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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 1, 2002
TXU US HOLDINGS COMPANY
(FORMERLY TXU ELECTRIC COMPANY)
(Exact Name of Registrant as Specified in its Charter)
TEXAS 1-11668 75-1837355
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(Address of Principal Executive Offices, Including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - (214)-812-4600
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ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
TXU ENERGY
TXU US Holdings Company (US Holdings), formerly TXU Electric Company, is
providing the following financial information to meet the ongoing needs of
customers, counterparties and others for financial information concerning its
unregulated energy business, TXU Energy Company LLC (TXU Energy), created as a
result of the deregulation of the electric utility industry in Texas, which
became effective January 1, 2002. The generation and certain retail operations
of US Holdings, the energy trading business and unregulated
commercial/industrial retail gas operations of TXU Gas Company and other energy
related businesses of TXU Corp. (TXU) were transferred to TXU Energy; and the
transmission and distribution business of US Holdings and TXU SESCO Company were
transferred to Oncor Electric Delivery Company (Oncor), a regulated entity. Both
TXU Energy and Oncor are wholly-owned subsidiaries of US Holdings, which is a
wholly-owned subsidiary of TXU.
The relationships of the entities affected by the restructuring of US
Holdings due to deregulation and their rights and obligations with respect to
their collective assets and liabilities are contractually described in a master
separation agreement executed in December 2001 (Business Separation Agreement),
which provides, in general, that the economic impacts of the transition from a
regulated to a competitive environment will be borne by TXU Energy.
On December 31, 2001, US Holdings filed a settlement plan with the Texas
Public Utility Commission (Commission) that, if approved, will resolve all major
pending issues related to US Holdings' transition to competition and will
supersede certain ongoing lawsuits and regulatory proceedings that principally
are related to deregulation. See Regulatory Settlement Plan in Note 3 to
Financial Statements for more information. The settlement plan has the
endorsement of the major customer groups in the state of Texas. Parties to the
settlement plan include the Commission staff, the Office of Public Utility
Counsel, a coalition of cities served by Oncor, Texas Industrial Energy
Consumers, Texas Retailers Association, and a new retail electric provider (REP)
for the state. The settlement plan does not remove regulatory oversight of
Oncor's business. The settlement plan must be approved by the Commission, which
has held a hearing and has received briefs from the parties. A decision could be
made as early as April 18, 2002. While TXU Energy is unable to predict the
outcome of these proceedings, under the Business Separation Agreement, TXU
Energy has agreed to hold Oncor harmless from the results of any disallowance of
generation-related items, such as securitization of regulatory assets, stranded
costs and fuel reconciliation. TXU Energy is unable to predict what the impact
will be on its financial position and results of operations if the settlement
plan is not approved. (See Note 3 to Financial Statements for a discussion of
the items affected by the settlement plan.)
Certain expenses of US Holdings were not allocated to either TXU Energy or
Oncor. These consisted primarily of legal, consulting and other costs associated
with the restructuring of US Holdings ($25 million in 2001 and $36 million in
2000), as well as interest expense and preferred stock dividends related to debt
and preferred stock, respectively, that will remain at US Holdings ($24 million
in 2001, $23 million in 2000 and $24 million in 1999).
TXU Energy is managed as a single, integrated energy business, primarily
within the United States (US) and also in parts of Canada; consequently, there
are no separate reportable business segments. The following is a brief
description of the principal operations of TXU Energy:
o GENERATION - one of the largest and lowest variable cost producers of
electricity in Texas with 21,092 MW of owned or leased power production
capacity at 23 power production stations, 18 of them fueled by gas and
oil, four by lignite, and one by nuclear fuel. (In November 2001, TXU
announced an agreement to sell two of these stations with a combined
capacity of 2,334 megawatts.)
o ENERGY TRADING - one of the largest volume energy traders in the US
and parts of Canada, managing price and volume risks associated with
power generation, natural gas pipeline and storage management
1
and retail sales of electricity and gas, as well as other risks
inherent in TXU Energy's integrated business.
o ENERGY SERVICES - one of the largest competitive retailers of energy
and energy services in Texas and the US. TXU Energy provides energy
services as a REP in all areas of the Electric Reliability Council of
Texas (ERCOT) and may expand to other selected US markets where
customer choice is available. Also, TXU Energy intends to sell bundled
energy-related products and services in selected commercial/industrial
markets in North America. TXU Energy provides power to about 2.7
million customers.
Other operations of TXU Energy include:
o MINING - one of the largest mining companies in the US, engaged in
surface mining and recovery of lignite used by TXU Energy in the
generation of electricity.
o FUEL - engaged in the acquisition, storage and delivery, through an
owned natural gas pipeline system, of fuel gas used primarily for TXU
Energy's generation of electricity.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by US Holdings contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although US Holdings believes that in making
any such statement its expectations are based on reasonable assumptions, any
such statement involves uncertainties and is qualified in its entirety by
reference to factors contained in the Forward-Looking Statements section of Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in US Holdings' 2001 Form 10-K, as well as general industry trends;
implementation of legislation passed during the 1999 session of the Texas
Legislation designed to restructure the electric utility industry in Texas and
other legislation; power costs and availability; changes in business strategy,
development plans or vendor relationships; availability of qualified personnel;
changes in, or the failure or inability to comply with, governmental
regulations, including, without limitation, environmental regulations; changes
in tax laws; access to adequate transmission facilities to meet changing
demands; competition for new business opportunities; legal and administrative
proceedings and settlements; significant changes in critical accounting policies
material to TXU Energy; and actions of rating agencies, among other factors,
that could cause the actual results of US Holdings or TXU Energy to differ
materially from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and US Holdings undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for US
Holdings to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
2
The following financial information of TXU Energy is being filed by US
Holdings for the purpose of providing historical financial information about TXU
Energy's businesses after giving effect to the transactions described in the
Notes to Financial Statements. Had TXU Energy actually existed as a separate
entity, its results of operations and financial position could have differed
materially from those included in the following financial statements. In
addition, future results of TXU Energy's operations and financial position could
differ materially from the historical results presented.
TABLE OF CONTENTS
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TXU ENERGY COMPANY LLC FINANCIAL INFORMATION PAGE
Independent Auditors' Report............................... 4
Statements of Combined Income for the years
ended December 31, 2001, 2000 and 1999..................... 5
Statements of Combined Comprehensive Income
for the years ended December 31, 2001, 2000 and 1999....... 5
Statements of Combined Cash Flows for the years
ended December 31, 2001, 2000 and 1999..................... 6
Combined Balance Sheets-December 31, 2001 and 2000......... 7
Statements of Combined Member Interests.................... 8
Notes to Financial Statements.............................. 9
Signature........................................................ 33
3
INDEPENDENT AUDITORS' REPORT
TXU Energy Company LLC:
We have audited the accompanying combined balance sheets of TXU Energy Company
LLC (TXU Energy) and the businesses that comprise TXU Energy, as of December 31,
2001 and 2000, and the related statements of combined income, comprehensive
income, cash flows and member interests for each of the three years in the
period ended December 31, 2001. The combined financial statements include the
accounts of TXU Energy and related businesses as discussed in Note 1 to the
financial statements. These businesses were operated by subsidiaries of TXU
Corp. under common ownership and common management for the periods presented.
These financial statements are the responsibility of TXU Energy's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of TXU Energy and related businesses
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
April 15, 2002
4
TXU ENERGY COMPANY LLC
STATEMENTS OF COMBINED INCOME
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- ------
MILLIONS OF DOLLARS
Operating revenues....................... $10,867 $10,858 $7,364
------- ------- ------
Operating expenses
Energy purchased for resale and fuel
consumed............................. 8,208 8,510 5,019
Operation and maintenance.............. 973 807 770
Depreciation and amortization.......... 397 391 445
Taxes other than income................ 109 123 127
------- ------- ------
Total operating expenses......... 9,687 9,831 6,361
------- ------- ------
Operating income......................... 1,180 1,027 1,003
Other income (deductions)-- net.......... (56) 19 (7)
------- ------- ------
Income before interest, other charges,
income tax and extraordinary items..... 1,124 1,046 996
------- ------- ------
Interest income.......................... 38 6 3
Interest expense and other charges
Interest............................ 237 262 270
Capitalized interest................ (14) (5) (4)
------- ------- ------
Total interest expense and
other charges.................. 223 257 266
------- ------- ------
Income before income taxes and
extraordinary items 939 795 733
Income tax expense....................... 279 219 224
------- ------- ------
Income before extraordinary items........ 660 576 509
Extraordinary items, net of taxes........ (153) - -
------- ------- ------
Net income............................... $ 507 $ 576 $ 509
======= ======= ======
STATEMENTS OF COMBINED COMPREHENSIVE INCOME
Net income............................... $ 507 $ 576 $ 509
Other comprehensive income
Net change during period, net of tax effect
Cash flow hedges:
Cumulative transition adjustment as of
January 1, 2001...................... - - -
Net change in fair value of derivatives 16 - -
Amounts realized in earnings
during the year - - -
------- ------- ------
Change................................. 16 - -
------- ------- ------
Comprehensive income..................... $ 523 $ 576 $ 509
======= ======= ======
See Notes to Financial Statements.
5
TXU ENERGY COMPANY LLC
STATEMENTS OF COMBINED CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- ------
MILLIONS OF DOLLARS
Cash flows-- operating activities
Net income............................. $ 507 $ 576 $ 509
Adjustments to reconcile net income
to cash provided by (used in)
operating activities:
Loss on extraordinary items.......... 153 - -
Depreciation and amortization........ 508 507 583
Deferred income taxes and
investment tax credits-- net....... (155) 164 (47)
Gains from sale of assets............ - (28) -
Reduction of revenues for
earnings in excess of
regulatory earnings cap............ 34 305 92
Net effect of unrealized
mark-to-market valuation
(gains)/losses..................... (314) 19 7
Other................................ 22 8 9
Changes in operating assets and
liabilities:
Affiliate accounts receivable/
payable--net..................... 9 37 (84)
Accounts receivable................ 241 (799) 70
Inventories........................ (4) 11 12
Accounts payable................... (631) 852 (140)
Interest and taxes accrued......... 46 15 17
Margin deposits.................... 227 (225) (6)
Due from/to Oncor Electric
Delivery for net regulatory
assets for under - recovered
fuel revenue..................... 568 (813) (91)
Energy trading assets and
liabilities--net (19) 25 (56)
Other-- net........................ (20) 16 (22)
------- ------- ------
Cash provided by operating
activities 1,172 670 853
------- ------- ------
Cash flows-- financing activities
Increase in debt allocated
from US Holdings..................... 2,788 65 127
Retirements/repurchases of securities:
Subsidiary senior notes.............. - (100) -
Debt allocated from US Holdings...... (2,420) (415) (124)
Repurchase of member interests......... (404) (553) (369)
Advances from affiliates-- net......... (568) 766 (349)
Change in notes payable to banks....... - (9) 6
Debt premium, discount, financing,
reacquisition expenses and other..... (161) (6) (5)
------- ------- ------
Cash used in financing activities (765) (252) (714)
------- ------- ------
Cash flows-- investing activities
Capital expenditures................... (330) (264) (90)
Nuclear fuel........................... (39) (87) (54)
Proceeds from sale of assets........... - 5 -
Investments............................ (37) (58) 9
------- ------- ------
Cash used in investing activities (406) (404) (135)
------- ------- ------
Net change in cash and cash equivalents.. 1 14 4
Cash and cash equivalents--beginning
balance................................ 19 5 1
------- ------- ------
Cash and cash equivalents--ending
balance................................ $ 20 $ 19 $ 5
======= ======= ======
See Notes to Financial Statements.
6
TXU ENERGY COMPANY LLC
COMBINED BALANCE SHEETS
ASSETS
DECEMBER 31,
-------------------
2001 2000
---- ----
MILLIONS OF DOLLARS
Current assets:
Cash and cash equivalents...................... $ 20 $ 19
Accounts receivable............................ 808 1,049
Inventories-- at average cost.................. 260 256
Energy trading assets.......................... 791 1,412
Margin deposits................................ 4 231
Other current assets........................... 115 17
------ -------
Total current assets................... 1,998 2,984
Investments.......................................... 757 743
Property, plant and equipment-- net.................. 10,354 10,462
Energy trading assets................................ 418 287
Deferred debits and other assets..................... 130 80
------ -------
Total assets........................... $13,657 $14,556
======= =======
LIABILITIES AND MEMBER INTERESTS
Current liabilities:
Advances from affiliates...................... $ 250 $ 701
Long-term debt due currently.................. 123
Accounts payable:
Affiliates............................... 25 16
Trade.................................... 612 1,243
Energy trading liabilities.................... 602 1,396
Taxes accrued................................. 155 87
Deferred income taxes......................... - 261
Other current liabilities..................... 138 147
------- -------
Total current liabilities.............. 1,905 3,851
Accumulated deferred income taxes.................... 2,125 2,149
Investment tax credits............................... 397 414
Energy trading liabilities........................... 247 276
Other deferred credits and noncurrent liabilities.... 530 367
Due to Oncor Electric Delivery....................... 787 182
Long-term debt....................................... 3,454 3,196
Contingencies (Note 13)
Member interests..................................... 4,212 4,121
------- -------
Total liabilities and member interests. $13,657 $14,556
======= =======
See Notes to Financial Statements.
7
TXU ENERGY COMPANY LLC
STATEMENTS OF COMBINED MEMBER INTERESTS
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- ------
MILLIONS OF DOLLARS
Member Interest:
Capital Accounts:
Balance at beginning of year........... $4,121 $ 4,098 $3,958
Net income.......................... 507 576 509
Reduction in member interest -
amount of repurchases of
common stock of US Holdings
allocated to TXU Energy (404) (553) (369)
Conversion of capital to advances... (28) - -
------- ------- ------
Balance at end of year................. 4,196 4,121 4,098
------- ------- ------
Accumulated other comprehensive
income, net of tax effects:
Cash flow hedges (SFAS No. 133):
Balance at beginning of year..... - - -
Change during the year........ 16 - -
------- ------- ------
Balance at end of year........... 16 - -
------- ------- ------
Total member interests....... $4,212 $4,121 $4,098
======= ======= ======
See Notes to Financial Statements.
8
TXU ENERGY COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Energy Company LLC (TXU Energy) was formed as a Delaware limited
liability company in the fourth quarter of 2001. TXU Energy was created as a
result of the deregulation of the electric utility industry in Texas, which
became effective January 1, 2002. TXU Energy is a wholly-owned subsidiary of TXU
US Holdings Company (US Holdings), formerly TXU Electric Company, which is a
wholly-owned subsidiary of TXU Corp. (TXU). TXU Energy's operations are
conducted principally through the following subsidiaries effective January 1,
2002: TXU Generation Holdings Company LLC (TXU Generation); TXU Energy Trading
Company LP (TXU Energy Trading); TXU Energy Retail Company LP (TXU Energy
Retail); TXU Energy Solutions Company LP; TXU Fuel Company (TXU Fuel) and two
coal mining subsidiaries (TXU Mining).
TXU Energy is engaged primarily in the generation of electricity, wholesale
energy trading and risk management and retail energy sales and services
primarily in the United States (US) and also in parts of Canada. TXU Energy is
managed as a single, integrated energy business; consequently there are no
separate reportable business segments.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructures the electric utility industry in Texas
(1999 Restructuring Legislation). Among other matters, the l999 Restructuring
Legislation required that by January 1, 2002, each electric utility separate
(unbundle) its business into the following: power generation operations, a REP
and a transmission and distribution (T&D) company or separate T&D companies.
(See Note 3 for information concerning restructuring of the electric utility
industry in Texas.) As a result, TXU restructured certain of its businesses as
of January 1, 2002, and began to participate in retail competition in the Texas
electricity market on January 1, 2002.
As required by the 1999 Restructuring Legislation, US Holdings filed its
business separation plan with the Public Utility Commission of Texas
(Commission). This business separation plan and the March 2000 application to
the Commission laid the foundation for TXU Energy to take part in retail
competition in the Texas electricity market as planned on January 1, 2002. In
order to satisfy its obligations to unbundle its business pursuant to the 1999
Restructuring Legislation and consistent with its business separation plan as
amended and approved by the Commission on October 31, 2001, as of January 1,
2002, US Holdings transferred:
o its regulated electric T&D business to Oncor Electric Delivery Company
(Oncor), which is a wholly-owned subsidiary of US Holdings,
o its unregulated electric power generation business to TXU Energy, and
o its retail customers to an unregulated subsidiary REP of TXU Energy.
Also on January 1, 2002, the regulated electric T&D business of TXU SESCO
Company, a subsidiary of TXU, was transferred to Oncor. In addition, as of
January 1, 2002, TXU Energy acquired the following businesses from within the
TXU system: the REP of TXU SESCO Company; the energy trading business and the
unregulated commercial/industrial retail gas operations of TXU Gas Company (TXU
Gas); and the energy management services businesses and other affiliates of TXU,
including the fuel procurement and coal mining businesses that service the
generation operations.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a master separation agreement executed in
December 2001 (Business Separation Agreement).
9
The diagrams below summarize the principal US legal entities and their
relationships before and after the restructuring.
CHART
Organization Chart with 2 columns
Left Column
Title (centered over column) - BEFORE RESTRUCTURING
Top box, centered, labeled - TXU
Next level - 2 boxes, labeled (left to right) - TXU Gas, TXU Electric
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 (left to right) - TXU Gas, US Holdings*
Next level - 2 boxes under second box, labeled (left to right) -
TXU Energy, Oncor
Next level - 3 boxes under first box, labeled (left to right) -
TXU Generation, TXU Energy Trading, TXU Energy
Retail
- ----------------------------
*Formerly TXU Electric Company
Basis of Presentation and Combination - The financial information for
generation and certain retail operations included within the combined financial
statements was derived from the historical financial statements of US Holdings.
US Holdings maintained expense accounts for each of its component operations.
However, revenues of US Holdings consisted of a bundled rate for all operations
combined. Historical generation revenues were determined by unbundling the
generation component of revenues from US Holdings' bundled rate charged to
customers, which also included a T&D component, and adding any
generation-related revenues from ancillary services and wholesale energy
activity. Such historical revenues earned in the regulatory environment may not
be indicative of revenues that will be earned in the competitive environment
effective January 1, 2002. Allocation of revenues between TXU Energy and Oncor
also reflected consideration of return on invested capital, which is regulated
for Oncor. 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. In connection with the Business Separation
Agreement, TXU Energy and Oncor have agreed on how the related advances and
intercompany accounts will be settled. This resulted in the reclassification of
$437 million, as an intercompany payable to Oncor, to be paid over the term of
Oncor's securitization bonds (see Note 3), with an offset to advances to
affiliates. The amounts for prior years have been reclassified to conform to the
current proposed settlement terms. There was no effect on earnings or member
interests as a result of such reclassification. Certain other reclassifications
have been made to previously reported assets, liabilities and cash flows to
conform to the current year presentation.
The financial information for the energy trading and the unregulated
commercial/industrial retail gas operations included in the combined financial
statements was derived from the historical financial statements of TXU Gas.
Revenues, expenses, and assets were specifically identified by component
operation and disaggregated accordingly.
10
The financial information of the fuel and coal mining subsidiaries and the
energy services businesses included in the combined financial statements was
derived from the separate historical financial statements of those entities.
Certain expenses of US Holdings were not allocated to either TXU Energy or
Oncor. These consisted primarily of legal, consulting and other costs associated
with the restructuring of US Holdings ($25 million in 2001 and $36 million in
2000), as well as interest expense and preferred stock dividends related to debt
and preferred stock, respectively, that will remain at US Holdings ($24 million
in 2001, $23 million in 2000 and $24 million in 1999).
Management believes that the allocation methodologies used are reasonable.
Had TXU Energy actually existed as a separate entity, its results of operations
and financial position could have differed materially from those included in the
combined financial statements included herein. In addition, future results of
operations and financial position could differ materially from the historical
results presented.
The Business Separation Agreement provides, in general, that the economic
impacts of the transition from a regulated to a competitive environment will be
borne by TXU Energy, including stranded costs as finally determined and other
related items. Oncor will collect from (or refund to) REPs, through a
non-bypassable tariff (or credit), amounts associated with the unregulated
businesses' transition to competition and remit to (or collect from) TXU Energy
any such amounts which have not been securitized. These combined financial
statements reflect the transfer from TXU Energy to Oncor of all regulatory
assets and liabilities that will be subject to finalization at true-up of
stranded costs, as required by the 1999 Restructuring Legislation, with a
corresponding amount recorded as due from/to Oncor. Any changes to the
regulatory assets and liabilities and any final determination of stranded costs
at true-up will result in adjustments to the amount due from or to Oncor and
will be reflected in earnings of TXU Energy as an extraordinary item in
accordance with Statement of Financial Accounting Standards (SFAS) No. 101
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71." Certain aspects of TXU Energy's generation operations
are subject to continued regulation and true-up proceedings as further discussed
in Note 3. Issues with respect to stranded costs and true-up and the application
of such regulation and proceedings to TXU Energy will be handled differently in
the event the settlement plan proposed to the Commission is not approved. (See
Regulatory Settlement Plan in Note 3.)
2. SIGNIFICANT ACCOUNTING POLICIES
Combination -- The combined financial statements were prepared on the basis
described above and are in conformity with accounting principles generally
accepted in the United States of America. All intercompany items and
transactions between the combined companies have been eliminated. All dollar
amounts in the financial statements and notes to financial statements are stated
in millions of US dollars unless otherwise indicated.
Use of Estimates -- The preparation of TXU Energy's financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense, including
mark-to-market valuation adjustments, during the period. In the event estimates
or assumptions prove to be different from actual amounts, adjustments are made
in subsequent periods to reflect more current information. In addition, see Note
1 for discussion of estimates used and methodologies employed to derive the
combined financial statements.
Investments -- TXU Energy classifies all of its investments in marketable
securities as available for sale. Deposits in an external trust fund for nuclear
decommissioning are carried at fair value in the balance sheet in investments
with the changes in fair value recorded as a liability, to reflect the statutory
nature of the trust. (See Note 13 - Nuclear Decommissioning.)
Goodwill -- Goodwill represents the excess of the purchase price paid over
the estimated fair value of the assets acquired and liabilities assumed for each
company acquired and was amortized over periods to 40 years. Annual goodwill
amortization of $2 million ceased after December 31, 2001, and remaining
11
goodwill is subject to an impairment-based review procedure. (See Changes in
Accounting Standards below.) At December 31, 2001 and 2000, goodwill of $50
million and $52 million, respectively, is included in investments and is stated
net of accumulated amortization of $4 million and $2 million, respectively.
12
Included in the balance sheet of TXU Gas at December 31, 2001 is $773
million of goodwill, net of amortization, arising from TXU's 1997 acquisition of
ENSERCH Corporation (renamed TXU Gas Company). The energy trading business and
the unregulated commercial/industrial retail gas operations included in the
accompanying financial statements were originally part of ENSERCH Corporation.
As discussed below under Changes in Accounting Standards, TXU is determining the
amount of goodwill to be allocated to reporting units. A substantial portion of
the goodwill previously associated with TXU Gas is expected to be allocated to
TXU Energy as of January 1, 2002.
Property, Plant and Equipment -- Generation utility plant is stated at
original cost less certain regulatory disallowances. The cost of generation
property additions prior to July 1, 1999 includes labor and materials,
applicable overhead and payroll-related costs and an allowance for funds used
during construction. Generation property additions subsequent to July 1, 1999
and other property are stated at cost.
Valuation of Long-Lived Assets -- TXU Energy evaluates the carrying value of
long-lived assets to be held and used when events and circumstances warrant such
a review. The carrying value of long-lived assets would be considered impaired
when the projected undiscounted cash flows are less than the carrying value. In
that event, a loss would be recognized based on the amount by which the carrying
value exceeds the fair market value. Fair market value is determined primarily
by available market valuations or, if applicable, discounted cash flows. See
Changes in Accounting Standards below for a discussion of changes in valuation
criteria for long-lived assets effective January 1, 2002.
As a result of the 1999 Restructuring Legislation, in 1999, US Holdings
performed an impairment analysis of generation assets under the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires a company to
forecast future net cash flows from operating an asset, on an undiscounted basis
excluding carrying costs, and to compare the sum of those cash flows with the
net carrying value of the asset. Under this test, no impairment existed for
accounting purposes.
Derivative Instruments -- See Changes in Accounting Standards below for the
change in accounting for derivatives that became effective January 1, 2001. TXU
Energy enters into derivative instruments, including options, swaps, futures,
forwards and other contractual commitments, for trading and non-trading purposes
in order to manage market risks related to changes in interest rates and
commodity prices.
The impact of changes in the market value of the effective portion of any
derivative instruments designated and documented as accounting hedges is
deferred in the balance sheet and recognized in earnings when the hedged
transactions are realized, and the ineffective portion is recognized in
earnings.
Prior to adoption of SFAS No. 133 in January 2001, gains and losses on
non-trading derivative instruments effective as hedges were deferred and
recorded as a component of the underlying transaction when settled. Also, the
energy trading business used mark-to-market accounting for trading activities,
which is consistent with the required accounting under SFAS No. 133 for trading
transactions that are derivatives. If a derivative contract meets the criteria
for the normal purchase or sale exception, TXU Energy can elect not to treat it
as a derivative. The use of the normal purchase or sale exception and the hedge
accounting designation are elections that can be made by management if certain
strict criteria for derivatives are met and documented.
Revenue Recognition -- TXU Energy records revenues for generation and retail
and other energy sales and services under the accrual method. However, the fair
market values of sales contracts determined to be derivative instruments and not
designated as normal sales under SFAS No. 133 are recognized upon inception
under mark-to-market accounting. Unrealized mark-to-market valuations are
recorded net as revenues. Retail electricity and gas sales revenues that are
recognized when services are provided to customers on the basis of periodic
cycle meter readings include an estimated accrual for the value of electricity
and gas provided from the meter reading date to the end of the period. Energy
trading revenues are recorded using the mark-to-market method of accounting.
13
The financial statements presented reflect adjustments to revenues for
over/under recovered fuel costs. To the extent fuel costs incurred exceeded
regulated fuel factor amounts included in customer billings, TXU Energy has
recorded revenues on the basis of its ability and intent to obtain regulatory
approval for rate surcharges on future customer billings to recover such
amounts. Conversely, to the extent fuel costs incurred have been less than
amounts included in customer billings, revenues have been reduced on the basis
that TXU Energy has been required to adjust rates in future customer billings.
Following deregulation of the Texas market, fuel factor amounts will, if
necessary, be applied prospectively; consequently, recorded revenues will no
longer reflect such fuel cost adjustments.
Mark-to-Market Accounting -- In accordance with Emerging Issues Task Force
(EITF) Issue No. 98-10, TXU Energy accounts for its energy trading activities
using the mark-to-market method of accounting. SFAS No. 133 also requires
mark-to-market accounting for derivatives unless the normal purchase or sale
exception or hedge accounting are elected. Under the mark-to-market method,
energy-related trading contracts and derivative instruments are recorded at
current fair value on the balance sheet as either energy trading assets or
liabilities, and any unrealized gains or losses resulting from period-to-period
changes in the current fair values are recorded net in revenues. TXU Energy
values its portfolio of energy-related trading contracts, which include
volumetric forecasts, and derivative instruments at current market prices,
commonly referred to as forward price curves. Such market prices normally are
based on independent broker quotes and other trading information and are
validated routinely under TXU Energy's risk management control policies. The
availability of quoted market prices is dependent on the type of commodity
(e.g., natural gas, electricity, etc.), time period specified and location of
delivery. In the absence of quoted market prices, forward price curves are
developed based on the available trading information or through the use of
standard accepted modeling techniques based on market fundamentals (e.g.,
supply/demand, replacement cost, etc.).
All trading positions are marked initially to the mid-point of the bid/ask
spread (the mid-market value) discounted using a risk-free interest rate.
Liquidity valuation adjustments are recorded as reductions of the mid-market
value of open positions and increase as liquidity decreases. In computing the
liquidity valuation adjustments, each market (or curve) is split into liquid and
illiquid portions. The liquid portion varies by region, time period and
commodity. Generally, the liquid period is supported by broker quotes and
frequent trading activity. In illiquid periods, normally little or no market
information exists, and the fair value is generally estimated through market
modeling techniques. However, as a matter of policy, TXU Energy generally does
not recognize any income or loss from these illiquid periods.
A performance reserve is also established for costs to complete transactions
and for various administrative and overhead costs associated with settling the
contracts in the future, such as risk management, scheduling and accounting. In
addition, a credit reserve is recorded to allow for the risk that the value of
contracts may not be collected from the counterparties. Mark-to-market valuation
adjustments and reserves (liquidity, performance and credit) are reflected in
TXU Energy's balance sheet as a reduction in the value of the energy trading
asset.
Depreciation of Property, Plant and Equipment -- Depreciation of TXU
Energy's property, plant and equipment is calculated on a straight-line basis
over the estimated service lives of the properties. Depreciation also includes
an amount for decommissioning costs for the Comanche Peak nuclear powered
electric generating station, which is being accrued over the lives of the units.
Depreciation as a percentage of average depreciable property for TXU Energy
approximated 2.7% for 2001, 2.6% for 2000 and 2.9% for 1999. See Changes in
Accounting Standards below for a discussion of changes in accounting for nuclear
decommissioning effective January 1, 2003.
TXU Energy capitalizes computer software costs in accordance with Statement
of Position 98-1; "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use". These costs are being amortized over periods ranging
from five to seven years.
Amortization of Nuclear Fuel -- The amortization of nuclear fuel in the
reactors (net of regulatory disallowances) is calculated on the
units-of-production method and is included in nuclear fuel expense.
14
Income Taxes --TXU Energy's operations are included in the consolidated
federal income tax return of TXU, and federal income taxes are allocated to
subsidiaries of TXU based upon their respective taxable income or loss.
Investment tax credits are amortized to income over the estimated service lives
of the properties. Deferred income taxes are provided for temporary differences
between the book and tax basis of assets and liabilities.
Cash Equivalents -- For purposes of reporting cash and cash equivalents,
temporary cash investments purchased with a remaining maturity of three months
or less are considered to be cash equivalents.
Changes in Accounting Standards-- On January 1, 2001, TXU Energy adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 137 and SFAS No. 138. (See Note 10 to Financial Statements.)
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", became effective for TXU Energy for
transfers on or after April 1, 2001. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires additional disclosures, which have been incorporated in
the financial statements. The adoption of SFAS No. 140 did not affect reported
results.
SFAS No. 141, "Business Combinations", became effective for TXU Energy 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", became effective for
TXU Energy on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units and the discontinuance of goodwill
amortization.
In addition, SFAS No. 142 requires completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Any goodwill impairment
loss during the transition period will be recognized as the cumulative effect of
a change in accounting principle. Subsequent impairments, if any, will be
recorded in operations.
As part of its effort to implement SFAS No. 142, 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.
TXU is in the process of determining the amount of goodwill to be transferred to
TXU Energy upon adoption of SFAS No. 142.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Energy on January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets. The offset to any liability recorded is added to the
previously recorded asset and the additional amount is depreciated over the same
period as the long-lived asset for which the retirement obligation is
established. SFAS No. 143 also requires additional disclosures. TXU Energy 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", became effective for TXU Energy on January 1, 2002. SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by
sale and resolves significant implementation issues related to SFAS No. 121.
For standards not yet adopted, TXU Energy is evaluating the potential impact
on its financial position and results of operations.
15
3. RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY IN TEXAS
1999 RESTRUCTURING LEGISLATION -- Legislation passed during the 1999 session
of the Texas Legislature restructured the electric utility industry in Texas and
provided for a transition to competition. Among other matters with accounting
consequences, the legislation:
o provided that by January 1, 2002, each electric utility had to unbundle
its business into the following units: a power generation company, a
REP and a T&D company or separate T&D companies;
o authorized 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 provides for a true up in 2004 of stranded costs based on market
determinations;*
o required a rate freeze, excluding cost of fuel, for all retail
customers until January 1, 2002 and requires certain rate reductions
and a price to beat for residential and small commercial customers for
up to five years thereafter;
o provided that earnings in excess of a regulatory earnings cap be used
as mitigation (reduction) to the cost of nuclear production assets;*
o provides that wholesale revenues for 2002 and 2003 be based on the
Excess Cost Over Market (ECOM) model;*
o provides for a reduction in T&D rates (as a retail clawback) in certain
circumstances described below;*
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.
- -------------
*The application of these provisions to TXU Energy will change in the event the
settlement plan proposed to the Commission is approved. See Regulatory
Settlement Plan below.
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a
settlement plan with the Commission that, if approved, will resolve all major
pending issues related to US Holdings' transition to competition and will
supersede certain ongoing lawsuits and regulatory proceedings that are
principally related to deregulation. The settlement plan has the endorsement of
the major customer groups in the State of Texas. Parties to the settlement
include the Commission staff, the Office of Public Utility Counsel, a coalition
of cities served by Oncor, Texas Industrial Energy Consumers, Texas Retailers
Association, and a new REP for the state. The settlement plan does not remove
regulatory oversight of Oncor's business. The settlement plan must be approved
by the Commission, which has held a hearing and has received briefs from the
parties. A decision may be made as early as April 18, 2002. While TXU Energy is
unable to predict the outcome of these proceedings, under the Business
Separation Agreement, TXU Energy has agreed to hold Oncor harmless from the
results of any disallowance of generation related items, such as securitization
of regulatory assets, stranded costs and fuel reconciliation. TXU Energy is
unable to predict what the impact will be on its financial position and results
of operations if the settlement plan is not approved.
The major terms of the settlement plan are:
o Transmission and Distribution Rates-- In 2002, Oncor will implement an
excess mitigation credit (EMC) in the amount of $350 million (plus
interest), applied over a two-year period as a reduction to T&D rates
charged to REPs. This amount reflects resolution of stranded cost
mitigation, approximately $8.2 billion of fuel costs covering the
period of July 1998 through 2001, the unrecovered fuel balance at
December 31, 2001, and other items. Oncor's sole responsibility with
respect to those matters will be to act as collection or disbursement
agent, and Oncor has no rights or obligations with respect to any such
amounts collected or refunded.
o Stranded Cost Resolution -- TXU Energy's stranded costs are fixed at
zero, including resolution of amounts related to its repurchase of
minority owner interests in the Comanche Peak nuclear generating
station, recovery of certain environmental improvement costs and
elimination of the 2004 true-up proceedings.
16
o Regulatory Asset Securitization -- Oncor will receive a financing order
authorizing it to issue securitization bonds in the aggregate amount of
$1.3 billion to monetize and recover generation-related regulatory
assets. The settlement provides that there will be an initial issuance
of securitization bonds in the amount of up to $500 million upon
approval of the settlement followed by a second issuance for the
remainder after 2003. This settlement resolves all issues related to
generation-related regulatory assets and liabilities.
o Retail Clawback -- The retail clawback provision was included in the
1999 Restructuring Legislation to serve as an incentive for the
affiliated REPs of the T&D utilities to actively compete for customers
outside their traditional service areas. In the event that TXU Energy's
affiliated REP retains more than 60 percent of its residential and
small commercial customers after the first two years of competition,
the amount of the retail clawback credit will be no greater than:
o the number of US Holdings' former residential and small commercial
customers retained by TXU Energy in US Holdings' traditional
service area on January 1, 2004;
o less the number of new customers TXU Energy adds outside of its
traditional service territory by January 1, 2004;
o multiplied by $90.
This determination will be made separately for the residential
and small commercial classes and compares to the $150 per customer
limit contained in the 1999 Restructuring Legislation. The credit will
be applied to Oncor's rates over a two-year period beginning January
1, 2004.
o Lawsuit and Regulatory Proceeding Resolution -- The parties agree to
seek dismissal of a number of pending lawsuits, as well as regulatory
proceedings, including Docket No. 22652 and agree to seek dismissal of
certain related lawsuits in the event they are commenced. (See
Regulatory Disallowances below.)
TXU Energy recorded a $153 million (after-tax) extraordinary charge in the
fourth quarter of 2001 as a result of settlement related items and debt
refinancing. (See Note 4.)
IMPLEMENTATION OF THE 1999 RESTRUCTURING LEGISLATION - As noted in the
appropriate sections of the following discussion, the settlement plan filed with
the Commission by US Holdings, if adopted, will result in final determination
concerning certain provisions of the legislation. If the settlement plan is not
approved, certain other proceedings discussed below will not be resolved.
Stranded Cost True-up (see Regulatory Settlement Plan 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 US
Holdings' 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 for TXU Energy
through the non-bypassable delivery charges of Oncor, unless the regulatory
settlement plan described above is approved, in which case, this filing is not
required.
17
For the purposes of determining the final stranded cost figure, the 1999
Restructuring Legislation requires TXU Energy to quantify the market value of
its generation 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 Energy to reconcile, and either credit or bill to Oncor (and Oncor
to credit or bill T&D customers), 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
TXU Energy's generation revenues for the period 2002-2003;
o TXU Energy to reconcile and credit to Oncor (and Oncor to credit T&D
customers) any positive difference between the price to beat, reduced
by the non-bypassable delivery 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 Oncor
that are buying electricity from TXU Energy 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 Oncor's
non-bypassable delivery RATES.
Stranded Cost Recovery (see Regulatory Settlement Plan above) -- In October
1999, US Holdings 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 in the form of a non-bypassable
charge from retail customers. On May 1, 2000, the Commission signed a final
order rejecting US Holdings' request for the $1.65 billion and authorized only
$363 million. US Holdings 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. US
Holdings 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
US Holdings believes is a favorable ruling that should allow Oncor to issue
transition bonds of approximately $1.3 billion. On October 18, 2001, the Supreme
Court remanded the case to the Commission for determination of the final amount
of permitted securitization. The Commission has begun the remand proceeding
(Docket No. 24892). US Holdings 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. If the regulatory
settlement plan described above is approved by the Commission, issues involving
securitization will be resolved.
On June 6, 2001, the Texas Supreme Court affirmed the judgment of the Travis
County, Texas District Court denying an appeal and finding that the
securitization provisions are constitutional.
Mitigation (see Regulatory Settlement Plan above) -- From January 1, 1998
through June 30, 1999, US Holdings' earnings of $170 million in 1998 and $52
million in 1999 in excess of the regulatory earnings cap (mitigation) were
recorded as additional depreciation of nuclear production assets. Effective July
1, 1999, following the 1999 Restructuring Legislation, all of US Holdings'
18
earnings in excess of the regulatory earnings cap of $92 million in 1999, $305
million in 2000 and $34 million in 2001 were recorded as a reduction of
revenues, with a corresponding regulatory liability recorded.
On June 4, 2001, the Commission issued an interim order that addressed
Oncor's charges for T&D service when retail competition would begin. Among other
things, that interim order and subsequent final order issued on October 3, 2001,
required Oncor to reduce rates (which will necessitate a corresponding
reimbursement from TXU Energy), over the period from 2002-2008, both the
1998-2000 earnings in excess of the regulatory earnings cap and an estimate of
the 2001 earnings in excess of the regulatory earnings cap. On June 20, 2001, US
Holdings filed a petition with the Texas Supreme Court, requesting that the
Court issue a writ of mandamus compelling the Commission to vacate the portions
of its orders that require US Holdings to halt mitigation of stranded costs and
reverse the stranded cost mitigation already taken. On December 31, 2001, the
Supreme Court of Texas denied the petition. The Commission's decision continues
to be under appeal to the Travis County, Texas District Court.
On July 31, 2001, the staff of the Commission notified US Holdings and the
Commission that it disagreed with US Holdings' computation of the level of
earnings in excess of the regulatory earnings cap for calendar year 2000. The
Commission's staff disagrees with US Holdings' 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. US Holdings disagrees with the Commission's decision and has appealed
it to the Travis County, Texas, District Court. If the appeal is not successful,
TXU Energy will record an after-tax charge of $23 million.
Fuel Cost Recovery (see Regulatory Settlement Plan above) -- US Holdings'
eligible fuel costs incurred through December 31, 2001 will be recoverable
through fixed fuel factors, and to the extent such costs are not recovered by
that date, through the true-up process. At December 31, 2001, US Holdings had
unrecovered fuel costs plus related interest of $329 million and the balance,
plus additional accrued interest, is expected to be recovered through the
true-up process.
TXU Energy is required to file in 2002 with the Commission for final
reconciliation of its eligible fuel costs in a proceeding in which it has the
burden of proving that fuel costs under review were reasonable and necessary to
provide reliable electric service, that it has properly accounted for its
fuel-related revenues, and that fuel prices charged to the utility by an
affiliate were reasonable and necessary and not higher than prices charged for
similar items by such affiliate to other affiliates or nonaffiliates. This final
reconciliation will cover the period from July 1998 through December 2001,
during which US Holdings incurred about $8.2 billion of reconcilable fuel costs.
Management believes all costs are recoverable; however, should there be any
disallowances by the Commission, these will be the responsibility of TXU Energy.
Regulatory Disallowance (see Regulatory Settlement Plan above) -- The
Commission's final order in connection with US Holdings' 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 US Holdings' reacquisitions of minority owners' interests in Comanche Peak,
which had previously been recorded as a charge to 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 US Holdings'
construction work in progress included in rate base in light of its financial
condition at the time of the initial hearing. 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 final decision is expected in
2002.
4. EXTRAORDINARY ITEMS
Loss on reacquisition of debt -- As a result of US Holdings' debt
restructuring and refinancings in the fourth quarter of 2001, TXU Energy
recorded an extraordinary loss of $97 million (after taxes of $52 million) for
the early reacquisition of debt.
Loss on settlement -- As a result of the Regulatory Settlement Plan submitted
to the Commission for approval of outstanding unbundling issues (see Note 3),
19
TXU Energy recorded an extraordinary loss of $56 million (after taxes of $62
million) in the fourth quarter of 2001 to reflect the effect of settlement items
that are no longer probable of recovery. The settlement related items included
unrecovered fuel cost, all remaining generation-related regulatory assets and
regulatory liabilities that are not subject to recovery through the issuance of
securitization bonds, and the excess cost over market of certain purchased power
contracts.
5. SHORT-TERM FINANCING
TXU Energy is provided short-term financing by TXU or affiliated companies.
At December 31, 2001 and 2000, such short-term financing totaled $250 million
and $701 million, respectively. Average borrowings outstanding from affiliates
were $476 million and $349 million during 2001 and 2000, respectively. Weighted
average interest rates on these borrowings were 3.08% and 7.36% at December 31,
2001 and 2000, respectively.
6. LONG-TERM DEBT
Long-term debt represents debt of TXU Mining and the portion of US
Holdings' debt outstanding during the periods that was allocated to TXU Energy.
Interest expense on the allocated debt reflects interest associated with the
historical debt of US Holdings supporting the generation business, primarily
using a blend of prevailing short-term and long-term weighted-average interest
rates.
DECEMBER 31,
-----------------
2001 2000
------ ------
TXU Mining senior notes ($100 million,
6.875% due 2005 and $125 million,
7.0% due 2003) (net of unamortized
discount of $1 million)........................... $ 224 $ 224
Debt allocated from US Holdings..................... 3,345 2,972
Other............................................... 8 -
------ ------
Total long-term debt........................ 3,577 3,196
Less amounts due currently.......................... 123 -
------ ------
Total long-term debt, less amounts
due currently............................... $3,454 $3,196
====== ======
In connection with the separation of US Holdings' businesses, TXU Mining
redeemed $70 million of the 6.875% senior notes due 2005 and $53 million of the
7.0% senior notes due 2003 on February 28, 2002, realizing a loss of
$.9 million.
Effective January 1, 2002, debt assumed and representing the $3.3 billion
debt allocated from US Holdings consists of:
Pollution control series:
Brazos River Authority:
Fixed rate (4.25% to 5.75% due 2029 to 2036)............ $1,042
Taxable series (2.0% to 2.02% due 2023 to 2036)......... 310
Variable rate (1.60% to 1.75% due 2032 to 2034)(a)...... 66
Sabine River Authority of Texas:
Fixed rate (4% to 6.45% due 2021 to 2030)............... 319
Taxable series (2.02% due 2036)(a)...................... 57
Trinity River Authority of Texas:
Fixed rate (4.9% to 5.0% due 2027 to 2028)(a)........... 51
Floating rate debentures (3.639% due 2003)(b)................... 1,500
------
Total long-term debt .............................. $3,345
======
(a) Interest rates in effect at December 31, 2001 are presented. These series
are in a flexible or weekly rate mode and are secured by an irrevocable
letter of credit. Bonds in the flexible mode will be remarketed for periods
of less than 270 days.
(b) Interest rates in effect at December 31, 2001 are presented.
20
Debt Restructure and Refinancing Plan --In connection with the restructuring
of US Holdings' business as of January 1, 2002, the generation assets
transferred to TXU Energy were released from the lien of US Holdings' mortgage.
The debt restructuring process resulted in a one-time extraordinary charge
to earnings of $97 million (after-tax) in the fourth quarter of 2001 (see Note
4).
The pollution control series variable rate debt of TXU Energy requires
periodic remarketing. Because TXU Energy intends to remarket these obligations,
and has the ability and intent to refinance, they have been classified as
long-term debt.
Maturities -- Maturity requirements for the years 2002 through 2006 under
long-term debt outstanding at December 31, 2001, after giving effect to the
redemption of the senior notes by TXU Mining on February 28, 2002, were as
follows:
YEAR
2002..................................... $ 123
2003..................................... 1,580
2004..................................... -
2005..................................... 30
2006..................................... -
7. MEMBER INTERESTS
TXU Energy was formed as a limited liability company in the fourth quarter
2001. In the accompanying financial statements, TXU Energy's member interests
consist of the historical excess of assets over liabilities of the companies
that were combined to form TXU Energy, after giving effect to allocations
discussed in Note 1, effective January 1, 2002.
As part of its restructuring, US Holdings determined that the initial
capitalization of TXU Energy at January 1, 2002 would consist of approximately
50% member interest and 50% long-term debt (long-term debt and advances from
affiliates). Accordingly, $28 million of capital was converted to advances to
affiliates during 2001.
21
8. INCOME TAXES
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- ------
Current:
US Federal.......................... $ 400 $ 49 $ 256
State............................... 39 5 14
Non-US.............................. (5) 1 1
------- ------- ------
Total...................... 434 55 271
------- ------- ------
Deferred:
US Federal.......................... (134) 201 (47)
State............................... (3) (20) 17
Non-US.............................. (1) - -
------- ------- ------
Total....................... (138) 181 (30)
------- ------- ------
Investment tax credits................... (17) (17) (17)
------- ------- ------
Total ...................... $ 279 $ 219 $ 224
======= ======= ======
Reconciliation of income taxes computed at the US federal statutory rate to
provision for income taxes:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- ------
Income before income taxes............... $ 939 $ 795 $ 733
======= ======= ======
Income taxes at the US federal
statutory rate of 35%.................. $ 329 $ 278 $ 257
Depletion allowance................ (25) (24) (25)
Amortization of investment
tax credits...................... (17) (17) (17)
Redirected depreciation............ (18) - -
State income taxes, net of
federal tax benefits............. 24 (10) 20
Other.............................. (14) (8) (11)
------- ------- ------
Income tax expense....................... $ 279 $ 219 $ 224
======= ======= ======
Effective tax rate....................... 30% 28% 31%
22
The components of TXU Energy's deferred tax assets and liabilities are as
follows:
DECEMBER 31,
-----------------------------------------------------------
2001 2000
-------------------------- ----------------------------
TOTAL CURRENT NONCURRENT TOTAL CURRENT NONCURRENT
----- ------- ---------- ----- ------- ----------
DEFERRED TAX ASSETS
Unamortized investment tax credits....... $ 138 $ - $ 138 $ 222 $ - $ 222
Impairment of assets..................... 73 - 73 73 - 73
Regulatory disallowance.................. 93 - 93 107 - 107
Alternative minimum tax.................. 267 - 267 305 - 305
Employee benefits........................ 70 - 70 63 - 63
Deferred benefits of state income taxes.. 26 24 2 102 16 86
Other.................................... 162 55 107 119 42 77
Deferred state income taxes.............. 7 - 7 67 - 67
----- ------ ------ ------ ------ ------
Total deferred tax assets.............. 836 79 757 1,058 58 1,000
----- ------ ------ ------ ------ ------
DEFERRED TAX LIABILITIES
Depreciation differences and
capitalized construction costs......... 2,788 - 2,788 2,822 - 2,822
Under-recovered fuel revenue............. - - - 295 295 -
Software development..................... 79 - 79 26 - 26
Other.................................... 8 - 8 43 - 43
Deferred state income taxes 7 - 7 282 24 258
----- ------ ------ ------ ------ ------
Total deferred tax liability......... 2,882 - 2,882 3,468 319 3,149
----- ------ ------ ------ ------ ------
NET DEFERRED TAX (ASSET ) LIABILITY......... $2,046 $ (79) $2,125 $2,410 $ 261 $2,149
====== ======= ====== ====== ====== ======
DECEMBER 31,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
NET NET NET NET NET NET
CURRENT CURRENT NONCURRENT CURRENT CURRENT NONCURRENT
ASSET LIABILITY LIABILITY ASSET LIABILITY LIABILITY
------- --------- ---------- ------- --------- ----------
SUMMARY OF DEFERRED INCOME TAXES
US Federal............... $ 79 $ - $ 2,127 $ - $ 237 $ 1,973
State.................... - - (2) - 24 176
------- ------- ------- ------- ------- --------
Total............... $ 79 $ - $ 2,125 $ - $ 261 $ 2,149
======= ======= ======= ======= ======= ========
At December 31, 2001, TXU Energy had approximately $267 million of
alternative minimum tax credit carryforwards available to offset future tax
payments.
TXU Energy's income tax returns are subject to audit by applicable tax
authorities. The IRS is currently examining the returns of TXU and its
subsidiaries for the tax years ended 1993 through 1997. In management's opinion,
an adequate provision has been made for any future taxes that may be owed as a
result of any audits.
23
9. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
TXU Energy is a participating employer in the TXU Retirement Plan
(Retirement Plan), a defined benefit pension plan sponsored by TXU. The
Retirement Plan is a qualified pension plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended (Code), and is subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended (ERISA). Employees
are eligible to participate in the Retirement Plan upon their completion of one
year of service and the attainment of age 21. All benefits are funded by the
participating employers. The Retirement Plan provides benefits to participants
under one of two formulas: (i) a cash balance formula under which participants
earn monthly contribution credits based on their compensation and years of
service, plus monthly interest credits, or (ii) a traditional defined benefit
formula based on years of service and the average earnings of the three years of
highest earnings. At December 31, 2001 the fair value of Retirement Plan assets
was $3.3 billion and the total of pension obligations, including net actuarial
losses was $3.0 billion, discounted at 7.5%.
All eligible employees hired after January 1, 2002 will participate under
the cash balance formula. Certain employees who, prior to January 1, 2002,
participated under the traditional defined benefit formula, continue their
participation under that formula. Under the cash balance formula, future
increases in earnings will not apply to prior service costs. It is TXU's policy
to fund the plans on a current basis to the extent deductible under existing
federal tax regulations. Such contributions, when made, are intended to provide
not only for benefits attributed to service to date, but also those expected to
be earned in the future.
The allocated net periodic pension cost (benefit) applicable to TXU Energy
was $(6.2) million for 2001, $(7.1) million for 2000 and $12 million for 1999.
Estimated accrued pension cost applicable to TXU Energy as of December 31, 2001
and 2000 was $26 million and $33 million, respectively. Contributions were $1.1
million, $.7 million and $1.2 million in 2001, 2000 and 1999, respectively.
In addition, TXU Energy's employees are eligible to participate in a
qualified savings plan, the TXU Thrift Plan (Thrift Plan). This plan is a
participant-directed defined contribution profit sharing plan qualified under
Section 401(a) of the Code, and is subject to the provisions of ERISA. The
Thrift Plan includes an employee stock ownership component. Under the terms of
the Thrift Plan, as amended effective January 1, 2002, employees who do not earn
more than the IRS threshold compensation limit used to determine highly
compensated employees may contribute, through pre-tax salary deferrals and/or
after-tax payroll deductions, a specified amount of compensation ranging from 1%
to 20%. Employees who earn more than such threshold may contribute from 1% to
16% of their compensation. Employer matching contributions are also made in an
amount equal to 100% of employee contributions up to 6% of compensation for
employees who participate under the cash balance formula of the Retirement Plan,
and 75% of employee contributions up to 6% of compensation for employees who
participate under the traditional defined benefit formula of the Retirement
Plan. Employer matching contributions are invested in TXU common stock.
Contributions to the Thrift Plan by TXU aggregated $16 million for 2001 and $15
million for 2000 and 1999.
In addition to the Retirement Plan and the Thrift Plan, TXU Energy
participates with TXU and certain other affiliated subsidiaries of TXU to offer
certain health care and life insurance benefits to eligible employees and their
eligible dependents upon the retirement of such employees from TXU. For
employees retiring on or after January 1, 2002, the retiree contributions
required for such coverage vary based on a formula depending on the retiree's
age and years of service. The estimated net periodic postretirement benefits
cost other than pensions applicable to TXU Energy was $25 million for 2001, $23
million for 2000 and $34 million for 1999. Estimated accrued postretirement
benefits cost as of December 31, 2001 and 2000 were $91 million and $84 million,
respectively. Contributions paid by TXU Energy to fund postretirement benefits
other than pensions were $19 million, $15 million and $16 million in 2001, 2000
and 1999, respectively. At December 31, 2001, the fair value of assets of the
TXU plan was $190 million, and the total of benefit obligations, including net
actuarial gains and losses, was $506 million.
24
The liabilities for accrued pension cost and accrued postretirement benefits
cost were based on estimates of retired employees by company. The estimated
liabilities for accrued pension cost and accrued postretirement benefits cost
recorded above may be subject to revision based on final actuarial
determinations, resulting in an increase or decrease in advances to or from
affiliates.
10. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133 became effective for TXU Energy on January 1, 2001. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of derivatives in the balance
sheet and the measurement of those instruments at fair value. Changes in the
fair value of derivatives are recorded in earnings, unless (i) the normal
purchase or sale exception or (ii) hedge accounting is elected.
TXU Energy enters into derivative instruments, including options, swaps,
futures, forwards and other contractual commitments for both non-trading and
trading purposes. TXU Energy may enter into physical and financial contracts to
hedge market risks and exposures to prices of electricity, natural gas and fuel
utilized for its generation assets and certain forecasted purchases and sales of
power. TXU Energy may utilize treasury derivative instruments (primarily
interest rate swaps), in order to manage its exposures to changes in interest
rates. As a result of regulation, TXU Energy did not use derivative instruments
to hedge price risk of non-trading activities prior to adoption of SFAS No. 133.
There was no initial impact of adopting SFAS No. 133 as of January 1, 2001,
because all of TXU Energy's derivatives entered into for trading purposes were
already being accounted for by the mark-to-market method (see Note 11), and no
derivatives were designated as accounting hedges. In the fourth quarter of
2001 TXU Energy entered into several derivative contracts that were designated,
documented and assessed as cash flow accounting hedges. These types of hedges
require TXU Energy to record the derivative assets or liabilities at their fair
value on its balance sheet with an offset in other comprehensive income. Hedge
ineffectiveness is recorded in earnings. Amounts are removed from other
comprehensive income as the underlying transactions occur.
In 2001 TXU Energy began entering into contracts with large commercial and
industrial customers for electricity deliveries following deregulation of the
electricity markets in Texas which began January 1, 2002. The contracts for such
deliveries are derivatives; accordingly, these contracts were accounted for on
the mark-to-market accounting method in 2001. Due to the highly competitive
nature of the large US commercial and industrial customer base, TXU Energy
manages these commodity sales contracts through its energy trading operations.
Due to the nature of these contracts, unrealized gains of $88 million were
recognized on origination pursuant to SFAS No. 133, and have been included with
energy trading assets. An additional $38 million in origination gains were
recorded in 2001 primarily related to commercial and industrial retail contracts
for sales of natural gas, but $31 million in gains were realized within the
year, as the majority of the contracts are short-lived.
Financial Summary -- TXU Energy formally documents all relationships between
accounting hedge instruments and hedged items, as well as its risk-management
objective and strategy for undertaking various accounting hedge transactions.
This process includes linking all derivatives that are designated as fair-value
or cash-flow hedges to specific assets and liabilities on the balance sheet or
to specific firm commitments or forecasted transactions.
Essentially all of the terms of TXU Energy's derivatives which have been
designated as accounting hedges match the terms of the underlying hedged items.
TXU Energy did not experience any net hedge ineffectiveness for the year ended
December 31, 2001.
As of December 31, 2001, it is expected that $3 million after-tax of net
gains 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 gain 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
25
hedges. As of December 31, 2001, the maximum term over which TXU Energy hedged
its exposure to the variability of future cash flows for all forecasted
transactions is three years.
Capacity Auction -- The form of contract entered into as a result of the
capacity auction required by the 1999 Restructuring Legislation is a derivative
pursuant to SFAS No. 133. These contracts have not been designated as accounting
hedges and did not have significant mark-to-market value at December 31, 2001.
11. ENERGY TRADING ACTIVITIES
In the course of providing comprehensive energy products and services to its
diversified client base, TXU Energy engages in energy price risk management
activities. In addition to the purchase or sale of physical commodities, TXU
Energy enters into futures contracts; swap agreements, where settlement is based
on the difference between a fixed and floating (index based) price for the
underlying commodity; exchange trade options; over-the counter options, which
are settled in cash or in the physical delivery of the underlying commodity;
exchange-of-futures-for-physical transactions; energy exchange transactions;
storage activities; and other contractual arrangements. TXU Energy may buy and
sell certain of these instruments to manage its exposure to price risk from
existing contractual commitments as well as other energy-related assets and
liabilities. It may also enter into contracts to take advantage of arbitrage
opportunities. In order to manage its exposure to the price risk associated with
these instruments, TXU Energy has established trading policies and limits and
revalues its exposures against these benchmarks utilizing integrated energy
systems to capture, value and understand the portfolio risks. TXU Energy also
periodically reviews these policies to ensure they are responsive to changing
market and business conditions.
TXU Energy applies mark-to-market accounting for its energy trading and risk
management activity and certain retail contracts. In accounting for energy
trading contracts, settlements of positions under which energy ownership is
exchanged (physical contracts) are recorded gross as revenues and purchases.
Gains and losses from settlements of financial positions are recorded net as
revenues. For energy trading contracts not yet settled, whether financial or
physical, changes in fair value are recorded net as revenues. Such fair value
changes are referred to as unrealized gains and losses from mark-to-market
valuations. When positions are settled and gains and losses are realized, the
previously recorded unrealized gains and losses from mark-to-market valuations
are reversed. The corresponding balance sheet entry in recording the unrealized
gain/loss is made to energy trading assets/liabilities.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of TXU Energy's
significant nontrading financial instruments were as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------
ON BALANCE SHEET ASSETS (LIABILITIES):
Investments - nuclear decommissioning
deposits............................ $ 276 $ 276 $ 267 $ 267
TXU Mining senior notes (including
current maturities)................. (224) (231) (224) (228)
Debt allocated from US Holdings....... (3,345) (3,345) (2,972) (2,984)
Other long-term debt.................. (8) (8) - -
OFF BALANCE SHEET ASSETS (LIABILITIES):
Financial guarantees.................. - (53) - (65)
With the implementation of SFAS No. 133 on January 1, 2001, financial
instruments that are derivatives are recorded on the balance sheet at fair
value.
26
The carrying value of securities held in external trusts for nuclear
decommissioning are based on quoted market prices. (See Note 14.) The remaining
investments are not considered to be financial instruments and, other than
goodwill, are recorded at cost.
The fair values of long-term debt are estimated at the lesser of either the
call price or the market value as determined by quoted market prices, where
available, or, where not available, at the present value of future cash flows
discounted at rates consistent with comparable maturities with similar credit
risk. The carrying amounts for financial assets and liabilities classified as
current approximate fair value due to the short maturity of such instruments.
The fair value of the financial guarantees represents the maximum amount
payable should TXU Energy fail to perform on all its guarantees. The likelihood
of this happening is considered remote.
13. COMMITMENTS AND CONTINGENCIES
Emissions -- The Federal Clean Air Act, as amended (Clean Air Act) includes
provisions which, among other things, place limits on SO2 and NOx emissions
produced by generating units. TXU Energy's capital requirements have not been
significantly affected by the requirements of the Clean Air Act. In addition,
all permits required for the air pollution control provisions of the 1999
Restructuring Legislation have been applied for and TXU Energy has initiated a
construction program to install control equipment to achieve the required
reductions.
Coal Contracts -- TXU Energy has coal purchase agreements and coal
transportation agreements. Commitments under these contracts for the next five
years and thereafter are as follows:
2002...........................................$87
2003............................................82
2004............................................67
2005............................................24
2006............................................18
Thereafter...................................... -
-
Total ...................................$278
====
Gas Purchase Contracts -- TXU Energy buys gas under various types of
long-term and short-term contracts in order to assure reliable supply to and to
help meet the expected needs of its generation assets and its wholesale and
retail customers. Many of these gas purchase contracts require minimum purchases
("take-or-pay") of gas under which the buyer agrees to pay for a minimum
quantity of gas in a year. At December 31, 2001 TXU Energy had estimated annual
minimum commitments under long-term gas purchase contracts of $2 million
covering the periods 2002 through 2011.
Purchased Power Contracts -- TXU Energy has entered into contracts to
purchase power through the year 2005. These contracts provide for capacity
payments subject to performance standards and energy payments based on the
actual power taken under contract. Capacity payments paid under these contracts
for the years ended December 31, 2001, 2000 and 1999 were $189 million, $186
million and $227 million, respectively.
Assuming performance standards are achieved, future capacity payments under
the agreements are estimated as follows:
YEAR
2002....................................... $132
2003....................................... 78
2004....................................... 46
2005....................................... 29
2006....................................... -
Thereafter................................. -
----
Total capacity payments............... $285
====
27
On the basis of TXU Energy's current expectations of demand from its
electricity and gas customers as compared with its capacity payments or
take-or-pay obligations under such purchase contracts, management does not
consider it likely that any material payments will become due from TXU Energy
for electricity or gas not taken.
Leases -- TXU Energy has entered into operating leases covering various
facilities and properties including combustion turbines, transportation
equipment, mining equipment, data processing equipment and office space. Certain
of these leases contain renewal and purchase options and residual value
guarantees. Lease costs charged to operating expense for 2001, 2000 and 1999
were $116 million, $91 million and $93 million, respectively.
Payments under capital leases, together with the present value of such
minimum lease payments, and future minimum lease commitments under operating
leases that have initial or remaining noncancellable lease terms in excess of
one year as of December 31, 2001, were as follows:
YEAR
2002...................................... $ 61
2003...................................... 54
2004...................................... 53
2005...................................... 57
2006...................................... 53
Thereafter................................ 550
------
Total future minimum lease payments.. $ 828
======
Financial Guarantees -- US Holdings has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy
and has agreed, in effect, to guarantee the principal, $19 million at December
31, 2001, and interest on bonds issued to finance the reservoirs from which the
water is supplied. US Holdings remains obligated on the water bond obligations;
however, it is expected that TXU Energy will make the payments under the bonds.
The bonds mature at various dates through 2011 and have interest rates ranging
from 5-1/2% to 7%. US Holdings is required to make periodic payments equal to
such principal and interest, including amounts assumed by a third party and
reimbursed to US Holdings, of $4 million annually for the years 2002 through
2003, $7 million for 2004 and $1 million for 2005 and 2006. Annual payments made
by US Holdings, net of amounts assumed by a third party under such contracts,
for 1999, 2000 and 2001 were $4 million each year. 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 December 31, 2001, issued for similar purposes which had
previously been guaranteed by US Holdings. US Holdings is, however, contingently
liable in the unlikely event of default by the municipality.
Nuclear Insurance -- With regard to liability coverage, the Price-Anderson
Act (Act) provides financial protection for the public in the event of a
significant nuclear power plant incident. The Act sets the statutory limit of
public liability for a single nuclear incident currently at $9.5 billion and
requires nuclear power plant operators to provide financial protection for this
amount. The Act is being considered by the United States Congress for
modification. The terms of a modification, if any, are not presently known and
therefore TXU Energy is unable, at this time, to determine any impact it may
have on nuclear liability coverage. As required, TXU Energy provides this
financial protection for a nuclear incident at Comanche Peak resulting in public
bodily injury and property damage through a combination of private insurance and
industry-wide retrospective payment plans. As the first layer of financial
protection, TXU Energy has $200 million of liability insurance from American
Nuclear Insurers (ANI), which provides such insurance on behalf of a major stock
insurance company pool, Nuclear Energy Liability Insurance Association. The
second layer of financial protection is provided under an industry-wide
retrospective payment program called Secondary Financial Protection (SFP).
Under the SFP, each operating licensed reactor in the United States is
subject to an assessment of up to $88 million, subject to increases for
inflation every five years, in the event of a nuclear incident at any nuclear
plant in the United States. Assessments are limited to $10 million per operating
licensed reactor per year per incident. All assessments under the SFP are
subject to a 3% insurance premium tax, which is not included in the above
amounts.
28
With respect to nuclear decontamination and property damage insurance,
Nuclear Regulatory Commission (NRC) regulations require that nuclear plant
license-holders maintain not less than $1.1 billion of such insurance and
require the proceeds thereof to be used to place a plant in a safe and stable
condition, to decontaminate it pursuant to a plan submitted to and approved by
the NRC before the proceeds can be used for plant repair or restoration or to
provide for premature decommissioning. TXU Energy maintains nuclear
decontamination and property damage insurance for Comanche Peak in the amount of
$3.45 billion, above which TXU Energy is self-insured. The primary layer of
coverage of $500 million is provided by Nuclear Electric Insurance Limited
(NEIL), a nuclear electric utility industry mutual insurance company. The
remaining coverage includes premature decommissioning coverage and is provided
by NEIL in the amount of $2.25 billion and $700 million from Lloyds of London,
other insurance markets and foreign nuclear insurance pools. TXU Energy is
subject to a maximum annual assessment from NEIL of $25.7 million in the event
NEIL's losses under this type of insurance for major incidents at nuclear plants
participating in these programs exceed the mutual's accumulated funds and
reinsurance.
TXU Energy maintains Extra Expense Insurance through NEIL to cover the
additional costs of obtaining replacement power from another source if one or
both of the units at Comanche Peak are out of service for more than twelve weeks
as a result of covered direct physical damage. The coverage provides for weekly
payments of $3.5 million for the first fifty-two weeks and $2.8 million for the
next 110 weeks for each outage, respectively, after the initial twelve-week
period. The total maximum coverage is $490 million per unit. The coverage
amounts applicable to each unit will be reduced to 80% if both units are out of
service at the same time as a result of the same accident. Under this coverage,
TXU Energy is subject to a maximum annual assessment of $8.5 million per year.
There have been some revisions made to the nuclear property and nuclear
liability insurance policies regarding the maximum recoveries available for
multiple terrorism occurrences. Under the NEIL policies, if there were multiple
terrorism losses occurring within one year beginning with the first loss from
terrorism, NEIL would make available one industry aggregate limit of $3.24
billion and any amounts it recovers from reinsurance, government indemnity or
other sources up to the limits for each claimant. If terrorism losses occurred
beyond the one-year period, a new set of limits and resources would apply. Under
the ANI liability policy, the liability arising out of terrorist acts will be
subject to one industry aggregate limit of $200 million which could be
reinstated at ANI's option depending on prevailing risk circumstances and the
balance in the Industry Credit Rating Plan reserve fund.
Nuclear Decommissioning -- TXU Energy has established a reserve, charged to
depreciation expense and included in accumulated depreciation, for the
decommissioning of Comanche Peak. Decommissioning costs are being recovered from
Oncor customers over the life of the plant and deposited in external trust funds
(included in investments). As of December 31, 2001 and 2000, deposits in the
external trust for decommissioning of Comanche Peak were invested in marketable
debt and equity securities, and the market value of those securities, including
unrealized gains of $57 million and $75 million, respectively, were:
DECEMBER 31,
-----------------
2001 2000
------ ------
Debt securities..................................... $ 125 $ 117
Equity securities................................... 151 150
------ ------
Total.......................................... $ 276 $ 267
===== =====
Realized earnings on funds deposited in the external trust are recognized in
the reserve. Based on a site-specific study completed during 1997 using the
prompt dismantlement method and 1997 dollars, decommissioning costs for Comanche
Peak Unit 1 and for Unit 2 and common facilities were estimated to be $271
million and $404 million, respectively. This estimate is subject to change in
the future.
Decommissioning activities are projected to begin in 2030 for Comanche Peak
Unit 1 and 2033 for Unit 2 and common facilities. Through December 31, 2001,
decommissioning costs were recovered based upon a 1992 site-specific study
through rates placed in effect under US Holdings' January 1993 rate increase
request. US Holdings accrued $18 million of decommissioning costs for each of
the years ended December 31, 2001, 2000 and 1999. Effective January 1, 2002,
29
decommissioning costs will be recovered through a non-bypassable charge by Oncor
and remitted to TXU Energy based upon a 1997 site-specific study, adjusted for
trust fund assets, through rates placed in effect under US Holdings' 2001
Unbundled Cost of Service filing.
Because the accounting for nuclear decommissioning recognizes that costs are
recovered through rates or a non-bypassable charge to customers, fluctuations in
equity prices or interest rates of trust fund assets do not affect results of
operations, cash flows or financial position.
Legal Proceedings -- In September 1999, Quinque Operating Company (Quinque)
filed suit in the State District Court of Stevens County, Kansas against over
200 gas companies, including TXU Gas (named in the litigation as ENSERCH
Corporation). The suit was removed to federal court; however, a motion to remand
the case back to Kansas State District Court was granted in January 2001, and
the case is now pending in Stevens County, Kansas. The plaintiffs amended their
petition to join TXU Fuel, a subsidiary of TXU Energy, as a defendant in this
litigation. Quinque has dismissed its claims and a new lead plaintiff has filed
an amended petition in which the plaintiffs seek to represent a class consisting
of all similarly situated gas producers, overriding royalty owners, working
interest owners and state taxing authorities either from whom defendants had
purchased natural gas or who received economic benefit from the sale of such gas
since January 1, 1974. No class has been certified. The petition alleges that
the defendants have mismeasured both the volume and heat content of natural gas
delivered into their pipelines resulting in underpayments to plaintiffs. No
amount of damages has been specified in the petition. While TXU Energy and TXU
Fuel are unable to estimate any possible loss or predict the outcome of this
case, TXU Energy and TXU Fuel believe these claims are without merit and intend
to vigorously defend this suit.
General -- In addition to the above, TXU Energy is involved in various other
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.
14. SUPPLEMENTARY FINANCIAL INFORMATION
Credit Risk -- Credit risk relates to the risk of loss that TXU Energy would
incur as a result of non-performance by counterparties. TXU Energy maintains
credit risk policies with regard to its counterparties to minimize overall
credit risk. These policies include an evaluation of a potential counterparty's
financial condition, credit rating, and other credit criteria and risk
mitigation tools as deemed appropriate, including but not limited to use of
standardized agreements that allow for netting of positive and negative
exposures associated with a single counterparty. TXU Energy has standardized
processes for monitoring and managing credit, including methodologies to
analyze counterparties' financial strength, measurement of current counterparty
exposures and contract language that includes netting. Credit enhancements such
as parental guarantees, letters of credit, surety bonds and margin deposits are
also utilized. Additionally, counterparties and portfolios are stress tested for
potential credit exposure and managed to acceptable levels. This evaluation
results in establishing credit limits or collateral requirements prior to
entering into an agreement with a counterparty that creates credit exposure to
TXU Energy. Additionally, TXU Energy has established controls to determine and
monitor the appropriateness of these limits on an ongoing basis. Any material
adverse change in the financial condition of a counterparty or downgrade of its
credit quality will result in the reassessment of the credit limit with that
counterparty. This could result in a reduction of the credit limit or request
for additional financial assurances.
Concentration of Credit Risk -- TXU Energy's gross exposure to trading and
non-trading credit risk as of December 31, 2001 was $2.1 billion, representing
trade accounts receivable, energy trading assets and derivative assets.
A large share of the gross assets subject to credit risk are accounts
receivable from the retail sale of electricity and gas to residential and small
commercial customers. The risk of material loss from nonperformance from these
customers is not considered likely. Reserves for uncollectible accounts
receivable are provided for the potential loss from nonpayment by these
customers based on historical experience. The restructuring of the electric
industry in Texas effective January 1, 2002 increases the risk profile of TXU
Energy in relation to its customers; however, TXU Energy has the ability to take
actions to mitigate such customer risk.
30
Most of the remaining trade accounts receivables are with large commercial
and industrial customers. TXU Energy's energy trading counterparties include
major energy companies, financial institutions, gas and electric utilities,
independent power producers, oil and gas producers and other energy trading
companies. The net exposure to credit risk from these counterparties as of
December 31, 2001 is $1.3 billion using standardized master netting contracts
and agreements which provide for the right of offset of positive and negative
credit exposures with individual counterparties. Of this amount, approximately
71% of the associated credit exposure is considered to be with investment grade
counterparties, as determined using publicly available information including
major rating agencies' published ratings and TXU Energy's internal credit
evaluation. Those counterparties without a Standard & Poor's (S&P) rating of a
least BBB- or a similar rating from another major rating agency, are rated using
internal credit methodologies and credit scoring models which are used to
determine an S&P equivalent rating. Approximately 29% of the credit exposure is
considered to be with counterparties rated as below investment grade or not
rated. TXU Energy monitors and reports its exposures and limits on a daily basis
and provides regular reports to its risk monitoring committees and treasury
subcommittees.
As of December 2001, TXU Energy had no credit exposure as a result of the
Enron Corporation bankruptcy, after taking into consideration netting
agreements.
TXU Energy had no exposure to any one customer that represented greater than
5% of the gross fair value of TXU's trade accounts receivable, energy trading
assets and derivative assets at December 31, 2001. Based on TXU Energy's
policies for managing credit risk, its exposures and its credit and other
reserves, TXU Energy does not anticipate a materially adverse effect on its
financial position or results of operations as a result of non-performance by
any counterparty.
Accounts Receivable -- At December 31, 2001 and 2000, accounts receivable
are stated net of uncollectible accounts of $24 million and $20 million,
respectively.
Sale of Receivables -- Prior to January 1, 2002, US Holdings and TXU Gas
sold certain customer accounts receivable to a wholly-owned bankruptcy-remote
unconsolidated subsidiary of TXU Corp. (TXU Receivables Company), which sells
undivided interests in accounts receivable it purchases to financial
institutions. As of January 1, 2002, the facility was amended to add TXU Energy
Retail, TXU SESCO Energy Services Company and Oncor as qualified originators of
accounts receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. As of December 31, 2001, TXU Energy's
portion of US Holdings' receivables sold to TXU Receivables Company then
outstanding under the program was $581 million, in exchange for cash of $315
million and $260 million in subordinated notes issued to the originators, with
$6 million representing costs of the program since inception in August 2001.
Annualized costs of the program approximated 3.7% of the cash proceeds from the
receivables sales. As of December 31, 2000, TXU Energy's portion of US Holdings'
receivables sold under a prior facility was $470 million. The subordinated notes
receivable from TXU Receivables Company are included in accounts receivables in
the consolidated balance sheet.
Inventories by Major Category--
DECEMBER 31,
---------------
2001 2000
----- -----
Materials and supplies.............................. $149 $133
Fuel stock.......................................... 62 70
Gas stored underground.............................. 49 53
------ ------
Total inventories............................ $260 $256
==== ====
31
Property, Plant and Equipment--
DECEMBER 31,
--------------------
2001 2000
----- -----
Electricity production.............................. $16,627 $16,551
Other............................................... 242 165
------- -------
Total....................................... 16,869 16,716
Less accumulated depreciation....................... 6,186 5,797
------- -------
Net of accumulated depreciation............. 10,683 10,919
Construction work in progress....................... 361 201
Nuclear fuel (net of accumulated amortization: 2001-- 146 178
$787; 2000-- $716).................................
Reserve for regulatory disallowances................ (836) (836)
------- -------
Net property, plant and equipment........... $10,354 $10,462
======= =======
Capitalized software costs of $100 million at December 31, 2001 are included
in property, plant and equipment. Amortization expense of $3 million relating to
these software costs was recorded in 2001.
Affiliate Transactions -- In addition to the accounts receivable program
with TXU Receivables Company, TXU Energy enters into transactions with TXU and
other affiliates. Net interest expense related to advances from TXU and other
affiliates was $38 million, $32 million and $14 million for 2001, 2000 and 1999,
respectively. TXU, through an affiliate, billed TXU Energy $238 million, $133
million and $87 million for 2001, 2000 and 1999, respectively, for financial,
accounting, information technology, environmental, procurement and personnel
services and other administrative services at cost. Also, TXU Energy billed $4
million in 2001 and was billed $10 million and $2 million in 2000 and 1999,
respectively, by TXU and other affiliates primarily for energy purchases.
Based on the Business Separation Agreement, TXU Energy has payables due to
Oncor arising from the restructuring of US Holdings to form Oncor and TXU Energy
as follows (see Note 1):
o Mitigation - Under the terms of the settlement plan discussed in Note 3,
Oncor will implement an excess mitigation credit of $350 million with
interest, to be returned to REPs, including TXU Energy, over a two-year
period beginning January 1, 2002. TXU Energy will reimburse Oncor for the
credit and related interest.
o Securitization - Under the terms of the settlement plan, Oncor will issue
securitization bonds of $1.3 billion. The incremental income taxes Oncor will
pay on the revenue associated with non-bypassable charge to customers related
to the bonds will be reimbursed by TXU Energy. Therefore, TXU Energy's
financial statements reflect a $437 million payable to Oncor that will be
extinguished as Oncor pays the related income taxes.
Supplemental Cash Flow Information--
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
---- ---- ----
Cash payments/(refunds):
Interest (net of amounts capitalized) $239 $266 $252
Income taxes......................... 366 24 355
Non-cash items:
Non-cash advances.................... 89 (61) (105)
Conversion of capital to advances.... 28 - -
Receipt of note receivable from
sale of asset...................... - 23 -
Non-cash investing activities in 2000 represent the receipt of a note receivable
of $23 million for the sale of assets.
32
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
23 Consent of Deloitte & Touche LLP
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU US HOLDINGS COMPANY
By /s/ Biggs C. Porter
----------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: April 17, 2002
EXHIBIT INDEX
-------------
Exhibit No. Name
- ---------- ----
23 Consent of Independent Auditors for US Holdings