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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, 2001
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-11668
TXU Electric Company
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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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 12, 2001: 58,802,600 shares, without par
value.
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TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income-
Three and Nine Months Ended September 30, 2001 and 2000..................... 1
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2001 and 2000............................... 2
Condensed Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000.................................... 3
Notes to Financial Statements............................................... 4
Independent Accountants' Report............................................. 15
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 20
SIGNATURE.................................................................................. 21
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Millions of Dollars
Operating revenues .............................................................. $ 2,302 $ 2,444 $ 6,060 $ 5,479
------- ------- ------- -------
Operating expenses
Energy purchased for resale and fuel consumed .............................. 931 1,071 2,594 2,189
Operation and maintenance .................................................. 359 383 1,067 1,021
Depreciation and amortization .............................................. 155 153 463 456
Income taxes ............................................................... 179 194 358 346
Taxes other than income .................................................... 165 134 463 398
-------- -------- -------- -------
Total operating expenses ............................................. 1,789 1,935 4,945 4,410
-------- -------- -------- -------
Operating income ................................................................ 513 509 1,115 1,069
Other income (deductions)
Allowance for equity funds used during construction ........................ -- 3 2 6
Other income (deductions)-- net ............................................ (24) (4) (32) (12)
Income tax benefit (expense) ............................................... 7 1 10 --
------- ------- ------- -------
Total other income (deductions) ...................................... (17) -- (20) (6)
------- ------- ------- -------
Income before interest and other charges ........................................ 496 509 1,095 1,063
------- ------- ------- -------
Interest income ................................................................. 11 1 30 2
Interest expense and other charges
Interest ................................................................... 98 100 301 289
Distributions on TXU Electric Company obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding solely junior
subordinated debentures of TXU Electric Company ........................ 17 17 51 51
Allowance for borrowed funds used during construction and capitalized interest (5) (2) (12) (6)
------- ------- ------- -------
Total interest expense and other charges ............................ 110 115 340 334
------- ------- ------- -------
Net income ...................................................................... 397 395 785 731
Preferred stock dividends ....................................................... 3 2 8 7
------- ------- ------- -------
Net income available for common stock ........................................... $ 394 $ 393 $ 777 $ 724
======= ======= ======= =======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Millions of Dollars
Net income ...................................................................... $ 397 $ 395 $ 785 $ 731
------- ------- ------- -------
Other comprehensive loss--
Net change during period, net of tax effects:
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001 ................ -- -- -- --
Net change in fair value of derivatives ............................... -- -- (2) --
------- ------- ------- -------
Total ............................................................. -- -- (2) --
------- ------- ------- -------
Comprehensive income ............................................................ $ 397 $ 395 $ 783 $ 731
======= ======= ======= =======
See Notes to Financial Statements.
1
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------
2001 2000
------- -------
Millions of Dollars
Cash flows -- operating activities
Net income ................................................................. $ 785 $ 731
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization ......................................... 529 597
Deferred income taxes and investment tax credits -- net ............... (151) (102)
Reduction in revenues for earnings in excess of earnings cap .......... 139 247
Changes in operating assets and liabilities ........................... 273 (168)
------- -------
Cash provided by operating activities .................... 1,575 1,305
------- -------
Cash flows -- financing activities
Issuances of long-term debt ................................................ 521 65
Retirements/repurchases of securities:
Long-term debt ......................................................... (302) (161)
Common stock ........................................................... (629) (588)
Change in notes payable -- affiliates ...................................... (187) (78)
Preferred stock dividends paid ............................................. (8) (7)
Debt premium, discount, financing and reacquisition expenses ............... (13) (5)
------- -------
Cash used in financing activities .......................... (618) (774)
------- -------
Cash flows -- investing activities
Capital expenditures ........................................................ (581) (458)
Nuclear fuel ................................................................ (11) (47)
Other ....................................................................... (2) (15)
------- -------
Cash used in investing activities .......................... (594) (520)
------- -------
Net change in cash and cash equivalents ......................................... 363 11
Cash and cash equivalents -- beginning balance .................................. 21 4
------- -------
Cash and cash equivalents -- ending balance ..................................... $ 384 $ 15
======= =======
See Notes to Financial Statements.
2
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2001 December 31,
(Unaudited) 2000
----------- ------------
Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 384 $ 21
Accounts receivable ...................................................................... 334 287
Inventories-- at average cost ............................................................ 213 217
Other current assets ..................................................................... 80 38
-------- --------
Total current assets ............................................................. 1,011 563
Investments ................................................................................... 649 662
Property, plant and equipment-- net ............................................................ 15,438 15,324
Regulatory assets ............................................................................. 1,868 2,206
Deferred debits and other assets ............................................................... 140 61
--------- --------
Total assets ..................................................................... $ 19,106 $ 18,816
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable-- affiliates .............................................................. $ 115 $ 302
Long-term debt due currently ............................................................ 398 220
Accounts payable:
Affiliates ........................................................................ 30 278
Trade ............................................................................. 271 256
Taxes accrued .......................................................................... 714 243
Deferred income taxes ................................................................... 182 268
Other current liabilities ............................................................... 334 344
-------- --------
Total current liabilities ........................................................ 2,044 1,911
Accumulated deferred income taxes .............................................................. 3,194 3,237
Investment tax credits ........................................................................ 477 493
Other deferred credits and noncurrent liabilities .............................................. 434 407
Long-term debt, less amounts due currently ..................................................... 5,082 5,039
TXU Electric Company obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely junior subordinated debentures of TXU Electric Company ....................... 829 829
Preferred stock subject to mandatory redemption ................................................ 21 21
Contingencies (Note 5)
Shareholders' equity:
Preferred stock not subject to mandatory redemption ..................................... 115 115
-------- --------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: 2001 -- 58,802,600 and 2000 -- 79,749,600 ....................... 1,792 2,421
Retained earnings ....................................................................... 5,120 4,343
Accumulated other comprehensive loss .................................................... (2) --
--------- --------
Total common stock equity ............................................................ 6,910 6,764
-------- --------
Total shareholders' equity ....................................................... 7,025 6,879
-------- --------
Total liabilities and shareholders' equity ....................................... $ 19,106 $ 18,816
======== ========
See Notes to Financial Statements.
3
TXU ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Electric Company (TXU Electric) is an electric utility engaged in the
generation, purchase, transmission, distribution and sale of electric energy in
the north-central, eastern and western parts of Texas. As an integrated electric
utility, TXU Electric has only one reportable segment. TXU Electric is a
wholly-owned subsidiary of TXU Corp. (TXU), a Texas corporation. TXU is a global
energy services company that engages in electric and natural gas services,
electricity generation, merchant energy trading, energy marketing, energy
delivery, telecommunications, and other energy-related services primarily in the
United States (US), Europe and Australia.
Legislation was passed during the 1999 session of the Texas Legislature
that restructures the electric utility industry in Texas (1999 Restructuring
Legislation). As required by the 1999 Restructuring Legislation, TXU Electric
filed its business separation plan with the Public Utility Commission of Texas
(Commission). Under the business separation plan, which was approved by the
Commission on October 31, 2001, the generation business unit of TXU Electric,
TXU Generation Holdings Company, LLC (TXU Generation) and the retail business
unit of TXU Electric, TXU Energy Retail Company LP (TXU Energy Retail), will
become unregulated entities and will be allowed to compete for customers. The
transmission and distribution (T&D) business units of TXU Electric and TXU SESCO
Company (TXU SESCO) will become a separate regulated entity, TXU Electric
Delivery Company (TXU T&D).
As a result, effective January 1, 2002, TXU Electric will be an
intermediate holding company with TXU Energy Company (TXU Energy) and TXU T&D as
its new wholly-owned subsidiaries. TXU Electric will continue to be a
wholly-owned subsidiary of TXU.
TXU Energy will be formed as a Delaware limited liability company. It will
be a holding company for subsidiaries that will engage in the generation,
purchase, and sale of electricity; the purchase and sale of natural gas;
merchant energy trading; energy services and other businesses.
In addition, as of January 1, 2002, TXU Energy will acquire the following
businesses which are currently a part of the TXU system: the retail electric
provider (REP) businesses of TXU Electric and TXU SESCO; the merchant energy
trading business of TXU Gas Company (TXU Gas), (TXU Energy Trading); the energy
services businesses of other affiliates of TXU, (TXU Energy Retail); TXU Fuel
Company (TXU Fuel); and TXU Mining Company (TXU Mining).
Once the new companies are established, TXU Electric, TXU Generation, TXU
T&D and the REP business of TXU Energy Retail will contractually define the
rights and obligations of the companies as matters relating to the business
separation are resolved.
For periods through December 31, 2001, the generation, mining and fuel
operations will continue to be subject to rate regulation by the Commission.
Effective January 1, 2002, none of those businesses will be subject to rate
regulation, although certain potentially stranded cost amounts could be
recoverable from ratepayers.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements of
TXU Electric and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and, except for the adoption in the first quarter of 2001 of the new
accounting standard for derivatives discussed below, on the same basis as the
audited financial statements included in its Annual Report on Form 10-K for 2000
(2000 Form 10-K). In the opinion of management, all adjustments (consisting of
4
normal recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with US GAAP have been omitted
pursuant to the rules and regulations of the US Securities and Exchange
Commission. The results of operations for an interim period may not give a true
indication of results for a full year. Certain previously reported amounts have
been reclassified to conform to current classifications. All dollar amounts in
the financial statements and tables in the notes to financial statements are
stated in millions of US dollars unless otherwise indicated.
Derivative Instruments and Hedging Activities-- On January 1, 2001, TXU
Electric adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137 (June 1999) and by SFAS No. 138 (June 2000).
In accordance with the transition provisions of SFAS No. 133, TXU Electric
recorded, as of January 1, 2001, a cumulative effect of $.4 million after-tax as
a decrease to other comprehensive income to recognize the fair value of all
derivatives effective as cash-flow hedging instruments. For the period from
transition to September 30, 2001, none of this cumulative transition adjustment
has been reclassified into earnings.
Ongoing implementation issues being addressed by standard-setting groups
may affect the application of SFAS No. 133. In April 2001, the Financial
Accounting Standards Board (FASB) finalized a conclusion that contracts with
volume optionality do not qualify for the normal purchase and sale exception. In
June 2001, the FASB approved a number of implementation issues regarding the
normal purchase and sale exception. One of the issues applied exclusively to the
electric industry and provided for the normal purchase and sale exception under
specific circumstances. TXU Electric does not expect the new guidance to have a
material effect on its financial position. The FASB continues to address
specific aspects of the normal purchase and sale exception.
The terms of TXU Electric's derivatives that have been designated as hedges
match the terms of the underlying hedged items. As a result, TXU Electric
experienced no hedge ineffectiveness during the period.
As of September 30, 2001, it is expected that $1.7 million of after-tax net
losses now included in the net gains/losses from derivative instruments that are
accumulated in other comprehensive income will be reclassified into earnings
during the next twelve months. This amount represents the projected value of the
hedges over the next twelve months relative to what would be recorded if the
hedge transactions had not been entered into. The amount expected to be
reclassified is not a forecasted loss incremental to normal operations, but
rather it demonstrates the extent to which volatility in earnings (which would
otherwise exist) is mitigated through the use of cash flow hedges.
Capacity Auction -- In September 2001, pursuant to the requirements of the
1999 Restructuring Legislation, TXU Electric, and most other electric utility
companies in Texas that own generation production assets, auctioned 15 percent
of the output of that generation effective January 1, 2002. The form of contract
entered into as a result of that auction is a derivative pursuant to SFAS No.
133. The capacity auction for periods ended prior to December 31, 2003 will
directly affect amounts ultimately recovered from or returned to customers under
the 1999 Restructuring Legislation. As a result, regulatory assets and
liabilities will be established for movements in the fair value of the
derivatives.
New Accounting Standards-- SFAS No. 141, "Business Combinations", became
effective for TXU Electric on July 1, 2001. SFAS No. 141 requires the use of the
purchase method of accounting for business combinations initiated and completed
after June 30, 2001 and eliminates the use of the pooling-of-interests method.
SFAS No. 142, "Goodwill and Other Intangible Assets", is effective for TXU
Electric beginning 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.
5
In addition, SFAS No. 142 requires TXU Electric to complete a transitional
goodwill impairment test within six months from the date of adoption. It
establishes a new method of testing goodwill for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. Any goodwill
impairment loss during the transition period will be recognized as the
cumulative effect of a change in accounting principle. Subsequent impairments
will be recorded in operations.
As part of its implementation effort to adopt SFAS No. 142, TXU is in the
process of determining its reporting units as defined by SFAS No. 142, the fair
value of those reporting units and the allocation of goodwill to those reporting
units based upon the determined fair value. TXU has not yet determined the
amount of goodwill that will be allocated to its reporting units upon adoption
of SFAS No. 142.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Electric beginning January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets. The offset to any liability recorded is added to the
previously recorded asset and the additional amount is depreciated over the same
period as the long-lived asset for which the retirement obligation is
established. SFAS No. 143 also requires additional disclosures. TXU Electric
will change its accounting for nuclear decommissioning costs to conform to the
new standard.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", will be effective for TXU Electric beginning January 1, 2002. SFAS No.
144 establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by
sale and resolves significant implementation issues related to SFAS No. 121.
TXU Electric is evaluating the impact the adoption of these standards will
have on its financial position and results of operations.
3. CAPITALIZATION
Common Stock -- During the nine months ended September 30, 2001, TXU
Electric purchased and retired 20,947,000 shares of its issued and outstanding
common stock from TXU Corp. at a cost of $629 million.
TXU Electric Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts, Holding Solely Junior Subordinated Debentures of TXU Electric
(Trust Securities) -- The statutory business trust subsidiaries had Trust
Securities and Trust Assets outstanding as follows:
Trust Securities Trust Assets Maturity
------------------------------------------------------------- ----------------------------- --------
Units (000's) Amount Amount
----------------------------- ----------------------------- -----------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2001 2000 2001 2000 2001 2000
------ ------ -------- -------- -------- --------
TXU Electric Capital I
(8.25% Series) ........ 5,871 5,871 $ 141 $ 141 $ 155 $ 155 2030
TXU Electric Capital III
(8.00% Series) ........ 8,000 8,000 194 194 206 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Series)(a) (b) ........ 100 100 98 98 103 103 2037
TXU Electric Capital V
(8.175% Series)(b) .... 400 400 396 396 412 412 2037
------ ------ -------- -------- -------- --------
Total ......... 14,371 14,371 $ 829 $ 829 $ 876 $ 876
====== ====== ======== ======== ======== ========
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring in May 2002, effectively fixes the rate at 7.183%.
(b) On November 1, 2001, TXU Electric purchased $99 million of the TXU Electric
Capital IV securities and $392 million of the TXU Electric Capital V
securities in settlement of a tender offer.
6
TXU Electric owns the common Trust Securities issued by its subsidiary
trusts and has effectively issued a full and unconditional guarantee of each
such trust's Trust Securities.
Long-term Debt -- Certain variable rate debt of TXU Electric requires
periodic remarketing. Because TXU Electric intends to remarket these
obligations, and has the ability to refinance if necessary, they have been
classified as long-term debt. TXU Electric's first mortgage bonds are secured by
a mortgage and deed of trust with a major financial institution. Electric plant
of TXU Electric is generally subject to the lien of its mortgage.
On September 11, 2001, TXU Electric announced details of its debt
restructuring and refinancing plan pursuant to the requirements of the 1999
Restructuring Legislation. On January 1, 2002, TXU Electric's business will be
restructured into a regulated transmission and distribution (T&D) utility
business and an unregulated merchant energy business. TXU Electric will remain
as a holding company for the T&D business and the merchant energy business. The
merchant energy business will include power generation, energy trading and
portfolio management operations and a REP (see Note 4).
Under the debt restructure and refinancing plan, TXU Electric's tax-exempt
bond obligations will be assigned to TXU Energy, which will be a wholly-owned
subsidiary of TXU Electric. TXU Energy will be a holding company for TXU
Electric's merchant energy business. It has an indicative credit rating of BBB+
from Standard & Poors.
TXU Electric will retain its preferred stock, unsecured debt and preferred
securities or have those securities assumed by TXU Generation or TXU Energy. TXU
Electric expects that its first mortgage bonds outstanding on January 1, 2002
will be assumed by TXU T&D.
In August 2001, TXU Electric announced a tender offer program for twelve
series of outstanding tax-exempt bonds aggregating $682 million. The bonds,
issued by the Brazos River Authority and the Sabine River Authority of Texas,
funded a portion of certain pollution control facilities at TXU Electric's
electric generating stations. The tender offer expired October 30, 2001; and
$385 million of the bonds were tendered and accepted for purchase. TXU Electric
expects to redeem all the bonds that were not tendered. TXU Electric expects to
fund the purchase of the tendered and redeemed bonds with the proceeds from new
tax-exempt bonds to be issued through the Brazos and Sabine River Authorities.
TXU Electric expects to refund $485 million additional tax-exempt bonds
issued by the Brazos and Sabine River Authorities in the fourth quarter with the
proceeds of new tax-exempt bonds issued through those authorities.
On October 26, 2001, TXU Electric announced the completion of another
tender offer and waiver solicitation programs, for the following securities,
payment for which was made on November 1, 2001:
Security Outstanding Principal Amount Principal Amount Tendered
- -------- ---------------------------- -------------------------
7.17% Debentures.................................. $300 million $290 million
TXU Electric Capital IV
Floating Rate Capital
Securities........................................ $100 million $99 million
TXU Electric Capital V
8.175% Capital Securities......................... $400 million $392 million
The original terms of these securities would have required a transfer of
TXU Electric's obligations or the addition of another obligor under the
securities upon the restructuring of TXU Electric. The waivers received in
connection with the tenders permit TXU Electric to continue alone as obligor.
TXU Electric has the intent and ability to refinance the above described
transactions and as a result they are classified as long-term.
7
TXU Electric estimates that the debt restructuring process will result in a
one-time extraordinary charge to earnings between $70 million and $100 million
(after-tax) in the fourth quarter of 2001.
In July 2001, TXU Electric issued $400 million aggregate principal amount
of Floating Rate First Mortgage Bonds due June 15, 2003. The initial interest
rate, based on LIBOR plus a spread, was 4.39% and is reset quarterly. Proceeds
from the issuance were used for general corporate purposes.
In April 2001, the Brazos River Authority issued $121 million aggregate
principal amount of Pollution Control Revenue Refunding Bonds, Series 2001A, due
October 1, 2030 for TXU Electric. The Brazos River Authority 2001A bonds bear
interest at a rate of 4.95% per annum until the mandatory tender date of April
1, 2004. Proceeds from the issuance and sale of the Brazos River Authority 2001A
bonds were used to refund the entire principal amount of the 7-7/8% Brazos River
Authority Series 1991A bonds and $21 million of the Brazos River Authority
Taxable Series 1993 bonds.
4. REGULATION AND RATES
TXU Electric has ongoing proceedings outstanding with the Commission as of
September 30, 2001 that are in different stages of completion. TXU Electric
cannot predict the outcome of these proceedings. The status of the proceedings
as of September 30, 2001 is presented below.
In October 1999, TXU Electric filed an application with the Commission for
a financing order (Docket No. 21527) to permit the issuance by a special purpose
entity of $1.65 billion of transition bonds secured by payments designed to
enable TXU Electric to recover its generation-related regulatory assets and
other qualified costs in accordance with the 1999 Restructuring Legislation. The
proceeds received by TXU Electric from the issuance of the transition bonds are
to be used solely for the purpose of retiring utility debt and equity. On May 1,
2000, the Commission signed a final order rejecting TXU Electric's request for
the $1.65 billion and authorized only $363 million. TXU Electric filed an appeal
on May 2, 2000, with the Travis County, Texas District Court. On September 7,
2000, the District Court issued a final judgment that reversed part of the
Commission's financing order, affirmed other aspects of the Commission's
financing order, and ordered the case remanded to the Commission for further
proceedings consistent with the judgment. TXU Electric and various other parties
appealed this judgment directly to the Supreme Court of Texas. On June 6, 2001,
the Supreme Court of Texas issued what TXU Electric believes is a favorable
ruling that should allow it to securitize approximately $1.3 billion or more of
its regulatory assets and other qualified costs. The Supreme Court ruled in
favor of TXU Electric's contention that the Commission must consider regulatory
assets in the aggregate, rather than individually, in determining the amount of
securitization. The Supreme Court also reversed that part of the Commission's
order that utilized a longer regulated asset life for purposes of
present-valuing the benefits of securitization saying that the statute
contemplates a "far shorter recovery period for regulatory assets." In addition,
the Supreme Court ruled that the Commission's statements concerning the future
impact of securitization of loss on reacquired debt constituted an advisory and
premature finding. On October 18, 2001 the Supreme Court remanded the case to
the Commission for determination of the final amount of permitted
securitization. TXU Electric is unable to predict what this amount will be. The
commission has begun the remand proceeding (Docket No. 24892). TXU Electric
cannot predict when it will be completed, but is prepared to move quickly in
connection with the issuance of transition bonds once a final financing order is
issued by the Commission.
The constitutionality of the securitization provisions of the 1999
Restructuring Legislation under the Texas Constitution was challenged in
connection with a securitization request made by Central Power and Light
Company. In July 2000, the Travis County, Texas District Court issued its
judgment denying this appeal. This judgment was appealed directly to the Texas
Supreme Court. On June 6, 2001, the Texas Supreme Court affirmed the judgment of
the Travis County, Texas District Court denying this appeal and finding that the
securitization provisions are constitutional.
In March 2000, TXU Electric filed its application for approval of its
unbundled cost of service rates with the Commission (Docket No. 22350). In
addition to the actual T&D charges for delivering electricity, the cost of
service rates include a nuclear decommissioning fund charge and a system benefit
fund charge. In the March 2000 filing, TXU Electric's stranded costs were
estimated to be approximately $3.7 billion, including the regulatory assets that
were part of the Docket No. 21527 proceedings, addressed above, and amounts
related to
8
the remand of Docket No. 9300, addressed below. TXU Electric filed an updated
stranded cost estimate on August 28, 2000 to reflect various Commission
decisions made since Docket No. 22350 was filed. In the August 28, 2000 filing,
TXU Electric's stranded costs were estimated to be $2.8 billion. Subsequent to
the August 2000 filing, the Commission has required TXU Electric to revise the
stranded cost estimate to remove amounts related to regulatory assets, certain
environmental expenditures, and the remand of Docket No. 9300, which resulted in
a revised estimate of $14 million, including displaced worker costs. On March 7,
2001, the Commission issued an interim order requiring TXU Electric to file a
revised stranded cost estimate. On March 28, 2001, TXU Electric filed such
revised stranded cost estimate of negative $2.2 billion pursuant to that order.
On April 9, 2001, the Commission issued another interim order that required TXU
Electric to file a further revised stranded cost estimate. On April 18, 2001,
TXU Electric filed that required further revised estimate, which reflected
stranded costs of negative $2.7 billion. The estimate established in Docket No.
22350 is subject to a future market-based "true-up" in 2004. TXU Electric
strongly disagrees with the methodology required by the Commission pursuant to
which these stranded costs were calculated as being inconsistent with the 1999
Restructuring Legislation, and has appealed certain of the Commission's
decisions related to this matter to the Travis County, Texas District Court. On
June 4, 2001, the Commission issued an interim order that addressed TXU
Electric's charges for T&D service that will become effective when retail
competition begins. Among other things, that order requires TXU Electric to
reverse the effects of the T&D depreciation reclassifications and to refund,
over the period 2002-2008, both the 1998-2000 earnings in excess of the earnings
cap as well as an estimate of the 2001 earnings in excess of the earnings cap.
On June 20, 2001 TXU Electric filed a petition with the Texas Supreme Court
requesting that the Court issue a writ of mandamus compelling the Commission to
vacate the referenced portion of the order. Such petition is still pending. On
October 3, 2001, the Commission issued a final order in Docket No. 22350 that
approved, among other things, TXU Electric's charges for T&D service when retail
competition begins. TXU Electric plans to appeal portions of the final order.
TXU Electric is unable to predict the outcome of its appeals.
On July 31, 2001 the staff of the Commission notified TXU Electric and the
Commission that it disagreed with TXU Electric's computation of the level of
earnings in excess of the regulatory earnings cap for calendar year 2000. The
Commission's staff disagrees with TXU Electric's adjustment that removed $298
million of deferred federal income tax liability associated with under-recovered
fuel. On August 13, 2001, the Commission issued an order adopting the staff
position. TXU Electric disagrees with the Commission's decision and intends to
appeal it. If the appeal is not successful, TXU Electric will record an
after-tax charge of $23 million.
The Commission's final order (Order) in connection with TXU Electric's
January 1990 rate increase request (Docket No. 9300) was ultimately reviewed by
the Texas Supreme Court. As a result, an aggregate of $909 million of
disallowances with respect to TXU Electric's reacquisitions of minority owners'
interests in its Comanche Peak nuclear generating station, which had previously
been recorded as a charge to TXU Electric's earnings, was remanded to the
District Court with instructions that it be remanded to the Commission for
reconsideration on the basis of a prudent investment standard. On remand, the
Commission also was required to reevaluate the appropriate level of TXU
Electric's construction work in progress included in rate base in light of its
financial condition at the time of the initial hearing. In connection with the
settlement of another proceeding, the remand of Docket No. 9300 was stayed
through December 31, 1999. In April 2000, TXU Electric requested that the
District Court enter an order remanding Docket No. 9300 to the Commission. On
June 9, 2000, the District Court's order of remand was filed with the
Commission, and the Commission has assigned the remand proceeding Docket No.
22652. A hearing in the remand proceeding is currently scheduled for February
2002. A final decision is expected in 2002. TXU Electric cannot predict the
outcome of this proceeding.
9
Restructuring of TXU Electric
Restructuring -- Among other matters, the l999 Restructuring Legislation:
o provides that by January 1, 2002, each electric utility must separate
(unbundle) its business into the following units: a power generation
company, a REP and a T&D company or separate T&D companies;
o authorizes competition beginning January 1, 2002 in the retail and
generation markets for electricity;
o provides for the recovery of generation-related regulatory assets and
generation-related and purchased power-related costs that are in
excess of market value (stranded costs);
o requires utilities to use the Commission administrative Excess Costs
Over Market (ECOM) model to determine estimated stranded costs;
o provides for a "true up" in 2004 of stranded costs based on market
determinations;
o requires reductions in nitrogen oxides (NOx) and sulfur dioxides (SO2)
emissions;
o requires a rate freeze, excluding cost of fuel, for all retail
customers until January 1, 2002 and certain rate reductions for
residential and small commercial customers for up to five years
thereafter;
o provides that earnings in excess of a regulatory earnings cap be used
as mitigation (reduction) to the cost of nuclear production assets
during the rate freeze period;
o sets certain limits on capacity owned and controlled by power
generation companies;
o required that by September 1, 2000, each electric utility separate its
customer energy services business activities that are otherwise
already widely available in the competitive market from its regulated
activities;
o provides that wholesale revenues for 2002 and 2003 be based on the
ECOM model;
o provides for payments to the T&D company in certain circumstances
described below;
o provides for recovery of actual fuel costs incurred through December
31, 2001;
o provides for recovery of capital costs incurred before May 1, 2003 to
improve air quality; and
o provides that costs associated with nuclear decommissioning
obligations continue to be recovered from retail customers as a
non-bypassable charge until the units are decommissioned.
As required by the 1999 Restructuring Legislation, in January 2000, TXU
Electric filed its business separation plan with the Commission. This business
separation plan and the March 2000 application to the Commission, addressed
above, lay the foundation for TXU Electric to take part in retail competition to
begin in the Texas electricity market. In order to satisfy its obligations to
unbundle its business pursuant to the 1999 Restructuring Legislation and
consistent with its business separation plan approved by the Commission on
October 3 and, as amended October 31, 2001, as of January 1, 2002 TXU Electric
intends to transfer:
o its electric T&D assets to TXU T&D, which will be a regulated utility,
o its electric power generation assets to subsidiaries of TXU Generation,
which will be an unregulated company, and
o its customers to a REP (TXU Energy Retail), which will also be an
unregulated company.
TXU Generation and TXU Energy Retail have been formed in connection with
the restructuring and will be wholly-owned subsidiaries of TXU Energy. TXU
Energy will begin operations as of January 1, 2002. TXU Electric is a holding
company for TXU Energy and TXU T&D.
In addition, as of January 1, 2002, TXU Energy will acquire the following
businesses which are currently part of the TXU system: the REP of TXU SESCO
Company; the merchant energy trading business of TXU Gas (TXU Energy Trading);
the energy services businesses of other affiliates of TXU; TXU Fuel; and TXU
Mining.
The diagrams below are a summary of the structure of the TXU system before
the unbundling and its anticipated structure, including the principal
subsidiaries of TXU Energy, after the unbundling and restructuring:
10
[THE FOLLOWING TEXT APPEARS AS A FLOW CHART]
Organization Chart with 2 columns
Left Column
Title (centered over column) - BEFORE RESTRUCTURING
Top box, centered, labeled - TXU
Next level - 3 boxes labeled (left to right) - TXU Gas, TXU Electric,
TXU Energy Services
Subheading over third box - (INDIRECT SUBSIDIARY)
Next level - 1 box (under first box) labeled - TXU Energy Trading
Right Column
Title (centered over column) - AFTER RESTRUCTURING
Top box, centered, labeled - TXU
Next level - 2 boxes, labeled - TXU Gas, TXU Electric
Next level - 2 boxes under second box, labeled - TXU Energy,
TXU Energy Delivery
Next level - 3 boxes under first box, labeled - TXU Generation,
TXU Energy Trading, TXU Energy Retail
References to TXU Energy Retail's historical service territory will include
TXU Electric's and TXU SESCO Company's historical service territories and
references to TXU Electric's, TXU Energy's or TXU Energy Retail's retail
customers or REP will include TXU SESCO Company's retail customers or REP.
The 1999 Restructuring Legislation allows for customers representing up to
5% of each investor-owned utility's load in all customer classes to participate
in a pilot program in 2001 by taking action to select their REP. All retail
electricity customers of investor-owned utilities may take action to select
their REP for service starting January 1, 2002. On that date, all of TXU
Electric's customers who do not choose a different REP will automatically become
customers of TXU Energy Retail.
On January 1, 2002, TXU Energy Retail must lower the electric retail rates
charged to residential and small commercial customers in its historical service
territory to rates that are 6% less than the rates that were in effect on
January 1, 1999, as adjusted for fuel factor charges. These lower rates are
known as the "price to beat" rates. TXU Energy Retail may not charge rates to
those customers that are different from the price to beat rates until the
earlier of January 1, 2005 or until 40% of the electric power consumed by
customers in those respective customer classes is supplied by competing REPs.
After that time, TXU Energy Retail may offer alternative competitive rates, but
they must also continue to make the price to beat rates available for
residential and small commercial customers, adjusted for fuel factor charges,
until January 1, 2007. After January 1, 2002, TXU Energy Retail may request
twice a year that the Commission increase the fuel factor component of the price
to beat rate if the existing fuel factor does not adequately reflect significant
changes in the market price of natural gas and purchased energy used to serve
retail customers. Unaffiliated REPs entering TXU Energy Retail's historical
service territory will be allowed to sell electricity to residential and small
commercial customers at any price.
Electric retail rates charged to large commercial and industrial customers
are not subject to the price to beat rates and may be competitively negotiated
at any price by any REP, including those affiliated with an existing utility.
All REPs in Texas will be allowed at any time to enter long-term, bilateral
contracts with individual wholesalers, making the cost of retail power more
predictable and less subject to the volatility of short-term markets.
11
All REPs in a T&D service area served by a certificated utility will pay
the same rates and other charges for T&D, whether or not they are affiliated
with the T&D utility for that area. The T&D rates that will be in effect as of
January 1, 2002 for each utility will be based upon the resolution of rate cases
brought before the Commission, such as TXU Electric's Docket No. 22350 discussed
above.
The 1999 Restructuring Legislation requires each T&D utility, its
affiliated REP, and its affiliated power generation company to jointly file to
finalize stranded costs and to reconcile those costs with the estimate of
stranded costs developed in the unbundled cost of service proceeding conducted
during 2000-2001, such as TXU Electric's Docket No. 22350. Such a "true-up"
proceeding will be filed after January 10, 2004, on a schedule and under
procedures to be determined by the Commission. Any resulting stranded costs will
be collected through the non-bypassable charges of the T&D utility.
For the purposes of determining the final stranded cost figure, the 1999
Restructuring Legislation requires TXU Generation to quantify the market value
of its assets, and hence its stranded costs, using one or more of the following
methods: (i) sale of assets, (ii) stock valuation, (iii) partial stock
valuation, (iv) exchange of assets or (v) ECOM.
Any true-up proceeding would also require:
o TXU Generation to reconcile, and either credit or bill to the T&D
utility, any difference between the price of power determined through
the capacity auction process conducted pursuant to the Commission's
requirements and the power cost projections that were employed for the
same time period in the ECOM model to estimate stranded costs in the
Docket No. 22350 proceeding. This reconciliation (wholesale clawback)
generally would affect all of the generation of TXU Generation for the
period 2002-2003;
o TXU Electric's affiliated REP (TXU Energy Retail) to reconcile and
credit to the affiliated T&D utility any positive difference between
the price to beat, reduced by the non-bypassable charge, and the
prevailing market price of electricity during the same time period to
the extent that the price to beat exceeded the market price of
electricity. This reconciliation (retail clawback) for the applicable
customer class is not required if 40% of the electric power consumed
by customers in that class is supplied by competing REPs before
January 1, 2004. If a reconciliation is required, the amount credited
cannot exceed an amount equal to the number of residential or small
commercial customers served by the affiliated T&D utility that are
buying electricity from the affiliated REP at the price to beat on
January 1, 2004, minus the number of new customers obtained outside
the service area, multiplied by $150; and
o the Commission to conduct a review, to the extent any amount of
regulatory assets included in a transition charge or competition
transition charge had not been previously approved by the Commission,
to determine whether these regulatory assets were appropriately
calculated and constituted reasonable and necessary costs. If the
Commission finds that the amount of regulatory assets is subject to
modification, a credit or other rate adjustment will be made to the
T&D utility's non-bypassable rates.
The exact method that will be employed to calculate the wholesale and
retail clawbacks is the subject of an ongoing Commission rulemaking and has not
yet been determined. TXU Electric is unable to predict the outcome of any
true-up proceeding.
Traditionally structured utilities are subject to cost-of-service rate
regulation. By contrast, the rates charged by affiliated REPs will not be
subject to regulation except for the price to beat requirement and the retail
clawback provision within their historical service area. The results of an
affiliated REP's operations will be largely dependent upon the amount of gross
margin, or headroom, available in its price to beat. The available headroom will
equal the difference between (i) the price to beat and (ii) the sum of
non-bypassable charges and the price the affiliated REP pays for power to meet
its price to beat load. The result could be a positive or negative number. The
larger the amount of positive headroom, the more incentive new market entrants
will have to provide services in a given market. The initial price to beat will
not be established until late in 2001.
12
To encourage competition in the generation market, each power generation
company with at least 400 Megawatts (MW) or more of installed generating
capacity that is unbundled from an integrated electric utility in Texas is
required to sell at auction entitlements to 15% of the output of its installed
generating capacity (currently 3,175 MW for TXU Generation). This obligation
continues until January 1, 2007, unless before that date the Commission
determines that other REPs are selling electric power in an amount equal to at
least 40% of the electric power consumed in 2000 by residential and small
commercial customers in the service area of an affiliated T&D utility. This
capacity auction allows REPs to purchase power either through purchases in the
wholesale power markets or through mandated capacity auctions. A REP cannot
purchase entitlements sold by its affiliated power generation company. The first
auction in Texas was held in September 2001. There was significant interest in
the entitlements being auctioned, and the auction of two-year, one-year and
monthly entitlements required to be sold, was successful. The next auction will
be in March 2002.
5. CONTINGENCIES
Financial Guarantees -- TXU Electric has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy
and has agreed, in effect, to guarantee the principal, $20 million at September
30, 2001, and interest on bonds issued to finance the reservoirs from which the
water is supplied. The bonds mature at various dates through 2011 and have
interest rates ranging from 5-1/2% to 7%. TXU Electric is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to TXU Electric, of $4 million annually
for the years 2001 through 2003, $7 million for 2004 and $1 million for 2005. In
addition, TXU Electric is obligated to pay certain variable costs of operating
and maintaining the reservoirs. TXU Electric has assigned to a municipality all
contract rights and obligations of TXU Electric in connection with $42 million
principal amount of bonds outstanding at September 30, 2001, that had been
issued for similar purposes and previously guaranteed by TXU Electric. TXU
Electric is, however, contingently liable in the unlikely event of default by
the municipality.
General -- TXU Electric is involved in various legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management,
should not have a material effect upon its financial position, results of
operations or cash flows.
6. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts receivable -- At September 30, 2001 and December 31, 2000,
accounts receivable are stated net of uncollectible accounts of $14 million and
$7 million, respectively.
Sale of Receivables -- Prior to July 30, 2001, TXU Electric had facilities
to sell to financial institutions, on an ongoing basis, undivided interests in
up to an aggregate of $500 million of customer accounts receivable. On July 30,
2001, that arrangement was terminated and TXU Electric entered into a facility
with a bankruptcy remote subsidiary of TXU Gas, Receivables Company, which
purchases customer receivables from TXU Gas and TXU Electric and sells undivided
interests in receivables of up to $600 million to financial institutions. At
September 30, 2001, TXU Electric had sold $576 million of interests in customer
accounts receivable.
13
Inventories by major category--
September 30,
2001 December 31,
(Unaudited) 2000
--------- ---------
Materials and supplies ......................... $ 154 $ 147
Fuel stock ..................................... 59 70
--------- ---------
Total inventories .......................... $ 213 $ 217
========= =========
Property, plant and equipment--
September 30,
2001 December 31,
(Unaudited) 2000
--------- ---------
In service
Production ................................. $ 15,717 $ 15,658
Transmission ............................... 1,780 1,760
Distribution ............................... 5,931 5,723
General .................................... 511 506
--------- ---------
Total .................................. 23,939 23,647
Less accumulated depreciation .............. 8,346 7,958
--------- ---------
Net of accumulated depreciation ........ 15,593 15,689
Construction work in progress .................. 520 271
Nuclear fuel (net of accumulated amortization:
2001-- $768; 2000-- $716) .................... 139 178
Held for future use ............................ 22 22
Reserve for regulatory disallowances ........... (836) (836)
--------- ---------
Net property, plant and equipment ........ $ 15,438 $ 15,324
========= =========
14
INDEPENDENT ACCOUNTANTS' REPORT
TXU Electric Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Electric Company and subsidiaries (TXU Electric) as of September 30, 2001, and
the related condensed statements of consolidated income and comprehensive income
for the three-month and nine-month periods ended September 30, 2001 and 2000 and
of consolidated cash flows for the nine-month periods ended September 30, 2001
and 2000. These financial statements are the responsibility of TXU Electric's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Electric as of December 31, 2000, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report dated February 1, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 12, 2001
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Significant Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues (millions):
Base rate ................................... $ 1,492 $ 1,542 $ 3,604 $ 3,622
Transmission service ........................ 46 42 135 126
Fuel ........................................ 793 990 2,305 1,928
Earnings in excess of regulatory earnings cap (116) (147) (139) (247)
Other ....................................... 87 17 155 50
-------- -------- -------- --------
Total operating revenues ............ $ 2,302 $ 2,444 $ 6,060 $ 5,479
======== ======== ======== ========
Electric energy sales (gigawatt-hours) ............... 32,567 33,138 82,366 80,698
Degree days (% of normal):
Cooling ...................................... 99% 119% 102% 118%
Heating ...................................... -- -- 104% 66%
Three Months Ended September 30, 2001
TXU Electric Company's (TXU Electric's) operating revenues decreased by
$142 million, or 6%, to $2.3 billion for the three months ended September 30,
2001. The decrease was driven by lower fuel costs, but also reflected lower
energy sales (gigawatt-hours) due to cooler summer weather. Partially offsetting
the decline was an increase in customers and higher off-system sales. Earnings
in excess of the regulatory earnings cap were $116 million in 2001 and $147
million in 2000.
Gross margin (operating revenues less energy purchased for resale and fuel
consumed) decreased by $2 million to $1.4 billion for the third quarter of 2001.
Gross margin in the third quarter of 2001 was essentially flat compared to the
2000 period, reflecting the lower fuel costs passed through to revenues.
Operation and maintenance expense decreased by $24 million, or 6%, to $359
million for the third quarter of 2001 as a result of a $50 million write-off of
regulatory assets in the third quarter of 2000, partially offset by increases in
several expense categories, including bad debts, outside services and insurance.
Other operating expenses increased $18 million, or 4%, to $499 million for
the third quarter of 2001. The increase reflected higher gross receipts taxes
and regulatory assessments due to higher revenues in prior periods, partially
offset by a decrease in income taxes due to tax differences associated with the
reversal, pursuant to a regulatory order, of transmission and distribution
depreciation expense that had been redirected to generation assets.
Operating income increased by $4 million, or 1%, to $513 million for the
third quarter of 2001 as the decrease in operation and maintenance expense more
than offset the increase in other operating expenses and the decrease in gross
margin.
Other income (deductions) totaled $17 million in charges in the third
quarter of 2001. The current year includes a $21 million write-off of regulatory
assets allocated to the wholesale class as a result of a regulatory order.
Interest expense net of interest income decreased $15 million, or 13%, to
$99 million in the third quarter of 2001 due largely to lower interest rates.
16
Net income increased $2 million, or 1%, to $397 million for the third
quarter of 2001 reflecting higher operating income and lower interest expense,
partially offset by the write-off of regulatory assets.
Nine Months Ended September 30, 2001
TXU Electric's operating revenues increased by $581 million, or 11%, to
$6.1 billion for the nine months ended September 30, 2001. The growth reflected
increases in fuel costs, energy sales despite the effect of cooler summer
weather, and customers. Earnings in excess of the regulatory earnings cap were
$139 million in 2001 and $247 million in 2000.
Gross margin increased by $176 million, or 5%, to $3.5 billion in the 2001
nine-month period. The increase was primarily due to higher energy sales.
Operation and maintenance expense increased by $46 million, or 5%, to $1.1
billion in the 2001 nine-month period. The increase reflects higher costs in
several expense categories, including generation maintenance, bad debts and
transmission costs. Partially offsetting the increase was the effect of a $50
million write-off of regulatory assets in 2000. TXU Electric expects annual
total operation and maintenance expense to be within levels permitted in
connection with calculating the regulatory earnings cap.
Other operating expenses increased $84 million, or 7%, to $1.3 billion. The
increase primarily reflects a $65 million increase in taxes other than income
due to higher state and local gross receipts taxes and higher regulatory
assessments as a result of higher revenues.
Operating income increased by $46 million, or 4%, to $1.1 billion for the
2001 nine-month period. Increased gross margin was partially offset by higher
operation and maintenance expense and other operating expenses.
Other income (deductions) totaled $20 million in charges in the nine-month
period of 2001 and $6 million in 2000. The current year includes a $21 million
write-off of regulatory assets allocated to the wholesale class as a result of a
regulatory order.
Interest expense net of interest income decreased by $22 million, or 7%, to
$310 million in the 2001 nine-month period largely due to lower interest rates.
Net income increased by $54 million, or 7%, to $785 million for the 2001
nine-month period reflecting higher operating income and lower interest expense,
partially offset by the write-off of regulatory assets.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities before changes in operating assets
and liabilities for the nine months ended September 30, 2001 was $1.3 billion
compared with $1.5 billion for the same period last year. Changes in operating
assets and liabilities provided $274 million in the first nine months of 2001
compared to using $168 million in the first nine months of 2000. Changes in
operating assets and liabilities for the current period were caused by
fluctuations in working capital and the collection of significant
under-recovered fuel charges in the 2001 period.
Cash used in financing activities in the first nine months of 2001 was $618
million compared with $774 million in the first nine months of 2000. Financing
activities in the first nine months of 2001 included the repurchase of $629
million of common stock from TXU Corp. (TXU), the issuance of $521 million of
long-term debt, the retirement of $302 million of long-term debt and the
repayment of $187 million in advances to TXU.
17
Cash used in investing activities for the first nine months of 2001 totaled
$594 million versus $520 million for the same period in 2000. Capital
expenditures were $581 million and $458 million for the first nine months of
2001 and 2000, respectively. The increase in capital expenditures in the 2001
includes $100 million for projects to ease transmission congestion.
At September 30, 2001, TXU Electric had no borrowings outstanding under the
US Credit Agreements described in Note 4 of TXU Electric's Annual Report on Form
10-K (2000 Form 10-K). Letters of credit outstanding under the US Credit
Agreements totaled $251 million for TXU Electric. The US Credit Agreements
primarily support commercial paper borrowings of TXU.
On September 11, 2001, TXU Electric announced details of its restructuring
and refinancing plan pursuant to the requirements of the 1999 Restructuring
Legislation. On January 1, 2002, TXU Electric's businesses will be restructured
into a regulated transmission and distribution (T&D) utility business and an
unregulated merchant energy business. The merchant energy business will include
power generation, energy trading and portfolio management operations and a
retail electric provider (REP) operations.
Under the debt restructure and refinancing plan, TXU Electric's tax-exempt
bond obligations will be assigned to TXU Energy Company (TXU Energy), a company
to be formed as a wholly-owned subsidiary of TXU Electric. TXU Energy will be a
holding company for TXU Electric's merchant energy business. It has an
indicative credit rating of BBB+ from Standard & Poors.
TXU Electric will retain its preferred stock, unsecured debt and preferred
securities or have those securities assumed by TXU Generation or TXU Energy. TXU
Electric expects that its first mortgage bonds outstanding on January 1, 2002
will be assumed by TXU T&D.
In August 2001, TXU Electric announced a tender offer program for twelve
series of outstanding tax-exempt bonds aggregating $682 million. The bonds,
issued by the Brazos River Authority and the Sabine River Authority of Texas,
funded a portion of certain pollution control facilities at TXU Electric's
electric generating stations. The tender offer expired October 30, 2001; and
$385 million of the bonds were tendered and accepted for purchase. TXU Electric
expects to redeem all the bonds that were not tendered. TXU Electric expects to
fund the purchase of the tendered and redeemed bonds with the proceeds from new
tax-exempt bonds to be issued through the Brazos and Sabine River Authorities.
TXU Electric expects to refund $485 million additional tax-exempt bonds
issued by the Brazos and Sabine River Authorities in the fourth quarter with the
proceeds of new tax-exempt bonds issued through those authorities.
On October 26, 2001, TXU Electric announced the completion of tender offer
and waiver solicitation programs, for the following securities, payment for
which was made on November 1, 2001:
Security Outstanding Principal Amount Principal Amount Tendered
-------- ---------------------------- -------------------------
7.17% Debentures............... $300 million $290 million
TXU Electric Capital IV
Floating Rate Capital
Securities..................... $100 million $99 million
TXU Electric Capital V
8.175% Capital Securities...... $400 million $392 million
The original terms of these securities would have required a transfer of
TXU Electric's obligations or the addition of another obligor under the
securities upon the restructuring of TXU Electric. The waivers received in
connection with the tenders permit TXU Electric to continue alone as obligor.
It is estimated that the debt restructuring process will result in one-time
charges to TXU Electric earnings of between $70 million and $100 million
(after-tax) in the fourth quarter of 2001.
18
In July 2001, TXU Electric issued $400 million aggregate principal amount
of Floating Rate First Mortgage Bonds due June 15, 2003. The initial interest
rate, based on LIBOR plus a spread was 4.39% and is reset quarterly. Proceeds
from the issuance were used for general corporate purposes.
In April 2001, the Brazos River Authority issued $121 million aggregate
principal amount of Pollution Control Revenue Refunding Bonds, Series 2001A, due
October 1, 2030 for TXU Electric. The Brazos River Authority 2001A bonds bear
interest at a rate of 4.95% per annum until the mandatory tender date of April
1, 2004. Proceeds from the issuance and sale of the Brazos River Authority 2001A
bonds were used to refund the entire principal amount of the 7-7/8% Brazos River
Authority Series 1991A bonds and $21 million of the Brazos River Authority
Taxable Series 1993 bonds.
Financing Arrangements -- TXU Electric may issue and sell additional debt
and equity securities as needed, including the possible future issuance and sale
of up to $25 million of Cumulative Preferred Stock and up to an aggregate of
$924 million of additional Cumulative Preferred Stock, First Mortgage Bonds,
debt securities and/or preferred securities of subsidiary trusts, all of which
are currently registered with the Securities and Exchange Commission for
issuance pursuant to Rule 415 under the Securities Act of 1933.
Regulation and Rates
Legislation was passed during the 1999 session of the Texas Legislature to
restructure the electric utility industry in Texas (1999 Restructuring
Legislation). The 1999 Restructuring Legislation provided for a Pilot Project
(Pilot) to begin limited competition on June 1, 2001. It allowed up to five
percent of retail electric customers of electric utilities transitioning to
competition to choose to participate in the Pilot and select a competing REP.
Customers were not required to participate in the Pilot but were able to elect
to participate through an application process established by the Public Utility
Commission of Texas (Commission). The Pilot started on July 31, 2001 after
several delays by the Commission and is scheduled to run until the end of 2001.
Although TXU Electric cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in the TXU
Electric 2000 Form 10-K and this Form 10-Q, which might significantly alter it's
financial position, results of operations or cash flows. See Note 4 to Financial
Statements.
CHANGES IN ACCOUNTING STANDARDS
Changes in Accounting Standards -- See Note 2 to Financial Statements for
discussion of changes in accounting standards.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Electric contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Electric believes that in making
any such statement its expectations are based on reasonable assumptions, any
such statement involves uncertainties and is qualified in its entirety by
reference to factors contained in the Forward-Looking Statements section of Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Electric's 2000 Form 10-K, as well as general industry trends;
implementation of the 1999 Restructuring Legislation and other legislation;
power costs and availability; changes in business strategy, development plans or
vendor relationships; availability of qualified personnel; changes in, or the
failure or inability to comply with, governmental regulations, including,
without limitation, environmental regulations; changes in tax laws; and access
to adequate transmission facilities to meet changing demands, among others, that
could cause the actual results of TXU Electric to differ materially from those
projected in such forward-looking statements.
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Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Electric undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for TXU
Electric to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information as set forth in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk included in the TXU Electric 2000 Form 10-K and is therefore
not presented herein. Changes in the fair value of TXU Electric's cash flow
hedges for interest rate swaps, that were discussed in the TXU Electric 2000
Form 10-K, are recorded as a component of Comprehensive Income as a result of
implementation of SFAS No. 133. Other than as described therein, since December
31, 2000 there has been basically no change in the contractual terms and
notional amounts of interest rate contracts as disclosed in the TXU Electric
2000 Form 10-K.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 Letter from independent accountants as to unaudited interim financial
information.
99 Condensed Statements of Consolidated Income-- Twelve Months Ended
September 30, 2001 and 2000.
(b) Reports on Form 8-K filed since June 30, 2001:
Date of Report Item Reported
-------------- -------------
August 31, 2001 Item 5. Other Events and Regulation FD Disclosure.
September 21, 2001 Item 5. Other Events and Regulation FD Disclosure.
October 25, 2001 Item 5. Other Events and Regulation FD Disclosure.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU ELECTRIC COMPANY
By /s/ Biggs C. Porter
------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: November 12, 2001
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