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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2002
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-11668
TXU US Holdings Company
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Common Stock outstanding at November 8, 2002: 52,817,862 shares, without
par value.
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TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income-
Three and Nine Months Ended September 30, 2002 and 2001............ 1
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2002 and 2001...................... 2
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001............................ 3
Notes to Financial Statements.......................................... 4
Independent Accountants' Report........................................ 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 40
Item 4. Controls and Procedures................................................. 40
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 41
SIGNATURE ..................................................................................... 42
CERTIFICATIONS................................................................................. 43
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Operating revenues..................................................... $2,535 $2,398 $ 6,527 $6,302
------ ------ ------- ------
Operating expenses
Energy purchased for resale, fuel consumed and delivery fees...... 1,100 932 2,426 2,589
Operation and maintenance......................................... 551 460 1,639 1,306
Depreciation and amortization..................................... 176 156 524 472
Goodwill amortization............................................. -- 4 -- 12
Taxes other than income........................................... 149 168 449 472
------ ------ ------- ------
Total operating expenses.................................... 1,976 1,720 5,038 4,851
------ ------ ------- ------
Operating income....................................................... 559 678 1,489 1,451
Other income .......................................................... 20 4 36 9
Other deductions....................................................... 6 27 14 38
Interest income........................................................ -- 12 1 33
Interest expense and other charges..................................... 103 121 310 374
------- ------ ------- ------
Income before income taxes ............................................ 470 546 1,202 1,081
Income tax expense .................................................... 150 165 385 331
-------- ------ ------- ------
Net income ............................................................ 320 381 817 750
Preferred stock dividends.............................................. 2 2 7 7
------- ------ ------- ------
Net income available for common stock.................................. $ 318 $ 379 $ 810 $ 743
======= ====== ======= ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Net income......................................................................... $ 320 $ 381 $ 817 $ 750
------ ------ ----- -----
Other comprehensive income (loss)
Net change during period, net of tax effects:
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001 (net of tax of $-)...... -- -- -- (1)
Net change in fair value of derivatives (net of tax benefit of $19, $83, and $-).. (35) -- (153) (1)
Amounts realized in earnings during the period(net of tax benefit of $6 an $4).... (12) -- (8) --
----- ------ ----- -----
Total........................................................................... (47) -- (161) (2)
------ ------ ----- -----
Comprehensive income................................................................ $ 273 $ 381 $ 656 $ 748
====== ====== ===== =====
See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------
2002 2001
---- ----
Millions of Dollars
Cash flows-- operating activities
Net income..................................................................... $ 817 $ 750
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization............................................. 599 574
Deferred income taxes and investment tax credits-- net ................... 167 (118)
Gains from sales of assets................................................ (30) --
Net effect of unrealized mark-to-market valuation losses/(gains).......... 4 (188)
Other..................................................................... (6) 146
Changes in operating assets and liabilities................................... (583) 427
-------- --------
Cash provided by operating activities........................ 968 1,591
------- -------
Cash flows-- financing activities
Issuance of long-term debt...................................................... 2,261 521
Retirements/repurchases of securities:
Long-term debt............................................................ (2,265) (302)
Common stock.............................................................. -- (629)
Dividends paid to parent....................................................... (677) --
Change in notes payable-- affiliates........................................... (1,022) (105)
Capital contribution from parent............................................... -- 75
Change in commercial paper..................................................... 1,082 --
Preferred stock dividends paid................................................. (7) (7)
Debt premium, discount, financing and reacquisition expenses................... (49) (14)
-------- --------
Cash used in financing activities.............................. (677) (461)
------- --------
Cash flows-- investing activities
Capital expenditures............................................................ (591) (727)
Acquisition of a business....................................................... (36) --
Proceeds from sales of assets................................................... 443 --
Nuclear fuel ................................................................... (51) (12)
Other .......................................................................... (66) (20)
-------- -------
Cash used in investing activities.............................. (301) (759)
------- -------
Net change in cash and cash equivalents............................................. (10) 371
Cash and cash equivalents-- beginning balance....................................... 55 41
-------- -------
Cash and cash equivalents-- ending balance.......................................... $ 45 $ 412
======= =======
See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
----------- ------------
Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 45 $ 55
Accounts receivable............................................................. 1,769 940
Inventories-- at average cost................................................... 323 297
Commodity contract assets....................................................... 1,044 848
Other current assets............................................................ 198 155
------- -------
Total current assets.................................................... 3,379 2,295
------- -------
Investments........................................................................... 698 721
Property, plant and equipment-- net................................................... 16,189 16,156
Goodwill.............................................................................. 558 558
Regulatory assets-- net............................................................... 1,757 1,607
Commodity contract assets............................................................. 431 389
Cash flow hedges and other derivative assets.......................................... 12 31
Deferred debits and other assets...................................................... 121 81
------- -------
Total assets............................................................ $23,145 $21,838
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Affiliates................................................................. $ 551 $ 1,300
Commercial paper........................................................... 1,082 -
Long-term debt due currently.................................................... 799 374
Accounts payable:
Affiliates................................................................. 45 64
Trade...................................................................... 999 669
Commodity contract liabilities.................................................. 842 630
Taxes accrued................................................................... 393 309
Interest accrued................................................................ 114 77
Other current liabilities....................................................... 509 328
------- -------
Total current liabilities................................................. 5,334 3,751
------- -------
Accumulated deferred income taxes...................................................... 3,389 3,331
Investment tax credits................................................................. 456 476
Commodity contract liabilities......................................................... 241 236
Cash flow hedges and other derivative liabilities...................................... 230 2
Other deferred credits and noncurrent liabilities...................................... 896 738
Long-term debt, less amounts due currently............................................. 5,391 5,819
Preferred stock subject to mandatory redemption........................................ 21 21
Commitments and contingencies (Note 6)
Shareholders' equity (Note 4).......................................................... 7,187 7,464
------- -------
Total liabilities and shareholders' equity............................... $23,145 $21,838
======= =======
See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS
As of January 1, 2002, TXU US Holdings Company (US Holdings, formerly TXU
Electric Company) is a holding company for TXU Energy Company LLC (TXU Energy)
and Oncor Electric Delivery Company (Oncor). US Holdings is a wholly-owned
subsidiary of TXU Corp., a Texas corporation. Through December 31, 2001, US
Holdings was directly engaged in the generation, purchase, transmission,
distribution and sale of electric energy in the north-central, eastern and
western parts of Texas.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of
its businesses effective January 1, 2002. In order to satisfy its obligations to
unbundle its business pursuant to the 1999 Restructuring Legislation and
consistent with its business separation plan as approved by the Public Utility
Commission of Texas (Commission), as of January 1, 2002, US Holdings
transferred:
o its electric transmission and distribution (T&D) assets to Oncor, which is
a utility regulated by the Commission and a wholly-owned subsidiary of US
Holdings,
o its electric power generation assets to subsidiaries of TXU Energy, which
is the new competitive business and a wholly-owned subsidiary of US
Holdings, and
o its retail customers to a subsidiary retail electric provider (REP) of TXU
Energy.
The T&D assets of TXU SESCO Company, a subsidiary of TXU Corp., also were
transferred to Oncor. In addition, as of January 1, 2002, US Holdings acquired
the following businesses from within the TXU Corp. system and transferred them
to TXU Energy: the REP of TXU SESCO Company; the wholesale trading and risk
management operations and the unregulated commercial and industrial retail gas
business of TXU Gas Company (TXU Gas); and the energy management services
businesses and other affiliates of TXU Corp., including the fuel procurement and
coal mining businesses that service the generation operations.
Business Acquisitions - On April 24, 2002, TXU Energy acquired a
cogeneration and wholesale energy production business in New Jersey for $36
million in cash. The acquisition included a 122 megawatt combined-cycle power
production facility and various contracts, including electric supply and gas
transportation agreements.
Generation Plant Acquisitions and Dispositions - On May 31, 2002, TXU
Energy acquired a 260 megawatt combined-cycle power production facility in
northwest Texas through a settlement agreement which dismissed a lawsuit
previously filed related to the plant and included a nominal cash payment. TXU
Energy previously purchased all of the electrical output of this plant under a
long-term contract.
On April 25, 2002, TXU Energy completed the sale of its Handley and
Mountain Creek generating plants in the Dallas-Fort Worth area with total plant
capacity of 2,334 megawatts for $443 million in cash, including the assumption
of an above-market price tolling agreement with a fair value of $190 million
reflected in other liabilities. The tolling agreement provides for TXU Energy to
purchase power during summer months for the next five years. A pretax gain on
the sale of $146 million, net of the effects of the above-market tolling
agreement, was deferred and included in other liabilities, and is being
recognized in other income during summer months over the five-year term of the
tolling agreement.
4
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- In accordance with accounting principles
generally accepted in the United States of America (US GAAP), the business
restructuring transactions discussed above have been accounted for as a change
in reporting entity. As such, the consolidated financial statements of US
Holdings give retroactive effect to those transactions, which have been
accounted for in a manner similar to that in a pooling of interest. The
retroactive restatement resulting from the change in reporting entity increased
net income of US Holdings by $32 million for the nine months ended September 30,
2001.
In connection with the restructuring of certain of TXU Corp.'s businesses
effective January 1, 2002, the wholesale trading and risk management operations
and the unregulated commercial and industrial retail gas businesses of TXU Gas
were acquired by TXU Energy. Included in the balance sheet of TXU Gas at
December 31, 2001 was $773 million of goodwill, net of amortization, arising
from TXU Corp.'s 1997 acquisition of ENSERCH Corporation. As a result of TXU
Energy's acquisition of the businesses from TXU Gas, which were originally part
of ENSERCH Corporation, and the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", $468 million
of goodwill, net of $56 million of accumulated amortization, has been allocated
to these businesses and reflected in the September 30, 2002 balance sheet of US
Holdings. US Holdings has two reportable operating segments: North America
Energy and North America Electric Delivery (See Note 7).
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with US GAAP have been omitted from
these quarterly financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). The results of operations for an
interim period may not give a true indication of results for a full year.
Certain previously reported amounts have been reclassified to conform to current
classifications. All dollar amounts in the financial statements and tables in
the notes are stated in millions of US dollars unless otherwise indicated.
Revenue Recognition -- Electric T&D fees and retail sales revenues are
recognized when services are provided to customers on the basis of periodic
cycle meter readings and include an accrual for the value of electricity
delivery fees and electricity from the meter reading date to the end of the
period. The accrual of revenues is based on estimates, and reflects data
provided by ERCOT and T&D utilities based on various estimation processes and
routines.
Income Taxes -- US Holdings is included in the consolidated federal income
tax return of TXU Corp. and subsidiary companies. US Holdings uses the separate
return method to compute its income tax provision. Because of the alternative
minimum tax (AMT), differences may arise between the consolidated federal income
tax liability and the aggregated separate tax liability of the group members. In
instances where this occurs, the difference is allocated, pro-rata, to those
companies that generated AMT on a separate company basis.
Changes in Accounting Standards -- In June 2002, the Emerging Issues Task
Force (EITF) reached a consensus on certain aspects of Issue 02-3, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities",
regarding the presentation of trading activities in the statement of income. The
new rules were effective for US Holdings on July 1, 2002, and require that all
trading contracts, whether or not physically settled, be recorded net upon
settlement, rather than gross as a sale and cost of sale. US Holdings has
historically recorded financial contracts net, but has recorded those contracts
that provide for physical delivery gross upon settlement. Prior period amounts
have been reclassified to conform to this new reporting requirement. The table
below summarizes the impact on US Holdings' operating revenues and energy
purchased for resale, fuel consumed and delivery costs of the new reporting
requirements. Transactions affected by the new reporting requirements represent
contracts that provided for physical delivery but were settled financially
without delivery, as well as contracts physically settled but classified as
trading activities. The new reporting requirements have no impact on US
Holdings' gross margin, net income or cash provided by operating activities.
5
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Operating revenues before reclassification.................. $5,559 $3,379 $12,781 $10,556
Less: Energy purchased for resale, fuel consumed and
delivery costs netted with revenues.................. 3,024 981 6,254 4,254
------- ------ ------- -------
Operating revenues after reclassification................... $2,535 $2,398 $ 6,527 $ 6,302
====== ====== ======= =======
Energy purchased for resale, fuel consumed and delivery costs
before reclassification............................. $4,124 $1,913 $8,680 $ 6,843
Less: Energy purchased for resale, fuel consumed and
delivery costs netted with revenues.................. 3,024 981 6,254 4,254
------- ------- ------- -------
Energy purchased for resale,fuel consumed and delivery costs after
reclassification $ 1,100 $ 932 $ 2,426 $ 2,589
======= ======= ======== =======
On October 25, 2002, the EITF rescinded EITF Consensus No. 98-10, which
required mark-to-market accounting for all trading activities. Pursuant to this
rescission, only contracts that are derivatives under SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" will be subject to
mark-to-market accounting. Trading contracts that may not be derivatives under
SFAS No. 133 consist primarily of gas storage, power tolling, full requirements
and capacity contracts. This new accounting rule will be effective for new
contracts entered into after October 25, 2002. The cumulative effect of the
change on all existing contracts will be recorded no later than the first
quarter of 2003. US Holdings has not determined the impact this change in
accounting method will have on its results of operations.
SFAS No. 142 became effective for US Holdings on January 1, 2002. SFAS No.
142 requires, among other things, the allocation of goodwill to reporting units
based upon the current fair value of the reporting units, and the discontinuance
of goodwill amortization. The amortization of US Holdings' existing goodwill
($15 million annually) ceased effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. US Holdings completed
the transitional impairment test in the second quarter of 2002, the results of
which indicated no impairment of goodwill. The annual test for impairment will
be made as of October 1 each year.
The table below reflects what reported net income would have been in the
2001 periods, exclusive of goodwill amortization expense recognized in those
periods, compared to the 2002 periods.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Reported net income............................. $320 $381 $817 $750
Add back: goodwill amortization.................. - 4 - 12
----- ------- ----- ------
Adjusted net income.............................. 320 385 817 762
Preferred stock dividends........................ 2 2 7 7
----- ------- ------- ------
Adjusted net income available for common stock... $318 $383 $810 $755
==== ==== ==== ====
6
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective on January 1, 2003. SFAS No. 143 requires the recognition of a fair
value liability for any retirement obligation associated with long-lived assets.
SFAS No. 143 also requires additional disclosures. US Holdings will change its
reporting for nuclear decommissioning costs to conform to the new standard, as
well as conform its accounting for all other asset retirement obligations to the
new standard effective with 2003 reporting.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective 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, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections", was issued in April 2002
and will be effective on January 1, 2003. One of the provisions of this
statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". Any gain or loss on the early extinguishment of debt
that was classified as an extraordinary item in prior periods in accordance with
SFAS No. 4 will be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions".
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and will be effective on January 1, 2003.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
initially at fair value.
For accounting standards not yet adopted or implemented, US Holdings is
evaluating the potential impact on its financial position and results of
operations.
3. FINANCING ARRANGEMENTS
Credit Facilities - TXU Corp., US Holdings, TXU Energy and Oncor had
credit facilities (some of which provide for long-term borrowings) available as
follows:
Credit Facilities
---------------------------------------------
At September 30, 2002 At November 5, 2002(a)
--------------------- ----------------------
Facility Expiration Date Borrowers Limit Credit Borrowings Credit Borrowings
- -------- --------------- ---------- ----- --------- --------- --------- ----------
($in millions)
364-Day Revolving Credit Facility. April 2003 US Holdings,TXU
Energy, Oncor $ 1,000 $ 81 $ -- $ 88 $ 912
Five Year Revolving Credit February 2005 US Holdings
Facility(b)....................... 1,400 462 -- 461 939
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 -- 350 -- 500
Standby Liquidity Facility........ November 2002 US Holdings 400 -- -- -- 400
Standby Liquidity Facility........ November 2002 US Holdings,
TXU Energy,
Oncor 400 -- -- -- 400
------- ----- ------- ----- -----
Total (c)................... $ 3,700 $ 543 $ 350 $ 549 $3,151
======= ===== ====== ===== =====
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately $2.6
billion in cash against their available credit facilities. These funds and
other available cash will be used, in part, to repay outstanding commercial
paper. (See discussion below under Recent Actions by TXU Corp..)
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
TXU Corp. was removed as a borrower under this facility effective July 31,
2002.
(c) Supported commercial paper borrowings.
7
On October 30, 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility is intended to fund interim
refinancings of approximately $700 million of maturing secured debt should
market conditions not support a timely, cost effective refinancing. The balance
will be available for general corporate purposes at Oncor.
In July 2002, US Holdings entered into the $400 million Standby Liquidity
Facility that terminates no later than November 30, 2002. In August 2002, US
Holdings, TXU Energy and Oncor entered into the joint $400 million Standby
Liquidity Facility that also expires November 30, 2002. Borrowings of $800
million against those facilities are expected to be repaid no later than the
expiration date.
In May 2002, TXU Corp. entered into the $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
is used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into the joint
$1.0 billion 364-day revolving credit facility with a group of banks that
terminates in April 2003 but can be extended for one year. This facility is used
for working capital and general corporate purposes. Up to $1.0 billion of
letters of credit may be issued under the facility. This facility and the $500
million three-year revolving credit facility described above replaced the TXU
Corp. and US Holdings $1.4 billion 364-day revolving credit facility that
expired in April 2002.
In the second quarter of 2002, each of TXU Energy and Oncor began issuing
commercial paper to fund its short-term liquidity requirements. The commercial
paper programs allow each of TXU Energy and Oncor to issue up to $2.4 billion
and $1.0 billion of commercial paper, respectively. At September 30, 2002, each
of the credit facilities listed above provided back-up for outstanding
commercial paper under the TXU Energy and Oncor programs. The TXU Corp.
commercial paper program was discontinued in July 2002, and at that time, TXU
Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of September 30, 2002, total outstanding commercial paper
under these programs was $1,082 million of which TXU Energy's portion was $979
million and Oncor's portion was $103 million. Because of liquidity concerns
prevalent in the US financial markets arising from the conditions in the US
power sector and following events related to operating difficulties at TXU
Corp.'s European business, commercial paper markets became inaccessible. (See
discussion below under Recent Actions by TXU Corp.) Existing borrowings under
the program are being repaid upon maturity. Commercial paper borrowings are
expected to resume as market concerns regarding the liquidity of TXU Corp. and
its US subsidiaries are mitigated.
All of the credit facilities mentioned above, with the exception of the
Oncor commitment dated October 30, 2002, are included in the credit facilities
table above.
Long-Term Debt -- In August 2002, Oncor issued $1.0 billion aggregate
principal amount of unsecured debentures in two series in a private placement
with registration rights. One series of $200 million is due September 1, 2007
and bears interest at the rate of 5%, and the other series of $800 million is
due September 1, 2022 and bears interest at the rate of 7%. Proceeds from the
issuance were used by Oncor to repay advances from affiliates and commercial
paper.
In August 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
In June 2002, Oncor redeemed all of its 8% First Mortgage Bonds due June 1, 2002
in the aggregate principal amount of $147 million, and in February 2002, Oncor
redeemed all of its 8.125% First Mortgage Bonds due February 1, 2002 in the
aggregate principal amount of $150 million. In July 2002, TXU Energy redeemed at
par the remaining $635 million principal amount of its floating rate debentures
due May 20, 2003. Oncor and TXU Energy funded the redemptions through the
issuance of commercial paper, advances from affiliates and cash from operations.
8
In May 2002, Oncor issued $1.2 billion aggregate principal amount of
senior secured notes in two series in a private placement with registration
rights. One series of $700 million is due May 1, 2012 and bears interest at the
annual rate of 6.375%, and the other series of $500 million is due May 1, 2032
and bears interest at the annual rate of 7%. Each series is initially secured by
an equal principal amount of Oncor's first mortgage bonds; however, the lien of
those bonds may be released in certain circumstances. Proceeds from the issuance
were used by Oncor to repay advances from US Holdings. US Holdings used the
repayments from Oncor to repay advances from TXU Energy and TXU Corp. TXU Energy
used the repayments to redeem $865 million principal amount of floating rate
debentures due May 20, 2003. In March and April 2002, Oncor entered into a
series of forward interest rate swaps with a group of banks to effectively fix
the interest rates prior to the issuance of these notes. As a result of the
forward interest rate swaps, the effective rates of interest on the senior
secured notes due in 2012 and 2032 are fixed at 6.65% and 7.26%, respectively.
(See Note 8.)
Also in May 2002, the Brazos River Authority issued $61 million principal
amount of weekly reset floating rate pollution control revenue refunding bonds
for TXU Energy to refund a similar principal amount of pollution control revenue
bonds.
In February 2002, TXU Mining redeemed $70 million of its 6.875% senior
notes due 2005 and $53 million of its 7.0% senior notes due 2003.
As of September 30, 2002, the aggregate secured long-term debt of US
Holdings and its consolidated subsidiaries consisted of $3.1 billion of Oncor's
first mortgage bonds and senior secured notes that are secured by a lien on
substantially all of its tangible electric T&D property, and $143 million of
various other long-term debt secured by liens on utility plant and other assets
in North America. US Holdings' long-term debt obligations are not guaranteed or
secured by affiliates.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of September 30, 2002, TXU Energy
Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas are
qualified originators of accounts receivable under the program. TXU Receivables
Company may sell up to an aggregate of $600 million in undivided interests in
the receivables purchased from the originators under the program. As of
September 30, 2002, US Holdings' subsidiaries had sold $1,205 million face
amount of receivables to TXU Receivables Company under the program in exchange
for cash of $579 million and $609 million in subordinated notes, with $17
million of losses on sales for the nine months ended September 30, 2002
principally representing the interest on the underlying financing. These losses
approximated 4% of the cash proceeds from the sale of undivided interests in
accounts receivable on an annualized basis. Upon termination, cash flows to the
originators would be delayed as collections of sold receivables were used by TXU
Receivables Company to repurchase the undivided interests of the financial
institutions instead of purchasing new receivables. The level of cash flows
would normalize in approximately 16 to 31 days. TXU Business Services, a
subsidiary of TXU Corp., services the purchased receivables and is paid a market
based servicing fee by TXU Receivables Company. The subordinated notes
receivable from TXU Receivables Company represent US Holdings' and its
subsidiaries retained interests in the transferred receivables and are recorded
at book value, net of allowances for bad debts, which approximates fair value
due to the short-term nature of the subordinated notes, and are included in
accounts receivable in the consolidated balance sheet.
9
4. SHAREHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------ -----------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption......... $ 115 $ 115
--------- ------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: September 30, 2002 -- 52,817,862
and December 31, 2001-- 51,122,600 ................. 2,248 2,248
Retained earnings............................................. 4,970 5,086
Accumulated other comprehensive income (loss)................. (146) 15
-------- -------
Total common stock equity........................... 7,072 7,349
-------- -------
Total shareholders' equity.......................... $7,187 $7,464
======= =======
US Holdings issued 1,695,262 shares of its common stock to TXU Corp.
on January 1, 2002 in connection with the transfer of businesses
described in Note 1.
On March 6, 2002, US Holdings declared a cash dividend of $250 million
which was paid to TXU Corp. on April 1, 2002. On May 8, 2002, US Holdings
declared cash dividends of $177 million and $250 million which were paid to TXU
Corp. on May 17, 2002 and July 1, 2002, respectively. On August 7, 2002, US
Holdings declared a cash dividend of $250 million which was paid to TXU Corp. on
October 1, 2002.
The mortgage of Oncor restricts its payments of dividends to the amount of
its retained earnings.
5. REGULATION AND RATES
Regulatory Settlement Plan -- (For additional discussion of the settlement
plan and related items, see Note 4 to Financial Statements in US Holdings'
Annual Report on Form 10-K for the fiscal year ended December 31, 2002.) On
December 31, 2001, US Holdings filed a settlement plan with the Commission,
which was approved by the Commission on June 20, 2002. On August 5, 2002, the
Commission issued a financing order, pursuant to the settlement plan,
authorizing the issuance of transition (securitization) bonds with a principal
amount of $1.3 billion. The Commission's order approving the settlement plan and
the financing order were appealed by certain nonsettling parties in five
separate dockets in Travis County, Texas District Court in August 2002. The
court has consolidated these dockets into one, and a hearing on the merits is
scheduled for February 4, 2003. US Holdings is unable to predict when the appeal
process related to the Commission's approval of the settlement plan and the
financing order will be concluded or the outcome. If the Commission's approval
is upheld, the settlement plan resolves all major pending issues related to US
Holdings' transition to competition and will supersede certain proceedings that
are related to the 1999 Restructuring Legislation. The settlement plan does not
remove regulatory oversight of Oncor's business nor does it eliminate TXU
Energy's price-to-beat rates and related possible fuel adjustments.
The principal and interest on the securitization bonds would be secured by
payments from retail customers to provide recovery of generation-related
regulatory assets and other qualified costs. These regulatory assets have a
carrying value of approximately $1.8 billion. Once the bonds are issued, the
full amount of the regulatory assets will be amortized to expense by Oncor over
the life of the bonds. Any amount of the $1.8 billion which is in excess of the
future cash flows from the customer payments to service the bonds will be
expensed at the time such shortfall, if any, is determined. Assuming the bonds
were issued at the present time and considering current interest rates, the
amount of the regulatory asset's carrying value would exceed the cash flows from
the bonds by approximately $130 million.
10
Open-Access Transmission -- At the federal level, Federal Energy
Regulatory Commission (FERC) Order No. 888 requires all FERC-jurisdictional
electric public utilities to offer third parties wholesale transmission services
under an open-access tariff.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997 through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO are named defendants in both suits. US Holdings, TXU
SESCO and Oncor are unable to predict the outcome of this litigation.
TXU Energy -- Under Commission rules, affiliated REPs of utilities are
allowed to petition the Commission for an increase in the fuel factor component
of their price-to-beat rates if the average price of natural gas futures
increases more than 4% from the level used to set the previous price-to-beat
fuel factor rate. In April 2002, TXU Energy filed a request with the Commission
to increase the fuel factor component of its price-to-beat rates. On August 23,
2002, the Commission approved the fuel factor increase. The fuel factor increase
was implemented for the billing month beginning on August 26, 2002. Average
residential customers using 1,000 KWh saw an increase of just under 5% in their
monthly electric bill.
TXU Energy is the current provider of last resort (POLR) for residential
and small non-residential customers in all areas of Electric Reliability Council
of Texas (ERCOT), where customer choice is available except in its incumbent
service areas, and is the POLR for large non-residential customers in its
incumbent service area. TXU Energy's current POLR contract ends on December 31,
2002. On August 22, 2002, the Commission adopted new rules that significantly
changed POLR service. Under the new POLR rules, effective September 24, 2002,
residential and small non-residential customers served by affiliated REPs and
all large non-residential customers could be subject to disconnection for
non-payment rather than being transferred to a POLR provider. Also effective on
September 24, 2002, non-affiliated REPs ceased transferring non-paying customers
to the POLR provider, and instead began transferring them to the affiliated REP.
Within the new POLR framework, the POLR only provides electric service to
customers who request POLR service, whose selected REP goes out of business, or
who are transferred to the POLR by other REPs for reasons other than
non-payment. This limited POLR service will be provided by certified REPs for a
two-year period beginning January 1, 2003, and will be selected through a
competitive bid process. If no bids are submitted or all bids are rejected, a
lottery will be conducted to select a POLR to serve residential, small
non-residential customers and large non-residential customers. Only the
affiliated REP and the POLR can disconnect residential and small non-residential
customers for non-payment under the revised rules. Large non-residential
customers can be disconnected by any REP if the customer's contract allows for
it. The Commission will consider whether all REPs should be able to disconnect
non-paying customers and will make a determination by October 1, 2004.
11
6. COMMITMENTS AND CONTINGENCIES
Commodity Purchase and Transportation Contracts - TXU Energy has entered
into various power purchase contracts requiring the payment of annual capacity
fees. In addition, 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 power production 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. TXU Energy also has commitments under coal purchase
and transportation contracts. Including contracts entered into subsequent to
December 31, 2001, future minimum commitments under existing agreements are
estimated as follows:
October 1 through December 31, 2002.... $ 83
2003................................... 368
2004................................... 248
2005................................... 175
2006................................... 141
Thereafter............................. 28
-------
Total minimum commitments.... $ 1,043
=======
Legal Proceedings - On November 21, 2000, the City of Denton, Texas and
other Texas cities filed suit in the 134th Judicial District Court of Dallas
County, Texas against US Holdings, TXU Gas Company and TXU Corp. The petition
alleges claims for breach of contract, negligent representation, fraudulent
inducement of contract, breach of duty of good faith and fair dealing and unjust
enrichment related to the defendants' alleged exclusion of certain revenues from
the cities' franchise fee base. Oncor assumed the obligations of US Holdings in
connection with this lawsuit pursuant to the Business Separation Agreement. No
specified damages have been alleged. On January 31, 2002, US Holdings, TXU Gas
Company and TXU Corp. entered into a Memorandum of Understanding with the
plaintiffs to settle this lawsuit, subject to the execution of a definitive
settlement agreement. Final versions of the settlement document have been
provided to the plaintiff cities for execution. Most of the cities named as
plaintiffs in the litigation have accepted the settlement and executed the
settlement agreement. If any plaintiff cities decline to execute the settlement,
the suit will continue as to those cities. Oncor believes the allegations in
this suit are without merit and intends to vigorously defend this suit against
any plaintiff cities that do not execute the settlement. Oncor does not believe
the ultimate resolution of this suit will have a material effect on Oncor's
financial position, results of operations or cash flows.
In September 1999, Quinque Operating Company (Quinque) filed suit in
the State District Court of Stevens County, Kansas against over 200 gas pipeline
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 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, 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.
Financial Guarantees -- US Holdings has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy
and has agreed, in effect, to guarantee the principal, $16 million at September
30, 2002, and interest on bonds issued by the agencies to finance the reservoirs
from which the water is supplied. The bonds mature at various dates through 2011
and have interest rates ranging from 5.5% to
12
7%. US Holdings is required to make periodic payments equal to such
principal and interest, including amounts assumed by a third party and
reimbursed to US Holdings, of $4 million annually for the years 2002 through
2003, $7 million for 2004 and $1 million for each of 2005 and 2006. In addition,
US Holdings is obligated to pay certain variable costs of operating and
maintaining the reservoirs. US Holdings has assigned to a municipality all
contract rights and obligations of US Holdings in connection with $30 million
remaining principal amount of bonds at September 30, 2002, issued for similar
purposes which had previously been guaranteed by US Holdings. US Holdings would,
however, be contingently liable in the event of a default by the municipality.
General -- US Holdings and its subsidiaries are involved in various other
legal and administrative proceedings, the ultimate resolution of which, in the
opinion of US Holdings, is not expected to have a material effect upon their
financial position, results of operations or cash flows.
Retail Clawback -- The legislation passed by the Texas Legislature to
restructure the electric utility industry in Texas included a provision to
incent affiliated REPs of utilities to actively compete for customers outside
their traditional service areas. Under this provision, if TXU Energy retains
more than 60% of its former residential and small business customers after the
first two years of competition, a retail clawback amount would be applied as a
reduction of Oncor's delivery rates over a two-year period beginning January 1,
2004. The amounts of the retail clawback will be equal to the number of
residential and small business customers retained by TXU Energy in its
traditional service area as of January 1, 2004 less the number of new customers
added outside that service area as of that date, multiplied by $90. The
calculation will be done separately for each of the residential and small
business classes. The $90 amount is in accordance with the settlement plan
approved by the Commission and subject to appeals filed as discussed in Note 5.
The ultimate effect of the retail clawback on the results of US Holdings cannot
be reasonably estimated at this time.
7. SEGMENT INFORMATION
Through December 31, 2001, US Holdings had no separate reportable
operating segments. As a result of TXU Corp.'s reorganization as of January 1,
2002 (see Note 1), US Holdings realigned its operations into two reportable
segments: North America Energy and North America Electric Delivery. Prior period
amounts have been restated to conform to the new segments.
North America Energy (Energy) - operations involving the generation of
electricity, wholesale sales, trading and risk management activities, and retail
energy sales and services in the US and parts of Canada; and
North America Energy Delivery (Electric Delivery) - operations involving
the transmission and distribution of electricity in Texas.
The prior year financial information for the Energy segment and the
Electric Delivery segment includes information derived from the historical
financial statements of US Holdings. Reasonable allocation methodologies were
used to unbundle the financial statements of US Holdings between its generation
and T&D operations. Allocation of revenues reflected consideration of return on
invested capital, which continues to be regulated for the T&D operations. US
Holdings maintained expense accounts for each of its component operations. Costs
of energy and expenses related to operations and maintenance and depreciation
and amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and disaggregated. Various allocation methodologies were used to
disaggregate common expenses, assets and liabilities between US Holdings'
generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
13
Effective January 1, 2002, TXU Energy incurs electricity delivery fees
charged by Oncor and other T&D utilities, which TXU Energy includes in billings
to its large commercial and industrial (C&I) customers. For residential and
small business customers, the price-to-beat rates include a delivery component,
but such billed amounts are not necessarily equivalent to delivery fees incurred
by TXU Energy. These fees are reflected in TXU Energy's revenues and cost of
energy for the three and nine months ended September 30, 2002. For comparability
purposes, electricity delivery fees have been included in the Energy segment's
revenues and cost of energy for the three and nine months ended September 30,
2001. The Energy segment's gross margin is not materially affected by the
inclusion of these electricity delivery fees.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues -
Energy........................... $2,417 $2,350 $6,228 $6,161
Electric Delivery (net of intercompany revenues) 118 48 299 141
------- ------- ------- -------
Consolidated............... $2,535 $2,398 $6,527 $6,302
======= ======= ====== ======
Affiliated revenues -
Energy........................... $ 1 $ -- $ 5 $ 1
Electric Delivery................ 439 602 1,252 1,514
Eliminations..................... (440) (602) (1,257) (1,515)
------ ------- ------- -------
Consolidated............... $ - $ - $ - $ -
======= ======= ======= =======
Net income available for common stock
Energy........................... $ 222 $ 267 $ 578 $ 567
Electric Delivery................ 96 112 232 176
------- ------- ------- --------
Consolidated................ $ 318 $ 379 $ 810 $ 743
======= ======= ====== =======
------------------------
*The Energy and Electric Delivery segments were created as a result of the
deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. The Energy segment includes the generation and
certain retail operations of US Holdings, wholesale sales, trading and
risk management activities, an unregulated commercial and industrial
retail gas business and other energy-related businesses. The Electric
Delivery segment includes the electric T&D business of US Holdings and TXU
SESCO Company.
Prior period data is included above for the purpose of providing
historical financial information about the Energy and Electric Delivery
segments after giving effect to the restructuring transactions and
allocations described above and in Note 1. Had the Energy and Electric
Delivery segments existed as separate segments, their results of
operations and financial positions could have differed materially from
those reflected above. Additionally, future results of the Energy and
Electric Delivery segments' operations and financial positions could
differ materially from the historical information presented.
14
8. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues
Regulated........................................... $ 117 $ 2,320 $ 294 $ 6,104
Unregulated......................................... 2,418 78 6,233 198
------- ------- ------- -------
Total operating revenues....................... 2,535 2,398 6,527 6,302
------- ------- ------- -------
Operating expenses
Energy purchased for resale - regulated............. -- 419 -- 980
Energy purchased for resale - unregulated........... 613 9 1,294 16
Fuel consumed - regulated........................... -- 504 -- 1,593
Fuel consumed - unregulated......................... 487 -- 1,132 --
Operation and maintenance - regulated............... 193 376 560 1,105
Operation and maintenance - unregulated............. 358 84 1,079 201
Depreciation and amortization....................... 176 160 524 484
Taxes other than income............................. 149 168 449 472
------- ------- ------- -------
Total operating expenses....................... 1,976 1,720 5,038 4,851
------- ------- ------- -------
Operating income........................................ $ 559 $ 678 $ 1,489 $ 1,451
======= ======= ======= =======
The operations of the Energy segment are included in the 2002 periods
above as unregulated, as the Texas market is now open to competition. However,
retail pricing to residential and small business customers in its traditional
service area continues to be subject to certain price controls as discussed in
Note 5.
Other Income and Deductions --
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Other income
Gain on sale of businesses and other properties..... $ 18 $ -- $ 30 $ 1
Other............................................... 2 4 6 8
-------- -------- -------- --------
Total other income............................. $ 20 $ 4 $ 36 $ 9
======== ======== ======== ========
Other deductions
Loss on sale of properties.......................... $ -- $ 1 $ -- $ 1
Regulatory asset write-off.......................... -- 21 -- 21
Other............................................... 6 5 14 16
-------- -------- -------- --------
Total other deductions......................... $ 6 $ 27 $ 14 $ 38
======== ======== ======== ========
Regulatory Assets and Liabilities -- Included in regulatory assets - net
are regulatory assets of $2.1 billion and regulatory liabilities of $323 million
at September 30, 2002, and regulatory assets of $2.1 billion and regulatory
liabilities of $461 million at December 31, 2001. Regulatory assets of $2.0
billion at September 30, 2002 and December 31, 2001 were not earning a return.
Of the assets not earning a return, $1.8 billion is expected to be recovered
over the term of the securitization bonds pursuant to the regulatory settlement
plan approved by the Commission. (See Note 5 for further discussion of the
settlement plan.) The remaining regulatory assets have an average remaining
recovery period of 24 to 43 years.
Accounts receivable -- At September 30, 2002 and December 31, 2001,
accounts receivable were stated net of uncollectible accounts of $93 million and
$28 million, respectively. Accounts receivable included $745 million and $338
million of unbilled revenues at September 30, 2002 and December 31, 2001,
respectively. The increase in uncollectible accounts receivable and unbilled
revenues reflects the effects of the transition to competition.
Affiliate Transactions -- TXU Business Services Company, a subsidiary of
TXU Corp., allocates and bills US Holdings for financial, accounting,
information technology, environmental, procurement and personnel
15
services and other administrative services at cost. For the three and nine
months ended September 30, 2002, these costs totaled $104 million and $319
million, respectively.
Inventories by major category--
September 30 December 31,
2002 2001
------------ -----------
Materials and supplies................................................. $200 $186
Fuel stock............................................................. 61 62
Gas stored underground................................................. 62 49
---- ----
Total inventories................................................... $323 $297
==== ====
Property, plant and equipment--
September 30 December 31,
2002 2001
----------- -----------
In service:
Production......................................................... $16,475 $16,627
Transmission....................................................... 2,053 1,979
Distribution....................................................... 6,297 6,110
General............................................................ 905 672
------- --------
Total........................................................... 25,730 25,388
Less accumulated depreciation.......................................... 9,374 9,074
------- --------
Net of accumulated depreciation.................................... 16,356 16,314
Construction work in progress.......................................... 499 510
Nuclear fuel (net of accumulated amortization: 2002- $836; 2001 - $787) 148 146
Held for future use.................................................... 22 22
Reserve for regulatory disallowances................................... (836) (836)
------- -------
Net property, plant and equipment.................................. $16,189 $16,156
======= =======
Capitalized Software -- Capitalized software costs of $342 million at
September 30, 2002 and $231 million at December 31, 2001 were included in
property, plant and equipment. Amortization expense relating to these software
costs of $21 million and $60 million was recorded for the three and nine months
ended September 30, 2002, respectively. The increase in capitalized software
costs reflects the development of new systems to support the transition to
competition.
Goodwill -- At September 30, 2002 and December 31, 2001, goodwill is
stated net of accumulated amortization of $67 million.
Derivatives and Hedges -- In March and April 2002, Oncor entered into a
series of forward interest rate swaps with a group of banks to effectively fix
the interest rates on the senior secured notes discussed in Note 3. Such
contracts were designated as accounting hedges under SFAS No. 133, "Accounting
for Derivatives Instruments and Hedging Activities," and the fair values of the
contracts were reflected in Other Comprehensive Income. These contracts were
settled in May 2002 for $39 million in cash. The related amounts included in
Other Comprehensive Income will be reclassified into income over the term of the
senior secured notes resulting in fixed effective interest rates of 6.65% and
7.26% on the notes due in 2012 and 2032, respectively.
During the first nine months of 2002, existing accounting hedges of
anticipated sales from baseload production in TXU Energy became less effective
due to changes in ERCOT market rules and conditions. US Holdings experienced net
hedge ineffectiveness of $7 million and $40 million, reported as a reduction of
revenues, for the three and nine months ended September 30, 2002, respectively,
primarily related to these contracts. Accounting hedges of interest rate risk
remained highly effective during the periods.
16
As of September 30, 2002, it is expected that $30 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been entered into. The amount
expected to be reclassified is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which volatility in
earnings (which would otherwise exist) is mitigated through the use of cash flow
hedges.
17
INDEPENDENT ACCOUNTANTS' REPORT
TXU US Holdings Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU US
Holdings Company (US Holdings) and subsidiaries as of September 30, 2002, and
the related condensed statements of consolidated income and of comprehensive
income for the three-month and nine-month periods ended September 30, 2002 and
2001 and the condensed statements of consolidated cash flows for the nine-month
periods ended September 30, 2002 and 2001. These financial statements are the
responsibility of US Holdings' management. The condensed consolidated financial
statements give retroactive effect to the acquisition of affiliated businesses
which have been accounted for as a combination of entities under common control
as described in the Notes to Financial Statements.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of US
Holdings as of December 31, 2001, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report, dated January 31, 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2001, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived, after giving retroactive effect to the combination discussed
in the first paragraph.
As discussed in Note 2 to the Notes to Financial Statements, US Holdings changed
its method of accounting for goodwill amortization in 2002 in connection with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" and changed its method for reporting trading
activities in connection with the application of Emerging Issues Task Force
Issue 02-3 "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities."
DELOITTE & TOUCHE LLP
Dallas, Texas
November 13, 2002
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
TXU US Holdings Company (US Holdings, formerly TXU Electric Company) is a
holding company for TXU Energy Company LLC (TXU Energy) and Oncor Electric
Delivery Company (Oncor). US Holdings is a wholly-owned subsidiary of TXU Corp.,
a Texas corporation. Through December 31, 2001, US Holdings was directly engaged
in the generation, purchase, transmission, distribution and sale of electric
energy in the north-central, eastern and western parts of Texas. Effective
January 1, 2002, as a result of legislation passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation), US Holdings transferred to Oncor its
transmission and distribution (T&D) business and to TXU Energy its generation
assets and retail customers. In addition, as of January 1, 2002, TXU Energy
acquired the following businesses from within the TXU Corp. system: the retail
electric provider (REP) of TXU SESCO Company; the wholesale trading business and
risk management operations and the unregulated commercial and industrial retail
gas business of TXU Gas Company (TXU Gas); and the energy management services
businesses and other affiliates of TXU Corp., including the fuel procurement and
coal mining businesses that service the generation operations. Also, the T&D
business of TXU SESCO Company was transferred to Oncor. The historical financial
statements for 2001 have been restated to reflect these acquisitions of entities
under common control and management.
As of January 1, 2002 US Holdings engages in electricity generation,
wholesale energy sales, trading and risk management activities, retail energy
sales, energy delivery and other energy-related services in North America.
The prior period segment information reflects best efforts to allocate
both revenues and expenses of US Holdings between the North America Energy
(Energy) and North America Energy Delivery (Electric Delivery) segments.
Therefore, comparisons remain difficult due to the fact the prior period for the
Energy segment reflects certain operations that were regulated versus the
unregulated operations of today.
Effective January 1, 2002, TXU Energy incurs electricity delivery
fees charged by Oncor and other T&D utilities, which TXU Energy includes in
billings to its large commercial and industrial (C&I) customers. For residential
and small business customers, the price-to-beat rates include a delivery
component, but such billed amounts are not necessarily equivalent to delivery
fees incurred by TXU Energy. These fees are reflected in TXU Energy's revenues
and cost of energy for the three and nine months ended September 30, 2002. For
comparability purposes, electricity delivery fees have been included in the
Energy segment's revenues and cost of energy for the three and nine months ended
September 30, 2001. The Energy segment's gross margin is not materially affected
by the inclusion of these electricity delivery fees.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
- ----------------------------------------------------------------------------
US Holdings' operating revenues increased $137 million, or 6%, to $2.5
billion in 2002. Revenues in the Energy segment rose $67 million (net of
intercompany elimination)reflecting higher wholesale sales, partially offset by
the effect of lower retail electric volumes and prices. Revenues in the Electric
Delivery segment from unaffiliated REPs rose $70 (million as a result of the
opening of the Texas market to competition.
Excluding the effects of the Electric Delivery segment, which has no cost
of revenues, gross margin (operating revenue less energy purchased for resale,
fuel consumed and delivery fees) increased $62 million, or 8%, to $877 million
in 2002. This growth reflected the Energy segment's improved results from
expanded wholesale sales, trading and risk management activities and lower
average costs of power sold, partially offset by the effect of lower retail
electric volumes and pricing. Revenues and gross margin in 2002 included a
positive $8 million net effect of mark-to-market accounting for commodity
positions, compared to $86 million in 2001. (See discussion under Commodity
Contract and Mark-to-Market Activities.)
19
Operation and maintenance expense increased $91 million, or 20%, to $551
million in 2002. The increase was driven by the Energy segment, reflecting
increased staffing and other operating costs associated with expanded retail
sales operations and wholesale sales, trading and risk management activities and
higher bad debt expense, all due largely to the opening of the Texas electricity
market to competition in January 2002. Total net pension and postretirement
benefit costs increased $4 million, or 50%, to $12 million in 2002.
Operation and maintenance expenses in the Energy segment are expected to
decline in 2003. This decline reflects temporarily higher costs incurred in
2002, including bad debts and other administrative expenses arising from the
transition to deregulation, as well as planned reductions in certain
developmental expenses. Certain of the planned actions are expected to result in
severance charges in the fourth quarter of 2002.
Other operating expenses (depreciation and other amortization, goodwill
amortization and taxes other than income) decreased $3 million, or 1%, to $325
million in 2002, primarily reflecting a $19 million decrease in taxes other than
income due to lower retail revenues on which state and local gross receipts
taxes are assessed, partially offset by increased depreciation and amortization
expense of $16 million due to the investments in computer systems and expansion
of office facilities to support increased wholesale sales, trading, risk
management and other activities associated with the opening of the Texas
electricity market to competition.
Operating income decreased $119 million, or 18%, to $559 million in 2002,
reflecting the decrease in gross margin and the increase in operation and
maintenance and depreciation and amortization expense described above, partially
offset by lower taxes other than income.
Other income increased $16 million to $20 million in 2002. The increase
was due primarily to the amortization of a deferred gain associated with the
sale of two generating plants in Texas in 2002.
Other deductions decreased $21 million to $6 million in 2002. The 2001
period included a $21 million write-off of regulatory assets.
Interest income declined $12 million, or 100%, due largely to the recovery
of under-collected fuel revenue on which interest income had been accrued under
regulation in 2001.
Interest expense and other charges decreased $18 million, or 15%, to $103
million in 2002, reflecting an approximately $38 million decrease due to lower
interest rates, partially offset by an approximately $20 million increase due
to higher average debt levels.
The effective income tax rate was 31.9% in 2002 compared to 30.2% in 2001.
The increase reflected the effect of nonrecurring regulatory-driven adjustments
recorded in 2001 relating to prior years.
Net income available for common stock decreased $61 million, or 16%, to
$318 million in 2002. The decrease in net income reflected decreases in the
Energy and Electric Delivery segments of $45 million and $16 million,
respectively. These performances are discussed below under Segments. Net pension
and postretirement benefit costs reduced net income by $8 million in 2002 and $5
million in 2001.
20
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
- ---------------------------------------------------------------------------
US Holdings' operating revenues increased $225 million, or 4%, to $6.5
billion in 2002. Revenues in the Energy segment increased by $66 million, (net
of intercompany elimination) which reflected an increase in wholesale sales
partially offset by the effect of lower retail electric volumes and pricing.
Revenues in the Electric Delivery segment from unaffiliated REPs rose $159
million as a result of the opening of the Texas market to competition.
Excluding the effects of the Electric Delivery segment, which has no cost
of revenues, gross margin (operating revenue less energy purchased for resale,
fuel consumed and delivery fees) increased $494 million, or 24%, to $2,552
million. This growth reflected the Energy segment's improved results from
expanded wholesale sales, trading and risk management activities and lower
average cost of power sold, partially offset by the effect of lower retail
electric volumes and pricing. Revenues and gross margin in 2002 included a
negative $4 million net effect of mark-to-market accounting for commodity
positions, compared to a positive $188 million in 2001. (See discussion under
Commodity Contract and Mark-to-Market Activities.)
Operation and maintenance expense increased $333 million, or 25%, to $1.6
billion in 2002. The increase was driven by the Energy segment, reflecting
increased staffing and other operating costs associated with expanded retail
sales operations and wholesale sales, trading and risk management activities and
higher bad debt expense, all due largely to the opening of the Texas electricity
market to competition in January 2002. Total net pension and postretirement
benefit costs increased $18 million, or 72%, to $43 million in 2002.
Other operating expenses increased $17 million, or 2%, to $973 million in
2002, primarily reflecting increased depreciation and amortization expense of
$40 million due to the investments in computer systems and expansion of office
facilities to the support the opening of the Texas electricity market to
competition. Taxes other than income declined $23 million due to the effect of
lower retail electric revenues on which state and local gross receipts taxes are
assessed.
Operating income increased $38 million, or 3%, to $1,489 million in 2002,
reflecting higher gross margin and lower taxes other than income partially
offset by higher operation and maintenance expense and higher depreciation and
amortization expense.
Other income increased $27 million to $36 million in 2002. The increase was
due primarily to the amortization of a deferred gain associated with the sale of
two generating plants in Texas in 2002.
Other deductions decreased $24 million to $14 million in 2002. The 2001
period included a $21 million write-off of regulatory assets.
Interest income declined $32 million, or 97%, to $1 million in 2002, due
largely to the recovery of under-collected fuel revenue on which interest income
had been accrued under regulation in Texas in 2001.
Interest expense and other charges decreased $64 million, or 17%, to $310
million in 2002, reflecting an approximately $126 million decrease due to lower
interest rates, partially offset by an approximately $62 million increase due to
higher debt levels.
The effective income tax rate was 32.0% in 2002 compared to 30.6% in 2001.
The increase reflected the effect of nonrecurring regulatory-driven adjustments
recorded in 2001 relating to prior years.
Net income available for common stock increased $67 million, or 9%, to
$810 million in 2002. Net income increased in the Energy and Electric Delivery
segments by $11 million and $56 million, respectively. These performances are
discussed below under Segments. Net pension and postretirement benefit costs
reduced net income by $28 million in 2002 and $16 million in 2001.
21
COMMODITY CONTRACT AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets and
liabilities for the nine months ended September 30, 2002. The net decrease,
excluding "other activity" as described below, of $4 million represents the net
unfavorable effect of mark-to-market accounting on earnings for the nine months
ended September 30, 2002 ($8 million net favorable effect for the three months
ended September 30, 2002). This effect represents the difference between
earnings under mark-to-market accounting versus accounting for gains and losses
upon settlement of the contracts.
Balance of net commodity contract assets/(liabilities) at December 31, 2001.... $ 378
Settlements of positions included in the opening balance (1) ................. (177)
Unrealized mark-to-market valuations of positions held at end of period (2)... 173
Other activity (3)............................................................ 18
------
Balance of net commodity contract assets/(liabilities) at September 30, 2002.. $ 392
======
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of December 31, 2001.
(2) Includes unrealized gains of $36 million recognized upon origination of
certain contracts in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". There were no significant
changes in fair value attributable to changes in valuation techniques.
(3) Represents net option premiums paid/(received) in the current period and a
commodity contract transferred from TXU Gas. Also includes
reclassifications of commodity contract assets and liabilities, including
$71 million of unsettled liabilities to Enron reclassified to other current
liabilities These activities have no effect on unrealized mark-to-market
valuations.
The above table includes all trading and non-trading commodity contracts
that are marked to market in net income.
Of the net commodity contract asset balance above at September 30, 2002,
the amount representing unrealized mark-to-market net gains that have been
recognized in current and prior periods' earnings is $405 million. The
offsetting net liability of $13 million included in the September 30, 2002
balance consists of net option premiums received. The following table presents
the unrealized mark-to-market balance at September 30, 2002 scheduled by
contractual settlement dates of the underlying positions (in millions).
Maturity dates of unrealized net mark-to-market balances at September 30, 2002
------------------------------------------------------------------------------
Maturity Maturity in
less than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 5 years Total
---------------------- ----------- ----------- ----------- --------- -----
Prices actively quoted.. $ (6) $ 1 $ - $ - $ (5)
Prices provided by other
external sources...... 200 121 27 6 354
Prices based on models.. 29 13 8 6 56
---- ---- ---- ---- ----
Total................... $223 $135 $ 35 $ 12 $405
==== ==== ==== ==== ====
Percentage of total .... 55% 33% 9% 3% 100%
As the above table indicates, approximately 88% of the unrealized
mark-to-market valuations at September 30, 2002 mature within three years. This
is reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2005. The "prices provided by
other external sources" category represents forward commodity positions at
locations for which over-the-counter (OTC) broker quotes are available. OTC
quotes for power and natural gas generally extend through 2005 and 2010,
respectively. This category also includes values of large commercial and
industrial (C&I) retail sales contracts. The "prices based on models" category
contains the value of all non-exchange traded options, valued using industry
accepted option pricing models. In addition, this category contains other
22
contractual arrangements, which may have both forward and option components. In
many instances, these contracts can be broken down into their component parts
and modeled by US Holdings as simple forwards and options based on prices
actively quoted. As the modeled value is ultimately the result of a combination
of prices from two or more different instruments, it has been included in this
category.
SEGMENTS
Energy
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------
2002 2001* 2002 2001*
---- ----- ---- ----
Operating revenues....................................... $2,418 $2,350 $6,233 $6,162
------ ------ ------ ------
Operating expenses
Energy purchased for resale, fuel consumed and
delivery fees........................................ 1,541 1,535 3,681 4,104
Operation and maintenance............................ 357 255 1,081 700
Depreciation and amortization........................ 111 100 328 306
Taxes other than income.............................. 52 29 165 84
------- ------- ------- -------
Total operating expenses.................... 2,061 1,919 5,255 5,194
------- ------- ------- -------
Operating income......................................... 357 431 978 968
Other income ............................................ 20 3 34 5
Other deductions......................................... 5 25 10 33
Interest income ......................................... 1 19 24 60
Interest expense and other charges....................... 51 61 181 196
-------- -------- -------- -------
Income before income taxes .............................. 322 367 845 804
Income tax expense....................................... 100 100 267 237
------- ------- ------- -------
Net income............................................... $ 222 $ 267 $ 578 $ 567
======= ======= ======= =======
- -----------------
*The Energy segment was created as a result of the deregulation of the
electric utility industry in Texas, which became effective January 1,
2002. The Energy segment includes the generation and certain retail
operations of US Holdings, wholesale sales, trading and risk management
activities, an unregulated retail commercial and industrial gas business
and other energy related businesses.
Prior period data is included above for the purpose of providing
historical financial information about the Energy segment after giving
effect to the restructuring transactions and allocations described in the
Notes to Financial Statements. Had the Energy segment existed as a
separate segment, its results of operations and financial position could
have differed materially from those reflected above. Additionally, future
results of the Energy segment's operations and financial position could
differ materially from the historical information presented.
23
Segment Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Operating statistics -
Retail electric sales volumes (GWh)........................................ 27,394 30,461 72,551 78,064
Wholesale electric sales volumes (non-trading physically settled)(GWh)..... 9,260 2,444 22,447 5,178
Customers (end of period and in thousands)
Electric............................................................. 2,763 2,727
Gas.................................................................. 2 3
Total customers................................................ 2,765 2,730
Physical and financial wholesale trading and risk management volumes:
Electric (GWh)....................................................... 232,613 89,344 1,277,526 222,940
Gas (Bcf)............................................................ 5,581 3,998 15,354 7,699
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
----- ------ ------ -------
Operating revenues (millions of dollars):
Retail electric:
Residential............................................................. $1,093 $1,151 $2,569 $2,709
Commercial and industrial............................................... 839 1,104 2,720 3,117
------ ----- ------ ------
Total.......................................................... 1,932 2,255 5,289 5,826
------ ----- ------ ------
Wholesale electric revenues (non-trading physically settled)............. 327 25 645 77
Wholesale energy revenues - trading and risk management activities....... 123 52 237 106
Other revenues........................................................... 36 18 62 153
------ ------ ------ ------
Total operating revenues....................................... $2,418 $2,350 $6,233 $6,162
====== ====== ====== ======
Weather (average for service area)**
Percent of normal
Cooling degree days......................................... 99.8% 99.1% 102.1% 101.6%
Heating degree days......................................... -- -- 98.6% 104.3%
- -----------------------
*See footnote on previous page.
**Weather data is obtained from Meterlogix, a private company that collects
weather data from reporting stations of the National Oceanic and Atmospheric
Administration (a federal agency under the US Department of Commerce).
The prior year financial information for the Energy segment includes
information derived from the historical financial statements of US Holdings.
Reasonable allocation methodologies were used to unbundle the financial
statements of US Holdings between its generation and T&D operations. Allocation
of revenues reflected consideration of return on invested capital, which
continues to be regulated for the T&D operations. US Holdings maintained expense
accounts for each of its component operations. Costs of energy and expenses
related to operations and maintenance and depreciation and amortization, as well
as assets, such as property, plant and equipment, materials and supplies and
fuel, were specifically identified by component operation and disaggregated.
Various allocation methodologies were used to disaggregate common expenses,
assets and liabilities between US Holdings' generation and T&D operations.
Interest and other financing costs were determined based upon debt allocated.
Had the unbundled operations of US Holdings actually existed as separate
entities in a deregulated environment, their results of operations could have
differed materially from those included in the historical financial statements
included herein.
24
Effective January 1, 2002, TXU Energy incurs electricity delivery fees
charged by Oncor and other T&D utilities, which TXU Energy includes in billings
to its large C&I customers. For residential and small business customers, the
price-to-beat rates include a delivery component, but such billed amounts are
not necessarily equivalent to delivery fees incurred by TXU Energy. These fees
are reflected in TXU Energy's revenues and cost of energy for the three months
and nine months ended September 30, 2002. For comparability purposes,
electricity delivery fees have been included in the Energy segment's revenues
and cost of energy for the three and nine months ended September 30, 2001. The
Energy segment's gross margin is not materially affected by the inclusion of
these electricity delivery fees.
The Energy segment's operating revenues increased $68 million, or 3%, to
$2.4 billion for the third quarter of 2002. Non-trading wholesale electric
revenues increased $302 million to $327 million on higher sales volumes in the
newly deregulated Electric Reliability Council of Texas (ERCOT) power market.
Wholesale sales, trading and risk management revenues increased $71 million, or
137%, on favorable results from increased activity in ERCOT and other markets.
Retail electric revenues declined $323 million, or 14%, to $1.9 billion on a 10%
decline in overall volumes and lower average pricing. Lower volumes reflected
increased competitive activity in the large C&I power market. Lower retail
electric pricing reflected lower average C&I prices and lower regulated
price-to-beat rates effective in 2002 for residential and small business
customers. In addition to a lower base rate component of the price-to-beat rate
as compared to the 2001 base rate, the fixed fuel factor component of the
price-to-beat rate is lower than the fuel costs incurred and recognized in
revenues in 2001.
Gross margin (operating revenues less energy purchased for resale, fuel
consumed and delivery fees) increased $62 million, or 8%, to $877 million in the
third quarter of 2002. The increase was driven by favorable results from
expanded wholesale sales, trading and risk management activities in the ERCOT
market and lower average costs of power sold, partially offset by the effect of
lower retail electric volumes and pricing. Revenues and gross margin in 2002
include a positive $8 million net effect of mark-to-market accounting for
commodity positions, compared to $86 million in 2001.
Net income for the segment declined $45 million, or 17%, to $222 million
for the third quarter of 2002. The decline was driven by growth in operating
expenses, partially offset by the higher gross margin and positive effects of
other income and other deductions discussed below. An increase in operation and
maintenance expense of $102 million, or 40%, reflected $69 million in higher
staffing and other operating costs related to expanded retail sales operations
and wholesale sales, trading and risk management activities and $18 million in
increased bad debt expense, all due largely to the opening of the Texas
electricity market to competition. The increase in operation and maintenance
expense also reflected retail customer support costs and bad debt expense
reported in the Electric Delivery segment in 2001. Depreciation and amortization
increased $11 million, or 11%, due largely to investments in systems and
expansion of office facilities to support the opening of the Texas electricity
market to competition. Taxes other than income rose $23 million, or 79%, due
primarily to state gross receipts taxes that were reported by the Electric
Delivery segment in 2001. Other income increased by $17 million primarily
reflecting amortization of a gain on the sale of two generating plants in early
2002. Other deductions decreased by $20 million, reflecting a $21 million
write-off of regulatory assets in 2001. Interest income declined $18 million
primarily due to the recovery of under-collected fuel revenue on which interest
income had been accrued under regulation in 2001. Interest expense declined $10
million, or 16%, reflecting lower interest rates. The effective tax rate
increased to 31.1% in 2002 from 27.2% in 2001, due primarily to the effect of
nonrecurring regulatory-driven adjustments recorded in 2001 relating to prior
years. This effect is partially offset in the Electric Delivery segment.
Operation and maintenance expenses in the Energy segment are expected to
decline in 2003. This decline reflects temporarily higher costs incurred in
2002, including bad debts and other administrative expenses arising from the
transition to deregulation, as well as planned reductions in certain
developmental expenses. Certain of the planned actions are expected to result in
severance charges in the fourth quarter of 2002.
25
The Energy segment's operating revenues increased $71 million, or 1%, to
$6.2 billion for the first nine months of 2002. Non-trading wholesale electric
revenues increased $568 million to a total of $645 million on higher sales
volumes in the newly deregulated ERCOT power market. Wholesale sales, trading
and risk management activity revenues increased $131 million, or 124%, on
favorable results from increased activity in ERCOT and other markets. Retail
electric revenues declined $537 million, or 9%, to $5.3 billion on a 7% decline
in overall volumes and lower average pricing. Lower volumes reflected increased
competitive activity in the large C&I power market. Lower retail electric
pricing reflected lower average C&I prices and lower regulated price-to-beat
rates effective in 2002 for residential and small business customers. In
addition to a lower base rate component of the price-to-beat rate as compared to
the 2001 base rate, the fixed fuel factor component of the price-to-beat rate is
lower than the fuel costs incurred and recognized in revenues in 2001.
Gross margin increased $494 million, or 24%, to $2.6 billion for the first
nine months of 2002. The increase was driven by favorable results from expanded
wholesale sales, trading and risk management activities in the ERCOT market and
lower average costs of power sold, partially offset by the effect of lower
retail electric volumes and pricing. Revenues and gross margin in 2002 included
a negative $4 million net effect of mark-to-market accounting for commodity
positions, compared to a positive impact of $188 million in 2001.
Net income for the segment increased $11 million, or 2%, to $578 million
for the first nine months of 2002. The improvement was driven by higher gross
margin and positive effects of other income and other deduction items discussed
below, partially offset by growth in operating expenses. An increase in
operation and maintenance expense of $381 million, or 54%, reflected $265
million in higher staffing and other operating costs related to expanded retail
sales operations and wholesale sales, trading and risk management activities and
$111 million in increased bad debt expense, all due largely to the opening of
the Texas electricity market to competition. The increase in operation and
maintenance expense also reflected retail customer support costs and bad debt
expense reported in the Electric Delivery segment results for 2001. The increase
in depreciation and amortization expense of $22 million, or 7%, was primarily
due to investments in computer systems and expansion of office facilities. Taxes
other than income rose $81 million, or 96%, due to state gross receipts taxes
that were reported in the Electric Delivery segment results in 2001. Other
income increased by $29 million primarily reflecting amortization of a gain on
the sale of two generation plants in early 2002. Other deductions decreased by
$23 million, reflecting a $21 million write-off of regulatory assets in 2001.
Interest income declined $36 million primarily due to the recovery of
under-collected fuel revenue on which interest income had been accrued under
regulation in 2001. Interest expense declined $15 million, or 8%, due to lower
interest rates. The effective tax rate increased to 31.6% in 2002 from 29.5% in
2001, primarily due to the effect of nonrecurring regulatory-driven adjustments
recorded in 2001 relating to prior year. This effect is partially offset in the
Electric Delivery segment.
26
Electric Delivery
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2002 2001* 2002 2001*
---- ---- ---- ----
Operating revenues....................................... $ 557 $ 650 $1,551 $1,655
------ ------ ------ ------
Operating expenses
Operation and maintenance.......................... 193 204 560 606
Depreciation and amortization...................... 65 60 196 178
Taxes other than income............................ 97 139 284 388
-------- ------ ------ ------
Total operating expenses.................... 355 403 1,040 1,172
------- ------ ------ ------
Operating income......................................... 202 247 511 483
Other income ............................................ -- 1 2 4
Other deductions......................................... 1 2 4 5
Interest income ......................................... 11 -- 34 --
Interest expense and other charges....................... 66 69 193 212
--------- ------- ------ ------
Income before income taxes .............................. 146 177 350 270
Income tax expense....................................... 50 65 118 94
-------- ------- ------ ------
Net income............................................... $ 96 $ 112 $ 232 $ 176
======== ======= ====== ======
-------------------------
*The Electric Delivery segment was created as a result of the deregulation
of the electric utility industry in Texas, which became effective January
1, 2002. The Electric Delivery segment includes the electric T&D business
of US Holdings and TXU SESCO Company.
Prior period data is included above for the purpose of providing
historical combined financial information about the Electric Delivery
segment after giving effect to the restructuring transactions and
allocations described in the Notes to Financial Statements. Had the
Electric Delivery segment existed as a separate segment, its results of
operations and financial position could have differed materially from
those reflected above. Additionally, future results of the Electric
Delivery segment's operations and financial position could differ
materially from the historical information presented.
27
Segment Highlights
Millions of Dollars
Electric energy delivered (GWh)........................................ 32,574 30,463 82,392 78,056
====== ====== ====== ======
Electric points of delivery (end of period and in thousands)........... 2,902 2,851
Operating revenues (millions of dollars):
Energy.............................................................. $439 $602 $1,252 $1,514
Non-affiliated...................................................... 118 48 299 141
------ ------ ------ ------
Total electric energy delivery.............................. $557 $650 $1,551 $1,655
====== ====== ====== ======
- -------------------------
*See footnote above.
The prior year financial information for the Electric Delivery segment
includes information derived from the historical financial statements of US
Holdings. Reasonable allocation methodologies were used to unbundle the
financial statements of US Holdings between its generation and T&D operations.
Allocation of revenues reflected consideration of return on invested capital,
which continues to be regulated for the T&D operations. US Holdings maintained
expense accounts for each of its component operations. Costs of energy and
expenses related to operations and maintenance and depreciation and
amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and disaggregated. Various allocation methodologies were used to
disaggregate revenues, common expenses, assets and liabilities between US
Holdings' generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
The Electric Delivery segment's operating revenues decreased $93 million,
or 14%, to $557 million for the third quarter of 2002 primarily due to the
absence of certain revenues (primarily related to load balancing within ERCOT)
reported in the Energy segment effective in 2002. Excluding the impact of these
revenues, electric distribution revenues rose 5% on a 7% increase in electric
volumes delivered. Because a number of large C&I customers are charged fees that
are fixed for specified ranges of volumes, changes in distribution volumes do
not necessarily result in comparable changes in reported revenues.
The Electric Delivery segment does not buy or sell electricity; its
revenues consist primarily of T&D fees. There is, therefore, no gross margin for
this segment.
Net income decreased by $16 million, or 14%, to $96 million for the third
quarter of 2002. This performance reflected lower revenues, partially offset by
lower operating expenses and higher interest income. Taxes other than income
declined $42 million, or 30%, reflecting state gross receipts taxes that are
reported in the Energy segment effective in 2002. Operation and maintenance
expense declined $11 million, or 5%, reflecting decreases in customer support
costs and bad debt expense as a result of the transfer of customer related
functions to the Energy segment in 2002, partially offset by normal growth in
base operating costs. Interest income rose $11 million, or 100%, due to interest
on regulatory- related assets charged to the Energy segment effective in 2002.
The effective tax rate decreased to 34.2% in 2002 from 36.7% in 2001,
reflecting the effect of nonrecurring regulatory adjustments recorded in 2001
relating to prior years, as well as the discontinuance of nondeductible
goodwill amortization.
The Electric Delivery segment's operating revenues decreased $104 million,
or 6%, to $1.6 billion for the first nine months of 2002. Excluding the impact
of revenues earned by the REPs in 2002, as described above, electric
distribution revenues rose 7%, compared with a 6% increase in electric volumes
delivered in the distribution operations.
28
Net income increased by $56 million, or 32%, to $232 million for the first
nine months of 2002. The improvement reflected lower operating expenses, higher
interest income and reduced interest expense, partially offset by lower
revenues. Taxes other than income declined $104 million, or 27%, reflecting
state gross receipts taxes that are reported in the Energy segment effective in
2002. Operation and maintenance expense declined $46 million, or 8%, reflecting
decreases in customer support costs and bad debt expense as a result of the
transfer of customer related functions to the Energy segment in 2002, partially
offset by normal growth in base operating costs. Depreciaton and amortiztion
increased $18 million, or 10%, due to capital expenditures to prepare for the
restructuring of the Texas electricity market and upgrade system capability and
reliability. Interst income rose $34 million, or 100%, due to interest on
regulatory-related assets charged to the Energy segment effective in 2002.
Interest expense declined $19 million, or 9%, primarily due to the retirement of
long-term debt with higher interest rates than new debt issued. The effective
tax rate was 33.7% in 2002 compared to 34.8% in 2001, reflecting the effect of
nonrecurring regulatory adjustments recorded in 2001 relating to prior years, as
well as the discontinuance of nondeductible goodwill amortization.
COMPREHENSIVE INCOME
US Holdings has historically used, and will continue to use, derivatives
that are highly effective in offsetting future cash flow volatility in interest
rates and energy commodity prices. The fair value of derivatives that are
effective as cash flow hedges are recorded as derivative assets or liabilities
with an offset in other comprehensive income.
The amounts included in other comprehensive income reflect the value of
the cash flow hedges, based on current market conditions, to be used in the
future to offset the impact on related payments of expected changes in prices.
The effects of the accounting hedges will be recorded in the statement of income
as the related transactions are actually settled.
Other comprehensive income for the three months ended September 30, 2002
reflected a loss of $47 million (net of tax effect), which was due to a decrease
in the fair value of interest rate hedges because of lower interest rates,
partially offset by an increase in the fair value of commodity hedges. Other
comprehensive income for the nine months ended September 30, 2002 reflected a
loss of $161 million (net of tax effect), which was due to a decrease in the
fair value of interest rate hedges as well as a decrease in the fair value of
commodity hedges.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in US Holdings' 2001 10-K. No significant changes or events that
might affect the financial condition of US Holdings have occurred subsequent to
year-end other than as disclosed herein.
Cash Flows -- Cash flows provided by operating activities for the first
nine months of 2002 were $968 million compared to $1.6 billion for 2001. The
decrease of $623 million, or 39%, reflected higher accounts receivable in 2002.
Unbilled accounts receivable in the retail electric operations reflected an
increase of approximately $288 million related to the opening of the Texas
electricity market to competition. Of this amount, $208 million represented
delayed billing amounts, predominantly in large C&I accounts. These delays have
been caused primarily by temporary transition issues including customer
switching and billing, and new processes and systems within ERCOT and TXU
Energy. The remaining increase of $80 million in unbilled accounts receivable
represented the effect of the new ERCOT protocol that allows five days to clear
meter-read data through ERCOT, as well as other permanent changes in billing
processes. The decline in cash flows also reflected the effect of $194 million
in margin deposits returned in 2001 (in exchange for letters of credit.), as
well as higher inventories and timing of payments.
Cash flows used in financing activities for 2002 were $677 million,
compared to $461 million for the first nine months of 2001. Issuances and
retirements of debt securities of $2.3 billion and $2.3 billion, respectively,
in 2002 compared to issuances and retirements of debt securities of $521 million
and $302 million, respectively, in 2001. Dividends to parent required cash of
$677 million in 2002 and repurchases of common stock required cash of $629
million during the first nine months of 2001. Issuances of commercial paper
provided $1,082 million and repayments of notes payable to affiliates used
$1,022 million in 2002.
29
Cash flows used in investing activities were $301 million in 2002 compared
to $759 million in 2001. Proceeds in 2002 from the sale of the Handley and
Mountain creek power plants in the Dallas-Ft. Worth areas were $443 million.
Acquisitions in 2002 included $36 million for a cogeneration and wholesale
production business in New Jersey. Capital expenditures declined to $591 million
in 2002 from $727 million reflecting the spending in 2001 for computer system
development and expanded office facilities in connection with the opening of the
Texas market to competition. Nuclear fuel spending of $51 million reflected
scheduled refueling at one of the nuclear generating units.
As a result of constraints on capital in the energy sector and TXU Corp.'s
decision to significantly reduce planned capital expenditures in all its
businesses, certain generation plant development projects may not be completed.
US Holdings has certain assets, primarily generation equipment, with a carrying
value of approximately $340 million, a portion of which may become subject to
impairment and sale.
Credit Facilities - TXU Corp., US Holdings, TXU Energy and Oncor had
credit facilities (some of which provide for long-term borrowings) available as
follows:
Credit Facilities
---------------------------------------------
At September 30, 2002 At November 5, 2002(a)
--------------------- ----------------------
Authorized Facility Letters of Cash Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Credit Borrowings
- -------- --------------- ---------- ----- --------- --------- --------- ----------
($ in millions)
364-Day Revolving Credit Facility.... April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ 81 $ -- $ 88 $ 912
Five-Year Revolving Credit
Facility(b).......................... February 2005 US Holdings 1,400 462 -- 461 939
Three-Year Revolving Credit Facility. May 2005 TXU Corp. 500 -- 350 -- 500
Standby Liquidity Facility........... November 2002 US Holdings 400 -- -- -- 400
Standby Liquidity Facility........... November 2002 US Holdings,
TXU Energy,
Oncor 400 -- -- -- 400
------- ----- ------- ----- ------
Total(c)....................... $ 3,700 $ 543 $ 350 $ 549 $3,151
======= ===== ====== ===== ======
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately $2.6
billion in cash against their available credit facilities. These funds and
other available cash will be used, in part, to repay outstanding commercial
paper. (See discussion under Recent Actions by TXU Corp.)
(b) In February 2002, TXU Gas was removed as a borrower under this facility. TXU
Corp. was removed as a borrower under this facility effective July 31, 2002.
(c) Supported commercial paper borrowings.
On October 30, 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility is intended to fund interim
refinancings of approximately $700 million of maturiting secured debt should
market conditions not support a timely, cost effective refinancing. The balance
will be available for general corporate purposes at Oncor.
In July 2002, US Holdings entered into the $400 million Standby Liquidity
Facility that terminates no later than November 30, 2002. In August 2002, US
Holdings, TXU Energy and Oncor entered into the joint $400 million Standby
Liquidity Facility that also expires November 30, 2002. Borrowings of $800
million against those facilities are expected to be repaid no later than the
expiration date.
In May 2002, TXU Corp. entered into the $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
is used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
in April 2003 but can be extended for one year. This facility is used for
working capital and general corporate purposes. Up to $1.0 billion of letters of
credit may be issued under the facility. This facility and the $500 million
three-year revolving credit facility described above replaced the TXU Corp. and
US Holdings $1.4 billion 364-day revolving credit facility that expired in April
2002.
30
In the second quarter of 2002, each of TXU Energy and Oncor began issuing
commercial paper to fund its short-term liquidity requirements. The commercial
paper programs allow each of TXU Energy and Oncor to issue up to $2.4 billion
and $1.0 billion of commercial paper, respectively. At September 30, 2002, each
of the credit facilities listed above provided back-up for outstanding
commercial paper under the TXU Energy and Oncor programs. The TXU Corp.
commercial paper program was discontinued in July 2002, and at that time, TXU
Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of September 30, 2002, total outstanding commercial paper
under these programs was $1,082 million of which TXU Energy's portion was $979
million and Oncor's portion was $103 million. Because of liquidity concerns
prevalent in the US financial markets arising from the conditions in the US
power sector and following events related to operating difficulties at TXU
Corp.'s European business, commercial paper markets became inaccessible. (See
discussion below under Recent Actions by TXU Corp.) Existing borrowings under
the program are being repaid upon maturity. Commercial paper borrowings are
expected to resume as market concerns regarding the liquidity of TXU Corp. and
its US subsidiaries are mitigated.
All of the credit facilities mentioned above, with the exception of the
Oncor commitment dated October 30, 2002, are included in the credit facilities
table above.
Over the next twelve months, US Holdings and its subsidiaries will have
financing needs to fund ongoing working capital requirements and maturities of
debt. US Holdings and its subsidiaries have funded or intend to fund these
financing needs through cash on hand, cash flows from operations, short-term
credit facilities and the issuance of long-term debt or other securities. Other
potential sources of funding include proceeds from asset sales and bank
borrowings.
Long-term Debt -- During the nine months ended September 30, 2002, Oncor
and TXU Energy issued, redeemed, reacquired or made scheduled principal payments
on long-term debt as follows:
Issuances Retirements
--------- -----------
(Millions of Dollars)
Oncor
First mortgage bonds........................... $ -- $ 525
Senior secured notes........................... 1,200 --
Medium term notes.............................. -- 55
Fixed rate debentures.......................... 1,000 --
------ -------
$2,200 $ 580
====== =======
TXU Energy
Floating rate debentures......................... $ -- $ 1,500
Pollution control revenue bonds.................. 61 61
Other long-term debt............................. -- 124
------ -------
$ 61 $ 1,685
====== =======
See Note 3 to Financial Statements for further detail of debt issuance and
retirements.
Sale of Receivables --Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of September 30, 2002, the facility
includes TXU Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor
and TXU Gas as qualified originators of accounts receivable under the program.
TXU Receivables Company may sell up to an aggregate of $600 million in undivided
interests in the receivables purchased from the originators under the program.
As of September 30, 2002, US Holdings' subsidiaries had sold $1,205 million face
amount of receivables to TXU Receivables Company under the program in exchange
for cash of $579 million and $609 million in subordinated notes, with $17
million of losses on sales for the nine months ended September 30, 2002
principally representing the interest on the underlying financing. These losses
approximated 4% of the cash proceeds from the sale of undivided interests in
accounts receivable on an annualized basis. Upon termination, cash flows to the
originators would be delayed as collections of sold receivables were used by TXU
Receivables Company to repurchase the undivided interests of the financial
institutions instead of purchasing new receivables. The level of cash flows
would normalize in approximately 16 to 31 days. TXU Business Services, a
subsidiary of TXU Corp., services the purchased receivables and is paid a market
based servicing fee by TXU Receivables Company. The subordinated notes
receivable from TXU Receivables Company represent US Holdings' and its
subsidiaries retained interests in the transferred receivables and are recorded
at book value, net of allowances for bad debts, which approximates fair value
due to the short-term nature of the subordinated notes, and are included in
accounts receivable in the consolidated balance sheet.
31
Recent Actions by TXU Corp.
In October 2002, TXU Corp. made a determination to exit its TXU Europe
operations. Further, in consideration of concerns in US financial markets about
its liquidity, such concerns having already been prevalent in markets with
respect to the performance of the US energy sector, TXU Corp. took the following
actions to strengthen its credit position:
o Reduced its common stock dividend by 80 percent to an annual indicated rate
of $.50 per share effective with the dividend payable in January 2003
o Significantly reduced planned capital expenditures in all its businesses.
These reductions are primarily directed to developmental as opposed to
maintenance spending
o Reversed previous plans to support TXU Europe with up to $700 million in
capital contributions
o Eliminated by amendment the cross-default provision in a US financing
arrangement that would have been triggered by a TXU Europe default (TXU
Australia's financing arrangements have no cross-default provisions that
would have been triggered by a TXU Europe default.)
o Drew $2.6 billion in cash on its US revolving credit facilities
o On October 30, 2002, entered into a commitment for a secured credit
facility of up to $1 billion at Oncor. The facility is intended to fund
interim refinancings of approximately $700 million of maturities should
market conditions not support a timely, cost effective refinancing. The
balance will be available for general corporate purposes at Oncor.
Credit Ratings of TXU Corp., US Holdings, Oncor and TXU Energy
The current credit ratings, which are all investment grade, for TXU Corp.,
US Holdings, Oncor and TXU Energy are presented below:
TXU Corp. US Holdings Oncor TXU Energy
---------- ---------- ------- ----------
(Senior (Senior (Secured) (Senior
Unsecured) Unsecured) Unsecured)
S&P.............................. BBB- BBB- BBB BBB
Moody's.......................... Baa3 Baa3 A3 Baa2
Fitch............................ BBB BBB+ A- BBB+
Moody's is currently reviewing its ratings of TXU Corp., US Holdings, Oncor
and TXU Energy. S&P currently maintains a negative outlook for TXU Corp. and its
US subsidiaries. Fitch currently maintains a negative outlook for TXU Corp. but
maintains a stable outlook for the US subsidiaries.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions--
The terms of certain financing arrangements of US Holdings, TXU Energy and
Oncor contain financial covenants that require maintenance of specified fixed
charge coverage ratios, shareholders' equity to total capitalization ratios and
leverage ratios and/or contain minimum net worth covenants. As of September 30,
2002, US Holdings, TXU Energy and Oncor were in compliance with all such
applicable covenants.
32
Certain financing and other arrangements of TXU Corp., US Holdings, Oncor
and TXU Energy contain provisions that are specifically affected by changes in
credit ratings and also include cross default provisions. The material
provisions are described below:
Credit Rating Provisions
In the event of a downgrade of TXU Corp. to below investment grade, TXU
Energy or one of its investment grade affiliates will be required to provide an
additional guarantee of the obligation under the lease (approximately $145
million) for the TXU Energy Plaza headquarters building, or provide a letter of
credit within 30 days of any such ratings decline. It is anticipated that TXU
Energy would provide a guarantee in the event of a downgrade.
TXU Energy has entered into certain trading contracts and lease
arrangements that in some instances give the other party the right, but not the
obligation, to request TXU Energy to post collateral in the event that it's
credit rating falls below investment grade.
Based on its current trading positions, if TXU Energy was downgraded below
investment grade, counterparties would have the option to request TXU Energy to
post additional collateral of approximately $230 million.
In addition, TXU Energy has a number of transactions where the
counterparties would have the right to request TXU Energy to post collateral if
its credit rating fell below investment grade. The amount TXU Energy would post
under these transactions would depend, in part, on the value of the contract at
that time. Based on current market conditions, the maximum TXU Energy might have
to post for these transactions is approximately $338 million.
TXU Energy is also the obligor on leases that total $168 million. Under
the terms of those leases, if TXU Energy's credit rating falls below investment
grade, TXU Energy could: sell the assets, assign the leases to a new obligor
which is investment grade, post a letter of credit or defease the leases.
ERCOT also has rules in place to assure adequate credit worthiness for
parties that schedule power on the ERCOT System. Under those rules, if TXU
Energy's credit ratings fell below investment grade, TXU Energy could be
required to post collateral of approximately $52 million.
Under the $600 million Accounts Receivables Sale Program, all originators
(currently TXU Gas, TXU Energy Retail Company LP, SESCO Energy Services Company
and Oncor), are required to maintain a 'BBB-' (S&P) and a 'Baa3' (Moody's)
rating (or supply a parent guarantee with a similar rating). A downgrade below
the required ratings for an originator would prevent that originator from
selling its accounts receivables under the program. If all originators are
downgraded so that there are no eligible originators, the facility would
terminate. Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used to repurchase the undivided interests
of the financial institutions instead of purchasing new receivables. The level
of cash flows would normalize in approximately 16 to 31 days.
33
Other agreements of TXU Corp. and its subsidiaries, including some of the
credit facilities discussed above, contain terms pursuant to which the interest
rates charged under the agreements may be adjusted depending on the credit
ratings of TXU Corp. or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Corp. and its subsidiaries contain
provisions that would result in an event of default under these arrangements if
there is a failure under other financing arrangements to meet payment terms or
to observe other covenants that would result in an acceleration of payments due.
Such provisions are referred to as "cross default" provisions. Most agreements
have a cure period of up to 30 days from the occurrence of the specified event
during which the company is allowed to rectify or correct the situation before
it becomes an event of default.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross-default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-Day Revolving Credit
Facility, the $1.4 billion US Holdings 5-Year Revolving Credit Facility, the
$400 million joint US Holdings/TXU Energy/Oncor Standby Liquidity Facility, the
$400 million US Holdings Standby Liquidity Facility, the two letter of credit
reimbursement and credit facility agreements ($68.1 million and $54.2 million
currently outstanding, respectively); and the $103 million TXU Mining Company
senior notes (which have a $1 million threshold). Under the joint US
Holdings/TXU Energy/Oncor $1.0 billion 364-Day Revolving Credit Facility and the
joint US Holdings/TXU Energy/Oncor $400 million Standby Liquidity Facility, a
default by TXU Energy or any subsidiary thereof would cause the maturity of
outstanding balances under such facilities to be accelerated as to TXU Energy
and US Holdings, but not as to Oncor. Also, under these two credit facilities, a
default by Oncor or any subsidiary thereof would cause the maturity of
outstanding balances to be accelerated under such facilities as to Oncor and US
Holdings, but not as to TXU Energy. Further, under these two credit facilities,
a default by US Holdings would cause the maturity of outstanding balances under
such facilities to be accelerated as to US Holdings, but not as to Oncor or TXU
Energy.
The accounts receivable program, described above, contains a cross default
provision with a threshold of $50 million applicable to each of the originators
under the program. TXU Receivables Company and TXU Business Services Company
each have a cross default threshold of $50 thousand. If either an originator,
TXU Business Services Company or TXU Receivables Company defaults on
indebtedness of the applicable threshold, the facility could terminate.
TXU Energy, as the lessee, has certain mining and equipment leasing
arrangements aggregating $226 million that would terminate upon the default on
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
TXU Energy enters into trading and risk management contracts, the master
forms of which contain provisions whereby an event of default would occur if TXU
Energy were to default under an obligation in respect of borrowings in excess of
thresholds stated in the contracts, which thresholds vary.
US Holdings, TXU Energy and Oncor have other arrangements, including
interest rate swap agreements and leases, with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
Regulatory Asset Securitization -- The regulatory settlement plan approved
by the Public Utility Commission of Texas (Commission)and currently subject to
appeal, provides Oncor with a financing order authorizing it to issue
securitization bonds in the aggregate principal amount of $1.3 billion to
monetize and recover generation-related regulatory assets. The settlement plan
provides that there will be an initial issuance of securitization bonds in the
amount of up to $500 million followed by a second issuance for the remainder
after 2003. (See Note 5 to Financial Statements.)
34
Capitalization -- The capitalization ratios of US Holdings at September
30, 2002 consisted of approximately 43% long-term debt, less amounts due
currently, 1% preferred stock and 56% common stock equity, compared to December
31, 2001 capitalization ratios of approximately 44% long-term debt, 1% preferred
stock and 55% common stock equity.
On March 6, 2002, US Holdings declared a cash dividend of $250 million
which was paid to TXU Corp. on April 1, 2002. On May 8, 2002, US Holdings
declared cash dividends of $177 million and $250 million which were paid to TXU
Corp. on May 17, 2002 and July 1, 2002, respectively. On August 7, 2002, US
Holdings declared a cash dividend of $250 million which was paid to TXU Corp. on
October 1, 2002.
Registered Financing Arrangements -- US Holdings may issue and sell, from
time to time, additional debt and equity securities including the possible
future issuance and sale by US Holdings of up to $25 million of Cumulative
Preferred Stock and up to an aggregate of $924 million of additional Cumulative
Preferred Stock, debt securities and/or preferred securities of subsidiary
trusts which are currently registered with the SEC for offering pursuant to Rule
415 under the Securities Act of 1933.
See Notes 3 and 4 to Financial Statements for further details concerning
financing arrangements and capitalization.
Minimum Pension Liability -- TXU Corp. believes that if actual investment
returns continue at current levels and interest rates remain unchanged through
the rest of the year, it will be required to record an increase in minimum
pension liability as of December 31, 2002. The minimum pension liability
represents the difference between the excess of the accumulated benefit
obligation over the plans' assets and the liability recorded. A majority of the
liability would be recorded as a reduction to shareholder's equity, as a
component of accumulated comprehensive income. A preliminary estimate based on
information available at this time indicates that the minimum pension liability
for the TXU Corp. plan would be approximately $140 million. The recording of the
liability will not affect TXU Corp.'s or any of its subsidiaries' financial
covenants in any of their credit agreements.
Further, based on the current assumptions and available information, in
2003 funding requirments related to the pension plans are expected to increase
by $10 million and pension expense is expected to increase approximately $30
million over the current year amounts for TXU Corp. Amounts applicable to US
Holdings have not yet been determined.
COMMITMENTS AND CONTINGENCIES
See Note 6 to Financial Statements for a discussion of contingencies.
All exposures related to Enron have been provided for. US Holdings'
significant activities with Enron were associated with energy trading contracts.
These positions were marked to market and resulted in a net liability to Enron
of $107 million at December 31, 2001. The net liability at September 30, 2002
was $121 million. All contracts in existence at the date of the Enron bankruptcy
have been terminated and are no longer marked to market and have been
reclassified to other current liabilities.
REGULATION AND RATES
Regulatory Settlement Plan -- (For additional discussion of the settlement
plan and related items, see Note 4 to Financial Statements in US Holdings'
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.) On
December 31, 2001, US Holdings filed a settlement plan with the Commission,
which was approved by the Commission on June 20, 2002. On August 5, 2002, the
Commission issued a financing order, pursuant to the settlement plan,
authorizing the issuance of transition (securitization) bonds with a principal
amount of $1.3 billion. The Commission's order approving the settlement plan and
the financing order were appealed by certain nonsettling parties in five
separate dockets in Travis County, Texas District Court in August 2002. The
court has consolidated these dockets into one, and a hearing on the merits is
scheduled for February 4, 2003. US Holdings is unable to predict when the appeal
process related to the Commission's approval of the settlement plan and the
financing order will be concluded or the outcome. If the Commission's approval
is upheld, the settlement plan resolves all major pending issues related to US
Holdings' transition to competition and will supersede certain proceedings that
are related to the 1999 Restructuring Legislation. The settlement plan does not
remove regulatory oversight of Oncor's business nor does it eliminate TXU
Energy's price-to-beat rates and related possible fuel adjustments.
35
The principal and interest on the securitization bonds would be secured by
payments from retail customers to provide recovery of generation-related
regulatory assets and other qualified costs. These regulatory assets have a
carrying value of approximately $1.8 billion. Once the bonds are issued, the
full amount of the regulatory assets will be amortized to expense by Oncor over
the life of the bonds. Any amount of the $1.8 billion which is in excess of the
future cash flows from the customer payments to service the bonds will be
expensed at the time such shortfall, if any, is determined. Assuming the bonds
were issued at the present time and considering current interest rates, the
amount of the regulatory asset's carrying value would exceed the cash flows from
the bonds by approximately $130 million.
Open-Access Transmission -- At the federal level, Federal Energy
Regulatory Commission (FERC) Order No. 888 requires all FERC-jurisdictional
electric public utilities to offer third parties wholesale transmission services
under an open-access tariff.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997 through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO are named defendants in both suits. US Holdings, TXU
SESCO and Oncor are unable to predict the outcome of this litigation.
TXU Energy -- Under Commission rules, affiliated REPs of utilities are
allowed to petition the Commission for an increase in the fuel factor component
of their price-to-beat rates if the average price of natural gas futures
increases more than 4% from the level used to set the previous price-to-beat
fuel factor rate. In April 2002, TXU Energy filed a request with the Commission
to increase the fuel factor component of its price-to-beat rates. On August 23,
2002, the Commission approved the fuel factor increase. The fuel factor increase
was implemented for the billing month beginning on August 26, 2002. Average
residential customers using 1,000 KWh saw an increase of just under 5% in their
monthly electric bill.
TXU Energy is the current provider of last resort (POLR) for residential
and small non-residential customers in all areas of ERCOT, where customer choice
is available except in its incumbent service areas, and is the POLR for large
non-residential customers in its incumbent service area. TXU Energy's current
POLR contract ends on December 31, 2002. On August 22, 2002, the Commission
adopted new rules that significantly changed POLR service. Under the new POLR
rules, effective September 24, 2002, residential and small non-residential
customers served by affiliated REPs and all large non-residential customers
could be subject to disconnection for non-payment rather than being transferred
to a POLR provider. Also effective on September 24, 2002, non-affiliated REPs
ceased transferring non-paying customers to the POLR provider, and instead began
transferring them to the affiliated REP. Within the new POLR framework, the POLR
only provides electric service to customers who request POLR service, whose
selected REP goes out of business, or who are transferred to the POLR by other
REPs for reasons other than non-payment. This limited POLR service will be
provided by certified REPs for a two-year period beginning January 1, 2003, and
will be selected through a competitive bid process. If no bids are submitted or
all bids are rejected, a lottery will be conducted to select a POLR to serve
residential, small non-residential customers and large non-residential
customers. Only the affiliated REP and the POLR can disconnect residential and
small non-residential customers for non-payment under the revised rules. Large
non-residential customers can be disconnected by any REP if the customer's
contract allows for it. The Commission will consider whether all REPs should be
able to disconnect non-paying customers and will make a determination by October
1, 2004.
36
CHANGES IN ACCOUNTING STANDARDS
See Note 2 to Financial Statements for discussion of changes in accounting
standards.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.
Some important factors, in addition to others specifically addressed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, that could have a significant impact on US Holdings' operations and
financial results, and could cause US Holdings' actual results or outcomes to
differ materially from those discussed in the forward-looking statements set
forth below, include:
US Holdings operates in changing market environments influenced by various
legislative and regulatory initiatives regarding deregulation, regulation or
restructuring of the energy industry, including deregulation of the production
and sale of electricity. US Holdings will need to adapt to these changes and may
face increasing competitive pressure.
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the bankruptcy
filing by the Enron Corporation, recently discovered accounting irregularities
of public companies, and investigations by governmental authorities into energy
trading activities, companies in the regulated and non-regulated utility
businesses have been under a generally increased amount of public and regulatory
scrutiny. Recently discovered accounting irregularities at certain companies in
the industry have caused regulators and legislators to review current accounting
practices and financial disclosures. The capital markets and ratings agencies
also have increased their level of scrutiny. Additionally, allegations against
various energy trading companies of "round trip" or "wash" transactions, which
involve the simultaneous buying and selling of the same amount of power at the
same price and provide no true economic benefit, may have a negative effect on
the industry. US Holdings believes that it is complying with all applicable
laws, but it is difficult or impossible to predict or control what effect these
events may have on US Holdings' financial condition or access to the capital
markets. Additionally, it is unclear what laws and regulations may develop, and
US Holdings cannot predict the ultimate impact of any future changes in
accounting regulations or practices in general with respect to public companies,
the energy industry or it's operations specifically. Any such new accounting
standards could negatively impact reported results of operations.
US Holdings is subject to changes in laws or regulations, including the
Federal Power Act, as amended, the Public Utility Regulatory Policies Act of
1978, as amended, and the Public Utility Holding Company Act of 1935, as
amended, changing governmental policies and regulatory actions, including those
of the Texas Public Utility Commission and the U.S. Nuclear Regulatory
Commission and the Federal Energy Regulatory Commission, with respect to matters
including, but not limited to, approval of the settlement plan proposed to the
Commission to resolve all major pending issues related to the transition to
competition, operation of nuclear power facilities, operation and construction
of other power generation facilities, operation and construction of transmission
facilities, acquisition, disposal, depreciation and amortization of regulated
assets and facilities, decommissioning costs, return on invested capital for US
Holdings' regulated businesses, and present or prospective wholesale and retail
competition.
37
US Holdings' regulated businesses are subject to cost-of-service
regulation and annual earnings oversight. This regulatory treatment does not
provide any assurance as to achievement of earnings levels.
Risk factors specifically affecting the performance of US Holdings'
nonregulated businesses in competitive wholesale and retail markets,
particularly in Texas, include continuity and reliability of generation plant
output, the price and supply of fuel and power purchased for resale,
transmission constraints and congestion expenses, competition from new sources
of generation, variability in demand for power, reduced market liquidity and/or
reduced number of wholesale counterparties, market penetration by other REPs
into US Holdings' traditional service area, US Holdings' ability to penetrate
other REP's traditional service areas, and reliability of computer systems and
other processes maintained by ERCOT and availability and reliability of
transmission and distribution facilities owned and operated by others. Further,
as US Holdings may enter into long-term power purchase and power sales
agreements, its financial results could be adversely affected by changes in
commodity market prices.
US Holdings relies on access to financial markets as a significant source
of liquidity for capital requirements not satisfied by operating cash flows. The
inability to raise capital on favorable terms, particularly during times of
uncertainty in the financial markets, could impact US Holdings' ability to
sustain and grow its businesses, which are capital intensive, and would likely
increase its capital costs. Further, concerns on the part of counterparties
regarding US Holdings' liquidity and credit could limit its short-term trading
and risk management activities as well as its ability to enter into larger and
longer-dated transactions.
US Holdings uses derivative instruments, such as swaps, options, futures
and forwards to manage its commodity and financial market risks and engage in
trading activities. US Holdings could recognize financial losses as a result of
volatility in the market values of these contracts, or if a counterparty fails
to perform. US Holdings' inability or failure to effectively hedge its assets or
positions against changes in commodity prices, interest rates, counterparty
credit risk or other risk measures could result in greater volatility of and/or
declines in future financial results. Results from trading and risk management
activities may be adversely affected as trading markets mature, or as activity
in markets declines due to lack of credit-worthy counterparties, reduced price
volatility and arbitrage opportunities or other factors.
The operation of power generation and energy transportation facilities
involves many risks, including start up risks, breakdown or failure of
equipment, transmission lines and pipelines, lack of sufficient capital to
maintain the facilities, the dependence on a specific fuel source or the impact
of unusual or adverse weather conditions or other natural events, as well as the
risk of performance below expected levels of output or efficiency. This could
result in lost revenues and/or increased expenses. Insurance, warranties or
performance guarantees may not cover any or all of the lost revenues or
increased expenses, including the cost of replacement power. In addition to
these risks, US Holdings' nuclear units face certain risks that are unique to
the nuclear industry including additional regulatory actions up to and including
shut down of the units stemming from public safety concerns both at US Holdings'
plants and at the plants of other nuclear operators. Breakdown or failure of a
US Holdings operating facility may prevent the facility from performing under
applicable power sales agreements which, in certain situations, could result in
termination of those agreements or incurring a liability for liquidated damages.
Natural disasters, war, terrorist acts and other catastrophic events may
impact US Holdings' operations in unpredictable ways, including disruption of
power production and energy delivery activities, declines in customer demand,
commodity price increases and instability in the financial markets.
US Holdings is subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and health and safety that could, among other
things, restrict or limit the use of certain fuels required for the production
of electricity. There are capital, operating and other costs associated with
compliance with these environmental statutes, rules and regulations, and those
costs could increase in the future.
38
US Holdings' ability to successfully and timely complete capital
improvements to existing facilities or other capital projects is contingent upon
many variables and subject to substantial risks. Should any such efforts be
unsuccessful, US Holdings could be subject to additional costs and/or the write
off of its investment in the project or improvement.
US Holdings is likely to encounter competition for acquisition
opportunities that may become available as a result of the consolidation of the
US power industry. In addition, US Holdings may be unable to identify attractive
acquisition opportunities at favorable prices or may not be successful in
integrating acquisitions.
US Holdings is subject to the effects of new or changes in, income tax
rates or policies and increases in taxes related to property, plant and
equipment and gross receipts and other taxes. Further, US Holdings is subject to
audit and reversal of its tax positions by the Internal Revenue Service and
state taxing authorities.
US Holdings' ability to obtain insurance, and the cost of and coverage
provided by such insurance, could be affected by events outside its control.
US Holdings is subject to employee workforce factors, including loss or
retirement of key executives, availability of qualified personnel, collective
bargaining agreements with union employees or work stoppage.
The issues and associated risks and uncertainties described above are not
the only ones US Holdings may face. Additional issues may arise or become
material as the energy industry evolves. The risks and uncertainties associated
with these additional issues could impair US Holdings' businesses in the future.
Reference is made to the discussion under Liquidity and Capital Resources.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by 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
such statements its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in US Holdings' 2001 Form 10-K, as well as general industry trends;
implementation of the Texas electricity deregulation legislation and other
legislation; power costs and availability; changes in business strategy,
development plans or vendor relationships; unanticipated changes in operating
expenses and capital expenditures; legal and administration proceedings and
settlements; availability of qualified personnel; changes in, or the failure or
inability to comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; implementation of
new accounting standards; commercial paper market and global financial and
credit market conditions; credit rating agency actions; and access to adequate
transmission facilities to meet changing demands; among others, that could cause
the actual results of US Holdings to differ materially from those projected in
such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and US Holdings undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for US
Holdings to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
39
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Except as discussed below, the information required hereunder is not
significantly different from the information set forth in Item 7A. Quantitative
and Qualitative Disclosures About Market Risk included in US Holdings' 2001 Form
10-K and is therefore not presented herein.
Expected Maturity Date
-------------------------------------------------------------
September 30, December 31,
(Millions of Dollars, Except Percentages) 2002 2001
---- ----
There- Fair Fair
2002 2003 2004 2005 2006 2007 After Total Value Value
---- ---- ---- ---- ---- ---- ----- ----- ----- -----
Long-term debt(including
current maturities)
Fixed rate $ 20 $ 388 $ 225 $ 127 $ 6 $ 216 $4,387 $5,369 $5,434 $3,943
Average interest rate 6.88% 6.96% 7.19% 6.87% 8.96% 5.21% 6.50% 6.52% -- --
Variable rate -- $ 400 -- -- -- $ 1 $ 432 $ 833 $ 833 $2,334
Average interest rate -- 6.73% -- -- -- 3.03% 1.75% 4.14% -- --
Preferred stock of
subsidiary subject to
mandatory redemption
Fixed rate -- $ 10 $ 10 $ 1 -- -- -- $ 21 $ 15 $ 21
Average interest rate -- 6.68% 6.68% 6.98% -- -- -- 6.69% -- --
See Note 3 to Financial Statements for further detail of debt issuances
and retirements.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of US Holdings' management, including the principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this quarterly report. Based on the evaluation performed, US
Holdings' management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective. There were no significant changes in US Holdings' internal controls
or in other factors that could significantly affect internal controls subsequent
to their evaluation.
40
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
15 Letter from independent accountants as to unaudited interim
financial information.
99(a) Condensed Statements of Consolidated Income - Twelve
Months Ended September 30, 2002.
99(b) Chief Executive Officer Certification.
99(c) Chief Financial Officer Certification.
99(d) Detail of Long-term Debt as of September 30, 2002.
-----------------
(b) Reports on Form 8-K filed since June 30, 2002:
Date of Report Item Reported
------------- -------------
August 23, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
August 27, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
November 5, 2002 Item 2. Disposition of Assets.
41
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: November 14, 2002
42
TXU US HOLDINGS COMPANY
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of TXU US
Holdings Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU US Holdings
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Erle Nye
----------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
43
TXU US HOLDINGS COMPANY
CERTIFICATION OF PFO
I, Michael J. McNally, Principal Financial Officer of TXU US Holdings
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU US Holdings
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michael J. McNally
--------------------------------------
Signature: Michael J. McNally
Title: Principal Financial Officer
44