purchase contracts related to the equity-linked debt securities issued in 1998
that were settled with common stock in August 2002. On August 13, 2002, a
remarketing of the debt component of the equity-linked debt securities did not
occur as contemplated by its terms. As a result, TXU Corp. retained and canceled
a portion ($238 million) of the associated notes in satisfaction of the holders'
obligations under the common stock forward purchase contracts (see Note 4).
3. SUBSEQUENT EVENTS RELATED TO TXU EUROPE
Difficult Operating Environment in the UK -- On October 4, 2002, TXU Corp.
announced that it was reducing earnings expectations for 2002 and 2003 due
primarily to continued pressure on operating results in the UK. A significant
decrease in wholesale power prices and low price volatility, due in part to
milder than normal weather, had led to continuing declines in profitability and
cash flows from TXU Europe's upstream electricity generation assets and
short-term wholesale trading activities. In addition, TXU Europe's ability to
enter into structured transactions (long-term trades) had been considerably
reduced because of depressed market activity and lack of available
counterparties due to energy sector-wide credit concerns. A significant portion
of TXU Europe's retail power load in the UK was satisfied with long-term
agreements that obligated TXU Europe to purchase power at prices considerably in
excess of current wholesale market prices. These comparatively high power
purchase costs, combined with increased competition and associated customer
attrition, had resulted in reduced profitability and cash flows from TXU
Europe's retail electric business. TXU Europe's planned actions to address the
situation included restructuring the power purchase agreements and physical
generation positions in the UK, ceasing acquisition and other developmental
activities, reducing administrative costs and enhancing retail margins.
Market Reaction and TXU Corp.'s Response -- Prior to TXU Corp.'s October 4
announcement, concerns were already prevalent in US financial markets regarding
financial performance of the US energy sector. Subsequent to TXU Corp.'s October
4 announcement, concerns also arose in the financial markets regarding the
liquidity of TXU Corp.'s North American and Australian operations.
TXU Corp. has taken the following actions to address the US financial
markets' concern about liquidity and to strengthen its credit position:
. Reduced its common stock dividend by 80 percent to an annual indicated
rate of $.50 per share effective with the dividend payable in January
2003
. Significantly reduced planned capital expenditures in all its
businesses
. Reversed previous plans to support TXU Europe with up to $700 million
in capital contributions
. Eliminated by amendment the cross-default provision in a US financing
arrangement that would have been triggered by a TXU Europe default
(TXU Australia's financing arrangements have no cross-default
provision that would have been triggered by a TXU Europe default.)
. Drew $2.6 billion in cash on its US revolving credit facilities
. On October 30, 2002, entered into a commitment for a secured credit
facility of up to $1 billion at Oncor. The facility is intended to
fund interim refinancings of approximately $700 million of maturities
should market conditions not support a timely, cost effective
refinancing. The balance will be available for general corporate
purposes at Oncor.
The actions to reduce the common stock dividend and capital expenditures
will result in estimated annual cash savings of $850 to $950 million, which is
intended to be used for debt reduction.
Following the announcement of these actions, between October 4 and October
14, 2002, the major credit rating agencies downgraded TXU Europe's credit
ratings to below investment grade. Credit ratings for TXU Corp and its US and
Australian subsidiaries remain investment grade.
Impact of Credit Rating Downgrades on TXU Europe -- The downgrades of
credit ratings to below investment grade have resulted in a number of potential
demands on TXU Europe's liquidity. These demands are in certain cases at the
discretion of TXU Europe's counterparties and include additional cash or letter
of credit collateral requirements and repayment of indebtedness under various
financing and other contractual
9
arrangements. Certain of these collateral requirements relate to wholesale
trading, further limiting these activities. In addition, events of default have
occurred under certain of these arrangements, and several financing agreements
contain cross-default provisions that accelerate repayment of borrowings. The
effect of these developments on liquidity is significant, and TXU Europe has
entered into negotiations with its creditors regarding these matters.
Sale of Certain TXU Europe Operations-- On October 14, 2002, TXU Corp.
announced that TXU Europe was offering for sale all or portions of its business.
Such action effectively represented a determination by TXU Corp. to exit all of
its operations in Europe.
On October 21, 2002, TXU Europe sold certain of its operations to Powergen,
a unit of Germany's E.ON AG, for approximately $2.1 billion ((pound)1.37
billion) in cash.
Concurrently, Powergen terminated the accounts receivable securitization
program, under which TXU Europe had been selling its trade accounts receivable,
for approximately $390 million ((pound)250 million), effectively buying back the
receivables from the participating financial institution.
The operations sold include: (a) the retail electric and gas business in
the UK, consisting of 5.3 million residential, commercial and industrial
customers, and (b) three power plants representing a total of 2.9 gigawatts of
coal-fired generation capacity and a combined heat and power plant, all in the
UK. The sale and purchase agreement also provides for the transfer of
approximately 1,900 employees in the UK to Powergen and the assumption by
Powergen of the associated pension obligations.
After the sale, TXU Europe continues to retain: (a) its energy trading
assets and liabilities; (b) several long-term power purchase agreements in the
UK; (c) operations in Germany consisting of a national retail energy provider
with 200,000 customers, as well as majority interests in two businesses
providing power, gas, heating and water services: the city utility in Kiel (51%
owned) with 250,000 customers and the city utility in Braunschweig (74.9% owned)
with 210,000 customers; (d) operations in Scandinavia consisting of an 80% owned
wholesale power business in Finland, selling over four terawatt hours of
electricity annually, a 45% interest in an electricity distribution business in
Finland with access to 90,000 customers and a retail energy business with 80,000
customers in Norway; and (e) two combined heat and power plants in the UK and
interests in various renewable energy projects, mostly wind farms.
TXU Europe and its subsidiaries have not entered into formal administration
processes in the UK (similar to bankruptcy proceedings in the US). However,
consistent with UK law, these remaining operations are being managed by the
directors of TXU Europe for the benefit of the creditors of TXU Europe and its
subsidiaries. The sales proceeds discussed above, as well as any other proceeds
that may be realized, will not be available to TXU Corp.
In consideration of the above events and changes in circumstances regarding
TXU Corp.'s control of the operating activities of TXU Europe, TXU Corp. is
required to perform an impairment test of goodwill and other assets of TXU
Europe, in accordance with accounting rules. TXU Corp. expects to record an
estimated charge of approximately $4.2 billion in the fourth quarter of 2002,
consisting primarily of the write-off of its investment in TXU Europe ($3.7
billion as of September 30, 2002). The charge also includes the write-off of
receivables due from TXU Europe and amounts previously recorded in other
comprehensive income, consisting primarily of the cumulative translation loss
associated with TXU Europe, as well as certain anticipated income tax and other
obligations related to the exiting of the European operations. This charge is
before consideration of any income tax deduction with respect to the tax basis
($3.4 billion) of TXU Corp.'s investment in TXU Europe, as well as certain
income tax contingencies, as such matters continue to be under review. TXU Corp.
has no intention to continue to fund the operations or any obligations of TXU
Europe beyond its investment balance.
10
The following condensed consolidated pro forma financial information of
TXU Corp. has been prepared to give effect to the exiting of the TXU Europe
operations:
Nine Months Ended
September 30,
--------------------
2002 2001
------ --------
Millions of Dollars,
Except Per
Share Amounts
Operating revenues ............................................................. $7,873 $ 7,896
Operating income ............................................................... $1,651 $ 1,528
Income from continuing operations before extraordinary items ................... $ 703 $ 557
Per share (after preference stock dividends)-- basic and diluted ............ $ 2.53 $ 2.10
Previous TXU Europe Acquisitions and Dispositions -- On July 1, 2002, TXU
Europe acquired a majority interest in Braunschweiger Versorgungs-
Aktiengesellschaft (BVAG), an electricity, gas, heating and water supplier for
210,000 residential, commercial and industrial customers in the German city of
Braunschweig, for $400 million in cash. In March 2002, TXU Europe acquired the
UK energy retail and trading business of Amerada Hess, which included over
400,000 residential energy and telecommunication accounts, a commercial and
industrial natural gas retail operation with 63 billion cubic feet (Bcf) in
annual sales volumes and wholesale gas marketing operations, for $168 million in
cash.
In January 2002, TXU Europe completed the sale of its UK electricity
distribution (networks) business, including its 50% interest in the 24seven
joint venture, to London Electricity Group plc (LE Group) for $1.8 billion,
consisting of net cash proceeds of $712 million (used to repay debt) and the
assumption by LE Group of $1.1 billion aggregate principal amount of debt. TXU
Europe recorded a loss on the sale of the networks business of $125 million ($88
million after-tax), after transaction costs, in the fourth quarter of 2001.
11
4. FINANCING ARRANGEMENTS
TN41 Credit Facilities -- TXU Corp. and its US and Australian
subsidiaries have credit facilities (some of which provide for long-term
borrowings) available as follows:
Credit Facilities
---------------------------------------------------------
At September 30, 2002 At November 5, 2002(a)
--------------------- ----------------------
Letters Letters
Authorized Facility of Cash of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Credit Borrowings
- -------- --------------- --------- ------- ------ ---------- ------ ----------
(Millions of dollars)
364-Day Revolving Credit Facility April 2003 US Holdings,
TXU Energy,
Oncor $ 1,000 $ 81 $ -- $ 88 $ 912
Five-Year Revolving Credit Facility(b) February 2005 US Holdings 1,400 462 -- 461 939
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 350 -- 500
Standby Liquidity Facility November 2002 US Holdings 400 -- -- -- 400
Standby Liquidity Facility November 2002 US Holdings,
TXU Energy,
Oncor 400 -- -- -- 400
------- ------ -------- ------ -------
Total US (c) $ 3,700 $ 543 $ 350 $ 549 $ 3,151
Senior Facility October 2004 TXU Australia $ 962 $ -- $ 815 $ -- $ 879
Working Capital Facility October 2002 TXU Australia 54 -- -- -- --
------- ------ -------- ------ -------
Total Australia (d) $ 1,016 $ -- $ 815 $ -- $ 879
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately
$2.6 billion in cash against their available credit facilities. These
funds and other available cash will be used, in part, to repay
outstanding commercial paper. (See Note 3 - Subsequent Events Related
to TXU Europe.)
(b) In February 2002, TXU Gas was removed as a borrower under this
facility. TXU Corp. was removed as a borrower under this facility
effective July 31, 2002.
(c) Supported commercial paper borrowings.
(d) Supports commercial paper borrowings, which were $63 million and $36
million at September 30, 2002 and November 5, 2002, respectively.
On October 30, 2002, Oncor entered into a commitment for a
secured credit facility of up to $1 billion. The facility is intended
to fund interim refinancings of approximately $700 million of maturing
secured debt should market conditions not support a timely, cost
effective refinancing. The balance will be available for general
corporate purposes at Oncor.
In July 2002, US Holdings entered into the $400 million Standby
Liquidity Facility that terminates no later than November 30, 2002. In
August 2002, US Holdings, TXU Energy and Oncor entered into the joint
$400 million Standby Liquidity Facility that also expires November 30,
2002. Borrowings of $800 million against these facilities are expected
to be repaid no later than the expiration date.
In May 2002, TXU Corp. entered into the $500 million three-year
revolving credit facility with a group of banks that terminates May 1,
2005. This facility is used for working capital and general corporate
purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into the
joint $1.0 billion 364-day revolving credit facility with a group of
banks that terminates in April 2003 but can be extended for one year.
This facility is used for working capital and general corporate
purposes. Up to $1.0 billion of letters of credit may be issued under
the facility. This facility and the $500 million three-year revolving
credit facility described above replaced the TXU Corp. and US Holdings
$1.4 billion 364-day revolving credit facility that expired in April
2002.
In the second quarter of 2002, each of TXU Energy and Oncor began
issuing commercial paper to fund its short-term liquidity
requirements. The commercial paper programs allow each of TXU Energy
and Oncor to issue up to $2.4 billion and $1.0 billion of commercial
paper, respectively. At September 30, 2002, each of the US credit
facilities listed above provided back-up for outstanding commercial
paper under the Oncor and TXU
12
Energy programs. The TXU Corp. commercial paper program was discontinued in July
2002, and at that time, TXU Corp. was removed as a borrower under the $1.4
billion Five-Year Revolving Credit Facility. As of September 30, 2002, total
outstanding commercial paper under these programs was $1.1 billion. Concurrent
with events in October 2002, as described in Note 3, US commercial paper markets
became inaccessible. Existing borrowings under the program are being repaid upon
maturity. Commercial paper borrowings are expected to resume as market concerns
regarding the liquidity of TXU Corp. and its US subsidiaries are mitigated.
All of the credit facilities discussed above, with the exception of the
Oncor commitment dated October 30, 2002, are included in the credit facilities
table above. Excluded from the credit facilities table is the revolving credit
facility of TXU Europe. As of September 30, 2002, the outstanding borrowings
under this facility were (pound)673 million ($1,051 million). (See Note 3
regarding subsequent events related to TXU Europe.)
Long-Term Debt -- At September 30, 2002 and December 31, 2001, total
long-term debt of TXU Europe included in the balance sheet was $4.7 billion and
$5.7 billion, respectively. (See Note 3 for further discussion.)
On October 15, 2002, TXU Gas exercised its right to redeem $200 million
aggregate principal amount of Putable Asset Term Securities (PATS notes) that
would have matured on October 15, 2012 for a cash premium of $35 million ($23
million after-tax), which will be recognized as an extraordinary debt
extinguishment loss by TXU Corp. in the fourth quarter of 2002. TXU Gas used
cash advances from TXU Corp. and cash on hand to fund the redemption of the PATS
notes.
On October 1, 2002, TXU Corp. paid off $125 million of notes at maturity.
In August 2002, Oncor issued $1.0 billion aggregate principal amount of
unsecured debentures in two series in a private placement with registration
rights. One series of $200 million is due September 1, 2007 and bears interest
at the rate of 5%, and the other series of $800 million is due September 1, 2022
and bears interest at the rate of 7%. Proceeds from the issuance were used by
Oncor to repay advances from affiliates and commercial paper.
In August 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
In June 2002, Oncor redeemed all of its 8% First Mortgage Bonds due June 1, 2002
in the aggregate principal amount of $147 million, and in February 2002, Oncor
redeemed all of its 8.125% First Mortgage Bonds due February 1, 2002 in the
aggregate principal amount of $150 million. In July 2002, TXU Energy redeemed at
par the remaining $635 million principal amount of its floating rate debentures
due May 20, 2003. Oncor and TXU Energy funded the redemptions through the
issuance of commercial paper, advances from affiliates and cash from operations.
In 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component and common stock forward purchase contracts.
The first of two common stock forward purchase contracts was settled on August
16, 2001 with the issuance of 7.5 million shares of common stock for $351
million in cash. The second of two common stock forward purchase contracts was
settled on August 16, 2002, on which date TXU Corp. issued approximately 8.4
million shares of common stock to the holders of these equity-linked securities.
TXU Corp. received approximately $111 million in cash upon settlement of common
stock forward purchase contracts. In addition, TXU Corp. retained and canceled
approximately $238 million of the 6.5% Series E Notes in satisfaction of the
obligations under the common stock forward purchase contracts of holders that
did not settle their contracts with cash. Holders of $109 million of Series E
Notes had their notes repaid by TXU Corp. on September 3, 2002. The Series E
Notes that remain outstanding (approximately $2.2 million principal amount) bear
interest at 4.05% per annum from August 16, 2002 through maturity on August 16,
2004.
In June 2002, TXU Corp. issued 8.8 million equity-linked debt securities
(corporate units) with an aggregate stated amount of $440 million. Net proceeds
of $427 million were used for working capital and other general corporate
purposes, including repayment of commercial paper and to provide advances to
subsidiaries. Each of the corporate units initially consists of an unsecured $50
note and a contract to purchase from TXU Corp. its common stock in the future.
Quarterly distributions on the corporate units will include interest on the
13
notes at the annual rate of 5.8% and contract adjustment payments payable by TXU
Corp. at the annual rate of 2.325%. The contracts require the holders to
purchase TXU Corp. common stock based on a range of prices ($51.15 to $62.9145)
at the settlement date of May 16, 2006.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of
senior secured notes in two series in a private placement with registration
rights. One series of $700 million is due May 1, 2012 and bears interest at the
annual rate of 6.375%, and the other series of $500 million is due May 1, 2032
and bears interest at the annual rate of 7%. Each series is initially secured by
an equal principal amount of Oncor's first mortgage bonds; however, the lien of
those bonds may be released in certain circumstances. Proceeds from the issuance
were used by Oncor to repay advances from US Holdings. US Holdings used the
repayments from Oncor to repay advances from TXU Energy and TXU Corp. TXU Energy
used the repayments to redeem $865 million principal amount of floating rate
debentures due May 20, 2003, and TXU Corp. used the repayments to repay $335
million of short-term borrowings.
Also in May 2002, the Brazos River Authority issued $61 million principal
amount of weekly reset floating rate pollution control revenue refunding bonds
for TXU Energy to refund a similar principal amount of pollution control revenue
bonds.
During the first quarter of 2002, TXU Corp. redeemed $114 million of senior
notes with rates ranging from 5.52% to 10.58% that were originally due from 2002
to 2010, resulting in an extraordinary loss of $17 million (net of income tax
benefit of $9 million). Also, TXU Mining Company LP redeemed $70 million of its
6.875% senior notes due 2005 and $53 million of its 7.0% senior notes due 2003.
In January 2002, in connection with TXU Europe's sale of its UK networks
business, $1.1 billion of TXU Europe's debt ($500 million due 2004, $286 million
due 2012 and $286 million due 2025) was assumed by the purchaser.
As of September 30, 2002, the aggregate secured long-term debt of TXU
Corp. and its consolidated subsidiaries consisted of $3.1 billion of Oncor's
first mortgage bonds and senior secured notes that are secured by a lien on
substantially all of its tangible electric T&D property, and $596 million of
various other long-term debt secured by liens on utility plant and other assets
in North America and Europe. TXU Corp.'s long-term debt obligations are not
guaranteed or secured by affiliates.
Leases -- In February 2002, TXU Corp. sold its interest in its
headquarters building in Dallas, Texas for $145 million. Simultaneously with the
sale of the property, TXU Corp. entered into a twenty-year lease obligation for
the property. At the end of the initial twenty-year term of the lease, TXU Corp.
has the right, but not the obligation, to renew the lease for three ten-year
renewal terms under which rents will be paid based on then-existing market
conditions. The sale was treated as a financing.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of September 30, 2002, TXU Energy
Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas are
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
September 30, 2002, $1.25 billion face amount of receivables were sold to TXU
Receivables Company under the program in exchange for cash of $600 million and
$632 million in subordinated notes, with $18 million of losses on sales for the
nine months ended September 30, 2002 principally representing the interest on
the underlying financing. These losses approximated 4% of the cash proceeds from
the sale of undivided interests in accounts receivable on an annualized basis.
Upon termination, cash flows to the originators would be delayed as collections
of sold receivables were used by TXU Receivables Company to repurchase the
undivided interests of the financial institutions instead of purchasing new
receivables. The level of cash flows would normalize in approximately 16 to 31
days. TXU Business Services, a subsidiary of TXU Corp., services the purchased
receivables and is paid a market based servicing fee by TXU Receivables Company.
The subordinated notes receivable from
14
TXU Receivables Company represent TXU Corp.'s subsidiaries' retained interests
in the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
5. SHAREHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------- ------------
Shareholders' equity:
Preference stock .................................................... $ 300 $ 300
------- -------
Common stock without par value:
Authorized shares -- 1,000,000,000
Outstanding shares: September 30, 2002 -- 286,779,225 and
December 31, 2001 -- 265,140,087 ............................ 7,516 6,560
Retained earnings ................................................... 2,021 1,863
Accumulated other comprehensive loss ................................ (562) (767)
------- -------
Total common stock equity ................................. 8,975 7,656
------- -------
Total shareholders' equity ................................ $ 9,275 $ 7,956
======= =======
On October 12, 2002, TXU Corp. declared a common stock dividend of $0.125
per share, payable on January 2, 2003, which represents an 80% reduction from
the previous dividend rate. The decrease was in response to concerns regarding
the liquidity of TXU Corp. and its US and Australian subsidiaries. See Note 3 to
Financial Statements regarding recent events related to TXU Europe. TXU Corp.
paid quarterly dividends of $0.60 a share in April 2002, July 2002 and October
2002. Future dividends may vary and are subject to consideration of TXU Corp.'s
operating cash flow levels, capital expenditure needs and other business
conditions existing at the time.
In June 2002, TXU Corp. issued in a public offering 11.8 million shares of
its common stock. Net proceeds of $585 million from the sale were used for
working capital and other general corporate purposes, including the repayment of
commercial paper and to provide advances to subsidiaries.
In connection with the issuance of equity-linked debt securities in June
2002, TXU Corp. recorded, as a reduction to common stock equity, the present
value of the contract adjustment payments and a portion of the costs,
aggregating approximately $48 million. A liability was recorded for the contract
adjustment payments and will be reduced as the contract adjustment payments are
made. TXU Corp. has the right to defer the contract adjustment payments, but any
such election will subject TXU Corp. to restrictions on the payment of dividends
on and redemption of outstanding shares of common stock. TXU Corp. has no plans
to defer these contract adjustment payments.
In 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component and common stock forward purchase contracts.
The second of two common stock forward purchase contracts was settled on August
16, 2002, on which date TXU Corp. issued 8,395,800 shares of common stock to the
holders of these equity-linked securities, resulting in an increase to
shareholders' equity of approximately $350 million. See Note 4.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp.'s subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At September 30, 2002, there were no restrictions on
the payment of dividends under these provisions.
6. TRUST SECURITIES
TXU Corp. or Subsidiary Obligated, Mandatorily Redeemable, Preferred
Securities of Subsidiary Trusts, Each Holding Solely Junior Subordinated
Debentures (Trust Assets) of TXU Corp. or Related Subsidiary (Trust Securities)
- -- The statutory business trust subsidiaries had Trust Securities and Trust
Assets outstanding as follows:
15
Trust Securities Trust Assets Maturity
------------------------------------------------------------- ----------------------------- --------
Units (000's) Amount Amount
---------------------------- ----------------------------- -----------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
TXU Corp.
- ---------
TXU Corp. Capital I
(7.25% Series) 9,200 9,200 $ 223 $223 $ 237 $ 237 2029
TXU Corp. Capital II
(8.7% Series) 6,000 6,000 145 145 155 155 2034
----- ---- ----- -----
Total TXU Corp. 368 368 392 392
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(a) 150 150 147 147 155 155 2028
----- ---- ----- -----
Total $ 515 $515 $ 547 $ 547
===== ==== ===== =====
(a) Floating rate is determined quarterly based on LIBOR. Related interest
rate swaps effectively fix the rates at 6.629% on $100 million and at
6.444% on $50 million to July 1, 2003.
Each parent company owns the common Trust Securities issued by its
subsidiary trust and has effectively issued a full and unconditional
guarantee of such trust's Trust Securities.
7. REGULATION AND RATES
Regulatory Settlement Plan -- (For additional discussion of the
settlement plan and related items, see Note 4 to Financial Statements in
TXU Corp.'s Annual Report on Form 10-K for the fiscal year ended December
31, 2001.) On December 31, 2001, US Holdings filed a settlement plan with
the Commission, which was approved by the Commission on June 20, 2002. On
August 5, 2002, the Commission issued a financing order, pursuant to the
settlement plan, authorizing the issuance of transition (securitization)
bonds with a principal amount of $1.3 billion. The Commission's order
approving the settlement plan and the financing order were appealed by
certain nonsettling parties in five separate dockets in Travis County,
Texas District Court in August 2002. The court has consolidated these
dockets into one, and a hearing on the merits is scheduled for February 4,
2003. US Holdings is unable to predict when the appeal process related to
the Commission's approval of the settlement plan and the financing order
will be concluded or the outcome. If the Commission's approval is upheld,
the settlement plan resolves all major pending issues related to US
Holdings' transition to competition and will supersede certain proceedings
that are related to the 1999 Restructuring Legislation. The settlement plan
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.
The principal and interest on the securitization bonds would be secured
by payments from retail customers to provide recovery of generation-related
regulatory assets and other qualified costs. These regulatory assets have a
carrying value of approximately $1.8 billion. Once the bonds are issued,
the full amount of the regulatory assets will be amortized to expense by
Oncor over the life of the bonds. Any amount of the $1.8 billion which is
in excess of the future cash flows from the customer payments to service
the bonds will be expensed at the time such shortfall, if any, is
determined. Assuming the bonds were issued at the present time and
considering current interest rates, the amount of the regulatory asset
carrying value would exceed the cash flows from the bonds by approximately
$130 million.
TXU Energy --Under Commission rules, affiliated REPs of utilities are
allowed to petition the Commission for an increase in the fuel factor
component of their price-to-beat rates if the average price of natural gas
futures increases more than 4% from the level used to set the previous
price-to-beat fuel factor rate. In April 2002, TXU Energy filed a request
with the Commission to increase the fuel factor component of its
price-to-beat rates. On August 23, 2002, the Commission approved the fuel
factor increase. The fuel factor
16
increase was implemented for the billing month beginning on August 26, 2002.
Average residential customers using 1,000 KWh saw an increase of just under 5%
in their monthly electric bills.
TXU Energy is the current provider of last resort (POLR) for residential
and small non-residential customers in all areas of the Electric Reliability
Council of Texas (ERCOT), where customer choice is available except in its
incumbent service areas, and is the POLR for large non-residential customers in
its incumbent service area. TXU Energy's current POLR contract ends on December
31, 2002. On August 22, 2002, the Commission adopted new rules that
significantly changed POLR service. Under the new POLR rules, effective
September 24, 2002, residential and small non-residential customers served by
affiliated REPs and all large non-residential customers could be subject to
disconnection for non-payment rather than being transferred to a POLR provider.
Also effective on September 24, 2002, non-affiliated REPs ceased transferring
non-paying customers to the POLR provider, and instead began transferring them
to the affiliated REP. Within the new POLR framework, the POLR only provides
electric service to customers who request POLR service, whose selected REP goes
out of business, or who are transferred to the POLR by other REPs for reasons
other than non-payment. This limited POLR service will be provided by certified
REPs for a two-year period beginning January 1, 2003, and will be selected
through a competitive bid process. If no bids are submitted or all bids are
rejected, a lottery will be conducted to select a POLR to serve residential,
small non-residential customers and large non-residential customers. Only the
affiliated REP and the POLR can disconnect residential and small non-residential
customers for non-payment under the revised rules. Large non-residential
customers can be disconnected by any REP if the customer's contract allows for
it. The Commission will consider whether all REPs should be able to disconnect
non-paying customers and will make a determination by October 1, 2004.
TXU Gas -- TXU Gas employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. During the first nine
months of 2002, rate cases supporting $56 million in annualized revenue
increases have been filed in 147 cities. Settlements have been reached with 73
of these cities for annual increases aggregating $9 million. Rate cases have
been withdrawn from 23 cities, and 51 cities have declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the Railroad Commission of Texas (RRC),
which represents $25 million of annualized revenue increases. Pertaining to this
appeal, a settlement in principal has been reached for $7.5 million. TXU Gas
will dismiss its appeal at the RRC after the 51 cities pass rate ordinances
approving the settlement. These settlements adjusted other aspects of the TXU
Gas tariffs. The total impact of the 2002 rate settlements and associated tariff
adjustments is $22 million. In July 2001 and August 2001, TXU Gas filed two
cases, a gas cost review, and a gas cost reconciliation, covering the period
between November 1997 and June 2001, seeking to recover $29 million of
under-recovered gas costs. On August 6, 2002 a settlement was approved by the
RRC authorizing TXU Gas to recover $18 million of this amount, which has been
recovered through a surcharge, while $11 million in under-recovered gas costs
remains pending. On August 30, 2002, TXU Gas filed the city gate gas cost
reconciliation for the twelve month ended period June 30, 2002 with the RRC.
During this period TXU Gas over-recovered its gas cost by $24 million, which is
being refunded from October 2002 through June 2003. The refund has no material
impact on the net income of TXU Gas.
TXU Australia -- TXU Australia's electricity distribution tariffs are
effective until at least December 31, 2005, and TXU Australia's gas distribution
tariffs are effective until December 31, 2002. The Essential Services Commission
(formerly the Office of the Regulator General) issued a price determination for
the five-year period from 2003 to 2007 on October 3, 2002. According to the
determination, TXU Australia's gas distribution tariffs are to be increased
slightly for 2003. Each subsequent year, the tariffs are to increase by 0.5%
after Consumer Price Index increases.
In Victoria and New South Wales, Australia, all electricity customers have
had the option to choose their retailer since January 2002. Retail gas customers
in Victoria were able to transfer retailers effective October 2002. The
Victorian government regulates retail energy prices for incumbent providers and
has approved a price increase for TXU Australia's electricity retail customers
for 2002. TXU Australia has submitted an application with the Victorian
government, which has subsequently referred the application to the Essential
Services Commission, with respect to a price increase for 2003 for TXU
Australia's retail gas customers.
In the State of South Australia, a phase-in schedule for the introduction
of competition for electric and gas customers has been established. The market
is currently competitive for electric customers with annual usage above 0.16
GWh, and the market for residential customers becomes competitive beginning
January 2003. TXU
17
Australia intends to enter the residential market in 2003, subject to the proper
implementation of market systems and the final decision by the South Australian
Regulator regarding regulated prices for incumbent retailers in South Australia.
8. COMMITMENTS AND CONTINGENCIES
Power Purchase Contracts -- US Holdings has entered into various power
purchase contracts requiring the payment of annual capacity fees. Including
contracts entered into subsequent to 2001 year-end, future capacity payments
under existing agreements are estimated as follows:
October 1 through December 31, 2002 ............ $ 57
2003 ........................................... 259
2004 ........................................... 163
2005 ........................................... 147
2006 ........................................... 117
Thereafter ..................................... 17
-------
Total capacity payments ................ $ 760
=======
Commitments for power purchase contracts related to TXU Europe are not
included in the table above. (See Note 3 regarding recent events related to TXU
Europe.)
Commitments under long-term gas purchase contracts and coal contracts at
September 30, 2002 were not materially different than those set forth in Note 9
to Financial Statements in TXU Corp.'s 2001 Form 10-K.
Legal proceedings -- In October and November 2002, at least twenty
separate lawsuits were filed in the United States District Court for the
Northern District of Texas, and one in the United States District Court for the
Eastern District of Texas, against TXU Corp., Erle Nye and Michael J. McNally.
Some of the lawsuits also name former officer David W. Biegler as a defendant;
however, based on the alleged class period, Mr. Biegler is inappropriately named
as a defendant. The plaintiffs seek to represent classes of certain purchasers
of TXU Corp. common stock during specified class periods ranging from January
31, 2002 to October 11, 2002. No class or classes have been certified. The
complaints allege violations of the provisions of Section 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, and Sections 11 and 12 of the Securities Act of 1933, as amended,
relating to alleged materially false and misleading statements, including
statements in prospectuses related to the offering by TXU Corp. of its
equity-linked securities and common stock in June 2002. The individual named
defendants are current or former officers and/or directors of TXU Corp. While
TXU Corp. believes the claims are without merit and intends to vigorously defend
these lawsuits, it is unable to estimate any possible loss or predict the
outcome of the actions.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp., in the 116th Judicial District Court of
Dallas County, Texas against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of duties of loyalty and
good faith. The individual named defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. Therefore, TXU Corp. is unable to estimate any
possible loss or predict the outcome of the action.
On October 30, 2002, a lawsuit was filed in the 191st Judicial District
Court of Dallas County, Texas against TXU Corp. and Erle Nye alleging
negligence, negligent mispresentation, fraud and statutory fraud. On November
12, 2002, the lawsuit was amended and the plaintiffs allege the same claims on
behalf of themselves and a putative class of persons or entities similarly
situated. No amount of damages have been specified. TXU Corp. expects to remove
this case to federal court and to seek to have it consolidated with the cases
pending in the Northern District of Texas, Dallas Division. While TXU Corp.
believes the claim is without merit and intends to vigorously defend the
lawsuit, it is unable to estimate any possible loss or predict the outcome of
the action.
In addition to the above, TXU Corp. and its subsidiaries are involved in
various other legal and administrative proceedings, the ultimate resolution of
which, in the opinion of each, is not expected to have a material effect upon
its financial position, results of operations or cash flows.
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, $16 million at September
30, 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 5.5% to 7%. US Holdings is required to make
periodic payments equal to such principal and interest, including amounts
18
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 September 30, 2002,
issued for similar purposes which had previously been guaranteed by US Holdings.
US Holdings would, however, be contingently liable in the event of default by
the municipality.
Obligations with Respect to Investments in Partnerships and Other
Unconsolidated Entities -- TXU Corp. has a 50% voting interest in Pinnacle One
Partners, L.P. (Pinnacle or joint venture), a joint venture with third-party
investors. TXU Corp.'s investment in Pinnacle is accounted for using the equity
method. Assets of the joint venture are not TXU Corp.'s and are not available to
pay creditors of TXU Corp. Pinnacle's principal investment is in TXU
Communications Ventures Company (TXU Communications). TXU Communications
operates a diversified telecommunications business, including regulated
incumbent local exchange carriers, a competitive telecommunications service
provider and a fiber optic transport business.
Following is a summary of the Pinnacle ownership structure:
. Pinnacle is a limited partnership, with the sole general partnership
interest of 0.5% being owned by Pinnacle One GP, and with two similar
49.75% limited partnership interests each being owned by TXU
Investment Company, a subsidiary of TXU Corp., and Zenith, an
unaffiliated statutory business trust with a bank as its trustee,
. Pinnacle One GP is equally owned by Zenith and TXU Investment Company,
. Pinnacle One GP is managed by a Board of Managers consisting of six
individuals, with three Managers being appointed by each owner, and
. Notwithstanding the rights of Zenith to appoint half of Pinnacle One
GP's Managers and to help selecting its officers, all of the current
managers and officers of Pinnacle One GP, with the exception of one
lower level officer, are directly affiliated with TXU Corp.
In connection with its formation, Pinnacle issued $810 million in senior
secured notes due August 15, 2004. The notes are secured by all of Pinnacle's
assets, including its shares of TXU Communications. Total proceeds (net of
transaction costs), including the $150 million received from third-party
investors, were used to make a $600 million cash distribution to TXU Corp. and
fund a trust with $336 million. The principal and interest on the trust assets
is being used to pay interest on the senior secured notes and distributions to
the third-party investors. The trust assets consist of TXU Corp. debt securities
with a principal amount of $178 million at September 30, 2002.
TXU Corp. provides a $200 million revolving credit facility to TXU
Communications, expiring in 2004, of which $150 million was outstanding and
included in investments in TXU Corp.'s balance sheet as of September 30, 2002.
In addition, TXU Corp. has made and may make future capital contributions to
Pinnacle to fund a portion of TXU Communications' capital expenditures. TXU
Corp. also provides certain administrative services to Pinnacle and its
affiliates at cost.
In connection with the Pinnacle transaction, TXU Corp. issued 810,000
shares of Mandatorily Convertible Single Reset Preference Stock, Series C
(Series C Preference Stock) to Pinnacle One Share Trust, a consolidated trust
(Share Trust). The Series C Preference Stock is convertible into common stock of
TXU Corp. In the event of:
a) a default by Pinnacle in connection with its $810 million of
senior secured notes,
b) a decline in the market price of TXU Corp. common stock below
$21.93 per share for ten consecutive trading days coupled with a
decline in the credit rating for TXU Corp.'s unsecured, senior
long-term obligations to or below BB by S&P or Fitch Ratings
(Fitch) or Ba2 by Moody's, or
c) Pinnacle's inability to raise sufficient cash to repay its senior
secured notes 120 days prior to maturity (August 2004) through
the sale of its shares of TXU Communications or the sale of
assets of TXU Communications,
TXU Corp. would be required to sell equity or otherwise raise proceeds
sufficient to repay Pinnacle's senior secured notes. If TXU Corp. did not raise
sufficient proceeds, the Share Trust could be required to sell some or
19
all of the Series C Preference Stock. The dividend rate and conversion price of
the Series C Preference Stock would be reset at the time of sale to generate
proceeds sufficient to redeem the senior secured notes.
Had TXU Corp. been required to consolidate Pinnacle at September 30, 2002,
TXU Corp.'s debt would have increased by approximately $648 million. TXU Corp.
does not believe that a consolidation of Pinnacle would have had a material
impact on its liquidity.
Equity losses in the joint venture were $16 million and $14 million for the
three months ended September 30, 2002 and 2001, respectively, and $40 million
and $41 million for the nine months ended September 30, 2002 and 2001,
respectively. TXU Corp.'s investment in Pinnacle was negative $180 million as of
September 30, 2002, classified in other deferred credits and noncurrent
liabilities in the consolidated balance sheet.
Retail Clawback -- The legislation passed by the Texas Legislature to
restructure the electric utility industry in Texas included a provision to
incent affiliated REPs of utilities to actively compete for customers outside
their traditional service areas. Under this provision, if TXU Energy retains
more than 60% of its former residential and small business customers after the
first two years of competition, a retail clawback amount would be applied as a
reduction of Oncor's delivery rates over a two-year period beginning January 1,
2004. The amounts of the retail clawback will be equal to the number of
residential and small business customers retained by TXU Energy in its
traditional service area as of January 1, 2004 less the number of new customers
added outside that service area as of that date, multiplied by $90. The
calculation will be done separately for each of the residential and small
business classes. The $90 amount is in accordance with the settlement plan
approved by the Commission and subject to appeals filed as discussed in Note 7.
The ultimate effect of the retail clawback on the results of TXU Corp. cannot be
reasonably estimated at this time.
9. SEGMENT INFORMATION
At December 31, 2001, TXU Corp. had five reportable operating segments as
reflected in TXU Corp.'s 2001 Form 10-K. As a result of TXU Corp.'s
reorganization as of January 1, 2002, TXU Corp. realigned its operations into
three reportable segments: North America Energy, North America Energy Delivery
and International Energy. Prior period amounts have been restated to conform to
the following segments.
North America Energy - operations involving the generation of electricity,
wholesale sales, trading and risk management activities, and retail energy sales
and services in the US and parts of Canada. The segment consists of all
operations, other than the T&D business, of the former US Electric segment and
the former US Energy segment;
North America Energy Delivery - operations involving the transmission and
distribution of electricity and the purchase, transmission, distribution and
sale of natural gas in Texas. The segment consists of the T&D operations of the
former US Electric segment and the operations of the former US Gas segment; and
International Energy - operations involving the generation of electricity,
wholesale energy trading and risk management, retail energy sales and services
in Europe and Australia, and electricity and gas distribution
and gas storage in Australia. The segment consists of the operations of the
former Europe and Australia segments. (See Note 3 regarding recent events
related to TXU Europe.)
Corporate and other - operations consisting primarily of general corporate
expenses, equity earnings or losses of unconsolidated affiliates, including the
telecommunications joint venture, and interest on debt at the TXU Corp. level.
Affiliated revenues represent intercompany service charges.
The prior year financial information for the North America Energy segment
and the electric delivery operations included in the North America Energy
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 between its generation and T&D
operations. Allocation of revenues reflected consideration of return on invested
capital, which continues to be regulated for the T&D operations. 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
20
disaggregated. Various allocation methodologies were used to disaggregate common
expenses, assets and liabilities between US Holdings' 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 electricity delivery fees
charged by Oncor and other T&D utilities, which TXU Energy includes in billings
to its large C&I customers. For residential and small business customers, the
price-to-beat rates include a delivery component, but such billed amounts are
not necessarily equivalent to delivery fees incurred by TXU Energy. These fees
are reflected in TXU Energy's revenues and cost of energy for the three months
and nine months ended September 30, 2002. For comparability purposes,
electricity delivery fees have been included in the North America Energy
segment's revenues and cost of energy for the three and nine months ended
September 30, 2001. The North America Energy segment's gross margin is not
materially affected by the inclusion of these electricity delivery fees.
21
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2002 2001* 2002 2001*
------ ----- ------ -----
Operating revenues -
North America Energy .............. $ 2,420 $2,351 $ 6,236 $ 6,163
North America Energy Delivery ..... 694 770 2,189 2,630
International Energy .............. 1,592 1,429 4,714 5,044
Corporate and other ............... 148 155 448 462
Eliminations ...................... (578) (738) (1,662) (1,906)
------- ------ ------- -------
Consolidated ................ $ 4,276 $3,967 $11,925 $12,393
======= ====== ======= =======
Regulated revenues included in
operating revenues -
North America Energy .............. $ -- $2,273 $ -- $ 5,965
North America Energy Delivery ..... 694 770 2,189 2,630
International Energy .............. 22 126 57 387
Corporate and other ............... 23 23 68 80
Eliminations ...................... (451) (608) (1,276) (1,529)
------- ------ ------- -------
Consolidated ................. $ 288 $2,584 $ 1,038 $ 7,533
======= ====== ======= =======
Affiliated revenues included in
operating revenues -
North America Energy .............. $ 12 $ 1 $ 29 $ 6
North America Energy Delivery ..... 446 608 1,268 1,528
Corporate and other ............... 120 129 365 372
Eliminations ...................... (578) (738) (1,662) (1,906)
------- ------ ------- -------
Consolidated ................. $ -- $ -- $ -- $ --
======= ====== ======= =======
Net income (loss) -
North America Energy .............. $ 223 $ 267 $ 579 567
North America Energy Delivery ..... 78 83 220 153
International Energy .............. (13) 51 69 212
Corporate and other ............... (77) (62) (201) (185)
------- ------ ------- -------
Consolidated ................ $ 211 $ 339 $ 667 $ 747
======= ====== ======= =======
-----------------
*The North America Energy and North America Energy Delivery segments were
created as a result of the deregulation of the electric utility industry
in Texas, which became effective January 1, 2002. The North America Energy
segment includes the generation and certain retail operations of US
Holdings, wholesale sales, trading and risk management activities, an
unregulated commercial and industrial retail gas business and other
energy-related businesses. The North America Energy Delivery segment
includes the electric T&D business of US Holdings and TXU SESCO Company
and the natural gas pipeline and distribution operations of TXU Gas.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy and North
America Energy Delivery segments after giving effect to the restructuring
transactions and allocations described above and in Note 1. Had the North
America Energy and North America Energy Delivery segments existed as
separate segments, their results of operations and financial positions
could have differed materially from those reflected above. Additionally,
future results of the North America Energy and North America Energy
Delivery segments' operations and financial positions could differ
materially from the historical information presented.
22
10. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues
Regulated ................................................. $ 288 $ 2,584 $ 1,038 $ 7,533
Unregulated ............................................... 3,988 1,383 10,887 4,860
-------- -------- -------- --------
Total operating revenues ............................. 4,276 3,967 11,925 12,393
-------- -------- -------- --------
Operating expenses
Energy purchased for resale - regulated ................... 79 493 386 1,691
Energy purchase for resale - unregulated .................. 1,741 805 4,588 2,906
Fuel consumed - regulated ................................. -- 504 -- 1,593
Fuel consumed - unregulated ............................... 564 101 1,329 396
Operation and maintenance - regulated ..................... 170 386 582 1,148
Operation and maintenance - unregulated ................... 683 625 1,934 1,354
Depreciation and amortization ............................. 244 301 716 915
Taxes other than income ................................... 173 195 534 577
-------- -------- -------- --------
Total operating expenses ............................. 3,654 3,410 10,069 10,580
-------- -------- -------- --------
Operating income .............................................. $ 622 $ 557 $ 1,856 $ 1,813
======== ======== ======== ========
The operations of the North America Energy segment are included above as
unregulated, as the Texas market is now open to competition. However, retail
pricing to residential and small business customers in its traditional service
area continues to be subject to certain price controls as discussed in Note 7.
Other Income and Deductions --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Other income
Gain on sale of businesses and other properties ........... $ 20 $ -- $ 33 $ 87
Gain on sale of marketable securities ..................... -- -- -- 3
Equity in earnings of unconsolidated entities ............. -- 3 9 6
Dividends from cost investments and marketable securities . -- 2 -- 10
Other ..................................................... 13 5 23 19
------- -------- -------- --------
Total other income ................................... $ 33 $ 10 $ 65 $ 125
======= ======== ======== ========
Other deductions
Loss on sale of properties ................................ $ 2 $ 12 $ 2 $ 15
Equity in losses of unconsolidated entities ............... 17 15 42 42
Regulatory asset write-off ................................ - 21 - 21
Other ..................................................... 12 12 42 41
------- -------- -------- --------
Total other deductions ............................... $ 31 $ 60 $ 86 $ 119
======= ======== ======== ========
Regulatory Assets and Liabilities -- Included in regulatory assets - net
are regulatory assets of $2.2 billion and regulatory liabilities of $361 million
at September 30, 2002, and regulatory assets of $2.2 billion and regulatory
liabilities of $474 million at December 31, 2001. Regulatory assets of $2.0
billion at September 30, 2002 and at December 31, 2001 were not earning a
return. Of the assets not earning a return, $1.8 billion is expected to be
recovered over the term of the securitization bonds pursuant to the regulatory
settlement plan approved by the Commission. (See Note 7 for further discussion
of the settlement plan.) The remaining regulatory assets have an average
remaining recovery period of 14 to 31 years.
Accounts Receivable -- At September 30, 2002 and December 31, 2001,
accounts receivable were stated net of uncollectible accounts of $194 million
and $96 million, respectively. Accounts receivable included $980 million and
$617 million of unbilled revenues at September 30, 2002 and December 31, 2001,
respectively.
23
Inventories by Major Category --
September 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Materials and supplies ...................... $247 $233
Fuel stock .................................. 157 131
Gas stored underground ...................... 167 158
---- ----
Total inventories ................... $571 $522
==== ====
Property, Plant and Equipment --
September 30,
2002 December 31,
(Unaudited) 2001
------------ -----------
North America Energy:
Production ...................................................................... $16,475 $16,627
General ......................................................................... 470 242
Nuclear fuel (net of accumulated amortization of $836 and $787) ................. 148 146
Reserve for regulatory disallowances ............................................ (836) (836)
North America Energy Delivery:
Transmission .................................................................... 2,053 1,979
Distribution .................................................................... 6,297 6,110
Gas distribution and pipeline ................................................... 1,757 1,677
General ......................................................................... 435 430
Other ................................................................................... 285 234
------- -------
Total ........................................................................... 27,084 26,609
Less accumulated depreciation ........................................................... 9,758 9,397
------- -------
Net of accumulated depreciation ................................................ 17,326 17,212
Construction work in progress ........................................................... 527 608
------- -------
Net North America property, plant and equipment ................................ 17,853 17,820
International Energy:
Europe - Electric and other (net of accumulated depreciation of $423 and $514) . 1,390 3,062
Australia - Electric and gas distribution and generation (net of
accumulated depreciation of $337 and $267) ................................... 1,706 1,598
------- -------
Net property, plant and equipment .............................................. $20,949 $22,480
======= =======
Capitalized software costs of $569 million at September 30, 2002 and $352
million at December 31, 2001 were included in property, plant and equipment.
Amortization expense relating to these software costs of $32 million and $85
million was recorded for the three and nine months ended September 30, 2002,
respectively.
Goodwill -- At September 30, 2002 and December 31, 2001, goodwill was
stated net of accumulated amortization of $658 million and $710 million,
respectively.
Derivatives and Hedges -- During the first nine months of 2002, existing
accounting hedges of anticipated sales from baseload generation in North America
Energy became less effective due to changes in ERCOT market rules and
conditions. TXU Corp. experienced net hedge ineffectiveness of $7 million and
$41 million, reported as a reduction of revenues, for the three and nine months
ended September 30, 2002, respectively, primarily related to these contracts.
Accounting hedges of interest rate and foreign exchange risk remained highly
effective during the period.
24
As of September 30, 2002, it is expected that $55 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.
Supplemental Cash Flow Information -- Noncash transactions for the nine
months ended September 30, 2002 included $1.1 billion of debt assumed by the
purchaser of TXU Europe's UK networks business and the retention and
cancellation of $238 million of Series E Notes in satisfaction of the holders'
obligations under common stock forward purchase contracts not settled in cash.
25
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries as of September 30, 2002, and the related condensed
statements of consolidated income and of comprehensive income for the
three-month and nine-month periods ended September 30, 2002 and 2001 and the
condensed statements of consolidated cash flows for the nine-month periods ended
September 30, 2002 and 2001. These financial statements are the responsibility
of TXU Corp.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Corp. as 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.
As discussed in Note 2 to the Notes to Financial Statements, TXU Corp. changed
its method of accounting for goodwill amortization in 2002 in connection with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" and changed its method for reporting trading
activities in connection with the application of Emerging Issues Task Force
Issue 02-3 "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities."
As discussed in Note 3 to the Notes to Financial Statements, TXU Corp. has
decided to exit all of its operations in Europe.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 13, 2002
26
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
BUSINESS
TXU Corp. is an energy services company that engages in electricity
generation, wholesale energy sales, trading and risk management activities,
retail energy sales, energy delivery, other energy-related services and, through
a joint venture, telecommunications services.
In October 2002, TXU Corp. made a determination to exit its TXU Europe
business. See discussion below under Subsequent Events Related to TXU Europe
regarding recent events related to TXU Europe and presentation of financial
statements reflecting the exiting of the TXU Europe business.
In connection with the restructuring of the Texas electric industry,
certain businesses of TXU Corp. were reorganized as of January 1, 2002, into
three reportable segments: North America Energy, North America Energy Delivery
and International Energy. (See Note 9 to Financial Statements for information
concerning reportable business segments.)
Certain segment comparisons in this report have been affected by the
restructuring of TXU Corp.'s US business in connection with deregulation of the
Texas electricity market and TXU Europe's sale of its United Kingdom (UK)
electricity distribution (networks) business and its 50% interest in the 24seven
joint venture operation in January 2002, as well as the discontinuance of
goodwill amortization and the presentation of certain operating revenues and
expenses on a net basis under new accounting rules. (See Note 2 to Financial
Statements.)
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars, unless they were determined using exchange
rates on the date of a specific event:
Income Statements
(Average Rates)
-----------------------------------------
Balance Sheets Three Months Nine Months
--------------------------- Ended September 30, Ended September 30,
September 30, December 31, ------------------- -------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
UK pounds sterling((pound)) $ 1.5614 $ 1.4515 $ 1.5501 $ 1.4388 $ 1.4805 $ 1.4404
Australian dollars(A$) $ 0.5435 $ 0.5115 $ 0.5477 $ 0.5144 $ 0.5394 $ 0.5203
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
TXU Corp.'s operating revenues increased $309 million, or 8%, to $4.3
billion in 2002. Higher revenues in the International Energy segment of $163
million were primarily due to the effects on translation of a weaker US dollar,
acquisitions in Europe and growth in retail electric operations in Australia,
partially offset by the effect of the UK networks sale in early 2002. Revenues
in the North America Energy segment rose $69 million reflecting higher wholesale
sales, partially offset by the effect of lower retail electric volumes and
prices. Revenues in the North America Energy Delivery segment declined $76
million due to the absence of certain revenues that are reported in the North
America Energy segment in 2002.
Gross margin (operating revenue less energy purchased for resale, fuel
consumed and delivery costs) decreased $172 million, or 8%, to $1.9 billion in
2002. A decline in margin in the International Energy segment of $152 million
reflected the effect of the sale of the UK networks business, lower results from
wholesale trading and risk management activities, and increased retail
competition in the UK. Gross margin growth in the North America Energy segment
of $62 million was driven by improved results from expanded wholesale sales,
trading and risk management activities and lower average costs of power sold,
partially offset by the effect of lower retail electric volumes and pricing. The
consolidated gross margin decline also reflected lower electric delivery
revenues in the North America Energy Delivery segment. Consolidated revenues and
gross margins in
27
2002 included a positive $33 million net effect of mark-to-market accounting for
commodity positions, compared to $158 million in 2001. (See discussion under
Commodity Contract and Mark-to-Market Activities.)
Operation and maintenance expense decreased $158 million, or 16%, to $853
million in 2002. The decrease in the International Energy segment of $245
million, due primarily to the disposal of the UK networks business in early
2002, was partially offset by an increase in the North America Energy segment of
$101 million, which reflected increased staffing and other operating costs
associated with expanded retail sales operations and wholesale sales, trading
and risk management activities and higher bad debt expense, all due largely to
the opening of the Texas electricity market to competition. Total net pension
and postretirement benefit costs increased $8 million, to $19 million in 2002.
Operation and maintenance expenses in the North American Energy segment
are expected to decline in 2003. This decline reflects temporarily higher costs
incurred in 2002, including bad debts and other administrative expenses arising
from the transition to deregulation, as well as planned reductions in certain
developmental expenses. Certain of the planned actions are expected to result in
severance charges in the fourth quarter of 2002.
Other operating expenses (depreciation and other amortization, goodwill
amortization and taxes other than income) decreased $79 million, or 16%, to $417
million in 2002, primarily reflecting a $56 million impact from the
discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142. Taxes other than income declined $22 million due to lower US retail
revenues on which state and local gross receipts taxes are assessed.
Operating income increased $65 million, or 12%, to $622 million in 2002,
reflecting the reduction in operation and maintenance expense and the
discontinuance of goodwill amortization described above, partially offset by
lower gross margin.
Other income increased $23 million to $33 million in 2002. The increase
was due primarily to the amortization of a deferred gain associated with the
sale of two generating plants in Texas in early 2002.
Other deductions decreased $29 million to $31 million in 2002. The 2001
period included a $21 million loss on the write-off of regulatory assets. This
line item includes equity losses in the telecommunications joint venture ($16
million in 2002 and $14 million in 2001).
Interest income declined $40 million, or 83%, to $8 million in 2002, due
largely to the recovery of under-collected fuel revenue on which interest income
had been accrued under regulation in Texas in 2001, lower interest-bearing
balances of restricted cash in Europe and lower interest rates.
Interest expense and other charges decreased $83 million, or 22%, to $301
million in 2002, reflecting $42 million due to lower debt levels and $41 million
due to lower interest rates.
The effective income tax rate was 30.4% in 2002 compared to a negative tax
rate in 2001. The income tax benefit in 2001 was driven by foreign tax credits
and other benefits associated with asset disposals in the UK.
Net income available for common stock decreased $128 million, or 38%, to
$206 million in 2002. The decrease in net income reflected a net loss in the
International Energy segment of $13 million compared to net income of $51
million in 2001, and lower net income in the North America Energy and North
America Energy Delivery segments of $44 million and $5 million, respectively.
These performances are discussed below under Segments. The net loss in Corporate
and other activities increased $15 million, primarily due to a $15 million (net
of income tax benefit of $8 million) impairment charge, reported as loss from
discontinued operations, resulting from the expected sale of a gas distribution
business in Mexico. Net pension and postretirement benefit costs reduced net
income by $13 million in 2002 and $7 million in 2001.
Earnings per share decreased $0.55, or 43%, to $0.73 per share in 2002. Of
the decrease, $0.06 per share was due to an 8% increase in average shares
outstanding. As discussed above, net income performance in 2002 benefited from
the absence of goodwill amortization ($56 million, or $0.22 per share, in 2001).
28
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
TXU Corp.'s operating revenues decreased $468 million, or 4%, to $11.9
billion in 2002. Revenue declined $330 million in the International Energy
segment, driven by declines in both the wholesale and base retail operations in
the UK and the effect of the sale of the UK networks business, partially offset
by the effect of acquisitions. Revenues in the North America Energy segment
increased by $73 million, which reflected an increase in wholesale sales
partially offset by the effect of lower retail electric volumes and prices.
Revenues in the North America Energy Delivery segment fell by $441 million,
driven by reduced gas prices and lower gas distribution volumes due to milder
winter weather.
Gross margin decreased $185 million, or 3%, to $5.6 billion in 2002. The
decline in margin in the International Energy segment of $551 million reflected
the sale of the UK electricity distribution business and lower results from
wholesale trading and risk management activities. Growth in margins in the North
America Energy segment of $496 million was driven by improved results from
expanded wholesale sales, trading and risk management activities and lower
average costs of power sold, partially offset by the effect of lower retail
electric volumes and pricing. The consolidated gross margin decline also
reflected lower electric delivery revenues in the North America Energy Delivery
segment. Consolidated revenues and gross margins in 2002 included a positive $43
million net effect of mark-to-market accounting for commodity positions,
compared to $341 million in 2001. (See discussion under Commodity Contract and
Mark-to-Market Activities.)
Operation and maintenance expense increased $14 million, or 1%, to $2.5
billion in 2002. The increase in the North America Energy segment of $381
million was driven by increased staffing and other operating costs associated
with expanded retail sales operations and wholesale trading and risk management
activities and higher bad debt expense, all due largely to the opening of the
Texas electricity market to competition in January 2002. This increase was
partially offset by a decrease in the International Energy segment of $293
million, due primarily to the disposal of the UK networks business in early
2002, and a decrease of $44 million in the North American Energy Delivery
Segment, due primarily to lower customer support costs and bad debt expense now
reported in the North America Energy segment. Total net pension and
postretirement benefit costs increased $30 million to $65 million in 2002
compared to $35 million in 2001.
Other operating expenses decreased $242 million, or 16%, to $1.3 billion
in 2002, primarily reflecting a $165 million impact from the discontinuance of
goodwill amortization pursuant to the adoption of SFAS No. 142. Lower
depreciation and amortization expense of $34 million was driven by the UK
operations, reflecting the sale of the UK networks business in early 2002 and
generation plant dispositions in the latter part of 2001. Taxes other than
income declined $43 million due to the effect of lower US retail revenues on
which state and local gross receipts taxes are assessed.
Operating income increased $43 million, or 2%, to $1.9 billion in 2002,
reflecting lower taxes other than income, discontinuance of goodwill
amortization and lower depreciation expense, partially offset by lower gross
margin and higher operation and maintenance expense.
Other income decreased $60 million to $65 million in 2002. The decrease
was due primarily to a gain of $72 million in the 2001 period on the sale of an
investment in a Spanish power company.
Other deductions decreased $33 million to $86 million in 2002. The 2001
period included a $21 million after-tax loss on the write-off of regulatory
assets. This line item includes equity losses in the telecommunications joint
venture of $40 million in 2002 and $41 million in 2001.
Interest income declined $90 million, or 74%, to $31 million in 2002, due
largely to the recovery of under-collected fuel revenue on which interest income
had been accrued under regulation in Texas in 2001, lower interest-bearing
balances of restricted cash in Europe and lower interest rates.
Interest expense and other charges decreased $284 million, or 24%, to $892
million in 2002, reflecting $199 million due to lower interest rates and $85
million due to lower debt levels.
29
The effective income tax rate before the extraordinary loss was 28.1% in
2002 compared to 2.2% in 2001. The 2001 effective income tax rate reflected
foreign tax credits and other benefits associated with asset disposals in the
UK.
Net income available for common stock decreased $80 million, or 11%, to
$651 million in 2002. A decline in net income of $143 million in the
International Energy segment was partially offset by increases in the North
America Energy and North America Energy Delivery segments of $12 million and $67
million, respectively. These performances are discussed below under Segments.
The net loss in Corporate and other activities increased $16 million, due to a
$15 million (net of income tax benefit of $8 million) impairment charge,
reported as loss from discontinued operations, resulting from the expected sale
of a gas distribution business in Mexico and an extraordinary loss of $18
million (net of income tax benefit of $9 million) related to the early
extinguishment of debt, partially offset by lower interest expense. Net pension
and postretirement benefit costs reduced net income by $42 million in 2002 and
$23 million in 2001.
Earnings per share decreased $0.43, or 15%, to $2.40 per share in 2002.
Results for 2002 included the loss on discontinued operations of $0.05 per share
and the extraordinary loss of $0.07 per share. Earnings per share in 2002
declined $0.13 per share due to a 5% increase in average shares outstanding. As
discussed above, net income performance in 2002 benefited from the absence of
goodwill amortization ($165 million, or $0.64 per share, in 2001).
COMMODITY CONTRACT AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets and
liabilities for the nine months ended September 30, 2002. The net increase,
excluding "other activity" as described below, of $43 million represents the net
favorable effect of mark-to-market accounting on earnings for the nine months
ended September 30, 2002 ($33 million net favorable effect for the three months
ended September 30, 2002). This effect represents the difference between
earnings under mark-to-market accounting versus accounting for gains and losses
upon settlement of the contracts.
Balance of net commodity contract assets/(liabilities) at December 31, 2001 $ 409
Settlements of positions included in the opening balance (1) (225)
Unrealized mark-to-market valuations of positions held at end of period (2) 268
Other activity (3) 148
-----
Balance of net commodity contract assets/(liabilities) at September 30, 2002 $ 600
=====
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of December 31, 2001.
(2) Includes unrealized gains of $36 million recognized upon origination of
certain contracts in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." There were no significant
changes in fair value attributable to changes in valuation techniques.
(3) Includes initial values of positions assumed in acquisitions or involving
the receipt or payment of cash, such as option premiums, and amortization
of such positions originating in prior periods. Also includes
reclassifications of commodity contract assets and liabilities, including
$71 million of unsettled liabilities to Enron reclassified to other
current liabilities, and the impact of currency translation adjustments.
These activities have no effect on unrealized mark-to-market valuations.
The above table includes all trading and non-trading commodity contracts
that are marked to market in net income.
Of the net commodity contract asset balance of $600 million at September
30, 2002, $58 million relates to TXU Europe and has been excluded from the
maturity table below (see Note 3 to Financial Statements regarding recent events
related to TXU Europe). Also excluded from the maturity table below is the net
asset of $98 million consisting of the initial values, net of amortization, of
positions assumed in acquisitions or involving the receipt or payment of cash,
including option premiums. The remaining net commodity contract
asset balance at September 30, 2002 of $444 million, represents unrealized
mark-to-market net gains that have been recognized in current and prior periods'
earnings, excluding TXU Europe. The following table presents the unrealized
mark-to-market balance at September 30, 2002 scheduled by contractual settlement
dates of the underlying positions (in millions).
30
Maturity dates of unrealized net mark-to-market balances at September 30, 2002
------------------------------------------------------------------------------
Maturity less Maturity in
than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 years 5 years Total
---------------------- ------------- ----------- ----------- ------------ -------
Prices actively quoted .......... $ (6) $ 1 $ - $ - $ (5)
Prices provided by other
external sources ............... 203 140 27 6 376
Prices based on models .......... 29 14 9 21 73
----- ---- --- --- ----
Total ........................... $ 226 $155 $36 $27 $444
===== ==== === === ====
Percentage of total ............. 51% 35% 8% 6% 100%
As the above table indicates, approximately 86% of the unrealized
mark-to-market valuations at September 30, 2002 mature within three years. This
is reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2005. 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 power and natural gas generally extend through 2005 and 2010,
respectively. This category also includes values of large commercial and
industrial (C&I) 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 TXU Corp. as simple forwards and options 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.
31
SEGMENTS
North America Energy
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2002 2001* 2002 2001*
------ ------- ------ ------
Operating revenues ................................................ $2,420 $ 2,351 $6,236 $6,163
------ ------- ------ ------
Operating expenses
Energy purchased for resale, fuel consumed and delivery
costs ..................................................... 1,543 1,536 3,682 4,105
Operation and maintenance ................................... 356 255 1,081 700
Depreciation and amortization ............................... 111 100 328 306
Taxes other than income ..................................... 52 29 165 84
------ ------- ------ ------
Total operating expenses ............................. 2,062 1,920 5,256 5,195
------ ------- ------ ------
Operating income .................................................. 358 431 980 968
Other income ...................................................... 21 3 34 5
Other deductions .................................................. 5 25 10 33
Interest income ................................................... -- 19 23 60
Interest expense and other charges ................................ 51 61 181 196
------ ------- ------ ------
Income before income taxes ........................................ 323 367 846 804
Income tax expense ................................................ 100 100 267 237
------ ------- ------ ------
Net income ........................................................ $ 223 $ 267 $ 579 $ 567
====== ======= ====== ======
- -----------------
*The North America Energy segment was created as a result of the
deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. The North America Energy segment includes the
generation and certain retail operations of US Holdings, wholesale sales,
trading and risk management activities, an unregulated retail commercial
and industrial gas business and other energy-related businesses.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy segment
after giving effect to the restructuring transactions and allocations
described in the Notes to Financial Statements. Had the North America
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 North America Energy segment's
operations and financial position could differ materially from the
historical information presented.
32
Segment Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------------
2002 2001* 2002 2001*
--------- -------- ----------- ---------
Operating statistics:
Retail electric sales volumes (GWh) ........................................ 27,394 30,461 72,551 78,064
Wholesale electric sales volumes (non-trading physically
settled)(GWh) .............................................................. 9,260 2,444 22,447 5,178
Customers (end of period and in thousands):
Electric ................................................................ 2,763 2,727
Gas ..................................................................... 2 3
----------- ---------
Total customers ...................................................... 2,765 2,730
Physical and financial wholesale trading and risk management volumes:
Electric (GWh) ......................................................... 232,613 89,344 1,277,526 222,940
Gas (billion cubic feet) ................................................ 5,581 3,998 15,354 7,699
Operating revenues (million of dollars):
Retail electric:
Residential ............................................................. $ 1,093 $ 1,151 $ 2,569 $ 2,709
Commercial and industrial ............................................... 839 1,104 2,720 3,117
--------- -------- ----------- ---------
Total ................................................................ 1,932 2,255 5,289 5,826
Wholesale electric revenues (non-trading physically settled) ............... 327 25 645 77
Wholesale energy revenues - trading and risk management activities.......... 123 52 237 106
Other revenues ............................................................. 38 19 65 154
--------- -------- ----------- ---------
Total operating revenues ............................................. $ 2,420 $ 2,351 $ 6,236 $ 6,163
========= ======== =========== =========
Weather (average for service area)**
Percent of normal:
Cooling degree days .................................................. 99.8% 99.1% 102.1% 101.6%
Heating degree days .................................................. -- -- 98.6% 104.3%
- --------------------------
*See footnote on previous page.
** Weather data is obtained from Meterlogix, a private company that collects
weather data from reporting stations of the National Oceanic and Atmospheric
Administration (a federal agency under the US Department of Commerce).
The prior year financial information for the North America Energy 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 between its generation and T&D operations.
Allocation of revenues reflected consideration of return on invested capital,
which continues to be regulated for the T&D operations. 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 Holdings'
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 electricity delivery fees
charged by Oncor and other T&D utilities, which TXU Energy includes in billings
to its large commercial and industrial (C&I) customers. For residential and
small business customers, the price-to-beat rates include a delivery component,
but such billed amounts are not necessarily equivalent to delivery fees incurred
by TXU Energy. These fees are reflected in TXU Energy's revenues and cost of
energy for the three months and nine months ended September 30, 2002. For
comparability purposes, electricity delivery fees have been included in the
North America Energy segment's revenues and cost of energy for the three and
nine months ended September 30, 2001. The North America Energy segment's gross
margin is not materially affected by the inclusion of these electricity delivery
fees.
33
The North America Energy segment's operating revenues increased $69
million, or 3%, to $2.4 billion for the third quarter of 2002. Non-trading
wholesale electric revenues increased $302 million to $327 million on higher
sales volumes in the newly deregulated Electric Reliability Council of Texas
(ERCOT) power market. Wholesale energy trading and risk management revenues
increased $71 million, or 137%, on favorable results from increased activity in
ERCOT and other markets. Retail electric revenues declined $323 million, or 14%,
to $1.9 billion on a 10% decline in overall volumes and lower average pricing.
Lower volumes reflected increased competitive activity in the large C&I power
market. Lower retail electric pricing reflected lower average C&I prices and
lower regulated price-to-beat rates effective in 2002 for residential and small
business customers. In addition to a lower base rate component of the
price-to-beat rate as compared to the 2001 base rate, the fixed fuel factor
component of the price-to-beat rate is lower than the fuel costs incurred and
recognized in revenues in 2001.
Gross margin (operating revenues less energy purchased for resale, fuel
consumed and delivery costs) increased $62 million, or 8%, to $877 million in
the third quarter of 2002. The increase was driven by favorable results from
expanded wholesale sales, trading and risk management activities in the ERCOT
market and lower average costs of power sold, partially offset by the effect of
lower retail electric volumes and pricing. Revenues and gross margin in 2002
included a positive $8 million net effect of mark-to-market accounting for
commodity positions, compared to $86 million in 2001.
Net income for the segment declined $44 million, or 16%, to $223 million
for the third quarter of 2002. The decline was driven by growth in operating
expenses, partially offset by the higher gross margin and positive effects of
other income and other deduction items discussed below. An increase in operation
and maintenance expense of $101 million, or 40%, reflected $69 million in higher
staffing and other operating costs related to expanded retail sales operations
and trading and risk management activities and $18 million in increased bad debt
expense, all due largely to the opening of the Texas electricity market to
competition. The increase in operation and maintenance expense also reflected
retail customer support costs and bad debt expense reported in the North America
Energy Delivery segment in 2001. Depreciation and amortization increased $11
million, or 11%, due largely to investments in systems and expansion of office
facilities to support the opening of the Texas electricity market to
competition. Taxes other than income rose $23 million due primarily to state
gross receipts taxes that were reported by the North America Energy Delivery
segment in 2001. Other income increased by $18 million reflecting amortization
of a gain on the sale of two generation plants in early 2002. Other deductions
decreased by $20 million reflecting a $21 million write-off of regulatory assets
in 2001. Interest income declined $19 million due to the recovery of
under-collected fuel revenue on which interest income had been accrued under
regulation in 2001. Interest expense declined $10 million, or 16%, reflecting
lower interest rates. The effective tax rate increased to 31.0% in 2002 from
27.2% in 2001, due primarily to the reversal in 2001, pursuant to regulatory
order, of T&D depreciation expense redirected from generation assets and higher
general business tax credits in 2001.
Operation and maintenance expenses in the North American Energy segment are
expected to decline in 2003. These reductions reflect temporarily higher costs
incurred in 2002, including bad debts and other administrative expenses arising
from the transition to deregulation, as well as planned reductions in certain
developmental activities.
The North America Energy segment's operating revenues increased $73
million, or 1%, to $6.2 billion for the first nine months of 2002. Non-trading
wholesale electric revenues increased $568 million to $645 million on higher
sales volumes in the newly deregulated ERCOT power market. Wholesale energy
trading and risk management revenues increased $131 million, or 124%, on
favorable results from increased activity in ERCOT and other markets. Retail
electric revenue declined $537 million, or 9%, to $5.3 billion on a 7% decline
in overall volumes and lower average pricing. Lower volumes reflected increased
competitive activity in the large C&I power market. Lower retail electric
pricing reflected lower average C&I prices and lower regulated price-to-beat
rates effective in 2002 for residential and small business customers. In
addition to a lower base rate component of the price-to-beat rate as compared to
the 2001 base rate, the fixed fuel factor component of the price-to-beat rate is
lower than the fuel costs incurred and recognized in revenues in 2001.
34
Gross margin increased $496 million, or 24%, to $2.6 billion for the first
nine months of 2002. The increase was driven by favorable results from expanded
wholesale sales, trading and risk management activities in the ERCOT market and
lower average costs of power sold, partially offset by the effect of lower
retail electric volumes and pricing. Revenues and gross margin in 2002 included
a negative $4 million net effect of mark-to-market accounting for commodity
positions, compared to a positive net effect of $188 million in 2001.
Net income for the segment increased $12 million, or 2%, to $579 million
for the first nine months of 2002. The improvement was driven by higher gross
margin and positive effects of other income and other deduction items discussed
below, partially offset by growth in operating expenses. An increase in
operation and maintenance expense of $381 million, or 54%, reflected $265
million in higher staffing and other operating costs related to expanded retail
sales operations and trading and risk management activities and $111 million in
increased bad debt expense, all due largely to the opening of the Texas
electricity market to competition. The increase in operation and maintenance
expense also reflected the effect of retail customer support costs and bad debt
expense reported in the North America Energy Delivery segment in 2001. The
increase in depreciation and amortization expense of $22 million, or 7%, was
primarily due to investments in computer systems and expansion of office
facilities. Taxes other than income rose $81 million due to state gross receipts
taxes that were reported by the North America Energy Delivery segment in 2001.
Other income increased by $29 million primarily reflecting $30 million in
amortization of a gain on the sale of two generation plants in early 2002. Other
deductions decreased by $23 million, reflecting a $21 million write-off of
regulatory assets in 2001. Interest income declined $37 million due to the
recovery of under-collected fuel revenue on which interest income had been
accrued under regulation in 2001. Interest expense declined $15 million due to
lower interest rates. The effective tax rate increased to 31.6% in 2002 from
29.5% in 2001, primarily due to the reversal in 2001, pursuant to regulatory
order, of T&D depreciation expense redirected from generation assets and higher
general business tax credits in 2001.
35
North America Energy Delivery
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001* 2002 2001*
---- ----- ---- -----
Operating revenues ..................... $ 694 $ 770 $2,189 $2,630
------ ------ ------ ------
Operating expenses
Gas purchased for resale ............ 47 54 302 640
Operation and maintenance ........... 258 264 752 796
Depreciation and amortization ....... 82 79 245 232
Taxes other than income ............. 113 157 343 467
------ ------ ------ ------
Total operating expenses ........ 500 554 1,642 2,135
------ ------ ------ ------
Operating income ....................... 194 216 547 495
Other income ........................... 1 1 7 9
Other deductions ....................... 2 2 9 7
Interest income ........................ 10 9 32 16
Interest expense and other charges ..... 83 89 244 272
------ ------ ------ ------
Income before income taxes ............. 120 135 333 241
Income tax expense ..................... 42 52 113 88
------ ------ ------ ------
Net income ............................. $ 78 $ 83 $ 220 $ 153
====== ====== ====== ======
------------------------
*The North America Energy Delivery segment was created as a result of the
deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. The North America Energy Delivery segment
includes the electric T&D business of US Holdings and TXU SESCO Company
and the natural gas pipeline and distribution operations of TXU Gas.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy Delivery
segment after giving effect to the restructuring transactions and
allocations described in the Notes to Financial Statements. Had the North
America Energy 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 North America
Energy Delivery segment's operations and financial position could differ
materially from the historical information presented.
36
Segment Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001* 2002 2001*
---- ------ ---- -----
Operating statistics:
Electric energy delivered volumes (GWh) .................... 32,574 30,463 82,392 78,056
------- ------- ------- -------
Gas distribution volumes (Bcf):
Residential ............................................. 6 6 57 60
Commercial .............................................. 7 6 38 39
Industrial and electric generation ...................... 1 1 5 6
------- ------- ------- -------
Total gas sales ....................................... 14 13 100 105
======= ======= ======= =======
Pipeline transportation volumes (Bcf) ...................... 129 112 347 292
Gas distribution customers and electric points of delivery
(end of period and
in thousands):
Gas distribution customers .............................. 1,444 1,424
Electric points of delivery ............................. 2,902 2,851
Operating revenues (million of dollars):
Electric delivery:
North America Energy .................................... $ 439 $ 602 $ 1,252 $ 1,514
Non-affiliated .......................................... 118 48 299 141
------- ------- ------- -------
Total electric energy delivery ........................ 557 650 1,551 1,655
------- ------- ------- -------
Gas distribution:
Residential ............................................. 64 57 363 560
Commercial .............................................. 39 38 181 311
Industrial and electric generation ...................... 5 6 18 44
------- ------- ------- -------
Total gas ............................................. 108 101 562 915
Pipeline transportation .................................... 16 13 44 37
Other revenues, net of eliminations ........................ 13 6 32 23
------- ------- ------- -------
Total gas distribution and pipeline transportation .... 137 120 638 975
------- ------- ------- -------
Total operating revenues .............................. $ 694 $ 770 $ 2,189 $ 2,630
======= ======= ======= =======
- --------------------------
*See footnote on previous page.
The prior year financial information for the electric delivery operations
included in the North America Energy 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 between its generation and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. 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 revenues, common expenses,
assets and liabilities between US Holdings' 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.
Operating revenues for the North America Energy Delivery segment decreased
$76 million, or 10%, to $694 million for the third quarter of 2002. Electric T&D
revenues decreased $93 million, or 14%, primarily due to the absence of revenues
that are earned by the REP and reported in the North America Energy segment
effective in 2002. Excluding the impact of these revenues, electric distribution
revenues rose 5% on a 7% increase in electric volumes delivered. The decrease in
electric T&D revenues was partially offset by a $17 million, or 14%, increase in
gas delivery revenues due to a nonrecurring unfavorable adjustment for
unrecoverable gas cost recorded in 2001. The effects of gas delivery rate
increases and sales volume growth in 2002 were largely offset by decreases in
gas costs.
37
Gross margin for the segment relates only to the gas delivery business.
The electric T&D business does not buy and sell electricity; its revenues
consist primarily of T&D fees. Gross margin in the gas delivery business
improved $24 million, or 36%, in 2002, driven by an unfavorable adjustment for
unrecoverable gas costs in the prior year, rate increases for transportation and
other services, and the sales volume increase.
Net income decreased by $5 million, or 6%, to $78 million for the third
quarter of 2002. This performance reflected lower electric T&D revenues,
partially offset by a decline of $44 million, or 28%, in taxes other than
income, reflecting gross receipts taxes reported in the North America Energy
segment effective 2002. Operation and maintenance expense declined $6 million,
or 2%, reflecting retail electric customer support costs and bad debt expense
reported in the North America Energy segment in 2002, partially offset by normal
growth in base operations. Interest expense declined $6 million, or 7%, on lower
interest rates. The effective tax rate decreased to 35.0% in 2002 from 38.5% in
2001, due primarily to the discontinuance of nondeductible goodwill
amortization.
Operating revenues for the North America Energy Delivery segment decreased
$441 million, or 17%, to $2.2 billion for the first nine months of 2002. Gas
delivery revenues declined $337 million, or 34%, to $638 million, reflecting
reduced costs of gas and lower distribution sales volumes generally driven by
milder winter weather and reduced heating demand relative to 2001. Gas
distribution sales volumes declined 5%. Electric T&D revenues decreased $104
million, or 6%, to $1.6 billion. Excluding the impact of revenues that are
reported in the North America Energy segment in 2002, electric distribution
revenues rose 7% on a 6% increase in electric volumes delivered.
Gross margin in the gas delivery business increased $4 million, or 1%, for
the first nine months of 2002. The increase is primarily due to the unfavorable
adjustments for unrecoverable gas costs in 2001, partially offset by reduced
gross receipts tax collections. Rate increases were largely offset by the effect
of lower volumes.
Net income increased by $67 million, or 44%, to $220 million for the first
nine months of 2002. This performance reflected a decline of $124 million, or
27%, in taxes other than income, reflecting gross receipts taxes reported in the
North America Energy segment effective in 2002, higher interest income on
regulatory-related assets charged by the North America Energy Delivery segment
to the North America Energy segment effective in 2002 and reduced interest
expense. The effective tax rate was 33.9% in 2002 compared to 36.5% in 2001, due
primarily to the discontinuance of nondeductible goodwill amortization.
38
International Energy
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues ................................................. $ 1,592 $ 1,429 $ 4,714 $ 5,044
------- ------- -------- -------
Operating expenses
Energy purchased for resale, fuel consumed and delivery costs ... 1,213 898 3,513 3,292
Operation and maintenance ....................................... 243 488 682 975
Depreciation and amortization ................................... 48 68 128 220
Goodwill amortization ........................................... -- 50 -- 147
------- ------- ------- -------
Total operating expenses ..................................... 1,504 1,504 4,323 4,634
------- ------- ------- -------
Operating income (loss) ............................................ 88 (75) 391 410
Other income ....................................................... 11 5 19 101
Other deductions ................................................... 4 17 25 32
Interest income .................................................... 5 21 15 57
Interest expense and other charges ................................. 121 171 349 532
------- ------- ------- -------
Income (loss) before income taxes .................................. (21) (237) 51 4
Income tax expense (benefit) ....................................... (8) (288) (18) (208)
------- ------- ------- -------
Net income (loss) .................................................. $ (13) $ 51 $ 69 $ 212
======= ======= ======= =======
39
Segment Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating statistics:
Retail electric sales volumes (GWh) ....................................... 14,436 13,042 44,343 40,751
Retail gas sales volumes (Bcf) ............................................ 46 37 174 163
Wholesale energy sales volumes (non-trading physically settled)
Electric (GWh) .......................................................... 1,922 1,761 4,887 36,989
Gas (Bcf) ............................................................... 5 12 16 35
Physical and financial wholesale trading and risk management volumes:
Electric (GWh) .......................................................... 223,338 198,542 645,580 735,600
Gas (Bcf) ............................................................... 982 733 2,891 3,311
Retail customers (end of period and in thousands):
Electric ................................................................ 5,083 4,859
Gas ..................................................................... 2,151 1,666
Operating revenues (million of dollars):
Retail electric:
Residential ............................................................. $ 514 $ 426 $ 1,612 $ 1,529
Industrial and commercial ............................................... 455 394 1,299 1,127
--------- -------- -------- --------
Total ................................................................ 969 820 2,911 2,656
Electricity distribution .................................................. 65 161 198 486
Retail gas:
Residential ............................................................. 119 78 478 400
Industrial and commercial ............................................... 90 68 328 251
--------- -------- -------- --------
Total ................................................................ 209 146 806 651
Wholesale energy revenues (non-trading physically settled):
Gas ..................................................................... 15 33 46 106
Electric ................................................................ 49 27 122 536
--------- -------- -------- --------
Total ................................................................ 64 60 168 642
Wholesale energy trading and risk management and other revenues ........... 328 340 763 909
Less intercompany revenues ................................................ (43) (98) (132) (300)
--------- -------- -------- --------
Total operating revenues ............................................. $ 1,592 $ 1,429 $ 4,714 $ 5,044
========= ======== ======== ========
Refer to Note 3 to Financial Statements regarding recent events related to
TXU Europe.
The International Energy segment's operating revenues increased $163
million, or 11%, to $1.6 billion for the third quarter of 2002. Europe's
revenues rose $129 million, or 11%. The effects of changes in foreign currency
translation rates contributed approximately $88 million to the increase, with
the balance due to the effect of acquisitions, partially offset by declines in
base wholesale and retail operations in the UK and the sale in early 2002 of the
UK networks business. Revenues in Australia increased $34 million, or 17%, which
included approximately $14 million from translation effects. The balance of the
increase reflected higher retail electricity volumes and pricing, partially
offset by lower wholesale results.
The International Energy segment's gross margin fell $152 million, or 29%,
to $379 million for the third quarter of 2002. Europe's gross margin declined
$153 million, or 37%, driven by the UK operations. Gross margin performance was
negatively impacted by a $113 million effect of the sale of the UK networks
business. The UK gross margin decline also reflected lower wholesale power
prices and lack of price volatility that
40
negatively impacted wholesale trading and risk management results. The wholesale
power pricing environment also diminished generation portfolio results. Retail
electric operations in the UK were adversely impacted by the effect of
heightened competitive activity and resulting customer attrition. Lower
wholesale pricing did not significantly benefit retail electric results as a
substantial portion of retail load is satisfied with long-term power purchase
agreements with pricing considerably in excess of current wholesale market
prices. Europe's revenues and gross margin in 2002 included a positive $33
million net effect of mark-to-market accounting for commodity positions,
compared to $61 million in 2001.
Australia's gross margin rose $1 million, or 1%. On a local currency
basis, margins declined by 10% reflecting a decline in wholesale trading and
risk management results, partially offset by improved retail margins due to the
higher volumes and prices. Australia's revenues and gross margin in 2002
included a negative $8 million net effect of mark-to-market accounting for
commodity positions, compared to a positive $11 million net effect in 2001.
Net income for the International Energy segment declined $64 million, to a
loss of $13 million for the third quarter of 2002. Europe posted a net loss of
$37 million, versus net income of $21 million in 2001. The decline in Europe's
results reflected lower UK wholesale power prices and volatility, which impacted
retail, trading and generation results, leading to events occurring in October
2002 described in Note 3 to Financial Statements. The effect on Europe's
performance of the cessation of goodwill amortization ($45 million with no tax
effect) and net losses in 2001 on UK asset dispositions ($26 million after tax),
was partially offset by the absence of earnings from the UK networks business
($33 million after-tax). Australia posted net income of $24 million in 2002
compared to $30 million in 2001. Australia's results reflected the decline in
gross margin and higher operation and maintenance expense that reflected
additional staffing costs to support retail competition, partially offset by the
discontinuance of goodwill amortization ($5 million with no tax effect). The
decline in the International Energy segment's income tax benefit reflects
foreign tax credits and other benefits associated with asset disposals in the UK
in 2001.
The International Energy segment's operating revenues decreased $330
million, or 7%, to $4.7 billion for the first nine months of 2002. Europe's
revenue fell $445 million, or 10%. Revenue declines in base wholesale and retail
operations in the UK and the effect of the sale of the UK networks business were
partially offset by the effect of acquisitions and the approximately $87 million
positive effect of changes in foreign currency translation rates. Revenues in
Australia increased $115 million, or 21%, which reflected approximately $24
million increase due to foreign currency translation effects. The balance of the
growth was driven by higher retail electricity volumes and pricing and also
reflected favorable wholesale results.
The International Energy segment's gross margin fell $551 million, or 31%,
to $1.2 billion for the first nine months of 2002. Europe's gross margin fell
$631 million, or 43%, driven by the UK operations. Gross margin performance was
negatively impacted by a $313 million effect of the sale of the UK networks
business. The UK gross margin decline also reflected lower wholesale power
prices and lack of price volatility that negatively impacted wholesale trading
and risk management results. The wholesale power pricing environment also
diminished generation portfolio results. Retail electric operations in the UK
were adversely impacted by the effect of heightened competitive activity and
resulting customer attrition. See discussion of other impacts above as well as
Note 3 to Financial Statements regarding recent events related to TXU Europe.
Europe's revenues and gross margin in 2002 included a positive $37 million net
effect of mark-to-market accounting for commodity positions, compared to $145
million in 2001.
Australia's gross margin rose $80 million, or 28%. On a local currency
basis, margin improved 21%, reflecting improved retail electric margins due to
higher volumes and rates. Australia's revenues and gross margin in 2002 included
a positive $10 million net effect of mark-to-market accounting for commodity
positions, compared to $8 million in 2001.
Net income for the International Energy segment declined $143 million, or
68%, to $69 million for the first nine months of 2002. This decline reflected a
gain in 2001 on the sale of an investment in a Spanish power company ($51
million after-tax). Europe posted a net loss of $33 million in 2002, compared to
net income of $161 million in 2001. The decline in Europe's results reflected
lower UK wholesale power prices and volatility, which impacted retail, trading
and generation results, leading to events occurring in October 2002 described in
Note 3 to Financial Statements. The effect on Europe's performance of the
cessation of goodwill amortization ($133 million with no tax effect), and net
losses in 2001 on UK asset dispositions ($19 million after tax), was
41
partially offset by the absence of earnings from the UK networks business ($99
million after tax). Australia's net income rose $51 million to $102 million in
2002. Australia's results were driven by the higher gross margin and the
discontinuance of goodwill amortization ($14 million with no tax effect),
partially offset by higher operation and maintenance expense that reflected
additional staffing costs to support retail competition. The decline in the
International Energy segment's income tax benefit reflects foreign tax credits
and other benefits associated with asset disposals in the UK in 2001.
SUBSEQUENT EVENTS RELATED TO TXU EUROPE
Difficult Operating Environment in the UK -- On October 4, 2002, TXU Corp.
announced that it was reducing earnings expectations for 2002 and 2003 due
primarily to continued pressure on operating results in the UK. A significant
decrease in wholesale power prices and low price volatility, due in part to
milder than normal weather, had led to continuing declines in profitability and
cash flows from TXU Europe's upstream electricity generation assets and
short-term wholesale trading activities. In addition, TXU Europe's ability to
enter into structured transactions (long-term trades) had been considerably
reduced because of depressed market activity and lack of available
counterparties due to energy sector-wide credit concerns. A significant portion
of TXU Europe's retail power load in the UK was satisfied with long-term
agreements that obligated TXU Europe to purchase power at prices considerably in
excess of current wholesale market prices. These comparatively high power
purchase costs, combined with increased competition and associated customer
attrition, had resulted in reduced profitability and cash flows from TXU
Europe's retail electric business. TXU Europe's planned actions to address the
situation included restructuring the power purchase agreements and physical
generation positions in the UK, ceasing acquisition and other developmental
activities, reducing administrative costs and enhancing retail margins.
Market Reaction and TXU Corp.'s Response -- Prior to TXU Corp.'s October 4
announcement, concerns were already prevalent in US financial markets regarding
financial performance of the US energy sector. Subsequent to TXU Corp.'s October
4 announcement, concerns also arose in the financial markets regarding the
liquidity of TXU Corp.'s North American and Australian operations.
TXU Corp. has taken the following actions to address the US financial
markets' concern about liquidity and to strengthen its credit position:
. Reduced its common stock dividend by 80 percent to an annual indicated
rate of $.50 per share effective with the dividend payable in January
2003
. Significantly reduced planned capital expenditures in all its
businesses
. Reversed previous plans to support TXU Europe with up to $700 million
in capital contributions
. Eliminated by amendment the cross-default provision in a US financing
arrangement that would have been triggered by a TXU Europe default (TXU
Australia's financing arrangements have no cross-default provision that
would have been triggered by a TXU Europe default.)
. Drew $2.6 billion in cash on its US revolving credit facilities
. On October 30, 2002, entered into a commitment for a secured credit
facility of up to $1 billion at Oncor. The facility is intended to fund
interim refinancings of approximately $700 million of maturities should
market conditions not support a timely, cost effective refinancing. The
balance will be available for general corporate purposes at Oncor.
The actions to reduce the common stock dividend and capital expenditures
will result in estimated annual cash savings of $850 to $950 million, which is
intended to be used for debt reduction.
Following the announcement of these actions, between October 4 and October
14, 2002, the major credit rating agencies downgraded TXU Europe's credit
ratings to below investment grade. Credit ratings for TXU Corp and its US and
Australian subsidiaries remain investment grade.
Impact of Credit Rating Downgrades on TXU Europe -- The downgrades of
credit ratings to below investment grade have resulted in a number of potential
demands on TXU Europe's liquidity. These demands are in certain cases at the
discretion of TXU Europe's counterparties and include additional cash or letter
of credit collateral requirements and repayment of indebtedness under various
financing and other contractual arrangements. Certain of these collateral
requirements relate to wholesale trading, further limiting these
42
activities. In addition, events of default have occurred under certain of these
arrangements, and several financing agreements contain cross-default provisions
that accelerate repayment of borrowings. The effect of these developments on
liquidity is significant, and TXU Europe has entered into negotiations with its
creditors regarding these matters.
Sale of Certain TXU Europe Operations -- On October 14, 2002, TXU Corp.
announced that TXU Europe was offering for sale all or portions of its business.
Such action effectively represented a determination by TXU Corp. to exit all of
its operations in Europe.
On October 21, 2002, TXU Europe sold certain of its operations to Powergen,
a unit of Germany's E.ON AG, for approximately $2.1 billion ((pound)1.37
billion) in cash.
Concurrently, Powergen terminated the accounts receivable securitization
program, under which TXU Europe had been selling its trade accounts receivable,
for approximately $390 million ((pound)250 million), effectively buying back the
receivables from the participating financial institution.
The operations sold include: (a) the retail electric and gas business in
the UK, consisting of 5.3 million residential, commercial and industrial
customers, and (b) three power plants representing a total of 2.9 gigawatts of
coal-fired generation capacity and a combined heat and power plant, all in the
UK. The sale and purchase agreement also provides for the transfer of
approximately 1,900 employees in the UK to Powergen and the assumption by
Powergen of the associated pension obligations.
After the sale, TXU Europe continues to retain: (a) its energy trading
assets and liabilities; (b) several long-term power purchase agreements in the
UK; (c) operations in Germany consisting of a national retail energy provider
with 200,000 customers, as well as majority interests in two businesses
providing power, gas, heating and water services: the city utility in Kiel (51%
owned) with 250,000 customers and the city utility in Braunschweig (74.9% owned)
with 210,000 customers; (d) operations in Scandinavia consisting of an 80% owned
wholesale power business in Finland, selling over four terawatt hours of
electricity annually, a 45% interest in an electricity distribution business in
Finland with access to 90,000 customers and a retail energy business with 80,000
customers in Norway; and (e) two combined heat and power plants in the UK and
interests in various renewable energy projects, mostly wind farms.
TXU Europe and its subsidiaries have not entered into formal administration
processes in the UK (similar to bankruptcy proceedings in the US). However,
consistent with UK law, these remaining operations are being managed by the
directors of TXU Europe for the benefit of the creditors of TXU Europe and its
subsidiaries. The sales proceeds discussed above, as well as any other proceeds
that may be realized, will not be available to TXU Corp.
In consideration of the above events and changes in circumstances regarding
TXU Corp.'s control of the operating activities of TXU Europe, TXU Corp. is
required to perform an impairment test of goodwill and other assets of TXU
Europe, in accordance with accounting rules. TXU Corp. expects to record an
estimated charge of approximately $4.2 billion in the fourth quarter of 2002,
consisting primarily of the write-off of its investment in TXU Europe ($3.7
billion as of September 30, 2002). The charge also includes the write-off of
receivables due from TXU Europe and amounts previously recorded in other
comprehensive income, consisting primarily of the cumulative translation loss
associated with TXU Europe, as well as certain anticipated income tax and other
obligations related to the exiting of the European operations. This charge is
before consideration of any income tax deduction with respect to the tax basis
($3.4 billion) of TXU Corp.'s investment in TXU Europe, as well as certain
income tax contingencies, as such matters continue to be under review. TXU Corp.
has no intention to continue to fund the operations or any obligations of TXU
Europe beyond its investment balance.
Financial Statements Reflecting the Exiting of TXU Europe Operations -- The
following condensed consolidated financial statements of TXU Corp. have been
prepared to give effect to the exiting of all of the European operations and the
write-off of the investment in TXU Europe.
The unaudited condensed balance sheet as of September 30, 2002 gives effect
to the write-off of the investment in TXU Europe as if it had occurred on
September 30, 2002. The unaudited condensed statements of income for the three
month and nine month periods ended September 30, 2002 and 2001 and the
statements
43
of cash flows for the nine months ended September 30, 2002 and 2001, give effect
to the exiting of the TXU Europe operations as if it had occurred at the
beginning of the periods, but do not give effect to the write-off of the
investment.
The unaudited statements of income and cash flows are not necessarily
indicative of the financial results that would have been realized had the sale
and exiting of TXU Europe occurred on the indicated dates, nor are they
necessarily indicative of future financial results. In addition, results for the
three and nine-month periods presented herein are not necessarily indicative of
results for a full year's operations.
Income Statement Reflecting the Exiting of Europe--
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
Millions of Dollars, Except per Share Amounts
Operating revenues ...................................................... $ 2,918 $ 2,738 $ 7,873 $ 7,896
------- ------- ------- -------
Operating expenses
Energy purchased for resale, fuel consumed and delivery costs ......... 1,288 1,089 3,087 3,556
Operation and maintenance ............................................. 661 558 1,964 1,629
Depreciation and other amortization ................................... 213 192 637 574
Goodwill amortization ................................................. -- 11 -- 32
Taxes other than income ............................................... 173 195 534 577
------- ------- ------- -------
Total operating expenses ........................................... 2,335 2,045 6,222 6,368
------- ------- ------- -------
Operating income ........................................................ 583 693 1,651 1,528
Other income ............................................................ 25 5 49 24
Other deductions ........................................................ 27 44 64 89
Interest income ......................................................... 3 27 16 64
Interest expense and other charges ...................................... 212 244 637 739
------- ------- ------- -------
Income from continuing operations before income taxes and
extraordinary items .................................................. 372 437 1,015 788
Income tax expense (a) .................................................. 119 129 312 231
------- ------- ------- -------
Income from continuing operations before extraordinary items ............ $ 253 $ 308 $ 703 $ 557
======= ======= ======= =======
Average shares of common stock outstanding (millions) ................... 282 260 272 258
Per share of common stock:
Basic and diluted earnings
Income from continuing operations before extraordinary items
and after preference stock dividends ................................ $ 0.88 $ 1.17 $ 2.53 $ 2.10
(a) Excludes tax benefit reported in TXU Australia's results associated with
the UK business ($9 million and $8 million for the three months ended
September 30, 2002 and 2001, respectively, and $26 million and $25 million
for the nine months ended September 30, 2002 and 2001, respectively).
44
Condensed Cash Flow Statement Reflecting the Exiting of Europe --
Nine Months Ended
September 30,
--------------------
2002 2001
------- -------
Millions of Dollars
Cash flows - operating activities
Income from continuing operations ..................................................... $ 703 $ 557
Adjustments to reconcile net income to cash provided by operating activities .......... 917 609
Changes in operating assets and liabilities ........................................... (621) 250
------- -------
Cash provided by operating activities ........................................ 999 1,416
------- -------
Cash flows - financing activities
Issuances of securities .............................................................. 3,585 1,772
Retirements/repurchases of securities ................................................ (2,707) (1,354)
Change in notes payable .............................................................. (409) (6)
Cash dividends paid .................................................................. (497) (479)
Assumed debt reduction in lieu of cash outflows related to Europe, primarily (544) --
capital contributions ..............................................................
Debt premium, discount, financing and reacquisition expenses ......................... (107) (6)
------- -------
Cash used in financing activities ............................................ (679) (73)
------- -------
Cash flows - investing activities
Capital expenditures ................................................................. (733) (940)
Acquisitions of businesses ........................................................... (36) --
Proceeds from sale of assets ......................................................... 445 6
Nuclear fuel ......................................................................... (51) (12)
Other ................................................................................ (42) (35)
------- -------
Cash used in investing activities ........................................... (417) (981)
------- -------
Effect of exchange rates on cash and cash equivalents .................................. (6) --
------- -------
Net change in cash and cash equivalents ................................................ (103) 362
Cash and cash equivalents - beginning balance .......................................... 216 49
------- -------
Cash and cash equivalents - ending balance ............................................. $ 113 $ 411
======= =======
45
Condensed Balance Sheet Reflecting the Exiting of Europe --
September 30,
2002
(Unaudited)
-----------
ASSETS Millions of Dollars
Current assets
Cash and cash equivalents ............................................... $ 113
Accounts receivable ..................................................... 1,970
Inventories -- at average cost .......................................... 461
Commodity contract assets ............................................... 1,044
Prepayments and other current assets .................................... 277
--------
Total current assets ............................................ 3,865
--------
Investments ................................................................... 966
Property, plant and equipment -- net .......................................... 19,560
Goodwill ...................................................................... 1,561
Regulatory assets -- net ...................................................... 1,817
Commodity contract assets ..................................................... 622
Cash flow hedges and other derivative assets .................................. 163
Deferred debits and other assets .............................................. 204
--------
Total assets .................................................... $ 28,758
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable -- commercial paper and banks ............................ $ 1,515
Long-term debt due currently ........................................... 1,668
Accounts payable ....................................................... 1,157
Commodity contract liabilities ......................................... 842
Other current liabilities .............................................. 1,486
--------
Total current liabilities ....................................... 6,668
--------
Accumulated deferred income taxes and investment tax credits .................. 3,960
Commodity contract liabilities ................................................ 282
Cash flow hedges and other derivative liabilities ............................. 337
Other deferred credits and noncurrent liabilities ............................. 1,447
Long-term debt, less amounts due currently .................................... 10,159
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of the obligated company ........... 515
Preferred stock of subsidiaries ............................................... 211
Shareholders' equity
Preference stock ............................................................ 300
Common stock without par value .............................................. 7,516
Retained deficit ............................................................ (2,221)
Accumulated other comprehensive income ...................................... (416)
--------
Total shareholders' equity ....................................... 5,179
--------
Total liabilities and shareholders' equity ....................... $ 28,758
========
46
Comparison of Capital Ratios --
Reported Balances at
Balances at Less September 30, 2002
September 30, TXU Excluding
2002 % Europe TXU Europe %
------------- - ------ ---------- -
(In millions, except percentages)
Short-term debt ............................................. $ 1,653 $ 138 $ 1,515
Long-term debt due currently ................................ 1,695 27 1,668
Long-term debt (excluding equity-linked securities) ......... 13,390 4,671 8,719
Less: restricted and unrestricted cash ...................... (1,226) (1,098) (128)
-------- -------- --------
Total net debt ......................................... 15,512 57.2% 3,738 11,774 61.6%
Preferred securities of subsidiary trusts ................... 665 2.5% 150 515 2.7%
Preferred and preference stock .............................. 511 1.9% - 511 2.7%
Equity-linked securities .................................... 1,440 5.3% - 1,440 7.5%
Common stock equity ......................................... 8,975 33.1% 4,096 (a) 4,879 25.5%
-------- ----- -------- -------- ------
Total .................................................. $ 27,103 100.0% $ 7,984 $ 19,119 100.0%
======== ======== ========
(a) Reflects estimated write-off of TXU Corp.'s investment in TXU Europe
($4,242), less other comprehensive loss related to TXU Europe ($146).
COMPREHENSIVE INCOME
Foreign currency translation adjustments for both the 2002 and 2001
periods (gains of $47 million and $297 million for the three and nine months
ended September 30, 2002, respectively, and a gain of $127 million and a loss of
$120 million for the three and nine months ended September 30, 2001,
respectively), reflected the movement in exchange rates between the US dollar
and the UK pound sterling and the Australian dollar.
TXU Corp. has historically used, and will continue to use, derivatives
that are effective in offsetting future cash flow volatility in interest rates,
currency exchange rates and energy commodity prices. The fair values of
derivatives that are effective as cash flow hedges are recorded as derivative
assets or liabilities with an offset in other comprehensive income. During the
first nine months of 2002, declines in the fair value of effective cash flow
hedges ($61 million for the quarter and $236 million year to date) in the form
of debt related interest rate and currency swaps were primarily driven by
declining interest rates and the strengthening of the UK pound sterling.
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 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 TXU Corp.'s 2001 Form 10-K. No significant changes or events that
might affect the financial condition of TXU Corp. have occurred subsequent to
year-end other than as disclosed herein.
Cash Flows -- Cash flows provided by operating activities for the first
nine months of 2002 were $953 million compared to $1.6 billion for 2001. The
decrease of $654 Imillion, or 41%, reflected higher accounts receivable in 2002.
Unbilled accounts receivable in the US retail electric operations reflected an
increase of approximately $288 million related to the opening of the Texas
electricity market to competition. Of this
amount, $208 million represented delayed billing amounts, predominantly in
large C&I accounts. These delays
47
have been caused primarily by temporary transition issues including customer
switching and billing, and new processes and systems within ERCOT and TXU
Energy. The remaining increase of $80 million in unbilled accounts receivable
represented the effect of the new ERCOT protocol that allows five days to clear
meter-read data through ERCOT, as well as other permanent changes in billing
processes. The decline in cash flows also reflected the effect of $194 million
in margin deposits returned in 2001 (in exchange for letters of credit).
The decline in cash provided by operating activities also reflected lower
cash flows of $237 million in Europe, which was due primarily to the difficult
operating environment described in Subsequent Events Related to TXU Europe and
Segments - International Energy.
Cash flows used in financing activities for 2002 were $1.4 billion,
compared to $1.2 billion for the first nine months of 2001.
In 2002, issuances and retirements of debt securities both totaled $3.8
billion. In 2001, issuances and retirements of debt securities totaled $1.6
billion and $2.3 billion, respectively. Issuances of common stock provided cash
of $717 million and $353 million during the first nine months of 2002 and 2001,
respectively, and net redemptions of commercial paper and notes payable to banks
used $1.6 billion in 2002 compared to $297 million in 2001. Cash dividends paid
were $512 million and $479 for the first nine months of 2002 and 2001,
respectively. In addition to the debt retirements reflected in the statement of
cash flows, $1.1 billion of debt was assumed by the purchaser of the UK networks
business sold in 2002.
Cash flows used in investing activities were $190 million in 2002
compared to $734 million in 2001. Capital expenditures were $840 million in 2002
compared with $1.2 billion in 2001. Acquisitions in 2002, primarily BVAG and
certain assets of Amerada Hess in the UK, were $606 million, compared with $230
million in 2001, primarily for the Stadtwerke Kiel acquisition in Germany.
Proceeds from the sale of assets (including $730 million from the UK networks
business, $443 million from the sale of two generating plants in Texas, and $181
million from the final payment from a UK generating plant sold in 2001), totaled
$1.4 billion in 2002 compared to $755 million in 2001.
As a result of constraints on capital in the energy sector and TXU Corp's
decision to significantly reduce planned capital expenditures in all its
businesses, certain generation plant development projects may not be completed.
TXU Corp. has certain assets, primarily generation equipment, with a carrying
value of approximately $340 million, a portion of which may become subject to
impairment and sale.
48
Credit Facilities -- TXU Corp. and its US and Australian subsidiaries
have credit facilities (some of which provide for long-term borrowings)
available as follows:
Credit Facilities
---------------------------------------------
At September 30, 2002 At November 5, 2002(a)
--------------------- ----------------------
Letters Letters
Authorized Facility of Cash of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Credit Borrowings
- -------- --------------- -------- ----- ------ ---------- ------ ----------
(Millions of Dollars)
364-Day Revolving Credit Facility April 2003 US Holdings,
TXU
Energy,
Oncor $ 1,000 $ 81 $ -- $ 88 $ 912
Five-Year Revolving Credit February 2005 US Holdings
Facility(b) 1,400 462 -- 461 939
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 350 -- 500
Standby Liquidity Facility November 2002 US Holdings 400 -- -- -- 400
Standby Liquidity Facility November 2002 US Holdings,
TXU
Energy,
Oncor 400 -- -- -- 400
------- ------ -------- ------- --------
Total US (c) $ 3,700 $ 543 $ 350 $ 549 $ 3,151
Senior Facility October 2004 TXU Australia $ 962 $ -- $ 815 $ -- $ 879
Working Capital Facility October 2002 TXU Australia 54 -- -- -- --
------- ------ --------- ------- -------
Total Australia (d) $ 1,016 $ -- $ 815 $ -- $ 879
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately
$2.6 billion in cash against their available credit facilities. These
funds and other available cash will be used, in part, to repay
outstanding commercial paper. (See discussion under Subsequent Events
Related to TXU Europe.)
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
TXU Corp. was removed as a borrower under this facility effective July
31, 2002.
(c) Supported commercial paper borrowings.
(d) Supports commercial paper borrowings, which were $63 million and $36
million at September 30, 2002 and November 5, 2002, respectively.
On October 30, 2002, Oncor entered into a commitment for a secured
credit facility of up to $1 billion. The facility is intended to fund
interim refinancings of approximately $700 million of maturing secured
debt should market conditions not support a timely, cost effective
refinancing. The balance will be available for general corporate purposes
at Oncor.
In July 2002, US Holdings entered into the $400 million Standby
Liquidity Facility that terminates no later than November 30, 2002. In
August 2002, US Holdings, TXU Energy and Oncor entered into the joint
$400 million Standby Liquidity Facility that also expires November 30,
2002. Borrowings of $800 million against these facilities are expected to
be repaid no later than the expiration date.
In May 2002, TXU Corp. entered into the $500 million three-year
revolving credit facility with a group of banks that terminates May 1,
2005. This facility is used for working capital and general corporate
purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into the
joint $1.0 billion 364-day revolving credit facility with a group of
banks that terminates in April 2003 but can be extended for one year.
This facility is used for working capital and general corporate purposes.
Up to $1.0 billion of letters of credit may be issued under the facility.
This facility and the $500 million three-year revolving credit facility
described above replaced the TXU Corp. and US Holdings $1.4 billion
364-day revolving credit facility that expired in April 2002.
In the second quarter of 2002, each of TXU Energy and Oncor began
issuing commercial paper to fund its short-term liquidity requirements.
The commercial paper programs allow each of TXU Energy and Oncor to issue
up to $2.4 billion and $1.0 billion of commercial paper, respectively. At
September 30, 2002, each of the US credit facilities listed above
provided back-up for outstanding commercial paper under the Oncor and TXU
Energy programs. The TXU Corp. commercial paper program was discontinued
in July 2002, and at that time,
49
TXU Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of September 30, 2002, total outstanding commercial paper
under these programs was $1.1 billion. Concurrent with events in October 2002,
as described in Note 3, US commercial paper markets became inaccessible.
Existing borrowings under the program are being repaid upon maturity. Commercial
paper borrowings are expected to resume as market concerns regarding the
liquidity of TXU Corp. and its US subsidiaries are mitigated.
All of the credit facilities discussed above, with the exception of the
Oncor commitment dated October 30, 2002, are included in the credit facilities
table above. Excluded from the credit facilities table is the revolving credit
facility of TXU Europe. As of September 30, 2002, the outstanding borrowings
under this facility were (pound)673 million ($1,051 million). (See Note 3
regarding subsequent events related to TXU Europe.)
Over the next twelve months, TXU Corp. and its subsidiaries will have
financing needs to fund ongoing working capital requirements and maturities of
debt. TXU Corp. and its subsidiaries have funded or intend to fund these
financing needs through cash on hand, cash flows from operations, short-term
credit facilities and the issuance of long-term debt or other securities. Other
potential sources of funding include proceeds from asset sales and bank
borrowings.
Long-Term Debt -- During the nine months ended September 30, 2002, TXU
Corp. and its subsidiaries issued, redeemed, reacquired or made scheduled
principal payments on long-term debt as follows:
Issuances Retirements
--------- -----------
TXU Corp.:
Long-term debt ................................. $ 585 $ 224
US Holdings:
First mortgage bonds ........................... -- 525
Senior secured notes ........................... 1,200 --
Pollution control revenue bonds ................ 61 61
Floating rate debentures ....................... -- 1,500
Medium term notes .............................. -- 55
Fixed rate debentures .......................... 1,000 --
Other long-term debt ........................... -- 125
TXU Europe:
Revolving Credit Facility (Tranche A) .......... 952 626
Other long-term debt ........................... 22 428
TXU Australia:
Long-term debt ................................. 22 131
All other subsidiaries ............................... -- 86
------ ------
Total ......................................... $3,842 $3,761
====== ======
See Note 4 to Financial Statements for further detail of debt issuance and
retirements.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of September 30, 2002, TXU Energy
Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas are
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
September 30, 2002, $1.25 billion face amount of receivables were sold to TXU
Receivables Company under the program in exchange for cash of $600 million and
$632 million in subordinated notes, with $18 million of
losses on sales for the nine months ended September 30, 2002 principally
representing the interest on the
50
underlying financing. These losses approximated 4% of the cash proceeds from the
sale of undivided interests in accounts receivable on an annualized basis. Upon
termination, cash flows to the originators would be delayed as collections of
sold receivables were used by TXU Receivables Company to repurchase the
undivided interests of the financial institutions instead of purchasing new
receivables. The level of cash flows would normalize in approximately 16 to 31
days. TXU Business Services, a subsidiary of TXU Corp., services the purchased
receivables and is paid a market based servicing fee by TXU Receivables Company.
The subordinated notes receivable from TXU Receivables Company represent TXU
Corp.'s subsidiaries' retained interests in the transferred receivables and are
recorded at book value, net of allowances for bad debts, which approximates fair
value due to the short-term nature of the subordinated notes, and are included
in accounts receivable in the consolidated balance sheet.
Credit Ratings of TXU Corp. and its US and Australian Subsidiaries -- The
current credit ratings, which are all investment grade, for TXU Corp. and its US
and Australian subsidiaries are presented below:
TXU Corp. US Holdings Oncor TXU Energy TXU Gas TXU Australia
------------- ------------- ------- ---------- ------- -------------
(Senior Unsecured) (Senior Unsecured) (Secured) (Senior Unsecured) (Senior Unsecured) (Senior Unsecured)
S&P ....... BBB- BBB- BBB BBB BBB BBB
Moody's ... Baa3 Baa3 A3 Baa2 Baa2 Baa2
Fitch ..... BBB BBB+ A- BBB+ BBB BBB
Moody's is currently reviewing its ratings of TXU Corp. and its US and
Australian subsidiaries. S&P currently maintains a negative outlook for TXU
Corp. and its US and Australian subsidiaries. Fitch currently maintains a
negative outlook for TXU Corp., but maintains a stable outlook for its US and
Australian subsidiaries.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating Provisions and Cross Default
Provisions -- The terms of certain financing arrangements of TXU Corp. and its
consolidated subsidiaries contain financial covenants that require maintenance
of specified fixed charge coverage ratios, shareholders' equity to total
capitalization ratios and leverage ratios and/or contain minimum net worth
covenants. As of September 30, 2002, TXU Corp. and its US and Australian
subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. and its US and
Australian subsidiaries contain provisions that are specifically affected by
changes in credit ratings and also include cross default provisions. The
material provisions are described below:
Credit Rating Provisions
As fully described in the TXU Corp. Annual Report on Form 10-K for the
year ended December 31, 2001 (2001 Form 10-K) and in Note 8 to Financial
Statements, in connection with the telecommunications joint venture (Pinnacle)
transaction, in the event of a decline in the credit rating for TXU Corp.'s
unsecured, senior long-term obligations to two notches below investment grade
(i.e. to or below `BB' by S&P or Fitch or `Ba2' by Moody's), coupled with a
decline in the market price of TXU Corp. common stock below $21.93 per share for
ten consecutive trading days, TXU Corp. would be required to sell equity or
otherwise raise cash proceeds sufficient to repay Pinnacle's senior secured
notes ($810 million outstanding at September 30, 2002).
In the event of a downgrade of TXU Corp. to below investment grade, TXU
Energy or one of its investment grade affiliates will be required to provide an
additional guarantee of the obligations under the lease (approximately $145
million) for the TXU Energy Plaza headquarters building or provide a letter of
credit within 30 days of any such ratings decline. It is anticipated that TXU
Energy would provide a guarantee in the event of a downgrade.
TXU Energy has entered into certain trading contracts and lease
arrangements that in some instances give the other party the right, but not the
obligation, to request TXU Energy to post collateral in the event that its
credit rating falls below investment grade.
51
Based on its current trading positions, if TXU Energy was downgraded
below investment grade, counterparties would have the option to request TXU
Energy to post additional collateral of approximately $230 million.
In addition, TXU Energy has a number of transactions where the
counterparties would have the right to request TXU Energy to post collateral if
its credit rating fell below investment grade. The amount TXU Energy would post
under these transactions depends in part, on the value of the contract at that
time. Based on current market conditions, the maximum TXU Energy might have to
post for these transactions is $338 million.
TXU Energy is also the obligor on leases, which total $168 million. Under
the terms of those leases, if TXU Energy's credit rating falls below investment
grade, TXU Energy could: sell the assets, assign the leases to a new obligor
which is investment grade, post a letter of credit or defease the leases.
ERCOT also has rules in place to assure adequate credit worthiness for
parties that schedule power on the ERCOT System. Under those rules, if TXU
Energy's credit ratings fell below investment grade, TXU Energy could be
required to post collateral of approximately $52 million.
Under the $600 million Accounts Receivables Sale Program, all originators
(currently TXU Gas, TXU Energy Retail Company LP, SESCO Energy Services Company
and Oncor), are required to maintain a `BBB-' (S&P) and a `Baa3' (Moody's)
rating (or supply a parent guarantee with a similar rating). A downgrade below
the required ratings for an originator would prevent that originator from
selling its accounts receivables under the program. If all originators are
downgraded so that there are no eligible originators, the facility would
terminate. Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used to repurchase the undivided interests
of the financial institutions instead of purchasing new receivables. The level
of cash flows would normalize in approximately 16 to 31 days.
In the event that TXU Australia's credit rating falls below investment
grade, there are cross currency swaps and interest rate swaps in effect with
banks who have the right to terminate the swaps. However, the contracts are
currently in the money on a net basis.
TXU Australia has several contracts that may require additional
guarantees or cash collateral amounting to approximately $62 million if the
credit rating falls below investment grade.
Other agreements of TXU Corp. and its subsidiaries, including some of the
credit facilities discussed above, contain terms pursuant to which the interest
rates charged under the agreements may be adjusted depending on the credit
ratings of TXU Corp. or its subsidiaries.
Cross Default Provisions
Certain financing arrangements of TXU Corp. and its subsidiaries contain
provisions that would result in an event of default under these arrangements if
there is a failure under other financing arrangements to meet payment terms or
to observe other covenants that would result in an acceleration of payments due.
Such provisions are referred to as "cross default" provisions. Most agreements
have a cure period of up to 30 days from the occurrence of the specified event
during which the company is allowed to rectify or correct the situation before
it becomes an event of default.
At September 30, 2002, TXU Corp.'s $500 million Three-Year Revolving
Facility contained a cross-default with respect to any default by TXU Corp. or
any subsidiary thereof in respect of any indebtedness in excess of $50 million.
TXU Corp. subsequently amended this facility so that a default by any of TXU
Corp.'s non-US subsidiaries, including TXU Europe, would not trigger the
cross-default provision contained in the facility.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross-default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-Day Revolving Credit
Facility, the $1.4 billion US Holdings 5-Year Revolving Credit Facility, the
$400 million joint US Holdings/TXU Energy/Oncor Standby Liquidity Facility, the
$400 million US Holdings Standby Liquidity Facility, the two letter of credit
reimbursement and credit facility agreements ($68.1 million and $54.2 million
currently outstanding, respectively); and the $103 million TXU Mining Company
senior notes (which have a $1
52
million threshold). Under the joint US Holdings/TXU Energy/Oncor $1.0 billion
364-Day Revolving Credit Facility and the joint US Holdings/TXU Energy/Oncor
$400 million Standby Liquidity Facility, a default by TXU Energy or any
subsidiary thereof would cause the maturity of outstanding balances under such
facilities to be accelerated as to TXU Energy and US Holdings, but not as to
Oncor. Also, under these two credit facilities, a default by Oncor or any
subsidiary thereof would cause the maturity of outstanding balances to be
accelerated under such facilities as to Oncor and US Holdings, but not as to TXU
Energy. Further, under these two credit facilities, a default by US Holdings
would cause the maturity of outstanding balances under such facilities to be
accelerated as to US Holdings, but not as to Oncor or TXU Energy.
The accounts receivable program, described above, contains a cross
default provision with a threshold of $50 million applicable to each of the
originators under the program. TXU Receivables Company, a wholly-owned
bankruptcy remote subsidiary of TXU Corp. which sells undivided interests in
accounts receivable it purchases to financial institutions, and TXU Business
Services Company, a subsidiary of TXU Corp. which services the purchased
receivables, each have a cross default threshold of $50 thousand. If either an
originator, TXU Business Services Company or TXU Receivables Company defaults on
indebtedness of the applicable threshold, the facility could terminate.
TXU Corp.'s 6% Notes due 2002 to 2004 relating to the Pinnacle Overfund
Trust ($178 million outstanding at September 30, 2002) and Pinnacle's 8.83%
Senior Secured Notes due 2004 ($810 million outstanding at September 30, 2002)
contain cross-default provisions relating to a failure to pay principal or
interest on indebtedness of TXU Corp. or TXU Communications (in the case of the
8.83% Senior Secured Notes due 2004) in an amount of $50 million or above.
TXU Energy, as the lessee, has certain mining and equipment leasing
arrangements aggregating $226 million that would terminate upon the default on
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
A default by TXU Gas or any of its material subsidiaries on indebtedness
of $25 million or more would result in a cross-default under the TXU Gas senior
notes due 2004 and 2005 ($300 million).
TXU Energy enters into trading and risk management contracts, the master
forms of which contain provisions whereby an event of default would occur if TXU
Energy were to default under an obligation in respect of borrowings in excess of
thresholds stated in the contracts, which thresholds vary.
TXU Corp. and its subsidiaries have other arrangements, including
interest rate and currency swap agreements and leases with cross default
provisions, the triggering of which would not result in a significant effect on
liquidity.
Regulatory Asset Securitization -- The regulatory settlement plan
approved by the Public Utility Commission of Texas (Commission) provides Oncor
with a financing order authorizing it to issue securitization bonds in the
aggregate principal 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 the amount of up to $500
million followed by a second issuance for the remainder after 2003. (See Note 7
to Financial Statements.)
Leases -- In February 2002, TXU Corp. sold its interest in its
headquarters building in Dallas, Texas for $145 million. Simultaneously with the
sale of the property, TXU Corp. entered into a twenty-year lease obligation for
the property. At the end of the initial twenty-year term of the lease, TXU Corp.
has the right, but not the obligation, to renew the lease for three ten-year
renewal terms under which rents will be paid based on then-existing market
conditions. The sale was treated as a financing.
53
Equity -- In June 2002, TXU Corp. issued in a public offering 11.8
million shares of its common stock. Net proceeds of $585 million from the sale
were used for working capital and other general corporate purposes, including
the repayment of commercial paper. See Note 5 to Financial Statements regarding
8.4 million common shares issued in connection with equity-linked debt
securities in August 2002.
On October 12, 2002, TXU Corp. declared a common stock dividend of $0.125
per share, payable on January 2, 2003, which represents an 80% reduction from
the previous dividend rate. The decrease was in response to concerns regarding
the liquidity of TXU Corp. and its US and Australian subsidiaries. See Note 3 to
Financial Statements regarding recent events related to TXU Europe. TXU Corp.
paid quarterly dividends of $0.60 a share in April 2002, July 2002 and October
2002. Future dividends may vary and are subject to consideration of TXU Corp.'s
operating cash flow levels, capital expenditure needs and other business
conditions existing at the time.
In addition, under Texas law, TXU Corp. may only declare dividends out of
surplus, which consists of total shareholders' equity less the book value of
common stock (stated capital). The anticipated write-off of TXU Corp.'s
investment in TXU Europe will result in an accumulated deficit and an
elimination of surplus available for dividends. Texas law permits, subject to
the receipt of shareholder approval, the reclassification of stated capital into
surplus. TXU Corp. expects to seek approval of such a reclassification to permit
future dividend payments. The January 2, 2003 payment will not be affected.
Capitalization -- External funds of a permanent or long-term nature are
obtained through the issuance of common stock, preference and preferred stock,
trust securities and long-term debt by TXU Corp. and its subsidiaries. The
capitalization ratios of TXU Corp. at September 30, 2002 consisted of 5.8%
equity-linked debt securities, 53.6% other long-term debt, 2.7% preferred
securities of subsidiary trusts, 2.0% preference and preferred stock, and 35.9%
common stock equity.
Registered Financing Arrangements -- TXU Corp., US Holdings, TXU Gas and
other subsidiaries of TXU Corp. may issue and sell additional debt and equity
securities as needed, including potential: (i) issuances by TXU Corp. of up to
an aggregate of $516 million of common stock, preference stock, equity linked
debt securities, debt securities and/or preferred securities of subsidiary
trusts; (ii) issuances by US Holdings of up to $25 million of Cumulative
Preferred Stock and up to an aggregate of $924 million of additional Cumulative
Preferred Stock, debt securities and/or preferred securities of subsidiary
trusts and (iii) issuances by TXU Gas of up to an aggregate of $400 million of
debt securities and/or preferred securities of subsidiary trusts, all of which
are currently registered with the SEC for offering pursuant to Rule 415 under
the Securities Act of 1933.
See Notes 3, 4 and 6 to Financial Statements for further details
concerning financing arrangements, capitalization and trust securities.
Minimum Pension Liability -- TXU Corp. believes that if actual investment
returns continue at current levels and interest rates remain unchanged through
the rest of the year, it will be required to record an increase in minimum
pension liability as of December 31, 2002. The minimum pension liability
represents the difference between the excess of the accumulated benefit
obligation over the plans' assets and the liability recorded. A majority of the
liability would be recorded as a reduction to shareholder's equity, as a
component of accumulated comprehensive income. A preliminary estimate based on
information available at this time indicates that the minimum pension liability
for the TXU Corp. plan would be approximately $140 million. The recording of the
liability will not affect TXU Corp.'s financial covenants in any of its credit
agreements.
Further, based on the current assumptions and available information, in
2003 funding requirements related to the pension plans are expected to increase
by $10 million and pension expense is expected to increase approximately $30
million over the current year amounts.
54
CONTINGENCIES
See Note 8 to Financial Statements for discussion of contingencies.
All exposures related to Enron have been provided for. As disclosed in
TXU Corp.'s 2001 Form 10-K, a charge of $22 million (after-tax) was recorded in
2001 for exposures at TXU Europe. In the US, TXU Corp.'s significant activities
with Enron were associated with energy trading contracts. These positions were
marked to market and resulted in a net liability to Enron of $107 million at
December 31, 2001. The net liability at September 30, 2002 was $121 million. All
contracts in existence at the date of the Enron bankruptcy have been terminated
and are no longer marked to market and have been reclassified to other current
liabilities.
REGULATION AND RATES
See Note 7 to Financial Statements for discussion of regulation and
rates.
CHANGES IN ACCOUNTING STANDARDS
See Note 2 to Financial Statements for discussion of changes in
accounting standards.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.
Some important factors, in addition to others specifically addressed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, that could have a significant impact on TXU Corp.'s operations and
financial results, and could cause TXU Corp.'s actual results or outcomes to
differ materially from those discussed in the forward-looking statements set
forth below, include:
TXU Corp.'s businesses in the US and Australia operate in changing market
environments influenced by various legislative and regulatory initiatives
regarding deregulation, regulation or restructuring of the energy industry,
including deregulation of the production and sale of electricity. TXU Corp. will
need to adapt to these changes and may face increasing competitive pressure.
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the bankruptcy
filing by the Enron Corporation, recently discovered accounting irregularities
of public companies, and investigations by governmental authorities into energy
trading activities, companies in the regulated and non-regulated utility
businesses have been under a generally increased amount of public and regulatory
scrutiny. Recently discovered accounting irregularities at certain companies in
the industry have caused regulators and legislators to review current accounting
practices and financial disclosures. The capital markets and ratings agencies
also have increased their level of scrutiny. Additionally, allegations against
various energy trading companies of "round trip" or "wash" transactions, which
involve the simultaneous buying and selling of the same amount of power at the
same price and provide no true economic benefit, may have a negative effect on
the industry. TXU Corp. believes that it is complying with all applicable laws,
but it is difficult or impossible to predict or control what effect these events
may have on TXU Corp.'s financial condition or access to the capital markets.
Additionally, it is unclear what laws or regulations may develop, and TXU Corp.
cannot predict the ultimate impact of any future changes in accounting
regulations or practices in general with respect to public companies, the energy
industry or its operations specifically. Any such new accounting standards could
negatively impact reported financial results.
TXU Corp. is subject to changes in laws or regulations, including the
Federal Power Act, as amended, the Public Utility Regulatory Policies Act of
1978, as amended, and the Public Utility Holding Company Act of 1935, as
amended, changing governmental policies and regulatory actions, including those
of the Texas Public Utility Commission, the Railroad Commission of Texas, the
U.S. Nuclear Regulatory Commission and the Federal Energy Regulatory Commission,
with respect to matters including, but not limited to, approval of the
settlement plan proposed to the Texas Public Utility Commission to resolve all
major pending issues related to
55
the transition to competition, operation of nuclear power facilities, operation
and construction of other power generation facilities, operation and
construction of transmission facilities, acquisition, disposal, depreciation and
amortization of regulated assets and facilities, recovery of purchased gas
costs, decommissioning costs, return on invested capital for TXU Corp.'s
regulated businesses, and present or prospective wholesale and retail
competition.
TXU Corp.'s regulated businesses are subject to cost-of-service
regulation and annual earnings oversight. This regulatory treatment does not
provide any assurance as to achievement of earnings levels.
Risk factors specifically affecting the performance of TXU Corp.'s
nonregulated businesses in competitive wholesale and retail markets,
particularly in Texas, include continuity and reliability of generation plant
output, the price and supply of fuel and power purchased for resale,
transmission constraints and congestion expenses, competition from new sources
of generation, variability in demand for power, reduced market liquidity and/or
reduced number of wholesale counterparties, market penetration by other REPs
into TXU Corp.'s traditional service area, TXU Corp.'s ability to penetrate
other REP's traditional service areas, reliability of computer systems and other
processes maintained by ERCOT and availability and reliability of transmission
and distribution facilities owned and operated by others. Further, as TXU Corp.
may enter into long-term power purchase and power sales agreements, its
financial results could be adversely affected by changes in commodity market
prices.
TXU Corp. relies on access to financial markets as a significant source
of liquidity for capital requirements not satisfied by operating cash flows. The
inability to raise capital on favorable terms, particularly during times of
uncertainty in the financial markets, could impact TXU Corp.'s ability to
sustain and grow its businesses, which are capital intensive, and would likely
increase its capital costs. Further, concerns on the part of counterparties
regarding TXU Corp.'s liquidity and credit could limit its short-term trading
and risk management activities as well as its ability to enter into larger and
longer-dated transactions.
TXU Corp. uses derivative instruments, such as swaps, options, futures
and forwards to manage its commodity and financial market risks and engage in
trading activities. TXU Corp. could recognize financial losses as a result of
volatility in the market values of these contracts, or if a counterparty fails
to perform. TXU Corp.'s inability or failure to effectively hedge its assets or
positions against changes in commodity prices, interest rates, counterparty
credit risk or other risk measures could result in greater volatility of and/or
declines in future financial results. Results from trading and risk management
activities may be adversely affected as trading markets mature, or as activity
in markets declines due to lack of credit-worthy counterparties, reduced price
volatility and arbitrage opportunities or other factors.
The operation of power generation and energy transportation facilities
involves many risks, including start up risks, breakdown or failure of
equipment, transmission lines and pipelines, lack of sufficient capital to
maintain the facilities, the dependence on a specific fuel source or the impact
of unusual or adverse weather conditions or other natural events, as well as the
risk of performance below expected levels of output or efficiency. This could
result in lost revenues and/or increased expenses. Insurance, warranties or
performance guarantees may not cover any or all of the lost revenues or
increased expenses, including the cost of replacement power. In addition to
these risks, TXU Corp.'s nuclear units face certain risks that are unique to the
nuclear industry including additional regulatory actions up to and including
shut down of the units stemming from public safety concerns both at TXU Corp.'s
plants and at the plants of other nuclear operators. Breakdown or failure of a
TXU Corp. operating facility may prevent the facility from performing under
applicable power sales agreements which, in certain situations, could result in
termination of those agreements or incurring a liability for liquidated damages.
Natural disasters, war, terrorist acts and other catastrophic events may
impact TXU Corp.'s operations in unpredictable ways, including disruption of
power production and energy delivery activities, declines in customer demand,
commodity price increases and instability in the financial markets.
56
TXU Corp. is subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and health and safety that could, among other
things, restrict or limit the use of certain fuels required for the production
of electricity. There are capital, operating and other costs associated with
compliance with these environmental statutes, rules and regulations, and those
costs could increase in the future.
TXU Corp.'s ability to successfully and timely complete capital
improvements to existing facilities or other capital projects is contingent upon
many variables and subject to substantial risks. Should any such efforts be
unsuccessful, TXU Corp. could be subject to additional costs and/or the write
off of its investment in the project or improvement.
TXU Corp. is likely to encounter competition for acquisition opportunities
that may become available as a result of the consolidation of the US power
industry. In addition, TXU Corp. may be unable to identify attractive
acquisition opportunities at favorable prices or may not be successful in
integrating acquisitions.
TXU Corp. is subject to costs and other effects of legal and administrative
proceedings, settlements, investigations and claims. As described in Part II,
Item 1. Legal Proceedings, in October 2002, several lawsuits were filed in
federal and state courts in Texas against TXU Corp. and various of its officers
and directors, including a former officer. If any of these suits results in a
substantial monetary judgment against TXU Corp. or such officers and directors,
or is settled on unfavorable terms, TXU Corp.'s financial results could be
adversely affected.
TXU Corp. is subject to the effects of new, or changes in, income tax rates
or policies and increases in taxes related to property, plant and equipment and
gross receipts and other taxes. Further, TXU Corp. is subject to audit and
reversal of its tax positions by the Internal Revenue Service and state taxing
authorities.
TXU Corp.'s ability to obtain insurance, and the cost of and coverage
provided by such insurance, could be affected by events outside its control.
TXU Corp. is subject to employee workforce factors, including loss or
retirement of key executives, availability of qualified personnel, collective
bargaining agreements with union employees or work stoppage.
The market price of TXU Corp.'s common stock has been volatile recently,
and a variety of factors could cause the price to fluctuate in the future. In
addition to the matters discussed above and in TXU Corp.'s other filings under
the Securities Exchange Act of 1934, as amended, the following could impact the
market price for TXU Corp.'s common stock:
. developments related to TXU Corp.'s businesses;
. fluctuations in TXU Corp.'s results of operations;
. TXU Corp.'s debt to equity ratios and other leverage ratios;
. effect of significant events relating to the energy sector in general;
. sales of TXU Corp. securities into the marketplace;
. general conditions in the industry and the energy markets in which TXU
Corp. is a participant;
. the worldwide economy;
. an outbreak of war or hostilities;
. a shortfall in revenues or earnings compared to securities analysts'
expectations;
. changes in analysts' recommendations or projections; and
. actions by credit rating agencies.
Fluctuations in the market price of TXU Corp.'s common stock may be
unrelated to TXU Corp.'s performance. General market price declines or market
volatility could adversely affect the price of TXU Corp.'s common stock and the
current market price may not be indicative of future market prices.
The issues and associated risks and uncertainties described above are not
the only ones TXU Corp. may face. Additional issues may arise or become material
as the energy industry evolves. The risks and uncertainties
57
associated with these additional issues could impair TXU Corp.'s businesses in
the future. Reference is made to the discussion under Liquidity and Capital
Resources.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Corp. contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Corp. believes that in making
such statements its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Corp.'s 2001 Form 10-K, as well as general industry trends;
implementation of the 1999 Texas electricity deregulation legislation and other
legislation; power costs and availability; changes in business strategy,
development plans or vendor relationships; availability of qualified personnel;
changes in, or the failure or inability to comply with, governmental regulations
including, without limitation, environmental regulations; changes in tax laws;
implementation of new accounting standards; global financial and credit market
conditions, credit rating agency actions and capital market conditions; and
access to adequate transmission facilities to meet changing demands; among
others, that could cause the actual results of TXU Corp. to differ materially
from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Corp. undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for TXU
Corp. 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
actual results to differ materially from those contained in any forward-looking
statement.
58
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed below, the information required hereunder is not
significantly different from the information set forth in Item 7A. Quantitative
and Qualitative Disclosures About Market Risk included in TXU Corp.'s 2001 Form
10-K and is therefore not presented herein.
Interest Rate Risk -- The table below provides information concerning TXU
Corp.'s and its US subsidiaries' financial instruments as of September 30, 2002
that are sensitive to changes in interest rates, which include debt obligations,
interest rate swaps and trust securities. TXU Corp. has entered into interest
rate swaps under which it has agreed to exchange the difference between
fixed-rate and variable-rate interest amounts calculated with reference to
specified notional principal amounts at dates that generally coincide with
interest payments. For trust securities, the table presents cash flows based on
September 30, 2002 book value and the related weighted average rate by expected
redemption date. The weighted average rate is based on the rate in effect at the
reporting date. Capital leases and the effects of fair value hedges on long-term
debt are excluded from the table. In addition, the long-term debt of TXU Europe
has been excluded. See Note 4 to Financial Statements for a discussion of
changes in debt obligations.
Expected Maturity Date September 30, December 31,
----------------------------------------------------------------
(Millions of Dollars, Except Percentages) 2002 2001
------------ -----------
There- Fair Fair
2002 2003 2004 2005 2006 2007 After Total Value Value
---- ---- ---- ---- ---- ---- ----- ----- ----- -----
Long-term debt
(including current maturities)
Fixed rate $ 345 $ 615 $1,251 $ 386 $1,001 $ 366 $4,779 $ 8,744 $ 8,926 $ 7,582
Average interest rate 7.07% 6.69% 6.81% 7.01% 6.82% 5.98% 6.53% 6.63% -- --
Variable rate -- $ 724 $ 187 $ 1 $ 1 $ 2 $ 432 $ 1,347 $ 1,345 $ 2,953
Average interest rate -- 2.94% 6.19% 12.80% 12.80% 7.53% 1.75% 3.03% -- --
Equity linked debt securities
Fixed rate -- -- -- -- -- -- $ 440 $ 440 $ 385 $ 356
Average interest rate -- -- -- -- -- 5.80% 5.80% -- --
Variable rate -- -- -- -- $ 500 $ 500 -- $ 1,000 $ 866 $ 997
Average interest rate -- -- -- -- 2.10% 2.90% -- 2.50% -- --
Trust securities
Fixed rate -- -- -- -- -- $ 368 -- $ 368 $ 390 $ 386
Average interest rate -- -- -- -- -- 7.82% -- 7.82% -- --
Variable rate -- -- -- -- -- $ 147 -- $ 147 $ 150 $ 150
Average interest rate -- -- -- -- -- 3.95% -- 3.95% -- --
Preferred stock of subsidiary
subject to mandatory redemption
Fixed rate -- $ 10 $ 10 $ 1 -- -- -- $ 21 $ 15 $ 21
Average interest rate -- 6.68% 6.68% 6.98% -- -- -- 6.69% --
Interest rate swaps
(notional amounts)
Variable to fixed $ 973 $ 455 -- $ 754 $ 327 -- -- $ 2,509 $ (64) $ (75)
Average pay rate 6.90% 6.16% -- 6.70% 6.10% -- -- 6.60% -- --
Average receive rate 3.46% 4.86% -- 3.21% 5.13% -- -- 3.82% -- --
Fixed to variable $ 500 $ 235 -- -- $ 250 -- $ 100 $ 1,085 $ 1 $ 17
Average pay rate 1.87% 5.24% -- -- 1.90% -- 1.90% 2.61% -- --
Average receive rate 2.61% 5.86% -- -- 6.75% -- 7.25% 4.69% -- --
59
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of TXU Corp.'s management, including the principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this quarterly report. Based on the evaluation performed, TXU
Corp.'s management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective.
The events subsequent to September 30, 2002, as described in Note 3 to
Financial Statements, resulted in significant changes in the internal control
environment at TXU Europe. The changes reflect the following:
. the operations of TXU Europe are being managed by its board of
directors for the benefit of the creditors of TXU Europe, consistent
with UK law;
. operations comprising the majority of TXU Europe's revenues and
business operations were sold to Powergen on October 21, 2002; and
. approximately 1,900 employees in the UK, including the majority of
employees engaged in accounting processes and accountable for the
preparation of TXU Europe's financial statements, became employees of
Powergen effective October 21, 2002.
As a result of these factors, TXU Corp. no longer has authority over the
internal control processes at TXU Europe. Further, TXU Corp. expects to
write-off its entire investment in TXU Europe, including cumulative earnings
through September 30, 2002, in the fourth quarter of 2002, as discussed in Note
3 to Financial Statements. Otherwise, there have been no significant changes in
TXU Corp.'s internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation referenced above.
60
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal Proceedings -- In October 2002, seventeen separate lawsuits were
filed in the United States District Court for the Northern District of Texas,
and one in the United States District Court for the Eastern District of Texas,
against TXU Corp., Erle Nye and Michael J. McNally. Some of the lawsuits also
name former officer David W. Biegler as a defendant; however, based on the
alleged class period, Mr. Biegler is inappropriately named as a defendant. The
plaintiffs seek to represent classes of certain purchasers of TXU Corp. common
stock during specified class periods ranging from January 31, 2002 to October
11, 2002. No class or classes have been certified. The complaints allege
violations of the provisions of Section 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and
Sections 11 and 12 of the Securities Act of 1933, as amended, relating to
alleged materially false and misleading statements, including statements in
prospectuses related to the offering by TXU Corp. of its equity-linked
securities and common stock in June 2002. The individual named defendants are
current or former officers and/or directors of TXU Corp. While TXU Corp.
believes the claims are without merit and intends to vigorously defend these
lawsuits, it is unable to estimate any possible loss or predict the outcome of
the actions.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp., in the 116th Judicial District Court of
Dallas County, Texas against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of duties of loyalty and
good faith. The individual named defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. While TXU Corp. intends to vigorously defend
the lawsuit, it is unable to estimate any possible loss or predict the outcome
of the action.
On October 30, 2002, a lawsuit was filed in the 191st Judicial District
Court of Dallas County, Texas against TXU Corp. and Erle Nye alleging
negligence, negligent misrepresentation, fraud and statutory fraud. On November
12, 2002, the lawsuit was amended and the plaintiffs allege the same claims on
behalf of themselves and a putative class of persons or entities similarly
situated. No amount of damages have been specified. TXU Corp. expects to remove
this case to federal court and to seek to have it consolidated with the cases
pending in the Northern District of Texas, Dallas Division. While TXU Corp.
believes the claim is without merit and intends to vigorously defend the
lawsuit, it is unable to estimate any possible loss or predict the outcome of
the action.
61
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information.
99(a) Condensed Statements of Consolidated Income - Twelve Months
Ended September 30, 2002.
99(b) Chief Executive Officer Certification.
99(c) Chief Financial Officer Certification.
99(d) TXU Corp. and Subsidiaries Detail of Long-term Debt.
(b) Reports on Form 8-K filed since June 30, 2002:
Date of Report Item Reported
July 15, 2002 Item 5. Other Events and Regulation FD
Disclosure.
August 14, 2002 Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
October 17, 2002 Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
November 5, 2002 Item 2. Disposition of Assets.
62
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU CORP.
By /s/ Biggs C. Porter
--------------------------
Biggs C. Porter
Controller and Principal
Accounting Officer
Date: November 14, 2002
63
TXU CORP.
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of TXU Corp.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Erle Nye
----------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief
Executive
64
TXU CORP.
CERTIFICATION OF CFO
I, Michael J. McNally, Executive Vice President and Chief Financial
Officer of TXU Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michael J. McNally
--------------------------------------
Signature: Michael J. McNally
Title: Executive Vice President and
Chief Financial Officer