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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
-- OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Exact Name of Registrant as Specified in its
Charter; State of Incorporation; Address of
Commission Principal Executive Offices; and Telephone I.R.S. Employer
File Number Number Identification No.
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1-12833 TXU Corp. 75-2669310
a Texas Corporation
Energy Plaza, 1601 Bryan Street
Dallas, TX 75201-3411
(214) 812-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Registrant Title of Each Class Which Registered
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TXU Corp. Common Stock, without par value, New York Stock Exchange
and Preference Stock Purchase The Chicago Stock Exchange
Rights The Pacific Exchange
Corporate Units New York Stock Exchange
Income Prides New York Stock Exchange
TXU Capital I, 7.25% Cumulative Trust New York Stock Exchange
a subsidiary Preferred Capital
of TXU Corp. Securities
TXU Capital II,
a subsidiary 8.70% Trust Originated New York Stock Exchange
of TXU Corp. Preferred Securities
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No
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Aggregate market value of TXU Corp. Common Stock held by non-affiliates, based
on the last reported sale price on the NYSE composite tape on June 28, 2002, the
last trading date of the registrant's most recently completed second fiscal
quarter: $14,297,623,496
Common Stock outstanding at March 5, 2003: 322,141,937 shares, without par
value
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission on or about April 3, 2003, are incorporated by
reference into Part III of this report.
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TABLE OF CONTENTS
Page
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PART I
Items 1. and 2. BUSINESS and PROPERTIES............................................................... 1
TXU CORP. AND SUBSIDIARIES................................................................... 1
ELECTRIC RESTRUCTURING ...................................................................... 2
COMPETITIVE STRATEGY......................................................................... 5
OPERATING SEGMENTS........................................................................... 5
North America Energy ...................................................................... 6
North America Energy Delivery.............................................................. 11
Australia.................................................................................. 16
ENVIRONMENTAL MATTERS........................................................................ 19
Item 3. LEGAL PROCEEDINGS............................................................................ 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 22
EXECUTIVE OFFICERS OF TXU CORP. ...................................................................... 22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................................................... 24
Item 6. SELECTED FINANCIAL DATA...................................................................... 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................................ 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 25
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................................................... 25
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 25
Item 11. EXECUTIVE COMPENSATION....................................................................... 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 26
PART IV
Item 14. CONTROLS AND PROCEDURES...................................................................... 26
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................. 27
APPENDIX A - Financial Information of TXU Corp. and Subsidiaries
APPENDIX B - TXU Corp. Exhibits to 2002 Form 10-K
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. are made available to the public,
free of charge, on the TXU Corp. website at http://www.txucorp.com, shortly
after they have been filed with the Securities and Exchange Commission. TXU
Corp. will provide copies of current reports not posted on the website upon
request.
i
PART I
Items 1. and 2. BUSINESS and PROPERTIES
TXU CORP. AND SUBSIDIARIES
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TXU Corp., a Texas corporation, was formed in 1997 as a holding company
and is the successor to TXU Energy Industries Company (TEI), the holding
company for the TXU Corp. system prior to the 1997 acquisition of ENSERCH
Corporation (renamed TXU Gas Company). TEI, formerly known as Texas Utilities
Company, was organized in 1945.
Use of the term "TXU Corp.," unless otherwise noted or indicated by the
context, refers to TXU Corp., a holding company, and its consolidated
subsidiaries.
TXU Corp. is an energy company that engages in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, energy delivery, and, through a joint venture,
telecommunications services. TXU Corp. is one of the largest energy services
companies in the world with $10 billion in revenue and $31 billion of assets.
TXU Corp. owns or leases over 20,400 megawatts of power generation and sells
130 terawatt hours of electricity and 207 billion cubic feet of natural gas
annually. TXU Corp. delivers or sells energy to approximately 5 million
residential, commercial and industrial customers in the United States (US) and
Australia. At December 31, 2002, TXU Corp. and its subsidiaries had
approximately 14,600 full-time employees.
TXU Corp.'s principal US operations are conducted through TXU US Holdings
Company (US Holdings, formerly TXU Electric Company) and TXU Gas Company (TXU
Gas). TXU Corp.'s principal international operations are conducted through TXU
Australia Holdings (Partnership) Limited Partnership (TXU Australia). In
October 2002, TXU Corp. made a determination to exit its operations in Europe,
which were conducted through TXU Europe Limited (TXU Europe). See Note 3 to
Financial Statements for information related to TXU Europe.
Legislation passed during the 1999 session of the Texas Legislature
restructured the electric utility industry in Texas and provided for a
transition to increased competition in the generation and retail sale of
electricity (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 on October 31, 2001 by the Public Utility Commission of Texas (the
Commission), as of January 1, 2002, US Holdings transferred:
o its electric transmission and distribution (T&D) operations to Oncor
Electric Delivery Company (Oncor), which is a utility regulated by the
Commission and a wholly-owned subsidiary of US Holdings,
o its power generation operations to subsidiaries of TXU Energy Company LLC
(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.
See further discussion of the 1999 Restructuring Legislation below.
The following is a description of the business of TXU Corp. and its
principal subsidiaries.
US Holdings, TXU Energy and Oncor -- US Holdings is a holding company for
TXU Energy and Oncor. TXU Energy serves more than 2.7 million retail electric
customers (1) and owns, or leases and operates
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(1) All numbers of electric customers are based on the number of meters.
1
19,140 megawatts of power generating capacity. Oncor owns and operates
96,847 miles of electric distribution lines and 14,137 miles of electric
transmission lines. The businesses transferred to TXU Energy and Oncor effective
January 1, 2002, together comprised the integrated electric utility business
conducted by US Holdings prior to that date. In addition, as of January 1, 2002,
TXU Energy acquired the following businesses from within the TXU Corp. system:
the REP of TXU SESCO Company; the portfolio management operations and the
unregulated commercial/industrial retail gas business of TXU Gas; and the energy
management services businesses and other affiliates of TXU Corp., including the
fuel supply and coal mining businesses that primarily service the generation
operations. Also, the T&D business of TXU SESCO Company was transferred to
Oncor. The operating assets of TXU Energy and Oncor are located principally in
the north-central, eastern and western parts of Texas.
US Holdings and its subsidiaries operate within the Electric Reliability
Council of Texas (ERCOT) system. ERCOT is an intrastate network of
investor-owned entities, cooperatives, public entities, non-utility generators
and power marketers. ERCOT is the regional reliability coordinating organization
for member electricity systems in Texas, the Independent System Operator of the
interconnected transmission system of those systems, and is responsible for
ensuring equal access to transmission service by all wholesale market
participants in the ERCOT region.
TXU Gas -- an integrated company engaged in the purchase, transmission,
distribution and sale of natural gas in the north-central, eastern and western
parts of Texas. TXU Gas serves more than 1.4 million retail gas customers and
owns and operates 26,000 miles of gas distribution mains and 6,800 miles of gas
transportation and gathering pipelines. Divisions of TXU Gas include TXU Gas
Distribution, one of the largest retail gas distribution companies in the United
States and the largest in Texas, and TXU Lone Star Pipeline, which provides
transportation services to gas distribution companies, electric generation
plants, end use industrial customers, and through-system shippers, as owner and
operator of interconnected natural gas transportation and gathering lines,
underground storage reservoirs, compressor stations and related properties, all
within Texas.
TXU Australia -- a holding company for TXU Corp.'s Australian operations.
Its principal operating subsidiaries include TXU Electricity Limited, which
purchases, distributes, retails and wholesales electricity in the State of
Victoria, Australia and purchases and retails electricity to commercial and
industrial customers in the State of South Australia; TXU Networks (Gas) Pty.
Ltd., which distributes natural gas in Victoria; and TXU Pty. Ltd., which
retails natural gas in Victoria. TXU Electricity Limited serves over 567,000
customers, principally in the state of Victoria, including suburban Melbourne,
the second-largest city in Australia. TXU Networks (Gas) Pty. Ltd. has over
466,000 supply points. TXU Pty. Ltd. retails natural gas to approximately
471,000 customers. TXU Australia also owns the only underground natural gas
storage facility in Victoria and operates the 1,280 megawatt Torrens Island
power station in South Australia.
TXU Business Services Company (TXU Business Services) -- a provider of
certain financial, accounting, information technology, environmental,
procurement, personnel and other administrative services, at cost, to TXU Corp.
and its other subsidiaries. TXU Business Services acts as transfer agent,
registrar and dividend paying agent with respect to the common stock and
preference stock of TXU Corp., and the preferred stock of US Holdings. TXU
Business Services also acts as dividend paying agent for the preferred stock of
TXU Gas and as agent for participants under TXU Corp.'s Direct Stock Purchase
and Dividend Reinvestment Plan.
In addition, TXU Corp. owns a 50% interest in Pinnacle One Partners, L.P.,
a joint venture that owns TXU Communications Ventures Company (TXU
Communications). TXU Communications operates an established incumbent local
exchange carrier serving residential and business customers in East Texas and
certain suburbs of Houston, Texas. TXU Communications offers its customers a
comprehensive package of telecommunications services, including local, long
distance, dial-up internet, digital subscriber line, and network and data
services. TXU Communications currently has approximately 169,000 access lines.
ELECTRIC RESTRUCTURING
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Restructuring Legislation -- Under the 1999 Restructuring Legislation,
discussed above, each electric utility was required to separate (unbundle) by
January 1, 2002 its business activities into a power generation company (PGC), a
retail electric provider (REP), and a transmission and distribution (T&D)
utility or separate T&D utilities. Unbundled T&D utilities within ERCOT, such as
Oncor, remain regulated by the Commission.
2
Beginning January 1, 2002, REPs affiliated with T&D utilities began
charging residential and small commercial customers located in their historical
service territories rates that are 6% less than the rates that were in effect on
January 1, 1999, as adjusted for fuel factor changes ("price-to-beat rate"). TXU
Energy, as a REP affiliated with a T&D utility, may not charge prices to such
customers that are different from the price-to-beat rate until the earlier of
January 1, 2005 or the date on which 40% of the electricity consumed by
customers in those respective customer classes is supplied by competing REPs.
Thereafter, TXU Energy may offer rates different from the price-to-beat rate,
but it must also continue to make the price-to-beat, adjusted for fuel factor
changes, available for residential and small commercial customers until January
1, 2007. REPs must be certified by the Commission. TXU Energy has received
appropriate REP certifications from the Commission.
Also, beginning January 1, 2002, PGCs that are affiliated with T&D
utilities may charge unregulated prices in connection with ERCOT wholesale power
transactions. Estimated costs associated with PGC nuclear power plant
decommissioning obligations continue to be recovered as a nonbypassable T&D
charge over the life of the plant. Each affiliated PGC owning 400 megawatts (MW)
or more of installed generating capacity must offer each year at auction
entitlements to at least 15% of such capacity. The obligation of an affiliated
PGC to sell capacity entitlements at auction continues until the earlier of
January 1, 2007 or the date on which 40% of the electricity consumed by
residential and small commercial customers of the PGC's affiliated REP is
supplied by competing REPs. PGCs must be registered with the Commission. TXU
Energy has filed appropriate PGC registrations with the Commission.
The 1999 Restructuring Legislation also provided for the recovery of
generation-related regulatory assets (regulatory assets) and generation-related
and purchased power-related costs that are in excess of market value (stranded
costs). It provided means for electric utilities to mitigate stranded costs
during the rate freeze period that preceded unbundling. Unmitigated stranded
costs would be finally determined in a 2004 "true-up" proceeding relying
principally upon market-based asset valuations. Regulatory assets and
unmitigated stranded costs can be recovered through the issuance of transition
(securitization) bonds or imposition of a competition transition charge.
Further, a REP would also be required to reconcile and credit to its
affiliated T&D utility (and the T&D utility to credit T&D customers), as a
so-called retail clawback, any positive difference between the price-to-beat
rate, reduced by the nonbypassible delivery charge, and the prevailing market
price of electricity during the same time period to the extent the price-to-beat
rate exceeded the market price of electricity. This reconciliation is not
required for the applicable customer class if 40% of the electricity consumed by
customers in that class is supplied by competing REPs before January 1, 2004. If
a retail clawback reconciliation is required, the 1999 Restructuring Legislation
provided that the amount credited cannot exceed an amount equal to the number of
residential or small commercial customers served by a T&D utility that are
buying electricity from the affiliated REP at the price-to-beat rate on January
1, 2004, minus the number of new customers obtained outside the historical
service territory, multiplied by $150. (The calculation of this credit was
altered for TXU Energy in connection with the Settlement Plan discussed below.)
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
1999 Restructuring Legislation. The settlement (Settlement) provided for in 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 fuel adjustments.
The Settlement was approved by the Commission in June 2002. In August 2002, the
Commission issued a financing order, pursuant to the Settlement Plan,
authorizing the issuance of securitization bonds relating to recovery of
regulatory assets. The Commission's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties to the Travis
County, Texas District Court in August 2002. In January 2003, US Holdings
concluded a settlement of these appeals and they were dismissed. Thus, the
Settlement became final.
3
The major elements of the Settlement are:
Excess Mitigation Credit and Appeal Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit in the
amount of $350 million, plus interest, applied over a two-year period as a
reduction to T&D rates charged to REPs. In June 2001, the Commission had issued
an interim order that addressed Oncor's charges for T&D service when retail
competition would begin. Among other things, that interim order, and subsequent
final order issued in October 2001, required Oncor to reduce rates over the
period from 2002-2008. The Commission's decision was appealed by US Holdings to
the Travis County, Texas District Court. Finalization of the Settlement means US
Holdings' appeal has been dismissed. Also, in July 2001, the staff of the
Commission had notified US Holdings and the Commission that it disagreed with US
Holdings' computation of the level of earnings in excess of the regulatory
earnings cap for calendar year 2000. In August 2001, the Commission issued an
order adopting the staff position. US Holdings appealed this matter to the
Travis County, Texas District Court, which affirmed the Commission's order and
US Holdings then appealed that decision to the Third District Court of Appeals
in Austin, Texas. This appeal has now been dismissed.
Regulatory Asset Securitization -- In October 1999, US Holdings filed an
application with the Commission for a financing order to permit the issuance by
a special purpose entity of $1.65 billion of securitization bonds. In May 2000,
the Commission signed an order rejecting such request and authorized only $363
million of such bonds. US Holdings filed an appeal with the Travis County, Texas
District Court and in September 2000, the Court issued a judgment that reversed
part of the Commission's order and affirmed other aspects of the Commission's
order. US Holdings and various other parties appealed this judgment directly to
the Supreme Court of Texas and in June 2001, it issued a ruling; in October
2001, it remanded the case to the Commission, which consolidated it into the
Settlement Plan proceeding. In accordance with the Settlement, Oncor received a
financing order authorizing it to issue securitization bonds in the aggregate
principal amount of $1.3 billion to recover regulatory assets and other
qualified costs. The Settlement provides that there can be an initial issuance
of securitization bonds in the amount of up to $500 million, followed by a
second issuance of the remainder after 2003. The Settlement resolves all issues
related to regulatory assets and liabilities.
Retail Clawback -- If, as currently expected, TXU Energy retains more than
60% of its historical residential and small commercial customers after the first
two years of competition, the amount of the retail clawback credit will be equal
to the number of residential and small commercial customers retained by TXU
Energy in its historical service territory on January 1, 2004, less the number
of new customers TXU Energy has added outside of its historical service
territory as of January 1, 2004, multiplied by $90. This determination will be
made separately for the residential and small commercial classes. The credit, if
any, will be applied to T&D rates charged by Oncor to REPs, including TXU
Energy, over a two-year period beginning January 1, 2004. Under the settlement
agreement, TXU Energy will make a compliance filing with the Commission
reflecting customer count as of January, 2004. In the fourth quarter of 2002,
TXU Energy recorded a $185 million ($120 million after-tax) charge for the
retail clawback, which represents the current best estimate of the amount to be
funded to Oncor over the two-year period.
Stranded Cost Resolution -- TXU Energy's stranded costs, not including
regulatory assets, are fixed at zero. Accordingly, it will not have to conduct
the stranded cost true-up in 2004 provided for in the 1999 Restructuring
Legislation. In addition, the Settlement resulted in a resolution of the
regulatory disallowance of amounts related to US Holdings' repurchase of
minority owner interests in the Comanche Peak nuclear generating station. The
Commission's final order in connection with US Holdings' January 1990 rate
increase request had been ultimately reviewed by the Supreme Court of Texas, and
an aggregate of $909 million of disallowances with respect to US Holdings'
reacquisitions of minority owners' interests in Comanche Peak, which had
previously been recorded as a charge to earnings, was remanded to the District
Court and then to the Commission for reconsideration. As a result of the
Settlement, the parties have moved to dismiss this remand. The Settlement also
precludes recovery by US Holdings of certain environmental improvement costs.
Fuel Cost Recovery -- The Settlement also provides that US Holdings will
not seek to recover its unrecovered fuel costs which existed at December 31,
2001. Also, it will not conduct a final fuel cost reconciliation, which would
have covered the period from July 1998 until the beginning of competition in
January 2002.
4
Provider of Last Resort -- Through calendar year 2002, TXU Energy was the
provider of last resort (POLR) for residential and small non-residential
customers in those areas of ERCOT where customer choice was available outside
its historical service territory and was the POLR for large non-residential
customers in its historical service territory. TXU Energy's POLR contract
expired on December 31, 2002. However, in August 2002, the Commission adopted
new rules that significantly changed POLR service. Under the new POLR rules,
instead of being transferred to the POLR, non-paying residential and small
non-residential customers served by affiliated REPs are subject to
disconnection. Non-paying residential and small non-residential customers served
by non-affiliated REPs are transferred to the affiliated REP. Non-paying large
non-residential customers can be disconnected by any REP if the customer's
contract does not preclude it. Thus, within the new POLR framework, the POLR
provides electric service only 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. No later than October 1, 2004, the
Commission must decide whether all REPs should be permitted to disconnect all
non-paying customers. The new POLR rules are expected to result in reduced bad
debt expense beginning in 2003.
COMPETITIVE STRATEGY
--------------------
TXU Corp. has developed a strategy designed to achieve operations of
significant scale in selected regions which optimize a portfolio of assets,
capabilities and customer relationships across multiple products and services.
TXU Corp. plans to enhance its leading position in retail and wholesale electric
and gas sales and related services and transmission and delivery in Texas; and
build on its substantial, broad-based position in Australia. TXU Corp.'s
strategy involves establishing upstream positions (electricity generation
through ownership or contracts and gas supply through purchase contracts,
pipeline access to multiple supply sources and storage assets) and downstream
retail customer relationships. TXU Corp. uses the knowledge gained from and the
value of these positions through effective portfolio management capabilities to
manage the risk and enhance the value of existing positions while adjusting the
portfolio as needed to address market conditions. TXU Corp. intends to focus on
operational excellence in its current operations, cost reduction customer
retention and debt reduction to strengthen its balance sheet and support future
growth. TXU Corp. intends for its energy delivery business to continue to be a
leader in the efficient and reliable transmission and distribution of energy.
OPERATING SEGMENTS
------------------
Concurrent with TXU Corp.'s reorganization as of January 1, 2002, TXU
Corp. realigned its operations into three reportable segments: North America
Energy, North America Energy Delivery and International Energy. In October 2002,
TXU Corp. discontinued its operations in Europe. Those operations of TXU Europe
that have not been sold are being managed for the benefit of its creditors
through administration (similar to bankruptcy) proceedings in the United
Kingdom. (See Note 3 to Financial Statements.) The International Energy segment
has been renamed and consists solely of operations in Australia. (See Note 17 to
Financial Statements for further information concerning reportable business
segments.)
North America Energy - operations, principally in the competitive Texas
market, involving power production, wholesale energy sales, retail energy sales
and services, as well as portfolio management, including risk management and
certain trading activities.
North America Energy Delivery - largely regulated operations in Texas
involving the transmission and distribution of electricity and the purchase,
transportation, distribution and sale of natural gas.
Australia - operations, principally in Victoria and South Australia,
involving power production, wholesale energy sales, retail energy sales and
services in largely competitive markets, portfolio management and gas storage,
as well as regulated electricity and gas distribution.
5
NORTH AMERICA ENERGY SEGMENT
The North America Energy segment was created as a result of the
deregulation of the electric utility industry in Texas, which became effective
January 1, 2002. The North America Energy segment is an integrated operation
that engages in power production, wholesale energy sales, retail energy sales
and related services and portfolio management activities, primarily in the state
of Texas. The North America Energy segment's operations are conducted
principally through TXU Energy and its following subsidiaries: TXU Generation
Holdings Company LLC; TXU Portfolio Management Company LP; TXU Energy Retail
Company LP; TXU Energy Solutions Company LP; TXU Fuel Company; and two coal
mining subsidiaries.
TXU Energy is one of the largest competitive retailers of energy in the
US. Regulatory restructuring in Texas has resulted in competitive markets within
the state, thus presenting additional opportunities for growth accompanied by
the introduction of competitive pressures.
TXU Energy's strategy is to focus on operational excellence, customer
retention and low risk growth from core operations in Texas. TXU Energy intends
to accomplish this through the operation of a single, integrated energy business
managing a portfolio of assets, capabilities and customer relationships. TXU
Energy's portfolio of assets includes 19,140 MW of owned or leased power
generating capacity, approximately 2,700 MW of power generating capacity under
power purchase contracts and over 2.7 million retail electric customers. Early
in 2002, TXU Energy intended to enhance its significant business portfolio in
Texas through expansion into other regions in North America. However, the slowed
pace of deregulation, the weaker economy, reduced liquidity in power markets and
reduced developmental capital spending have resulted in TXU Energy delaying
those growth objectives until competitive and regulatory environments develop
and economic factors improve. TXU Energy is currently implementing plans to
reduce operating costs.
TXU Energy's power generating facilities provide TXU Energy with the
capability to supply a significant portion of the wholesale power market demand
in Texas, particularly the North Texas market, at competitive production costs.
As part of TXU Energy's integrated business portfolio, much of the low cost
power generation is available to supply the power demands of its retail
customers and other competitive REPs.
TXU Energy's portfolio management operation is responsible for managing
the risks inherent in TXU Energy's portfolio of businesses and providing supply
structuring, pricing and risk management services in connection with TXU
Energy's unregulated retail energy activities. The portfolio management
operation also is responsible for the commodity price risk management of the
fuel supply needs of TXU Energy's generating plants as well as the dispatch and
sale of power from those plants.
Power Production
The power fleet in Texas consists of 22 owned or leased plants with
generating capacity fueled as follows: 2,300 MW nuclear; 5,837 MW coal/lignite;
and 10,881 MW gas/oil. TXU Energy has adequate power capacity to supply its
retail customer base from its power fleet and purchases from third parties. TXU
Energy believes that a key competitive advantage is its ability to produce
electricity at low variable costs. The power generating plants and other
important properties of TXU Energy are located primarily on land owned in fee
simple.
TXU Energy completed the acquisition of the Pedricktown, New Jersey
co-generation facility and wholesale energy production business in April 2002.
The acquisition included a 122 MW combined-cycle power production facility and
various contracts, including electric supply and gas transportation agreements.
In May 2002, TXU Energy acquired a 260 MW combined-cycle power production
facility in northwest Texas through a settlement agreement which dismissed a
lawsuit previously filed related to the plant. TXU Energy previously purchased
all of the electrical output of this plant under a long-term contract.
In April 2002, TXU Energy completed the sale of its Handley and Mountain
Creek power generating plants (total plant capacity of 2,334 MW). The Handley
plant consists of five natural gas-fueled generating units with a total plant
capacity of 1,441 MW. The Mountain Creek plant consists of five natural
gas-fueled generating units with a total plant capacity of 893 MW. The
transaction included a power purchase and tolling agreement for TXU Energy to
purchase power during the summer months through 2006. TXU Energy from time to
6
time may sell additional assets to reduce its position in the Texas market, to
provide funds for other investments and to reduce debt.
TXU Energy has been active in adding renewable energy to its portfolio.
TXU Energy is one of the largest purchasers of wind-generated, renewable energy
in Texas and the US. TXU Energy currently purchases renewable energy from over
382 MW of wind projects located in West Texas. TXU Energy expects to continue to
add additional renewable supplies as commercial opportunities become available.
Capacity Auction -- To encourage competition in the ERCOT region, each PGC
with 400 MW or more of installed generating capacity that is unbundled from an
integrated electric utility in Texas is required to sell at auction entitlements
to 15% of the output of its installed generating capacity. The obligation of an
affiliated PGC to sell capacity entitlements at auction continues until the
earlier of January 1, 2007 or the date on which 40% of the electricity consumed
by residential and small commercial customers initially transferred to the PGC's
affiliated REP on January 1, 2002 is supplied by competing REPs. This capacity
auction allows market participants to purchase power either through purchases in
the wholesale power markets or through mandated capacity auctions. A REP cannot
purchase entitlements sold by its affiliated PGC in mandated capacity auctions.
The first auction in Texas was held in September 2001. There was significant
interest in the entitlements being auctioned, and the auction of two-year,
one-year and monthly entitlements required to be sold was successful. The second
and third auctions were held in March and July of 2002, respectively. TXU Energy
sold the monthly entitlements required at each of these auctions. The October
2002 auction offered one-year and monthly entitlements for 2003 only. Not all of
the entitlements offered in the October auction were sold; however, TXU Energy
will re-offer these unsold entitlements in subsequent auctions to be held
through 2003.
Nuclear production assets -- TXU Energy owns and operates two
nuclear-fueled electricity generating units at the Comanche Peak plant, each of
which is designed for a capacity of 1,150 MW.
TXU Energy has on hand, or has contracted for, services it expects to need
for its nuclear units through the years indicated: conversion (2003), enrichment
(2005), and fabrication (2011). TXU Energy is currently evaluating bids for the
purchase of uranium for 2003, which is readily available on the open market. TXU
Energy does not anticipate any difficulties procuring raw materials and services
beyond these dates.
TXU Energy's onsite spent nuclear fuel storage capability is sufficient to
accommodate the operation of Comanche Peak through the year 2017, while
maintaining the capability to off-load the core of one of the nuclear-fueled
generating units.
Under current regulatory licenses, nuclear decommissioning activities are
projected to begin in 2030 for Comanche Peak Unit 1 and 2033 for Unit 2 and
common facilities. Since January 1, 2002, projected decommissioning costs are
being recovered from Oncor's customers through a non-bypassable charge based
upon a 1997 site-specific study, adjusted for changes in the value of trust fund
assets, through rates placed into effect under the 2001 Unbundled Cost of
Service filing.
Lignite/Coal production assets -- Lignite is used as the primary fuel for
two units at the Big Brown generating plant, three units at the Monticello
generating plant, three units at the Martin Lake generating plant, and one unit
at the Sandow generating plant, having an aggregate capacity of 5,837 MW. TXU
Energy's lignite units have been constructed adjacent to surface minable lignite
reserves. TXU Energy owns in fee or has under lease proven reserves dedicated to
the Big Brown, Monticello and Martin Lake generating plants. TXU Energy utilizes
owned and/or leased equipment to remove the overburden and recover the lignite.
Approximately 77% of the fuel used at TXU Energy's lignite plants in 2002 was
supplied from owned or leased lignite.
TXU Energy supplements its lignite fuel at Big Brown, Monticello and
Martin Lake with western coal from the Powder River Basin (PRB) in Wyoming. The
coal is purchased from multiple suppliers under contracts of various lengths and
is transported from the PRB to TXU Energy's generating plants by railcar.
Approximately 23% of the fuel used at TXU Energy's lignite plants in 2002 was
supplied from western coal under these contracts. Based on its current usage,
which includes the use of western coal to supplement its lignite reserves, TXU
Energy believes that it has sufficient lignite reserves and access to western
coal resources for its generating needs in the foreseeable future.
7
Gas/Oil production assets -- TXU Energy has eighteen gas/oil fueled plants
(including Pedricktown, New Jersey) with a capacity of 11,003 MW. Gas/oil fuel
requirements for 2002 were provided through a mix of contracts with producers at
the wellhead and contracts with commercial suppliers. Fuel oil can be stored at
15 of the principally gas-fueled generating plants. At January 1, 2003, TXU
Energy had fuel oil storage capacity sufficient to accommodate approximately 5.5
million barrels of oil and had approximately 0.9 million barrels of oil in
inventory. A significant portion of the gas/oil generating plants have the
ability to switch between gas and fuel oil.
TXU Energy owns and operates an intrastate natural gas pipeline system
with approximately 1,900 miles of pipeline facilities which extends from the
gas-producing area of the Permian Basin in West Texas to the East Texas gas
fields and southward to the Gulf Coast area. The pipeline facilities were
originally built to serve US Holdings' generating plants. In keeping with the
deregulation principles, this network now offers transportation and storage
service to TXU Energy as well as third parties at a competitive price.
TXU Energy also owns and operates two underground gas storage facilities
with a usable capacity of 14.0 billion cubic feet (Bcf). TXU Energy holds a
portion of this storage capacity for use during periods of peak demand to meet
seasonal and other fluctuations or interruption of deliveries by gas suppliers.
Under normal operating conditions, up to 400 million cubic feet can be withdrawn
each day for a ten-day period, with withdrawals at lower rates thereafter.
Products and Services
On January 1, 2002, all of US Holdings' over 2.7 million retail electric
service customers in Texas who did not choose a different REP automatically
became customers of TXU Energy. TXU Energy's historical service territory is
located in the north-central, eastern and western parts of Texas, with an
estimated population in excess of 7 million, about one-third of the population
of Texas. TXU Energy provides electric service in that service territory to
customers in 92 counties and 370 incorporated municipalities, including Dallas,
Fort Worth, Arlington, Irving, Plano, Waco, Mesquite, Rowlett, Grand Prairie,
Wichita Falls, Odessa, Midland, Carrollton, Tyler, Richardson and Killeen. The
area is a diversified commercial and industrial center with substantial banking,
insurance, telecommunications, electronics, aerospace, petrochemical and
specialized steel manufacturing, and automotive and aircraft assembly. The
territory served includes major portions of the oil and gas fields in the
Permian Basin and East Texas, as well as substantial farming and ranching
sections of the state. TXU Energy also provides retail electric service in other
areas of ERCOT now open to competition.
TXU Energy's wholesale power sales are conducted through its portfolio
management activities that are designed to integrate a portfolio of assets,
capabilities and customer relationships. See Portfolio Management below. In
February 2002, TXU Energy was awarded 1,000 MW of load in the New Jersey
Statewide Basic Generation Service Electricity Supply Auction. However, plans
for further expansion outside of Texas have been delayed until competitive and
regulatory environments develop and economic factors improve.
TXU Energy's natural gas operation in Texas includes pipelines, storage
facilities, well-head production contracts, transportation agreements, storage
leases, retail and wholesale customers and supply to gas fired generation
plants. Service is primarily provided to TXU Energy's generation operations.
Third party service, which is expected to increase in coming years, comprised
approximately 15% of revenue for the pipeline system in 2002. TXU Energy's
portfolio management operation integrates various techniques and resources to
maximize value and manage the risks inherent in this natural gas operation. The
main goal of portfolio management, in this regard, is to reduce costs and
improve gross margin associated with the assets through storage, transportation
and exchange and production contracts. Portfolio management must take into
account market pricing, operational constraints and existing obligations in
order to determine the best blend of resources.
Portfolio Management
The portfolio management operation integrates, manages and creates value
from TXU Energy's extensive portfolio of retail and production assets,
capabilities and customer relationships. Specifically, portfolio management
ensures supply availability and manages associated operating costs, provides
competitively priced power, and maximizes the value of physical assets, capital
and technological infrastructure to monitor, evaluate and anticipate gas and
electric commodity market trends relating to fundamental supply, market demand
and Texas deregulation. TXU Energy uses these capabilities to optimize the cash
flows and earnings of its deregulated Texas portfolio. TXU Energy also offers
similar portfolio management services to non-affiliated third parties.
8
TXU Energy enters into both financial contracts as well as contracts that
provide for physical delivery related to the purchase and sale of electricity
and gas primarily in the wholesale markets in Texas and to a limited extent in
selected regions elsewhere in North America. Competitive markets demand that a
number of services be offered, including term contracts with interruptible and
firm deliveries, risk management, aggregation of supply, nominations, scheduling
of deliveries for both gas transportation capacity and gas storage, as well as
power generating facilities. In the course of providing these comprehensive
portfolio management services to its customer base, TXU Energy engages in energy
price risk management activities. TXU Energy enters into short- and long-term
physical contracts, financial contracts that are traded on exchanges and
"over-the-counter" and bilateral contracts with customers. Speculative trading
activities represent a small fraction of TXU Energy's portfolio management
activities.
TXU Energy manages its exposure to price risk from existing contractual
commitments as well as other energy related assets and liabilities within
established transactional policies and limits. TXU Energy ensures best practices
in risk management and risk control by employing proven principles used by
financial institutions. These controls have been structured so that they are
practical in application and consistent with stated business objectives.
Portfolio management revalues TXU Energy's exposures daily using integrated
energy systems to capture value and mitigate the portfolio management risks. A
risk management forum meets regularly to ensure that transactional practices
comply with its prior approval of commodities, instruments, exchanges and
markets. Transactional risks are monitored and limits are enforced to comply
with established TXU Corp. policy requirements. Risk assessment is segregated
and operated separately from compliance and enforcement to ensure independence,
accountability and integrity of actions. TXU Corp. has a strict disciplinary
program to address any violations of its risk management policy requirements.
TXU Energy also periodically reviews these policies to ensure they are
responsive to changing market and business conditions. These policies are
designed to protect earnings, cash flows and credit ratings. For information
regarding TXU Energy's risk management policies, please read MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
"Financial Condition, Liquidity and Capital Resources - Quantitative and
Qualitative Disclosures about Market Risk-Risk Oversight."
Competition
Texas -- Deregulation of the electric utility industry in Texas, effective
January 1, 2002, allows retail consumers of independent operating utilities in
the ERCOT region to choose a REP, which purchases its power from competing power
producers. All customer switching is conducted through ERCOT, which acts as a
clearinghouse and enforcement agent. Texas is one of the fastest growing states
in the nation with a diverse and resilient economy and, as a result, has
attracted several competitors into the retail electricity market. TXU Energy, as
an active participant in this competitive market, is marketing its services in
Texas to add new customers and to retain its existing customers.
According to the latest data provided by the Commission (September 2002),
customers at over 400,000 locations across ERCOT had elected to switch providers
within their historical service territory. This number represents approximately
7% of all customers in ERCOT areas open to customer choice. Since December 2000,
the Commission has certified a total of 54 REPs and while some have dropped out,
competition has remained strong.
TXU Energy believes that the scale derived from a large retail portfolio
provides the platform for a profitable operation by, among other things,
reducing the cost of service and billing per customer. TXU Energy emphasizes its
identification with the TXU brand and reputation. TXU Energy uses a value
pricing approach by customizing its products to each customer segment with
service enhancements that are known to be valued by customers in those segments.
With its approach, TXU Energy intends to achieve substantially higher customer
loyalty and enhanced profit margins, while reducing the costs associated with
customers frequently switching suppliers.
TXU Energy has invested in customer related infrastructure and uses its
customer relationships, technology operating platforms, marketing, customer
service operations and customer loyalty to actively compete to retain its
initial customer base and to add customers.
9
Because Texas began restructuring its wholesale electricity business in
1995, new generation was encouraged to enter the state. As a result, there have
been approximately 60 new power plants added in the state since that time,
providing the state with ample power resources. Capacity margins for ERCOT,
based upon existing capacity and planned capacity with interconnection
agreements, are expected to be 24% in 2003 and remain at or above 20% for the
next several years. New gas-fired capacity is generally more efficient to
operate than existing gas/oil-fired capacity due to technological advances.
However, base-load nuclear, lignite and coal plants have lower variable
production costs than even new gas-fired plants at current annual average market
gas prices. Due to the higher variable operating and fuel costs of its
gas/oil-fired units, as compared to its lignite/ coal and nuclear units,
production from TXU Energy's gas/oil units is more susceptible to being
displaced by the more efficient units being constructed. This positions TXU
Energy's gas/oil units to run during intermediate and peak load periods when
prices are higher and provides more opportunities for hedging activities and
increased market liquidity.
TXU Energy believes that the ERCOT region presents an attractive
competitive electric service market due to the following factors:
o gas-fired plants are expected to set the price of generation during a
substantial portion of the year, providing an opportunity for TXU Energy to
benefit from its nuclear and lignite/coal units fuel cost advantages;
o peak demand is expected to grow at an average rate of 2.8% per year;
o it is a sizeable market with over 57 gigawatts (GW) of peak demand and 33
GW of average demand; and
o there is no mandatory power pool structure.
Outside Texas -- Deregulation, although proceeding well in Texas, has not
had similar success in other parts of the U.S. Federal legislation such as the
Public Utility Regulatory Policy Act of 1978 and the Energy Policy Act, as well
as initiatives in various states, were enacted to encourage wholesale
competition among electric utility and non-utility power producers. Together
with increasing customer demand for lower priced electricity and other energy
services, these measures were expected to have accelerated the industry's
movement toward a more competitive pricing and cost structure.
Many states, faced with this increasing pressure from legislative bodies
(federal and state) to become more competitive while adhering to certain
continued regulatory requirements, along with changing economic conditions and
rapid technological changes, put forth deregulation plans that have since been
deferred or changed. The result is delayed deregulation. New entry by retailers
as well as by merchant generators in states other than Texas has been slowed.
The continued uncertainty regarding regional transmission organizations, (the
Federal Energy Regulatory Commission's (FERC's) Order 2000) and more recently
FERC's Notice of Proposed Rulemaking regarding Standard Market Design have
delayed the opening of new retail markets and decreased the economic viability
for merchant generation.
Nature of Competition -- The level of competition in the energy industry
is affected by a number of variables, including price, reliability of service,
the cost of energy alternatives, new technologies and governmental regulations.
TXU Energy competes with other energy providers based on the ability to
aggregate supplies at competitive prices from different sources and locations
and to efficiently utilize transportation from third-party pipelines and
transmission from electric utilities. These operations also compete against
other energy marketers on the basis of their relative skills, financial position
and credit. Competition means energy customers, wholesale energy suppliers and
transporters may seek financial guarantees and other assurances that their
energy contracts will be satisfied. As pricing information becomes increasingly
available in the energy business and when deregulation in the electricity
markets begins to revive, the power generation and portfolio management
operations of TXU Energy may experience greater competition.
10
Customers -- There are no individually significant unaffiliated customers
upon which TXU Energy's business or results of operations are highly dependent.
Regulation and Rates
TXU Corp. is a holding company as defined in the Public Utility Holding
Company Act of 1935. However, TXU Corp. and all of its subsidiary companies are
exempt from the provisions of such Act, except Section 9(a)(2) which relates to
the acquisition of securities of public utility companies and Section 33 which
relates to the acquisition of foreign (non-US) utility companies.
TXU Energy is subject to various federal, state and local regulations.
(See discussion below and Environmental Matters.)
TXU Energy is an exempt wholesale generator under the Federal Power Act
and is subject to the jurisdiction of the Nuclear Regulatory Commission (NRC)
with respect to its nuclear power plant. NRC regulations govern the granting of
licenses for the construction and operation of nuclear power plants and subject
such plants to continuing review and regulation. TXU Energy also holds a power
marketer license from FERC.
NORTH AMERICA ENERGY DELIVERY SEGMENT
The North America Energy Delivery segment consists primarily of the
electricity transmission and distribution operations of Oncor and the
purchasing, transportation, distribution and retail sales operations of TXU Gas.
North America Energy Delivery provides the delivery of essential services of
electricity and gas safely, reliably and economically to end-use customers.
Electric Transmission
Oncor's electric transmission business is responsible for the real-time
safe and reliable operations of its transmission network. These responsibilities
consist of the construction and maintenance of transmission facilities and the
monitoring, controlling and dispatching of high-voltage electricity within
Oncor's control area.
Oncor is a member of ERCOT, and the transmission business actively
supports the operation of ERCOT and all market participants. The transmission
business participates with ERCOT and other member utilities to plan, design and
obtain regulatory approval for construction of new transmission lines necessary
to increase bulk power transfer capability and to remove existing limitations
and constraints on the ERCOT transmission grid.
Transmission revenues are provided under tariffs approved by the
Commission and FERC. Network transmission revenues are provided from the use of
the transmission power lines for delivery of power over facilities operating at
60,000 volts and above. Transformation service revenues are provided from the
use of distribution substation facilities that transform power from high-voltage
transmission to distribution voltages below 60,000 volts. Other services offered
by the transmission business include, but are not limited to: system impact
studies, facilities studies and maintenance of substations and transmission
lines owned by other non-retail parties.
The principal generating facilities of TXU Energy, certain non-utility
generators and the load centers of Oncor are connected by 4,522 circuit miles of
345-kilovolt (kV) transmission lines and 9,615 circuit miles of 138- and 69-kV
transmission lines.
Oncor is connected by eight 345-kV lines to CenterPoint Energy (formerly
Reliant Energy Inc.); by four 345-kV, eight 138-kV and nine 69-kV lines to
American Electric Power Company; by two 345-kV and eight 138-kV lines to the
Lower Colorado River Authority; by four 345-kV and nine 138-kV lines to the
Texas Municipal Power Agency; by two asynchronous High Voltage Direct Current
interconnections to American Electric Power Company in the Southwest Power Pool;
and at several points with smaller systems operating wholly within Texas.
11
Electric Distribution
Oncor's electricity distribution business is responsible for the overall
safe and efficient operations of distribution facilities, including power
delivery, power quality and system reliability. The Oncor distribution system
supplies electricity to over 2.9 million points of delivery. The electricity
distribution business consists of the ownership, management, construction,
maintenance and operation of the distribution network within Oncor's
certificated service area. Over the past five years, the number of Oncor's
distribution system premises served has been growing an average of more than 2%
a year.
The 2.7 million formerly regulated electricity customers (retail customers
who purchase and consume electricity) are free to choose from REP's who compete
for their business. However, the REP's are now Oncor's customers. The changed
character of customers, however, does not mean that the safe and reliable
delivery of dependable power is any less critical to Oncor's success. Service
quality, safety and reliability are of paramount importance to retail providers,
their customers, and Oncor. Oncor intends to continue to build on its inherited
tradition of low cost and high performance.
Oncor's distribution system receives electricity from the transmission
system through power distribution substations and distributes electricity to end
users and wholesale customers through 2,914 distribution feeders.
The Oncor distribution network consists of 55,178 miles of overhead
primary conductors, 22,073 miles of overhead secondary and street light
conductors, 12,264 miles of underground primary conductors and 7,332 miles of
underground secondary and street light conductors. The majority of the
distribution system operates at 25-kV and 12.5-kV.
Most of Oncor's power lines have been constructed over lands of others
pursuant to easements or along public highways, streets and right-of-ways as
permitted by law. Substantially all of Oncor's transmission and distribution
systems are subject to liens under its mortgage indentures.
Competition - Electric Delivery
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals which 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 Company are named defendants in both suits. TXU is unable
to predict the outcome of any litigation related to this matter.
Customers -- Oncor's transmission customers consist of municipalities,
electric cooperatives and other distribution companies. Oncor's distribution
customers consist of approximately 35 REPs in Oncor's certified service area,
including a subsidiary REP of TXU Energy. Revenues from TXU Energy represent the
substantial majority of Oncor's revenues. There are no individually significant
unaffiliated customers upon which Oncor's business or results are highly
dependent.
12
Regulation and Rates - Electric Delivery
Regulatory Proceedings Affecting Restructuring -- See Electric
Restructuring above for a description of the various regulatory proceedings
relating to the restructuring of the Texas electric industry.
Oncor is subject to various federal, state and local regulations. (See
Environmental Matters below for information on environmental matters affecting
Oncor.) As its operations are wholly within Texas, Oncor believes that it is not
a public utility as defined in the Federal Power Act and has been advised by its
counsel that it is not subject to general regulation under such Act.
The Commission has original jurisdiction over transmission rates and
services and over distribution rates and services in unincorporated areas and
those municipalities that have ceded original jurisdiction to the Commission and
has exclusive appellate jurisdiction to review the rate and service orders and
ordinances of municipalities. Generally, the Public Utility Regulatory Act has
prohibited the collection of any rates or charges by a public utility that does
not have the prior approval of the Commission.
Gas Delivery
Service Area -- TXU Lone Star Pipeline, a partially rate-regulated
division of TXU Gas, owns and operates interconnected natural gas transmission
lines, five underground storage reservoirs, 20 compressor stations and related
properties, all within Texas. TXU Lone Star Pipeline also owns a sixth
underground storage reservoir that is currently being depleted for possible
retirement. With a system consisting of approximately 6,800 miles of
transmission and gathering pipelines in Texas, TXU Lone Star Pipeline is one of
the largest pipelines in the US. Through these facilities, it transports natural
gas to distribution systems of TXU Gas Distribution, a division of TXU Gas, and
other customers. Rates for the services provided to TXU Gas Distribution are
regulated by the Railroad Commission of Texas (RRC), while rates for services to
other customers are generally established by competitively negotiated contracts.
The gas transmission and distribution lines of TXU Gas Distribution and TXU Lone
Star Pipeline have been constructed over lands of others pursuant to easements
or along public highways, streets and rights-of-way as permitted by law.
TXU Gas Distribution provides service through over 26,000 miles of
distribution mains. Through these facilities, it purchases, distributes and
sells natural gas to over 1.4 million residential, commercial and industrial
customers in approximately 550 cities and towns, including the 11-county
Dallas-Fort Worth Metroplex. TXU Gas Distribution also transports natural gas to
end users within its distribution system as market opportunities allow. The
distribution service rates that TXU Gas Distribution charges its residential and
commercial customers are generally established by the municipal governments of
the cities and towns served, with the RRC having appellate, or in some
instances, primary jurisdiction. Sales to electric generation customers are
affected by the mildness or severity of both cooling and heating seasons.
Gas Distribution Peaking -- TXU Gas Distribution estimates its peak-day
availability of natural gas supply from its long-term contracts, short-term
contracts and withdrawals from underground storage to be in excess of 2.2 Bcf.
Daily purchases on the spot market raise this availability level to meet
additional peak-day needs.
TXU Gas Distribution's peak-day demand in 2002 was on March 2, when sales
to its customers reached approximately 2.1 Bcf. During 2002 the average daily
demand of TXU Gas Distribution's residential and commercial customers was 0.4
Bcf.
TXU Gas Distribution has historically maintained a contractual right to
interrupt load, which is designed to achieve the highest load factor possible in
the use of the pipeline system while ensuring continuous and uninterrupted
service to residential and commercial customers. Interruptible service contracts
include the right to curtail gas deliveries up to 100% according to a priority
plan.
Estimates of natural gas supplies and reserves are not necessarily
indicative of TXU Gas Distribution's ability to meet current or anticipated
market demands or immediate delivery requirements because of factors such as the
physical limitations of gathering, storage and transmission systems, the
duration and severity of cold weather, the availability of gas reserves from its
suppliers, the ability to purchase additional supplies on a short-term basis and
actions by federal and state regulatory authorities. Curtailment rights provide
13
TXU Gas Distribution flexibility to meet the human-needs requirements of its
customers on a firm basis. Priority allocations imposed by federal and state
regulatory agencies, as well as other factors beyond the control of TXU Gas
Distribution, may affect its ability to meet the demands of its customers.
Gas Supply -- TXU Gas Distribution's natural gas supply consists of
contracts for the purchase of specific reserves, contracts not related to
specific reserves or fields, and natural gas in storage. The total planned
natural gas supply as of January 1, 2003 is 148 Bcf, which is approximately
seven percent less than TXU Gas Distribution's actual supply during 2002. TXU
Gas Distribution has approximately 18 Bcf committed under contracts with
specific reserves, 31 Bcf in working gas in storage and 50 Bcf committed under
gas supply contracts not related to specific reserves or fields. In 2002, TXU
Gas Distribution's natural gas requirements were purchased from approximately 93
independent producers, marketers and pipeline companies.
TXU Gas Distribution manages its storage working gas inventory and storage
deliverability along with other purchased gas to meet its peak-day requirements.
TXU Gas Distribution utilizes the services of five natural gas storage fields
owned by TXU Lone Star Pipeline, all of which are located in Texas. These fields
have an optimal working gas capacity of more than 39 Bcf and a storage
withdrawal deliverability of up to 1.2 Bcf per day.
TXU Gas Distribution buys natural gas under long-term and short-term
intrastate contracts, many of which require minimum purchases of gas. The
estimated natural gas demand, which assumes normal weather conditions,
significantly exceeds the minimum purchase obligations of these contracts for
the year 2003 and thereafter.
The TXU Gas Distribution supply program is designed to contract for new
supplies of natural gas and to recontract targeted expiring sources. In addition
to being heavily concentrated in the established natural gas-producing areas of
central, northern and eastern Texas, TXU Lone Star Pipeline's intrastate
pipeline system also extends into or near the major producing areas of the Texas
Gulf Coast and the Delaware and Val Verde Basins of West Texas. Nine basins
located in Texas are estimated to contain a substantial portion of the nation's
remaining onshore natural gas reserves. TXU Lone Star Pipeline's pipeline system
provides access to all of these basins. TXU Lone Star Pipeline is well situated
to receive large volumes into its system at the major hubs, such as Katy and
Waha, as well as from storage facilities where TXU Gas Distribution maintains
high delivery capabilities.
Competition - Gas Delivery
Customer sensitivity to energy prices and the availability of
competitively priced natural gas in the unregulated markets continue to cause
competition in the electricity generation and industrial user markets. Natural
gas faces varying degrees of competition from electricity, coal, natural gas
liquids, oil and other refined products throughout TXU Gas Distribution's
service territory. Pipeline systems of other companies, both intrastate and
interstate, extend into or through the areas in which TXU Gas Distribution's
markets are located, creating competition from other sellers of natural gas. As
developments in the energy industry point to a continuation of these competitive
pressures, TXU Gas Distribution intends to maintain its focus on customer
service and the creation of new services for its customers in order to remain
its customers' supplier of choice.
TXU Lone Star Pipeline is the sole transporter of natural gas to TXU Gas
Distribution's distribution systems. TXU Lone Star Pipeline competes with other
pipelines in Texas to transport natural gas to new and existing industrial and
power generation facilities as well as off-system markets. These businesses are
highly competitive.
Open Access- Transmission -- TXU Lone Star Pipeline has been an open
access transporter under Section 311 of the Natural Gas Policy Act of 1978
(NGPA) on its intrastate transmission facilities since July 1988. Such
transportation is performed pursuant to Section 311(a)(2) of the NGPA and is
subject to an exemption from the jurisdiction of the FERC under the Natural Gas
Act, pursuant to Section 601 of the NGPA.
Customers -- There are no individually significant unaffiliated customers
upon which the segment's business or results of operations are highly dependent.
14
Regulation and Rates - Gas Delivery
TXU Gas Distribution and TXU Lone Star Pipeline are wholly intrastate in
character and perform distribution utility operations and pipeline
transportation services, respectively, in the State of Texas subject to
regulation by municipalities in Texas and the RRC. The RRC regulates the charge
for the transportation of gas by TXU Lone Star Pipeline to TXU Gas
Distribution's distribution systems for sale to TXU Gas Distribution's
residential and commercial consumers. TXU Lone Star Pipeline owns no
certificated interstate transmission facilities subject to the jurisdiction of
the FERC under the Natural Gas Act, has no sales for resale under the rate
jurisdiction of the FERC and does not perform any transportation service that is
subject to FERC jurisdiction under the Natural Gas Act.
The city gate rate for the cost of natural gas TXU Gas Distribution
ultimately delivers to residential and commercial customers is established by
the RRC and provides for full recovery of the actual cost of gas delivered,
including out-of-period costs such as gas purchase contract settlement costs.
The distribution service rates TXU Gas Distribution charges its residential and
commercial customers are established by the municipal governments of the cities
and towns served, with the RRC having appellate jurisdiction.
TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the RRC. A settlement was reached for $7.5
million. These settlements adjusted other aspects of the TXU Gas tariffs. The
total annual impact of the 2002 rate settlements and associated tariff
adjustments is approximately $22 million. In July 2001 and August 2001, TXU Gas
filed two cases, a gas cost review and a gas cost reconciliation, covering the
period between November 1997 and June 2001, seeking to recover $29 million of
under-recovered gas costs. On August 6, 2002, a settlement was approved by the
RRC authorizing TXU Gas to recover $18 million of this amount, which has been
recovered through a surcharge, while $11 million in under-recovered gas costs
remains pending. On August 30, 2002, TXU Gas filed the city gate gas cost
reconciliation for the twelve-month period ended June 30, 2002 with the RRC.
During this period, TXU Gas over-recovered its gas cost by $24 million, which is
being refunded from October 2002 through June 2003. The refund has no material
impact on the net income of TXU Gas.
TXU Gas Distribution sells to industrial customers under standard rate
schedules that permit automatic adjustment on a monthly basis for the full
amount of increases or decreases in the cost of natural gas. Transportation
services to industrial and electricity generation customers are provided under
both standard tariffs and competitively negotiated contracts.
Oncor Utility Solutions
Oncor Utility Solutions (North America) Company and Oncor Utility
Solutions (Texas) Company (collectively, "Utility Solutions"), both wholly-owned
subsidiaries of TXU Gas, were launched in late 2001 to provide unregulated
utility asset management services for cooperatives, and municipally-owned and
investor-owned utilities throughout North America. Electric, gas, water and
wastewater utilities may choose from Utility Solutions' menu of services ranging
from a complete turnkey solution to selected services such as work management,
resource management, strategic planning, design, maintenance and construction.
Utility Solutions leverages TXU Corp.'s existing economies of scale, asset
management processes, technologies and personnel to deliver cost savings and
reliability improvements to client network systems.
15
AUSTRALIA SEGMENT
TXU Australia provides its products and services, primarily in the States
of Victoria and South Australia, through its two main operating divisions:
Energy Delivery Business and Energy Business.
Energy Delivery Business
TXU Australia's Energy Delivery Business engages principally in managing
the distribution of electricity to 549,000 connection points in the eastern
suburbs of Melbourne and in rural areas in eastern Victoria, and the
distribution of natural gas to 466,000 supply points located in the western
suburbs of Melbourne and in rural towns in western Victoria.
TXU Australia manages an electricity network of approximately 26,000 miles
of distribution lines over an area of approximately 31,000 square miles, and a
gas network of approximately 5,000 miles of pipelines over approximately 800
square miles in its territory.
Energy Business
TXU Australia's Energy Business involves the managing of retail and
wholesale activities in TXU Australia's energy markets, predominantly in
Victoria and South Australia.
Retail Activities -- The business involves selling energy and related
services. TXU Australia's customers include industrial, commercial and
residential customers in Victoria. Since the introduction of competition to the
residential markets in Victoria for electricity in January 2002 and for gas in
October 2002, TXU Australia has marketed product options to the residential and
business mass-markets focusing on energy plans tailored to suit individual
lifestyles and specific business types. Customers are also given a choice to
combine the separate electricity and gas bills they receive from TXU Australia
into a single bill. TXU Australia has also promoted to the customers an option
to supplement their existing electricity supply with electricity generated from
renewable sources.
TXU Australia also sells energy to industrial and commercial customers in
South Australia as well as, on a smaller scale, to customers in New South Wales,
Queensland and the Australian Capital Territory.
Electricity and gas sales are seasonal to the extent that annual peaks
generally occur in summer months for electricity and in winter months for gas.
TXU Australia has electricity retail licenses in Victoria, New South
Wales, South Australia, Queensland and the Australian Capital Territory, and gas
retail licenses in Victoria, New South Wales and South Australia.
The state of Victoria regulates retail energy prices for incumbent
retailers and has granted an average rise of 9% in gas prices for TXU
Australia's gas retail customers beginning in 2003. The state has also
determined an electricity price decrease of 4% effective April 1, 2003, for TXU
Australia's electric retail customers, and has replaced the Special Power
Payment (a $A118 million subsidy to all eligible electricity customers in the
state of Victoria, introduced at the beginning of 2002) with the Network Tariff
Rebate (a $A57 million subsidy to be introduced in April 2003). The combined
effect results in an average 3.1% price increase for TXU Australia's electric
customers effective April 1, 2003.
Wholesale Activities -- The wholesale business involves wholesale
purchases of energy, generation of electricity, portfolio management, including
risk management and certain trading activities, management of capacity
requirements and gas processing and storage.
In the National Electricity Market (NEM) comprising Victoria, New South
Wales, South Australia, Australian Capital Territory, Queensland, and Tasmania,
generators producing over 30 MW are required to offer all of their electricity
output for sale through the wholesale market. Holders of retail electricity
licenses are required to participate in and comply with rules established by the
wholesale market operators. Each electricity provider is required to purchase
most of its electricity needs from NEM. Generation in South Australia is
16
primarily undertaken by a small number of generators. South Australia also
imports some of its electricity through interconnectors from Victoria.
TXU Australia operates a gas-powered generation plant at Torrens Island,
South Australia, through a long-term lease. The output from this plant is sold
into the NEM. The plant acts as the marginal generator in South Australia during
most periods.
Victoria's current gas supplies are sourced predominantly from Esso/BHPP.
Victoria is the only Australian state that has a gas spot market. Each gas
retailer in Victoria, including TXU Australia, must specify the injections
(volumes and prices) it is willing to make from its supply sources, prior to any
spot market trading day. Any imbalance on a spot market trading day between its
injections and the demands of its customers with counterparties in the Victorian
spot market is automatically settled, based on the volume and price bids
submitted prior to that day. South Australia's current gas supplies are sourced
from the South Australia Cooper Basin Joint Venture.
Gas in Australia is sourced primarily through long-term contracts. TXU
Australia has entered into long-term gas supply arrangements with gas producers
to meet the demands of its customers and of its Torrens Island generation plant.
Long-term arrangements are also made to manage pipeline and peak gas delivery
capacity for the Australian operations.
TXU Australia owns and operates an underground gas storage facility near
Port Campbell in western Victoria. The facility processes raw gas and stores
processed gas. This facility provides TXU Australia with the strategic advantage
of having ready access to an alternative supply of natural gas at times of peak
demand, and also enables TXU Australia to offer gas processing and storage
services to market customers.
In addition to the purchase and sale of physical products and services,
TXU Australia enters into financial contracts and hedging arrangements, within
approved risk limits, to manage its energy price risk exposure in various energy
markets, and to maintain the optimum capacity and output of its physical assets.
TXU Australia has an option agreement with AES Ecogen, which owns 966 MW
of gas-fired generation that is typically used during peak periods of demand for
electricity in Victoria. The agreement provides TXU Australia with the option to
enter into contracts with AES Ecogen that require the exchange of cash for the
difference between the amounts specified in the agreement and the then current
spot price of electricity. TXU Australia also has an agreement to supply gas to
AES Ecogen for 20 years. The AES Ecogen power stations were sold to Ecogen Power
Pty Ltd. in December 2002. The sale process was completed on February 14, 2003.
The sale of the power stations will have no impact on the existing contractual
arrangements with TXU Australia.
Competition - Australia
Retail Activities -- In Victoria and New South Wales, the residential
electricity markets have been competitive since January 2002, and the
residential gas markets have been competitive in New South Wales since January
2002 and in Victoria since October 2002. The residential energy prices are still
regulated and determined by the government bodies of the respective States of
Victoria and New South Wales. More particularly, the New South Wales government
operates a fund that redistributes excess profits among generators and energy
retailers. The fund, in effect, limits the pool price risk for the state's
incumbent retailers.
In Victoria, TXU Australia, being the third largest retailer of energy to
the residential market, has been active in marketing to residential customers.
As a result, the general level of customer switching has increased across the
state, and TXU Australia's customer levels have increased. In New South Wales,
the level of customer switching is of a lesser magnitude.
In South Australia, the residential energy market has been competitive
since January 2003. TXU Australia intends to enter this market during 2003,
subject to the proper implementation of a market transfer system. TXU Australia
has also been successful in acquiring commercial and industrial customers in the
competitive South Australia market.
Wholesale Activities -- With its current asset position, TXU Australia
maintains flexibility in the upstream energy market in most major states.
17
Upstream gas supply has a limited number of major suppliers in each state
of Australia. Therefore, the market price volatility has been relatively low to
date. New sources of gas supply are expected in the future with new reserves and
pipelines being developed. TXU Australia has a one-third interest in a joint
venture to construct a gas pipeline from Port Campbell, Victoria to Adelaide,
South Australia.
Customers -- There are no individually significant customers upon which
the segment's business or results of operations are highly dependent.
Regulation and Rates - Australia
Gas and Electricity -- Entities operating in the gas and electricity
industries in Victoria operate under several legislative acts, regulations and
legal documents that form the regulatory framework, which is outlined below.
Gas Industry Act 2001 and Electricity Industry Act 2000, as amended --
These Acts are the primary legislation governing the reformed gas and
electricity industries in Victoria. They complement the national regulatory
framework (see National Access Regime below).
Essential Services Act 2001 -- This Act establishes the Essential Services
Commission (ESC) which assumes the role of the previous regulator, the Office of
the Regulator-General (ORG). The ESC came into effect on January 1, 2002.
Simultaneously, the ORG Act has been repealed and subsumed by this Act.
Essential Services Commission Act 2001 -- This Act, established in late
2001, primarily sets out the responsibilities and the power of the ESC. The ESC,
being an independent economic regulator, has the responsibility to regulate
prescribed essential utility services supplied by the electricity, gas, water,
ports, grain handling and rail freight industries. It has the power to issue
licenses for the generation, transmission, distribution and retailing of gas and
electricity in Victoria and to regulate tariffs.
National Access Regime
Gas Industry -- TXU Australia's gas pipelines are subject to the Gas
Pipelines Access Law and the National Third Party Access Code for Natural Gas
Pipeline System. However, TXU Australia has an existing access arrangement
approved by the ESC. TXU Australia's revisions to its access arrangement's terms
and conditions, including tariffs for the further five-year period commencing
January 1, 2003, were approved on December 2, 2002. The access arrangement
provides for distribution services in accordance with the Distribution Code and
will charge for these services in accordance with the tariffs set out in the
access arrangement.
Electric Industry -- NEM is a wholesale market for the sale of electricity
that is combined with an open access regime for the use of physical electricity
networks within the participating states of Australia. The NEM currently
operates a wholesale electricity pool into which all electricity output from
generators within Victoria, New South Wales and South Australia is centrally
pooled and scheduled to meet the electricity demand of those states. Each
electricity provider is required to purchase electricity either through a pool
or through another provider who has purchased that electricity from a pool.
TXU Australia is registered as a market customer for the purposes of the
market established under the National Electricity Code, and purchases its power
requirements from the NEM. It manages its risk of exposure to high prices in
this market, however, by entering into hedging arrangements with electricity
market generators.
The distribution tariffs for electricity until December 31, 2005, and for
gas until December 31, 2007, were determined by the ESC. According to the
determination, the gas distribution tariffs are to increase by 2.2% for 2003.
Each subsequent year, the tariffs are to increase by 0.8% plus the Consumer
Price Index increase.
18
ENVIRONMENTAL MATTERS
---------------------
US
TXU Corp. and its US subsidiaries are subject to various federal, state
and local regulations dealing with air and water quality and related
environmental matters.
Air -- Under the Texas Clean Air Act, the Texas Commission on
Environmental Quality (TCEQ) has jurisdiction over the permissible level of air
contaminant emissions from, and permitting requirements for, generating, mining
and gas delivery facilities located within the State of Texas. The New Jersey
Department of Environmental Protection has jurisdiction over the emissions from
TXU Energy's generation facility in New Jersey. In addition, the new source
performance standards of the Environmental Protection Agency (EPA) promulgated
under the Federal Clean Air Act, as amended (Clean Air Act), which have also
been adopted by the TCEQ, are applicable to certain generating units. TXU
Energy's generation plants and mining equipment and TXU Gas' facilities operate
in compliance with applicable regulations, permits and emission standards
promulgated pursuant to these Acts.
The Clean Air Act includes provisions which, among other things, place
limits on the sulfur dioxide (SO2) emissions produced by certain generation
plants. In addition to the new source performance standards applicable to SO2,
the Clean Air Act requires that fossil-fueled plants have sufficient SO2
emission allowances and meet certain Nitrous Oxide (NOx) emission standards. TXU
Energy's generation plants meet the SO2 allowance requirements and NOx emission
rates.
In December 2000, the EPA published a notice that it intends to regulate
the emissions of hazardous air pollutants, including mercury, from fossil
fuel-fired power plants in the future. Regulations on mercury are expected to be
proposed in 2003, issued in 2004 and become effective in 2007. TXU Energy is
unable to predict the effects of these regulations. In addition, in 1999, the
EPA promulgated National Emissions Standards for Hazardous Air Pollutants that
apply to certain TXU Gas facilities. The EPA has also issued rules for
controlling regional haze; the impact of these rules is unknown at this time
because the TCEQ has not yet implemented the regional haze requirements.
The Bush Administration will address greenhouse gas emissions through a
recently announced greenhouse gas emissions intensity reduction policy. The Bush
Administration and EPA have proposed the Clear Skies initiative calling for
additional reductions of SO2, NOx, and mercury from electricity generation
facilities over a 15-year period. TXU Energy is unable to predict the impact of
the Bush Administration proposal or related legislation.
Major air pollution control provisions of the 1999 Restructuring
Legislation require a 50% reduction in NOx emissions from "grandfathered"
electric utility generation plants and a 25% reduction in SO2 emissions from
"grandfathered" electric utility generation plants by May 1, 2003. The
"grandfathered" plants must also obtain permits. This legislation also provides
for an "opt-in" of permitted plants as an alternative to achieve the same
reductions, and recovery of reasonable environmental improvement costs as
stranded costs upon approval by the Commission (see Stranded Cost Resolution
within ELECTRIC RESTRUCTURING section above). All permits required by the 1999
Restructuring Legislation have been obtained and TXU Energy has initiated a
construction program to install control equipment to achieve the required
reductions.
In 2001, the Texas Clean Air Act was amended to require that
"grandfathered" facilities, other than electric utility generation plants apply
for permits. TXU Energy, TXU Gas and Oncor anticipate that the permits can be
obtained for their "grandfathered" facilities without significant effects on the
costs for operating these facilities.
The TCEQ has also adopted revisions to its State Implementation Plan rules
that require an 89% reduction in NOx emissions from electric utility generation
plants in the Dallas-Fort Worth ozone non-attainment area and a 51% reduction in
NOx emissions from electric utility generation plants in East and Central Texas.
The cost of compliance will be reduced due to emission trading provisions in the
rules.
Water -- The TCEQ, the EPA and the RRC have jurisdiction over water
discharges (including storm water) from all domestic facilities. TXU Energy's,
TXU Gas' and Oncor's facilities are presently in compliance with applicable
19
state and federal requirements relating to discharge of pollutants into the
water. TXU Energy, TXU Gas and Oncor hold all required waste water discharge
permits from the TCEQ and the RRC for facilities in operation and have applied
for or obtained necessary permits for facilities under construction. TXU Energy,
TXU Gas and Oncor believe they can satisfy the requirements necessary to obtain
any required permits or renewals. Recent changes to federal rules pertaining to
Spill Prevention, Control and Countermeasure Plans for oil-filled electrical
equipment and bulk storage facilities for oil will require updating of certain
plans and facilities. TXU Gas and Oncor are unable to predict at this time the
impact of these changes. Clean Water Act Section 316(b) regulations pertaining
to existing water intake structures are being developed by the EPA with
publication scheduled for early 2004. TXU Energy is unable to predict at this
time the impacts of these regulations.
Other -- Diversion, impoundment and withdrawal of water for cooling and
other purposes are subject to the jurisdiction of the TCEQ. TXU Energy possesses
all necessary permits for these activities from the TCEQ for its present
operations.
Treatment, storage and disposal of solid and hazardous waste are regulated
at the state level under the Texas Solid Waste Disposal Act (Texas Act) and at
the federal level under the Resource Conservation and Recovery Act of 1976, as
amended, (RCRA) and the Toxic Substances Control Act (TSCA). The EPA has issued
regulations under the RCRA and TSCA, and the TCEQ and the RRC have issued
regulations under the Texas Act applicable to TXU Energy, TXU Gas' and Oncor's
facilities. TXU Energy has registered solid waste disposal sites and has
obtained or applied for such permits as are required by such regulations.
Under the federal Low-Level Radioactive Waste Policy Act of 1980, as
amended, the State of Texas is required to provide, either on its own or jointly
with other states in a compact, for the disposal of all low-level radioactive
waste generated within the state. The State of Texas has agreed to a compact
with the States of Maine and Vermont for a disposal facility that would be
located in Texas. That compact was ratified by Congress and signed by the
President in 1998. The State of Texas had proposed to license a disposal site in
Hudspeth County, Texas, but in October 1998 the TCEQ denied that license
application. No appeal was taken from the denial of the license application, and
that denial is now final. The nature and extent of future efforts by the State
of Texas to provide for a disposal site are presently uncertain. TXU Energy
intends to continue to ship low-level waste material off-site for as long as an
alternative disposal site is available. Should existing off-site disposal become
unavailable, the low-level waste material will be stored on-site. TXU Energy's
on-site storage capacity is expected to be adequate until other off-site
facilities become available.
AUSTRALIA
TXU Australia is subject to various Australian federal and state
environmental regulations, the most significant of which are the Victorian
Environmental Protection Act of 1970 and the South Australian Environment
Protection Act of 1993. Both Acts regulate, in particular, the discharge of
waste into air, land and water, site contamination, the emission of noise and
waste management. Both Acts also established their respective state
Environmental Protection Authorities (Australia EPA) and grant the Australia EPA
a wide range of powers to control and prevent environmental pollution.
The Torrens Island electricity generation plant in South Australia has a
license to carry out activities of environmental significance including the
discharge of warm cooling water into the marine environment, subject to certain
conditions. The conditions relate to temperature rise limit, temperature
monitoring and reporting obligations to the Australia EPA. TXU Australia has
complied with its license conditions.
In Victoria, no licenses or works approvals from the Australia EPA are
currently required for activities undertaken by TXU Networks. TXU Gas Storage
has a license to carry out activities of environmental significance including
discharges to air and water subject to certain conditions. TXU Australia has
complied with its license conditions.
Through past acquisitions, TXU Australia was allocated certain properties
that are contaminated. Liabilities totaling $7 million (A$12 million) have been
recorded for estimated costs of land reclamation and site restoration at these
properties. These costs may change if the extent of contamination is different
than testing indicated at the time of initial limited reviews. Under the Acts,
the Australia EPA has the power to order TXU Australia to incur such costs to
remedy the contamination of land. TXU Australia also recorded a $5 million (A$9
million) liability for land remediation costs for its Torrens Island plant.
20
Item 3. LEGAL PROCEEDINGS
In October, November and December 2002 and January 2003, at least
twenty-five lawsuits were filed in or removed to the United States District
Court for the Northern District of Texas, and two in the United States District
Court for the Eastern District of Texas, against TXU Corp., Erle Nye and Michael
J. McNally. Some of the lawsuits also name former officer David W. Biegler as a
defendant; however, based on the alleged class period, Mr. Biegler is
inappropriately named as a defendant. The plaintiffs seek to represent classes
of certain purchasers of TXU Corp. common and preferred stock during specified
class periods ranging from January 31, 2002 to October 11, 2002. No class or
classes have been certified. The complaints allege violations of the provisions
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder, and Sections 11 and 12 of the Securities
Act of 1933, as amended (Securities Act), relating to alleged materially false
and misleading statements, including statements in prospectuses related to the
offering by TXU Corp. of its equity-linked securities and common stock in May
and June 2002. The named individual defendants are current or former officers
and/or directors of TXU Corp. While TXU Corp. believes the claims are without
merit and intends to vigorously defend these lawsuits, it is unable to estimate
any possible loss or predict the outcome of these actions.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of the duties of loyalty
and good faith. The named individual defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. Therefore, TXU Corp. is unable to estimate any
possible loss or predict the outcome of this action.
On October 30, 2002, a lawsuit was filed in the 191st Judicial District
Court of Dallas County, Texas against TXU Corp. and Erle Nye alleging
negligence, negligent misrepresentation, fraud and statutory fraud. On November
12, 2002, the lawsuit was amended and the plaintiffs alleged the same claims on
behalf of themselves and a putative class of persons or entities similarly
situated. No amount of damages has been specified. TXU Corp. has removed this
case to the United States District Court for the Northern District of Texas to
have it consolidated with the other cases described above pending in that court.
While TXU Corp. believes the claim is without merit and intends to vigorously
defend the lawsuit, it is unable to estimate any possible loss or predict the
outcome of this action.
On November 26, 2002, a lawsuit was filed in the United States District
Court for the Northern District of Texas against TXU Corp. and the directors of
TXU Corp. asserting claims under the Employee Retirement Income Security Act
(ERISA) on behalf of a putative class of participants in various employee
benefit plans of TXU Corp. The plaintiff seeks to represent a class of
participants in such plans during the period between January 31, 2002 and
October 11, 2002 based on factual allegations substantially the same as the
other cases described above pending in the United States District Court for the
Northern District of Texas. The complaint has not yet been served on the
defendants and, therefore, the defendants have not yet responded thereto. While
TXU Corp. believes the claim is without merit and intends to vigorously defend
the lawsuit, it is unable to estimate any possible loss or predict the outcome
of this action.
In November and December 2002, two lawsuits were filed in the 191st and
116th Judicial District Courts of Dallas County, Texas against TXU Corp., Erle
Nye, Michael J. McNally, Biggs Porter and the directors of TXU Corp. asserting a
claim under Section 11 of the Securities Act on behalf of purchasers of TXU
Corp.'s equity linked debt securities issued in June 2002. These cases have been
removed from the United States District Court for the Northern District of Texas
and transferred to the court with jurisdiction of the consolidated cases
described above. The plaintiffs have filed motions to remand the cases to state
district court. The defendants intend to file a motion to have these cases
consolidated with the other cases described above pending in such court. While
TXU Corp. believes the claims are without merit and intends to vigorously defend
these lawsuits, it is unable to estimate any possible loss or predict the
outcome of these actions.
21
On February 28, 2003, a lawsuit was filed in the United States District
Court for the Northern District of Texas, Dallas Division, against TXU Corp.,
the directors of TXU Corp., Peter B. Tinkham, Diane J. Kubin, Robert L. Turpin
and other former unidentified members of the TXU Thrift Plan Committee asserting
claims under ERISA on behalf of a putative class of participants and
beneficiaries of the TXU Thrift Plan. The plaintiff seeks to represent a class
of participants in such plan during the period between November 23, 2001 through
October 11, 2002. The complaint has not yet been served on the defendants and,
therefore, the defendants have not yet responded thereto. While TXU Corp.
believes the claim is without merit and intends to vigorously defend the
lawsuit, it is unable to estimate any possible loss or predict the outcome of
this action.
General -- In addition to the above, TXU Corp. and its US and Australian
subsidiaries are involved in various other legal and administrative proceedings
the ultimate resolution of which, in the opinion of each, should not have a
material effect upon their financial position, results of operations or cash
flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF TXU CORP.
Positions and Date First Elected
Offices Presently to Present Offices
Held (Current Term (Current Term
Expires Expires Business Experience
Name of Officer Age on May 16, 2003) on May 16, 2003) (Preceding Five Years)
- ---------------------- ------- --------------------- ---------------------- -------------------------------
Erle Nye 65 Chairman of the May 23, 1997 Chairman of the Board and
Board and Chief Chief Executive of TXU
Executive Corp., Oncor Electric
Delivery, TXU Energy, TXU
Gas and TXU US Holdings.
T. L. Baker 57 Executive Vice February 21, 2003 Executive Vice President of
President TXU Corp. and Vice Chairman
of Oncor and TXU Gas; prior
thereto, President of Oncor
and TXU Gas; prior thereto,
President of TXU Electric
Company; prior thereto,
President, Electric Service
Division of TXU Electric
Company, TXU Gas Distribution
Division of TXU Gas (TXU Gas
Distribution) and TXU SESCO.
Barbara B. Curry 49 Executive Vice September 14, 2000 Executive Vice President of
President TXU Corp.; prior thereto,
Executive Vice President of
TXU Business Services.
Brian N. Dickie 47 Executive Vice May 14, 1999 Executive Vice President of
President TXU Corp. and President of
TXU Energy; prior thereto,
Executive Vice President of
TXU Corp. and President of
TXU Energy Group; prior
thereto, President and
Chief Operating Officer of
BoozoAllen & Hamilton,
Inc.; prior thereto,
President, Worldwide
Commercial Business of
BoozoAllen & Hamilton, Inc.
22
EXECUTIVE OFFICERS OF TXU CORP. (CONT)
Positions and Date First Elected
Offices Presently to Present Offices
Held (Current Term (Current Term
Expires Expires Business Experience
Name of Officer Age on May 16, 2003) on May 16, 2003) (Preceding Five Years)
- ---------------------- ------- --------------------- ---------------------- -------------------------------
H. Dan Farell 53 Executive Vice February 21, 2003 Executive Vice President and
President and Chief Chief Financial Officer of
Financial Officer TXU Corp. and President of
TXU Gas, Distribution
Division of TXU Gas and TXU
Lone Star Pipeline; prior
thereto, President of
Distribution Division of
TXU Gas and Oncor; prior
thereto, Executive Vice
President of TXU Electric,
TXU Gas Distribution and
TXU SESCO; prior thereto,
Chairman of the Board of
TXU Electricity Limited and
Managing Director of TXU
Australia.
Michael J. McNally 48 Executive Vice May 23, 1997 Executive Vice President of
President TXU Corp. and TXU US
Holdings; prior thereto,
Executive Vice President
and Chief Financial Officer
of TXU Corp.
Eric H. Peterson 42 Executive Vice May 9, 2002 Executive Vice President and
President and General Counsel of TXU
General Counsel Corp.; prior thereto,
Senior Vice-President and
General Counsel for DTE
Energy; prior thereto,
partner at Worsham,
Forsythe & Wooldridge.
There is no family relationship between any of the above-named Executive
Officers.
23
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TXU Corp.'s common stock is listed on the New York, Chicago and Pacific
stock exchanges (symbol: TXU). The price range of the common stock of TXU Corp.,
as reported by Bloomberg, and the dividends paid during each of the calendar
quarters of 2002 and 2001 were as follows:
Price Range Dividends Paid
----------------------------------------- --------------
Quarter Ended 2002 2001 2002 2001
- ------------- ------------------ ------------------- ---- ----
High Low High Low
---- --- ---- ---
March 31......................... $55.20 $46.27 $44.13 $34.81 $ .60 $ .60
June 30.......................... 57.05 48.81 49.74 39.60 .60 .60
September 30..................... 51.85 33.65 50.00 43.25 .60 .60
December 31...................... 40.99 10.10 49.97 43.11 .60 .60
----- -----
$2.40 $2.40
===== =====
On October 12, 2002, TXU Corp. declared a common stock dividend of $0.125
per share, payable on January 2, 2003, which represents an 80% reduction from
the previous dividend rate. The decrease was in response to capital market
concerns regarding the liquidity of TXU Corp. and its US and Australian
subsidiaries. Under Texas law, TXU Corp. may only declare dividends out of
surplus, which is statutorily defined as total shareholders' equity less the
book value of common stock (stated capital). The write-off of TXU Corp.'s
investment in TXU Europe resulted in negative surplus. Texas law permits,
subject to the receipt of shareholder approval, the reclassification of stated
capital into surplus. TXU Corp. received such shareholder approval of this
reclassification in a special meeting of shareholders held February 14, 2003.
Accordingly, approximately $8.0 billion will be reclassified from stated capital
to additional paid-in capital, resulting in an increase of surplus in the same
amount.
TXU Corp., or its predecessor TEI, have declared common stock dividends
payable in cash in each year since TEI's incorporation in 1945. The Board of
Directors of TXU Corp., at its February 2003 meeting, declared a quarterly
dividend of $0.125 a share, payable April 1, 2003 to shareholders of record on
March 7, 2003. Future dividends may vary depending upon TXU Corp.'s profit
levels, operating cash flow levels and capital requirements as well as financial
and other business conditions existing at the time.
The number of record holders of the common stock of TXU Corp. as of
February 28, 2003 was 68,910.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for TXU Corp. is set forth under
Selected Financial Data included in Appendix A to this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for TXU Corp. is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for TXU Corp. is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for TXU Corp. is set forth under
Statement of Responsibility, Independent Auditors' Report, Statements of
Consolidated Income, Statements of Consolidated Comprehensive Income, Statements
of Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Shareholders' Equity and Notes to Financial Statements included in
Appendix A to this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is found under the heading Election
of Directors in the definitive proxy statement to be filed by TXU Corp. with the
Securities and Exchange Commission on or about April 3, 2003. Additional
information with respect to Executive Officers of TXU Corp. is found at the end
of Part I.
Item 11. EXECUTIVE COMPENSATION
Information with respect to this item is found under the headings Election
of Directors and Executive Compensation in the definitive proxy statement to be
filed by TXU Corp. with the Securities and Exchange Commission on or about April
3, 2003.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information concerning stock-based
compensation plans as of December 31, 2002. (See Note 10 to Financial
Statements.)
(c)
Number of shares
remaining available for
(a) future issuance under
Number of shares to (b) equity compensation
be issued upon Weighted-average plans (excluding
exercise of exercise price of securities
outstanding options, outstanding options, reflected in
warrants and rights warrants and rights column a)
------------------- ------------------- -----------
Stock compensation plans approved by
shareholders........................ 26,206(1) $24.55 8,148,341(2)
Stock compensation plans not
approved by shareholders............ - - 81,935(3)
------- ------ ---------
Total.......................... 26,206 $24.55 8,230,276
======= ====== =========
(1) Amount relates exclusively to outstanding stock options assumed by TXU
Corp. in connection with its 1997 merger with ENSERCH Corporation (now
TXU Gas Company) that were exchanged for options for TXU Corp. common
stock (TXU Gas Option Plan).
(2) Represents shares under the TXU Long-Term Incentive Compensation Plan.
(3) Represents shares under the TXU Australia Employee Share Plan
described below.
TXU Gas Option Plan -- As part of the acquisition of ENSERCH Corporation
(now TXU Gas) by TXU Corp., options to purchase shares of ENSERCH Corporation
common stock that were granted under the ENSERCH Corporation 1991 Stock
Incentive Plan were converted into options to purchase shares of TXU Corp.
common stock. All options were granted on or before August 5, 1997, and expire
on the tenth anniversary of their grant date. No further options may be granted
under this plan. TXU Corp. has reserved for issuance under this plan a
sufficient number of shares of common stock for delivery upon exercise of the
outstanding options.
The material features of each TXU Corp. stock-based compensation plan that
has not been approved by shareholders are described below.
25
TXU Australia Employee Share Plan -- TXU Australia has an Employee Share
Plan, introduced in 2001, which is available to Australia-based directors and
employees of TXU Australia with at least three months of service at the
beginning of each six-month offering period, starting on January 1 and July 1.
Employees who elect to participate in this plan enroll and re-enroll for
six-month offer periods, and purchase TXU Corp. common stock at a 15% discount
of the TXU Corp. stock price, based on the lower of the fair market value on the
first business day of the offering period or the fair market value on a
nominated date just prior to final contributions for the relevant offering
period. Participants may elect between a tax exempt option or a tax deferred
option. At the end of each offering period, participants may elect to continue,
change their contribution amounts or exit the plan. As of December 31, 2002,
participants were eligible to purchase 18,065 shares of TXU Corp. common stock.
TXU Europe Sharesave Plan -- TXU Europe Limited had a TXU Europe Sharesave
Plan, introduced in 1999, which was available to the UK-based directors and
employees of TXU Europe Group who devoted more than 25 hours a week to their
duties. Employees who participated in this plan entered into a monthly savings
contract, for either a three- or five-year period. At the end of that period, a
participant may elect within a period of six months to apply the savings
accumulated to the purchase of shares of TXU Corp. common stock. Grants of
options were made in 2001 and 1999, no grants were made in 2002. The exercise
price for both grants was based on a 15% discount of the TXU Corp. stock price
on the invitation date in respect of three-year options and the five-year
Sharesave Plan exercise price was based on a 20% discount.
Despite the exiting of the TXU Europe business, participants in the TXU
Europe Sharesave Plan have until May 19, 2003 to determine if they will exercise
their rights to purchase TXU Corp. common stock at the weighted average price of
approximately $23.63 per share. As of December 31, 2002, participants were
eligible to purchase 119,256 shares with the proceeds of their savings balance
under the TXU Europe Sharesave Plan.
Summary -- Other information with respect to this item is found under the
heading Beneficial Ownership of Common Stock of the Company in the definitive
proxy statement to be filed by TXU Corp. with the Securities and Exchange
Commission on or about April 3, 2003.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of TXU Corp.'s management, including the principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this annual report. Based on the evaluation performed, TXU
Corp.'s management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective.
There have been no significant changes in TXU Corp.'s internal controls
for its continuing operations or in other factors that could significantly
affect these controls subsequent to the evaluation referenced above.
26
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) Documents filed as part of this Report:
Financial Statements (included in Appendix A to this report):
Selected Financial Data - Consolidated Financial Statistics........................... A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... A-3
Statement of Responsibility........................................................... A-59
Independent Auditors' Report.......................................................... A-60
Statements of Consolidated Income for each of the three years in the
period ended December 31, 2002................................................. A-61
Statements of Consolidated Comprehensive Income for each of the
three years in the period ended December 31, 2002.............................. A-62
Statements of Consolidated Cash Flows for each of the three years in
the period ended December 31, 2002............................................. A-63
Consolidated Balance Sheets, December 31, 2002 and 2001............................... A-64
Statements of Consolidated Shareholders' Equity for each of the three years in
the period ended December 31, 2002............................................. A-65
Notes to Financial Statements......................................................... A-67
The consolidated financial statement schedules are omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
notes thereto.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 2002, are as follows:
Date Item
---- ----
October 17, 2002 Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
November 5, 2002 Item 2. Disposition of Assets
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
Item 5. Other Events and Regulation FD Disclosure
November 21, 2002 Item 7. Exhibits
November 26, 2002 Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
December 17, 2002 Item 5. Other Events and Regulation FD Disclosure
February 25, 2003 Item 5. Other Events and Regulation FD Disclosure
(c) Exhibits:
Included in Appendix B to this report.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Corp. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TXU CORP.
Date: March 11, 2003
By: /s/ ERLE NYE
-----------------------------------
(Erle Nye, Chairman of the Board and
Chief Executive)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of TXU Corp. and
in the capacities and on the date indicated.
Signature Title Date
--------- ----- ------
/s/ ERLE NYE Principal Executive
- --------------------------------------------------------
(Erle Nye, Chairman of the Board and Chief Officer and Director March 11, 2003
Executive)
/s/ H. DAN FARELL Principal Financial Officer March 11, 2003
- --------------------------------------------------------
(H. Dan Farell, Executive Vice President and Chief
Financial Officer)
/s/ BIGGS C. PORTER Principal Accounting Officer March 11, 2003
- --------------------------------------------------------
(Biggs C. Porter, Controller and Principal Accounting Officer)
/s/ DEREK C. BONHAM Director March 11, 2003
- --------------------------------------------------------
(Derek C. Bonham)
/s/ J. S. FARRINGTON Director March 11, 2003
- --------------------------------------------------------
(J. S. Farrington)
/s/ WILLIAM M. GRIFFIN Director March 11, 2003
- --------------------------------------------------------
(William M. Griffin)
/s/ KERNEY LADAY Director March 11, 2003
- --------------------------------------------------------
(Kerney Laday)
/s/ JACK E. LITTLE Director March 11, 2003
- --------------------------------------------------------
(Jack E. Little)
/s/ MARGARET N. MAXEY Director March 11, 2003
- --------------------------------------------------------
(Margaret N. Maxey)
/s/ J. E. OESTERREICHER Director March 11, 2003
- --------------------------------------------------------
(J. E. Oesterreicher)
/s/ MICHAEL W. RANGER Director March 11, 2003
- --------------------------------------------------------
(Michael W. Ranger)
/s/ HERBERT H. RICHARDSON Director March 11, 2003
- -----------------------------------------------------
(Herbert H. Richardson)
28
TXU CORP.
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of TXU Corp.,
certify that:
1. I have reviewed this annual report on Form 10-K of TXU Corp.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual 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: March 11, 2003 /s/ Erle Nye
-------------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
29
TXU CORP.
CERTIFICATION OF CFO
I, H. Dan Farell, Executive Vice President and Chief Financial Officer of
TXU Corp., certify that:
1. I have reviewed this annual report on Form 10-K of TXU Corp.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual 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: March 11, 2003 /s/ H. Dan Farell
--------------------------------------------------
Signature: H. Dan Farell
Title: Executive Vice President and Chief Financial
Officer
30
Appendix A
TXU CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
December 31, 2002
Page
----
Selected Financial Data - Consolidated Financial Statistics................................. A-2
Management's Discussion and Analysis of Financial Condition and Results of Operations....... A-3
Statement of Responsibility................................................................. A-59
Independent Auditors' Report................................................................ A-60
Financial Statements:
Statements of Consolidated Income....................................................... A-61
Statements of Consolidated Comprehensive Income......................................... A-62
Statements of Consolidated Cash Flows................................................... A-63
Consolidated Balance Sheets............................................................. A-64
Statements of Consolidated Shareholders' Equity......................................... A-65
Notes to Financial Statements........................................................... A-67
A-1
TXU CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL STATISTICS
Year Ended December 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Millions of US Dollars, except ratios)
Total assets - end of year ................................. $ 30,891 $ 42,318 $ 45,079 $ 40,985 $ 40,701
Property, plant & equipment - net - end of year ............ $ 19,642 $ 19,419 $ 19,148 $ 19,246 $ 18,439
Capital expenditures ..................................... 996 1,248 1,038 1,008 827
Capitalization - end of year
Equity-linked debt securities ............................ $ 1,440 $ 1,350 $ 700 $ 700 $ 700
Exchangeable subordinated notes .......................... 750 -- -- -- --
All other long-term debt, less amounts due currently ..... 9,510 9,576 7,890 8,619 8,934
Mandatorily redeemable, preferred securities of subsidiary
trusts, each holding solely junior subordinated
debentures of the obligated company (trust securities):
TXU Corp. obligated ................................... 368 368 368 368 223
Subsidiary obligated .................................. 147 147 976 971 969
Preferred stock of subsidiaries:
Not subject to mandatory redemption ................... 190 190 190 190 190
Subject to mandatory redemption ....................... 21 21 21 21 21
Common stock repurchasable under equity forward contracts -- -- 190 -- --
Preference stock ......................................... 300 300 300 -- --
Common stock equity ...................................... 4,766 7,656 7,476 8,334 8,246
-------- -------- -------- -------- --------
Total ............................................... $ 17,492 $ 19,608 $ 18,111 $ 19,203 $ 19,283
======== ======== ======== ======== ========
Capitalization ratios - end of year
Equity-linked debt securities ............................ 8.2% 6.9% 3.9% 3.6% 3.6%
Exchangeable subordinated notes .......................... 4.3 -- -- -- --
All other long-term debt, less amounts due currently ..... 54.4 48.8 43.6 44.9 46.3
Trust securities ......................................... 2.9 2.6 7.4 7.0 6.2
Preferred stock of subsidiaries .......................... 1.2 1.1 1.2 1.1 1.1
Common stock repurchasable under equity forward contracts -- -- 1.0 -- --
Preference stock ......................................... 1.7 1.5 1.7 -- --
Common stock equity ...................................... 27.3 39.1 41.2 43.4 42.8
-------- -------- -------- -------- --------
Total ................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Embedded interest cost on long-term debt - end of year (d) . 6.9% 6.2% 7.5% 6.9% 7.8%
Embedded distribution cost on trust securities - end of year 7.8% 7.8% 9.8% 8.1% 8.0%
Embedded dividend cost on preferred stock of subsidiaries -
end of year (b) .......................................... 6.5% 6.5% 7.0% 7.0% 9.4%
Revenues ................................................... $ 10,034 $ 10,049 $ 9,647 $ 8,059 $ 7,992
Income from continuing operations (a) ...................... $ 175 $ 639 $ 666 $ 686 $ 600
Income (loss) from discontinued operations ................. $ (4,210) $ 192 $ 250 $ 299 $ 140
Extraordinary loss net of tax .............................. $ (175) $ (154) $ -- $ -- $ --
Preference stock dividends ................................. $ 22 $ 22 $ 12 $ -- $ --
Net income (loss) available for common stock ............... $ (4,232) $ 655 $ 904 $ 985 $ 740
Dividends declared on common stock ......................... $ 533 $ 625 $ 625 $ 647 $ 597
Common stock data
Shares outstanding - average (millions) ................... 278 259 264 279 265
Shares outstanding - end of year (millions) ............... 322 265 258 276 282
Basic and diluted earnings per share:
Income from continuing operations before extraordinary loss $ 0.55 $ 2.38 $ 2.48 $ 2.46 $ 2.26
Income (loss) from discontinued operations ................ $ (15.15) $ 0.74 $ 0.95 $ 1.07 $ 0.53
Extraordinary loss, net of tax ............................ $ (0.63) $ (0.60) $ -- $ -- $ --
Net income (loss) available for common stock .............. $ (15.23) $ 2.52 $ 3.43 $ 3.53 $ 2.79
Dividends declared per share ............................... $ 1.925 $ 2.400 $ 2.40 $ 2.325 $ 2.225
Book value per share - end of year ......................... $ 14.80 $ 28.88 $ 28.97 $ 30.15 $ 29.21
Return average common stock equity (c) ..................... 2.8% 8.4% 8.4% 8.3% 8.0%
(a) See Results of Operations in MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(b) Includes the unamortized balance of the loss on reacquired preferred
stock and associated amortization. The embedded dividend cost excluding
the effects of the loss on reacquired preferred stock is 6.0% for 2002, 6.0%
for 2001, 6.2% for 2000, 6.2% for 1999, and 5.9% for 1998.
(c) Based on results from continuing operations.
(d) Represents the annual interest and amortization of any discounts,
premiums, issuance costs and any deferred gains/losses on reacquisitions
divided by the carrying value of the debt plus the unamortized balance of
any discounts, premiums, issuance costs and gains/losses on reacquisitions
at the end of the year.
Certain previously reported financial statistics have been reclassified to
conform to current classifications. Prior year periods have been restated to
reflect Europe operations as discontinued operations.
A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS
Use of the term "TXU Corp.," unless otherwise noted, refers to
TXU Corp., a holding company, and/or its consolidated subsidiaries.
TXU Corp. is an energy company that engages in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, energy delivery and, through a joint venture,
telecommunications services.
The consolidated financial statements and related discussion of results of
operations of TXU Corp. have been restated to reflect the operations of TXU
Europe Limited (TXU Europe) as discontinued operations (see Note 3 to Financial
Statements for information about discontinued operations).
Concurrent with TXU Corp.'s reorganization as of January 1, 2002, TXU
Corp. realigned its operations into three reportable segments: North America
Energy, North America Energy Delivery and International Energy. With the exiting
of the Europe operations, the International Energy segment has been renamed and
consists solely of operations in Australia. (See Note 17 to Financial Statements
for further information concerning reportable business segments.)
The following exchange rates have been used to convert foreign currency
denominated amounts into United States (US) dollars, unless they were determined
using exchange rates on the date of a specific event:
Income Statement
Balance Sheet (average for year
(at December 31,) ended December 31,)
-------------------- ------------------------------
2002 2001 2002 2001 2000
---- ---- ---- ---- ----
Australian dollars (A$) .......... $0.5650 $0.5115 $0.5441 $0.5182 $0.5824
CRITICAL ACCOUNTING POLICIES
All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein, except per share
amounts, are stated in millions of US dollars unless otherwise indicated.
TXU Corp.'s significant accounting policies are detailed in Note 2 to
Financial Statements. TXU Corp. follows accounting principles generally accepted
in the United States of America. In applying these accounting policies in the
preparation of TXU Corp.'s consolidated financial statements, management is
required to make estimates and assumptions about future events that affect the
reporting and disclosure of assets and liabilities at the balance sheet dates
and revenue and expense during the periods covered. The following is a summary
of certain critical accounting policies of TXU Corp. that are impacted by
judgments and uncertainties and for which different amounts might be reported
under a different set of conditions or using different assumptions.
Financial Instruments and Mark-to-Market Accounting -- TXU Corp. enters
into financial instruments, including options, swaps, futures, forwards and
other contractual commitments primarily to manage market risks related to
changes in commodity prices, including costs of fuel for generation of power, as
well as changes in interest rates and foreign currency exchange rates. These
financial instruments are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and, prior to October 26, 2002, Emerging
Issues Task Force (EITF) Issue No. 98-10 "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." The majority of financial
instruments entered into by TXU Corp. are derivatives as defined in SFAS No.
133.
A-3
SFAS No. 133 requires the recognition of derivatives in the balance sheet,
the measurement of those instruments at fair value and the recognition in
earnings of changes in the fair value of derivatives. This recognition is
referred to as "mark-to-market" accounting. SFAS No. 133 provides exceptions to
this accounting if (a) the derivative is deemed to represent a transaction in
the normal course of purchasing from a supplier and selling to a customer, or
(b) the derivative is deemed to be a cash flow or fair value hedge. In
accounting for cash flow hedges, derivative assets and liabilities are recorded
on the balance sheet at fair value with an offset in other comprehensive income.
Any hedge ineffectiveness is recorded in earnings. Amounts are reclassified from
other comprehensive income to earnings as the underlying transactions occur and
realized gains and losses are recognized in earnings.
TXU Corp. documents designated commodity, debt-related and other hedging
relationships, including the strategy and objectives for entering into such
hedge transactions and the related specific firm commitments or forecasted
transactions. TXU Corp. applies hedge accounting in accordance with SFAS No. 133
for these non-trading transactions, providing the underlying transactions remain
probable of occurring. Effectiveness is assessed based on changes in cash flows
of the hedges as compared to changes in cash flows of the hedged items.
Pursuant to SFAS No. 133, the normal purchase or sale exception and the
cash flow hedge designation are elections that can be made by management if
certain strict criteria are met and documented. As these elections can reduce
the volatility in earnings resulting from fluctuations in fair value, results of
operations could be materially affected by such elections.
Financial instruments entered into in connection with indebtedness to
manage interest rate and foreign currency exchange rate risks are generally
accounted for as cash flow hedges in accordance with SFAS No. 133.
EITF Issue No. 98-10 required mark-to-market accounting for energy-related
contracts, whether or not derivatives under SFAS No. 133, that were deemed to be
entered into for trading purposes as defined by that rule. The majority of
commodity contracts and energy-related financial instruments entered into by TXU
Corp. to manage commodity price risk represented trading activities as defined
by EITF Issue No. 98-10 and were therefore marked-to-market. On October 25,
2002, the EITF rescinded EITF Issue No. 98-10. Pursuant to this rescission, only
financial instruments that are derivatives under SFAS No. 133 will be subject to
mark-to-market accounting. See discussion below under "Changes in Accounting
Standards."
In June 2002, in connection with the EITF's consensus on Issue No. 02-3,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," additional guidance on recognizing gains and losses at the
inception of a trading contract was provided. In November 2002, this guidance
was extended to all derivatives. If the commercial and industrial (C&I) retail
contracts that TXU Corp. enters into do not meet the requirements of the revised
guidance, then income from such contracts will be recognized on a settlement
basis. See discussion below under "Commodity Contracts and Mark-to-Market
Activities."
The majority of financial instruments entered into by TXU Corp. for the
purpose of managing risk or optimizing margins in meeting the energy demands of
customers are derivatives and will continue to be subject to SFAS No. 133.
Mark-to-market accounting recognizes changes in the value of financial
instruments as reflected by market price fluctuations. In the energy market, the
availability of quoted market prices is dependent on the type of commodity
(e.g., natural gas, electricity, etc.), time period specified and location of
delivery. In computing the mark-to-market valuations, each market segment is
split into liquid and illiquid periods. The liquid period varies by region and
commodity. Generally, the liquid period is supported by broker quotes and
frequent trading activity. In illiquid periods, little or no market information
may exist, and the fair value is estimated through market modeling techniques.
For those periods where quoted market prices are not available, forward
price curves are developed based on the available information or through the use
A-4
of industry accepted modeling techniques and practices based on market
fundamentals (e.g., supply/demand, replacement cost, etc.). As a matter of
policy, however, TXU Corp. generally does not recognize any income or loss from
the illiquid periods.
Revenue Recognition -- TXU Corp. generally records revenue for retail and
wholesale energy sales under the accrual method, with the exception of certain
large C&I retail contracts that are derivatives as defined in SFAS No. 133 and
have therefore been marked-to-market. Retail electric and gas revenues are
recognized when the commodity is provided to customers on the basis of periodic
cycle meter readings and include an estimated accrual for the value of the
commodity consumed from the meter reading date to the end of the period. The
unbilled revenue is estimated at the end of the period based on estimated daily
consumption after the meter read date to the end of the period. Estimated daily
consumption is derived using historical customer profiles adjusted for weather
and other measurable factors affecting consumption. Electricity transmission and
distribution (T&D) revenues are recognized when delivery services are provided
to customers on the basis of periodic cycle meter readings and include an
estimated accrual for the delivery fee value of electricity provided from the
meter reading date to the end of the period.
As a result of the opening of the Texas market to competition and related
changes in systems and processes within the Electric Reliability Council of
Texas (ERCOT), adjustments are recorded for accounts receivable from or payable
to ERCOT related to system balancing and are recorded net in revenues. Such
balances reflect estimates of volumetric data and are subject to adjustment as
data is reconciled and final settlements are determined. Net accounts receivable
from ERCOT totaled approximately $40 million at December 31, 2002, covering
periods that date back to 2001.
Revenues reflect unrealized gains and losses related to large C&I retail
contracts, including unrealized gains recorded upon inception of these
contracts, as discussed below under "Commodity Contracts and Mark-to-Market
Activities." Results of wholesale portfolio management activities, which
represent realized and unrealized gains and losses from transacting in
energy-related contracts, are also reported as a component of revenues. As
discussed above under "Financial Instruments and Mark-to-Market Accounting,"
recognition of unrealized gains and losses involves a number of assumptions and
estimates that could have a significant effect on reported revenues and
earnings.
The historical financial statements for periods prior to 2002 included
adjustments made to revenues for over/under recovered fuel costs. To the extent
fuel costs incurred exceeded regulated fuel factor amounts included in customer
billings, TXU Corp. recorded revenues on the basis of its ability and intent to
obtain regulatory approval for rate surcharges on future customer billings to
recover such amounts. Conversely, to the extent fuel costs incurred were less
than amounts included in customer billings, revenues were reduced. Following
deregulation of the Texas market on January 1, 2002, any changes to the fuel
factor component of regulatory rate amounts are applied prospectively.
Accounting for Contingencies -- The financial results of TXU Corp. may be
affected by judgments and estimates related to loss contingencies. Accruals for
loss contingencies are recorded when management determines that it is probable
that an asset has been impaired or a liability has been incurred and that such
economic loss can be reasonably estimated. Such determinations are subject to
interpretations of current facts and circumstances, forecasts of future events
and estimates of the financial impacts of such events.
A significant contingency that TXU Corp. accounts for is the loss
associated with uncollectible trade accounts receivable. The determination of
such bad debts expense is based on factors such as historical write-off
experience, agings of current accounts receivable balances, changes in operating
practices, regulatory rulings, general economic conditions and customers'
behaviors. With the opening of the Texas electricity market to competition, many
historical measures used to estimate bad debt experience may be less reliable.
The changing environment, including effects of provider of last resort (POLR)
rules (as discussed below under "Regulation and Rates"), billing delays due to
new procedures within ERCOT and changes in systems and processes, and customer
churn due to competitor actions has added a level of complexity to the
estimation process. In 2002, TXU Corp. recorded bad debt expense of $171
million.
A-5
In connection with the opening of the Texas market to competition, the
Texas Legislature established a retail clawback provision intended to incent
affiliated retail electric providers (REPs) of utilities to actively compete for
customers outside their historical service territories. As discussed in Note 15
to Financial Statements, a retail clawback liability arises if TXU Energy
Company LLC (TXU Energy) retains more than 60% of TXU US Holdings Company's (US
Holdings) former residential and small business customers after the first two
years of competition. The amount of the liability is based on the number of such
customers as of January 1, 2004 less the number of new customers from outside
the historical service territory multiplied by $90. In 2002, TXU Energy recorded
a retail clawback accrual of $185 million ($120 million after-tax) reported in
cost of energy sold and delivery fees in the statement of income. Over a
two-year period beginning January 1, 2004, the liability would be paid to Oncor
Electric Delivery Company (Oncor), which in turn would pass the credit to REPs,
including TXU Energy, through reduced electricity delivery rates. The accrual
reflects assumptions and estimates regarding the number of customers expected in
and out of territory. The accrual is subject to further adjustment as the actual
measurement date approaches.
Additionally, as a result of the impairments of long-lived assets and
goodwill recorded by the telecommunications joint venture (see discussion below
under "Impairment of Long-Lived Assets" and "Goodwill and Intangible Assets"),
TXU Corp. evaluated its potential obligations related to the partnership
arrangement. TXU Corp. determined that it was probable, in light of the decline
in value of the business, that an economic loss had occurred, and accordingly
recorded a charge of $150 million (without tax benefit) in 2002, reported in
other deductions in the statement of income.
Impairment of Long-Lived Assets -- TXU Corp. evaluates long-lived assets
for impairment whenever indications of impairment exist, in accordance with the
requirement of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." One of those indications is a current expectation that "more
likely than not" a long-lived asset will be sold or otherwise disposed of
significantly before the end of its previously estimated useful life. The
determination of the existence of this and other indications of impairment
involves judgments that are subjective in nature and in some cases requires the
use of estimates in forecasting future results and cash flows related to an
asset or group of assets. Further, the unique nature of TXU Corp.'s property,
plant and equipment, which includes a fleet of generation assets using different
fuels and individual plants that have varying utilization rates, requires the
use of significant judgments in determining the existence of impairment
indications and grouping assets for impairment testing.
In 2002, TXU Corp. recorded an impairment charge of $237 million ($154
million after-tax) for the writedown of two generation plant construction
projects as a result of current wholesale electricity market conditions and
reduced planned developmental capital spending. Fair value was determined based
on current appraisals of property and equipment. The charge is reported in other
deductions in the statement of income. As the writedown is based on current
estimates, the remaining carrying value of the projects of $113 million is
subject to further adjustment should estimates of recoverable value change.
Additionally, in 2002 TXU Corp.'s telecommunication joint venture
recognized writedowns related to long-lived assets, of which TXU Corp.
recognized its share, $28 million ($18 million after-tax). The writedowns
reflected estimated net realizable values of assets in the competitive local
exchange carrier and fiber-optic transport operations held for sale. The charge
is reported in other deductions in the statement of income. See discussion below
under "Investments in Unconsolidated Entities."
Goodwill and Intangible Assets -- TXU Corp. evaluates goodwill for
impairment at least annually in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets." TXU Corp. has performed impairment tests for reporting
units reflected in results from continuing operations, and no goodwill
impairment charges were recorded. In 2002, TXU Corp.'s telecommunications joint
venture recorded a goodwill impairment charge, of which TXU Corp. recognized its
share, $9 million ($6 million after-tax). The charge is reported in other
deductions in the statement of income. See discussion below under "Investments
in Unconsolidated Entities."
A-6
TXU Corp. primarily uses discounted cash flow analyses to test for
goodwill impairment. Such analyses require a significant number of estimates and
assumptions regarding future earnings, working capital requirements, capital
expenditures, discount rate, terminal year growth factor and other modeling
factors.
Depreciation -- The depreciable lives of power generation plants are based
on management's estimates/determinations of the plants' economically useful
lives. To the extent that the actual lives differ from these estimates there
would be an impact on the amount of depreciation charged to the financial
statements.
Regulatory Assets and Liabilities -- The financial statements of TXU
Corp.'s regulated businesses, primarily its US electricity T&D (Oncor) and its
US gas distribution operations (TXU Gas), reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with SFAS No. 71,
"Accounting for the Effect of Certain Types of Regulation." As a result of the
1999 Restructuring Legislation, (see Note 15 to Financial Statements for further
description), the US electricity generation portion of TXU Corp.'s business no
longer meets the criteria to apply regulatory accounting principles.
Accordingly, application of SFAS No. 71 to the generation portion of TXU Corp.'s
business was discontinued as of June 30, 1999. Oncor's operations continue to
meet the criteria for recognition of regulatory assets and liabilities. The
assumptions and judgments used by regulatory authorities continue to have an
impact on the recovery of costs, the rate earned on invested capital and the
timing and amount of assets to be recovered by rates. (See discussion in Note 18
to Financial Statements under "Regulatory Assets and Liabilities.")
In 2002, TXU Corp. recorded an extraordinary loss of $134 million (net of
income tax benefit of $72 million) principally to write down the regulatory
asset related to securitization bonds to be issued in accordance with TXU
Corp.'s settlement plan with the Public Utility Commission of Texas (Commission)
as described in Note 15 to Financial Statements. The carrying value of the
regulatory asset is intended to represent the amount of future cash flows
related to the bonds to be recovered from REPs through increased electricity
delivery rates; the determination of such amount is based on estimates. The
writedown, which was taken as a result of the final approval of the settlement
plan, reflects the impact of lower interest rates. As actual interest rates on
the bonds may differ from current estimates, the regulatory asset carrying
value, which was $1.7 billion at December 31, 2002, is subject to further
adjustment.
Defined Benefit Pension Plans and Other Postretirement Benefit Plans --
TXU Corp. offers pension benefits through various defined benefit pension plans
and also offers certain health care and life insurance benefits to eligible
employees and their eligible dependents upon the retirement of such employees
from TXU Corp. Reported costs of providing non-contributory defined pension
benefits and other postretirement benefits (see Note 12 to Financial Statements
for information regarding retirement plans and other postretirement benefits)
are dependent upon numerous factors, assumptions and estimates.
For example, these costs are impacted by actual employee demographics
(including age, compensation levels and employment periods), the level of
contributions made to the plan and earnings on plan assets. TXU Corp.'s pension
plan assets are primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may also impact current and future
pension costs. Fluctuations in actual equity market returns as well as changes
in general interest rates may result in increased or decreased pension costs in
future periods. Pension costs may also be significantly affected by changes in
key actuarial assumptions, including anticipated rates of return on plan assets
and the discount rates used in determining the projected benefit obligation and
pension costs.
In accordance with SFAS No. 87, "Employers' Accounting for Pensions,"
changes in pension obligations associated with these factors may not be
immediately recognized as pension costs on the income statement, but generally
are recognized in future years over the remaining average service period of plan
participants. As such, significant portions of pension costs recorded in any
period may not reflect the actual level of cash benefits provided to plan
participants. TXU Corp. recorded noncash expense of $8 million related to
pensions in 2002 and noncash income of $11 million in 2001, in accordance with
the provisions of SFAS No. 87.
A-7
As of December 31, 2002, key assumptions of the US pension plans and other
postretirement benefit plans were revised, including decreasing the expected
return on plan assets from 9% to 8.5% and decreasing the assumed discount rate
in 2002 from 7.5% to 6.75%. In selecting assumed discount rates, TXU Corp.
considered fixed income security yield rates for AA rated portfolios as reported
by Moody's. In selecting an assumed rate of return on plan assets, TXU Corp.
considered past performance and economic forecasts for the types of investments
held by the plan. The market value of TXU Corp.'s US plan assets has been
affected by sharp declines in equity markets since the first quarter of 2000.
Plan asset values have declined $151 million and $49 million in 2002 and 2001,
respectively. Reported pension costs for US plans are expected to increase in
2003 by approximately $18 million as the result of these changed assumptions.
The projected benefit obligation has increased by $165 million as a result of
the change in the discount rate. Further, based on the current assumptions and
available information, in 2003 funding requirements related to the US plans are
expected to increase approximately $7 million and pension expense is expected to
increase, as a result of such changed assumptions and other factors, a total of
approximately $40 million over 2002 amounts. Pension cost and cash funding
requirements could increase in future years.
As a result of its plan asset return experience, at December 31, 2002, TXU
Corp. was required to recognize an additional minimum liability as prescribed by
SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 132, "Employers'
Disclosures about Pensions and Postretirement Benefits." The liability, which
totaled $128 million ($83 million after-tax), was recorded as a reduction to
shareholders' equity through a charge to Other Comprehensive Income, and did not
affect net income for 2002. The charge to Other Comprehensive Income will be
reversed in future periods to the extent the fair value of trust assets exceeds
the accumulated benefit obligation.
RESULTS OF OPERATIONS
OVERVIEW
The results of operations and the related management's discussion of those
results for all periods presented have been restated to reflect the
discontinuance of TXU Corp.'s operations in Europe, the change in reporting
segments effective January 1, 2002, the change in format of the statements of
consolidated income and the impact of EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities," as discussed below.
(See Note 2 to Financial Statements for description of new line items.)
Changes in Accounting Standards -- In June 2002, the EITF reached a
consensus on certain aspects of EITF Issue No. 02-3 regarding the presentation
of trading activities in the statement of income. The new rules were effective
on July 1, 2002, and required that all trading contracts (as defined by EITF
Issue No. 98-10), whether or not physically settled, be recorded net upon
settlement, rather than gross as a sale and cost of sale. TXU Corp. has
historically recorded financial contracts net, but has recorded those contracts
that provide for physical delivery gross upon settlement. Prior period amounts
have been reclassified to conform to this new reporting requirement.
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 had no impact on TXU Corp.'s gross margin, net income
or cash provided by operating activities.
A-8
The table below summarizes the impact on TXU Corp.'s operating revenues
and costs of energy sold and delivery fees for prior years of the new reporting
rules under EITF Issue No. 02-3 and the discontinuance of TXU Europe operations.
Year Ended December 31,
----------------------
2001 2000
---- ----
Operating revenues as previously reported........................ $27,927 $22,009
Historical Europe discontinued operations ....................... (12,719) (7,044)
Cost of energy sold and delivery fees netted with revenues....... (5,159) (5,318)
------- ------
Operating revenues after reclassification........................ $10,049 $ 9,647
======= =======
Cost of energy sold and delivery fees as previously reported..... $19,793 $14,451
Historical Europe discontinued operations ....................... (10,402) (4,927)
Cost of energy sold and delivery fees netted with revenues ...... (5,159) (5,318)
------ -------
Cost of energy sold and delivery fees after reclassification..... $ 4,232 $ 4,206
====== =======
On October 25, 2002, the EITF rescinded EITF Issue No. 98-10, which
required mark-to-market accounting for all trading activities. Pursuant to this
rescission, only financial instruments that are derivatives under SFAS No. 133
will be subject to mark-to-market accounting. Financial instruments that may not
be derivatives under SFAS No. 133, but were marked-to-market under EITF Issue
No. 98-10, consist primarily of gas transportation and storage agreements, power
tolling, full requirements and capacity contracts. This new accounting rule was
effective for new contracts entered into after October 25, 2002. Non-derivative
contracts entered into prior to October 26, 2002, continued to be accounted for
at fair value through December 31, 2002; however, effective January 1, 2003,
such contracts were required to be accounted for on a settlement basis.
Accordingly, a charge of approximately $100 million ($65 million after-tax) is
expected to be reported as a cumulative effect of an accounting change in the
first quarter of 2003. The expected cumulative effect adjustment represents net
gains previously recognized for these contracts under mark-to-market accounting.
See Note 2 to Financial Statements for discussion of other changes in
accounting standards.
2002 compared to 2001
Reference is made to comparisons of results by business segment presented
below.
TXU Corp.'s operating revenues were essentially even at $10.0 billion in
both years. Revenues in the North America Energy Delivery segment fell by $569
million or 16%, reflecting declines in both the electricity and gas delivery
businesses of $320 million and $249 million, respectively. The electricity
delivery decline was due primarily to allocations of business activity in
unbundling the former electric utility business (as required by the opening of
the Texas market to competition). Certain revenues allocated to electric
delivery operations in 2001 are reflected in the North America Energy segment's
revenues in 2002, reflecting changes in responsibility for activities associated
with the revenues. The decline in gas delivery revenue reflected lower gas
prices. Revenues in the North America Energy segment increased by $280 million,
or 4%, due primarily to significantly higher wholesale sales volumes and the
effects of unbundling allocations, partially offset by the effect of a 9%
decline in retail electric sales volumes, reflecting the opening of the Texas
market to competition. Operating revenues rose $160 million in the Australia
segment reflecting increased retail C&I sales volumes, higher pricing and the
effect of changes in foreign currency translation rates.
A-9
Gross Margin
Year Ended December 31,
-----------------------------------------------------
% of % of
2002 Revenue 2001 Revenue
---- ------- ---- -------
Operating revenues..................................... $10,034 100% $ 10,049 100%
Cost and expenses:
Cost of energy sold and delivery fees............. 4,198 42% 4,232 42%
Operating costs................................... 1,660 16% 1,532 15%
Depreciation and amortization related to operating
assets........................................ 780 8% 749 8%
------- ----- -------- ------
Gross margin........................................... $ 3,396 34% $ 3,536 35%
======= ===== ======== ======
Gross margin decreased $140 million, or 4%, to $3.4 billion in 2002. This
decline was driven by the effect of lower US retail electric volumes, a $185
million ($120 million after-tax) accrual for regulatory-related retail clawback
(see discussion above under "Accounting for Contingencies") and higher operating
costs, partially offset by the effect of lower average electricity costs and
increased wholesale electric sales in the US. Mark-to-market accounting for
commodity contracts reduced revenues and gross margin by $67 million in 2002 (as
compared to accounting on a settlement basis), and increased results by $319
million in 2001. (See discussion below under "Commodity Contracts and
Mark-to-Market Activities.")
Selling, general and administrative (SG&A) expense increased $260 million,
or 26%, to $1.3 billion in 2002. The increase was driven by higher staffing and
other administrative expenses associated with expanded retail sales and
wholesale portfolio management operations, as well as higher bad debt expense,
all due largely to the opening of the Texas electricity market to competition.
With the completion of the transition to competition in Texas, the industry-wide
decline in portfolio management activities, the exit of the business in Europe
and the expected deferral of deregulation of energy markets in other states, TXU
Corp. initiated several cost savings actions in 2002 that are expected to
continue in 2003. Such actions resulted in $31 million ($21 million after-tax)
in severance charges in 2002, which contributed to the increase in SG&A expense.
In addition, new POLR rules established by the Commission are expected to result
in reduced bad debt expense. (See discussion in Note 15 to Financial Statements
under "Provider of Last Resort"). With the anticipated lower staffing and
related administrative expenses and reduced bad debts expense, SG&A expenses are
expected to decline in 2003.
Franchise and revenue-based taxes decreased $51 million, or 10%, to $479
million in 2002. This decline was due to the effect of lower US retail revenues
on which state and local gross receipts taxes are assessed.
Other income increased $5 million to $56 million in 2002. The 2002 period
includes $35 million of gains on disposition of property. The 2001 period
includes $18 million from a settlement of a gas purchase contract, $9 million of
gains on disposition of property and $4 million of earnings from investments in
unconsolidated subsidiaries.
Other deductions increased $329 million to $514 million in 2002. The 2002
period includes a $237 million ($154 million after-tax) writedown of an
investment in generation plant construction projects (see discussion above under
"Impairment of Long-Lived Assets") and $187 million ($174 million after-tax) in
charges related to the Pinnacle One Partners, L.P. (Pinnacle) telecommunications
joint venture. These charges include $37 million for TXU Corp.'s share of the
joint venture's impairments of long-lived assets and goodwill. TXU Corp. also
recorded a $150 million charge related to its investment in Pinnacle (see
discussion above under "Accounting for Contingencies"). Other deductions in 2002
also included $67 million in ongoing equity losses from the joint venture. The
2001 period includes a recoverable charge of $73 million related to the
regulatory restructuring of the Texas electricity market, a $22 million
nonrecoverable regulatory asset write-off pursuant to a regulatory order and
losses on sales of properties of $12 million. The 2001 period also includes $53
million in equity losses from the Pinnacle joint venture. In accordance with the
Pinnacle agreement and in consideration of cumulative losses of the joint
venture since its formation, in 2002 TXU Corp. began to absorb 100%, rather than
its 50% share, of losses of the venture, which accounts for the $14 million
increase in ongoing equity losses in 2002.
Interest income declined $52 million, or 62%, to $32 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.
A-10
Interest expense and other charges decreased $81 million, or 8%, to $884
million in 2002, reflecting a $100 million decrease due to lower interest rates,
an $11 million increase due to higher debt levels and an $8 million increase due
to lower capitalized interest.
Goodwill amortization of $43 million in 2001 ceased in 2002, reflecting
the discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142.
The effective income tax rate on income from continuing operations before
extraordinary loss was 34.9% in 2002 compared to 29.9% in 2001. The increase
reflected the absence of tax benefit on a portion of the charge related to the
Pinnacle joint venture, partially offset by the effect of comparable (to 2001)
tax benefit amounts of depletion allowances and amortization of investment tax
credits on a lower income base in 2002. (See Note 11 to Financial Statements for
an analysis of the effective tax rate.)
Income from continuing operations before extraordinary loss decreased $464
million, or 73%, to $175 million in 2002. This performance reflected a decline
of $391 million in the North America Energy segment, reflecting the writedown of
generation projects of $154 million after-tax, the accrual of regulatory-related
retail clawback of $120 million after-tax and the severance charges of $21
million after-tax. Corporate and other activities declined by $155 million,
reflecting charges of $174 million after-tax related to the decline in value of
the telecommunications joint venture. These declines were partially offset by
growth of $55 million in the Australia segment and $27 million in the North
American Energy Delivery segment. These performances are discussed below. Net
pension and postretirement benefit costs reduced net income by $60 million in
2002 and $37 million in 2001.
Earnings per share available to common shareholders from continuing
operations before extraordinary loss decreased $1.83, or 77%, to $0.55 per share
in 2002. Of this decline, $0.04 per share is due to a 7% increase in average
shares outstanding. As discussed above, net income performance in 2002 benefited
from the absence of goodwill amortization ($43 million, or $0.16 per share, in
2001).
Discontinued operations reflected the exit and the write-off of the
investment in the Europe operations. (See Note 3 to Financial Statements for
more information concerning the write-off.) The $4.2 billion expense ($15.15 per
share) includes the write-off of the investment of $3.9 billion, without tax
benefit, as well as certain related tax charges and exit costs. Also included is
a charge of $15 million (net of income tax benefit of $8 million) to write-down
the investment in TXU Corp.'s Mexico operations discontinued in the third
quarter of 2002.
Extraordinary loss in 2002 includes a $134 million (net of income tax
benefit of $72 million) regulatory-related charge, principally to write down
regulatory assets related to securitization bonds to be issued in the future in
accordance with the regulatory settlement plan (See discussion in Note 4 to
Financial Statements under "Loss on Settlement"), and a $41 million (net of
income tax benefit of $22 million) loss on the early extinguishment of debt. The
regulatory asset writedown reflects the difference between the carrying value of
the assets and the cash flows associated with the securitization bonds expected
to be recovered through electricity delivery rates. This difference reflects the
decline in anticipated interest rates on the bonds. The extraordinary loss in
2001 of $154 million (net of income tax benefit of $115 million) consisted of
$97 million (net of $52 million income tax benefit) of charges related to the
early extinguishment of debt under the debt restructuring and refinancing plan
pursuant to the requirements of the 1999 Restructuring Legislation and $57
million (net of $63 million income tax benefit) of net charges related to the
settlement with the Commission to resolve all major open issues related to the
transition to deregulation. (See Notes 4 and 15 to Financial Statements for
further information concerning the settlement of deregulation issues.)
A-11
2001 compared to 2000
Reference is made to comparisons of results by business segment presented
below.
TXU Corp.'s operating revenues increased $402 million, or 4%, to $10
billion in 2001. The increase in revenue was primarily driven by higher
recoverable costs in retail electric operations and higher prices and volumes in
the retail gas distribution business due to colder weather. Operating revenue
growth was partially offset by the contribution of the US telecommunications
business to the Pinnacle joint venture in August 2000. The telecommunications
business posted 2000 revenues of $92 million before the transaction.
Gross Margin
Year Ended December 31,
--------------------------------------------
% of % of
2001 Revenue 2000 Revenue
---- ------- ---- -------
Operating revenues..................................... $10,049 100% $ 9,647 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 4,232 42% 4,206 43%
Operating costs................................... 1,532 15% 1,522 16%
Depreciation and amortization related to operating
assets........................................ 749 8% 753 8%
------- --- ------- ----
Gross margin........................................... $ 3,536 35% $ 3,166 33%
======= === ======= ====
Gross margin increased $370 million, or 12%, to $3.5 billion in 2001. The
growth was driven by an increase in wholesale portfolio management activity, in
anticipation of the opening of the Texas market to competition, and higher
revenues in retail electric operations. The impact of the Pinnacle joint venture
transaction in 2000 offset gross margin growth by $92 million. Mark-to-market
accounting for commodity contracts increased revenues and gross margin by $319
million (as compared to accounting on a settlement basis).
SG&A expense rose $148 million, or 17%, to $1.0 billion in 2001. The
increase was due largely to higher costs to support expanded retail sales and
portfolio management operations, largely in anticipation of the introduction of
competition in the Texas electricity market, as well as higher bad debts expense
driven by the effect on electric and gas revenues of higher weather-related gas
costs in late 2000 and early 2001. The impact of the Pinnacle joint venture
transaction in 2000 offset SG&A expense growth by $67 million.
Franchise and revenue-related taxes increased $128 million, or 32%, to
$530 million in 2001. This increase was driven by higher gross receipts taxes
due to higher revenues on which such taxes are based. As discussed above, higher
weather-related gas costs drove higher electric and gas revenues.
Other income decreased $106 million to $51 million in 2001. The 2001
period includes $18 million from a favorable settlement of legal proceedings
related to a gas purchase contract, $9 million of gains on dispositions and $4
million of equity in earnings from unconsolidated subsidiaries. The 2000 period
includes a $53 million gain from the sale of the assets of the natural gas
processing business, a $28 million gain on sale of land and a $21 million gain
on sale of a minority interest in a telecommunications company.
Other deductions increased $102 million to $185 million in 2001. The 2001
period includes a $73 million recoverable charge related to regulatory
restructuring of the Texas electricity market, $53 million in losses from the
Pinnacle joint venture, a $22 million non-recoverable regulatory asset write-off
and $12 million in losses on sales of properties. The 2000 period includes a $52
million regulatory-related recoverable charge. Equity losses in the Pinnacle
joint venture increased to $53 million from $18 million, reflecting a full year
of results in 2001 compared to a partial year in 2000.
Interest income increased $38 million, or 83%, to $84 million in 2001. The
higher interest income related primarily to interest on under-recovered fuel
costs under regulation.
Interest expense and other charges decreased $58 million, or 6%, to $965
million in 2001. The decline was due primarily to lower rates and a $12 million
increase in capitalized interest.
A-12
Amortization of goodwill decreased $7 million to $43 million in 2001,
reflecting the Pinnacle transaction. Such amortization ceased January 1, 2002,
pursuant to a new accounting standard. See Note 2 to Financial Statements.
The effective tax rate on income from continuing operations before
extraordinary loss was 29.9% in 2001 compared to 29.4% in 2000, reflecting
higher state income taxes.
Income from continuing operations before extraordinary loss decreased $27
million, or 4%, to $639 million in 2001. Amounts per share of common stock were
$2.38 for 2001 compared with $2.48 for 2000. The lower earnings reflected
declines in the North America Energy Delivery segment of $63 million, the
Corporate and other segment of $42 million, due largely to increased equity
losses in the Pinnacle joint venture, and the Australia segment of $4 million,
partially offset by profit growth in the North America Energy segment of $82
million. The analysis of each business segment's performance is presented below.
The extraordinary loss in 2001 of $154 million (net of $115 million income
tax benefit) consisted of $97 million (net of $52 million income tax benefit) of
charges related to the reacquisition of debt under the debt restructuring and
refinancing plan pursuant to the requirements of the 1999 Restructuring
Legislation and $57 million (net of $63 million income tax benefit) of net
charges related to the settlement with the Commission to resolve all major open
issues related to the transition to deregulation. (See discussion in Note 4 to
Financial Statements under "Loss on Settlement.")
Discontinued operations decreased $58 million, or 23%, to $192 million in
2001. The decrease reflects the decline in net income from the Europe
operations. (See Note 3 to Financial Statements for more information concerning
the exit of the Europe business.)
Net income available for common stock in 2001 decreased $249 million, or
28%, to $655 million. Earnings per share were $2.52 in 2001 compared with $3.43
in 2000. A 2% decline in average shares outstanding had a favorable impact of
$0.06 on the comparison of earnings per share. The decline in net income was
driven by the extraordinary loss and discontinued operations as discussed above.
Commodity Contracts and Mark-to-Market Activities
The table below summarizes the changes in commodity contract assets and
liabilities for the years ended December 31, 2002 and 2001, for continuing
operations. The net change in these assets and liabilities, excluding "other
activity" as described below, represents the net unrealized gains/(losses)
recognized under mark-to-market accounting. Mark-to-market accounting reduced
pre-tax earnings by $67 million in 2002 (as compared to accounting on a
settlement basis), and increased pre-tax earnings by $319 million in 2001. There
were no material changes in valuation methodologies in 2002 or 2001.
2002 2001
---- ----
Balance of net commodity contract assets at beginning of year......... $511 $170
Settlements of positions included in the opening balance (1) ......... (238) (53)
Unrealized mark-to-market valuations of positions held at end of
period (2) ........................................................... 171 372
Other activity (3).................................................... 22 22
------ ------
Balance of net commodity contract assets at end of year .............. $466 $511
==== ====
- --------------------------
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of the beginning of the year.
(2) Includes unrealized gains recognized upon origination of retail
electric contracts in accordance with SFAS No. 133, as discussed
below, and $14 million in origination gains related to
nonderivative wholesale contracts entered into prior to July 1,
2002.
(3) Includes initial values of positions assumed in acquisitions or
involving the receipt or payment of cash, such as option premiums,
and amortization of such positions originating in prior periods.
Also includes $71 million of unsettled liabilities to Enron
Corporation reclassified to other current liabilities in 2002, and
the impact of currency translation adjustments. These activities
have no effect on unrealized mark-to-market valuations.
A-13
Origination Gains -- With the implementation of the 1999 Restructuring
Legislation in Texas, retail electric contracts are no longer subject to rate
regulation and are negotiated between the various REPs and the customer. This
has resulted in an especially competitive environment for power contracts with
large C&I customers. The contracts are derivatives as defined in SFAS No. 133
and, therefore, have been marked-to-market upon execution. Origination gains of
$40 million and $88 million were recorded in 2002 and 2001, respectively. The
decline reflected fewer contracts executed in 2002. The average term of a C&I
contract is approximately 18 months.
The C&I contracts are typically standard contracts that provide for the
delivery of power at fixed prices up to the expected load. Within the ERCOT
system, a competitive, liquid wholesale market exists. Given TXU Corp.'s
inherent asset position of baseload generation coupled with the ability to
transact competitively in the wholesale market, a "dealer profit" is recognized.
TXU Corp. is able to validate the forward price curve of the commodity given the
short-term nature of the retail contracts and the existence of a wholesale
market in ERCOT. (See discussion in Note 2 to Financial Statements under
"Financial Instruments and Mark-to-Market Accounting.")
Maturity Table -- Of the net commodity contract asset balance above at
December 31, 2002, the amount representing unrealized mark-to-market net gains
that have been recognized in current and prior years' earnings is $374 million.
The remaining $92 million of the December 31, 2002, balance is comprised
principally of amounts representing current and prior years' net payments of
cash or other consideration, including option premiums, associated with contract
positions, net of any amortization. The following table presents the unrealized
mark-to-market balance at December 31, 2002, scheduled by contractual settlement
dates of the underlying positions.
Maturity dates of unrealized net mark-to-market balances at December 31, 2002
-----------------------------------------------------------------------------
Maturity Maturity in
less than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 years 5 years Total
---------------------- ----------- ----------- ---------- ------ -----
Prices actively quoted........... $ (4) $ - $ - $ - $ (4)
Prices provided by other
external sources............. 126 105 25 6 262
Prices based on models........... 61 26 5 24 116
---- ----- ---- ---- ----
Total............................ 183 131 30 30 374
Less: estimated cumulative effect
of an accounting change - (EITF
98-10 rescission).................. 56 25 9 10 100
---- ---- ---- ---- ----
Adjusted total................... $127 $106 $21 $ 20 $274
==== ==== === ==== ====
% - before EITF 98-10 rescission 49% 35% 8% 8% 100%
% - after EITF 98-10 rescission 46% 39% 8% 7% 100%
As the above table indicates, approximately 85% of the remaining
unrealized mark-to-market valuations at December 31, 2002, as adjusted for the
estimated cumulative effect of an accounting change to be recorded in the first
quarter of 2003 for EITF Issue No. 98-10, 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 in the US. 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 2012, respectively, in the US. This category also includes values of large
C&I retail sales contracts. The "prices based on models" category contains the
value of all non-exchange traded options, valued using industry accepted option
pricing models. In addition, this category contains other contractual
arrangements which may have both forward and option components. In many
instances, these contracts can be broken down into their component parts and
modeled by TXU Corp. as simple forwards and options based on prices actively
quoted. As the modeled value is ultimately the result of a combination of prices
from two or more different instruments, it has been included in this category.
A-14
Portfolio Management -- The use of commodity contracts to manage risks,
generally referred to as trading activities, is one of several responsibilities
of the "portfolio management" operations of TXU Corp. Portfolio management
refers to risk management and value creation activities undertaken to balance
the demand for energy by customers with the supply of energy in an economically
efficient and effective manner. These activities include:
o Managing the utilization of generation assets through "make or buy"
decisions.
o Forecasting volume demands and scheduling supply resources.
o Entering into short- and long-term contracts to balance energy supply and
demand.
o Arranging physical sales of energy to wholesale customers.
o Buying and selling energy-related contracts to minimize the cost of fuel
used to generate electricity and to maximize the margin earned on
wholesale and retail sales of energy. These activities are sometimes
broadly characterized as "trading." However, speculative trading,
whereby energy-related financial instruments are bought and sold outside
of the supply/demand balancing process with the objective of generating
profits on anticipated price changes, represents a small fraction of
TXU Corp.'s portfolio management activities.
In this Management's Discussion and Analysis of Financial Condition and
Results of Operations, analyses of revenue and gross margin performance may
refer to results of wholesale portfolio management activities. Such results
represent net realized and unrealized gains and losses from transacting in
energy-related contracts as described in the last point above, which are
reported as a component of revenues.
A-15
North America Energy
- -------------------
Financial Results
Year Ended December 31,
---------------------------------
2002 2001* 2000*
---- ---- ----
Operating revenues....................................... $7,738 $ 7,458 $ 7,449
------ ------- -------
Costs and expenses:
Cost of energy sold and delivery fees............... 4,803 4,802 5,101
Operating costs..................................... 747 708 673
Depreciation and amortization, other than goodwill.. 438 396 390
Selling, general and administrative expenses........ 842 390 284
Franchise and revenue-based taxes .................. 139 15 16
Other income ....................................... (33) (3) (32)
Other deductions.................................... 254 50 6
Interest income..................................... (29) (71) (52)
Interest expense and other charges ................. 257 247 280
Goodwill amortization............................... -- 14 14
------ ------- -------
Total costs and expenses........................ 7,418 6,548 6,680
------ ------- -------
Income before income taxes and extraordinary loss........ 320 910 769
Income tax expense....................................... 78 277 218
------ ------- -------
Income before extraordinary loss......................... $ 242 $ 633 $ 551
====== ======= =======
- -----------------
The North America Energy segment includes the electricity generation,
wholesale and retail energy sales, and portfolio management operations of
TXU Energy Company LLC, operating principally in the competitive Texas
market.
* Prior period data is included above for the purpose of providing historical
financial information about the North America Energy segment after giving
effect to the restructuring transactions and unbundling allocations
described in the Notes to Financial Statements. Allocations reflected in
prior period data did not necessarily result in amounts reported in
individual line items that are comparable to actual results in 2002. Had the
North America Energy segment existed as a separate segment, its results of
operations and financial position could have differed materially from those
reflected above. Additionally, future results of the North America Energy
segment's operations and financial position could differ materially from the
historical information presented.
A-16
North America Energy
- --------------------
Operating Data
Year Ended December 31,
------------------------------
2002 2001* 2000*
---- ---- ----
Operating statistics:
Retail electric sales volumes (Gigawatt hours-GWh).......... 90,581 99,151 100,493
Wholesale electric sales volumes (GWh)...................... 29,578 6,409 6,154
Retail customers (end of period & in thousands):
Electric (based on number of meters).................. 2,737 2,728 2,672
Gas................................................... 2 3 4
------ ------ ------
Total customers................................. 2,739 2,731 2,676
====== ====== ======
Operating revenues (millions of dollars):
Retail electric:
Residential........................................... $3,108 $ 3,255 $ 3,263
Commercial and industrial ............................ 3,415 3,837 4,025
------- ------ ------
Total........................................... 6,523 7,092 7,288
Wholesale electric ......................................... 845 96 168
Wholesale portfolio management activities................... 211 258 44
Other revenues.............................................. 159 46 254
Mitigation.................................................. - (34) (305)
-------- ------- ------
Total operating revenues......................... $ 7,738 $7,458 $7,449
======== ====== ======
Weather (average for service territory) **
Percent of normal:
Cooling degree days............................... 99.9% 100.5% 119.1%
Heating degree days............................... 101.6% 97.5% 94.6%
- --------------------------
* See footnote on previous page.
** Weather data is obtained from Meteorlogix, 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 financial information for 2001 and 2000 for the North America Energy
segment includes information derived from the historical financial statements of
US Holdings. Reasonable allocation methodologies were used to unbundle the
financial statements of US Holdings between its generation and T&D operations.
Allocation of revenues reflected consideration of return on invested capital,
which continues to be regulated for the T&D operations. US Holdings maintained
expense accounts for each of its component operations. Costs of energy and
expenses related to operations and maintenance and depreciation and
amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and disaggregated. Various allocation methodologies were used to
disaggregate common expenses, assets and liabilities between US Holdings'
generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Allocations reflected in the financial
information for 2001 and 2000 did not necessarily result in amounts reported in
individual line items that are comparable to actual results in 2002. 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.
A-17
Effective January 1, 2002, TXU Energy incurs electricity delivery fees
charged by Oncor and other T&D utilities. Rates charged by TXU Energy to its
customers are intended to recover the costs of delivery. Electricity delivery
fees have been included in the North America Energy segment's revenues and cost
of energy for 2001 and 2000. The North America Energy segment's gross margin for
2001 and 2000 is not affected by the inclusion of these electricity delivery
fees.
2002 compared to 2001
The North America Energy segment's operating revenues increased $280
million, or 4%, to $7.7 billion in 2002. Wholesale electric revenues increased
$749 million to $845 million, reflecting the substantial increase in wholesale
sales volumes due to the opening of the Texas market to competition. Retail
electric revenues declined $569 million, or 8%, to $6.5 billion, reflecting a
$613 million reduction due to lower volumes partially offset by a $44 million
increase due to higher average pricing. The price variance reflects a shift in
customer mix, partially offset by the effect of lower rates. A 9% decline in
overall retail electric sales volumes was primarily due to the effects of
increased competitive activity in the small business and large C&I markets.
Year-end residential electric customer counts, reflecting losses in the
historical service territory and gains in new territories due to competition,
were about even with the prior year. The increase in revenues also reflects
certain revenues and related retail and generation expenses that were the
responsibility of the North America Energy Delivery segment in 2001, but are
included in North America Energy revenues in 2002.
Gross Margin
Year Ended December 31,
----------------------------------------------------
% of % of
2002 Revenue 2001 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 7,738 100% $ 7,458 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 4,803 62% 4,802 64%
Operating costs................................... 747 10% 708 10%
Depreciation and amortization related to generation
assets........................................ 396 5% 391 5%
------- ------ ------- -------
Gross margin........................................... $ 1,792 23% $ 1,557 21%
======= ====== ======= =======
Gross margin increased $235 million, or 15%, to $1.8 billion in 2002. The
increase was driven by lower average costs of electricity and delivery fees and
significant growth in wholesale electric sales in the newly deregulated ERCOT
market, partially offset by the effect of lower retail electric volumes. Gross
margin in 2002 was negatively affected by the accrual of $185 million for retail
clawback (see discussion above under "Accounting for Contingencies"), which is
reported in cost of energy sold and delivery fees. Results of wholesale
portfolio management activities were down $47 million from the prior year
primarily due to hedge ineffectiveness. Mark-to-market accounting for wholesale
and retail commodity contracts reduced revenues and gross margin by $72 million
in 2002 (as compared to accounting on a settlement basis), and increased results
in 2001 by $314 million. Operating costs rose $39 million, or 6%, to $747
million primarily due to the costs of refueling two units, compared to one in
2001, at the nuclear-powered generation plant.
A-18
The following table analyzes the North America Energy segment's gross
margin between its realized and unrealized components:
Year Ended December 31,
----------------------
2002 2001
---- ----
Gross margin.................................................... $1,792 $1,557
Noncash items:
Unrealized mark-to-market (gain) loss........................ 72 (314)
Retail clawback accrual...................................... 185 -
Depreciation and amortization related to generation assets... 396 391
Cash flow hedge ineffectiveness.............................. 41 (4)
Other noncash items included in cost of energy sold.......... (31) 86
Mitigation................................................... - 34
Over- recovered fuel costs................................... - 568
------ ------
Gross margin on a cash basis............................. $2,455 $2,318
====== ======
An increase in depreciation and amortization, other than goodwill
(including amounts shown in the gross margin table above), of $42 million, or
11%, to $438 million was primarily due to investments in computer systems
required to operate in the newly deregulated market and expansion of office
facilities.
An increase in SG&A expenses of $452 million, or 116%, to $842 million
reflected the effect of retail customer support costs and bad debt expense of
approximately $150 million that were the responsibility of the North America
Energy Delivery segment in 2001. The increase in SG&A expenses also reflected
$199 million in higher staffing and other administrative costs, related to
expanded retail sales operations and portfolio management activities, and higher
bad debt expense of $90 million, all due largely to the opening of the Texas
electricity market to competition. With the completion of the transition to
competition in Texas, the industry-wide decline in portfolio management
activities, and the expected deferral of deregulation of energy markets in other
states, TXU Energy initiated several cost savings initiatives in 2002 that are
expected to continue in 2003. Such actions resulted in $31 million in severance
charges in 2002, which contributed to the increase in SG&A expense. In addition,
new POLR rules established by the Commission (see discussion in Note 15 to
Financial Statements under "Provider of Last Resort") are expected to result in
reduced bad debt expense. With the anticipated lower staffing and related
administrative expenses and improvement in bad debt experience, SG&A expenses
are expected to decline in 2003.
Franchise and revenue-based taxes rose $124 million to $139 million due to
state gross receipts taxes that were the responsibility of the North America
Energy Delivery segment in 2001. Effective in 2002, state gross receipts taxes
related to electricity revenues are an expense of the North America Energy
segment, while local gross receipts taxes are an expense of the North America
Energy Delivery segment.
Other income increased by $30 million to $33 million, reflecting
amortization of $30 million of a gain on the sale in 2002 of two generation
plants.
Other deductions increased by $204 million to $254 million, reflecting a
$237 million writedown in 2002 of an investment in two generation plant
construction projects (see discussion above under "Impairment of Long-Lived
Assets"). Amounts in 2001 included a $22 million regulatory asset write-off
pursuant to a regulatory order and $18 million in various asset writedowns.
Interest income declined by $42 million, or 59%, to $29 million primarily
due to the recovery of under-collected fuel revenue on which interest income had
been accrued under regulation in 2001.
Interest expense and other charges increased $10 million, or 4%, to $257
million. Of the change, $106 million was due to higher rates and an $8 million
decrease in capitalized interest, partially offset by $104 million due to lower
average debt levels.
A-19
The effective tax rate decreased to 24.4% in 2002 from 30.4% in 2001. The
decrease was driven by the effect of comparable (to 2001) tax benefit amounts of
depletion allowances and amortization of investment tax credits on a lower
income base in 2002. (See Note 11 to Financial Statements for analysis of the
effective tax rate.)
Income before extraordinary loss decreased $391 million, or 62%, to $242
million in 2002. The decline was driven by an increase in SG&A expenses, the
impairment charge reported in other deductions and higher franchise and
revenue-based taxes, partially offset by the improved gross margin (net of the
effect of the retail clawback accrual). Net pension and postretirement benefit
costs reduced net income by $21 million in 2002 and $13 million in 2001.
2001 compared to 2000
The North America Energy segment's operating revenues of $7.5 billion for
2001 were essentially even with the prior year. This performance reflected lower
retail electricity revenues of approximately $200 million, or 3%, largely offset
by increased wholesale portfolio management activities, due in large part to the
anticipated opening of the Texas market to competition, as well as increased
wholesale activity in markets outside of Texas. Lower retail electricity
revenues reflected both volume declines and lower fuel revenues, due to lower
fuel (primarily natural gas) costs in generation operations, partially offset by
a lower adjustment for earnings in excess of the regulatory earnings cap
(mitigation). Retail electricity volumes declined 1% due to milder, more normal
weather, partially offset by the effect of 2% growth in number of customers.
Gross Margin
Year Ended December 31,
-----------------------------------------------
% of % of
2001 Revenue 2000 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 7,458 100% $ 7,449 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 4,802 64% 5,101 69%
Operating costs................................... 708 10% 673 9%
Depreciation and amortization related to generation
assets........................................ 391 5% 390 5%
------- ----- ------- ------
Gross margin........................................... $ 1,557 21% $ 1,285 17%
======= ===== ======= ======
Gross margin increased $272 million, or 21%, to $1.6 billion in 2001. The
improved results reflected growth in wholesale portfolio management activities,
arising primarily in anticipation of the opening of the Texas market to
competition, partially offset by an increase in operating costs. Mark-to-market
accounting for commodity contracts increased revenues and gross margin by $314
million in 2001 (as compared to accounting on a settlement basis). This amount
reflects $88 million in origination gains recorded upon execution of retail
contacts with large C&I customers. Such contracts are derivatives and are
marked-to-market in accordance with SFAS No. 133. Operating costs increased $35
million, or 5%, to $708 million in 2001 primarily reflecting higher generation
plant maintenance costs.
The increase in depreciation and amortization, other than goodwill
(including amounts shown in the gross margin table above), of $6 million, or 2%,
to $396 million was primarily due to investments in computer systems and
expansion of office facilities.
The increase in SG&A expense of $106 million, or 37%, to $390 million
reflected higher spending for staffing and computer systems to support expanded
retail sales and portfolio management operations, largely in anticipation of
deregulation of the Texas electricity market, as well as increased bad debt
expense. The increase in bad debts was primarily due to the rise in fuel costs
and related revenue in late 2000 and early 2001.
Other income decreased by $29 million to $3 million, reflecting a $28
million gain on the sale of land in 2000.
A-20
Other deductions increased $44 million to $50 million, reflecting a $22
million write-off of regulatory assets pursuant to a regulatory order and $18
million in various asset writedowns, both in 2001.
Interest income increased $19 million, or 37%, to $71 million primarily
due to interest income on under-recovered fuel costs under regulation.
Interest expense and other charges declined $33 million, or 12%, to $247
million due primarily to lower interest rates and a $9 million increase in
capitalized interest.
The effective tax rate increased to 30.4% in 2001 from 28.3% in 2000,
primarily due to higher state income taxes.
Income before extraordinary loss increased $82 million, or 15%, to $633
million in 2002. The increase was driven by the higher gross margin, partially
offset by higher SG&A expenses.
North America Energy Delivery
- -----------------------------
Financial Results
Year Ended December 31,
----------------------------------------
2002 2001* 2000*
---- ---- ----
Operating revenues....................................... $2,973 $ 3,542 $ 3,187
------ ------- -------
Costs and expenses:
Cost of gas sold..................................... 510 764 604
Operating costs...................................... 848 757 740
Depreciation and amortization, other than goodwill... 332 303 293
Selling, general and administrative expenses......... 320 494 410
Franchise and revenue-based taxes ................... 322 495 367
Other income ........................................ (21) (35) (69)
Other deductions..................................... 4 76 53
Interest income ..................................... (48) (19) (12)
Interest expense and other charges .................. 331 347 344
Goodwill amortization................................ -- 10 9
------ ------- -------
Total costs and expenses......................... 2,598 3,192 2,739
------ ------- -------
Income before income taxes and extraordinary loss........ 375 350 448
Income tax expense....................................... 123 125 160
------ ------- -------
Income before extraordinary loss......................... $ 252 $ 225 $ 288
====== ======= =======
- ------------------------
The North America Energy Delivery segment includes the electricity T&D
business of Oncor and the natural gas pipeline and distribution business of
TXU Gas Company (TXU Gas), both of which are subject to regulation by Texas
authorities.
* Prior period data is included above for the purpose of providing historical
financial information about the North America Energy Delivery segment after
giving effect to the restructuring transactions and allocations described in
the Notes to Financial Statements. Allocations reflected in prior period
data did not necessarily result in amounts reported in individual line items
that are comparable to actual results in 2002. Had the North America Energy
Delivery segment existed as a separate segment, its results of operations
and financial position could have differed materially from those reflected
above. Additionally, future results of the North America Energy Delivery
segment's operations and financial position could differ materially from the
historical information presented.
A-21
North America Energy Delivery
- -----------------------------
Operating Data
Year Ended December 31,
----------------------------
2002 2001* 2000*
---- ---- ----
Operating statistics:
Delivered electricity volumes (GWh)................................. 104,785 99,139 100,545
Retail gas distribution volumes (Billion cubic feet-Bcf):
Residential................................................... 86 84 83
Commercial.................................................... 53 53 51
Industrial and electric generation............................ 5 7 4
------- ------ -------
Total gas sales......................................... 144 144 138
======= ====== =======
Pipeline transportation volumes (Bcf)............................... 437 386 462
======= ====== =======
Retail gas distribution customers and electric points of delivery
(end of period and in thousands):
Retail gas distribution customers.............................. 1,470 1,447 1,438
Electric points of delivery.................................... 2,909 2,844 2,796
Operating revenues (millions of dollars):
Electricity delivery:
North America Energy........................................... $1,586
Non-affiliated REPs............................................ 408
------
Total .................................................. 1,994 $2,314 $2,081
------ ------ ------
Retail gas distribution:
Residential.................................................... 563 710 616
Commercial..................................................... 291 387 318
Industrial and electric generation............................. 20 47 28
------ ------ ------
Total .................................................. 874 1,144 962
Pipeline transportation............................................. 59 48 57
Other revenues, net of eliminations................................. 48 37 88
------ ------ ------
Total retail gas distribution and pipeline
transportation........................................ 981 1,229 1,107
------ ------ ------
Intra-segment eliminations.......................................... (2) (1) (1)
------ ------ ------
Total operating revenues................................ $2,973 $3,542 $3,187
====== ====== ======
- --------------------------
* See footnote on previous page.
The financial information for 2001 and 2000 for the electric delivery
operations included in the North America Energy Delivery segment includes
information derived from the historical financial statements of US Holdings.
Reasonable allocation methodologies were used to unbundle the financial
statements of US Holdings between its generation and T&D operations. Allocation
of revenues reflected consideration of return on invested capital, which
continues to be regulated for the T&D operations. US Holdings maintained expense
accounts for each of its component operations. Costs of energy and expenses
related to operations and maintenance and depreciation and amortization, as well
as assets, such as property, plant and equipment, materials and supplies and
fuel, were specifically identified by component operation and disaggregated.
Various allocation methodologies were used to disaggregate revenues, common
expenses, assets and liabilities between US Holdings' generation and T&D
operations. Interest and other financing costs were determined based upon debt
allocated. Allocations reflected in the financial information for 2001 and 2000
did not necessarily result in amounts reported in individual line items that are
comparable to actual results in 2002. 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.
A-22
2002 compared to 2001
Operating revenues for the North America Energy Delivery segment decreased
$569 million, or 16%, to $3.0 billion in 2002. Electricity delivery revenues
decreased $320 million, or 14%, to $2.0 billion. Revenues in 2001 included
amounts associated with generation and retail expenses that were the
responsibility of electric delivery, but in 2002 such revenues and expenses are
the responsibility of the North America Energy segment. Excluding the impact of
such revenues in 2001, electric delivery revenues rose 3% on a 6% increase in
electricity volumes delivered. Because the fees to REPs for their large C&I
customers are fixed for specified ranges of volumes, changes in distribution
volumes do not necessarily result in comparable changes in reported revenues.
Gas delivery revenues declined $248 million, or 20%, to $1.0 billion, due to
reduced costs of gas, as sales volumes were about even.
Gross Margin
Year Ended December 31,
---------------------------------------------
% of % of
2002 Revenue 2001 Revenue
---- ------- ---- -------
Operating revenues........................................... $ 2,973 100% $ 3,542 100%
Costs and expenses:
Cost of gas sold........................................ 510 17% 764 22%
Operating costs......................................... 848 29% 757 21%
Depreciation and amortization (related to transmission
and distribution assets)............................. 321 11% 302 8%
------- ----- ------- ------
Gross margin................................................. $ 1,294 43% $ 1,719 49%
======= ===== ======= ======
Gross margin decreased $425 million, or 25%, to $1.3 billion in 2002.
The decrease reflects the impact of revenues allocated to electricity
delivery operations in 2001, as discussed above, and higher operating costs in
2002, partially offset by lower cost of gas sold. The increase in operating
costs of $91 million, or 12%, to $848 million primarily reflects costs
associated with a consumer energy efficiency program, mandated by the
Commission, and higher transmission costs paid to other utilities.
Depreciation and amortization, other than goodwill (including amounts
shown in the gross margin table above), increased $29 million, or 10%, to $332
million. The increase reflected investments in computer systems to support the
restructuring of the Texas electricity market, as well as normal growth and
replacements of delivery facilities.
SG&A expenses decreased by $174 million, or 35%, to $320 million due
primarily to lower bad debt expense and customer support costs of approximately
$150 million, as the retail sales function is now reflected in the North
American Energy segment. In addition, information technology costs were higher
in 2001 due to system changes made in preparation of unbundling the delivery
business from the generation and retail operations.
Franchise and revenue-based taxes decreased $173 million, or 35%, to $322
million in 2002 due to state gross receipts taxes that are reported in the North
America Energy segment in 2002. Effective in 2002, local gross receipts taxes
related to electricity revenue are an expense of Oncor while state gross
receipts taxes are an expense of TXU Energy. The decline also reflected the
impact of lower gas delivery revenues.
Other income declined $14 million, to $21 million in 2002. The 2002 period
includes a $7 million gain on sale of property and $14 million of other
individually immaterial items. The 2001 period included $18 million from a
favorable settlement of legal proceedings related to a gas purchase contract.
Other deductions decreased by $72 million to $4 million reflecting a
recoverable charge in 2001 of $73 million related to regulatory restructuring of
the Texas electricity market.
Interest income increased $29 million to $48 million due to reimbursement
from North America Energy for carrying costs on regulatory assets.
A-23
Interest expense and other charges declined by $16 million, or 5%, to $331
million. Of the change, $51 million was due to lower average debt levels,
partially offset by $33 million due to higher rates and a $2 million decrease in
capitalized interest.
Goodwill amortization of $10 million in 2001 ceased, reflecting the
discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142.
The effective income tax rate was 32.8% in 2002 compared to 35.7% in 2001.
The decline reflected the cessation of nondeductible goodwill amortization and
nonrecurring regulatory-driven adjustments recorded in 2001 relating to prior
years.
Income before extraordinary loss increased $27 million, or 12%, to $252
million due to the declines in SG&A expenses and franchise and revenue-based
taxes, higher interest income and lower interest expense, as well as the effect
of the regulatory-related charge in 2001, reported in other deductions,
partially offset by the lower gross margin. Net pension and postretirement
benefit costs reduced net income by $27 million in 2002 and $14 million in 2001.
2001 compared to 2000
Operating revenues for the North America Energy Delivery segment increased
by $355 million, or 11%, to $3.5 billion in 2001. Electricity delivery revenues
rose $233 million. This increase is primarily due to the impact on reported
revenues of regulation, reflecting higher recoverable costs. Electricity volumes
delivered in 2001 declined 1% due to milder, more normal weather and a slowing
economy, partially offset by the effect of 2% growth in number of customers. Gas
delivery revenues rose $122 million, reflecting higher prices due to colder
weather in the first quarter of 2001 and revenue enhancement activity, as well
as higher volumes due to the colder weather. Gas distribution volumes increased
4%. The increase in gas delivery revenues was partially offset by the absence of
$54 million of revenues from a gas processing business sold in 2000.
Gross Margin
Year Ended December 31,
----------------------------------------------
% of % of
2001 Revenue 2000 Revenue
---- ------ ---- -------
Operating revenues......................................... $ 3,542 100% $ 3,187 100%
Costs and expenses:
Cost of gas sold...................................... 764 22% 604 19%
Operating costs....................................... 757 21% 740 23%
Depreciation and amortization (related to transmission
and distribution assets)............................ 302 8% 292 9%
------- ---- ------- ----
Gross margin............................................... $ 1,719 49% $ 1,551 49%
======= ==== ======= ====
Gross margin increased by $168 million, or 11%, to $1.7 billion in 2001.
This increase reflected the higher operating revenues in the electricity
delivery operations, partially offset by a decline in the gas delivery business
due to the absence of the gas processing business. Higher cost of gas sold was
offset by the related increase in revenues. Operating costs increased $17
million, or 2%, primarily due to higher system maintenance costs and property
taxes. Depreciation and amortization increased $10 million, or 3%, due to
capital expenditures in 2000 and 2001 to upgrade system capability and
reliability.
Depreciation and amortization, other than goodwill (including amounts
shown in the gross margin table above), increased $10 million, or 3%, to $303
million primarily due to normal growth and replacements of delivery facilities.
Franchise and revenue-based taxes increased $128 million, or 35%, to $495
million in 2001 due to higher electric and gas revenues on which these taxes are
based.
A-24
SG&A expenses rose $84 million, or 20%, to $494 million in 2001 due
primarily to increases in computer systems-related expenses to prepare for the
restructuring of Texas electricity markets and bad debt expense due to the
increase in electric and gas revenues from the weather-related rise in gas costs
in late 2000 and early 2001.
Other income declined $34 million to $35 million in 2001. The 2001 period
included $18 million from a favorable settlement of legal proceedings related to
a gas purchase contract and a $5 million gain on sale of property. The 2000
period included a $53 million gain on sale of the gas processing business.
Other deductions increased by $23 million to $76 million in 2001. The 2001
period included a regulatory-related recoverable charge of $73 million related
to the opening of the Texas market to competition The 2000 period included a
similar recoverable charge of $52 million.
The effective income tax rate was 35.7% in both 2001 and 2000.
Income before extraordinary loss decreased $63 million, or 22%, to $225
million in 2001. The decrease was driven by higher franchise and revenue-based
taxes and SG&A expenses.
Australia
- ---------
Financial Results
Year Ended December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
Operating revenues....................................... $ 860 $ 700 $ 717
------ ------- -------
Costs and expenses:
Cost of energy sold and delivery fees............... 400 333 332
Operating costs..................................... 83 74 79
Depreciation and amortization, other than goodwill.. 67 60 59
Selling, general and administrative expenses........ 87 63 62
Other income ....................................... (2) (3) (10)
Other deductions.................................... 4 6 3
Interest income .................................... (1) -- (1)
Interest expense and other charges ................. 129 126 150
Goodwill amortization............................... -- 19 21
------ ------- -------
Total costs and expenses........................ 767 678 695
------ ------- -------
Income before income taxes .............................. 93 22 22
Income tax expense (benefit)............................. 19 3 (1)
------ ------- --------
Net income............................................... $ 74 $ 19 $ 23
====== ======= =======
A-25
Australia
- ---------
Operating Data
2002 2001* 2000*
---- ----- -----
Operating Statistics:
Retail electricity sales volumes (GWh).................................. 6,883 5,351 5,380
Delivered electricity volumes (GWh)..................................... 2,106 1,843 1,926
Retail gas sales volumes (Bcf).......................................... 63 67 64
Retail gas distribution volumes (Bcf)................................... 35 35 35
Wholesale electricity sales volumes (GWh)............................... 3,132 3,826 4,477
Retail customers and electric points of delivery (end of period and in
thousands):
Electric customers.................................................. 567 533 517
Gas customers....................................................... 471 427 419
----- --- ---
Total..................................................... 1,038 960 936
===== === ===
Electric points of delivery......................................... 549 535 522
Gas distribution points of delivery................................. 466 453 441
----- --- ---
Total..................................................... 1,015 988 963
===== === ===
Operating revenues (millions of dollars):
Retail electric:
Residential.................................................... $214 $172 $157
Commercial and industrial...................................... 226 142 155
--- --- ---
Total.................................................... 440 314 312
--- --- ---
Electricity delivery.................................................... 38 31 31
--- --- ---
Retail gas sales:
Residential........................................................ 73 71 105
Commercial and industrial.......................................... 109 97 97
--- --- ---
Total.................................................... 182 168 202
Retail gas distribution................................................. 33 32 34
Wholesale electric revenues............................................. 65 61 57
Wholesale electric portfolio management activities and other income .... 102 94 81
--- --- ---
Total operating revenues................................. $860 $700 $717
=== === ===
- --------------------------
* Includes results of acquired businesses from dates of acquisition.
2002 compared to 2001
The Australia segment's operating revenues increased $160 million, or 23%,
to $860 million in 2002. The effects of changes in foreign currency translation
rates contributed $40 million to the increase. The balance of the growth
reflected $84 million from increased retail electricity volumes and $26 million
from increased retail electricity pricing. Electricity volumes increased 29%,
driven primarily by the addition of new C&I accounts.
The state of Victoria regulates retail energy prices for incumbent
retailers and has granted an average rise of 9% in gas prices for TXU
Australia's gas retail customers beginning in 2003. The state has also
determined an electricity price decrease of 4% effective April 1, 2003, for TXU
Australia's electric retail customers, and has replaced the Special Power
Payment (a $A118 million subsidy to all eligible electricity customers in the
state of Victoria, introduced at the beginning of 2002) with the Network Tariff
Rebate (a $A57 million subsidy to be introduced in April 2003). The combined
effect results in an average 3.1% price increase for TXU Australia's electric
customers effective April 1, 2003.
A-26
Gross Margin
Year Ended December 31,
----------------------------------------------
% of % of
2002 Revenue 2001 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 860 100% $ 700 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 400 46% 333 47%
Operating costs.................................. 83 10% 74 11%
Depreciation and amortization (related to operating
assets)....................................... 61 7% 56 8%
------- ----- ------- ------
Gross margin........................................... $ 316 37% $ 237 34%
======= ===== ======= ======
Australia's gross margin improved $79 million, or 33%, to $316 million in
2002. On a local currency basis, margins improved 25%, reflecting higher retail
electricity prices and volumes, partially offset by lower wholesale electricity
margins as wholesale pool prices decreased in 2002. Operating costs rose $9
million, or 6%, on a local currency basis, due primarily to higher compensation
costs and headcount. Depreciation and amortization related to operating assets
increased $5 million, or 4% on a local currency basis, reflecting expenditures
for infrastructure expansion in the electricity delivery business.
Mark-to-market accounting for commodity contracts increased revenues and gross
margin by $5 million in both years (as compared to accounting on a settlement
basis).
Australia's SG&A expenses rose $24 million, or 23%, on a local currency
basis, reflecting increased promotional and staffing expenses to support retail
competition activities in newly opened markets.
The effective tax rate was 20.4% in 2002 versus 13.6% in 2001, due
primarily to nonrecurring adjustments to the tax basis of certain assets in
2001, partially offset by the discontinuance of goodwill amortization.
Australia's net income rose $55 million to $74 million in 2002.
Australia's results were driven by higher gross margin and the discontinuance of
goodwill amortization ($19 million with no tax effect), partially offset by
increased SG&A costs. Net pension and postretirement benefit cost reduced net
income by $2 million in 2002 and 2001.
2001 compared to 2000
Operating revenues decreased $17 million, or 2%, to $700 million in 2001,
primarily due to the effect of the stronger US dollar. On a local currency
basis, dollar revenues increased 9%. This improvement reflected an increase in
the number of retail customers, a full year of wholesale revenue from a power
generation plant acquired in May 2000 and favorable wholesale portfolio
management results. Partially offsetting this increase was lower electricity
delivery revenues due to lower tariffs.
Gross Margin
Year Ended December 31,
------------------------------------------------
% of % of
2001 Revenue 2000 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 700 100% $ 717 100%
Costs and expenses:
Cost of energy sold and delivery fees ............ 333 47% 332 46%
Operating costs.................................. 74 11% 79 11%
Depreciation and amortization (related to operating
assets)....................................... 56 8% 56 8%
------- ----- ------- ------
Gross margin........................................... $ 237 34% $ 250 35%
======= ===== ======= ======
Gross margin decreased by $13 million, or 5%, to $237 million in 2001. On
a local currency basis, gross margin increased 7%, largely in line with the
revenue growth. Mark-to-market accounting for commodity contracts increased
revenues and gross margin by $5 million in 2001 (as compared to accounting on a
settlement basis).
A-27
Net income decreased $4 million, or 17%, to $19 million in 2001. On a
local currency basis, net income increased 3% reflecting the revenue growth and
lower interest rates, partially offset by a $16 million gain on the sale of an
engineering and construction business in 2000.
COMPREHENSIVE INCOME - Continuing Operations
Foreign currency translation adjustments for 2002, 2001 and 2000, a gain
of $76 million and losses of $61 million and $98 million, respectively,
primarily reflected the movement in exchange rates between the US dollar and the
Australian dollar. These adjustments have no tax effects.
Minimum pension liability adjustments for 2002, 2001 and 2000 are losses
of $128 million ($83 million after-tax) and $9 million ($6 million after-tax)
and a gain of $1 million, respectively. The minimum pension liability represents
the difference between the excess of the accumulated benefit obligation over the
plans' assets and the liability reflected in the balance sheet. Further, based
on the current assumptions and available information, funding requirements in
2003 related to the pension plans are expected to increase by $7 million and
pension expense is expected to increase approximately $40 million over the 2002
amounts. The recording of the liability did not affect TXU Corp.'s financial
covenants in any of its credit agreements.
TXU Corp. adopted SFAS No. 133 effective January 1, 2001, and recorded a
$37 million ($25 million after-tax) charge to other comprehensive income to
reflect the fair value of derivatives effective as cash flow hedges at
transition. TXU Corp. has historically used, and will continue to use,
derivative financial instruments that are highly effective in offsetting future
cash flow volatility in interest rates, energy commodity prices, and currency
exchange rates. The amounts included in other comprehensive income are expected
to be used in the future to offset the impact of rate or price changes on
related payments. Amounts in other comprehensive income include (i) the value of
the cash flow hedges, based on current market conditions, and (ii) the value of
dedesignated and terminated cash flow hedges at the time of such dedesignation,
less amortization, providing the transaction that was hedged is still probable.
The effects of the hedge will be recorded in the statement of income as the
hedged transactions are actually settled.
During 2002 and 2001, changes in the fair value of derivatives effective
as cash flow hedges reflected losses of $348 million ($229 million after-tax)
and $113 million ($79 million after-tax), respectively. Losses in 2002 were due
to decreases of $256 million ($169 million after-tax) in the fair value of
interest rate hedges because of lower interest rates, and decreases of $92
million ($60 million after-tax) in the fair value of commodity hedges. Losses in
2001 were related to decreases in the fair value of hedges of indebtedness in
Australia.
During 2002 and 2001, other comprehensive income hedge losses recognized
in income were $119 million ($81 million after-tax) and $87 million ($62 million
after-tax), respectively, primarily related to interest rate hedges.
See also Note 14 to Financial Statements.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows -- Cash flows provided by operating activities for the year
ended December 31, 2002, were $1.3 billion compared to $1.9 billion and $908
million for the years ended December 31, 2001 and 2000, respectively. The
decrease in cash flows provided by operating activities in 2002 of $535 million,
or 29%, reflected a number of factors. The principal driver of the decline was
lower cash earnings (net income adjusted for the significant noncash items
identified in the statement of cash flows) and the effect of a return in 2001 of
$227 million in margin deposits related to portfolio management activities (in
exchange for letters of credit). The net working capital (accounts receivable,
accounts payable and inventories) increase of approximately $396 million in 2002
was comparable to 2001. However, this performance reflected higher unbilled
accounts receivable of approximately $200 million related to the opening of the
Texas market to competition, which reflects the effects of a new ERCOT protocol
that allows five days to clear meter-read data through ERCOT, as well as other
changes in billing processes. The higher accounts receivable was largely offset
by increased accounts payable, reflecting more purchases of power (as opposed to
power generated by TXU Energy) and timing of payments.
A-28
The increase in cash flows in 2001 from 2000 of $968 million was driven by
the effect of under-recovered fuel costs, reflecting high gas prices in 2000
that reduced cash flows in 2000 as the gas costs were incurred, but increased
cash flows in 2001 as the costs were recovered from customers. The increase also
reflected the year-over-year effect of margin deposit payments in 2000 and the
return of those deposits in 2001.
Cash flows provided by financing activities for 2002 were $1.5 billion,
primarily reflecting issuances of stock and debt. Issuances of debt and equity
securities totaled $5.8 billion and retirements and repurchases of debt totaled
$3.6 billion. Net redemptions of commercial paper totaled $844 million, and
notes payable to banks increased $1.2 billion. As a result of the unbundling of
US Holdings and related refinancings, there were substantial early retirements
and re-issuances of long-term debt and retirements of preferred securities in
2001. Cash flows used in financing activities were $509 million in 2001 and $669
million in 2000. Cash dividends paid on common shares approximated $652 million,
$621 million and $634 million in 2002, 2001 and 2000, respectively. Dividend
payments on common shares are expected to total approximately $160 million in
2003.
Cash flows used in investing activities totaled $847 million, $1,201
million and $299 million during 2002, 2001 and 2000, respectively. Proceeds in
2002 from the sale of the Handley and Mountain Creek power plants in the
Dallas-Fort Worth area were $443 million. Acquisitions in 2002 included $36
million for a cogeneration and wholesale production business in New Jersey.
Capital expenditures declined to $1.0 billion in 2002 from $1.2 billion in 2001.
Capital expenditures are expected to total $1.1 billion in 2003. Nuclear fuel
spending of $51 million reflected refuelings at the Comanche Peak nuclear
generation plant. Other investing activities in 2002 included $147 million for
terminations of out-of-the-money cash flow hedges, primarily reflecting declines
in interest rates and a $30 million investment in an Australian joint venture to
construct a gas pipeline from Victoria to South Australia.
Depreciation and amortization expense reported in the statement of cash
flows exceeds the amount reported in the statement of income by $91 million.
This difference primarily represents amortization of nuclear fuel, which is
reported as cost of energy sold in the statement of income consistent with
industry practice, and amortization of regulatory assets, which is reported as
operating costs in the statement of income.
Investing Activities - Acquisitions and Dispositions
Acquisitions -- TXU Corp. and its continuing operating subsidiaries have
made the following acquisitions that were accounted for as purchase business
combinations. The results of operations of the acquired companies are reflected
in the consolidated financial statements from their respective acquisition
dates.
Total
Date Cash
Acquisition Acquired Consideration
----------- -------- -------------
(in millions)
Pedricktown, New Jersey power business April 2002 $36
Fort Bend Communications, Inc (a)..... May 2000 161
Optima Energy Pty Ltd (Australia) .... May 2000 177
--------------------------
(a)Transferred to the Pinnacle joint venture in August 2000.
TXU Corp. may pursue potential investment opportunities from time to time
when it concludes that such investments are consistent with its business
strategies and will dispose of nonstrategic assets to allow redeployment of
resources into faster growing opportunities in an effort to enhance the
long-term return to its shareholders.
A-29
Dispositions-- TXU Corp. and its continuing operating subsidiaries have
disposed of the following businesses, investments and assets:
Cash Consideration Received
-------------------------------
2002 2001 2000
---- ---- ----
Texas generation plants............................................. $443 $ - $ -
US gas processing business.......................................... - - 105
PrimeCo telecommunication investments (sold in 1999, cash received
in 2000)............................................................ - - 350
Australian construction company..................................... - - 28
Various other sales................................................. 6 26 144
---- ---- ----
Total................................................... $449 $ 26 $627
==== ==== ====
In April 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. Concurrent with the sale, TXU
Energy entered into a tolling agreement to purchase power during the summer
months through 2006. The terms of the tolling agreement include above-market
pricing, representing a fair value liability of $190 million. A pretax gain on
the sale of $146 million, net of the effects of the tolling agreement, was
deferred and is being recognized in other income during summer months over the
five-year term of the tolling agreement. Both the value of the tolling agreement
and the deferred gain are reported in other liabilities in the balance sheet.
Future Capital Expenditures -- Capital expenditures are estimated at $1.1
billion for 2003, substantially all of which are for maintenance and organic
growth of existing operations, and are expected to be funded by cash flows from
operations. Approximately 58% is planned for the North America Energy Delivery
segment, 29% for the North America Energy segment, 11% for Australia and 2% for
other activities.
Financing Activities
Equity -- In December 2002, TXU Corp. issued 35 million common shares in a
public offering. In June 2002, TXU Corp. issued 11.8 million common shares in a
public offering. Net proceeds of $1.1 billion from these offerings were used for
general corporate purposes, including the repayment of commercial paper and to
provide advances to subsidiaries.
In April 2001, TXU Corp. repurchased 1.3 million shares of its common
stock for $44 million under one of two existing equity purchase agreements with
certain financial institutions. Following that purchase, TXU Corp. terminated
both agreements without purchasing additional shares. Settlement of these
agreements had no effect on earnings. During 2000, TXU Corp. repurchased
approximately 18.6 million shares of its common stock for $596 million through
open market purchases. No additional repurchases were made and none are planned
for 2003.
In October 2002, TXU Corp. declared a common stock dividend of $0.125 per
share, payable on January 2, 2003, which represented an 80% reduction from the
previous dividend rate. The decrease was in response to capital market concerns
regarding the liquidity of TXU Corp. and its US and Australian subsidiaries. See
Note 3 to Financial Statements regarding events related to TXU Europe. TXU Corp.
paid quarterly dividends of $0.60 a share in April 2002, July 2002 and October
2002.
TXU Corp. or its predecessor has declared common stock dividends payable
in cash in each year since incorporation in 1945. The Board of Directors of TXU
Corp., at its February 2003 meeting, declared a quarterly dividend of $0.125 a
share, payable April 1, 2003, to shareholders of record on March 7, 2003. Future
dividends may vary and are subject to consideration of TXU Corp.'s operating
cash flow levels and capital requirements as well as financial and other
business conditions existing at the time.
Under Texas law, TXU Corp. may only declare dividends out of surplus,
which is statutorily defined as total shareholders' equity less the book value
of common stock (stated capital). The write-off of TXU Corp.'s investment in TXU
Europe resulted in negative surplus. Texas law permits, subject to the receipt
of shareholder approval, the reclassification of stated capital into surplus.
TXU Corp. received such shareholder approval of this reclassification in a
special meeting of shareholders held February 14, 2003. Accordingly,
A-30
approximately $8.0 billion will be reclassified from stated capital to
additional paid in capital, resulting in an increase of surplus in the same
amount.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp.'s subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At December 31, 2002, there were no restrictions on
the payment of dividends under these provisions.
Other Capital Transactions -- Since August 2001, TXU Corp.'s requirements
under its Direct Stock Purchase and Dividend Reinvestment Plan and Thrift Plan
have been met through additional issuances by TXU Corp. of common stock.
Issuances under these plans totaled 1,069,264 and 260,243 shares in 2002 and
2001, respectively.
Capitalization -- TXU Corp. capitalization consists of common, preference
and preferred stock, long-term debt securities, including equity-linked and
exchangeable debt, and preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of TXU Corp. or its subsidiaries. The
capitalization ratios of TXU Corp. at December 31, 2002, consisted of 8.2%
equity-linked debt securities, 4.3% exchangeable subordinated notes, 54.4% other
long-term debt, less amounts due currently, 2.9% trust securities, 1.2%
preferred stock of subsidiaries, 1.7% preference stock and 27.3% common stock
equity. Not reflected in these ratios is restricted cash of $210 million
included in other investments that is held in trust for the defeasance of
long-term debt.
Equity-Linked Debt Securities -- In 2002 and 2001, TXU Corp. issued
equity-linked securities with aggregate stated amounts of $440 million and $1.0
billion, respectively. Equity-linked debt securities are units that consist of
(i) TXU Corp. senior notes and (ii) a stock purchase contract that requires the
holder to purchase TXU Corp. common stock in the future. The number of shares
issuable upon settlement of stock purchase contracts is based on the market
price, which is determined as the average of the closing price of TXU Corp.
common stock on each of the twenty consecutive trading days ending on the third
trading day immediately preceding the settlement date. The calculation of shares
issuable is subject to a minimum price or "reference price" (typically this is
the price of the common stock at the time of the initial issuance of the
equity-linked debt securities) and a maximum price or "threshold appreciation
price" (this represents a premium over the reference price that is negotiated in
connection with the pricing of the offering). The reference price and the
threshold appreciation price for each series of TXU Corp.'s equity-linked debt
securities are based on market conditions at the time the securities were
issued.
To the extent the market price of TXU Corp. common stock is below the
reference price on the applicable settlement date, holders of equity-linked debt
securities would be required to purchase TXU Corp. common stock at a price
higher than the market price at that time. The market price of TXU Corp.'s
common stock is currently below the reference price for both currently
outstanding series of TXU Corp.'s equity-linked debt securities. TXU Corp.'s
liquidity and stock price affect the market price of the equity-linked debt
securities (as well as the market price of other securities issued by TXU Corp.
and its subsidiaries), but do not have any effect on the provisions of the
equity-linked debt securities other than the impact on the settlement rate, as
discussed above.
Under the terms of the purchase contracts, TXU Corp. expects to issue
between 24,953,600 and 30,514,000 shares of its common stock upon settlement. A
total of 30,514,000 shares have been reserved for issuance.
Exchangeable Subordinated Debt -- In November 2002, TXU Energy issued $750
million of exchangeable subordinated notes in a private placement. The notes
will mature in November 2012, bear interest at the annual rate of 9% and permit
the deferral of interest payments. TXU Corp. has granted the holders the right
to exchange the notes for TXU Corp. common stock. The notes currently may be
exchanged, subject to certain restrictions, at any time for up to approximately
57 million shares of TXU Corp. common stock at an exercise price of $13.1242 per
share. The number of shares of TXU Corp. common stock that may be issuable upon
A-31
the exercise of the exchange right is determined by dividing the principal
amount of notes to be exchanged by the exercise price. The exercise price and
the number of shares to be issued are subject to anti-dilution adjustments. The
proceeds from the issuance of the notes were used for the repayment of two
standby credit facilities that expired in November 2002. TXU Corp. recognized a
discount on the notes of $111 million, which represented the excess of the
market value of TXU Corp. common stock on the transaction date over the exercise
price applied to the number of issuable shares. This discount is being amortized
to interest expense over the term of the debt. As a result, the effective
interest rate on the notes is 11.5%. At the time of any exchange of the notes
for common stock, the unamortized discount will be proportionately written off
as a charge to earnings. (See discussion in Note 7 to Financial Statements under
"Exchangeable Subordinated Notes.")
The exchangeable notes are subordinated in bankruptcy to all other TXU
Energy obligations. TXU Energy has the right until May 2003 to require the
holders of the notes to exchange their interest in the notes for a preferred
equity interest in TXU Energy with economic and other terms substantially
identical to the notes. The original purchasers of the notes have the right to
nominate one member to the board of directors of TXU Corp., and such member has
been appointed to fill a vacancy. This right exists so long as the original
purchasers hold at least 30% of their original investment in the form of common
stock and/or notes, but no later than November 2012 or, if later, the date no
notes remain outstanding. The holders of the notes are restricted from actions
that would increase their control of TXU Corp.
Registered Financing Arrangements -- TXU Corp., US Holdings, TXU Gas
and other subsidiaries of TXU Corp. may issue and sell additional debt and
equity securities as needed, including: (i) issuances by US Holdings of up to
$25 million of Cumulative Preferred Stock and up to an aggregate of $924 million
of additional Cumulative Preferred Stock, debt securities and/or preferred
securities of subsidiary trusts and (ii) issuances by TXU Gas of up to an
aggregate of $400 million of debt securities and/or preferred securities of
subsidiary trusts, all of which are currently registered with the Securities and
Exchange Commission (SEC) for offering pursuant to Rule 415 under the Securities
Act of 1933.
Long-Term Debt -- During the year ended December 31, 2002, TXU Corp. and
its subsidiaries issued, redeemed, reacquired or made scheduled principal
payments on long-term debt as follows:
Issuances Retirements
--------- -----------
TXU Corp.:
Equity-linked securities..................... $ 440 $ 109
Other long-term debt......................... 145 326
Oncor:
First mortgage bonds......................... - 1,012
Senior secured notes......................... 2,050 -
Medium term notes............................ - 73
Fixed rate debentures........................ 1,000 -
TXU Gas:
Putable asset term securities................ - 200
TXU Energy:
Exchangeable subordinated notes.............. 750 -
Pollution control revenue bonds.............. 61 61
Floating rate debentures..................... - 1,500
Other long-term debt......................... - 123
US Holdings:
Debt assumed for purchase of utility plant... - 4
TXU Australia:
Long-term debt............................... 121 188
----- ------
Total....................................... $4,567 $3,596
====== ======
A-32
In early March 2003, TXU Energy issued $1.25 billion aggregate principal
amount of senior unsecured notes in two series in a private placement with
registration rights. One series of $250 million is due March 15, 2008, and bears
interest at the annual rate of 6.125%, and the other series of $1 billion is due
March 15, 2013, and bears interest at the annual rate of 7%. Net proceeds from
the issuance will be used for general corporate purposes, including the
repayment of advances from affiliates.
See Notes 6, 7, 8 and 10 to Financial Statements for further detail of
debt issuance and retirements, financing arrangements, trust securities and
capitalization.
At December 31, 2002, TXU Corp. had credit facilities (some of which
provide for long-term borrowings) as follows:
At December 31, 2002
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
364-Day Revolving Credit Facility April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ 121 $ 879 $ --
364-Day Senior Secured Credit
Facility December 2003 Oncor 150 -- -- 150
Five-Year Revolving Credit Facility February 2005 US Holdings 1,400 473 927 --
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 -- 500 --
------- ------ ------ ------
Total US $ 3,050 $ 594 $2,306 $ 150
Senior Facility October 2004 TXU Australia $ 989 $ -- $ 871 $ 118
Working Capital Facility October 2003 TXU Australia 56 -- -- 56
Standby Facility (a) December 2003 TXU Australia 18 -- -- --
------- ------ ------ ------
Total Australia $ 1,063 $ -- $ 871 $ 174
(a) Supports commercial paper borrowings, which were $18 million at December 31,
2002.
In October 2002, US Holdings, Oncor and TXU Energy borrowed approximately
$2.6 billion in cash against their available credit facilities, the total of
which represented the remaining availability after $549 million was used to
support outstanding letters of credit. These funds and other available cash were
used, in part, to repay outstanding commercial paper upon maturity. As of
December 31, 2002, these facilities were fully drawn and were reflected in notes
payable-banks on the balance sheet. Excess cash of approximately $1.6 billion at
December 31, 2002, has been invested in liquid short-term marketable securities
earning current market rates. These funds will be used to repay debt as it
matures and meet other working capital requirements until such time as the
commercial paper market becomes accessible.
In January 2003, TXU Australia extended its $56 million (A$99 million)
working capital facilities to October 2003. At December 31, 2002, the facility
was fully available for future borrowings.
In October 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility was 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
was to be available for general corporate purposes at Oncor. In December 2002,
Oncor issued $850 million senior secured notes, reducing the commitment to $150
million. Oncor subsequently converted the commitment to a $150 million secured
364-day credit facility.
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 borrowings outstanding at any time 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
A-33
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 December 31, 2002, each
of the US credit facilities listed above provided back-up for outstanding
commercial paper under the Oncor and TXU Energy programs. The TXU Corp.
commercial paper program was discontinued in July 2002, and at that time, TXU
Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of December 31, 2002, there was no outstanding commercial
paper under these programs. Concurrent with events in October 2002, as described
in Note 3, US commercial paper markets became inaccessible to TXU Corp., TXU
Energy and Oncor. Commercial paper borrowings are expected to resume as market
concerns regarding the liquidity of TXU Corp. and its US subsidiaries are
mitigated.
With respect to the 364-day revolving credit facility in the above table,
TXU Corp. is pursuing various alternatives for renewing this facility, including
the option under the agreement of converting the outstanding borrowings at the
end of the term to a 364-day term loan.
Over the next twelve months, TXU Corp. and its subsidiaries will need to
fund ongoing working capital requirements and maturities of debt. TXU Corp. and
its subsidiaries have funded or intend to fund these requirements 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.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
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 December 31, 2002, TXU Energy
(through certain subsidiaries), 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 December 31, 2002, $1.26 billion
face amount of receivables were sold to TXU Receivables Company under the
program in exchange for cash of $406 million and $820 million in subordinated
notes, with $31 million of losses on sales for the year ended December 31, 2002,
that principally represent the interest costs on the underlying financing. These
losses approximated 5% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis. Funding under the program
decreased from $600 million at September 30, 2002, to $406 million at December
31, 2002, primarily due to billing and collection delays arising from new
systems and processes in TXU Energy and ERCOT for clearing customer switching
and billing data, as well as seasonality of the business.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be 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 Company, a subsidiary of TXU
Corp., services the purchased receivables and is paid a market based servicing
fee by TXU Receivables Company. The subordinated notes receivable from TXU
Receivables Company represent TXU Corp.'s subsidiaries' retained interests in
the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables that are
31-90 days past due into the program.
A-34
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
o the credit rating for the long-term senior debt securities of both any
originator and its parent guarantor, if any, declines below BBB- by S&P
or Baa3 by Moody's; or
o the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts, disputes
and other allowances) or the days collection outstanding ratio exceed
stated thresholds.
The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The resolution of these issues as well as the implementation of
new POLR rules by the Commission are expected to bring the ratios in consistent
compliance with the program. (See discussion in Note 15 to Financial Statements
under "Provider of Last Resort.")
Credit Ratings of TXU Corp. and its US and Australian Subsidiaries -- The
current credit ratings for TXU Corp. and its US and Australian subsidiaries are
presented below:
TXU Corp. US Holdings Oncor TXU Energy TXU Gas TXU Australia
--------------- --------------- -------- ----------------- ----------------- ---------------
(Senior Unsecured)(Senior Unsecured) (Secured) (Senior Unsecured) (Senior Unsecured) (Senior Unsecured)
S&P.............. BBB- BBB- BBB BBB BBB BBB
Moody's.......... Ba1 Baa3 Baa1 Baa2 Baa3 Baa2
Fitch............ BBB- BBB- BBB+ BBB BBB- BBB-
Moody's currently maintains a negative outlook for TXU Corp., TXU Gas and
TXU Australia, and a stable outlook for US Holdings, TXU Energy and Oncor. Fitch
Rating (Fitch) currently maintains a stable outlook for each such entity.
Standard and Poor's (S&P) currently maintains a negative outlook for each such
entity.
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of TXU Corp. and its consolidated
subsidiaries contain financial covenants that require maintenance of specified
fixed charge coverage ratios, shareholders' equity to total capitalization
ratios and leverage ratios and/or contain minimum net worth covenants. TXU
Energy's exchangeable subordinated notes also limit its incurrence of additional
indebtedness unless a leverage ratio and interest coverage test are met on a pro
forma basis. As of December 31, 2002, TXU Corp. and its US and Australian
subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. and its continuing
US and Australian subsidiaries contain provisions that are specifically affected
by changes in credit ratings and also include cross default provisions. The
material provisions are described below:
A-35
Credit Rating Provisions
------------------------
As fully described in Note 16 to Financial Statements, in connection with
the telecommunications joint venture (Pinnacle) transaction, in the event of a
decline in the credit rating for TXU Corp.'s unsecured, senior long-term
obligations to two notches below investment grade (i.e., to or below 'BB' by S&P
or Fitch or 'Ba2' by Moody's), coupled with a decline in the market price of TXU
Corp. common stock below $21.93 per share for ten consecutive trading days, TXU
Corp. would be required to sell equity or otherwise raise cash proceeds
sufficient to repay Pinnacle's senior secured notes ($810 million outstanding at
December 31, 2002). The market price of TXU Corp.'s common stock is below the
stated level.
TXU Energy has provided a guarantee of the obligations under TXU Corp.'s
lease (approximately $140 million at December 31, 2002) for its headquarters
building. In the event of a downgrade of TXU Energy's credit rating to below
investment grade, a letter of credit would need to be provided within 30 days of
any such ratings decline.
TXU Energy has entered into certain commodity contracts and lease
arrangements that in some instances give the other party the right, but not the
obligation, to request TXU Energy to post collateral in the event that its
credit rating falls below investment grade.
Based on its current commodity contract positions, if TXU Energy were
downgraded below investment grade by any specified rating agency, counterparties
would have the option to request TXU Energy to post additional collateral of
approximately $150 million.
In addition, TXU Energy has a number of other contractual arrangements
where the counterparties would have the right to request TXU Energy to post
collateral if its credit rating was downgraded below investment grade by any
specified rating agency. The amount TXU Energy would post under these
transactions depends in part on the value of the contracts at that time. Based
on current market conditions, the maximum TXU Energy would post for these
transactions is $246 million. Of this amount, $190 million relates to an
arrangement that would require TXU Energy to be downgraded to below investment
grade by all three rating agencies before collateral would be required to be
posted.
TXU Energy is also the obligor on leases aggregating $167 million. Under
the terms of those leases, if TXU Energy's credit rating was downgraded to below
investment grade by any specified rating agency, TXU Energy could be required to
sell the assets, assign the leases to a new obligor that 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 rating was downgraded to below investment grade by any specified
rating agency, TXU Energy could be required to post collateral of approximately
$31 million.
Under the accounts receivables program, all originators (currently TXU
Energy through certain subsidiaries, Oncor and TXU Gas), are required to
maintain a 'BBB-' (S&P) and a 'Baa3' (Moody's) rating or better (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
receivable under the program. If all originators are downgraded so that there
are no eligible originators, the facility would terminate. Upon termination,
cash flows to the originators would be delayed as collections of sold
receivables were used to repurchase the undivided interests of the financial
institutions instead of purchasing new receivables. The level of cash flows
would normalize in approximately 16 to 31 days.
In the event that TXU Australia's credit rating was downgraded to below
investment grade, there are cross currency swaps and interest rate swaps in
effect with banks who have the right to terminate the swaps. However, the
contracts are currently in the money on a net basis.
A-36
TXU Australia has several contracts that may require additional guarantees
or cash collateral totaling approximately $62 million if its credit rating was
downgraded to below investment grade, or if there was a material adverse change
in its financial condition.
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 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.
TXU Corp.'s $500 million three-year revolving facility contains a
cross-default with respect to any default by TXU Corp. or any US subsidiary
thereof in respect of any indebtedness in excess of $50 million. A default by
TXU Australia would not trigger the cross-default provision contained in this
facility.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross-default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-day revolving credit
facility, the $1.4 billion US Holdings 5-year revolving credit facility, 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 LP senior notes (which have a $1 million threshold). Under the
joint US Holdings/TXU Energy/Oncor $1.0 billion 364-day revolving credit
facility a default by TXU Energy or any subsidiary thereof would cause the
maturity of outstanding balances under such facility to be accelerated as to TXU
Energy and US Holdings, but not as to Oncor. Also, under this credit facility, a
default by Oncor or any subsidiary thereof would cause the maturity of
outstanding balances to be accelerated under such facility as to Oncor and US
Holdings, but not as to TXU Energy. Further, under this credit facility, a
default by US Holdings would cause the maturity of outstanding balances under
such facility to be accelerated as to US Holdings, but not as to Oncor or TXU
Energy. Under the Oncor $150 million credit facility, a default by Oncor or any
subsidiary thereof would cause the maturity of outstanding balances under such
facility to be accelerated.
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 Corp.'s 6% Notes due 2003 to 2004, which are held by the Pinnacle
Overfund Trust ($178 million outstanding at December 31, 2002) and Pinnacle's
8.83% Senior Secured Notes due 2004 ($810 million outstanding at December 31,
2002) contain cross-default provisions relating to a failure to pay principal or
interest on indebtedness of TXU Corp. or TXU Communications Ventures Company
(TXU Communications) (in the case of the 8.83% Senior Secured Notes due 2004) in
a principal amount of $50 million or above.
TXU Energy has entered into 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 Company LP, a subsidiary of TXU Energy, on indebtedness in
excess of $1 million, a cross default would result under the $31 million TXU
Mining Company LP leveraged lease and the lease would terminate.
A default by TXU Gas or any of its material subsidiaries on indebtedness
of $25 million or more would result in a cross-default under the $300 million
TXU Gas senior notes due 2004 and 2005.
A-37
TXU Energy enters into energy-related contracts, the master forms of which
contain provisions whereby an event of default would occur if TXU Energy were to
default under an obligation in respect of borrowings in excess of thresholds
stated in the contracts, which thresholds vary.
TXU Corp. and its subsidiaries have other arrangements, including interest
rate and currency swap agreements and leases with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
Regulatory Asset Securitization -- The regulatory settlement plan
approved by the Commission provides Oncor with a financing order authorizing it
to issue securitization bonds in the aggregate principal amount of $1.3 billion
to monetize and recover generation-related regulatory assets. The settlement
plan provides that there will be an initial issuance of securitization bonds in
the amount of up to $500 million followed by a second issuance for the remainder
after 2003. (See discussion in Note 15 to Financial Statements under "Regulatory
Asset Securitization.")
Leases -- In February 2002, TXU Corp. sold its interest in its
headquarters building in Dallas, Texas for $145 million. Simultaneously with the
sale of the property, TXU Corp. entered into a twenty-year lease obligation for
the property. At the end of the initial twenty-year term of the lease, TXU Corp.
has the right, but not the obligation, to renew the lease for three ten-year
renewal terms under which rents will be paid based on then-existing market
conditions. The sale was accounted for as a financing and the obligation is
reflected in long-term debt.
Long-term Contractual Obligations and Commitments -- The following table
summarizes the contractual cash obligations of TXU Corp. for each of the periods
presented (see Notes 7 and 16 to Financial Statements for additional disclosures
regarding terms of these obligations.)
Payment Due
-------------------------------------------------------------------
Contractual Cash Obligations 2003 2004 2005 2006 2007 Thereafter
- ----------------------------- ---- ---- ---- ---- ---- ----------
Long - term debt.................. $854 $1,526 $402 $1,521 $884 $7,351
Mandatorily redeemable preferred
securities and preferred
stock of subsidiaries........ 10 10 1 - - 515
Capital lease obligations ........ 1 1 2 2 2 6
Operating leases ................. 101 93 85 75 78 557
Capacity payments-electricity
contracts ...................... 316 164 149 119 20 12
Coal contracts ................... 94 79 23 18 - -
Pipeline transportation and storage
reservation fees............. 14 6 6 6 4 6
Gas take-or-pay contracts ....... 88 81 99 145 138 1,256
------ ------ ---- ------ ------ ------
Total contractual cash obligations $1,478 $1,960 $767 $1,886 $1,126 $9,703
====== ====== ==== ====== ====== ======
- --------------------------
Guarantees -- TXU Corp. has entered into contracts that contain guarantees
to outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Project development guarantees -- In 1990, TXU Corp. repurchased an
electric co-op's minority ownership interest in the Comanche Peak generation
plant and assumed the co-op's indebtedness to the US government for the
facilities. TXU Corp. is making principal and interest payments to the co-op in
an amount sufficient for the co-op to make payments on its indebtedness. TXU
Corp. guaranteed the co-op's payments, and in the event that the co-op fails to
make its payments on the indebtedness, the US government would assume the
co-op's rights under the agreement, and such payments would then be owed
directly by TXU Corp. At December 31, 2002, the balance of the indebtedness was
$140 million with maturities of principal and interest extending to December
2021. The indebtedness is secured by a lien on the purchased facilities.
A-38
Residual value guarantees in operating leases -- TXU Corp. is the lessee
under various operating leases that obligate it to guarantee the residual values
of the leased facilities. At December 31, 2002, the aggregate maximum amount of
residual values guaranteed was approximately $299 million with an estimated
residual recovery of approximately $222 million. The average life of the lease
portfolio is approximately nine years.
Shared saving guarantees -- TXU Corp. has guaranteed that certain
customers will realize specified annual savings resulting from energy management
services it has provided. In the aggregate, the average annual savings has
exceeded the annual savings guaranteed. The maximum potential annual payout is
approximately $4 million and the maximum total potential payout is approximately
$19 million. The average remaining life of the portfolio is approximately five
years.
Standby letters of credit -- TXU Corp. has entered into various agreements
that require letters of credit for financial assurance purposes. Approximately
$523 million of letters of credit are outstanding to support existing floating
rate pollution control revenue bond financings on existing debt of approximately
$433 million. The letters of credit are available to fund the payment of such
debt obligations. These letters of credit have expiration dates in 2003;
however, TXU Corp. intends to provide from either existing or new facilities for
the extension, renewal or substitution of these letters of credit to the extent
required for such floating rate debt or their remarketing as fixed rate debt.
TXU Corp. has provided for the posting of letters of credit in the amount
of $183 million to support portfolio management margin requirements in the
normal course of business. As of December 31, 2002, approximately 82% of the
obligations supported by these letters of credit mature within one year, and
substantially all of the remainder mature in the second year.
TXU Corp. has provided for the posting of a letter of credit in the amount
of $32 million as support for a subordinated loan related to a pipeline
construction project in Australia. The obligation expires on January 31, 2005.
TXU Australia has provided for the posting of letters of credit in the
amount of approximately $55 million, primarily to allow participation in the
electricity and gas spot markets. Although the average life of these guarantees
is for approximately one year, the obligation to provide guarantees is ongoing
based on TXU Australia's continued participation in the electricity and gas
spot markets.
Surety bonds -- TXU Corp. has provided for the issuance of approximately
$23 million of surety bonds to support performance under various subsidiary
construction contracts in the normal course of business. The term of the surety
bond obligations is approximately three years.
TXU Corp. 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 December 31, 2002, and
interest on bonds issued by the agencies to finance the reservoirs from which
the water is supplied. The bonds mature at various dates through 2011 and have
interest rates ranging from 5-1/2% to 7%. TXU Corp. is required to make periodic
payments equal to such principal and interest, including amounts assumed by a
third party and reimbursed to TXU Corp., of $4 million annually for 2003, $7
million for 2004 and $1 million for 2005 and 2006. Annual payments made by TXU
Corp., net of amounts assumed by a third party under such contracts, were $4
million for each of the last three years. In addition, TXU Corp. is obligated to
pay certain variable costs of operating and maintaining the reservoirs. TXU
Corp. has assigned to a municipality all its contract rights and obligations of
TXU Corp. in connection with $19 million remaining principal amount of bonds at
December 31, 2002, issued for similar purposes, which had previously been
guaranteed by TXU Corp. TXU Corp. is, however, contingently liable in the
unlikely event of default by the municipality.
A discontinued engineering and construction business of TXU Gas
constructed a plant for which performance is warranted through 2008.
A-39
Off Balance Sheet Arrangements
See discussion above under Sale of Receivables.
Investments in Unconsolidated Entities -- TXU Corp. has a 50% voting
interest in Pinnacle. TXU Corp.'s investment in Pinnacle is accounted for using
the equity method. Assets of the joint venture are not TXU Corp.'s and are not
available to pay creditors of TXU Corp. Pinnacle's principal investment is in
TXU Communications, a telecommunications business that operates an established
incumbent local exchange carrier serving residential and business customers in
East Texas and certain suburbs of Houston, Texas.
Following is a summary of the Pinnacle ownership structure:
o Pinnacle is a limited partnership, with the sole general partnership
interest of 0.5% being owned by Pinnacle One GP, and with two similar
49.75% limited partnership interests each being owned by TXU Corp. and
Zenith, an unaffiliated statutory business trust with a bank as its
trustee,
o Pinnacle One GP is equally owned by Zenith and TXU Corp.,
o Pinnacle One GP is managed by a board of managers consisting of six
individuals, with three managers being appointed by each owner, and
o Notwithstanding the rights of Zenith to appoint half of Pinnacle One
GP's managers and to participate in selecting its officers, all of the
current managers and officers of Pinnacle One GP, with the exception
of one lower level officer, are directly affiliated with TXU Corp.
In connection with its formation, Pinnacle issued $810 million of 8.83%
senior secured notes due August 15, 2004. The notes are secured by all of
Pinnacle's assets, including its shares of TXU Communications. Total proceeds
(net of transaction costs), including $150 million received from third-party
investors, were used by Pinnacle to make a $600 million cash distribution to TXU
Corp., in exchange for TXU Corp.'s contribution of the stock of TXU
Communications to Pinnacle, and fund a trust in the amount of $336 million. The
trust assets, including principal and related interest earned, are being used to
pay interest on the senior secured notes and distributions to the third-party
investors. The trust assets consist of TXU Corp. debt securities with a
principal amount of $178 million as of December 31, 2002. The debt securities
issued to that trust are reflected in long-term debt (see Note 7 to Financial
Statements for detail listing of debt issues). Interest expense on the note
payable totaled $15 million and $17 million for 2002 and 2001, respectively.
TXU Corp. provides a $200 million revolving credit facility to TXU
Communications, expiring 2004, of which $144 million was outstanding (at an
average interest rate of 3.5%) and included in investments on TXU Corp.'s
balance sheet as of December 31, 2002. Interest income on the revolving credit
facility totaled $5 million and $8 million for 2002 and 2001, respectively. In
addition, TXU Corp. has made and may make future capital contributions to
Pinnacle to fund a portion of TXU Communications' capital expenditures. TXU
Corp. also provides administrative services to Pinnacle and its affiliates at
cost, which totaled $3 million and $5 million for 2002 and 2001, respectively.
In connection with the Pinnacle debt transaction, TXU Corp. issued 810,000
shares of Mandatorily Convertible Single Reset Preference Stock, Series C
(Series C Preference Stock) to Pinnacle One Share Trust, a consolidated trust
(Share Trust). The Series C Preference Stock is convertible into common stock of
TXU Corp. in the event of:
(a) a default by Pinnacle in connection with its $810 million of
senior secured notes,
(b) a decline in the market price of TXU Corp. common stock below
$21.93 per share for ten consecutive trading days (the market
price has declined below this price) coupled with a decline in the
credit rating for TXU Corp.'s unsecured, senior long-term
obligations to or below BB by S&P or Fitch or Ba2 by Moody's, or
(c) Pinnacle's inability to raise sufficient cash to repay its senior
secured notes 120 days prior to maturity (August 2004) through the
sale of its shares of TXU Communications or the sale of assets of
TXU Communications.
A-40
TXU Corp. would be required to sell equity, use available liquidity or
otherwise raise proceeds sufficient to repay Pinnacle's senior secured notes. If
TXU Corp. did not have available liquidity or raise sufficient proceeds, the
Share Trust could be required to sell some or all of the Series C Preference
Stock. The dividend rate and conversion price of the Series C Preference Stock
would be reset at the time of sale to generate proceeds sufficient to redeem the
senior secured notes. The market price of TXU common stock at the time of sale
of the Series C Preference Stock would determine the dilutive impact to common
stockholders. Currently, TXU Corp. expects that it will have sufficient
liquidity or otherwise would be able to sell equity or debt securities to
satisfy its contingent obligations to repay Pinnacle's debt.
Had TXU Corp. been required to consolidate Pinnacle at December 31, 2002,
TXU Corp.'s debt would have increased by approximately $648 million. TXU Corp.
does not believe that a consolidation of Pinnacle would have a material impact
on its liquidity or financial condition.
For the years ended December 31, 2002 and 2001, Pinnacle reported revenues
of $215 million and $202 million, respectively, and incurred a net loss of $180
million and $106 million, respectively, due largely to impairments of goodwill
and other long-lived assets in 2002 of $75 million after-tax, interest expense
on the senior secured notes and the distributions to the third-party investors.
TXU Corp. recorded its equity in Pinnacle's losses for the years ended December
31, 2002 and 2001, of $104 million and $53 million, respectively, which is
reported in other deductions in the statement of income. At December 31, 2002,
Pinnacle had total assets of approximately $858 million (including goodwill of
$318 million) and liabilities of $1.1 billion, including long-term debt
securities of $810 million issued at the time of Pinnacle's formation. TXU
Corp.'s investment in Pinnacle was negative $392 million as of December 31,
2002, classified in noncurrent liabilities and other deferred credits in the
balance sheet. The $392 million represents TXU Corp.'s potential obligation
under the partnership agreement, including retirement of the $810 million in
debt and amounts due the partner, net of estimated value realizable from the
business.
As a result of the impairments of goodwill and long-lived assets recorded
by Pinnacle, TXU Corp. evaluated its potential obligations related to the
partnership arrangement. TXU Corp. determined that it was probable, in light of
the decline in value of the business, that an economic loss had occurred, and
accordingly recorded a charge of $150 million (without tax benefit) in 2002 ,
reported in other deductions in the statement of income. Contingent income tax
amounts payable related to Pinnacle, in excess of $11 million in accumulated
deferred income taxes recorded at December 31, 2002, total approximately $60
million. Such unrecorded liability would arise if the business was sold at its
current estimated fair value.
In February 2003, TXU Corp. and Zenith entered into a Put/Call Agreement
pursuant to which TXU Corp. has the right, at any time, to buy from Zenith all
of its interests in Pinnacle and in Pinnacle's general partner for $150 million.
Conversely, Zenith has the right to require TXU Corp. to buy those interests for
that amount if (i) there is an event of default under the Pinnacle senior
secured notes that leads to acceleration, (ii) the Pinnacle senior secured notes
mature, or (iii) the Pinnacle senior secured notes are redeemed early and there
is a default under TXU Corp.'s $500 million working capital credit facility
(based on its terms as of February 2003 and without regard to future
amendments). In consideration of the rights accorded TXU Corp. under the
agreement and applicable accounting rules, TXU Corp. will consolidate the
operations of Pinnacle in its financial statements effective with reporting for
the first quarter of 2003.
Under Rule 309 of Regulation S-X, TXU Corp. is required to file separate
audited financial statements of Pinnacle. TXU Corp. expects to file those
financial statements by amendment to its Form 10-K on or before March 31, 2003.
TXU Corp. has equity ownership interests in certain various other
businesses which are accounted for using the equity method. There are no
material contingencies related to these investments other than Pinnacle
described above, and TXU Corp. has not provided any guarantees related to these
investments.
A-41
Quantitative and Qualitative Disclosure About Market Risk
Market risk is the risk that TXU Corp. may experience a loss in value as a
result of changes in market conditions such as commodity prices, interest rates
or foreign currency exchange rates, which TXU Corp. is exposed to in the
ordinary course of business. TXU Corp.'s exposure to market risk is affected by
a number of factors, including the size, duration and composition of its energy
and financial portfolio, as well as volatility and liquidity of markets. TXU
Corp. enters into financial instruments, including cash flow hedges to manage
interest rate risks and foreign currency exchange rate risks related to its
indebtedness, as well as exchange traded, OTC contracts and other contractual
commitments to manage commodity price risk in its portfolio management
activities.
Risk Oversight
TXU Corp.'s portfolio management operations manage the market, credit and
operational risk of the unregulated energy business within limitations
established by senior management and in accordance with TXU Corp.'s overall risk
management policies. Market risks are monitored daily by risk management groups
that operate and report independently of the portfolio management operations,
utilizing industry accepted practices and analytical methodologies. These
techniques measure the risk and change in value of the portfolio of contracts
and the hypothetical effect on this value from changes in market conditions and
include, but are not limited to, Value at Risk (VaR) methodologies.
TXU Corp. has a corporate risk management organization that is headed by a
chief risk officer. The chief risk officer, through his designees, enforces the
VaR limits by region, including the respective policies and procedures to ensure
compliance with such limits and evaluates the risks inherent in the various
businesses of TXU Corp. and their associated transactions. Key risk control
activities include, but are not limited to, credit review and approval,
operational and market risk measurement, validation of transactions, portfolio
valuation and daily portfolio reporting, including mark-to-market valuation, VaR
and other risk measurement metrics.
Commodity Price Risk
TXU Corp. is subject to the inherent risks of market fluctuations in the
price of electricity, natural gas and other energy-related products marketed and
purchased. Through its portfolio management operations, TXU Corp. actively
manages its portfolio of owned generation, fuel supply and retail load to
mitigate the impacts of these risks on its results of operations.
In managing energy price risk, TXU Corp. enters into short- and long-term
physical contracts, financial contracts that are traded on exchanges and
"over-the-counter", and bilateral contracts with customers. Speculative trading
activities represent a small fraction of the portfolio management process. The
portfolio management operation continuously monitors the valuation of identified
risks and adjusts the portfolio based on current market conditions. Valuation
adjustments or reserves are established in recognition that certain risks exist
until full delivery of energy has occurred, counterparties have fulfilled their
financial commitments and related financial instruments have either matured or
are closed out.
VaR Methodology -- A VaR methodology is used to measure the amount of
current and prospective risk that exists within a portfolio under a variety of
market conditions. The VaR process produces an estimate of a portfolio's
potential for loss given a specified confidence level and considers among other
things, market movements utilizing standard statistical techniques given
historical and projected market prices and volatilities. Stress testing of
market variables is also conducted to simulate and address abnormal market
conditions.
The use of this method requires a number of key assumptions, such as use
of (i) an assumed confidence level; (ii) an assumed holding period (i.e. the
time necessary for management action, such as to liquidate positions); and (iii)
historical estimates of volatility and correlation data.
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VaR for Energy Contracts Subject to Mark-to-Market Accounting -- This
measurement estimates the maximum potential loss in value, due to price risk, of
all energy-related contracts subject to mark-to-market accounting, based on a
specific confidence level and an assumed holding period. Assumptions in
determining this VaR include using a 95% confidence level and a five-day holding
period. A probabilistic simulation methodology is used to calculate VaR, and is
considered by management to be the most effective way to estimate changes in a
portfolio's value based on assumed market conditions for liquid markets. TXU
Australia uses a variance-covariance methodology in deriving its VaR
calculation, due to the differences in its market as compared to that of TXU
Energy.
2002 2001(a)
---- ----
Year-end VaR:
------------
North America Energy................................... $23.2 $38.7
Australia ............................................. $13.4 $17.4
Average VaR:
-----------
North America Energy................................... $38.0 -
Australia ............................................. $14.8 -
(a) Comparable information on an average VaR basis is not available for the
full year of 2001 because during part of 2001, VaR was calculated
using different assumptions than in 2002 and an average VaR for 2001
would therefore not be comparable.
Portfolio VaR -- Represents the estimated maximum potential loss in value,
due to price risk, of the entire energy portfolio, including owned assets and
all contractual positions (the portfolio assets). Assumptions in determining
this VaR include using a 95% confidence level and a five-day holding period and
includes both mark-to-market and accrual positions expiring over the next ten
years.
2002 2001(a)
---- ----
Year- end Portfolio VaR:
-----------------------
North America Energy................................... $143.5 -
Australia ............................................. $ 21.9 $16.5
Average VaR:
-----------
Australia.............................................. $ 22.8 -
(a) Prior to deregulation in Texas, which became effective January 1, 2002,
the portfolio assets included in the Portfolio VaR were regulated
assets and not subject to market risk. As a result, there is no
Portfolio VaR at year-end 2001 and no average Portfolio VaR for either
2001 or 2002.
Other Risk Measures -- The metrics appearing below provide information
regarding the effect of energy price risk on earnings and cash flow. Similar
metrics for TXU Australia are not available.
North America Earnings at Risk (EaR) -- EaR measures the estimated maximum
short-fall in fiscal year projected margin (revenues less cost of energy sold),
due to price risk. EaR metrics include the portfolio assets except for accrual
positions expected to be settled beyond the fiscal year. Assumptions include
using a 95% confidence level over a five-day holding period under normal market
conditions. As of December 31, 2002, the EaR for TXU Energy was $27.7 million.
As this measure is stated on the last business day of 2002, it represents the
EaR measure for fiscal year 2003.
North America Cash Flow at Risk (CFaR) -- CFaR measures the estimated
maximum short-fall of projected cash flow over the next six months, due to price
risk. CFaR metrics include all portfolio positions that impact cash flow during
the next six months. Assumptions include using a 99% confidence level over a 125
A-43
business-day holding period under normal market conditions. As of December 31,
2002, the CFaR, based on a contract settlement period of six months, was $177.5
million.
Interest Rate Risk
The table below provides information concerning TXU Corp.'s financial
instruments as of December 31, 2002 and 2001, that are sensitive to changes in
interest rates, which include debt obligations, interest rate swaps and trust
securities. TXU Corp. has entered into interest rate swaps under which it has
agreed to exchange the difference between fixed-rate and variable-rate interest
amounts calculated with reference to specified notional principal amounts at
dates that generally coincide with interest payments. For trust securities, the
table presents cash flows based on December 31, 2002, book value and the related
weighted average rate by expected redemption date. The weighted average rate is
based on the rate in effect at the reporting date. Capital leases and the
effects of unamortized premiums and discounts and fair value hedges on long-term
debt are excluded from the table. See Note 7 to Financial Statements for a
discussion of changes in debt obligations.
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Expected Maturity Date
----------------------------------------------
2002 2001
There- 2002 Fair 2001 Fair
2003 2004 2005 2006 2007 After Total Value Total Value
---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Long-term debt
(including current
maturities)
Fixed rate (a) $ 837 $ 654 $ 401 $ 816 $ 227 $6,408 $9,343 $9,327 $10,391 $10,657
Average interest rate 6.17% 6.56% 6.91% 6.35% 5.13% 6.78% 6.64% -- 6.77% --
Variable rate $ 17 $ 872 $ 1 $ 205 $ 158 $ 502 $1,755 $1,800 $ 4,412 $ 4,412
Average interest rate 5.61% 5.92% 12.80% 5.31% 5.29% 2.02% 4.68% -- 3.79% --
Equity linked debt
securities
Fixed rate -- -- -- $ 500 $ 500 $ 440 $1,440 $1,276 $ 350 $ 356
Average interest rate -- -- -- 4.75% 5.45% 5.80% 5.31% -- 6.50% --
Variable rate -- -- -- -- -- -- -- -- $ 1,000 $ 997
Average interest rate -- -- -- -- -- -- -- -- 2.50% --
Trust securities
Fixed rate -- -- -- -- -- $ 368 $ 368 $ 346 $ 368 $ 386
Average interest rate -- -- -- -- -- 7.82% 7.82% -- 7.82% --
Variable rate -- -- -- -- -- $ 147 $ 147 $ 150 $ 147 $ 150
Average interest rate -- -- -- -- -- 3.95% 3.95% -- 3.95% --
Preferred stock of
subsidiary subject to
mandatory redemption
Fixed rate $ 10 $ 10 $ 1 -- -- -- $ 21 $ 15 $ 21 $ 21
Average interest rate 6.68% 6.68% 6.98% -- -- -- 6.69% -- 6.69% --
Interest rate swaps
(notional amounts)
Variable to fixed $ 467 $ 70 $ 342 $ 514 $ 407 -- $1,800 $ (57) $ 3,325 $ (130)
Average pay rate 6.16% 6.48% 6.25% 6.15% 5.77% -- 6.10% -- 6.60% --
Average receive rate 4.26% 4.64% 4.79% 4.93% 4.79% -- 4.68% -- 4.11% --
Fixed to variable $ 244 -- -- $ 250 -- $ 100 $ 594 $ 57 $ 3,371 $ 58
Average pay rate 4.76% -- -- 1.43% -- 1.43% 2.80% -- 2.50% --
Average receive rate 5.86% -- -- 6.75% -- 7.25% 6.47% -- 5.97% --
- -------------------------
(a) Reflects the maturity date and not the remarketing date for certain debt
which is subject to mandatory tender for remarketing prior to maturity.
See Note 7 to Financial Statements for details concerning long-term debt
subject to mandatory tender for remarketing.
A-45
Foreign Currency Risk
TXU Corp. has exposure to foreign currency risks, primarily associated
with the Australian operations. TXU Australia has accessed the US capital
markets and issued dollar denominated obligations. TXU Corp. enters into
currency swaps, options and forwards, where appropriate, to manage foreign
currency exposure. The following table summarizes notional amounts at the
contract exchange rates, weighted-average contractual exchange rates and
estimated fair value by contract maturity for open contracts at December 31,
2002 and 2001:
Expected Maturity Date
------------------------------------------------------------
(Millions of dollars, except exchange rates) 2002 2001
There- 2002 Fair Fair
2003 2004 2005 2006 2007 after Total Value Value
---- ---- ---- ---- ---- ------- ----- ----- -----
Australian dollar -- -- -- $250 $ 219 $ 100 $ 569 $ 95 $ 102
Average exchange rate -- -- -- $0.69 $0.53 $ 0.81 $0.65 -- --
Credit Risk -- Credit risk relates to the risk of loss associated with
non-performance by counterparties. TXU Corp. maintains credit risk policies with
regard to its counterparties to minimize overall credit risk. These policies
require an evaluation of a potential counterparty's financial condition, credit
rating, and other quantitative and qualitative credit criteria and specify
authorized risk mitigation tools, including but not limited to use of
standardized agreements that allow for netting of positive and negative
exposures associated with a single counterparty. TXU Corp. has standardized
documented processes for monitoring and managing its credit exposure, including
methodologies to analyze counterparties' financial strength, measurement of
current and potential future credit exposures and standardized contract language
that provides rights for netting and set-off. Credit enhancements such as
parental guarantees, letters of credit, surety bonds and margin deposits are
also utilized. Additionally, individual counterparties and credit portfolios are
managed to preset limits and stress tested to assess potential credit exposure.
This evaluation results in establishing credit limits or collateral requirements
prior to entering into an agreement with a counterparty that creates credit
exposure to TXU Corp. Additionally, TXU Corp. has established controls to
determine and monitor the appropriateness of these limits on an ongoing basis.
Any prospective material adverse change in the financial condition of a
counterparty or downgrade of its credit quality will result in the reassessment
of the credit limit with that counterparty. This process can result in the
subsequent reduction of the credit limit or a request for additional financial
assurances.
Concentration of Credit Risk
TXU Corp.'s gross exposure to credit risk represents trade accounts
receivable, commodity contract assets and derivative assets. (See Note 18 to
Financial Statements for amount of gross exposure by region).
A large share of gross assets subject to credit risk represents accounts
receivable from the retail sale of electricity and gas to residential and small
commercial customers. The risk of material loss from non-performance from these
customers is unlikely based upon historical experience. Reserves for
uncollectible accounts receivable are established for the potential loss from
non-payment by these customers based on historical experience and market or
operational conditions. The restructuring of the electric industry in Texas
effective January 1, 2002, increases the risk profile of TXU Corp. in relation
to these customers; however, TXU Corp. has the ability to take actions to
mitigate such customer risk, particularly with the change in the POLR rules (see
discussion in Note 15 to Financial Statements under "Provider of Last Resort").
In addition, Oncor has exposure to credit risk as a result of non-performance by
nonaffiliated REPs.
Most of the remaining trade accounts receivable are with large C&I
customers. TXU Corp.'s wholesale commodity contract counterparties include major
energy companies, financial institutions, gas and electric utilities,
independent power producers, oil and gas producers and energy trading companies.
A-46
The following table presents the distribution of credit exposure as of
December 31, 2002, for commodity contract assets, and derivative assets and
trade accounts receivable from large C&I customers, by investment grade and
noninvestment grade, credit quality and maturity.
Exposure by Maturity
----------------------------
Exposure
before Greater
Credit Credit Net Less than 2 2-5 than 5
Collateral Collateral Exposure years years years Total
---------- ---------- --------- --------- ----- ------ ------
Investment grade $ 950 $ (61) $ 889 $ 777 $108 $ 4 $ 889
Noninvestment grade 517 (153) 364 339 25 - 364
------ ----- ------ ------ ---- ---- ------
Totals $1,467 $(214) $1,253 $1,116 $133 $ 4 $1,253
====== ===== ====== ====== ==== ==== ======
Investment grade 65% 28% 71%
Noninvestment grade 35% 72% 29%
The exposure to credit risk from these customers and counterparties,
excluding credit collateral, as of December 31, 2002, is $1.5 billion net of
standardized master netting contracts and agreements which provide the right of
offset of positive and negative credit exposures with individual customers and
counterparties. When considering collateral currently held by TXU Corp. (cash,
letters of credit and other security interests), the net credit exposure is $1.3
billion. Of this amount, approximately 71% of the associated exposure is with
investment grade customers and counterparties, as determined using publicly
available information including major rating agencies' published ratings and TXU
Corp.'s internal credit evaluation process. Those customers and counterparties
without an S&P rating of at least BBB- or similar rating from another major
rating agency, are rated using internal credit methodologies and credit scoring
models to estimate an S&P equivalent rating. TXU Corp. routinely monitors and
manages its exposure to credit risk to these customers and counterparties on
this basis.
TXU Corp. had no exposure to any one customer or counterparty greater than
10% of the net exposure of $1.3 billion at December 31, 2002. Additionally,
approximately 89% of the credit exposure, net of collateral held, has a maturity
date of less than two years. TXU Corp. does not anticipate any material adverse
effect on its financial position or results of operations as a result of
non-performance by any customer or counterparty.
Regulation and Rates
Restructuring Legislation -- See Note 15 to Financial Statements for a
description of the significant provisions of the legislation passed by the Texas
Legislature regarding the restructuring of the Texas electricity market to
provide for a transition to competition. The opening of the Texas market to
competition was effective January 1, 2002.
TXU Gas -- TXU Gas employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. During 2002, rate cases
were filed in 147 cities. The status of these cases is as follows: settlements
were reached with 73 of these cities for annual increases aggregating $9
million; rate cases were withdrawn from 23 cities; and 51 cities declined
settlement offers and passed ordinances denying the rate increases. On July 15,
2002, TXU Gas filed an appeal of these cities' actions with the Railroad
Commission of Texas (RRC). A settlement was reached for $7.5 million. These
settlements adjusted other aspects of the TXU Gas tariffs. The total annualized
impact of the 2002 rate settlements and associated tariff adjustments is $22
million. In July 2001 and August 2001, TXU Gas filed two cases, a gas cost
review, and a gas cost reconciliation, covering the period between November 1997
and June 2001, seeking to recover $29 million of under-recovered gas costs. On
August 6, 2002, a settlement was approved by the RRC authorizing TXU Gas to
A-47
recover $18 million of this amount, which has been recovered through a
surcharge, while $11 million in under-recovered gas costs remains pending. On
August 30, 2002, TXU Gas filed the city gate gas cost reconciliation for the
twelve-month period ended June 30, 2002, with the RRC. During this period TXU
Gas over-recovered its gas cost by $24 million, which is being refunded from
October 2002 through June 2003. The refund has no material impact on the net
income of TXU Gas.
TXU Energy -- Under Commission rules, affiliated REPs of utilities are
allowed to petition the Commission twice per year 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. On August 23, 2002, the Commission approved TXU
Energy's request to increase the fuel factor component of its price-to-beat
rates. The fuel factor increase went into effect for the billing cycle that
began August 26, 2002. As a result, average monthly residential bills rose
approximately 5%.
In January 2003, TXU Energy filed a request with the Commission to
increase the fuel factor component of its price-to-beat rates based upon
significant increases in the market price of natural gas. This request was
approved on March 5, 2003. The fuel factor increase went into effect for the
billing cycle that began March 6, 2003. As a result, average monthly residential
bills will rise approximately 12%. In March 2003, the Commission amended its
rules to require that natural gas prices increase more than 5% (10% if the
petition is filed after November 15 of any year) before allowing petitions for
adjustments to the full factor component.
Through calendar year 2002, TXU Energy was the POLR for residential and
small non-residential customers in those areas of ERCOT where customer choice
was available outside its historical service territory and was the POLR for
large non-residential customers in its historical service territory. TXU
Energy's POLR contract expired on December 31, 2002. However, in August 2002,
the Commission adopted new rules that significantly changed POLR service. Under
the new POLR rules, instead of being transferred to the POLR, non-paying
residential and small non-residential customers served by affiliated REPs are
subject to disconnection. Non-paying residential and small non-residential
customers served by non-affiliated REPs are transferred to the affiliated REP.
Non-paying large non-residential customers can be disconnected by any REP if the
customer's contract does not preclude it. Thus, within the new POLR framework,
the POLR provides electric service only 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. No later than October 1, 2004,
the Commission must decide whether all REPs should be permitted to disconnect
all non-paying customers. The new POLR rules are expected to result in reduced
bad debt expense beginning in 2003.
Through a competitive bid process, the Commission selected a POLR to serve
for a two-year term beginning January 1, 2003, for several areas within Texas.
In areas for which no bids were submitted, the Commission selected the POLR by
lottery. TXU Energy did not bid to be POLR, but was designated POLR through
lottery for small business and residential customers in certain West Texas
service areas and for small business customers in the Houston service area.
Australia -- The distribution tariffs for electricity until December 31,
2005, and for gas until December 31, 2007, were determined by the Essential
Services Commission. According to the determination, the gas distribution
tariffs are to be increased by 2.2% for 2003. Each subsequent year, the tariffs
are to increase by 0.8% plus Consumer Price Index increase.
In Victoria and New South Wales, the residential electricity markets have
both become contestable since January 2002, and the residential gas markets have
become contestable in New South Wales, from January 2002 and in Victoria, from
October 2002. The residential energy prices are still regulated and determined
by the government bodies of the respective States of Victoria and New South
Wales.
In South Australia, the residential energy market has been competitive
since January 2003. TXU Australia intends to enter this market during 2003.
A-48
Summary -- Although TXU Corp. cannot predict future regulatory or
legislative actions or any changes in economic and securities market conditions,
no changes are expected in trends or commitments, other than those discussed in
this report, which might significantly alter its basic financial position,
results of operations or cash flows.
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
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a material impact on TXU Corp.'s operations,
financial results and financial condition, and could cause TXU Corp.'s actual
results or outcomes to differ materially from those discussed in the
forward-looking statements set forth below, include:
The competitive electric market in Texas is new. TXU Corp., the
Commission, ERCOT and other market participants have limited operating history
under the market framework created by the 1999 Restructuring Legislation. ERCOT
is the independent system operator that is responsible for maintaining reliable
operations of the bulk electric power supply system in the ERCOT region. Its
responsibilities include ensuring that information relating to a customer's
choice of REP is conveyed in a timely manner to anyone needing the information.
Some operational difficulties were encountered in the pilot program conducted in
2001 and are currently being experienced. Problems in the flow of information
between ERCOT, the T&D utilities and the REPs have resulted in delays in
switching customers from one REP to another and delays in billings to and
payments from consumers and REPs. While the flow of information is improving,
operational problems in the new system and processes are still being worked out.
Existing laws and regulations governing the market structure in Texas,
including the provisions of the 1999 Restructuring Legislation, could be
reconsidered, revised or reinterpreted, or new laws or regulations could be
adopted.
TXU Corp.'s businesses operate in changing market environments influenced
by various legislative and regulatory initiatives regarding deregulation,
regulation or restructuring of the energy industry, including deregulation of
the production and sale of electricity. TXU Corp. will need to adapt to these
changes and may face increasing competitive pressure.
TXU Corp.'s businesses are subject to changes in laws (including the Texas
Public Utility Regulatory Act, as amended, Texas Gas Utility Regulatory Act, as
amended, Federal Power Act, as amended, Atomic Energy Act, as amended, Public
Utility Regulatory Policies Act of 1978, as amended, and Public Utility Holding
Company Act of 1935, as amended) and changing governmental regulatory policy and
actions (including those of the Public Utility Commission of Texas, Railroad
Commission of Texas, Federal Energy Regulatory Commission, and U.S. Nuclear
Regulatory Commission) with respect to matters including, but not limited to,
operation of nuclear power facilities, construction and operation of other power
generation facilities, construction and operation of transmission facilities,
acquisition, disposal, depreciation, and amortization of regulated assets and
facilities, recovery of purchased gas costs, decommissioning costs, and return
on invested capital for TXU Corp.'s regulated businesses, and present or
prospective wholesale and retail competition.
TXU Corp. is subject to the effects of new, or changes in, income tax
rates or policies and increases in taxes related to property, plant and
equipment and gross receipts and other taxes. Further, TXU Corp. is subject to
audit and reversal of its tax positions by the Internal Revenue Service and
other taxing authorities.
A-49
TXU Corp. is not guaranteed any rate of return on its capital investments
in unregulated businesses. TXU Corp. markets and trades power, including from
its own power production facilities, as part of its wholesale energy sales
business and portfolio management operation. TXU Corp.'s results of operations
are likely to depend, in large part, upon prevailing retail rates, which are
set, in part, by regulatory authorities, and market prices for electricity, gas
and coal in its regional markets and other competitive markets. Market prices
may fluctuate substantially over relatively short periods of time. Demand for
electricity can fluctuate dramatically, creating periods of substantial under-
or over-supply. During periods of over-supply, prices might be depressed. Also,
at times there may be political pressure, or pressure from regulatory
authorities with jurisdiction over wholesale and retail energy commodity and
transportation rates, to impose price limitations, bidding rules and other
mechanisms to address volatility and other issues in these markets.
Some of the fuel for TXU Corp.'s power production facilities is purchased
under short-term contracts or on the spot market. Prices of fuel, including
natural gas, may also be volatile, and the price TXU Corp. can obtain for power
sales may not change at the same rate as changes in fuel costs. In addition, TXU
Corp. markets and trades natural gas and other energy related commodities, and
volatility in these markets may affect TXU Corp.'s costs incurred in meeting its
obligations.
Volatility in market prices for fuel and electricity may result from:
o severe or unexpected weather conditions,
o seasonality,
o changes in electricity usage,
o the current diminished liquidity in the wholesale power markets as well
as any future illiquidity in these or other markets,
o transmission or transportation constraints, inoperability or inefficiencies,
o availability of competitively priced alternative energy sources,
o changes in supply and demand for energy commodities,
o changes in power production capacity,
o outages at TXU Corp.'s power production facilities or those of its
competitors,
o changes in production and storage levels of natural gas, lignite, coal and
crude oil and refined products,
o natural disasters, wars, sabotage, terrorist acts, embargoes and other
catastrophic events, and
o federal, state, local and foreign energy, environmental and other
regulation and legislation.
In the US, all but one of TXU Corp.'s facilities for power production are
located in the ERCOT region, a market with limited interconnections to other
markets. Electricity prices in the ERCOT region are related to gas prices
because gas fired plant is the marginal cost plant unit during the majority of
the year in the ERCOT region. Accordingly, the contribution to earnings and the
value of TXU Corp.'s base-load plant is dependent in significant part upon the
price of gas. TXU Corp. cannot fully hedge the risk associated with dependency
on gas because of the expected useful life of TXU Corp.'s power production
assets and the size of its position relative to market liquidity.
A-50
To manage its financial exposure related to commodity price fluctuations,
TXU Corp. routinely enters into contracts to hedge portions of its purchase and
sale commitments, weather positions, fuel requirements and inventories of
natural gas, lignite, coal, crude oil and refined products, and other
commodities, within established risk management guidelines. As part of this
strategy, TXU Corp. routinely utilizes fixed-price forward physical purchase and
sales contracts, futures, financial swaps and option contracts traded in the OTC
markets or on exchanges. However, TXU Corp. cannot cover the entire exposure of
its assets or its positions to market price volatility, and the coverage will
vary over time. To the extent TXU Corp. has unhedged positions, fluctuating
commodity prices can impact TXU Corp.'s results of operations and financial
position, either favorably or unfavorably. For additional information regarding
the accounting treatment for TXU Corp.'s hedging and portfolio management
activities, see Notes 2 and 14 to Financial Statements. For additional
information regarding the types of contracts and activities of TXU Corp.'s
wholesale energy sales business and portfolio management operation, see the
discussion above under "Financial Condition, Liquidity and Capital Resources -
Qualitative and Quantitative Disclosures about Market Risk."
Although TXU Corp. devotes a considerable amount of management time and
effort to the establishment of risk management procedures as well as the ongoing
review of the implementation of these procedures, the procedures it has in place
may not always be followed or may not always work as planned and cannot
eliminate all the risks associated with these activities. As a result of these
and other factors, TXU Corp. cannot predict with precision the impact that its
risk management decisions may have on its businesses, results of operations or
financial position. For information regarding TXU Corp.'s risk management
policies, see the discussion above under "Financial Condition, Liquidity and
Capital Resources - Quantitative and Qualitative Disclosures about Market Risk -
Risk Oversight."
In connection with TXU Corp.'s portfolio management activities, TXU Corp.
has guaranteed or indemnified the performance of a portion of the obligations of
its portfolio management subsidiaries. Some of these guarantees and indemnities
are for fixed amounts, others have a fixed maximum amount and others do not
specify a maximum amount. The obligations underlying certain of these guarantees
and indemnities are recorded on TXU Corp.'s consolidated balance sheet as both
current and noncurrent commodity contract liabilities. These obligations make up
a significant portion of these line items. TXU Corp. might not be able to
satisfy all of these guarantees and indemnification obligations if they were to
come due at the same time.
TXU Corp.'s portfolio management activities are exposed to the risk that
counterparties which owe TXU Corp. money, energy or other commodities as a
result of market transactions will not perform their obligations. The likelihood
that certain counterparties may fail to perform their obligations has increased
due to financial difficulties, brought on by improper or illegal accounting and
business practices, affecting some participants in the industry. Some of these
financial difficulties have been so severe that certain industry participants
have filed for bankruptcy protection or are facing the possibility of doing so.
Should the counterparties to these arrangements fail to perform, TXU Corp. might
be forced to acquire alternative hedging arrangements or honor the underlying
commitment at then-current market prices. In such event, TXU Corp. might incur
losses in addition to amounts, if any, already paid to the counterparties. For
information regarding TXU Corp.'s credit risk, see the discussion above under
"Financial Condition, Liquidity and Capital Resources - Quantitative and
Qualitative Disclosure About Market Risk - Credit Risk" and Note 18 to Financial
Statements.
The current credit ratings for TXU Corp.'s and its subsidiaries' long-term
debt are investment grade, except for Moody's credit rating for long-term debt
of TXU Corp. (the holding company), which is one notch below investment grade. 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. If S&P, Moody's or Fitch were to downgrade TXU Corp.'s
and/or its subsidiaries' long-term ratings, particularly below investment grade,
borrowing costs would increase and the potential pool of investors and funding
sources would likely decrease.
Most of TXU Corp.'s large customers, suppliers and counterparties require
sufficient creditworthiness in order to enter into transactions. If TXU Corp.'s
subsidiaries' ratings were to decline to below investment grade, costs to
operate the power and gas businesses would increase because counterparties may
require the posting of collateral in the form of cash-related instruments, or
counterparties may decline to do business with TXU Corp.'s subsidiaries.
A-51
In addition, as discussed elsewhere in this Annual Report on Form 10-K,
the terms of certain financing and other arrangements contain provisions that
are specifically affected by changes in credit ratings and could require the
posting of collateral, the repayment of indebtedness or the payment of other
amounts.
The operation of power production and energy transportation facilities
involves many risks, including start up risks, breakdown or failure of
facilities, 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, the occurrence of any of which could
result in lost revenues and/or increased expenses. A significant portion of TXU
Corp.'s facilities was constructed many years ago. In particular, older
generating equipment, even if maintained in accordance with good engineering
practices, may require significant capital expenditures to keep it operating at
peak efficiency. This equipment is also likely to require periodic upgrading and
improvement. The increased starting and stopping of equipment due to the
volatility of the competitive market is likely to increase maintenance and
capital expenditures. TXU Corp. is subject to costs associated with any
unexpected failure to produce power, including failure caused by breakdown or
forced outage, as well as repairing damage to facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events. Further, TXU
Corp.'s ability to successfully and timely complete capital improvements to
existing facilities or other capital projects is contingent upon many variables
and subject to substantial risks. Should any such efforts be unsuccessful, TXU
Corp. could be subject to additional costs and/or the write-off of its
investment in the project or improvement.
Insurance, warranties or performance guarantees may not cover any or all
of the lost revenues or increased expenses, including the cost of replacement
power. Likewise, TXU Corp.'s ability to obtain insurance, and the cost of and
coverage provided by such insurance, could be affected by events outside its
control.
The ownership and operation of nuclear facilities, including TXU Corp.'s
ownership and operation of the Comanche Peak generation plant, involve certain
risks. These risks include: mechanical or structural problems; inadequacy or
lapses in maintenance protocols; the impairment of reactor operation and safety
systems due to human error; the costs of storage, handling and disposal of
nuclear materials; limitations on the amounts and types of insurance coverage
commercially available; and uncertainties with respect to the technological and
financial aspects of decommissioning nuclear facilities at the end of their
useful lives. The following are among the more significant of these risks:
o Operational Risk - Operations at any nuclear power production plant
could degrade to the point where the plant would have to be shut down.
If this were to happen, the process of identifying and correcting the
causes of the operational downgrade to return the plant to operation
could require significant time and expense, resulting in both lost
revenue and increased fuel and purchased power expense to meet supply
commitments. Rather than incurring substantial costs to restart the
plant, the plant may be shut down.
o Regulatory Risk - The NRC may modify, suspend or revoke licenses and
impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under it or the terms of the licenses of nuclear
facilities. Unless extended, the NRC operating licenses for Comanche
Peak Unit 1 and Unit 2 will expire in 2030 and 2033, respectively.
Changes in regulations by the NRC could require a substantial increase
in capital expenditures or result in increased operating or
decommissioning costs.
o Nuclear Accident Risk - Although the safety record of Comanche Peak and
nuclear reactors generally has been very good, accidents and other
unforeseen problems have occurred both in the US and elsewhere. The
consequences of an accident can be severe and include loss of life and
property damage. Any resulting liability from a nuclear accident could
exceed TXU Corp.'s resources, including insurance coverage.
A-52
TXU Corp. will be required to apply a credit to its electricity delivery
charges (retail clawback) to REPs in Texas beginning in early 2004 unless the
Commission determines that, on or prior to January 1, 2004, 40% or more of the
amount of electric power that was consumed in 2000 by residential or small
commercial customers, as applicable, within its historical service territories
is committed to be served by REPs other than TXU Corp. Under the Settlement
Plan, if the 40% test is not met and a credit is required, the amount of these
credits would be $90 multiplied by the number of residential or small commercial
customers, as the case may be, that TXU Corp. serves on January 1, 2004, in its
historical service territories less the number of new retail electric customers
TXU Corp. serves in other areas of Texas. As of December 31, 2002, TXU Corp. had
approximately 2.7 million residential and small commercial customers in its
historical service territories. Based on assumptions and estimates regarding the
number of customers expected in and out of territory, TXU Corp. recorded an
accrual for retail clawback in 2002 of $185 million ($120 million after-tax).
This accrual is subject to adjustment as the actual measurement date approaches.
TXU Corp. is subject to extensive environmental regulation by governmental
authorities. In operating its facilities, TXU Corp. is required to comply with
numerous environmental laws and regulations, and to obtain numerous governmental
permits. TXU Corp. may incur significant additional costs to comply with these
requirements. If TXU Corp. fails to comply with these requirements, it could be
subject to civil or criminal liability and fines. Existing environmental
regulations could be revised or reinterpreted, new laws and regulations could be
adopted or become applicable to TXU Corp. or its facilities, and future changes
in environmental laws and regulations could occur, including potential
regulatory and enforcement developments related to air emissions.
TXU Corp. may not be able to obtain or maintain all required environmental
regulatory approvals. If there is a delay in obtaining any required
environmental regulatory approvals or if TXU Corp. fails to obtain, maintain or
comply with any such approval, the operation of its facilities could be stopped
or become subject to additional costs. Further, at some of TXU Corp.'s older
facilities it may be uneconomical for TXU Corp. to install the necessary
equipment, which may cause TXU Corp. to shut down those facilities.
In addition, TXU Corp. may be responsible for any on-site liabilities
associated with the environmental condition of facilities that it has acquired
or developed, regardless of when the liabilities arose and whether they are
known or unknown. In connection with certain acquisitions and sales of assets,
TXU Corp. may obtain, or be required to provide, indemnification against certain
environmental liabilities. Another party could fail to meet its indemnification
obligations to TXU Corp.
On January 1, 2002, most retail customers in Texas of investor-owned
utilities, and those of any municipal utility and electric cooperative that
opted to participate in the competitive marketplace, became able to choose their
REP. On January 1, 2002, TXU Corp. began to provide retail electric services to
all customers who did not take action to select another REP.
TXU Corp. will not be permitted to offer electricity to residential and
small commercial customers in its historical service territory at a price other
than the price-to-beat rate until January 1, 2005, unless before that date the
Commission determines that 40% or more of the amount of electric power consumed
by each respective class of customers in that area is committed to be served by
REPs other than TXU Corp. Because TXU Corp. will not be able to compete for
residential and small commercial customers on the basis of price in its
historical service territory, TXU Corp. could lose a significant number of these
customers to other providers. In addition, at times, during this period, if the
market price of power is lower than TXU Corp.'s cost to produce power, TXU Corp.
would have a limited ability to mitigate the loss of margin caused by its loss
of customers by selling power from its power production facilities.
Other REPs will be allowed to offer electricity to TXU Corp.'s residential
and small commercial customers at any price. The margin or "headroom" available
in the price-to-beat rate for any REP equals the difference between the
price-to-beat rate and the sum of delivery charges and the price that REP pays
for power. The higher the amount of headroom for competitive REPs, the more
incentive those REPs should have to provide retail electric services in a given
market.
A-53
In addition, TXU Corp. provides commodity and value-added energy
management services to the large C&I customers who did not take action to select
another REP beginning on January 1, 2002. TXU Corp. or any other REP can offer
to provide services to these customers at any negotiated price. TXU Corp.
believes that this market will be very competitive; consequently, a significant
number of these customers may choose to be served by another REP, and any of
these customers that select TXU Corp. to be its provider may subsequently decide
to switch to another provider.
An affiliated REP is obligated to offer the price-to-beat rate to
requesting residential and small commercial customers in the historical service
territory of its incumbent utility through January 1, 2007. The initial
price-to-beat rates for the affiliated REPs, including TXU Corp.'s, were
established by the Commission on December 7, 2001. Pursuant to Commission
regulations, the initial price-to-beat rate for each affiliated REP is 6% less
than the average rates in effect for its incumbent utility on January 1, 1999,
adjusted to take into account a new fuel factor as of December 31, 2001.
The results of TXU Corp.'s retail electric operations in its historical
service territory will be largely dependent upon the amount of headroom
available to TXU Corp. and the competitive REPs in TXU Corp.'s price-to-beat
rate. Since headroom is dependent, in part, on power purchase costs, TXU Corp.
does not know nor can it estimate the amount of headroom that it or other REPs
will have in TXU Corp.'s price-to-beat rate or in the price-to-beat rate for the
affiliated REP in each other Texas retail electric market. Headroom may be a
positive or negative number. If the amount of headroom in its price-to-beat rate
is a negative number, TXU Corp. will be selling power to its price-to-beat rate
customers in its historical service territory at prices below its costs of
purchasing and delivering power to those customers. If the amount of positive
headroom for competitive REPs in its price-to-beat rate is large, TXU Corp. may
lose customers to competitive REPs.
In April 2002, pursuant to Commission rules, TXU Corp. filed a request
with the Commission to increase the fuel factor component of its price to beat.
On August 23, 2002, the Commission acted on this request, increasing TXU Corp.'s
price-to-beat rates for residential and small commercial customers by slightly
less than 5%. In January 2003, TXU Corp. filed a request with the Commission to
increase the fuel factor component of its price-to-beat rates based upon
significant increases in the market price of natural gas. This request was
approved on March 5, 2003. The fuel factor increase went into effect for the
billing cycle that began March 6, 2003. As a result, average monthly residential
bills will rise approximately 12%. In March 2003, the Commission amended its
rules to require that natural gas prices increase more than 5% (10% if the
petition is filed after November 15 of any year) before allowing petitions for
adjustments to the full factor component. There is no assurance that TXU Corp.'s
price-to-beat rate will not result in negative headroom in the future, or that
future adjustments to its price-to-beat rate will be adequate to cover future
increases in its costs to purchase power to serve its price-to-beat rate
customers.
In most retail electric markets outside its historical service territory,
TXU Corp.'s principal competitor may be the local incumbent utility company or
its retail affiliate. The incumbent utilities have the advantage of
long-standing relationships with their customers. In addition to competition
from the incumbent utilities and their affiliates, TXU Corp. may face
competition from a number of other energy service providers, or other energy
industry participants, who may develop businesses that will compete with TXU
Corp. in both local and national markets, and nationally branded providers of
consumer products and services. Some of these competitors or potential
competitors may be larger and better capitalized than TXU Corp. If there is
inadequate margin in these retail electric markets, it may not be profitable for
TXU Corp. to enter these markets.
TXU Corp. depends on T&D facilities owned and operated by other utilities,
as well as its own such facilities, to deliver the electricity it produces and
sells to consumers, as well as to other REPs. If transmission capacity is
inadequate, TXU Corp.'s ability to sell and deliver electricity may be hindered,
it may have to forgo sales or it may have to buy more expensive wholesale
electricity that is available in the capacity-constrained area. In particular,
during some periods transmission access is constrained to some areas of the
Dallas-Fort Worth metroplex. TXU Corp. expects to have a significant number of
customers inside these constrained areas. The cost to provide service to these
customers may exceed the cost to service other customers, resulting in lower
gross margins. In addition, any infrastructure failure that interrupts or
impairs delivery of electricity to TXU Corp.'s customers could negatively impact
the satisfaction of its customers with its service.
A-54
Additionally, in Texas, TXU Corp. is dependent on unaffiliated T&D
utilities for the reading of its customers' energy meters. TXU Corp. is required
to rely on the utility or, in some cases, the independent transmission system
operator, to provide it with its customers' information regarding energy usage,
and it may be limited in its ability to confirm the accuracy of the information.
In connection with any future entry into retail electric markets outside
of Texas, TXU Corp. may be required under the regulatory structure of the
relevant market to rely on utilities with which it may be competing to perform
billing and collection services, the services and functions described in the
prior paragraph or other services and functions. In addition, TXU Corp. may be
required to enter into agreements with local incumbent utilities for use of the
local distribution systems and for the creation and operation of functional
interfaces necessary for TXU Corp. to serve its customers. Any delay in these
negotiations or TXU Corp.'s inability to enter into reasonable agreements could
delay or negatively impact its ability to serve customers in those markets.
TXU Corp. offers its customers a bundle of services that include, at a
minimum, the electric commodity itself plus transmission, distribution and
related services. To the extent that the prices TXU Corp. charges for this
bundle of services or for the various components of the bundle, either of which
may be fixed by contract with the customer for a period of time, differ from TXU
Corp.'s underlying cost to obtain the commodities or services, its results of
operations would be adversely affected. TXU Corp. will encounter similar risks
in selling bundled services that include non-energy-related services, such as
telecommunications, facilities management, and the like. In some cases, TXU
Corp. has little, if any, prior experience in selling these non-energy-related
services.
The 1999 Restructuring Legislation required the Commission to determine
procedures and criteria for designating REPs to serve as the POLR in areas of
the state in which retail competition is in effect. Through calendar year 2002,
TXU Corp. was the POLR for residential and small non-residential customers in
those areas of ERCOT where customer choice was available outside its historical
service territory, and was the POLR for large non-residential customers in its
historical service territory. TXU Corp.'s POLR contract expired on December 31,
2002. However, in August 2002, the Commission adopted new rules that
significantly changed POLR service. Under the new POLR rules, instead of being
transferred to the POLR, non-paying residential and small non-residential
customers served by affiliated REPs are subject to disconnection. Non-paying
residential and small non-residential customers served by non-affiliated REPs
are transferred to the affiliated REP. Non-paying large non-residential
customers can be disconnected by any REP if the customer's contract does not
preclude it. Thus, within the new POLR framework, the POLR provides electric
service only 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. No later than October 1, 2004, the Commission must decide
whether all REPs should be permitted to disconnect all non-paying customers. The
new POLR rules are expected to result in reduced bad debts expense beginning in
2003.
Through a competitive bid process, the Commission selected a POLR provider
to serve for a two-year term beginning January 1, 2003, for several areas within
the State. In areas for which no bids were submitted, the Commission selected
the POLR by lottery. TXU Corp. did not bid to be the POLR in any area, but was
designated POLR through lottery for small business and residential customers in
certain West Texas service areas and for small business customers in the Houston
service area. Under the new rules, as an affiliated REP, TXU Corp. may have to
temporarily provide electric service to some customers that are unable to pay
their electric bills. If the number of such customers is significant and TXU
Corp. is delayed in terminating electric service to those customers, its results
of operations may be adversely affected. TXU Corp. cannot be sure whether the
structure of POLR service and obligations will change further, how it will
change or what effect, if any, any further changes would have on TXU Corp.
The information systems and processes necessary to support risk
management, sales, customer service and energy procurement and supply in
competitive retail markets in Texas and elsewhere are new, complex and
extensive. TXU Corp. is refining these systems and processes, and they may prove
more expensive to refine than planned and may not work as planned.
A-55
Research and development activities are ongoing to improve existing and
alternative technologies to produce electricity, including gas turbines, fuel
cells, microturbines and photovoltaic (solar) cells. It is possible that
advances in these or other alternative technologies will reduce the costs of
electricity production from these technologies to a level that will enable these
technologies to compete effectively with electricity production from traditional
power plants like TXU Corp.'s. While demand for electric energy services is
generally increasing throughout the US, the rate of construction and development
of new, more efficient power production facilities may exceed increases in
demand in some regional electric markets. The commencement of commercial
operation of new facilities in the regional markets where TXU Corp. has
facilities will likely increase the competitiveness of the wholesale power
market in those regions. In addition, the market value of TXU Corp.'s power
production and/or energy transportation facilities may be significantly reduced.
In addition, electricity demand could be reduced by increased conservation
efforts and advances in technology, which could likewise significantly reduce
the value of TXU Corp.'s facilities. Changes in technology could also alter the
channels through which retail electric customers buy electricity.
TXU Corp. is subject to employee workforce factors, including loss or
retirement of key executives, availability of qualified personnel, collective
bargaining agreements with union employees or work stoppage.
TXU Corp. is a holding company and conducts its operations primarily
through wholly-owned subsidiaries. Substantially all of TXU Corp.'s consolidated
assets are held by these subsidiaries. Accordingly, TXU Corp.'s cash flows and
ability to meet its obligations are largely dependent upon the earnings of its
subsidiaries and the distribution or other payment of such earnings to TXU Corp.
in the form of distributions, loans or advances, and repayment of loans or
advances from TXU Corp.
Because TXU Corp. is a holding company, its obligations to its creditors
are structurally subordinated to all existing and future liabilities and
existing and future preferred stock of its subsidiaries. Therefore, TXU Corp.'s
rights and the rights of its creditors to participate in the assets of any
subsidiary in the event that such a subsidiary is liquidated or reorganized are
subject to the prior claims of such subsidiary's creditors and holders of its
preferred stock. To the extent that TXU Corp. may be a creditor with recognized
claims against any such subsidiary, its claims would still be subject to the
prior claims of such subsidiary's creditors to the extent that they are secured
or senior to those held by TXU Corp.
TXU Corp. relies on access to financial markets as a significant source of
liquidity for capital requirements not satisfied by cash on hand or operating
cash flows. TXU Corp.'s access to the financial markets could be adversely
impacted by various factors, such as:
o changes in credit markets that reduce available credit or the ability to
renew existing liquidity facilities on acceptable terms;
o inability to access commercial paper markets;
o a deterioration of TXU Corp.'s credit or a reduction in TXU Corp.'s
credit ratings or the credit ratings of its subsidiaries;
o extreme volatility in TXU Corp.'s markets that increases margin or credit
requirements;
o a material breakdown in TXU Corp.'s risk management
procedures;
o continued delays in billing and payment resulting from delays in
switching customers from one REP to another; and
o the occurrence of material adverse changes in TXU Corp.'s business that
restrict TXU Corp.'s ability to access its liquidity facilities.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact TXU Corp.'s ability
to sustain and grow its businesses, which are capital intensive, and would
likely increase its capital costs. Further, concerns on the part of
counterparties regarding TXU Corp.'s liquidity and credit could limit its
portfolio management activities.
A lack of necessary capital and cash reserves could adversely impact TXU
Corp.'s growth plans, its ability to raise additional debt and the evaluation of
its creditworthiness by counterparties and rating agencies.
A-56
As a result of the energy crisis in California during 2001, the recent
volatility of natural gas prices in North America, the bankruptcy filing by
Enron Corporation, 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. 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, power market manipulation and inaccurate power and commodity
price reporting have had a negative effect on the industry. TXU Corp. believes
that it is complying with all applicable laws, but it is difficult or impossible
to predict or control what effect these events may have on TXU Corp.'s financial
condition or access to the capital markets. Additionally, it is unclear what
laws and regulations may develop, and TXU Corp. cannot predict the ultimate
impact of any future changes in accounting regulations or practices in general
with respect to public companies, the energy industry or its operations
specifically.
TXU Corp. is subject to costs and other effects of legal and
administrative proceedings, settlements, investigations and claims. Since
October 2002, at least twenty-five lawsuits have been filed in federal and state
courts in Texas against TXU Corp. and various of its officers, directors and
underwriters. In addition, TXU Corp. is unable to predict whether its decision
to exit all of its operations in Europe might result in lawsuits by the
creditors of or others associated with TXU Europe. Such current and potential
legal proceedings could result in payments of judgment or settlement amounts.
TXU Corp.'s regulated businesses are subject to cost-of-service regulation
and annual earnings oversight. This regulatory treatment does not provide any
assurance as to achievement of earnings levels.
The market price of TXU Corp.'s common stock has been volatile recently,
and a variety of factors could cause the price to fluctuate in the future. In
addition to the matters discussed above and in TXU Corp.'s other filings under
the Securities Exchange Act of 1934, as amended, the following could impact the
market price for TXU Corp.'s common stock:
o developments related to TXU Corp.'s businesses;
o fluctuations in TXU Corp.'s results of operations;
o the level of dividends;
o TXU Corp.'s debt to equity ratios and other leverage ratios;
o effect of significant events relating to the energy sector in general;
o sales of TXU Corp. securities into the marketplace;
o general conditions in the industry and the energy markets in which TXU
Corp. is a participant;
o the worldwide economy;
o an outbreak of war or hostilities;
o a shortfall in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections; and
o actions by credit rating agencies.
Fluctuations in the market price of TXU Corp.'s common stock may be
unrelated to TXU Corp.'s performance. General market price declines or market
volatility could adversely affect the price of TXU Corp.'s common stock and the
current market price may not be indicative of future market prices.
A-57
The issues and associated risks and uncertainties described above are not
the only ones TXU Corp. may face. Additional issues may arise or become material
as the energy industry evolves. The risks and uncertainties associated with
these additional issues could impair TXU Corp.'s businesses in the future.
Reference is made to the discussion under Liquidity and Capital Resources.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Corp. and its subsidiaries
(collectively, TXU Corp.) contain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. Although TXU
Corp. believes that in making any such statement its expectations are based on
reasonable assumptions, any such statement involves uncertainties and is
qualified in its entirety by reference to the following important factors, among
others, that could cause the actual results of TXU Corp. to differ materially
from those projected in such forward-looking statements: (i) prevailing
governmental policies and regulatory actions, including those of the Federal
Energy Regulatory Commission, the Commission, the RRC, the Nuclear Regulatory
Commission, particularly with respect to allowed rates of return, industry,
market and rate structure, purchased power and investment recovery, operations
of nuclear generating facilities, acquisitions and disposal of assets and
facilities, operation and construction of plant facilities, decommissioning
costs, present or prospective wholesale and retail competition, changes in tax
laws and policies and changes in and compliance with environmental and safety
laws and policies, (ii) general industry trends, (iii) weather conditions and
other natural phenomena, and acts of sabotage, wars or terrorist activities,
(iv) unanticipated population growth or decline, and changes in market demand
and demographic patterns, (v) competition for retail and wholesale customers,
(vi) pricing and transportation of crude oil, natural gas and other commodities,
(vii) unanticipated changes in interest rates, commodity prices, rates of
inflation or foreign exchange rates, (viii) unanticipated changes in operating
expenses, liquidity needs and capital expenditures, (ix) commercial bank market
and capital market conditions, (x) competition for new energy development
opportunities, (xi) legal and administrative proceedings and settlements, (xii)
inability of the various counterparties to meet their obligations with respect
to TXU Corp.'s financial instruments, (xiii) changes in technology used and
services offered by TXU Corp., and (xiv) significant changes in TXU Corp.'s
relationship with its employees and the potential adverse effects if labor
disputes or grievances were to occur, (xv) power costs and availability, (xvi)
changes in business strategy, development plans or vendor relationships, (xvii)
availability of qualified personnel, (xviii) implementation of new accounting
standards, (xix) global financial and credit market conditions, and credit
rating agency actions and (xx) access to adequate transmission facilities to
meet changing demands.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Corp. undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for TXU
Corp. to predict all of such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statement.
A-58
TXU CORP. AND SUBSIDIARIES
STATEMENT OF RESPONSIBILITY
The management of TXU Corp. is responsible for the preparation, integrity
and objectivity of the consolidated financial statements of TXU Corp. and its
subsidiaries and other information included in this report. The consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America. As appropriate, the
statements include amounts based on informed estimates and judgments of
management.
The management of TXU Corp. is responsible for establishing and
maintaining a system of internal control which includes the internal controls
and procedures for financial reporting, that is designed to provide reasonable
assurance, on a cost-effective basis, that assets are safeguarded, transactions
are executed in accordance with management's authorization and financial records
are reliable for preparing consolidated financial statements. Management
believes that the system of control provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected within a timely period. Key elements in this
system include the effective communication of established written policies and
procedures, selection and training of qualified personnel and organizational
arrangements that provide an appropriate division of responsibility. This system
of control is augmented by an ongoing internal audit program designed to
evaluate its adequacy and effectiveness. Management considers the
recommendations of the internal auditors and independent auditors concerning TXU
Corp.'s system of internal control and takes appropriate actions which are
cost-effective in the circumstances. Management believes that, as of December
31, 2002, TXU Corp.'s system of internal control was adequate to accomplish the
objectives discussed herein.
The Board of Directors of TXU Corp. addresses its oversight responsibility
for the consolidated financial statements through its Audit Committee, which is
composed of directors who are not employees of TXU Corp. The Audit Committee
meets regularly with TXU Corp.'s management, internal auditors and independent
auditors to review matters relating to financial reporting, auditing and
internal control. To ensure auditor independence, both the internal auditors and
independent auditors have full and free access to the Audit Committee.
The independent auditing firm of Deloitte & Touche LLP is engaged to
audit, in accordance with auditing standards generally accepted in the United
States of America, the consolidated financial statements of TXU Corp. and its
subsidiaries and to issue their report thereon.
/s/ ERLE NYE /s/ T. L. BAKER
------------------------------- ------------------------------
Erle Nye, Chairman of the Board T. L. Baker, Oncor
and Chief Executive Group President
/s/ BRIAN N. DICKIE /s/ H. DAN FARELL
------------------------------ --------------------------------------
Brian N. Dickie, TXU Energy H. Dan Farell, Executive Vice President
Group President and Chief Financial Officer
/s/ BIGGS C. PORTER
--------------------------------
Biggs C. Porter, Controller and
Principal Accounting Officer
A-59
INDEPENDENT AUDITORS' REPORT
TXU Corp.:
We have audited the consolidated balance sheets of TXU Corp. and subsidiaries
(the Company) as of December 31, 2002 and 2001 and the related consolidated
statements of income, comprehensive income, cash flows and shareholders' equity
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of TXU Corp. and subsidiaries at
December 31, 2002 and 2001 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the Notes to Financial Statements, TXU Corp. changed
its method of accounting for goodwill amortization in 2002 in connection with
the adoption of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.
As discussed in Note 3 to the Notes to Financial Statements, TXU Corp. has
discontinued its operations in Europe. The loss on discontinuance and results
prior to the discontinuance are included in income from discontinued operations
in the accompanying financial statements.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 14, 2003
A-60
TXU CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
(millions of dollars, except per share amounts)
Operating revenues.......................................... $10,034 $10,049 $ 9,647
------- ------- -------
Costs and expenses:
Cost of energy sold and delivery fees.................. 4,198 4,232 4,206
Operating costs........................................ 1,660 1,532 1,522
Depreciation and amortization, other than goodwill..... 858 785 768
Selling, general and administrative expenses........... 1,260 1,000 852
Franchise and revenue-based taxes...................... 479 530 402
Other income........................................... (56) (51) (157)
Other deductions....................................... 514 185 83
Interest income........................................ (32) (84) (46)
Interest expense and other charges..................... 884 965 1,023
Goodwill amortization.................................. - 43 50
------ ------ ------
Total costs and expenses......................... 9,765 9,137 8,703
------ ------ ------
Income from continuing operations before income taxes and
extraordinary loss..................................... 269 912 944
Income tax expense ......................................... 94 273 278
------ ------ ------
Income from continuing operations before extraordinary loss 175 639 666
Income (loss) from discontinued operations, net of tax effect (4,210) 192 250
Extraordinary loss, net of tax effect ...................... (175) (154) -
------ ------ ------
Net income (loss) before preference stock dividends......... (4,210) 677 916
Preference stock dividends ................................. 22 22 12
------ ------ ------
Net income (loss) available for common stock................ $4,232) $ 655 $ 904
====== ====== =====
Average shares of common stock outstanding (millions)....... 278 259 264
Per share of common stock:
Basic and diluted earnings
Income from continuing operations before extraordinary loss $ 0.55 $ 2.38 $ 2.48
Income (loss) on discontinued operations, net of tax effect $(15.15) $ 0.74 $ 0.95
Extraordinary loss, net of tax.......................... $(0.63) $(0.60) $ -
Net income (loss) available for common stock ............. $(15.23) $ 2.52 $ 3.43
Dividends declared......................................... $ 1.925 $ 2.40 $ 2.40
See Notes to Financial Statements.
A-61
TXU CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Year Ended December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before extraordinary loss........... $ 175 $ 639 $ 666
----- ----- ----
Other comprehensive income (loss) --
Net change during period, net of tax effects:
Cumulative foreign currency translation adjustment ................. 76 (61) (98)
Investments classified as available for sale:
Unrealized holding losses (net of tax benefit of $12)............. - - (22)
Reclassification of net gain realized on sale of investments
to other deductions (net of tax benefit of $1 and $5)............. - (2) (9)
Minimum pension liability adjustments (net of tax benefit of
$45, $3 and $-)............................................... (83) (6) 1
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001
(net of tax benefit of $12).......................... - (25) -
Net change in fair value of derivatives (net of tax benefit of
$119 and $34)........................................ (229) (79) -
Amounts realized in earnings during the year (net of tax
expense of $38 and $25) ...................................... 81 62 -
----- ----- ----
Total....................................... (155) (111) (128)
----- ----- ----
Comprehensive income from continuing operations.................... 20 528 538
----- ----- ----
Components related to discontinued operations:
Income (loss) on discontinued operations, net of tax effect (4,210) 192 250
------ ------ -----
Cumulative foreign currency translation adjustment.................. 253 (88) (238)
Investments classified as available for sale (net of tax
expense of $24 and $12 ).......................................... - 55 28
Reclassification of net gain realized on sale of investments to
other deductions (net of tax benefit of $21 and $9)............... - (50) (21)
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001
(net of tax benefit of $46)................................... - (107) -
Net change in fair value of derivatives(net of tax benefit
of $18 and $37)......................................... (41) (86) -
Amounts realized in earnings during the year (net of tax
expense of $37 and $57) ...................................... 87 131 -
----- ------ -----
Total................................................. 299 (145) (231)
Comprehensive income from discontinued operations................... (3,911) 47 19
Extraordinary loss, net of tax effect............................... (175) (154) -
------ ------ -----
Comprehensive income (loss)............................................. $(4,066) $ 421 $ 557
======= ====== =====
See Notes to Financial Statements.
A-62
TXU CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
-------------------------------
2002 2001 2000
----- ---- ----
(millions of dollars)
Cash flows-- operating activities
Income from continuing operations before extraordinary loss.................. $ 175 $ 639 $ 666
Adjustments to reconcile income from continuing operations to cash provided by
operating activities:
Depreciation and amortization ....................................... 949 1,024 1,023
Deferred income taxes and investment tax credits-- net ................ 67 (35) 90
Gains from sale of assets............................................... (31) (1) (130)
Reduction of revenues for earnings in excess of regulatory earnings cap. -- 40 310
Net effect of unrealized mark-to-market valuations of commodity contracts 67 (319) (5)
Net loss associated with unconsolidated affiliates and joint ventures... 255 53 18
Asset impairments and writedowns........................................ 253 -- --
Retail clawback accrual................................................. 185 -- --
Reduction in regulatory liability....................................... (151) -- --
Over(under) - recovered fuel costs...................................... -- 568 (813)
Changes in operating assets and liabilities:
Accounts receivable - trade........................................ (518) 501 (907)
Inventories........................................................ (54) (49) 27
Accounts payable - trade........................................... 176 (833) 1,001
Commodity contract assets and liabilities.......................... (10) (32) 28
Margin deposits.................................................... -- 227 (225)
Other assets....................................................... (62) 42 (274)
Other liabilities.................................................. 40 51 99
------ ------ ------
Cash provided by operating activities.......................... 1,341 1,876 908
------ ------ ------
Cash flows-- financing activities
Issuances of securities:
Equity-linked debt securities........................................... 440 1,000 --
Exchangeable subordinated notes......................................... 750 -- --
Other long-term debt.................................................... 3,377 4,954 1,451
Preference stock........................................................ -- -- 300
Common stock............................................................ 1,274 354 2
Retirements/repurchase of securities:
Long-term debt......................................................... (3,596) (4,641) (1,051)
Subsidiary obligated, mandatorily redeemable, preferred securities
of subsidiary trusts, each holding solely junior subordinated
debentures of the obligated subsidiary................................ -- (837) --
Common stock........................................................... -- (44) (596)
Change in notes payable:
Commercial paper....................................................... (844) (1,035) 31
Banks.................................................................. 1,242 615 (142)
Cash dividends paid:
Common stock........................................................... (652) (621) (634)
Preference stock....................................................... (22) (22) (11)
Debt premium, discount, financing and reacquisition expenses................. (493) (232) (19)
------ ------ ------
Cash provided by (used in) financing activities................. 1,476 (509) (669)
------ ------- ------
Cash flows-- investing activities
Capital expenditures........................................................ (996) (1,248) (1,038)
Acquisitions of businesses.................................................. (36) -- (339)
Proceeds from sale of assets................................................ 449 26 627
Cash distributions from equity investee..................................... -- -- 599
Nuclear fuel................................................................ (51) (38) (87)
Other....................................................................... (213) 59 (61)
------ ------ ------
Cash used in investing activities.............................. (847) (1,201) (299)
------ ------ ------
Effect of exchange rate changes on cash and cash equivalents...................... (11) 1 10
------ ------ ------
Cash contributions to discontinued operations..................................... (601) -- --
------ ------ ------
Net change in cash and cash equivalents........................................... 1,358 167 (50)
Cash and cash equivalents-- beginning balance..................................... 216 49 99
------ ------ ------
Cash and cash equivalents-- ending balance........................................ $1,574 $ 216 $ 49
====== ====== ======
See Notes to Financial Statements.
A-63
TXU CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2002 2001
---- ----
ASSETS (millions of dollars)
Current assets
Cash and cash equivalents........................................................ $ 1,574 $ 216
Accounts receivable-- trade..................................................... 1,696 1,165
Income taxes receivable......................................................... 488 -
Inventories .................................................................... 493 439
Commodity contract assets....................................................... 1,298 848
Other current assets............................................................ 263 232
------- -------
Total current assets.................................................... 5,812 2,900
------- -------
Investments
Restricted cash................................................................. 306 -
Other investments............................................................... 757 985
Property, plant and equipment-- net................................................... 19,642 19,419
Goodwill.............................................................................. 1,588 1,520
Regulatory assets-- net.............................................................. 1,772 1,733
Commodity contract assets............................................................. 657 548
Cash flow hedges and other derivative assets ......................................... 150 163
Other noncurrent assets............................................................... 207 175
Assets-- discontinued operations..................................................... - 14,875
------- -------
Total assets............................................................ $30,891 $42,318
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable
Commercial paper.......................................................... $ 18 $ 853
Banks..................................................................... 2,306 1,061
Long-term debt due currently.................................................... 855 866
Accounts payable-- trade........................................................ 1,054 859
Commodity contract liabilities.................................................. 1,138 630
Other current liabilities....................................................... 1,250 1,170
------- -------
Total current liabilities................................................ 6,621 5,439
------- -------
Accumulated deferred income taxes...................................................... 3,607 3,361
Investment tax credits................................................................. 453 479
Commodity contract liabilities......................................................... 351 255
Cash flow hedges and other derivative liabilities .................................... 220 118
Other noncurrent liabilities and deferred credits ..................................... 2,147 1,198
Long-term debt, less amounts due currently............................................. 11,700 10,926
Liabilities-- discontinued operations................................................. - 11,860
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding solely
junior subordinated debentures of the obligated company:
TXU Corp. obligated............................................................. 368 368
Subsidiary obligated............................................................ 147 147
Preferred stock of subsidiaries:
Not subject to mandatory redemption............................................. 190 190
Subject to mandatory redemption................................................. 21 21
Contingencies (Note 16)
Shareholders' equity................................................................... 5,066 7,956
------- -------
Total liabilities and shareholders' equity............................... $30,891 $42,318
======= =======
See Notes to Financial Statements.
A-64
TXU CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Year Ended December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
(millions of dollars)
Preference stock:
Issuances in 2000 and balance at end of year 2002, 2001 and 2002 $ 300 $ 300 $ 300
------- ------ ------
Common stock without par value -- authorized shares-- 1,000,000,000
Balance at beginning of year.................................. 6,560 6,360 6,795
New public offering (2002-- 46,800,000 shares)............ 1,084 -- --
Direct Stock Purchase and Dividend Reinvestment Plan
(2002-- 1,069,264 shares; 2001-- 260,243 shares) ......... 40 12 --
Issuance of stock purchase contracts related to equity-linked
debt securities........................................... (48) (142) --
Issued for Long-Term Incentive Compensation Plan (2002--599,516
2001--535,052 Shares; and 2000-- 332,895 shares)......... (3) 4 3
Common stock repurchased and retired (2001-- 1,252,500 shares;
and 2000-- 18,630,517 shares) ............................ -- (30) (445)
Treasury stock-- Long-Term Incentive Plan Trusts............ 1 (4) (3)
Issued for purchase contracts under 1998 equity-linked debt
securities (2002-- 8,365,133 shares and 2001--7,488,395 shares) 349 351 --
Special allocation to Thrift Plan by trustee................ 8 9 9
Other....................................................... 4 -- 1
------ ------ ------
Balance at end of year ( 2002 -- 321,974,000 shares; 2001 --
265,140,087 shares; and 2000-- 258,108,897 shares).......... 7,995 6,560 6,360
------ ------ ------
Additional paid in capital:
Change during the year and balance at end of the year ...... 111 -- --
------ ------ ------
Common stock repurchasable under equity forward contracts:
Balance at beginning of year.................................. -- (190) --
Change during the year ..................................... -- 190 (190)
------ ------ ------
Balance at end of year....................................... -- -- (190)
------ ------ ------
Retained earnings:
Balance at beginning of year.................................. 1,863 1,817 1,691
Net income.................................................. (4,210) 677 916
Dividends declared on common stock ($1.925, $2.40 and
$2.40 per share)........................................... (533) (625) (625)
Common stock repurchased and retired........................ -- (14) (151)
Dividends on preference stock ($7,240, $7,240 and $3,902
per share)................................................ (22) (22) (12)
Equity forward contract settlements......................... -- 21 --
LESOP dividend deduction tax benefit and other.............. 2 9 (2)
------- ------ ------
Balance at end of year........................................ (2,900) 1,863 1,817
------- ------ ------
A-65
TXU CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (CONT.)
Year Ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
(millions of dollars)
Accumulated other comprehensive loss, net of tax effects:
Foreign currency translation adjustments:
Balance at beginning of year............................... (654) (505) (169)
Change during the year................................... 329 (149) (336)
Write-off of discontinued operations.................... 168 - -
----- ------ ------
Balance at end of year..................................... (157) (654) (505)
----- ------ ------
Unrealized holding gains (losses) on investments:
Balance at beginning of year............................... - (3) 21
Change during the year................................... - 3 (24)
----- ------ ------
Balance at end of year..................................... - - (3)
----- ------ ------
Minimum pension liability adjustments:
Balance at beginning of year............................... (9) (3) (4)
Change during the year................................... (83) (6) 1
----- ------ ------
Balance at end of year..................................... (92) (9) (3)
----- ------ ------
Cash flow hedges (SFAS No. 133):
Balance at beginning of year......................... (104) - -
Change during the year................................ (102) (104) -
Write-off of discontinued operations............ 15 - -
----- ------ ------
Balance at end of year............................... (191) (104) -
----- ------ ------
Total accumulated other comprehensive loss................... (440) (767) (511)
----- ------ ------
Total common stock equity......................................... 4,766 7,656 7,476
----- ------ ------
Shareholders' equity.............................................. $ 5,066 $7,956 $7,776
===== ====== ======
See Notes to Financial Statements.
A-66
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, MERGERS, ACQUISITIONS AND DISPOSITIONS
Use of the term "TXU Corp.," unless otherwise noted, refers to TXU Corp., a
holding company, and/or its consolidated subsidiaries.
TXU Corp. is an energy company that engages in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, energy delivery and, through a joint venture,
telecommunications services. TXU Corp. is a holding company whose principal
United States (US) operations are conducted through TXU US Holdings Company (US
Holdings), formerly TXU Electric Company, and TXU Gas Company (TXU Gas). TXU
Corp.'s principal international operations are conducted through TXU Australia
Holdings Limited Partnership (TXU Australia) and had also been previously
conducted through TXU Europe Limited (TXU Europe).
Exit of TXU Europe Business - In October 2002, TXU Corp. made a
determination to exit its operations in Europe, which were conducted through TXU
Europe. See Note 3 regarding events related to TXU Europe. The results of
operations for all periods presented have been restated to reflect the
operations in Europe as discontinued.
Business Restructuring - Legislation passed during the 1999 session of the
Texas Legislature restructured the electric utility industry in Texas and
provided for a transition to increased competition in the generation and retail
sale of electricity (1999 Restructuring Legislation). As a result, TXU Corp.
restructured certain of its US businesses as of 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 on October 31, 2001, 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 Electric
Delivery Company (Oncor), which is a utility regulated by the Commission
and a wholly-owned subsidiary of US Holdings,
o its power generation assets to subsidiaries of TXU Energy Company LLC
(TXU Energy), which is the new competitive business and a wholly-owned
subsidiary of US Holdings, and
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 portfolio management
and the unregulated commercial and industrial (C&I) retail gas operations of TXU
Gas; and the energy management services businesses and other affiliates of TXU
Corp., including the fuel procurement and coal mining businesses that service
the generation operations.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a master separation agreement executed in
December 2001.
A settlement of outstanding issues and other proceedings related to
implementation of the 1999 Restructuring Legislation received final approval in
January 2003. See Note 15 for further discussion.
Concurrent with TXU Corp.'s reorganization as of January 1, 2002, TXU
Corp. realigned its operations into three reportable segments: North America
Energy, North America Energy Delivery and International Energy. In October 2002,
TXU Corp. discontinued its operations in Europe. The International Energy
segment has been renamed and consists solely of operations in Australia. (See
Note 17 for further information concerning reportable business segments.)
A-67
Business Changes
Business Acquisitions -- TXU Corp. and its continuing subsidiaries have
made the following acquisitions, which were accounted for as purchase business
combinations. The results of operations of the acquired companies are reflected
in the consolidated financial statements from their respective acquisition
dates.
In April 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 (MW) combined-cycle power production facility and
various contracts, including electric supply and gas transportation agreements.
In May 2000, TXU Corp. acquired a telecommunications company, Fort Bend
Communication Company, for $161 million and TXU Australia acquired certain
assets and liabilities of Optima Energy Pty Ltd for $177 million.
Dispositions -- TXU Corp. intends to sell its 60% interest in a gas
distribution business in Mexico and recorded a charge of $15 million after-tax
in the third quarter of 2002 to write-down its investment in the business. The
charge was reported as discontinued operations. (See Note 3.)
In May 2000, TXU Gas sold substantially all of the assets of its natural
gas processing subsidiary for $105 million, resulting in a pre-tax gain of $53
million ($34 million after-tax), reported in other income in the statement of
income.
Generation Plant Acquisition and Disposition -- In May 2002, TXU Energy
acquired a 260 MW combined-cycle power generation 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.
In April 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 MW for $443 million in cash. Concurrent with the sale, TXU Energy
entered into a tolling agreement to purchase power during the summer months
through 2006. The terms of the tolling agreement include above-market pricing,
representing a fair value liability of $190 million. A pretax gain on the sale
of $146 million, net of the effects of the tolling agreement, was deferred and
is being recognized in other income during summer months over the five-year term
of the tolling agreement. Both the value of the tolling agreement and the
deferred gain are reported in other liabilities in the balance sheet.
Joint Venture -- In August 2000, TXU Corp. formed a joint venture with
third-party investors and contributed the stock of its telecommunications
subsidiaries, including Fort Bend Communication Company, to Pinnacle One
Partners, L.P. (Pinnacle or the joint venture) for a 50% voting interest and a
distribution of approximately $600 million in cash. The third-party investors
contributed $150 million for the remaining 50% voting interest. No gain or loss
was recorded on the formation of the joint venture. TXU Corp.'s investment in
the joint venture is accounted for using the equity method. (See Notes 5 and
16.)
A-68
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements of TXU
Corp. and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the US and, except for the discontinuance of
TXU Europe operations and the reclassifications made in accordance with the
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues Involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities" and the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" discussed below, on the same basis as the audited financial statements
included in its 2001 Form 10-K. Investments in businesses over which TXU Corp.
does not maintain effective control, such as the Pinnacle joint venture, are
generally accounted for under the equity method, and the assets and liabilities
of such investees are, therefore, not reflected in the consolidated financial
statements. The only significant unconsolidated entities are the Pinnacle joint
venture and the company established to purchase accounts receivable from
subsidiaries of TXU Corp. (see Notes 6 and 16). In the opinion of management,
all other adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of the results of operations and financial position have been
included therein. All intercompany items and transactions have been eliminated
in consolidation. All dollar amounts in the financial statements and tables in
the notes, except per share amounts, are stated in millions of US dollars unless
otherwise indicated.
In October 2002, TXU Corp. made a determination to discontinue its
operations in Europe. The results of TXU Europe are reported as discontinued
operations for all periods presented. See Note 3 regarding events related to TXU
Europe.
TXU Corp. has adopted a new income statement format. Certain previously
reported amounts have been reclassified to conform to current classifications.
The following summarizes the components of the new line items:
Cost of energy sold and delivery fees -- Includes costs of nuclear, coal
and gas fuel used by generation plants, energy purchased for resale and delivery
fees paid to electricity delivery businesses.
Operating costs -- Includes all labor and overhead costs incurred to
perform activities directly related to power generation and the transmission and
distribution of electricity and gas.
Selling, general and administrative expenses -- Includes all labor and
related overhead costs incurred to perform support services such as finance,
accounting, portfolio management, meter reading, customer billing, customer
service, collections, marketing, information technology, legal, regulatory,
environmental and corporate facilities.
Franchise and revenue-based taxes -- Includes state and local gross
receipts tax and franchise taxes.
Presentation of revenues -- In June 2002, the EITF reached a consensus on
certain aspects of EITF Issue No. 02-3 regarding the presentation of trading
activities in the statement of income. The new rules were effective on July 1,
2002, and required that all trading contracts (as defined by EITF Issue No.
98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities"), whether or not physically settled, be recorded net upon
settlement, rather than gross as a sale and cost of sale. TXU Corp. has
historically recorded financial contracts net, but has recorded those contracts
that provide for physical delivery gross upon settlement. Prior period amounts
have been reclassified to conform to this new reporting requirement.
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. With
the rescission of EITF Issue No. 98-10 (see discussion below under Financial
Instruments and Mark-to-Market Accounting), the EITF modified Issue No. 02-3 to
apply to financial instruments that are derivatives and entered into for trading
purposes effective January 1, 2003. The new reporting requirements have no
impact on TXU Corp.'s gross margin, net income or cash provided by operating
activities. (Also see Changes in Accounting Standards below.)
A-69
The table below summarizes the impact on TXU Corp.'s operating revenues
and cost of energy sold and delivery fees for prior years of the new reporting
rules under EITF Issue No. 02-3 and the discontinuance of TXU Europe operations.
Year Ended December 31,
----------------------
2001 2000
---- ----
Operating revenues as previously reported........................ $27,927 $22,009
Historical Europe discontinued operations ....................... (12,719) (7,044)
Cost of energy sold and delivery fees netted with revenues....... (5,159) (5,318)
------- -------
Operating revenues after reclassification........................ $10,049 $ 9,647
======= =======
Cost of energy sold and delivery fees as previously reported..... $19,793 $14,451
Historical Europe discontinued operations ....................... (10,402) (4,927)
Cost of energy sold and delivery fees netted with revenues....... (5,159) (5,318)
------ --------
Cost of energy sold and delivery fees after reclassification..... $4,232 $ 4,206
====== =======
Use of Estimates -- The preparation of TXU Corp.'s financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense, including
mark-to-market valuation adjustments. In the event estimates and/or assumptions
prove to be different from actual amounts, adjustments are made in subsequent
periods to reflect more current information. No material adjustments, other than
those disclosed elsewhere herein, were made to previous estimates during the
current year.
Financial Instruments and Mark-to-Market Accounting -- TXU Corp. enters
into financial instruments, including options, swaps, futures, forwards and
other contractual commitments primarily to manage market risks related to
changes in commodity prices, including cost of fuel for generation of power, as
well as changes in interest rates and foreign currency exchange rates. These
financial instruments are accounted for in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" and, prior to
October 26, 2002, EITF Issue No. 98-10. The majority of financial instruments
entered into by TXU Corp. are derivatives as defined in SFAS No. 133.
SFAS No. 133 requires the recognition of derivatives in the balance sheet,
the measurement of those instruments at fair value and the recognition in
earnings of changes in the fair value of derivatives. This recognition is
referred to as "mark-to-market" accounting. SFAS No. 133 provides exceptions to
this accounting if (a) the derivative is deemed to represent a transaction in
the normal course of purchasing from a supplier and selling to a customer, or
(b) the derivative is deemed to be a cash flow or fair value hedge. In
accounting for cash flow hedges, derivative assets and liabilities are recorded
on the balance sheet at fair value with an offset in other comprehensive income.
Any hedge ineffectiveness is recorded in earnings. Amounts are reclassified from
other comprehensive income to earnings as the underlying transactions occur and
realized gains and losses are recognized in earnings.
TXU Corp. documents designated commodity, debt-related and other hedging
relationships, including the strategy and objectives for entering into such
hedge transactions and the related specific firm commitments or forecasted
transactions. TXU Corp. applies hedge accounting in accordance with SFAS No. 133
for these non-trading transactions, providing the underlying transactions remain
probable of occurring. Effectiveness is assessed based on changes in cash flows
of the hedges as compared to changes in cash flows of the hedged items.
Pursuant to SFAS No. 133, the normal purchase or sale exception and the
cash flow hedge designation are elections that can be made by management if
certain strict criteria are met and documented. As these elections can reduce
the volatility in earnings resulting from fluctuations in fair value, results of
operations could be materially affected by such elections.
Financial instruments entered into in connection with indebtedness to
manage interest rate and foreign currency exchange rate risks are generally
accounted for as cash flow hedges in accordance with SFAS No. 133.
EITF Issue No. 98-10 required mark-to-market accounting for energy-related
contracts, whether or not derivatives under SFAS No. 133, that were deemed to be
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entered into for trading purposes as defined by that rule. The majority of
commodity contracts and energy-related financial instruments entered into by TXU
Corp. to manage commodity price risk represented trading activities as defined
by EITF Issue No. 98-10 and were therefore marked-to-market. On October 25,
2002, the EITF rescinded EITF Issue No. 98-10. Pursuant to this rescission, only
financial instruments that are derivatives under SFAS No. 133 will be subject to
mark-to-market accounting. See discussion below under "Changes in Accounting
Standards."
In June 2002, in connection with the EITF's consensus on Issue No. 02-3,
additional guidance on recognizing gains and losses at the inception of a
trading contract was provided. In November 2002, this guidance was extended to
all derivatives. If the C&I retail contracts that TXU Corp. enters into do not
meet the requirements of the revised guidance, then income from such contracts
will be recognized on a settlement basis.
The majority of financial instruments entered into by TXU Corp. for the
purpose of managing risk or optimizing margins in meeting the energy demands of
customers are derivatives and will continue to be subject to SFAS No. 133.
Mark-to-market accounting recognizes changes in the value of financial
instruments as reflected by market price fluctuations. In the energy market, the
availability of quoted market prices is dependent on the type of commodity
(e.g., natural gas, electricity, etc.), time period specified and location of
delivery. In computing the mark-to-market valuations, each market segment is
split into liquid and illiquid periods. The liquid period varies by region and
commodity. Generally, the liquid period is supported by broker quotes and
frequent trading activity. In illiquid periods, little or no market information
may exist, and the fair value is estimated through market modeling techniques.
For those periods where quoted market prices are not available, forward
price curves are developed based on the available information or through the use
of industry accepted modeling techniques and practices based on market
fundamentals (e.g., supply/demand, replacement cost, etc.). As a matter of
policy, however, TXU Corp. generally does not recognize any income or loss from
the illiquid periods.
Revenue Recognition -- TXU Corp. generally records revenue for retail
and wholesale energy sales under the accrual method, with the exception of
certain large C&I retail contracts that are derivatives as defined in SFAS No.
133 and have therefore been marked-to-market. Retail electric and gas revenues
are recognized when the commodity is provided to customers on the basis of
periodic cycle meter readings and include an estimated accrual for the value of
the commodity consumed from the meter reading date to the end of the period. The
unbilled revenue is estimated at the end of the period based on estimated daily
consumption after the meter read date to the end of the period. Estimated daily
consumption is derived using historical customer profiles adjusted for weather
and other measurable factors affecting consumption. Electricity T&D revenues are
recognized when delivery services are provided to customers on the basis of
periodic cycle meter readings and include an estimated accrual for the delivery
fee value of electricity provided from the meter reading date to the end of the
period.
As a result of the opening of the Texas market to competition and related
changes in systems and processes within the Electric Reliability Council of
Texas (ERCOT), adjustments are recorded for accounts receivable from or payable
to ERCOT related to system balancing and are recorded net in revenues. Such
balances reflect estimates of volumetric data and are subject to adjustment as
data is reconciled and final settlements are determined.
Revenues reflect unrealized gains and losses related to large C&I retail
contracts, including unrealized gains recorded upon inception of these
contracts. Results of wholesale portfolio management activities, which represent
realized and unrealized gains and losses from transacting in energy-related
contracts, are also reported as a component of revenues. Also see discussion of
Financial Instruments and Mark-To-Market Accounting above.
The historical financial statements for periods prior to 2002 included
adjustments made to revenues for over/under-recovered fuel costs. To the extent
fuel costs incurred exceeded regulated fuel factor amounts included in customer
billings, TXU Corp. recorded revenues on the basis of its ability and intent to
obtain regulatory approval for rate surcharges on future customer billings to
recover such amounts. Conversely, to the extent fuel costs incurred were less
than amounts included in customer billings, revenues were reduced. Following
deregulation of the Texas market on January 1, 2002, any changes to the fuel
factor component of the price-to-beat rate amounts are applied prospectively.
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Regulatory Assets and Liabilities -- The financial statements of TXU
Corp.'s regulated businesses, primarily its US electricity T&D (Oncor) and its
US gas distribution operations (TXU Gas), reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with SFAS No. 71,
"Accounting for the Effect of Certain Types of Regulation." As a result of the
1999 Restructuring Legislation, the US electricity generation portion of TXU
Corp.'s business no longer meets the criteria to apply regulatory accounting
principles. Accordingly, application of SFAS No. 71 to the generation portion of
TXU Corp.'s business was discontinued as of June 30, 1999. Oncor's operations
continue to meet the criteria for recognition of regulatory assets and
liabilities.
In 2002, TXU Corp. recorded an extraordinary loss of $134 million (net of
income tax benefit of $72 million) principally to write down the regulatory
asset related to securitization bonds to be issued in accordance with TXU
Corp.'s settlement plan with the Commission as described in Note 15 to Financial
Statements. The carrying value of the regulatory asset is intended to represent
the amount of future cash flows related to the bonds to be recovered from REPs
through increased electricity delivery rates; determination of such amount is
based on estimates. The writedown, which was taken as a result of the final
approval of the settlement plan, reflects the impact of lower interest rates. As
actual interest rates on the bonds may differ from current estimates, the
regulatory asset carrying value, which was $1.7 billion at December 31, 2002, is
subject to further adjustment.
Investments -- Deposits in an external trust fund for nuclear
decommissioning are carried at fair value in the balance sheet with the
cumulative increase in fair value recorded as a liability, to reflect the
statutory nature of the trust. Investments in nonutility properties are
primarily assets held for future development and are carried at cost, subject to
periodic impairment evaluation. Investments in unconsolidated business entities
over which TXU Corp. has significant influence but does not maintain effective
control, generally representing ownership of at least 20% and not more than 50%
of common stock or partnership interest, are accounted for under the equity
method. (See Note 5 - Investments).
Goodwill and Intangible Assets -- Goodwill represents the excess of the
purchase price paid over the estimated fair value of the assets acquired and
liabilities assumed for each company acquired and was amortized over a range of
20 to 40 years.
SFAS No. 142 became effective for TXU Corp. on January 1, 2002. SFAS No.
142 requires, among other things, the allocation of goodwill to reporting units
based upon the current fair value of the reporting units, and the discontinuance
of goodwill amortization. The amortization of TXU Corp.'s goodwill from
continuing operations ($43 million in 2001) ceased effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. TXU Corp. completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill at that time. In 2002, no impairment
resulted from the additional evaluation performed as of October 1, which has
been selected as the annual impairment test date. TXU Corp. has performed
impairment tests for reporting units reflected in results from continuing
operations, and no goodwill impairment charges were recorded. In 2002, TXU
Corp.'s telecommunications joint venture recorded a goodwill impairment charge,
of which TXU Corp. recognized its share, $9 million ($6 million after-tax). The
charge is reported in other deductions in the statement of income. See Note 16
for further discussion.
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The table below reflects what reported income from continuing operations
and net income (including basic and diluted earnings per share amounts) would
have been in the 2001 and 2000 periods, exclusive of goodwill amortization
expense recognized for consolidated entities in those periods compared to the
2002 periods.
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Reported income from continuing operations................... $ 175 $ 639 $ 666
Add back goodwill amortization.............................. - 43 50
------- ------- -------
Adjusted income from continuing operations................... 175 682 716
Income (loss) from discontinued operations, net of tax effect (4,210) 192 250
Extraordinary loss, net of tax effect....................... (175) (154) -
------- ------- -------
Adjusted net income (loss)................................... (4,210) 720 966
Preference stock dividends................................... 22 22 12
------- ------- -------
Adjusted net income (loss) available for common stock........ $(4,232) $ 698 $ 954
======= ======= =======
Basic and diluted earnings per share:
Reported income from continuing operations................... $ 0.55 $ 2.38 $ 2.48
Add back goodwill amortization.............................. - 0.16 0.19
------- ------- -------
Adjusted income from continuing operations................... 0.55 2.54 2.67
Income (loss) from discontinued operations, net of tax effect (15.15) 0.74 0.95
Extraordinary loss, net of tax effect........................ (0.63) (0.60) -
------- ------ -------
Adjusted net income (loss) available for common stock-basic.. $(15.23) $ 2.68 $ 3.62
======= ======= =======
Adjusted net income (loss) available for common stock-diluted $(15.23) $ 2.68 $ 3.62
======= ======= =======
SFAS No. 142 also requires additional disclosures regarding intangible
assets (other than goodwill) that are amortized or not amortized:
As of December 31, 2002 As of December 31,2001
------------------------------- --------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ ------ -------- ------------ -----
Amortized intangible assets
Capitalized software.............. $540 $217 $323 $345 $131 $214
Land easements.................... 195 68 127 188 70 118
Mineral rights and other.......... 32 21 11 32 20 12
---- ---- ---- ---- ---- ----
Total....................... $767 $306 $461 $565 $221 $344
==== ==== ==== ==== ==== ====
Unamortized intangible assets
Licenses (a)................ $321 $ 32 $289 $290 $ 29 $261
==== ===== ==== ==== ===== ====
(a) The amortization of indefinite-life licenses was suspended with the adoption
of SFAS No. 142.
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet, and unamortized intangible assets are included
with goodwill.
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Aggregate TXU Corp. amortization expense for intangible assets, excluding
goodwill, for the years ended December 31, 2002, 2001 and 2000 was $91 million,
$53 million and $38 million, respectively; estimated amounts for the next five
years are as follows:
Amortization
Year Expense
---- -----------
2003................................................. $76
2004................................................. 70
2005................................................. 63
2006................................................. 57
2007................................................. 34
Changes in the carrying amount of goodwill (net of accumulated
amortization) for the year ended December 31, 2002, are as follows:
North
North America
America Energy
Energy Delivery Australia Total
------ -------- --------- -----
Balance at December 31, 2001......... $ 65 $ 799 $ 656 $ 1,520
Goodwill transferred........... 468 (468) - -
Foreign currency translation
effects ....................... - - 68 68
------- ------ -------- ---------
Balance at December 31, 2002......... $ 533 $ 331 $ 724 $ 1,588
======= ====== ======== =========
At December 31, 2002 and 2001, goodwill was stated net of accumulated
amortization of $189 million and $182 million, respectively.
Property, Plant and Equipment -- US electric and gas utility plant is
stated at original cost less certain regulatory disallowances. The cost of T&D
property additions to North America Energy Delivery (and generation property
additions prior to July 1, 1999) and gas utility plant includes labor and
materials, applicable overhead and payroll-related costs and an allowance for
funds used during construction. Generation property additions subsequent to July
1, 1999, and other property, including non-US property, are stated at cost.
Interest Capitalized and Allowance For Funds Used During Construction
(AFUDC) -- AFUDC is a cost accounting procedure whereby amounts based upon
interest charges on borrowed funds and a return on equity capital used to
finance construction are added to utility plant being constructed. Prior to July
1, 1999, AFUDC was capitalized for all expenditures for ongoing construction
work in progress and nuclear fuel in process not otherwise included in rate base
by regulatory authorities. As a result of the 1999 Restructuring Legislation,
effective July 1, 1999, recording of AFUDC ceased on construction work in
progress of generation assets and only interest was capitalized during
construction. Interest and AFUDC related to debt for subsidiaries that still
apply SFAS No. 71 are capitalized as a component of projects under construction.
Interest on qualifying projects for subsidiaries that no longer apply SFAS No.
71 is capitalized in accordance with SFAS No. 34, "Capitalization of Interest
Cost."
Valuation of Long-Lived Assets -- TXU Corp. evaluates the carrying value
of long-lived assets to be held and used when events and circumstances warrant
such a review. The carrying value of long-lived assets would be considered
impaired when the projected undiscounted cash flows are less than the carrying
value. In that event, a loss would be recognized based on the amount by which
the carrying value exceeds the fair value. Fair value is determined primarily by
available market valuations or, if applicable, discounted cash flows. (See
Changes in Accounting Standards below.)
In 2002, TXU Corp. recorded an impairment charge of $237 million ($154
million after-tax) for the writedown of two generation plant construction
projects as a result of current wholesale electricity market conditions and
reduced planned developmental capital spending. Fair value was determined based
on current appraisals of property and equipment. The charge is reported in other
deductions in the statement of income. As the writedown is based on current
estimates, the remaining carrying value of the projects of $113 million is
subject to further adjustment should estimates of recoverable value change.
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Additionally, in 2002 TXU Corp.'s telecommunication joint venture
recognized writedowns related to long-lived assets, of which TXU Corp.
recognized its share, $28 million ($18 million after-tax). The writedowns
reflected estimated net realizable values of assets in the competitive local
exchange carrier and fiber-optic transport operations held for sale. The charge
is reported in other deductions in the statement of income. See Note 16 for
further discussion.
Foreign Currency Translation -- The assets and liabilities of non-US
operations denominated in local currencies are translated at rates in effect at
year end. Revenues and expenses are translated at average rates for the
applicable periods. Generally, local currencies are considered to be the
functional currency, and adjustments resulting from such translation are
included in other comprehensive income (loss).
Depreciation of Property, Plant and Equipment -- Depreciation of TXU
Corp.'s property, plant and equipment is generally calculated on a straight-line
basis over the estimated service lives of the properties. Depreciation also
includes an amount for decommissioning costs for the nuclear powered electricity
generation plant (Comanche Peak), which is being accrued over the lives of the
units. Consolidated depreciation as a percent of average depreciable property
for TXU Corp. approximated 2.8% for 2002 and 2.7% for 2001 and for 2000. See
discussion below under Changes in Accounting Standards regarding SFAS No. 143.
TXU Corp. capitalizes computer software costs in accordance with American
Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use." These costs are being amortized over periods ranging from three to ten
years.
Major Maintenance -- Major maintenance outage costs related to nuclear
fuel reloads are charged to expense as incurred.
Amortization of Nuclear Fuel -- The amortization of nuclear fuel in the
reactors (net of regulatory disallowances) is calculated on the
units-of-production method and is included in cost of energy sold.
Franchise and Revenue-Based Taxes -- Franchise and revenue-based taxes
such as gross receipts taxes are generally not a "pass through" item such as
sales and excise taxes. Gross receipts taxes are assessed to TXU Corp. and its
subsidiaries by state and local governmental bodies, based on revenues, as a
cost of doing business. TXU Corp. records gross receipts tax as an expense.
Rates charged to customers by TXU Corp. are intended to recover the taxes, but
TXU Corp. is not acting as an agent to collect the taxes from customers.
Income Taxes -- TXU Corp. and its US subsidiaries file a consolidated
federal income tax return, and federal income taxes are allocated to
subsidiaries based upon their respective taxable income or loss. Investment tax
credits are amortized to income over the estimated service lives of the
properties. Deferred income taxes are provided for temporary differences between
the book and tax basis of assets and liabilities. Certain provisions of SFAS No.
109, "Accounting for Income Taxes", provide that regulated enterprises are
permitted to recognize deferred taxes as regulatory tax assets or tax
liabilities if it is probable that such amounts will be recovered from, or
returned to, customers in future rates.
Income Taxes on Undistributed Earnings of Non-US Subsidiaries -- TXU Corp.
intends to reinvest the earnings of its non-US subsidiaries into those
businesses. Accordingly, no provision has been made for taxes which would be
payable if such earnings were to be repatriated. Upon distribution of these
earnings in the form of dividends or otherwise, TXU Corp. may be subject to US
income taxes and foreign withholding taxes. It is not practicable, however, to
estimate the amount of taxes that may be payable on the eventual remittance of
these earnings.
Gains/Losses on Extinguishments of Debt -- Gains and losses on reacquired
debt are recognized in the statement of income as incurred in accordance with
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", unless
these costs will be recovered from customers through regulated cash flows. In
that case, these gains or losses are deferred and recorded as a regulatory asset
and amortized to interest expense over the period approved for ratemaking
purposes. (See Changes in Accounting Standards below.)
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Earnings Per Share -- Basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share include the effect of all potential issuances
of common shares under certain debt securities and other arrangements. For the
years ended December 31, 2002, 2001 and 2000, 108,382, 235,449, and 447,827
shares, respectively, were added to the average shares outstanding.
Additional dilution of earnings per share would result for common stock
associated with 6,993,600 and 17,960,000 shares of common stock in connection
with equity-linked debt securities issued in 2002 and 2001, respectively, if the
average of the closing price per share of TXU Corp. common stock on each of the
twenty consecutive trading days ending on the third day immediately preceding
the period end is above the strike price of $62.91 and $55.68 per share, for the
respective issuances.
In November 2002, TXU Energy issued $750 million of exchangeable
subordinated notes (see Note 7). The notes may be exchanged at any time for TXU
Corp. common stock at an initial exercise price of $13.15 per share. The number
of shares of TXU Corp. common stock that may be issuable upon the exercise of
the exchange right is approximately 57 million. For the periods ended December
31, 2002, these securities were antidilutive and not included in the calculation
of diluted earnings per share as the interest per share on the notes was greater
than basic earnings per share. As a result of the common stock offering in
December 2002, the exercise price has been adjusted to $13.1242 per share.
Cash Equivalents -- For purposes of reporting cash and cash equivalents,
temporary cash investments purchased with a remaining maturity of three months
or less are considered to be cash equivalents.
Changes in Accounting Standards -- On October 25, 2002, the EITF rescinded
EITF Issue No. 98-10 which required mark-to-market accounting for all trading
activities. Pursuant to this rescission, only financial instruments that are
derivatives under SFAS No. 133 will be subject to mark-to-market accounting.
Financial instruments that may not be derivatives under SFAS No. 133 but were
marked-to-market under EITF Issue No. 98-10, consist primarily of gas
transportation and storage agreements, power tolling, full requirements and
capacity contracts. This new accounting rule was effective for new contracts
entered into after October 25, 2002. Non-derivative contracts entered into prior
to October 26, 2002, continued to be accounted for at fair value through
December 31, 2002; however, effective January 1, 2003, such contracts were
required to be accounted for on a settlement basis. Accordingly, a charge of
approximately $100 million ($65 million after-tax) is expected to be reported as
a cumulative effect of an accounting change in the first quarter of 2003. The
expected cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.
SFAS No. 143, "Accounting for Asset Retirement Obligations", became
effective on January 1, 2003. SFAS No. 143 requires entities to record the fair
value of a legal liability for an asset retirement obligation in the period in
which it is incurred. When a new liability is recorded beginning in 2003, the
entity will capitalize the net present value of the liability by increasing the
carrying amount of the related long-lived asset. The liability is accreted each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Legal liabilities identified by TXU Corp. relate primarily to
nuclear decommissioning and reclamation of lands mined for lignite.
Prior to January 2003, TXU Corp. recorded liabilities for nuclear
decommissioning and for land reclamation in accumulated depreciation. Upon
adoption of SFAS No. 143, TXU Corp. will reclassify $271 million previously
recorded in accumulated depreciation and record the related liability. TXU Corp.
has not previously recorded costs of any other asset retirement obligations that
require recognition upon adoption.
With respect to nuclear decommissioning costs, TXU Corp. believes that the
adoption of SFAS No. 143 results primarily in timing differences in the
recognition of legal asset retirement costs that TXU Energy is currently
recovering, as Oncor recovers decommissioning fees from REPs on behalf of TXU
Energy, and will be deferring such differences through the regulatory process as
described in Note 15. The impact of adopting SFAS No. 143 is not expected to be
significant to TXU Corp.'s earnings and financial condition.
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SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective January 1, 2002. SFAS No. 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," for long-lived assets to be disposed of by sale, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," was issued in April 2002
and will be effective on January 1, 2003. One of the provisions of this
statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." Any gain or loss on the early extinguishment of debt
that was classified as an extraordinary item in prior periods in accordance with
SFAS No. 4 will be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and became 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.
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" was issued in December 2002. TXU Corp. adopted the disclosure
requirements of SFAS No. 148 effective December 31, 2002. This statement
requires that the pro forma information related to stock based compensation, for
companies that do not use fair value accounting, be presented in a table in the
accounting policies footnote. It also provides other transition alternatives
when companies adopt fair value accounting for stock based compensation. TXU
Corp. does not currently issue stock options, and only approximately 26,000
previously issued options remain outstanding at December 31, 2002.
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" was issued in
November 2002 and became effective for disclosures made in December 31, 2002,
financial statements. The interpretation requires expanded disclosures of
guarantees (see Note 16 to Financial Statements - Guarantees). In addition, the
interpretation requires recording the fair value of guarantees upon issuance or
modification after January 1, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for the quarter ending September 30, 2003.
For accounting standards not yet adopted or implemented, including recent
EITF rules regarding recognition of gains and losses at the inception of a
derivative contract, TXU Corp. is evaluating the potential impact on its
financial position and results of operations.
3. DISCONTINUED OPERATIONS
Exit of TXU Europe Operations -- On October 4, 2002, TXU Corp. announced
that it was reducing earnings expectations for 2002 and 2003 due primarily to
continued pressure on operating results in the United Kingdom (UK). A
significant decrease in wholesale power prices and low price volatility, due in
part to milder than normal weather, had led to continuing declines in
profitability and cash flows from TXU Europe's upstream electricity generation
assets and short-term wholesale trading activities. In addition, TXU Europe's
ability to enter into structured transactions (long-term trades) had been
considerably reduced because of depressed market activity and lack of available
counterparties due to energy sector-wide credit concerns. A significant portion
of TXU Europe's retail power load in the UK was satisfied with long-term
agreements that obligated TXU Europe to purchase power at prices considerably in
excess of current wholesale market prices. These comparatively high power
purchase costs, combined with increased competition and associated customer
attrition, had resulted in reduced profitability and cash flows from TXU
Europe's retail electric business. TXU Europe's planned actions to address the
situation included restructuring the power purchase agreements and physical
generation positions in the UK, ceasing acquisition and other developmental
activities, reducing administrative costs and enhancing retail margins.
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On October 14, 2002, TXU Corp. announced that TXU Europe was offering for
sale all or portions of its business. Such action effectively represented a
determination by TXU Corp. to exit all of its operations in Europe.
On October 21, 2002, TXU Europe sold certain of its operations to
Powergen, a unit of Germany's E.ON AG, for approximately $2.1 billion
((pound)1.37 billion) in cash. The operations sold included: (a) the retail
electric and gas business in the UK, consisting of 5.3 million residential and
C&I customers, and (b) three power plants representing a total of 2.9 gigawatts
of coal-fired generation and a combined heat and power plant, all in the UK. The
sale and purchase agreement also provided for the transfer of approximately
1,900 employees in the UK to Powergen and the assumption by Powergen of the
associated pension obligations.
After the sale, TXU Europe retained: (a) its energy trading assets and
liabilities; (b) several long-term power purchase agreements in the UK; (c)
operations in Germany consisting of a national retail energy provider with
200,000 customers, as well as majority interests in two businesses providing
power, gas, heating and water services: the city utility in Kiel (51% owned)
with 250,000 customers and the city utility in Braunschweig (74.9% owned) with
210,000 customers; (d) operations in Scandinavia consisting of an 80% owned
wholesale power business in Finland, selling over four terawatt hours of
electricity annually, a 45% interest in an electricity distribution business in
Finland with access to 90,000 customers and a retail energy business with 80,000
customers in Norway; and (e) two combined heat and power plants in the UK and
interests in various renewable energy projects, mostly wind farms.
Subsequently, TXU Europe's principal UK subsidiaries entered into formal
administration processes in the UK (similar to bankruptcy proceedings in the
US). All operations are being managed by the administrators for the benefit of
the creditors of TXU Europe and its subsidiaries, consistent with UK law. The
sales proceeds discussed above, as well as any other proceeds that may be
realized, will not be available to TXU Corp.
Accordingly, TXU Europe has been reflected as discontinued operations in
the statements of consolidated income and cash flows of TXU Corp., and the prior
periods have been restated. TXU Corp.'s charge related to TXU Europe of $4.2
billion in the fourth quarter of 2002 consisted primarily of the write-off of
its investment in TXU Europe of $3.9 billion, including $168 million of foreign
currency cumulative translation loss. The total charge also included the
write-off of receivables due from TXU Europe, as well as certain anticipated
income tax and other obligations related to the exiting of the European
operations. This charge is before consideration of any income tax benefit,
aggregating approximately $1.2 billion with respect to the write-off of TXU
Corp.'s investment in TXU Europe, as well as certain contingent income tax
liabilities aggregating approximately $300 million. Any tax benefit related to
the write-off of the investment will be recognized in income in accordance with
SFAS No. 109, "Accounting for Income Taxes." The contingent tax liabilities
associated with the write-off will be recognized in income if it becomes
probable that such liabilities have been incurred. TXU Corp. will not fund the
future operations or any obligations of TXU Europe.
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The following summarizes the historical consolidated financial information
of TXU Europe included in discontinued operations:
Year Ended December 31,
-----------------------------
2002(a) 2001 2000
------- ---- ----
Operating revenues.................................................. $4,052 $12,719 $7,044
------ ------- ------
Operating costs and expenses........................................ 3,852 12,299 6,372
Other deductions (income)-- net..................................... 6 45 (121)
Interest income..................................................... (15) (99) (90)
Interest expense and other charges.................................. 255 579 574
------ ------ ------
Income (loss) before income taxes.................................. (46) (105) 309
Income tax expense (benefit)........................................ (38) (297) 59
------ ------ ------
Income (loss) from operations ...................................... (8) 192 250
Write-off related to exit........................................... (4,187) - -
-------- ------ ------
Income (loss) from discontinued operations ..................... $(4,195) $ 192 $ 250
======= ====== ======
(a) Reflects operations through September 30, 2002.
Year Ended
December 31, 2001
----------------
Current Assets
Cash........................................... $ 945
Accounts receivable-- trade.................... 1,389
Inventories ................................... 90
Commodity contract assets...................... 832
Other current assets........................... 384
------
Total current assets........................ 3,640
Long-term Assets
Investment and restricted cash................. 1,208
Property, plant and equipment - net............ 3,062
Goodwill....................................... 5,728
Commodity contract assets...................... 246
Cash flow hedges and other derivative assets... 284
Other assets................................... 707
------
Total assets................................ 14,875
------
Current liabilities
Notes payable - banks........................... 1,308
Long-term debt due currently.................... 441
Accounts payable-- trade........................ 1,608
Commodity contract liabilities.................. 915
Other current liabilities....................... 437
------
Total current liabilities................... 4,709
Noncurrent liabilities
Accumulated deferred income taxes................. 346
Commodity contract liabilities.................... 266
Cash flow hedges and other derivative
liabilities..................................... 198
Long-term debt, less amounts due currently........ 5,247
Preferred securities of subsidiary trust.......... 150
Other noncurrent liabilities and deferred credits. 944
------
Total liabilities........................... 11,860
------
Net investment......................................... $ 3,015
======
A-79
Sale of Certain Operations in Mexico -- TXU Corp. intends to sell its 60%
interest in a gas distribution business in Mexico and recorded a charge of $15
million (after taxes of $8 million) in the third quarter of 2002 to write-down
its investment in the business. The charge was reported as discontinued
operations.
4. EXTRAORDINARY LOSS
Loss on reacquisition of debt -- In October 2002, TXU Corp. recorded a $23
million extraordinary loss (net of income tax benefit of $12 million) for the
cash premiums paid on the early redemption of $200 million aggregate principal
amount of Putable Asset Term Securities (PATS notes). (See Note 7.)
During 2002, TXU Corp. redeemed other long-term debt earlier than due,
including $114 million of senior notes in the first quarter, resulting in
extraordinary losses of $18 million (net of income tax benefits of $10 million).
As a result of US Holdings' debt restructuring and refinancings in the
fourth quarter of 2001, TXU Corp. recorded an extraordinary loss of $97 million
(net of income tax benefit of $52 million) for the early reacquisition of debt
related to TXU Energy by US Holdings.
Loss on settlement -- As a result of the Settlement Plan submitted to the
Commission for approval of outstanding unbundling issues (see Note 15), TXU
Corp. recorded an extraordinary loss of $57 million (net of income tax benefit
of $63 million) in the fourth quarter of 2001 to reflect the effect of
settlement items that are no longer probable of recovery. The settlement-related
items include unrecovered fuel cost, all remaining generation-related regulatory
assets and regulatory liabilities that are not subject to recovery through the
issuance of securitization bonds, and the excess cost over market of certain
purchased power contracts.
In August 2002 the Regulatory Settlement Plan was approved and a financing
order was issued by the Commission, authorizing the issuance of transition
(securitization) bonds with a principal amount of $1.3 billion. (See Note 15.)
With the final approval of the settlement plan in January 2003, TXU Corp. may
proceed with the issuance of securitization bonds as provided in the Commission
financing order. In the fourth quarter of 2002, TXU Corp. recorded an
extraordinary loss of $134 million (net of income tax benefit of $72 million)
principally reflecting a writedown of regulatory assets. The writedown reflects
the effect of lower expected cash flows associated with the securitization bonds
due to the decline in interest rates.
5. INVESTMENTS
The following information is a summary of the investment balance as of
December 31, 2002 and 2001:
December 31,
-----------------------
2002 2001
---- ----
Equity method investments in entities......................... $ 35 $ 25
Nuclear decommissioning trust................................. 266 276
Nonutility property........................................... 143 347
Assets related to certain employee benefit plans.............. 123 116
Notes receivable from unconsolidated entities................. 155 182
Miscellaneous other........................................... 35 39
------ ------
Total investments....................................... $ 757 $ 985
====== ======
A-80
The principal investee companies (and related ownership interest) are:
Investee Accounting Carrying
Company Method Ownership Amount
-------- ---------- ---------- --------
SEA Gas - Australia Equity 33.3% $ 31
Utech Climate Challenge Fund, LP Equity 9.66% 1
Various US equity companies Equity 5.5%-20% 3
-----
$ 35
=====
See discussion regarding the telecommunications joint venture in Note 16
under "Investments in Unconsolidated Entities."
Nuclear Decommissioning Trust -- Deposits in an external trust fund for
nuclear decommissioning costs are carried at fair value ($266 million and $276
million at December 31, 2002 and 2001, respectively), with the cumulative
increase in fair value recorded as a liability, reflecting the statutory nature
of the trust (see Note 16 - Nuclear Decommissioning). Decommissioning costs are
being recovered from Oncor's customers as a non-bypassable T&D charge over the
life of the plant and deposited in the external trust fund. As of December 31,
2002 and 2001, the composition of the external trust fund for decommissioning of
the Comanche Peak nuclear power generating station was as follows:
December 31, 2002
--------------------------------------------------------------------------------
Cost Unrealized gain Unrealized (loss) Fair market value
Debt securities............ $ 128 $ 10 $ (1) $ 137
Equity securities.......... 111 37 (19) 129
------- ------ ------ -------
$ 239 $ 47 $ (20) $ 266
======= ====== ====== =======
December 31, 2001
--------------------------------------------------------------------------------
Cost Unrealized gain Unrealized (loss) Fair market value
Debt securities............ $ 120 $ 5 $ - $ 125
Equity securities.......... 99 61 (9) 151
------- ------ ------ -------
$ 219 $ 66 $ (9) $ 276
======= ====== ======- =======
Debt securities held at December 31, 2002 mature as follows: $48 million
in one to five years, $28 million in five to ten years and $61 million after ten
years.
Nonutility Property -- Nonutility property primarily represents the fair
value of land and equipment related to two lignite-fueled generation plant
construction projects in Texas with a carrying value of $113 million at December
31, 2002. (See Note 2 - Impairment of Long-Lived Assets.)
Assets related to certain employee benefit plans -- TXU Corp. has several
deferred compensation and life insurance plans for qualified employees. Most of
the assets of these plans represent cash surrender values of life insurance
policies that are purchased to fund various commitments under these plans. TXU
Corp. pays the premiums and is the beneficiary of these life insurance policies.
As of December 31, 2002, the face amount of these policies was $527 million and
the net cash surrender value was $91 million. The remainder of the assets
represents amounts held in trust funds for the deferred compensation plans.
These assets are generally recorded at cost.
Notes Receivable from Unconsolidated Entities -- Notes receivable from
unconsolidated subsidiaries primarily reflects the amounts due from the Pinnacle
joint venture under a $200 million revolving credit facility provided by TXU
Corp. expiring in 2004. At December 31, 2002, the balance outstanding under the
facility was $144 million.
A-81
6. SHORT-TERM FINANCING
At December 31, 2002, TXU Corp. had outstanding short-term borrowings
consisting of bank borrowings of $2.3 billion and commercial paper of $18
million. During the years 2002 and 2001, TXU Corp.'s average amounts outstanding
for short-term borrowings were $2.2 billion. Weighted average interest rates on
short-term borrowings were 2.60% and 3.36% at December 31, 2002 and 2001,
respectively.
At December 31, 2002, TXU Corp. has credit facilities (some of which
provide for long-term borrowings) as follows:
At December 31, 2002
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
364-Day Revolving Credit Facility April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ 121 $ 879 $ --
364-Day Senior Secured Credit December 2003 Oncor
Facility 150 -- -- 150
Five -Year Revolving Credit Facility February 2005 US Holdings 1,400 473 927 --
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 -- 500 --
------- ------ ------ ------
Total US $ 3,050 $ 594 $2,306 $ 150
Senior Facility October 2004 TXU Australia $ 989 $ -- $ 871 $ 118
Working Capital Facility October 2003 TXU Australia 56 -- -- 56
Standby Facility (a) December 2003 TXU Australia 18 -- -- --
------- ------ ------ ------
Total Australia $ 1,063 $ -- $ 871 $ 174
(a) Supports commercial paper borrowings, which were $18 million at December 31,
2002.
In October 2002, US Holdings, Oncor and TXU Energy borrowed approximately
$2.6 billion in cash against their available credit facilities, the total of
which represented the remaining availability after $549 million was used to
support outstanding letters of credit. These funds and other available cash were
used, in part, to repay outstanding commercial paper upon maturity. As of
December 31, 2002, these facilities were fully drawn and were reflected in notes
payable - banks on the balance sheet. Excess cash of approximately $1.6 billion
at December 31, 2002, has been invested in liquid short-term marketable
securities earning current market rates. These funds will be used to repay debt
as it matures and meet other working capital requirements until such time as the
commercial paper market becomes accessible.
In January 2003, TXU Australia extended its $56 million (A$99 million)
working capital facilities to October 2003. At December 31, 2002, the facility
was fully available for future borrowings.
In October 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility was 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
was to be available for general corporate purposes at Oncor. In December 2002,
Oncor issued $850 million senior secured notes, reducing the commitment to $150
million. Oncor subsequently converted the commitment to a $150 million secured
364-day credit facility.
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 borrowings outstanding at any time 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.
A-82
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 December 31, 2002, each
of the US credit facilities listed above provided back-up for outstanding
commercial paper under the Oncor and TXU Energy programs. The TXU Corp.
commercial paper program was discontinued in July 2002, and at that time, TXU
Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of December 31, 2002, there was no outstanding commercial
paper under these programs. Concurrent with events in October 2002, as described
in Note 3, US commercial paper markets became inaccessible to TXU Corp., TXU
Energy and Oncor. Commercial paper borrowings are expected to resume as market
concerns regarding the liquidity of TXU Corp. and its US subsidiaries are
mitigated.
With respect to the 364-day revolving credit facility in the above table,
TXU Corp. is pursuing various alternatives for renewing this facility, including
the option under the agreement of converting the outstanding borrowings at the
end of the term to a 364-day term loan.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
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 December 31, 2002, TXU Energy
(through certain subsidiaries), 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 December 31, 2002, $1.26 billion
face amount of receivables were sold to TXU Receivables Company under the
program in exchange for cash of $406 million and $820 million in subordinated
notes, with $31 million of losses on sales for the year ended December 31, 2002
that principally represents the interest costs on the underlying financing.
These losses approximated 5% of the cash proceeds from the sale of undivided
interests in accounts receivable on an annualized basis. Funding under the
program decreased from $600 million at September 30, 2002 to $406 million at
December 31, 2002, primarily due to billing and collection delays arising from
new systems and processes in TXU Energy and ERCOT for clearing customers
switching and billing data, as well as seasonality of the business.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be 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 Company, a subsidiary of TXU
Corp., services the purchased receivables and is paid a market based servicing
fee by TXU Receivables Company. The subordinated notes receivable from TXU
Receivables Company represent TXU Corp.'s subsidiaries' retained interests in
the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables that are
31-90 days past due into the program.
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt
securities of both any originator and its parent
guarantor, if any, declines below BBB- by Standard &
Poor's (S&P) or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for
the sold receivables, the default ratio (delinquent
for 91 days or deemed uncollectible), the dilution
ratio (reductions for discounts, disputes and other
allowances) or the days collection outstanding ratio
exceed stated thresholds.
The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
A-83
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The resolution of these issues as well as the implementation of
new POLR rules by the Commission (see Note 15) are expected to bring the ratios
in consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (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
receivable under the program. If all originators are downgraded so that there
are no eligible originators, the facility would terminate.
The accounts receivable program also 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.
A-84
7. LONG-TERM DEBT
Entity
- ------ December 31,
------------------------
2002 2001
---- ----
TXU Energy
- ----------
Pollution Control Revenue Bonds:
Brazos River Authority:
1.390% Floating Taxable Series 1993 due June 1, 2023(d).......................... $ 44 $ 69
4.900% Fixed Series 1994A due May 1, 2029(c)..................................... 39 39
5.400% Fixed Series 1994B due May 1, 2029(c)..................................... 39 39
5.400% Fixed Series 1995A due April 1, 2030(c)................................... 50 50
5.050% Fixed Series 1995B due June 1, 2030(c).................................... 118 118
4.800% Fixed Series 1999A due April 1, 2033(c)................................... 111 111
1.150% Floating Series 1999B due September 1, 2034(d)............................ 16 16
1.450% Floating Series 1999C due March 1, 2032(d)................................ 50 50
4.950% Fixed Series 2001A due October 1, 2030(c)................................. 121 121
4.750% Fixed Series 2001B due May 1, 2029(c)..................................... 19 19
5.750% Fixed Series 2001C due May 1, 2036(c)..................................... 274 274
4.250% Fixed Series 2001D due May 1, 2033(c)..................................... 271 271
1.940% Floating Taxable Series 2001E due December 31, 2036....................... -- 36
1.700% Floating Taxable Series 2001F due December 31, 2036(d).................... 39 39
1.700% Floating Taxable Series 2001G due December 31, 2036(d).................... 72 72
1.470% Floating Taxable Series 2001H due December 31, 2036(d).................... 31 31
1.420% Floating Taxable Series 2001I due December 31, 2036(d).................... 63 63
1.650% Floating Series 2002A due May 1, 2037(a).................................. 61 --
Sabine River Authority of Texas:
6.450% Fixed Series 2000A due June 1, 2021....................................... 51 51
5.500% Fixed Series 2001A due May 1, 2022(c)..................................... 91 91
5.750% Fixed Series 2001B due May 1, 2030(c)..................................... 107 107
4.000% Fixed Series 2001C due May 1, 2028(c)..................................... 70 70
1.700% Floating Taxable Series 2001D due December 31, 2036(d).................... 12 12
1.470% Floating Taxable Series 2001E due December 31, 2036(a).................... 45 45
Trinity River Authority of Texas:
4.900% Fixed Series 2000A due May 1, 2028(c)..................................... 14 14
5.000% Fixed Series 2001A due May 1, 2027(c)..................................... 37 37
Other:
7.000% Fixed Senior Notes - TXU Mining Company LLP due May 1, 2003............... 73 125
3.410% Floating Rate Debentures due May 20, 2003................................. -- 1,500
6.875% Fixed Senior Notes - TXU Mining Company LLP due August 1, 2005............ 30 100
9.000% Fixed Exchangeable Subordinated Notes due November 22, 2012 750 --
Capital Lease obligations........................................................ 10 --
Other............................................................................ 8 8
Unamortized premium and discount................................................. (111) (1)
------ -----
Other............................................................................ 2,605 3,577
------ -----
TXU US Holdings
- ---------------
7.170% Fixed Senior Debentures due August 1, 2007................................ 10 10
9.556% Fixed Notes due in bi-annual installments through December 4, 2019........ 73 75
8.254% Fixed Notes due in quarterly installments through December 31, 2021....... 68 70
2.507% Floating Rate Junior Subordinated Debentures, Series D due January 30,
2037(a).......................................................................... 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037....... 8 8
------ ------
Total TXU US Holdings ....................................................... 160 164
------ -------
A-85
December 31,
-----------------
2002 2001
Oncor
- ----
9.320% Fixed Medium Term Secured Notes due January 15, 2002...................... -- 10
9.680% Fixed Medium Term Secured Notes due February 25, 2002..................... -- 20
9.700% Fixed Medium Term Secured Notes due March 1, 2002......................... -- 25
6.470% Fixed Medium Term Secured Notes due November 13, 2002..................... -- 3
6.560% Fixed Medium Term Secured Notes due November 20, 2002..................... -- 10
6.580% Fixed Medium Term Secured Notes due November 20, 2002..................... -- 5
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... 4 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... 11 11
8.125% Fixed First Mortgage Bonds due February 1, 2002........................... -- 150
8.000% Fixed First Mortgage Bonds due June 1, 2002............................... -- 147
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. 133 194
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. 70 95
2.426% Floating Rate Series C First Mortgage Bonds due June 15, 2003............. -- 400
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
8.875% Fixed First Mortgage Bonds due February 1, 2022........................... -- 112
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... 103 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. 133 133
8.500% Fixed First Mortgage Bonds due August 1, 2024............................. -- 115
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 --
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 --
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 --
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 --
5.000% Fixed Debentures due September 1, 2007.................................... 200 --
7.000% Fixed Debentures due September 1, 2022.................................... 800 --
Unamortized premium and discount and fair value adjustments...................... (35) (15)
------- ------
Total Oncor Electric Delivery Company........................................ 4,399 2,452
------- ------
TXU Gas
- -------
7.625% Fixed Putable Asset Term Securities due October 15, 2012.................. -- 200
6.250% Fixed Notes due January 1, 2003........................................... 125 125
6.375% Fixed Notes due February 1, 2004.......................................... 150 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008.......................... 125 125
Unamortized premium and discount and fair value adjustments...................... 1 4
------ -----
Total TXU Gas ................................................................. 551 754
------ -----
TXU Australia
- -------------
7.200% Floating Notes due October 30, 2003(b).................................... 17 15
7.080% Floating Notes due September 21, 2007(b).................................. 155 141
7.120% Floating Note, Tranche A Facility due October 26, 2004(a)................. 23 21
5.800% Floating Note, Tranche A Facility due October 26, 2004(a)................. 142 56
5.160% Floating Note, Tranche A Facility due October 26, 2004.................... -- 70
5.040% Floating Note, Tranche A Facility due October 26, 2004.................... -- 63
6.950% Floating Note, Tranche B Facility due October 26, 2004(b)................. 113 101
7.110% Floating Note, Tranche B Facility due October 26, 2004(b)................. 34 31
8.320% Floating Note, Tranche B Facility due October 26, 2004(b)................. 62 124
6.860% Floating Note, Tranche B Facility due October 26, 2004(b)................. 73 --
7.050% Floating Note, Tranche C Facility due October 26, 2004(b)................. 311 394
6.860% Floating Note, Tranche C Facility due October 26, 2004(b)................. 113 --
7.000% Fixed Medium Term Notes due September 22, 2005............................ 113 102
6.680% Floating Senior Notes due December 1, 2006(b)............................. 203 184
7.150% Floating Senior Notes due December 1, 2016(b)............................. 70 63
Unamortized premium and discount and fair value adjustments...................... 99 107
------ ------
Total TXU Australia........................................................... 1,528 1,472
------ ------
A-86
December 31,
------------------
2002 2001
---- ----
Corporate and Other
- -------------------
10.25% Fixed Senior Notes due March 15, 2005..................................... -- 14
10.58% Fixed Senior Notes due March 15, 2010..................................... -- 72
6.200% Fixed Senior Notes Series A due October 1, 2002........................... -- 125
6.375% Fixed Senior Notes Series B due October 1, 2004........................... 175 175
6.375% Fixed Senior Notes Series C due January 1, 2008........................... 200 200
5.520% Fixed Senior Notes Series D due August 16, 2003........................... 323 350
4.050% Fixed Senior Notes Series E due August 16, 2004........................... 2 350
6.375% Fixed Senior Notes Series J due June 15, 2006............................. 800 800
4.750% Fixed Senior Notes Series K due November 16, 2006 (equity-linked)......... 500 500
5.450% Fixed Senior Notes Series L due November 16, 2007 (equity-linked)......... 500 500
5.800% Fixed Senior Notes Series M due May 16, 2008 (equity-linked).............. 440 --
6.000% Fixed Telecom Overfund Trust Debt due bi-annually through August 15, 2004. 178 259
12.80% Floating notes (a)........................................................ 4 6
3.355% Building Financing due bi-annually through February 28, 2022.............. 140 --
Unamortized premium and discount and fair value adjustments...................... 50 22
------- -------
Total Corporate and Other..................................................... 3,312 3,373
------- -------
Total TXU Corp. Consolidated..................................................... 12,555 11,792
Less amount due currently........................................................ 855 866
------- -------
Total Long-Term Debt............................................................. $11,700 $10,926
======= =======
NOTES:
-----
(a) Interest rates in effect at December 31, 2002.
(b) Interest rates fixed by swaps at December 31, 2002.
(c) These series are in the multiannual mode. These bonds are subject to
mandatory tender prior to maturity on the mandatory remarketing date.
On such date, a new interest rate and interest rate period will be
reset for the bonds.
(d) Interest rates in effect at December 31, 2002. These series are in a
flexible or weekly rate mode and are supported by an irrevocable letter
of credit. Series in the flexible mode will be remarketed for periods
of less than 270 days.
In February 2003, Oncor gave notice of its intent to redeem on March 5,
2003, all ($103 million principal amount) of its First Mortgage and Collateral
Trust Bonds, 8 3/4% Series due November 1, 2023, at 104.01% of the principal
amount thereof, plus accrued interest to the redemption date. The notice is
subject to receipt of the redemption funds by the trustee on or before the
redemption date.
In December 2002, Oncor issued $850 million principal amount of its senior
secured notes in two series in a private placement with registration rights. One
series of $500 million bears interest at the annual rate of 6.375% and matures
in 2015, and the other series of $350 million bears interest at the annual rate
of 7.250% and matures in 2033. Each series is initially secured by a lien on an
equal principal amount of Oncor's first mortgage bonds and the lien of the
indenture under which the senior secured notes were issued; however, the lien of
those bonds may be released in certain circumstances. The net proceeds were used
by Oncor for the repurchase and retirement of $61 million principal amount of
Oncor's 6.75% First Mortgage Bonds due in March 2003 and the defeasance of the
remaining $133 million principal amount, and the repurchase and retirement of
$25 million principal amount of Oncor's 6.75% First Mortgage Bonds due April
2003 and the defeasance of the remaining $70 million principal amount. The
remaining net proceeds were used for general corporate purposes, including the
repayment of short-term advances from affiliates. The short-term advances
represented amounts previously borrowed to redeem $400 million principal amount
of Oncor's First Mortgage Bonds floating rate Series C due June 15, 2003.
The defeasance amounts (approximately $210 million at December 31, 2002)
were deposited with the trustee for such bonds with irrevocable instructions
from Oncor to apply such deposited proceeds to the payment of principal and
interest on such bonds through maturity or the earliest redemption date. These
deposits are reflected in restricted cash on the balance sheet.
In October 2002, TXU Gas exercised its right to redeem $200 million
aggregate principal amount of Putable Asset Term Securities (PATS) notes that
would have matured on October 15, 2012 for a cash premium of $35 million ($23
million after-tax), which has been recognized as an extraordinary loss on debt
A-87
extinguishment in the fourth quarter of 2002. TXU Gas used cash advances from
TXU Corp. and cash on hand to fund the redemption of the PATS notes.
In October 2002, TXU Corp. paid off $125 million of notes at maturity.
In August 2002, Oncor issued $1.0 billion aggregate principal amount of
unsecured debentures in two series in a private placement with registration
rights. One series of $200 million is due September 1, 2007 and bears interest
at the rate of 5%, and the other series of $800 million is due September 1, 2022
and bears interest at the rate of 7%. Proceeds from the issuance were used by
Oncor to repay advances from affiliates and commercial paper.
In August 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
In June 2002, Oncor redeemed all of its 8% First Mortgage Bonds due June 1, 2002
in the aggregate principal amount of $147 million, and in February 2002, Oncor
redeemed all of its 8.125% First Mortgage Bonds due February 1, 2002 in the
aggregate principal amount of $150 million. In July 2002, TXU Energy redeemed at
par the remaining $635 million principal amount of its floating rate debentures
due May 20, 2003. Oncor and TXU Energy funded the redemptions through the
issuance of commercial paper, advances from affiliates and cash from operations.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of
senior secured notes in two series in a private placement with registration
rights. One series of $700 million is due May 1, 2012 and bears interest at the
annual rate of 6.375%, and the other series of $500 million is due May 1, 2032
and bears interest at the annual rate of 7%. Each series is initially secured by
an equal principal amount of Oncor's first mortgage bonds; however, the lien of
those bonds may be released in certain circumstances. Proceeds from the issuance
were used by Oncor to repay advances from US Holdings. US Holdings used the
repayments from Oncor to repay advances from TXU Energy and TXU Corp. TXU Energy
used the repayments to redeem $865 million principal amount of floating rate
debentures due May 20, 2003, and TXU Corp. used the repayments to repay $335
million of short-term borrowings.
Also in May 2002, the Brazos River Authority issued $61 million principal
amount of weekly reset floating rate pollution control revenue refunding bonds
for TXU Energy, the proceeds of which were used to refund a similar principal
amount of pollution control revenue bonds.
During the first quarter of 2002, TXU Corp. redeemed $114 million of
senior notes with rates ranging from 5.52% to 10.58% that were originally due
from 2002 to 2010, resulting in an extraordinary loss of $17 million (net of
income tax benefit of $9 million). Also, TXU Mining Company LP redeemed $70
million of its 6.875% senior notes due 2005 and $53 million of its 7.0% senior
notes due 2003.
As of December 31, 2002, the aggregate secured long-term debt of TXU Corp.
and its consolidated subsidiaries consisted of $3.4 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 $15 million of
various other long-term debt secured by liens on utility plant and other assets
in North America. TXU Corp.'s long-term debt obligations are not guaranteed or
secured by affiliates.
2001 Debt Restructuring and Refinancing Plan -- On January 1, 2002, US
Holdings' business was restructured into a regulated T&D utility business and an
unregulated energy business. In connection with the restructuring, the
generation assets transferred to TXU Energy were released from the lien of US
Holdings' mortgage. Upon transfer of the T&D assets to Oncor, Oncor assumed US
Holdings' mortgage and the first mortgage bonds outstanding thereunder.
Substantially all of Oncor's T&D assets are subject to liens under its mortgage
indentures.
Under the debt restructuring and refinancing plan, US Holdings' pollution
control bond obligations were assumed by TXU Energy.
The debt restructuring process resulted in an extraordinary charge of $97
million (net of income tax benefit of $52 million) in the fourth quarter of
2001. (See Note 4.) In connection with the refinancing, approximately $73
million in additional pre-tax losses from the reacquisition of debt and trust
securities was allocated to Oncor and was written-off in the fourth quarter of
2001. Because this write-off is recoverable, it reduced the adjustment to
revenues for earnings in excess of the regulatory earnings cap.
A-88
The pollution control series variable rate debt of TXU Energy requires
periodic remarketing. Because TXU Energy intends to remarket these obligations,
and has the ability and intent to refinance if necessary, they have been
classified as long-term debt.
Equity-Linked Debt Securities -- Equity-linked debt securities are units
that consist of (i) TXU Corp. senior notes and (ii) a stock purchase contract
that requires the holder to purchase TXU Corp. common stock in the future. The
number of shares issuable upon settlement of stock purchase contracts is based
on the market price, which is determined as the average of the closing price of
TXU Corp. common stock on each of the twenty consecutive trading days ending on
the third trading day immediately preceding the settlement date. The calculation
of shares issuable is subject to a minimum price or "reference price" (typically
this is the price of the common stock at the time of the initial issuance of the
equity-linked debt securities) and a maximum price or "threshold appreciation
price" (this represents a premium over the reference price that is negotiated in
connection with the pricing of the offering). The reference price and the
threshold appreciation price for each series of TXU Corp.'s equity-linked debt
securities are based on market conditions at the time the securities were
issued.
To the extent the market price of TXU Corp. common stock is below the
reference price on the applicable settlement date, holders of equity-linked debt
securities would be required to purchase TXU Corp. common stock at a price
higher than the market price at that time. The market price of TXU Corp.'s
common stock is currently below the reference price for both currently
outstanding series of TXU Corp.'s equity-linked debt securities. TXU Corp.'s
liquidity and stock price affect the market price of the equity-linked debt
securities (as well as the market price of other securities issued by TXU Corp.
and its subsidiaries), but do not have any effect on the provisions of the
equity-linked debt securities other than the impact on the settlement rate, as
discussed above.
In June 2002, TXU Corp. issued 8.8 million equity-linked debt securities
(2002 Corporate Units) with an aggregate stated amount of $440 million. Net
proceeds of $427 million were used for working capital and other general
corporate purposes, including repayment of commercial paper and to provide
advances to subsidiaries. Each of the 2002 Corporate Units initially consists of
an unsecured $50 note (Series M due 2008) and a contract to purchase from TXU
Corp. its common stock in the future. Quarterly distributions on the 2002
Corporate Units will include interest on the notes at the annual rate of 5.8%
and contract adjustment payments payable by TXU Corp. at the annual rate of
2.325%. The contracts require the holders to purchase TXU Corp. common stock
based on a range of prices per share ($51.15 minimum or reference price to
$62.9145 maximum or threshold appreciation price) at the settlement date of May
16, 2006. In connection with the issuance, TXU Corp. recorded, as a reduction to
common stock equity, the present value of the contract adjustment payments of
$36 million and a portion of the costs incurred in connection with the issuance
of the 2002 Corporate Units. A liability was recorded for the contract
adjustment payments and will be reduced as the contract adjustment payments are
made. Under the terms of the purchase contracts, TXU Corp. will issue between
6,993,600 and 8,602,000 shares of its common stock in connection with the
settlement date. A total of 8,602,000 shares of TXU Corp.'s common stock are
reserved for issuance in connection with the 2002 Corporate Units.
In October 2001, TXU Corp. issued 20 million equity-linked debt securities
(2001 Equity Units) with an aggregate stated amount of $1.0 billion. Net
proceeds of $974 million were used to repay commercial paper. Each of the
corporate units initially consists of two unsecured $25 notes (Series K due 2006
and Series L due 2007) and a contract to purchase from TXU Corp. its common
stock in the future. Quarterly distributions on the corporate units will include
interest on the notes at the annual rate of 4.75% on Series K and 5.45% on
Series L and contract adjustment payments of 3.65% per annum on the stated
amounts of the notes through the first settlement date, then interest of 5.45%
on Series L and contract adjustment payments of 3.30% per annum on the stated
amounts through the second settlement date. The contracts require the holders to
purchase TXU Corp. common stock based on a range of prices per share ($45.64
minimum or reference price to $55.68 maximum or threshold appreciation price) on
the settlement dates of November 16, 2004 and 2005. In connection with the
issuance, TXU Corp. recorded, as a reduction of common stock equity, the present
value of the contract adjustment payments of $116 million and a portion of the
costs incurred in connection with the issuance of the 2001 Equity Units. A
liability was recorded for the contract adjustment payments and will be reduced
as the contract adjustment payments are made. Under the terms of the Purchase
Contracts, TXU Corp. will issue between 8,980,000 and 10,956,000 shares of its
common stock in connection with each settlement date. A total of 21,912,000
shares of TXU Corp.'s common stock are reserved for issuance in connection with
the 2001 Equity Units.
A-89
TXU Corp. has the right to defer the contract adjustment payments on these
equity-linked debt securities, but any such election will subject TXU Corp. to
restrictions on the payment of dividends on and redemption of outstanding shares
of its common stock. TXU Corp. currently has no plans to defer these contract
adjustment payments.
In 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component (Series D due 2003 and Series E due 2004)
and common stock forward purchase contracts. The first of the two common stock
forward purchase contracts was settled on August 16, 2001 with the issuance of
7.5 million shares of common stock for $351 million in cash. The second of the
common stock forward purchase contracts was settled on August 16, 2002, with the
issuance of approximately 8.4 million shares of common stock to the holders of
these equity-linked securities for approximately $111 million in cash. In
addition, TXU Corp. retained and canceled approximately $238 million of the 6.5%
Series E Notes in satisfaction of the obligations under the common stock forward
purchase contracts of holders that did not settle their contracts with cash.
Holders of $109 million of Series E Notes had their notes repaid by TXU Corp. on
September 3, 2002. The Series E Notes that remain outstanding (approximately
$2.2 million principal amount) bear interest at 4.05% per annum from August 16,
2002 through maturity on August 16, 2004.
Exchangeable Subordinated Debt --In November 2002, TXU Energy issued $750
million of exchangeable subordinated notes in a private placement. The notes
will mature in November 2012, bear interest at the annual rate of 9% and permit
the deferral of interest payments. TXU Corp. has granted the holders the right
to exchange the notes for TXU Corp. common stock. The notes currently may be
exchanged, subject to certain restrictions, at any time for up to approximately
57 million shares of TXU Corp. common stock at an exercise price of $13.1242 per
share. The number of shares of TXU Corp. common stock that may be issuable upon
the exercise of the exchange right is determined by dividing the principal
amount of notes to be exchanged by the exercise price. The exercise price and
the number of shares to be issued are subject to anti-dilution adjustments. The
proceeds from the issuance of the notes were used for the repayment of two
standby credit facilities that expired in November 2002. TXU Corp. recognized a
discount on the notes of $111 million, which represented the excess of the
market value of TXU Corp. common stock on the transaction date over the exercise
price applied to the number of issuable shares. This discount is being amortized
to interest expense over the term of the debt. As a result, the effective
interest rate on the notes is 11.5%. At the time of any exchange of the notes
for common stock, the unamortized discount will be proportionately written off
as a charge to earnings.
The exchangeable notes are subordinated in bankruptcy to all other TXU
Energy obligations. TXU Energy has the right until May 2003 to require the
holders of the notes to exchange their interest in the notes for a preferred
equity interest in TXU Energy with economic and other terms substantially
identical to the notes. The original purchasers of the notes have the right to
nominate one member to the board of directors of TXU Corp., and such member has
been appointed to fill a vacancy. This right exists so long as the original
purchasers hold at least 30% of their original investment in the form of common
stock and/or notes, but no later than November 2012 or, if later, the date no
notes remain outstanding. The holders of the notes are restricted from actions
that would increase their control of TXU Corp.
Australia -- At December 31, 2002, TXU Australia had A$505 million ($285
million) in medium-term notes outstanding, of which payments of A$475 million
($268 million) were guaranteed under a policy issued by MBIA Insurance
Corporation. The medium-term notes have three tranches consisting of fixed and
variable rates of which A$30 million ($17 million) is due October 2003 and the
remainder is due between September 2005 and September 2007.
A-90
Maturities -- Sinking fund and maturity requirements for all long-term
debt instruments, excluding capital lease obligations, in effect at December 31,
2002, were as follows:
Year
2003......................................................... $ 854
2004......................................................... 1,526
2005......................................................... 402
2006......................................................... 1,521
2007 ........................................................ 884
Thereafter................................................... 7,351
Unamortized premium and discount and fair value adjustments.. 7
Capital lease obligations.................................... 10
------
Total.................................................. $12,555
=======
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of TXU Corp. and its consolidated
subsidiaries contain financial covenants that require maintenance of specified
fixed charge coverage ratios, shareholders' equity to total capitalization
ratios and leverage ratios and/or contain minimum net worth covenants. TXU
Energy's exchangeable subordinated notes also limit its incurrence of additional
indebtedness unless a leverage ratio and interest coverage test are met on a pro
forma basis. As of December 31, 2002, TXU Corp. and its US and Australian
subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. and its continuing
US and Australian subsidiaries contain provisions that are specifically affected
by changes in credit ratings and also include cross default provisions. The
material provisions are described below.
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 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.
TXU Corp.'s $500 million three-year revolving facility contains a
cross-default with respect to any default by TXU Corp. or any US subsidiary
thereof in respect of any indebtedness in excess of $50 million. A default by
TXU Australia would not trigger the cross-default provision contained in this
facility.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross-default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-day revolving credit
facility, the $1.4 billion US Holdings 5-year revolving credit facility, 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 LP senior notes (which have a $1 million threshold). Under the
joint US Holdings/TXU Energy/Oncor $1.0 billion 364-day revolving credit
facility, a default by TXU Energy or any subsidiary thereof would cause the
maturity of outstanding balances under such facility to be accelerated as to TXU
Energy and US Holdings, but not as to Oncor. Also, under this credit facility, a
default by Oncor or any subsidiary thereof would cause the maturity of
outstanding balances to be accelerated under such facility as to Oncor and US
Holdings, but not as to TXU Energy. Further, under this credit facility, a
default by US Holdings would cause the maturity of outstanding balances under
such facility to be accelerated as to US Holdings, but not as to Oncor or TXU
Energy. Under the Oncor $150 million credit facility, a default by Oncor or any
subsidiary thereof would cause the maturity of outstanding balances under such
facility to be accelerated.
A-91
TXU Corp.'s 6% Notes due 2003 to 2004, which are held by the Pinnacle
Overfund Trust ($178 million outstanding at December 31, 2002) and Pinnacle's
unconsolidated 8.83% Senior Secured Notes due 2004 ($810 million outstanding at
December 31, 2002) contain cross-default provisions relating to a failure to pay
principal or interest on indebtedness of TXU Corp. or TXU Communications (in the
case of the 8.83% Senior Secured Notes due 2004) in a principal amount of $50
million or above.
A default by TXU Gas or any of its material subsidiaries on indebtedness
of $25 million or more would result in a cross-default under the $300 million
TXU Gas senior notes due 2004 and 2005.
8. TXU CORP. OR SUBSIDIARY OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS, EACH HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF TXU CORP. OR RELATED SUBSIDIARY (TRUST SECURITIES)
Statutory business trusts have been established as wholly-owned financing
subsidiaries (Trusts) of TXU Corp., US Holdings and TXU Gas (parent companies)
for the purposes, in each case, of issuing trust securities and holding Junior
Subordinated Debentures issued by the Trust's parent company (Debentures). TXU
Corp. Capital I and II Trust Securities have a liquidation preference of $25 per
unit, and TXU Gas Capital I Trust Securities have a liquidation preference of
$1,000 per unit. The only assets of each Trust are Debentures of its parent
company having a principal amount set forth under "Trust Assets" in the table
below. The interest on Trust assets matches the distributions on the Trust
Securities. Each Trust uses interest payments received on the Debentures it
holds to make cash distributions on the Trust Securities it has issued.
The Trust Securities are subject to mandatory redemption upon payment of
the Debentures at maturity or upon redemption. The Debentures are subject to
redemption, in whole or in part at the option of the parent company, at 100% of
their principal amount plus accrued interest, after an initial period during
which they may not be redeemed and at any time upon the occurrence of certain
events. The carrying value of the Trust Securities is increased periodically to
equal the redemption amounts at the mandatory redemption dates with a
corresponding increase in Trust Securities distributions.
In December 2001, in connection with the restructuring and refinancing
plans of US Holdings to comply with the 1999 Restructuring Legislation, the TXU
Electric Capital I and Capital III Trust Securities, with liquidation
preferences of $25 per unit, were redeemed for $141 million and $194 million,
respectively. In addition, US Holdings redeemed $99 million of the $100 million
of outstanding TXU Electric Capital IV Trust Securities and $392 million of the
$400 million outstanding amount of its TXU Electric Capital V Trust Securities,
both of which had a liquidation preference of $1,000 per unit. Following the
completion of the redemption, the Capital IV and V Trusts were liquidated. The
capital securities held by the security holders were refinanced by proceeds of
junior subordinated debentures of US Holdings, which are classified on the
balance sheet as other long-term debt.
A-92
The statutory business trust subsidiaries of TXU Corp., US Holdings and
TXU Gas had Trust Securities outstanding and Trust Assets as follows at December
31:
Trust Securities
---------------------------------------------------- Trust Assets
Units (000's) Amount Amount Maturity
------------------------ ------------------------ --------------------------- --------
2002 2001 2000 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
TXU Corp.
- --------
TXU Corp. Capital I
(7.25% Series)..... 9,200 9,200 9,200 $223 $223 $ 223 $237 $ 237 $ 237 2029
TXU Corp. Capital II
(8.70% Series)..... 6,000 6,000 6,000 145 145 145 155 155 155 2034
------ ----- ----- ---- ---- ---- ---- ---- ------
Total TXU Corp..... 15,200 15,200 15,200 368 368 368 392 392 392
------ ------ ------ ---- ---- ---- ---- ---- ------
US Holdings
- -----------
TXU Electric Capital I
(8.25% Series)..... -- -- 5,871 -- -- 141 -- -- 155 2030
TXU Electric Capital III
(8.00% Series)..... -- -- 8,000 -- -- 194 -- -- 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Securities)........ -- -- 100 -- -- 98 -- -- 103 2037
TXU Electric Capital V
(8.175% Series).... -- -- 400 -- -- 396 -- -- 412 2037
----- ----- ------ ---- ---- ----- ---- ---- ------
Total US Holdings.. -- -- 14,371 -- -- 829 -- -- 876
----- ----- ------ ---- ---- ----- ---- ---- ------
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(a)..... 150 150 150 147 147 147 155 155 155 2028
----- ----- ----- ---- ---- ----- ---- ---- ------
Total.............. 15,350 15,350 29,721 $515 $515 $1,344 $547 $547 $1,423
====== ====== ====== ==== ==== ====== ==== ==== ======
(a) Interest rate swaps effectively fix the rate on $100 million of the TXU Gas
Floating Rate Trust Securities at 6.629% and at 6.444% on the remaining $50
million of the Trust Securities to July 1, 2003.
Each parent company owns the common trust securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's securities.
A-93
9. PREFERRED STOCK AND SECURITIES OF SUBSIDIARIES OF TXU CORP.
Shares Outstanding Amount
December 31, December 31, Redemption Price Per Share
2002 and 2001 2002 and 2001 December 31, 2002
--------------- ------------- ------------------
(thousands of shares)
Not Subject to Mandatory Redemption:
- ------------------------------------
US Holdings (a):
$4.00 to $5.08 dividend rate series.. 379 $ 38 $101.79 to $112.00
$7.98 series......................... 261 26 (c)
$7.50 series (b)..................... 308 30 (c)
$7.22 series (b)..................... 221 21 (c)
----
Sub-total....................... 115
----
TXU Gas
Adjustable rate-series F (d)......... 75 75 $1,000
----
Total............................ $190
====
Subject to Mandatory Redemption:
- -------------------------------
US Holdings (a):
$6.98 series......................... 107 $ 11 (e)
$6.375 series........................ 100 10 (e)
----
Total........................... $ 21
====
- ------------
(a) Cumulative, without par value, entitled upon liquidation to $100 per share;
17,000,000 total shares authorized.
(b) The preferred stock series is the underlying preferred stock for depositary
shares that were issued to the public. Each depositary share, at $25 per
share, represents one quarter of a share of underlying preferred stock.
(c) Not redeemable at December 31, 2002.
(d) Entitled upon liquidation to stated value of $1,000 per share; 2,000,000
total shares authorized. The preferred stock series is the underlying
preferred stock for depositary shares that were issued to the public.
Each depositary share, at $25 per share,represents one-fortieth of a share
of underlying preferred stock. Dividend rates are determined quarterly, in
advance, based on certain US Treasury rates. At December 31, 2002, the
Series F bears a dividend rate of 4.50%.
(e) US Holdings was required to redeem at a price of $100 per share plus
accumulated dividends a specified minimum number of shares annually or
semi-annually. As of December 31, 2002, TXU Corp. has met its sinking fund
requirements on these securities and has no further mandatory redemption
requirements. US Holdings may annually call for redemption, at its option,
an aggregate of up to twice the number of shares shown below for each
series at a price of $100 per share plus accumulated dividends on the
following dates.
Redeemable
Series Shares Date of Redemption
------------------------------- ------------------
$ 6.980 50,000 annually July 1
$ 6.375 50,000 annually October 1
The carrying value of preferred stock subject to mandatory redemption is
being increased periodically to equal the redemption amounts at the
mandatory redemption dates with a corresponding increase in preferred stock
dividends.
A-94
The holders of preferred stock have no voting rights except for changes to
the articles of incorporation that would change the rights or preferences of
such stock, authorize additional shares of stock or create an equal or superior
class of stock. They have the right to vote for the election of directors only
while certain dividend arrearages exist. The holders of preferred trust
securities have no voting rights.
10. SHAREHOLDERS' EQUITY
Common Stock Equity -- In December 2002, TXU Corp. issued 35 million
shares of its common stock for net cash proceeds of $499 million. In June 2002,
TXU Corp. issued in a public offering 11.8 million shares of its common stock
for net proceeds of $585 million. Proceeds from these sales were used for
working capital and other general corporate purposes, including the repayment of
commercial paper. See Note 7 to Financial Statements regarding 8.4 million
common shares issued in August 2002 in connection with the 1998 equity-linked
debt securities.
On October 12, 2002, TXU Corp. declared a common stock dividend of $0.125
per share, payable on January 2, 2003, which represents an 80% reduction from
the previous dividend rate. The decrease was in response to concerns regarding
the liquidity of TXU Corp. and its US and Australian subsidiaries. See Note 3
regarding events related to TXU Europe. TXU Corp. paid quarterly dividends of
$0.60 a share in January 2002, April 2002, July 2002 and October 2002. Future
dividends may vary and are subject to consideration of TXU Corp.'s profit
levels, operating cash flow levels and capital requirements, as well as
financial and other business conditions existing at the time.
Under Texas law, TXU Corp. may only declare dividends out of surplus,
which is statutorily defined as total shareholders' equity less the book value
of common stock (stated capital). The write-off of TXU Corp.'s investment in TXU
Europe resulted in negative surplus. Texas law permits, subject to the receipt
of shareholder approval, the reclassification of stated capital into surplus.
TXU Corp. received such shareholder approval of this reclassification in a
special meeting of shareholders held February 14, 2003. Accordingly,
approximately $8.0 billion will be reclassified from stated capital to
additional paid-in capital, resulting in an increase of surplus in the same
amount.
TXU Corp. has a Direct Stock Purchase and Dividend Reinvestment Plan
(DRIP) and a TXU Thrift Plan (Thrift Plan). During 2002 and 2001, $40 million
and $12 million in common stock of TXU Corp. were issued to these plans,
respectively. The requirements under the DRIP and Thrift Plan in 2000 were met
through open market purchases of TXU Corp.'s common stock.
At December 31, 2002, the Thrift Plan had an obligation of $241 million
outstanding in the form of a note, which TXU Corp. purchased from a third-party
lender in 1990 and recorded as a reduction to common equity. At December 31,
2002, the Thrift Plan trustee held 4,138,558 shares of common stock (LESOP
Shares) of TXU Corp. valued at $18.68 per share, under the leveraged employee
stock ownership provision of the Thrift Plan. LESOP Shares are held by the
trustee until allocated to Thrift Plan participants when required to meet TXU
Corp.'s obligations under terms of the Thrift Plan. The Thrift Plan uses
dividends on the LESOP Shares held and contributions from TXU Corp., if
required, to repay interest and principal on the note. As a result of the
reduction in the TXU Corp. common stock dividend, the TXU Corp. contributions
required to repay such interest and principal will increase by approximately $8
million next year. Common stock equity increases at such time as LESOP Shares
are allocated to participants' accounts although shares of common stock
outstanding include unallocated LESOP Shares held by the trustee. Allocations to
participants' accounts increased common stock equity by $8 million in 2002, and
$9 million in 2001 and 2000.
A-95
At December 31, 2002, authorized but unissued common stock of TXU Corp.
were reserved for issuance pursuant to the following;
DRIP Plan........................................ 3,267,957
Thrift Plan...................................... 2,291,273
TXU Corp. long-term incentive compensation plan.. 8,148,344
TXU Europe sharesave scheme...................... 489,970
Equity-linked debt securities.................... 30,514,000
Exchangeable subordinated notes.................. 57,146,340
Other............................................ 2,842,421
-----------
Total................................. 104,700,305
===========
During 2001, TXU Corp. had two equity purchase agreements with separate
financial institutions to purchase shares of TXU Corp.'s common stock. In April
2001, TXU Corp. purchased 1,252,500 shares of its common stock for $44 million
under one of the equity purchase agreements. Following that purchase, TXU Corp.
terminated both contracts without purchasing additional shares. Settlement of
these agreements had no effect on earnings. During 2000, TXU Corp. repurchased
approximately 18.6 million shares of its common stock for $596 million through
open market purchases. Additional purchases may occur from time to time although
none were made in 2002, and none are expected for 2003.
Stock-based Compensation Plans -- Effective with the merger of ENSERCH
Corporation (now TXU Gas) and TXU Corp., outstanding options for ENSERCH
Corporation common stock were exchanged for options for 532,913 shares of TXU
Corp.'s common stock (TXU Gas Stock Option Plan). At December 31, 2002, 26,206
of these options remained outstanding and exercisable at prices ranging from
$20.93 to $28.83 per share. No further options will be granted under this plan.
The Long-Term Incentive Compensation Plan is a comprehensive, stock-based
incentive compensation plan, providing for discretionary awards (Awards) of
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units,
bonus stock and other stock-based awards. The maximum number of shares of common
stock for which Awards may be granted under the plan is 10,000,000, of which
8,148,344 shares remain authorized and available for award. During 2002, 2001,
and 2000, the Board of Directors granted the award of shares of restricted
common stock, which were issued subject to performance and vesting requirements
over a three- to five-year period as shown below. Shares are currently purchased
for the plan on the open market by the plan trustee.
TXU Australia has an Employee Share Plan, introduced in 2001, which is
available to Australia-based directors and employees of TXU Australia with at
least three months of service at the beginning of each six-month offering
period, starting on January 1 and July 1. Employees who elect to participate in
this plan enroll and re-enroll for six-month offer periods, and purchase TXU
Corp. common stock at a 15% discount of the TXU Corp. stock price, based on the
lower of the fair market value on the first business day of the offering period
or the fair market value on a nominated date just prior to final contributions
for the relevant offering period. Participants may elect between a tax exempt
option or a tax deferred option. At the end of each offering period,
participants may elect to continue, change their contribution amounts or exit
the plan. As of December 31, 2002, participants were granted rights to purchase
18,065 shares of TXU Corp. common stock.
Despite the exiting of the TXU Europe business, participants in the TXU
Europe Sharesave Plan have until May 19, 2003, to determine if they will
exercise their rights to purchase TXU Corp. Common Stock at the weighted average
price of approximately $23.63 per share. As of December 31, 2002, participants
were eligible to purchase 119,256 shares with the proceeds of their saving
balance under the TXU Europe Sharesave Plan.
A-96
The following table presents information about the stock options and stock
grants under various stock compensation plans at December 31, 2002.
Stock Grant Plans
--------------------------------------------
TXU Long-term
TXU Gas Incentive TXU Australia
Stock Option Compensation Plan Sharesave Plan
Plan (Stock Grants) (Discount Purchases)
------------- ----------------- -------------------
Balance-- December 31, 1999.............. 218,046 337,200
Granted............................. -- 406,500
Lapsed.............................. -- (61,000)
Exercised........................... (18,676) (34,000)
------- --------
Balance-- December 31, 2000.............. 199,370 648,700
------- --------
Granted............................. -- 593,325
Lapsed ............................. (3,165) (40,000)
Exercised........................... (116,755) (32,667)
-------- ---------
Balance-- December 31, 2001.............. 79,450 1,169,358
-------- ---------
Granted............................. -- 1,002,650 18,065
Lapsed ............................. (52,105) (277,950) --
Exercised........................... (1,139) (361,067) --
-------- --------- ------
Balance-- December 31, 2002.............. 26,206 1,532,991 18,065
======== ========= ======
Exercisable/will vest-- 2003............. 2,532 357,833 --
Exercisable/will vest-- 2004............. 4,305 465,192 --
Exercisable/will vest-- 2005............. 2,343 709,966 18,065
Exercisable/will vest-- 2006............. 17,026 -- --
Exercisable/will vest-- thereafter....... -- -- --
Weighted average exercise price-2002
Outstanding-- Beginning of year..... $ 23.60 -- --
Granted............................. $ -- -- $27.59
Lapsed ............................. $ 19.75 -- --
Exercised........................... $ 23.21 -- --
Outstanding-- End of year........... $ 24.55 -- $27.59
Weighted average fair value of awards
granted in:
2000 ............................... $ -- $ 34.80 --
2001 ............................... $ -- $ 44.12 --
2002 ............................... $ -- $ 49.46 $32.45
Compensation expense related to restricted stock issued under the TXU
Long-term Incentive Compensation Plan is measured based on the market price of
the stock at the end of the performance period because the number of shares that
will be distributed are not known at the date of grant. Compensation expense
must be estimated and allocated over the performance period, beginning with the
period in which it becomes probable that the performance requirements will be
met. Changes in estimates are handled prospectively. The TXU Long-term Incentive
Compensation Plan increased compensation expense by $9 million in 2000 and 2001
and decreased compensation expense by $17 million in 2002. TXU Corp. does not
currently issue stock options. Had compensation expense for TXU Corp.'s stock
options granted to employees in 1992 through 1996 been determined based upon the
fair value methodology prescribed under SFAS No. 123, TXU Corp.'s net income
would not have been materially different.
A-97
Preference Stock -- In June 2000, TXU Corp. issued 3,000 shares of Series
B preference stock for $300 million. The preference stock has a dividend rate of
7.24% until June 15, 2005. The dividend rate for subsequent periods will be
determined according to periodic auctions. The Series B preference stock has a
liquidation preference of $100,000 per share. TXU Corp. may not redeem the
shares before June 15, 2005. TXU Corp. is authorized to issue up to 50 million
shares of preference stock in one or more series.
Shareholders Rights Plan -- In February 1999, the Board of Directors
adopted a shareholder rights plan pursuant to which shareholders were granted
rights to purchase one one-hundredth of a share of Series A Preference Stock
(Rights) for each share of TXU Corp.'s common stock held.
In the event that any person acquires more than 15% of TXU Corp.'s
outstanding common stock, in a transaction not approved by the board of
directors, the Rights become exercisable, entitling each holder (other than the
acquiring person or group) to purchase that number of shares of securities or
other property of TXU Corp. having a market value equal to two times the
exercise price of the Rights. If TXU Corp. were acquired in a merger or other
business combination, each Right would entitle its holder to purchase a number
of the acquiring company's common shares having a market value of two times the
exercise price of the Right. In either case, TXU Corp.'s Board of Directors may
choose to redeem the Rights before they become exercisable. TXU Corp.'s Board
declared a dividend of one Right for each outstanding share of Common Stock.
Rights were distributed to shareholders of record on March 1, 1999.
Dividend Restrictions -- Under existing provisions of the TXU Preferred
Securities (Preferred Securities), so long as any Preferred Securities of any
series remain outstanding, TXU Corp. shall not declare or pay any dividend on,
or redeem, purchase, acquire or make a liquidation payment with respect to, any
of TXU Corp.'s capital stock, or make any guarantee payments with respect to the
foregoing (other than payments under the guarantee relating to such Preferred
Securities) if at such time (a) TXU Corp. shall be in default with respect to
its payment or other obligations under the guaranty relating to such Preferred
Securities, (b) there shall have occurred, and be continuing, a payment default
(whether before or after expiration of any grace period) or an Event of Default
under the Preferred Securities, or (c) TXU Corp. shall have elected to extend
any payment period as provided in the agreement and any such period, or any
extension thereof, shall be continuing.
In connection with the issuance of equity-linked debt securities in June
2002, TXU Corp. is required to make contract adjustment payments to the holders
of the equity-linked debt securities. TXU Corp. has the right to defer the
contract adjustment payments, but any such election will subject TXU Corp. to
restrictions on the payment of dividends on and redemption of outstanding shares
of common stock. TXU Corp. has no plans to defer these contract adjustment
payments.
In addition, under borrowing arrangements, TXU Corp. is required to
maintain a specified equity ratio, which is affected by dividend payments;
however, no dividends are presently restricted.
The mortgage of Oncor restricts Oncor's payment of dividends to the amount
of its retained earnings. Certain other debt instruments and preferred
securities of TXU Corp.'s subsidiaries contain provisions that restrict payment
of dividends during any interest or distribution payment deferral period or
while any payment default exists. At December 31, 2002, there were no
restrictions on the payment of dividends under these provisions.
A-98
11. INCOME TAXES
The components of TXU Corp.'s provisions for income taxes for continuing
operations are as follows:
Year Ended December 31,
---------------------------
2002 2001 2000
---- ---- ----
Current:
US Federal.................................................... $ 17 $272 $165
State......................................................... 7 41 18
Non-US........................................................ 3 (5) 5
----- ----- ------
Total.................................................... 27 308 188
----- ---- ----
Deferred:
US Federal.................................................... 73 (11) 133
State......................................................... 1 (3) (19)
Non-US........................................................ 19 2 (1)
----- ----- -------
Total.................................................... 93 (12) 113
----- ----- ------
Investment tax credits............................................. (26) (23) (23)
----- ----- ------
Total.................................................... $ 94 $ 273 $278
==== ===== ====
Reconciliation of income taxes computed at the US federal statutory rate
to provision for income taxes:
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Income from continuing operations before income taxes and extraordinary loss:
Domestic.......................................................... $172 $904 $926
Non-US............................................................ 97 8 18
----- ----- ----
Total....................................................... 269 912 944
Preferred stock dividends of subsidiaries......................... 13 14 14
----- ---- ----
Income before preferred stock dividends of subsidiaries........... $282 $926 $958
==== ==== ====
Income taxes at the US federal statutory rate of 35%.................... $ 99 $324 $335
Depletion allowance............................................... (25) (25) (24)
Amortization of investment tax credits............................ (26) (23) (23)
Amortization (under regulatory accounting) of statutory rate changes (8) (8) (9)
State income taxes, net of federal tax benefit.................... 5 25 (1)
Amortization of goodwill.......................................... -- 11 13
Nondeductible losses.............................................. 53 -- --
Other............................................................. (4) (31) (13)
----- ---- ----
Provision for income taxes.............................................. $ 94 $273 $278
===== ==== ====
Effective tax rate (on income before preferred stock dividends
of subsidiaries)................................................... 33% 29% 29%
A-99
TXU Corp. had net tax benefits from LESOP dividend deductions of $2.7
million, $3.8 million and $4.0 million in 2002, 2001 and 2000, respectively,
which were credited directly to retained earnings.
Deferred income taxes provided by the liability method for significant
temporary differences based on tax laws in effect at December 31, 2002 and 2001,
balance sheet dates are as follows:
December 31,
------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------
Total Current Noncurrent Total Current Noncurrent
----- ------- ---------- ----- ------- ----------
Deferred Tax Assets
Unamortized investment tax credits $ 173 $ -- $ 173 $ 182 $ -- $ 182
Impairment of assets.............. 134 -- 134 136 -- 136
Regulatory disallowance........... 80 -- 80 93 -- 93
Alternative minimum tax........... 624 -- 624 540 -- 540
Tax rate differences.............. 31 -- 31 35 -- 35
Employee benefits................. 244 5 239 221 5 216
Net operating loss (NOL) carryforwards 1,630 14 1,616 62 15 47
NOL valuation allowance........... (1,569) -- (1,569) -- -- --
Mitigation and redirected depreciation 60 -- 60 124 -- 124
Foreign tax loss carryforwards.... 136 -- 136 124 -- 124
State income taxes................ 4 -- 4 16 1 15
Other............................. 477 88 389 291 99 192
------ ----- ------ ------ ----- ------
Total....................... 2,024 107 1,917 1,824 120 1,704
------ ----- ------ ------ ----- ------
Deferred Tax Liabilities
Depreciation differences and
capitalized construction costs.. 4,086 -- 4,086 4,013 -- 4,013
Redemption of long-term debt...... 44 -- 44 41 -- 41
Deductions related to Europe...... 275 -- 275 -- -- --
Securitizable regulatory asset.... 571 -- 571 633 -- 633
Other............................. 553 17 536 350 8 342
State income taxes................ 12 -- 12 36 -- 36
------- ----- ------ ------ ----- ------
Total....................... 5,541 17 5,524 5,073 8 5,065
------- ------ ------ ------ ----- ------
Net Deferred Tax (Asset) Liability $3,517 $ (90) $3,607 $3,249 $(112) $3,361
====== ====== ====== ====== ====== ======
December 31,
----------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------
Net Net Net Net Net Net
Current Current Noncurrent Current Current Noncurrent
Asset Liability Liability Asset Liability Liability
------- --------- ----------- ------- --------- ----------
Summary of Deferred Income Taxes
US Federal........................ $ 87 $-- $ 3,474 $104 $ -- $3,336
State............................. -- -- 8 1 -- 21
Australia......................... 3 -- 125 7 -- 4
---- --- ------ ---- ---- -----
Total....................... $ 90 $-- $3,607 $112 $ -- $3,361
==== === ====== ==== ==== ======
A-100
At December 31, 2002, TXU Corp. had $624 million of alternative minimum
tax credit carryforwards available to offset future tax payments. At December
31, 2002, TXU Corp. has net operating loss (NOL) carryforwards of $236 million
that expire as follows: $7 million in 2008, $11 million 2009, $57 million in
2010, $129 million in 2011 and $32 million in 2012. The NOLs can be used to
offset future US taxable income of TXU Corp. TXU Corp. fully expects to utilize
all its NOLs prior to their expiration date. TXU Corp. utilized $42 million of
NOLs in 2001. At December 31, 2002, TXU Australia had $454 million of tax loss
carryforwards that can be used to offset future taxable income in their
respective jurisdictions. These tax loss carryforwards do not have expiration
dates.
The tax effect of the components included in accumulated other
comprehensive income for the year ended December 31, 2002, was a net benefit of
$152 million.
TXU Corp.'s income tax returns are subject to examination by applicable
tax authorities. The Internal Revenue Service (IRS) is currently examining the
tax years ended 1993 through 1997. In management's opinion, an adequate
provision has been made for any future taxes that may be owed as a result of any
examination. To the extent that adjustments to income tax accounts of acquired
businesses for periods prior to their acquisition are required as a result of an
examination, the adjustment will be added to or deducted from goodwill.
12. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
TXU Corp. is the plan sponsor of, and a participating employer in, the TXU
Retirement Plan, which provides benefits to most US employees based on years of
service and average earnings. The TXU Retirement Plan (Retirement Plan), is a
defined benefit pension plan qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (Code) and is subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended (ERISA). Employees
are eligible to participate in the Retirement Plan upon their completion of one
year of service and the attainment of age 21. All benefits are funded by the
participating employers. The Retirement Plan provides benefits to participants
under one of two formulas: (i) a cash balance formula under which participants
earn monthly contribution credits based on their compensation and a combination
of their age and years of service, plus monthly interest credits, or (ii) a
traditional defined benefit formula based on years of service and the average
earnings of the three years of highest earnings.
All eligible employees hired after January 1, 2002, will participate under
the cash balance formula. Certain employees who, prior to January 1, 2002,
participated under the traditional defined benefit formula, continue their
participation under that formula. Under the cash balance formula, future
increases in earnings will not apply to prior service costs. It is TXU's policy
to fund the plans on a current basis to the extent deductible under existing
federal tax regulations. Such contributions, when made, are intended to provide
not only for benefits attributed to service to date, but also those expected to
be earned in the future.
In addition, employees of TXU Corp. are eligible to participate in a
qualified savings plan, the TXU Thrift Plan (Thrift Plan). This plan is a
participant-directed defined contribution profit sharing plan qualified under
Section 401(a) of the Code, and is subject to the provisions of ERISA. The
Thrift Plan includes an employee stock ownership component. Under the terms of
the Thrift Plan, as amended effective in 2002, employees who do not earn more
than the IRS threshold compensation limit used to determine highly compensated
employees may contribute, through pre-tax salary deferrals and/or after-tax
payroll deductions, the maximum amount of their regular salary or wages
permitted under law. Employees who earn more than such threshold may contribute
from 1% to 16% of their regular salary or wages. Employer matching contributions
are also made in an amount equal to 100% of the first 6% of employee
contributions for employees who are covered under the cash balance formula of
the Retirement Plan, and 75% of the first 6% of employee contributions for
employees who are covered under the traditional defined benefit formula of the
Retirement Plan. Employer matching contributions are invested in TXU Corp.
common stock. Employer contributions to the Thrift Plan, including cash and TXU
Corp. common stock, aggregated $30 million for 2002, $16 million for 2001 and
$15 million for 2000.
A-101
TXU Australia sponsors various pension plans covering the majority of its
employees. TXU Australia's contributions to its defined contribution plans were
$1.3 million for 2002 and 2001 and $1.1 million for 2000.
The projected benefit obligations and fair value of plan assets for the
pension plans with projected benefit obligations in excess of plan assets were
$2,019 million and $1,595 million respectively, as of December 31, 2002, and
$822 million and $714 million, respectively, as of December 31, 2001.
Minimum Pension Liability --The minimum pension liability represents the
difference between the excess of the accumulated benefit obligation over the
plans' assets and the liability recorded. The liability is recorded as a
reduction to shareholder's equity, as a component of accumulated comprehensive
income. Based on the actuarial information at year end a minimum pension
liability for the TXU Corp. US plans of approximately $83 million, net of tax,
was recorded. The recording of the liability did not affect TXU Corp.'s
financial covenants in any of its credit agreements.
Changes in Assumed Rates -- At year end 2002, it was determined to revise
the discount rate used to determine the actuarial benefit obligations to reflect
current rates. In addition the expected rate of return on plan assets was also
lowered. Based on these new assumptions and available information, in 2003,
funding requirements related to the pension plans are expected to increase by
approximately $7 million and pension expense is expected to increase
approximately $40 million over the current year amounts.
A-102
Year Ended December 31,
---------------------------------
2002 2001 2000
----- ---- ----
Weighted-average assumptions:
Discount rate.............................................................. 6.75% 7.50% 8.00%
Expected return on plan assets............................................. 8.50% 9.00% 9.00%
Rate of compensation increase.............................................. 3.95% 4.30% 4.30%
Components of Net Pension Costs:
Service cost............................................................... $ 45 $ 40 $ 36
Interest cost.............................................................. 128 121 114
Expected return on assets.................................................. (162) (159) (148)
Amortization of unrecognized net transition asset.......................... (1) - -
Amortization of unrecognized prior service cost............................ 5 5 4
Amortization of net gain................................................... (7) (18) (21)
----- ----- ----
Net periodic pension cost.............................................. $ 8 $ (11) $(15)
===== ===== ====
December 31,
--------------
2002 2001
---- ----
Change in Pension Obligation:
Pensions obligation at beginning of year................................... $1,771 $1,589
Service cost........................................................... 45 40
Interest cost.......................................................... 128 121
Participant contributions.............................................. 2 1
Plan amendments........................................................ 6 (4)
Net transfer of obligations to other plans............................. - (3)
Actuarial loss......................................................... 148 110
Benefits paid.......................................................... (89) (76)
Currency exchange rate changes......................................... 8 (7)
------ ------
Pension obligation at end of year.......................................... $2,019 $1,771
====== ======
Change in Plan Assets:
Fair value of assets at beginning of year.................................. $1,800 $1,889
Actual return on assets................................................ (154) (45)
Employer contributions................................................. 28 38
Participant contributions.............................................. 2 1
Net transfer of assets to other plans.................................. - (3)
Benefits paid.......................................................... (87) (74)
Currency exchange rate changes......................................... 6 (6)
------ ------
Fair value of assets at end of year........................................ $1,595 $1,800
====== ======
Funded Status:
Pension obligation......................................................... $(2,019) $(1,771)
Fair value of assets....................................................... 1,595 1,800
Unrecognized net transition asset.......................................... (1) (2)
Unrecognized prior service cost............................................ 33 35
Unrecognized net (gain)/loss............................................... 338 (134)
----- -----
Accrued pension cost....................................................... $ (54) $ (72)
===== =====
Amounts Recognized in the Balance Sheet Consist of:
Accrued benefit liability.................................................. $(208) $(90)
Intangible asset........................................................... 10 4
Accumulated other comprehensive loss....................................... 94 9
Accumulated deferred income taxes.......................................... 50 5
----- -----
Net amount recognized................................................... $ (54) $ (72)
===== =====
A-103
Postretirement Benefits Other Than Pensions -- In addition to the
Retirement Plan and Thrift Plan, TXU Corp. and certain of its subsidiaries
offer certain health care and life insurance benefits to eligible employees
and their eligible dependents upon the retirement of such employees. For
employees retiring on or after January 1, 2002, the retiree contributions
required for such coverage vary based on a formula depending on the retiree's
age and years of service.
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Weighted-average assumptions:
Discount rate....................................................... 6.75% 7.50% 8.00%
Expected return on plan assets...................................... 8.26% 8.34% 8.49%
Components of Net Periodic Postretirement Benefit Costs:
Service cost........................................................ $12 $20 $20
Interest cost....................................................... 63 52 49
Expected return on assets........................................... (16) (16) (15)
Amortization of unrecognized net transition obligation.............. 8 9 10
Amortization of unrecognized prior service cost..................... 6 2 1
Amortization of net loss............................................ 11 1 --
--- --- ---
Net postretirement benefit cost................................ $84 $68 $65
=== === ===
December 31,
-----------------
2002 2001
---- ----
Change in Postretirement Benefit Obligation:
Benefit obligation at beginning of year............................. $ 914 $695
Service cost.................................................... 12 20
Interest cost................................................... 63 52
Participant contributions....................................... 8 8
Plan amendments................................................. -- 18
Actuarial loss.................................................. 218 175
Benefits paid................................................... (59) (54)
------ ----
Benefit obligation at end of year................................... $1,156 $914
====== ====
Change in Plan Assets:
Fair value of assets at beginning of year........................... $190 $185
Actual return on assets......................................... (14) (4)
Employer contributions.......................................... 47 53
Participant contributions....................................... 7 7
Benefits paid................................................... (56) (51)
---- ----
Fair value of assets at end of year................................. $174 $190
==== ====
Funded Status:
Benefit obligation.................................................. $(1,156) $(914)
Fair value of assets................................................ 174 190
Unrecognized transition obligation.................................. 81 90
Unrecognized prior service cost..................................... 45 51
Unrecognized net loss............................................... 505 267
------- -----
Accrued postretirement benefit cost................................. $ (351) $(316)
======= =====
A-104
The expected increase in costs of future benefits covered by the
postretirement benefit plans is projected using a health care cost trend rate
for pre-65 liabilities of 10% for 2003 decreasing by 1% each year until the
ultimate rate of 5% is reached in 2008. For post-65 liabilities, the rate is 11%
for 2003 decreasing by 1% each year until the ultimate rate of 5% is reached in
2009. A one percentage point increase in the assumed health care cost trend rate
in each future year would increase the accumulated postretirement benefit
obligation at December 31, 2002, by approximately $138 million and other
postretirement benefits cost for 2002 by approximately $11 million. A one
percentage point decrease in the assumed health care cost trend rate would
decrease the accumulated postretirement benefit obligation at December 31, 2002,
by approximately $114 million and other postretirement benefits cost for 2002 by
approximately $10 million.
The projected benefit obligations and fair value of plan assets for the
other postretirement benefit plans with projected benefit obligations in excess
of plan assets were $1.2 billion and $174 million, respectively, as of December
31, 2002, and $914 million and $190 million, respectively, as of December 31,
2001. Amounts recognized in the statement of financial position consist of
accrued postretirement benefit liabilities of $351 million and $316 million as
of December 31, 2002 and 2001, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of TXU Corp.'s
significant financial instruments were as follows:
December 31, 2002 December 31, 2001
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- -------- -----
On balance sheet assets (liabilities):
Long-term debt (including current maturities)*.................... $(12,545) $(12,403) $(16,153) $(16,422)
TXU Corp. or subsidiary obligated, mandatorily redeemable,
preferred securities of subsidiary trusts, each holding solely
junior subordinated debentures of TXU Corp. or related subsidiary. (515) (496) (515) (536)
Preferred stock of subsidiary subject to mandatory redemption...... (21) (15) (21) (21)
LESOP note receivable.............................................. 241 294 244 284
Off balance sheet assets (liabilities):
Financial guarantees.............................................. -- (33) -- --
*Excludes capital leases.
With the implementation of SFAS No. 133, on January 1, 2001, financial
instruments that are derivatives are now recorded on the balance sheet at fair
value.
The fair values of long-term debt and preferred stock subject to mandatory
redemption are estimated at the lesser of either the call price or the market
value as determined by quoted market prices, where available, or, where not
available, at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risk. The fair value
of trust securities is based on quoted market prices.
Common stock has been reduced by the note receivable from the trustee of
the leveraged employee stock ownership provision of the Thrift Plan. The fair
value of such note is estimated at the lesser of TXU Corp.'s call price or the
present value of future cash flows discounted at rates consistent with
comparable maturities adjusted for credit risk.
The fair value of the guarantees is based on the difference between the
credit spread of the entity responsible for the underlying obligation and a
financial counterparty applied, on a net present value basis, to the notional
amount of the guaranty.
A-105
The carrying amounts for financial assets classified as current assets and
the carrying amounts for financial liabilities classified as current liabilities
approximate fair value due to the short maturity of such instruments. The fair
values of other financial instruments for which carrying amounts and fair values
have not been presented are not materially different than their related carrying
amounts.
14. DERIVATIVE FINANCIAL INSTRUMENTS
During 2002, certain of TXU Corp's cash flow hedges related to anticipated
sales from baseload generation became less effective due to changes in ERCOT
market rules and conditions. TXU Corp. experienced total net hedge
ineffectiveness of $40 million ($26 million after-tax) in 2002, which has been
recognized as a $41 million ($26 million after-tax) loss in revenues related to
these contracts, partially offset by a $1 million gain in interest expense on
interest rate swaps. In 2001, TXU Corp experienced net hedge ineffectiveness of
$3 million ($2 million after-tax), recorded as $1 million loss in interest
expense and $4 million ($2 million after-tax) gain in revenues.
The maximum length of time TXU Corp. hedges its exposure to the variability
of future cash flows for forecasted transactions, excluding the payment of
variable interest on existing indebtedness, is two years in North America and
three and one-half years in Australia. During 2002, TXU Corp. entered into
certain cash flow hedges related to future forecasted interest payments. These
hedges were terminated later in 2002, and $133 million ($86 million after-tax)
was recorded as a charge to other comprehensive income. These losses are being
amortized to earnings over a period of up to thirty years, as the forecasted
transactions remain probable of occurring.
As of December 31, 2002, TXU Corp. expects that $142 million ($92 million
after-tax) in other comprehensive loss will be recognized in earnings over 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. The following table
summarizes balances currently recognized in other comprehensive loss:
Other Comprehensive Loss
Year Ended December 31, 2002
------------------------------
Treasury Commodity Total
-------- --------- -----
Dedesignated hedges (amounts fixed)................. $ 113 $ 27 $ 140
Hedges subject to market price fluctuations......... 17 34 51
------- ------- -------
Total.......................................... $ 130 $ 61 $ 191
======= ======= =======
15. REGULATION AND RATES
Restructuring Legislation -- The 1999 Restructuring Legislation
restructured the electric utility industry in Texas and provided for a
transition to increased competition in the generation and retail sale of
electricity. Under the 1999 Restructuring Legislation, each electric utility was
required to separate (unbundle) by January 1, 2002, its business activities into
a power generation company (PGC), a REP, and a T&D utility or separate T&D
utilities. Unbundled T&D utilities within ERCOT, such as Oncor, remain regulated
by the Commission.
Beginning January 1, 2002, REPs affiliated with T&D utilities began
charging residential and small commercial customers located in their historical
service territories rates that are 6% less than the rates that were in effect on
January 1, 1999, as adjusted for fuel factor changes ("price-to-beat rate"). TXU
Energy, as a REP affiliated with a T&D utility, may not charge prices to such
customers that are different from the price-to-beat rate until the earlier of
January 1, 2005, or the date on which 40% of the electricity consumed by
customers in those respective customer classes is supplied by competing REPs.
Thereafter, TXU Energy may offer rates different from the price-to-beat rate,
but it must also continue to make the price-to-beat rate, adjusted for fuel
factor changes, available for residential and small commercial customers until
January 1, 2007. REPs must be certified by the Commission. TXU Energy has
received appropriate REP certifications from the Commission.
A-106
Also, beginning January 1, 2002, PGCs that are affiliated with T&D
utilities may charge unregulated prices in connection with ERCOT wholesale power
transactions. Estimated costs associated with PGC nuclear power plant
decommissioning obligations continue to be recovered as a nonbypassable T&D
charge over the life of the plant. Each affiliated PGC owning 400 MW or more of
installed generating capacity must offer each year at auction entitlements to at
least 15% of such capacity. The obligation of an affiliated PGC to sell capacity
entitlements at auction continues until the earlier of January 1, 2007, or the
date on which 40% of the electricity consumed by residential and small
commercial customers of the PGC's affiliated REP is supplied by competing REPs.
PGCs must be registered with the Commission. TXU Energy has filed appropriate
PGC registrations with the Commission.
The 1999 Restructuring Legislation also provided for the recovery of
generation-related regulatory assets (regulatory assets) and generation-related
and purchased power-related costs that are in excess of market value (stranded
costs). It provided means for electric utilities to mitigate stranded costs
during the rate freeze period that preceded unbundling. Unmitigated stranded
costs would be finally determined in a 2004 "true-up" proceeding relying
principally upon market-based asset valuations. Regulatory assets and
unmitigated stranded costs can be recovered through the issuance of transition
(securitization) bonds or imposition of a competition transition charge.
Further, a REP would also be required to reconcile and credit to its
affiliated T&D utility (and the T&D utility to credit T&D customers), as a
so-called retail clawback, any positive difference between the price-to-beat
rate, reduced by the nonbypassible delivery charge, and the prevailing market
price of electricity during the same time period to the extent the price-to-beat
rate exceeded the market price of electricity. This reconciliation is not
required for the applicable customer class if 40% of the electricity consumed by
customers in that class is supplied by competing REPs before January 1, 2004. If
a retail clawback reconciliation is required, the 1999 Restructuring Legislation
provided that the amount credited cannot exceed an amount equal to the number of
residential or small commercial customers served by a T&D utility that are
buying electricity from the affiliated REP at the price-to-beat rate on January
1, 2004, minus the number of new customers obtained outside the historical
service territory, multiplied by $150. (The calculation of this credit was
altered for TXU Energy in connection with the Settlement Plan discussed below.)
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
1999 Restructuring Legislation. The settlement (Settlement) provided for in 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 fuel adjustments.
The Settlement was approved by the Commission in June 2002. In August 2002, the
Commission issued a financing order, pursuant to the Settlement Plan,
authorizing the issuance of securitization bonds relating to recovery of
regulatory assets. The Commission's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties to the Travis
County, Texas, District Court in August 2002. In January 2003, US Holdings
concluded a settlement of these appeals and they were dismissed. Thus the
Settlement became final.
The major elements of the Settlement are:
Excess Mitigation Credit and Appeal Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit in the
amount of $350 million, plus interest, applied over a two-year period as a
reduction to T&D rates charged to REPs. In June 2001, the Commission had issued
an interim order that addressed Oncor's charges for T&D service when retail
competition would begin. Among other things, that interim order, and subsequent
final order issued in October 2001, required Oncor to reduce rates over the
period from 2002-2008. The Commission's decision was appealed by US Holdings to
the Travis County, Texas, District Court. Finalization of the Settlement means
US Holdings' appeal has been dismissed. Also, in July 2001, the staff of the
Commission had notified US Holdings and the Commission that it disagreed with US
Holdings' computation of the level of earnings in excess of the regulatory
earnings cap for calendar year 2000. In August 2001, the Commission issued an
order adopting the staff position. US Holdings appealed this matter to the
Travis County, Texas, District Court, which affirmed the Commission's order and
US Holdings then appealed that decision to the Third District Court of Appeals
in Austin, Texas. This appeal has now been dismissed.
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Regulatory Asset Securitization -- In October 1999, US Holdings filed an
application with the Commission for a financing order to permit the issuance by
a special purpose entity of $1.65 billion of securitization bonds. In May 2000,
the Commission signed an order rejecting such request and authorized only $363
million of such bonds. US Holdings filed an appeal with the Travis County,
Texas, District Court and in September 2000, the Court issued a judgment that
reversed part of the Commission's order and affirmed other aspects of the
Commission's order. US Holdings and various other parties appealed this judgment
directly to the Supreme Court of Texas, and in June 2001, it issued a ruling; in
October 2001, it remanded the case to the Commission, which consolidated it into
the Settlement Plan proceeding. In accordance with the Settlement, Oncor
received a financing order authorizing it to issue securitization bonds in the
aggregate principal amount of $1.3 billion to recover regulatory assets and
other qualified costs. The Settlement provides that there can be an initial
issuance of securitization bonds in the amount of up to $500 million, followed
by a second issuance of the remainder after 2003. The Settlement resolves all
issues related to regulatory assets and liabilities.
Retail Clawback -- If, as currently expected, TXU Energy retains more than
60% of its historical residential and small commercial customers after the first
two years of competition, the amount of the retail clawback credit will be equal
to the number of residential and small commercial customers retained by TXU
Energy in its historical service territory on January 1, 2004, less the number
of new customers TXU Energy has added outside of its historical service
territory as of January 1, 2004, multiplied by $90. This determination will be
made separately for the residential and small commercial classes. The credit, if
any, will be applied to T&D rates charged by Oncor to REPs, including TXU
Energy, over a two-year period beginning January 1, 2004. Under the settlement
agreement, TXU Energy will make a compliance filing with the Commission
reflecting customer count as of January 2004. In the fourth quarter of 2002, TXU
Energy recorded a $185 million ($120 million after-tax) charge for the retail
clawback, which represents the current best estimate of the amount to be funded
to Oncor over the two-year period.
Stranded Cost Resolution -- TXU Energy's stranded costs, not including
regulatory assets, are fixed at zero. Accordingly, it will not have to conduct
the stranded cost true-up in 2004 provided for in the 1999 Restructuring
Legislation. In addition, the Settlement resulted in a resolution of the
regulatory disallowance of amounts related to US Holdings' repurchase of
minority owner interests in the Comanche Peak nuclear generating station. The
Commission's final order in connection with US Holdings' January 1990 rate
increase request had been ultimately reviewed by the Supreme Court of Texas, and
an aggregate of $909 million of disallowances with respect to US Holdings'
reacquisitions of minority owners' interests in Comanche Peak, which had
previously been recorded as a charge to earnings, was remanded to the District
Court and then to the Commission for reconsideration. As a result of the
Settlement, the parties have moved to dismiss this remand. The Settlement also
precludes recovery by US Holdings of certain environmental improvement costs.
Fuel Cost Recovery -- The Settlement also provides that US Holdings will
not seek to recover its unrecovered fuel costs which existed at December 31,
2001. Also, it will not conduct a final fuel cost reconciliation, which would
have covered the period from July 1998 until the beginning of competition in
January 2002.
Provider of Last Resort -- Through calendar year 2002, TXU Energy was the
POLR for residential and small non-residential customers in those areas of ERCOT
where customer choice was available outside its historical service territory and
was the POLR for large non-residential customers in its historical service
territory. TXU Energy's POLR contract expired on December 31, 2002. However, in
August 2002, the Commission adopted new rules that significantly changed POLR
service. Under the new POLR rules, instead of being transferred to the POLR,
non-paying residential and small non-residential customers served by affiliated
REPs are subject to disconnection. Non-paying residential and small
non-residential customers served by non-affiliated REPs are transferred to the
affiliated REP. Non-paying large non-residential customers can be disconnected
by any REP if the customer's contract does not preclude it. Thus, within the new
POLR framework, the POLR provides electric service only 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. No later than October
1, 2004, the Commission must decide whether all REPs should be permitted to
disconnect all non-paying customers. The new POLR rules are expected to result
in reduced bad debt expense beginning in 2003.
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Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
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 Company are named defendants in both suits. TXU Corp. is
unable to predict the outcome of any litigation related to this matter.
Summary -- Although TXU Corp. cannot predict future regulatory or
legislative actions or any changes in economic and securities market conditions,
no changes are expected in trends or commitments, other than those discussed in
this report, which might significantly alter its basic financial position,
results of operations or cash flows.
16. COMMITMENTS AND CONTINGENCIES
Clean Air Act -- The Federal Clean Air Act, as amended (Clean Air Act)
includes provisions which, among other things, place limits on SO2 and NOx
emissions produced by generating units. TXU Corp.'s capital requirements have
not been significantly affected by the requirements of the Clean Air Act. In
addition, all permits required for the air pollution control provisions of the
1999 Restructuring Legislation have been applied for and TXU Energy has
initiated a construction program to install control equipment to achieve the
required reductions.
Power Purchase Contracts -- TXU Corp. has entered into contracts to
purchase power through the year 2006 with certain wind power contracts for a
longer period. These contracts, except for the wind power contracts, provide for
capacity payments subject to performance standards and energy payments based on
the actual power taken under the contracts. Capacity payments paid under these
contracts for the years ended December 31, 2002, 2001 and 2000 were $296
million, $196 million and $194 million, respectively.
Assuming operating standards are achieved, future capacity payments under
existing agreements are estimated as follows:
2003.................................................... $316
2004.................................................... 164
2005.................................................... 149
2006.................................................... 119
2007.................................................... 20
Thereafter.............................................. 12
---
Total capacity payments............................ $780
====
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Gas Contracts -- TXU Corp. buys gas under various types of long-term and
short-term contracts in the US and Australia and arranges for gas storage and
transportation under various contracts in order to assure reliable supply to,
and to help meet the expected needs of, its generation plants and its wholesale
and retail customers. Many of these gas purchase contracts require minimum
purchases ("take-or-pay") of gas under which the buyer agrees to pay for a
minimum quantity of gas in a year. At December 31, 2002, TXU Corp. had estimated
annual minimum commitments under long-term gas purchase contracts covering the
periods below:
2003....................................................... $ 88
2004....................................................... 81
2005....................................................... 99
2006....................................................... 145
2007....................................................... 138
Thereafter................................................. 1,256
------
Total gas take-or-pay contracts...................... $1,807
======
At December 31, 2002, TXU Corp. had commitments for pipeline
transportation and storage reservation fees as shown in the table below:
2003....................................................... $14
2004....................................................... 6
2005....................................................... 6
2006....................................................... 6
2007....................................................... 4
Thereafter................................................. 6
---
Total pipeline transportation and storage reservation
fees................................................. $42
===
On the basis of TXU Corp.'s current expectations of demand from its
electricity and gas customers in each of these regions as compared with its
capacity payments or take-or-pay obligations under such purchase contracts,
management does not consider it likely that any material payments will become
due from TXU Corp. for electricity or gas not taken.
Coal Contracts -- TXU Corp. has coal purchase agreements and coal
transportation agreements. Commitments under these contracts for the next five
years and thereafter are as follows:
2003.......................................................... $ 94
2004.......................................................... 79
2005.......................................................... 23
2006.......................................................... 18
----
Total ................................................... $214
====
Leases -- TXU Corp. has entered into operating leases covering various
facilities and properties including generating plants, combustion turbines,
transportation, mining equipment, data processing equipment and office space.
Certain of these leases contain renewal and purchase options and residual value
guarantees. Lease costs charged to operating expense for 2002, 2001 and 2000
were $227 million, $183 million, and $156 million, respectively.
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Future minimum lease payments under capital leases, together with the
present value of such minimum lease payments, and future minimum lease
commitments under operating leases that have initial or remaining noncancellable
lease terms in excess of one year as of December 31, 2002, were as follows:
Capital Operating
Year Leases Leases
- ---- ------ --------
2003.............................................. $ 1 $ 101
2004.............................................. 1 93
2005.............................................. 2 85
2006.............................................. 2 75
2007.............................................. 2 78
Thereafter........................................ 6 557
---- -----
Total future minimum lease payments............. 14 $ 989
=====
Less amounts representing interest................ 4
----
Present value of future minimum lease payments.... 10
Less current portion.............................. 1
----
Long-term capital lease obligation................ $ 9
====
Guarantees -- TXU Corp. has entered into contracts that contain guarantees
to outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Project development guarantees -- In 1990, TXU Corp. repurchased an
electric co-op's minority ownership interest in the Comanche Peak generation
plant and assumed the co-op's indebtedness to the US government for the
facilities. TXU Corp. is making principal and interest payments to the co-op in
an amount sufficient for the co-op to make payments on its indebtedness. TXU
Corp. guaranteed the co-op's payments, and in the event that the co-op fails to
make its payments on the indebtedness, the US government would assume the
co-op's rights under the agreement, and such payments would then be owed
directly by TXU Corp. At December 31, 2002, the balance of the indebtedness was
$140 million with maturities of principal and interest extending to December
2021. The indebtedness is secured by a lien on the purchased facilities.
Residual value guarantees in operating leases -- TXU Corp. is the lessee
under various operating leases that obligate it to guarantee the residual values
of the leased facilities. At December 31, 2002, the aggregate maximum amount of
residual values guaranteed was approximately $299 million with an estimated
residual recovery of approximately $222 million. The average life of the lease
portfolio is approximately nine years.
Shared saving guarantees -- TXU Corp. has guaranteed that certain
customers will realize specified annual savings resulting from energy management
services it has provided. In aggregate, the average annual savings has exceeded
the annual savings guaranteed. The maximum potential annual payout is
approximately $4 million and the maximum total potential payout is approximately
$19 million. The average remaining life of the portfolio is approximately five
years.
Standby letters of credit -- TXU Corp. has entered into various agreements
that require letters of credit for financial assurance purposes. Approximately
$523 million of letters of credit are outstanding to support existing floating
rate pollution control revenue bond financings on existing debt of approximately
$433 million. The letters of credit are available to fund the payment of such
debt obligations. These letters of credit have expiration dates in 2003;
however, TXU Corp. intends to provide from either existing or new facilities for
the extension, renewal or substitution of these letters of credit to the extent
required for such floating rate debt or their remarketing as fixed rate debt.
A-111
TXU Corp. has provided for the posting of letters of credit in the amount
of $183 million to support portfolio management margin requirements in the
normal course of business. As of December 31, 2002, approximately 82% of the
obligations supported by these letters of credit mature within one year, and
substantially all of the remainder mature in the second year.
TXU Corp. has provided for the posting of a letter of credit in the amount
of $32 million as support for a subordinated loan related to a pipeline
construction project in Australia. The obligation expires on January 31, 2005.
TXU Australia has provided for the posting of letters of credit in the
amount of approximately $55 million, primarily to allow participation in the
electricity and gas spot markets. Although the average life of these guarantees
is for approximately one year, the obligation to provide guarantees is ongoing
based on TXU Australia's continued participation in the electricity and gas
spot markets.
Surety bonds -- TXU Corp. has provided for the issuance of approximately
$23 million of surety bonds to support performance under various subsidiary
construction contracts in the normal course of business. The term of the surety
bond obligations is approximately three years.
TXU Corp. 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 December 31, 2002, and
interest on bonds issued by the agencies to finance the reservoirs from which
the water is supplied. The bonds mature at various dates through 2011 and have
interest rates ranging from 5-1/2% to 7%. TXU Corp. is required to make periodic
payments equal to such principal and interest, including amounts assumed by a
third party and reimbursed to TXU Corp. of $4 million annually for 2003, $7
million for 2004 and $1 million for 2005 and 2006. Annual payments made by TXU
Corp., net of amounts assumed by a third party under such contracts, were $4
million for each of the last three years. In addition, TXU Corp. is obligated to
pay certain variable costs of operating and maintaining the reservoirs. TXU
Corp. has assigned to a municipality all its contract rights and obligations of
TXU Corp. in connection with $19 million remaining principal amount of bonds at
December 31, 2002, issued for similar purposes, which had previously been
guaranteed by TXU Corp. TXU Corp. is, however, contingently liable in the
unlikely event of default by the municipality.
A discontinued engineering and construction business of TXU Gas
constructed a plant for which performance is warranted through 2008.
Investments in Unconsolidated Entities -- TXU Corp. has a 50% voting
interest in Pinnacle. TXU Corp.'s investment in Pinnacle is accounted for using
the equity method. Assets of the joint venture are not TXU Corp.'s and are not
available to pay creditors of TXU Corp. Pinnacle's principal investment is in
TXU Communications Ventures Company (TXU Communications), a telecommunications
business that operates an established incumbent local exchange carrier serving
residential and business customers in East Texas and certain suburbs of Houston,
Texas.
Following is a summary of the Pinnacle ownership structure:
o Pinnacle is a limited partnership, with the sole general partnership
interest of 0.5% being owned by Pinnacle One GP, and with two similar
49.75% limited partnership interests each being owned by TXU Corp. and
Zenith, an unaffiliated statutory business trust with a bank as its
trustee,
o Pinnacle One GP is equally owned by Zenith and TXU Corp.,
o Pinnacle One GP is managed by a board of managers consisting of six
individuals, with three managers being appointed by each owner, and
o Notwithstanding the rights of Zenith to appoint half of Pinnacle One
GP's managers and to participate in selecting its officers, all of the
current managers and officers of Pinnacle One GP, with the exception
of one lower level officer, are directly affiliated with TXU Corp.
A-112
In connection with its formation, Pinnacle issued $810 million of 8.83%
senior secured notes due August 15, 2004. The notes are secured by all of
Pinnacle's assets, including its shares of TXU Communications. Total proceeds
(net of transaction costs), including $150 million received from third-party
investors, were used by Pinnacle to make a $600 million cash distribution to TXU
Corp., in exchange for TXU Corp.'s contribution of the stock of TXU
Communications to Pinnacle, and fund a trust in the amount of $336 million. The
trust assets, including principal and related interest earned, are being used to
pay interest on the senior secured notes and distributions to the third-party
investors. The trust assets consist of TXU Corp. debt securities with a
principal amount of $178 million at December 31, 2002. The debt securities
issued to that trust are reflected in long-term debt (see Note 7). Interest
expense on the note payable totaled $15 million and $17 million for 2002 and
2001, respectively.
TXU Corp. provides a $200 million revolving credit facility to TXU
Communications, expiring 2004, of which $144 million was outstanding (at an
average interest rate of 3.5%) and included in investments on TXU Corp.'s
balance sheet as of December 31, 2002. Interest income on the revolving credit
facility totaled $5 million and $8 million for 2002 and 2001, respectively. In
addition, TXU Corp. has made and may make future capital contributions to
Pinnacle to fund a portion of TXU Communications' capital expenditures. TXU
Corp. also provides administrative services to Pinnacle and its affiliates at
cost, which totaled $3 million and $5 million for 2002 and 2001, respectively.
In connection with the Pinnacle debt transaction, TXU Corp. issued 810,000
shares of Mandatorily Convertible Single Reset Preference Stock, Series C
(Series C Preference Stock) to Pinnacle One Share Trust, a consolidated trust
(Share Trust). The Series C Preference Stock is convertible into common stock of
TXU Corp. in the event of:
a) a default by Pinnacle in connection with its $810 million of
senior secured notes,
b) a decline in the market price of TXU Corp. common stock below
$21.93 per share for ten consecutive trading days (the market
price has declined below this price) coupled with a decline in the
credit rating for TXU Corp.'s unsecured, senior long-term
obligations to or below BB by S&P or Fitch Ratings (Fitch) or Ba2
by Moody's, or
c) Pinnacle's inability to raise sufficient cash to repay its senior
secured notes 120 days prior to maturity (August 2004) through the
sale of its shares of TXU Communications or the sale of assets of
TXU Communications.
TXU Corp. would be required to sell equity, use available liquidity or
otherwise raise proceeds sufficient to repay Pinnacle's senior secured notes. If
TXU Corp. did not have available liquidity or raise sufficient proceeds, the
Share Trust could be required to sell some or all of the Series C Preference
Stock. The dividend rate and conversion price of the Series C Preference Stock
would be reset at the time of sale to generate proceeds sufficient to redeem the
senior secured notes. The market price of TXU common stock at the time of sale
of the Series C Preference Stock would determine the dilutive impact to common
stockholders. Currently, TXU Corp. expects that it will have sufficient
liquidity or otherwise would be able to sell equity or debt securities to
satisfy its contingent obligations to repay Pinnacle's debt.
Had TXU Corp. been required to consolidate Pinnacle at December 31, 2002,
TXU Corp.'s debt would have increased by approximately $648 million. TXU Corp.
does not believe that a consolidation of Pinnacle would have a material impact
on its liquidity or financial condition.
For the years ended December 31, 2002 and 2001, Pinnacle reported revenues
of $215 million and $202 million, respectively, and incurred a net loss of $180
million and $106 million, respectively, due largely to impairments of goodwill
and other long-lived assets in 2002 of $75 million after-tax, interest expense
on the senior secured notes and the distributions to the third-party investors.
TXU Corp. recorded its equity in Pinnacle's losses for the years ended December
31, 2002 and 2001, of $104 million and $53 million, respectively, which is
reported in other deductions in the statement of income. At December 31, 2002,
Pinnacle had total assets of approximately $858 million (including goodwill of
$318 million) and liabilities of $1.1 billion, including long-term debt
securities of $810 million issued at the time of Pinnacle's formation. TXU
Corp.'s investment in Pinnacle was negative $392 million as of December 31,
2002, classified in noncurrent liabilities and other deferred credits in the
balance sheet. The $392 million represents TXU Corp.'s potential obligation
under the partnership agreement, including retirement of the $810 million in
debt and amounts due the partner, net of estimated value realizable from the
business.
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As a result of the impairments of goodwill and long-lived assets recorded
by Pinnacle, TXU Corp. evaluated its potential obligations related to the
partnership arrangement. TXU Corp. determined that it was probable, in light of
the decline in value of the business, that an economic loss had occurred, and
accordingly recorded a charge of $150 million (without tax benefit) in 2002,
reported in other deductions in the statement of income. Contingent income tax
amounts payable related to Pinnacle, in excess of $11 million in accumulated
deferred income taxes recorded at December 31, 2002, total approximately $60
million. Such unrecorded liability would arise if the business was sold at its
current estimated fair value.
In February 2003, TXU Corp. and Zenith entered into a Put/Call Agreement
pursuant to which TXU Corp. has the right, at any time, to buy from Zenith all
of its interests in Pinnacle and in Pinnacle's general partner for $150 million.
Conversely, Zenith has the right to require TXU Corp. to buy those interests for
that amount if (i) there is an event of default under the Pinnacle senior
secured notes that leads to acceleration, (ii) the Pinnacle senior secured notes
mature, or (iii) the Pinnacle senior secured notes are redeemed early and there
is a default under TXU Corp.'s $500 million working capital credit facility
(based on its terms as of February 2003 and without regard to future
amendments). In consideration of the rights accorded TXU Corp. under the
agreement and applicable accounting rules, TXU Corp. will consolidate the
operations of Pinnacle in its financial statements effective with reporting for
the first quarter of 2003.
Nuclear Insurance -- With regard to liability coverage, the Price-Anderson
Act (Act) provides financial protection for the public in the event of a
significant nuclear power plant incident. The Act sets the statutory limit of
public liability for a single nuclear incident at $9.6 billion currently and
requires nuclear power plant operators to provide financial protection for this
amount. The Act is being considered by the United States Congress for
modification and extension. The terms of a modification, if any, are not
presently known and therefore TXU Corp. is unable, at this time, to determine
any impact it may have on nuclear liability coverage. As required, TXU Corp.
provides this financial protection for a nuclear incident at Comanche Peak
resulting in public bodily injury and property damage through a combination of
private insurance and industry-wide retrospective payment plans. As the first
layer of financial protection, TXU Corp. has $300 million of liability insurance
from American Nuclear Insurers (ANI), which provides such insurance on behalf of
a major stock insurance company pool, Nuclear Energy Liability Insurance
Association. The second layer of financial protection is provided under an
industry-wide retrospective payment program called Secondary Financial
Protection (SFP).
Under the SFP, each operating licensed reactor in the US is subject to an
assessment of up to $88 million, subject to increases for inflation every five
years, in the event of a nuclear incident at any nuclear plant in the US.
Assessments are limited to $10 million per operating licensed reactor per year
per incident. All assessments under the SFP are subject to a 3% insurance
premium tax, which is not included in the above amounts.
With respect to nuclear decontamination and property damage insurance,
Nuclear Regulatory Commission (NRC) regulations require that nuclear plant
license-holders maintain not less than $1.1 billion of such insurance and
require the proceeds thereof to be used to place a plant in a safe and stable
condition, to decontaminate it pursuant to a plan submitted to and approved by
the NRC before the proceeds can be used for plant repair or restoration or to
provide for premature decommissioning. TXU Corp. maintains nuclear
decontamination and property damage insurance for Comanche Peak in the amount of
$3.5 billion, above which TXU Corp. is self-insured. The primary layer of
coverage of $500 million is provided by Nuclear Electric Insurance Limited
(NEIL), a nuclear electric utility industry mutual insurance company. The
remaining coverage includes premature decommissioning coverage and is provided
by NEIL in the amount of $2.25 billion and $737 million from Lloyds of London,
other insurance markets and foreign nuclear insurance pools. TXU Corp. is
subject to a maximum annual assessment from NEIL of $26.6 million.
TXU Corp. maintains Extra Expense Insurance through NEIL to cover the
additional costs of obtaining replacement power from another source if one or
both of the units at Comanche Peak are out of service for more than twelve weeks
as a result of covered direct physical damage. The coverage provides for weekly
payments of $3.5 million for the first fifty-two weeks and $2.8 million for the
next 110 weeks for each outage, respectively, after the initial twelve-week
period. The total maximum coverage is $490 million per unit. The coverage
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amounts applicable to each unit will be reduced to 80% if both units are out of
service at the same time as a result of the same accident. Under this coverage,
TXU Corp. is subject to a maximum annual assessment of $8.7 million.
There have been some revisions made to the nuclear property and nuclear
liability insurance policies regarding the maximum recoveries available for
multiple terrorism occurrences. Under the NEIL policies, if there were multiple
terrorism losses occurring within a one-year time frame, NEIL would make
available one industry aggregate limit of $3.24 billion plus any amounts it
recovers from reinsurance or other sources up to the limits for each claimant.
If terrorism losses occurred beyond the one-year period, a new set of limits and
resources would apply. Under the ANI liability policy, the liability arising out
of terrorist acts will be subject to one industry aggregate limit of $300
million which could be reinstated at ANI's option depending on prevailing risk
circumstances and the balance in the Industry Credit Rating Plan reserve fund.
Under the US Terrorism Risk Insurance Act of 2002, the US government provides
reinsurance with respect to acts of terrorism in the US for losses caused by an
individual or individuals acting on behalf of foreign parties. In such
circumstances, the NEIL and ANI terrorism aggregates would not apply.
Nuclear Decommissioning -- Under current regulatory licenses,
decommissioning activities are projected to begin in 2030 for Comanche Peak Unit
1 and 2033 for Unit 2 and common facilities. Through December 31, 2001,
decommissioning costs were recovered from consumers based upon a 1992
site-specific study through rates placed in effect under TXU Corp.'s January
1993 rate increase request. Effective January 1, 2002, decommissioning costs
will be recovered through a non-bypassable charge to REPs by Oncor based upon a
1997 site-specific study, adjusted for trust fund assets, through rates placed
in effect under TXU Corp.'s 2001 Unbundled Cost of Service filing. TXU Corp.
accrued $14 million of decommissioning costs for 2002 and $18 million for each
of the years ended December 31, 2001 and 2000. Amounts recovered through
regulated rates are deposited in external trust funds (see Note 5).
See Note 2 (under Changes in Accounting Standards) for a discussion of the
impact of SFAS No. 143 on accounting for nuclear decommissioning costs.
Legal Proceedings -- In October, November and December 2002 and January
2003, at least twenty-five lawsuits were filed in or removed to the United
States District Court for the Northern District of Texas, and two in the United
States District Court for the Eastern District of Texas, against TXU Corp., Erle
Nye and Michael J. McNally. Some of the lawsuits also name former officer David
W. Biegler as a defendant; however, based on the alleged class period, Mr.
Biegler is inappropriately named as a defendant. The plaintiffs seek to
represent classes of certain purchasers of TXU Corp. common and preferred stock
during specified class periods ranging from January 31, 2002, to October 11,
2002. No class or classes have been certified. The complaints allege violations
of the provisions of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, and Sections 11 and 12
of the Securities Act of 1933, as amended (Securities Act), relating to alleged
materially false and misleading statements, including statements in prospectuses
related to the offering by TXU Corp. of its equity-linked securities and common
stock in May and June 2002. The named individual defendants are current or
former officers and/or directors of TXU Corp. While TXU Corp. believes the
claims are without merit and intends to vigorously defend these lawsuits, it is
unable to estimate any possible loss or predict the outcome of these actions.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas, against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of the duties of loyalty
and good faith. The named individual defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. Therefore, TXU Corp. is unable to estimate any
possible loss or predict the outcome of this action.
A-115
On October 30, 2002, a lawsuit was filed in the 191st Judicial District
Court of Dallas County, Texas, against TXU Corp. and Erle Nye alleging
negligence, negligent misrepresentation, fraud and statutory fraud. On November
12, 2002, the lawsuit was amended and the plaintiffs alleged the same claims on
behalf of themselves and a putative class of persons or entities similarly
situated. No amount of damages has been specified. TXU Corp. has removed this
case to the United Stated District Court for the Northern District of Texas to
have it consolidated with the other cases described above pending in that court.
While TXU Corp. believes the claim is without merit and intends to vigorously
defend the lawsuit, it is unable to estimate any possible loss or predict the
outcome of this action.
On November 26, 2002, a lawsuit was filed in the United States District
Court for the Northern District of Texas against TXU Corp. and the directors of
TXU Corp. asserting claims under the Employee Retirement Income Security Act
(ERISA) on behalf of a putative class of participants in various employee
benefit plans of TXU Corp. The plaintiff seeks to represent a class of
participants in such plans during the period between January 31, 2002, and
October 11, 2002, based on factual allegations substantially the same as the
other cases described above pending in the United States District Court for the
Northern District of Texas. The complaint has not yet been served on the
defendants and, therefore, the defendants have not yet responded thereto. While
TXU Corp. believes the claim is without merit and intends to vigorously defend
the lawsuit, it is unable to estimate any possible loss or predict the outcome
of this action.
In November and December 2002, two lawsuits were filed in the 191st and
116th Judicial District Courts of Dallas County, Texas, against TXU Corp., Erle
Nye, Michael J. McNally, Biggs Porter and the directors of TXU Corp. asserting a
claim under Section 11 of the Securities Act on behalf of purchasers of TXU
Corp.'s equity linked debt securities issued in June 2002. These cases have been
removed from the United States District Court for the Northern District of Texas
and transferred to the court with jurisdiction of the consolidated cases
described above. The plaintiffs have filed motions to remand the cases to state
district court. The defendants intend to file a motion to have these cases
consolidated with the other cases described above pending in such court. While
TXU Corp. believes the claims are without merit and intends to vigorously defend
these lawsuits, it is unable to estimate any possible loss or predict the
outcome of these actions.
On February 28, 2003, a lawsuit was filed in the United States District
Court for the Northern District of Texas, Dallas Division, against TXU Corp.,
the directors of TXU Corp., Peter B. Tinkham, Diane J. Kubin, Robert L. Turpin
and other former unidentified members of the TXU Thrift Plan Committee asserting
claims under ERISA on behalf of a putative class of participants and
beneficiaries of the TXU Thrift Plan. The plaintiff seeks to represent a class
of participants in such plan during the period between November 23, 2001 through
October 11, 2002. The complaint has not yet been served on the defendants and,
therefore, the defendants have not yet responded thereto. While TXU Corp.
believes the claim is without merit and intends to vigorously defend the
lawsuit, it is unable to estimate any possible loss or predict the outcome of
this action.
General -- In addition to the above, TXU Corp. and its US and Australian
subsidiaries are involved in various other legal and administrative proceedings
the ultimate resolution of which, in the opinion of each, should not have a
material effect upon their financial position, results of operations or cash
flows.
17. SEGMENT INFORMATION
Concurrent with TXU Corp.'s reorganization as of January 1, 2002, TXU Corp.
realigned its operations into three reportable segments: North America Energy,
North America Energy Delivery and International Energy. In October 2002, TXU
Corp. discontinued its operations in Europe (see Note 3 to Financial
Statements). The International Energy segment has been renamed and consists
solely of operations in Australia.
The segments are either strategic business units that offer different
products or services or are geographically differentiated. They are managed
separately because each business requires different marketing strategies or is
in a different geographic area.
North America Energy - operations, principally in the competitive Texas
market, involving the generation and wholesale sales of electricity, retail
energy sales and services and portfolio management, including risk management
and certain trading activities.
A-116
North America Energy Delivery - largely regulated operations in Texas
involving the transmission and distribution of electricity and the purchase,
transportation, distribution and sale of natural gas.
Australia - operations, principally in Victoria and South Australia,
involving the generation of electricity, wholesale sales of energy, retail
energy sales and services in largely competitive markets, portfolio management
and gas storage, as well as regulated electricity and gas distribution.
Corporate and Other - Remaining non-segment operations consisting
primarily of general corporate expenses, equity earnings or losses of
unconsolidated affiliates, including the telecommunications joint venture, and
interest on debt at the TXU Corp. level. Affiliated revenues represent
intercompany service charges.
The prior year financial information for the North America Energy segment
and the electric delivery operations included in the North America Energy
Delivery segment includes information derived from the historical financial
statements of US Holdings. Reasonable allocation methodologies were used to
unbundle the financial statements of US Holdings between its generation and T&D
operations. Allocation of revenues reflected consideration of return on invested
capital, which continues to be regulated for the T&D operations. US Holdings
maintained expense accounts for each of its component operations. Costs of
energy and expenses related to operations and maintenance and depreciation and
amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and 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. Allocations reflected in the financial
information for 2001 and 2000 did not necessarily result in amounts reported in
individual line items that are comparable to actual results in 2002. Had the
unbundled operations of US Holdings actually existed as separate entities in a
deregulated environment, their results of operations could have differed
materially from those included in the historical financial statements included
herein.
Effective January 1, 2002, TXU Energy incurs electricity delivery fees
charged by Oncor and other T&D utilities, which TXU Energy includes in billings
to its large C&I customers. For residential and small business customers, the
price-to-beat rates include a delivery component, but such billed amounts are
not necessarily equivalent to delivery fees incurred by TXU Energy. These fees
are reflected in TXU Energy's revenues and cost of energy for the year ended
December 31, 2002. Electricity delivery fees have been included in the North
America Energy segment's revenues and cost of energy for the year ended December
31, 2001 and 2000. The North America Energy segment's gross margin is not
affected by the inclusion of these electricity delivery fees.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. TXU Corp. evaluates performance
based on income from continuing operations before extraordinary loss. TXU Corp.
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices.
Certain of the business segments provide services or sell products to one
or more of the other segments. Generally, such sales are made at prices
comparable with those received from nonaffiliated customers for similar products
or services. No customer provided more than 10% of consolidated revenues.
A-117
North
North America Discontinued Corp.
America Energy Operations and
Energy Delivery Australia Europe Other Eliminations Consolidated
-----------------------------------------------------------------------------
Operating Revenues
2002....... $7,738 $2,973 $860 $-- $592 $ (2,129) $10,034
2001....... 7,458 3,542 700 658 (2,309) 10,049
2000....... 7,449 3,187 717 -- 657 (2,363) 9,647
Regulated Revenues - Included in
Operating Revenues
2002....... -- 2,973 76 -- 91 (1,616) 1,524
2001....... 7,044 3,542 65 -- 104 (1,771) 8,984
2000....... 7,287 3,187 67 -- 102 (1,941) 8,702
Affiliated Revenues - Included in
Operating Revenues
2002....... 40 1,606 -- -- 483 (2,129) --
2001....... 8 1,767 -- -- 534 (2,309) --
2000....... (1) 1,939 -- -- 425 (2,363) --
Depreciation and Amortization -
Including Goodwill Amortization
2002....... 438 332 67 -- 21 -- 858
2001....... 410 313 79 -- 26 -- 828
2000....... 404 302 80 -- 32 -- 818
Equity in Earnings (Losses) of
Unconsolidated Subsidiaries
2002....... (2) 2 -- -- (105) -- (105)
2001....... (4) -- -- -- (49) -- (53)
2000....... -- -- (1) -- (17) -- (18)
Interest Income
2002....... 29 48 1 -- 72 (118) 32
2001....... 71 19 -- -- 102 (108) 84
2000....... 52 12 1 -- 94 (113) 46
Interest Expense and Other Charges
2002....... 257 331 129 -- 284 (117) 884
2001....... 247 347 126 -- 353 (108) 965
2000....... 280 344 150 -- 362 (113) 1,023
Income Tax Expense (Benefit)
2002....... 78 123 19 -- (126) -- 94
2001....... 277 125 3 -- (132) -- 273
2000....... 218 160 (1) -- (99) -- 278
Income from Continuing Operations
Before Extraordinary Loss
2002....... 242 252 74 -- (393) -- 175
2001....... 633 225 19 -- (238) -- 639
2000....... 551 288 23 -- (196) -- 666
Investment in Equity Investees
2002....... 3 -- 31 -- (391) -- (357)
2001....... 7 -- -- -- (130) -- (123)
2000....... 20 -- 1 -- (71) -- (50)
Total Assets
2002....... 16,301 11,321 3,172 -- 2,821 (2,724) 30,891*
2001....... 17,957 13,721 2,703 14,875 3,016 (9,954) 42,318*
2000....... 18,032 12,007 2,835 16,439 2,143 (6,377) 45,079*
Capital Expenditures
2002....... 274 624 82 -- 16 -- 996
2001....... 330 821 65 -- 32 -- 1,248
2000....... 265 636 79 -- 58 -- 1,038
*Assets by segment exclude investments in affiliates.
A-118
18. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Operating revenues
Regulated ........................................................ $ 1,524 $ 8,984 $ 8,702
Unregulated ...................................................... 8,510 1,065 945
------ -------- --------
Total operating revenues .................................... 10,034 10,049 9,647
------ -------- --------
Costs and operating expenses
Cost of energy sold and delivery fees - regulated* ............... 608 3,870 3,795
Cost of energy sold and delivery fees - unregulated* ............. 3,590 362 411
Operating costs - regulated ...................................... 852 1,459 1,383
Operating costs - unregulated .................................... 808 73 139
Depreciation and amortization, other than goodwill - regulated.... 380 724 736
Depreciation and amortization, other than goodwill - unregulated.. 478 61 32
Selling, general and administrative expenses - regulated ......... 96 437 147
Selling, general and administrative expenses - unregulated ....... 1,164 563 705
Franchise and revenue-based taxes - regulated .................... 322 509 383
Franchise and revenue-based taxes - unregulated .................. 157 21 19
Goodwill amortization - regulated ................................ -- 10 9
Goodwill amortization - unregulated .............................. -- 33 41
Other income ..................................................... (56) (51) (157)
Other deductions ................................................. 514 185 83
Interest income .................................................. (32) (84) (46)
Interest expense and other charges ............................... 884 965 1,023
----- ----- -----
Total costs and expenses....................................... 9,765 9,137 8,703
----- ----- -----
Income from continuing operations before income taxes and
extraordinary items ................................................. $ 269 $ 912 $ 944
===== ===== =====
*Includes cost of fuel consumed of $1,486 million (unregulated) in 2002
and $1,900 million and $2,341 million (both largely regulated) in 2001 and 2000,
respectively. The balance represents energy purchased for resale and delivery
fees.
The operations of the North America Energy segment are included above as
unregulated, as the Texas market is now open to competition. However, retail
pricing to residential and small business customers in its historical service
territory continues to be subject to certain price controls as discussed in Note
15.
Other Income and Deductions --
Year Ended December 31,
----------------------------
2002 2001 2000
------- ------- -------
Other income
Gain on sale of businesses and other properties............ $ 35 $ 9 $ 125
Equity in earnings of unconsolidated entities.............. - 4 1
Settlement of legal proceedings related to a gas contract.. - 18 -
Other...................................................... 21 20 31
----- ----- ------
Total other income.................................... $ 56 $ 51 $ 157
====== ===== ======
Other deductions
Loss on sale of properties................................. $ 3 $ 12 $ 4
Equity in losses of unconsolidated entities................ 105 57 19
Impairment of generation plant assets...................... 237 - -
Loss related to telecommunications partnership............. 150 - -
Regulatory asset write-offs................................ - 95 52
Other...................................................... 19 21 8
----- ---- -----
Total other deductions......................... $ 514 $ 185 $ 83
====== ===== =====
Credit Risk -- Credit risk relates to the risk of loss associated with
non-performance by counterparties. TXU Corp. maintains credit risk policies with
regard to its counterparties to minimize overall credit risk. These policies
require an evaluation of a potential counterparty's financial condition, credit
rating, and other quantitative and qualitative credit criteria and specify
authorized risk mitigation tools, including but not limited to use of
standardized agreements that allow for netting of positive and negative
exposures associated with a single counterparty. TXU Corp. has standardized
documented processes for monitoring and managing its credit exposure, including
methodologies to analyze counterparties' financial strength, measurement of
current and potential future credit exposures and standardized contract language
that provides rights for netting and set-off. Credit enhancements such as
parental guarantees, letters of credit, surety bonds and margin deposits are
A-119
also utilized. Additionally, individual counterparties and credit portfolios are
managed to preset limits and stress tested to assess potential credit exposure.
This evaluation results in establishing credit limits or collateral requirements
prior to entering into an agreement with a counterparty that creates credit
exposure to TXU Corp. Additionally, TXU Corp. has established controls to
determine and monitor the appropriateness of these limits on an ongoing basis.
Any prospective material adverse change in the financial condition of a
counterparty or downgrade of its credit quality will result in the reassessment
of the credit limit with that counterparty. This process can result in the
subsequent reduction of the credit limit or a request for additional financial
assurances.
Concentration of Credit Risk -- TXU Corp.'s regional gross exposure to
credit risk as of December 31, 2002, is as follows:
Region Credit Exposure
------ ---------------
US............................ $3,317
Australia..................... 484
------
Consolidated.................. $3,801
======
TXU Corp.'s gross exposure to credit risk represents trade accounts
receivable (net of allowance for uncollectible accounts receivable of $83
million), commodity contract assets and derivative assets. These regional
concentrations have the potential to affect TXU Corp.'s overall exposure to
credit risk, either positively or negatively, in that the customer base and
counterparties may be similarly affected, both regionally and globally, by
changes in economic, regulatory, industry, weather or other conditions. Global
credit coordination is in place to reduce credit limits on a global basis, to
provide transparency across regions and to communicate through various risk
committees and forums.
A large share of gross assets subject to credit risk represents accounts
receivable from the retail sale of electricity and gas to residential and small
commercial customers. The risk of material loss from non-performance from these
customers is unlikely based upon historical experience. Reserves for
uncollectible accounts receivable are established for the potential loss from
non-payment by these customers based on historical experience and market or
operational conditions. The restructuring of the electric industry in Texas
effective January 1, 2002, increases the risk profile of TXU Corp. in relation
to these customers; however, TXU Corp. has the ability to take actions to
mitigate such customer risk, particularly with the changes in the POLR rules
(see Note 15). In addition, Oncor has exposure to credit risk as a result of
non-performance by nonaffiliated REPs.
Most of the remaining trade accounts receivable are with large C&I
customers. TXU Corp.'s wholesale commodity contract counterparties include major
energy companies, financial institutions, gas and electric utilities,
independent power producers, oil and gas producers and energy trading companies.
The exposure to credit risk from these customers and counterparties, excluding
credit collateral, as of December 31, 2002, is $1.5 billion, net of standardized
master netting contracts and agreements which provide the right of offset of
positive and negative credit exposures with individual customers and
counterparties. When considering collateral currently held by TXU Corp. (cash,
letters of credit and other security interests), the net credit exposure is $1.3
billion.
TXU Corp. had no exposure to any one customer or counterparty greater than
10% of the net exposure of $1.3 billion at December 31, 2002. Additionally,
approximately 89% of the credit exposure, net of collateral held, has a maturity
date of less than 2 years. TXU Corp. does not anticipate any material adverse
effect on its financial position or results of operations as a result of
non-performance by any customer or counterparty.
A-120
Regulatory Assets and Liabilities --
December 31,
----------------------
2002 2001
---- ----
Regulatory Assets
Generation-related regulatory assets subject to securitization.............. $1,652 $1,841
Securities reacquisition costs.............................................. 124 117
Recoverable deferred income taxes-- net..................................... 76 80
Other regulatory assets..................................................... 217 170
------ ------
Total regulatory assets................................................. 2,069 2,208
------ ------
Regulatory Liabilities
Liability to be applied to stranded generation assets....................... 170 355
ITC and protected excess deferred taxes..................................... 99 108
Other regulatory liabilities................................................ 28 12
------ ------
Total regulatory liabilities............................................ 297 475
------ ------
Net regulatory assets................................................... $1,772 $1,733
====== ======
Included in net regulatory assets are assets of $1.8 billion at December
31, 2002, and $2.0 billion at December 31, 2001, that were not earning a return.
Of the assets not earning a return, $1.7 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 15 for further discussion of the
settlement plan.) The remaining regulatory assets have a remaining recovery
period of 14 to 31 years.
Restricted Cash -- At December 31, 2002, approximately $210 million of the
net proceeds from Oncor's issuance of senior secured notes on December 20, 2002,
was deposited in a trust to be used, to pay interest and redeem First Mortgage
Bonds of Oncor due in March and April 2003 and is reported in investments on the
balance sheet. Other restricted cash included $96 million as collateral for
letters of credit issued in the US.
Related Party Transactions -- See discussion in Note 16 under "Investments
in Unconsolidated Entities."
Accounts Receivable -- At December 31, 2002 and 2001, accounts receivable
are stated net of allowance for uncollectible accounts of $83 million and $35
million, respectively. During 2002, bad debt expense was $171 million, account
write-offs were $126 million and other activity increased the allowance for
uncollectible accounts by $3 million.
Accounts receivable included $644 million and $436 million of unbilled
revenues at December 31, 2002 and 2001, respectively.
A-121
Commodity Contracts -- At December 31, 2002 and 2001, current and
noncurrent commodity contract assets are stated net of applicable credit and
performance reserves (described in Note 2 - Financial Instruments and
Mark-to-Market Accounting) of $44 million and $26 million, respectively.
Inventories by Major Category --
December 31,
-----------------
2002 2001
---- ----
Materials and supplies...................................................... $227 $ 212
Fuel stock.................................................................. 91 62
Gas stored underground...................................................... 175 165
---- -----
Total inventories....................................................... $493 $ 439
==== =====
Inventories are carried at average costs, except for gas inventories
managed as part of portfolio management activities, which are carried at spot
rates through December 31, 2002. Inventories recorded at spot rates at December
31, 2002 and 2001 were $54 million and $18 million, respectively. As part of the
rescission of EITF Issue No. 98-10, such inventories will be adjusted to average
costs as part of the cumulative adjustment to be recorded in the first quarter
of 2003.
Property, Plant and Equipment --
December 31,
---------------------
2002 2001
---- ----
North America Energy:
Production.......................................................... $15,675 $15,791
Nuclear fuel (net of accumulated amortization of $847 and $787)..... 137 146
Other assets........................................................ 483 242
North America Energy Delivery:
Transmission - electric............................................. 2,176 1,979
Distribution - electric............................................. 6,376 6,110
Gas distribution and pipeline....................................... 1,782 1,677
Other assets........................................................ 483 478
Corporate and Other........................................................ 218 186
------ -------
Total............................................................... 27,330 26,609
Less accumulated depreciation............................................... 9,901 9,397
------- -------
Net of accumulated depreciation.................................... 17,429 17,212
Construction work in progress............................................... 434 608
------ -------
Net North America property, plant and equipment.................... 17,863 17,820
International Energy:
Australia - Electric and gas distribution and generation (net of
accumulated depreciation of $369 and $267)........................ 1,779 1,599
------- -------
Net property, plant and equipment.................................. $19,642 $19,419
======= =======
As of December 31, 2002, substantially all of Oncor's electric utility
property, plant and equipment (with a net book value of $6.1 billion) is pledged
as collateral on Oncor's first mortgage bonds and senior secured notes.
A-122
Interest Expense and Related Charges --
Year Ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Interest......................................................... $ 810 $ 837 $ 871
Distributions on mandatorily redeemable, preferred securities of
subsidiary trusts, each holding solely junior subordinated
debentures of the construction obligated company:
TXU obligated......................................... 30 30 30
Subsidiary obligated.................................. 10 71 79
Preferred stock dividends of subsidiaries........................ 13 14 14
Amortization of debt discounts, premiums and issuance cost....... 33 36 40
Allowance for borrowed funds used during construction
and capitalized interest...................................... (12) (23) (11)
------ ------ ------
Total interest expense and other related charges...... $ 884 $ 965 $1,023
====== ====== ======
Supplemental Cash Flow Information --
Year Ended December 31,
------------------------------
2002 2001 2000
---- ---- ----
Cash payments (receipts):
Interest (net of amounts capitalized)......................... $ 813 $ 971 $ 985
Income taxes.................................................. $ (17) $ 30 $ 132
Non-cash investing and financing activities:
Note receivable from sale of assets........................... $ - $ 186 $ 23
Equity forward contracts...................................... $ - $ (190) $ 190
Equity-linked securities surrendered to meet obligations under
related common stock purchase contracts..................... $ 238 $ - $ -
Discount related to exchangeable subordinated notes recorded
to paid-in-capital...................................... $ 111 $ - $ -
A-123
Quarterly Information (unaudited) -- The results of operations by quarter
are summarized below and reflect the discontinuance of the Europe operations and
the effect of EITF Issue No. 02-3 to report certain trading activities on a net
basis. Net income was not affected by the accounting rule change as the decrease
in revenues was offset in cost of energy sold and delivery fees. In the opinion
of TXU Corp., all other adjustments (consisting of normal recurring accruals)
necessary for a fair statement of such amounts have been made. Quarterly results
are not necessarily indicative of a full year's operations because of seasonal
and other factors.
Quarter Ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
2002:
Operating revenues ................................................. $ 2,453 $ 2,505 $ 2,918 $ 2,158
Income (loss) from continuing operations before extraordinary loss.. $ 274 $ 178 $ 256 $ (533)
Income (loss) from discontinued operations, net of tax effect ...... $ (2) $ 23 $ (44) $(4,187)
Extraordinary loss, net of tax effect .............................. $ (17) $ - $ (1) $ (157)
Net income (loss) before preference stock dividends ................ $ 255 $ 201 $ 211 $(4,877)
Net income (loss) available for common stock ....................... $ 250 $ 195 $ 206 $(4,883)
Basic and diluted per share of common stock:
Income (loss) from continuing operations before extraordinary
loss after provision for preference dividends................ $ 1.02 $ 0.64 $ 0.88 $ (1.81)
Income (loss) from discontinued operations, net of tax effect... $ (0.01) $ 0.09 $ (0.15) $(14.10)
Extraordinary loss, net of tax effect .......................... $ (0.07) $ - $ - $ (0.53)
Net income (loss) available for common stock.................... $ 0.94 $ 0.73 $ 0.73 $(16.44)
2001:
Operating revenues ................................................. $ 2,777 $ 2,381 $ 2,738 $ 2,153
Income from continuing operations before extraordinary loss ........ $ 125 $ 126 $ 310 $ 78
Income from discontinued operations, net of tax effect ............. $ 76 $ 81 $ 29 $ 6
Extraordinary loss, net of tax effect............................... $ - $ - $ - $ (154)
Net income (loss) before preference stock dividends................. $ 201 $ 207 $ 339 $ (70)
Net income (loss) available for common stock ....................... $ 196 $ 201 $ 334 $ (76)
Basic and diluted per share of common stock:
Income from continuing operations before extraordinary loss
after provision for preference dividends..................... $ 0.47 $ 0.47 $ 1.17 $ 0.27
Income from discontinued operations, net of tax effect ......... $ 0.29 $ 0.31 $ 0.11 $ 0.02
Extraordinary loss, net of tax effect .......................... $ - $ - $ - $ (0.58)
Net income (loss) available for common stock.................... $ 0.76 $ 0.78 $ 1.28 $ (0.29)
A-124
Also included in fourth quarter 2002 results were a $185 million ($120
million after-tax) accrual for regulatory-related retail clawback, a $237
million ($154 million after-tax) writedown of an investment in generation plant
construction projects and $187 million ($174 million after-tax) in charges
related to the Pinnacle joint venture to reflect the loss in value of the
business.
Reconciliation of Previously Reported Quarterly Information -- The
following table presents the changes to previously reported quarterly amounts to
reflect the discontinuance of Europe operations (see Note 3) and to report
certain trading activities on a net basis (see Note 2). Net income was not
affected by these changes.
Quarter Ended
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Increase (Decrease) from Previously Reported
2002:
Revenues - to reflect trading activities on a net basis... $ (1,703) $ (1,524) $ - $ -
Revenues - from discontinued operations .................. $ (3,944) $ (3,173) $ (1,358) $ -
Income (loss) from discontinued operations, net of tax
effect ................................................. $ (2) $ 23 $ (44) $ -
2001:
Revenues - to reflect trading activities on a net basis... $ (2,233) $ (1,039) $ (981) $ (906)
Revenues - from discontinued operations .................. $ (3,365) $ (2,706) $ (2,884) $ (3,764)
Income from discontinued operations, net of tax effect .. $ 76 $ 81 $ 29 $ 6
19. SUBSEQUENT EVENTS (unaudited)
In early March 2003, TXU Energy issued $1.25 billion aggregate principal
amount of senior unsecured notes in two series in a private placement with
registration rights. One series of $250 million is due March 15, 2008, and bears
interest at the annual rate of 6.125%, and the other series of $1 billion is due
March 15, 2013, and bears interest at the annual rate of 7%. Net proceeds from
the issuance will be used for general corporate purposes, including the
repayment of advances from affiliates.
A-125
TXU CORP. Exhibits to 2002 Form 10-K
APPENDIX B
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
2(a) 1-12833 2 -- Master Separation Agreement by and among Oncor, TXU
Form 8-K Generation Holdings Company LLC, TXU Merger Energy Trading
(filed January 16, Company LP, TXU SESCO Company, TXU SESCO Energy Services
2002) Company, TXU Energy Retail Company LP and TXU US Holdings,
dated as of December 14, 2001.
3(a) 333-37652 4(a) -- Amended and Restated Articles of Incorporation.
3(b) 333-37652 4(b) -- Restated bylaws, as amended.
3(c) 1-12833 1 -- Rights Agreement, dated as of February 19, 1999, between the
Form 8-A Company and The Bank of New York, which includes as
(filed February 26, Exhibit A thereto the form of Statement of Resolution Establishing
1999) the Series A Preference Stock, Exhibit B thereto the form of
a Right Certificate and Exhibit C thereto the Summary of Rights to
Purchase Series A Preference Stock.
3(d) 1-12833 3(b) -- Statement of Resolution establishing Flexible Money Market
Form 10-Q Cumulative Preference Stock, Series B of TXU Corp.
(Quarter ended
June 30, 2000)
3(e) 333-49434 4(d) -- Statement of Resolution establishing Mandatorily Convertible
333-49434-01 Single Reset Preference Stock, Series C of TXU Corp.
333-49434-02
4(a) 2-90185 4(a) -- Mortgage and Deed of Trust, dated as of December 1, 1983,
between Oncor and The Bank of New York, as Trustee.
4(a)(1) -- Supplemental Indentures to Mortgage and Deed of Trust:
Number Dated as of
------ ---------------
2-90185 4(b) First April 1, 1984
33-24089 4(a)-1 Fifteenth July 1, 1987
33-30141 4(a)-3 Twenty-second January 1, 1989
33-35614 4(a)-3 Twenty-fifth December 1, 1989
33-39493 4(a)-2 Twenty-eighth October 1, 1990
33-49710 4(a)-1 Thirty-fourth April 1, 1992
33-57576 4(a)-3 Fortieth November 1, 1992
33-60528 4(a)-1 Forty-second March 1, 1993
33-64692 4(a)-2 Forty-fourth April 1, 1993
33-68100 4(a)-1 Forty-sixth July 1, 1993
33-68100 4(a)-3 Forty-seventh October 1, 1993
1-12833 4(2)(1) Sixty-third January 1, 2002
Form 10-K
(2001)
B-1
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
1-12833 4 Sixty-fourth May 1, 2002
Form 10-Q
(Quarter ended March
31, 2002)
333-100240 4(f)(2) Sixty-fifth December 1, 2002
4(b) -- Agreement to furnish certain debt instruments.
4(c) 33-68104 4(b)-17 -- Deposit Agreement between TXU US Holdings and Chemical Bank,
dated as of August 4, 1993.
4(d) 0-11442 4(e) -- Deposit Agreement between TXU US Holdings and Chemical Bank,
Form 10-K (1993) dated as of October 14, 1993.
4(e) 333-45999 4(b) -- Indenture, dated October 1, 1997, relating to TXU Corp.'s
6.375% Series B Senior Notes and 6.375% Series B Exchange
Notes (together, Series B Notes).
4(f) 333-45999 4(f) -- Officer's Certificate establishing TXU Corp.'s Series B
Notes.
4(g) 0-12833 4(ff) -- Indenture, dated January 1, 1998, relating to TXU Corp.'s
Form 10-K (1997) 6.375% Series C Senior Notes and 6.375% Series C Exchange
Notes (together, Series C Notes).
4(h) 0-12833 4(hh) -- Officers' Certificate establishing TXU Corp.'s Series C
Form 10-K (1997) Notes.
4(i) 0-11442 4(a) -- Indenture (For Unsecured Debt Securities), dated as of
Form 10-Q August 1, 1997, between TXU US Holdings and The Bank of New
(Quarter ended Sept. York.
30, 1997)
4(j) 0-11442 4(b) -- Officer's Certificate establishing the TXU US Holdings 7.17%
Form 10-Q Debentures due August 1, 2007.
(Quarter ended Sept.
30, 1997)
4(k) 0-12833 4(kk) -- Indenture (For Unsecured Debt Securities), dated as of
Form 10-K (1997) January 1, 1998, between TXU Gas and The Bank of New York.
4(l) 0-12833 4(mm) -- Officer's Certificate establishing the TXU Gas Remarketed
Form 10-K (1997) Reset Notes due January 1, 2008.
4(m) 33-45688 4.2 -- Indenture, dated February 15, 1992, between TXU Gas and The
First National Bank of Chicago.
4(n) 0-12833 4(qq) -- TXU Gas 6-3/8% Note due 2004, dated February 1, 1994.
Form 10-K (1997)
4(o) 0-12833 4(rr) -- TXU Gas 7-1/8% Note due 2005, dated June 6, 1995.
Form 10-K (1997)
4(p) 1-12833 4(a) -- Remarketing Agreement, dated as of January 30, 1998 and form
Form 8-K of Remarketing Agreement Supplement with respect to TXU Gas
(filed August 28, Remarketed Reset Notes.
1998)
B-2
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
4(q) 1-12833 4(b) -- Indenture, (For Unsecured Subordinated Debt Securities),
Form 8-K dated as of June 1, 1998, between TXU Gas and The Bank of
(filed August 28, New York, as Trustee.
1998)
4(r) 1-12833 4(c) -- Officer's Certificate, dated as of July 2, 1998,
Form 8-K establishing the terms of the TXU Gas Floating Rate Junior
(filed August 28, Subordinated Debentures, issued in connection with the
1998) preferred securities of TXU Gas Capital I.
4(s) 1-12833 4(d) -- Amended and Restated Trust Agreement, dated as of July 2,
Form 8-K 1998, between TXU Gas, as Depositor, and The Bank of New
(filed August 28, York, The Bank of New York (Delaware), and the
1998) Administrative trustees thereunder.
4(t) 1-12833 4(e) -- Guarantee Agreement with respect to TXU Gas Capital I, dated
Form 8-K as of July 2, 1998, between TXU Gas, as Guarantor, and The
(filed August 28, Bank of New York, as Trustee.
1998)
4(u) 1-12833 4(f) -- Agreement as to Expenses and Liabilities, dated as of July
Form 8-K 1, 1998, between TXU Gas and TXU Gas Capital I.
(filed August 28,
1998)
4(v) 1-12833 4(g) -- Indenture (For Unsecured Debt Securities Series D
Form 8-K and Series E), dated as of July 1, 1998, between TXU
(filed August 28, Corp. and The Bank of New York.
1998)
4(w) 1-12833 4(h) -- Officers' Certificate, dated July 22, 1998 establishing the
Form 8-K terms of TXU Corp.'s 6.37% Series D Senior Notes and 6.50%
(filed August 28, Series E Senior Notes.
1998)
4(x) 1-12833 4(a) -- Indenture, (For Unsecured Subordinated Debt
Form 8-K Securities), dated as of December 1, 1998,
filed between TXU Corp. and The Bank of New York, as Trustee.
January 19, 1999)
4(y) 1-12833 4(b) -- Officer's Certificate, dated as of December 30, 1998,
Form 8-K establishing the terms of TXU Corp.'s 7 1/4% Junior
(filed January 19, Subordinated Debentures, Series A issued in connection with
1999) the preferred securities of TXU Capital I.
4(z) 1-12833 4(c) -- Amended and Restated Trust Agreement, dated as of December
Form 8-K 30, 1998, between TXU Corp., as Depositor, and The Bank of
(filed January 19, New York, The Bank of New York (Delaware), and the
1999) Administrative Trustees thereunder.
4(aa) 1-12833 4(d) -- Guarantee Agreement with respect to TXU Capital I, dated as
Form 8-K of December 30, 1998, between TXU Corp., as Guarantor, and
(filed January 19, The Bank of New York, as Trustee.
1999)
4(bb) 1-12833 4(e) -- Agreement as to Expenses and Liabilities, dated
Form 8-K (filed as of December 30, 1998, between TXU Corp. and TXU Capital I.
January 19, 1999)
B-3
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
4(cc) 1-12833 4(iii) -- Officer's Certificate dated as of December 13, 1999
Form 10-K establishing the terms of TXU Corp.'s 8.70% Junior
(1999) Subordinated Debentures, Series B, issued in connection with
the preferred securities of TXU Capital II.
4(dd) 1-12833 4(jjj) -- Amended and Restated Trust Agreement, dated as of December
Form 10-K 13, 1999, between TXU Corp., as Depositor, and The Bank of
(1999) New York, The Bank of New York (Delaware), and the
Administrative Trustees thereunder.
4(ee) 1-12833 4(kkk) -- Guarantee Agreement with respect to TXU Capital II, dated as
Form 10-K of December 13, 1999, between TXU Corp., as Guarantor, and
(1999) The Bank of New York, as Trustee.
4(ff) 1-12833 4(lll) -- Agreement as to Expenses and Liabilities, dated
as of December 13, 1999, between TXU Corp. and TXU Capital II.
4(gg) 1-12833 4(b) -- Indenture (For Unsecured Debt Securities Series J), dated as
Form 10-Q (Quarter of June 1, 2001 between TXU Corp. and The Bank of New York,
ended June 30, as Trustee.
2001)
4(hh) 1-12833 4(c) -- Officer's Certificate establishing the terms of TXU Corp.'s
Form 10-Q (Quarter 6.375% Series J Senior Notes due June 15, 2006.
ended June 30,
2001)
4(ii) 1-12833 4(b) -- Indenture (For Unsecured Debt Securities Series K and L),
Form 10-Q (Quarter dated as of October 1, 2001, between TXU Corp. and The Bank
ended September 30, of New York.
2001)
4(jj) 1-12833 4(c) -- Officer's Certificate, dated October 16, 2001, establishing
Form 10-Q (Quarter the terms of TXU Corp.'s Series K Senior Notes and Series L
ended September 30, Senior Notes.
2001)
4(kk) 1-12833 4(d) -- Purchase Contract Agreement, dated as of October 1, 2001,
Form 10-Q (Quarter between TXU Corp. and The Bank of New York with respect to
ended September 30, TXU's issuance of Equity Units.
2001)
4(ll) 1-12833 4(e) -- Pledge Agreement, dated as of October 1, 2001, among TXU
Form 10-Q (Quarter Corp., The Chase Manhattan Bank and The Bank of New York
ended September 30, with respect to the Equity Units.
2001)
4(mm) 1-12833 4(a) -- Indenture (For Unsecured Debt Securities Series M), dated as
Form 10-Q of June 1, 2002, between TXU Corp. and The Bank of New York.
(Quarter ended June
30, 2002)
4(nn) 1-12833 4(b) -- Officers' Certificate, dated June 5, 2002, establishing the
Form 10-Q terms of TXU Corp.'s Series M Senior Notes.
(Quarter ended June
30, 2002)
B-4
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
4(oo) 1-12833 4(c) -- Purchase Contract Agreement, dated as of June 1, 2002,
Form 10-Q between TXU Corp. and The Bank of New York, as Purchase
(Quarter ended June Contract Agent and Trustee with respect to TXU Corp.'s
30, 2002) issuance of Equity Units.
4(pp) 1-12833 4(d) -- Pledge Agreement, dated as of June 1, 2002, among TXU Corp.,
Form 10-Q JPMorgan Chase Bank, as Collateral Agent, Custodial Agent
(Quarter ended June and Securities Intermediary and The Bank of New York as
30, 2002) Purchase Contract Agent with respect to Equity Units.
4(qq) 1-12833 4(a) -- TXU Energy's 9% Exchangeable Subordinated Notes
Form 8-K (filed due 2012, dated as of November 22, 2002.
November 25, 2002)
4(ss) 1-12833 10(a) -- Exchange Agreement, dated as of November 22, 2002, among TXU
Form 8-K (filed Corp., TXU Energy and UXT Holdings LLC and UXT Intermediary
November 25, 2002) LLC.
4(tt) 1-12833 10(c) -- Registration Rights Agreement, dated as of November 22,
Form 8-K (filed 2002, among TXU Corp. and UXT Holdings LLC and UXT
November 25, 2002) Intermediary LLC.
4(uu) -- Amendment No. 1 to Registration Rights Agreement, dated as of
December 19, 2002, among TXU Corp. and UXT Holdings LLC and UXT
Intermediary LLC.
4(vv) 333-100240 4(a) -- Indenture and Deed of Trust, dated as of May 1, 2002, between
Oncor and The Bank of New York, as Trustee.
4(ww) 333-100240 4(c) -- Officer's Certificate, dated May 6, 2002, establishing the
forms of the Oncor Senior Secured Notes of the 6.375% Series
due 2012 and the 7.000% Series due 2032.
4(xx) 333-100240 4(c) -- Officer's Certificate, dated December 20, 2002, establishing
(Pre-Effective the forms of the Oncor Senior Secured Notes of the 6.375%
Amendment No. 1) Series due 2015 and the 7.250% due 2033.
4(yy) 333-100242 4(a) -- Indenture (for Unsecured Debt Securities), dated as of
August 1, 2002, between Oncor and The Bank of New York, as
Trustee.
4(zz) 333-100242 4(b) -- Officer's Certificate, dated as of August 30, 2002,
establishing the forms of Oncor's 5% Debentures due 2007 and
7% Debentures due 2022.
10(a)** 1-12833 10(a) -- Deferred and Incentive Compensation Plan of TXU Corp., as
Form 10-K restated, effective August 17, 2001.
(2001)
10(b)** 1-12833 10(b) -- Salary Deferral Program of TXU Corp., as restated, effective
Form 10-K August 17, 2001.
(2001)
10(c)** 1-12833 10(c) -- Second Supplemental Retirement Plan for Employees of TXU
Form 10-K Corp., as amended and restated, effective August 17, 2001.
(2001)
B-5
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
10(d)** 1-12833 10(d) -- Deferred Compensation Plan for Outside Directors of TXU
Form 10-K Corp., effective as of August 17, 2001.
(2001)
10(e)** -- Long-Term Incentive Compensation Plan of TXU Corp., restated
effective as of May 20, 2002.
10(f)** 1-12833 10(f) -- Annual Incentive Plan of the TXU Corp., restated effective
Form 10-K as of August 17, 2001.
(2001)
10(g)** 1-12833 10(g) -- Split Dollar Life Insurance Program of TXU Corp., amended
Form 10-K and restated effective as of August 17, 2001.
(2001)
10(h)** 1-12833 10(g) -- Description of Compensatory Arrangement with Derek Bonham.
Form 10-K
(1998)
10(i)** -- Employment Agreement, dated December 3, 2002 between TXU
Corp. and Brian N. Dickie.
10(j)** -- Employment Agreement, dated June 1, 2002 between TXU Corp.
and Erle Nye.
10(k)** 1-12833 10(l) -- Employment Agreement, dated July 1, 2000 between TXU Corp.
Form 10-K and Michael J. McNally.
(2000)
10(l) ** 1-12833 10(l) -- Amendment to Employment Agreement, dated May 11, 2001
Form 10-K between TXU Corp. and Michael J. McNally.
(2001)
10(m) ** -- Employment Agreement, dated March 13, 2002 between TXU Corp.
and Eric H. Peterson.
10(n) 1-12833 10(b) -- 364 Day Competitive Advance and Revolving Credit Facility
Form 10-Q Agreement, dated as of April 24, 2002 among TXU Energy,
(Quarter ended March Oncor and US Holdings, Chase Manhattan Bank of Texas,
31, 2002) National Association, as Administrative Agent, and certain
banks listed therein and The Chase Manhattan Bank, as
Competitive Advance Facility Agent.
10(o) 1-12833 10(c) -- Three-year Revolving Credit Agreement, dated as of May 1,
Form 10-Q 2002, among TXU Corp., Citibank, N.A., as Administrative
(Quarter ended March Agent, and the financial institutions named therein.
31, 2002)
10(p) 1-12833 10 -- Amendment, dated as of October 13, 2002, to the Three-year
Form 8-K Revolving Credit Agreement.
(filed October 16,
2002)
10(q) 1-12833 10(b) -- $1,400,000,000 Five-Year Third Amended and Restated
Form 10-Q Competitive Advance and Revolving Facility Agreement, dated
(Quarter ended as of July 31, 2002, among TXU Holdings Company, JP Morgan
June 30, 2002) Chase Bank, as Administrative Agent and Competitive Advance
Facility Agent, J.P. Morgan Securities, Inc., Bank of
America, N.A. and Citibank, N.A.
B-6
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
10(r) 333-100240 10(c) -- Credit Agreement, dated December 20, 2002, among Oncor and
(Pre-Effective certain banks listed therein, and Credit Suisse First
Amendment No. 1) Boston, as Administrative Agent.
10(s) 333-100240 10(c) -- Generation Interconnection Agreement, dated December 14,
2001, between Oncor and TXU Generation Company LP.
10(t) 333-100240 10(d) -- Generation Interconnection Agreement, dated December 14,
2001, between Oncor and TXU Generation Company LP, for
itself and as Agent for TXU Big Brown Company LP, TXU
Mountain Creek Company LP, TXU Handley Company LP, TXU
Tradinghouse Company LP and TXU DeCordova Company LP
(Interconnection Agreement).
10(u) 333-100240 10(e) -- Amendment to Interconnection Agreement, dated May 31, 2002.
10(v) 333-100240 10(f) -- Standard Form Agreement between Oncor and Competitive
Retailer Regarding Terms and Conditions of Delivery of
Electric Power and Energy.
10(w) -- Stipulation and Joint Application for Approval of Settlement
as approved by the PUC in Docket Nos. 21527 and 24892.
12 -- Computation of Ratio of Earnings to Fixed Charges, and Ratio
of Earnings to Combined Fixed Charges and Preference Dividends.
21 -- Subsidiaries of TXU Corp.
23(a) -- Consent of Counsel to TXU Corp.
23(b) -- Consent of Deloitte & Touche LLP, Independent Auditors' for
TXU Corp.
99(a) 33-55408 99(a) -- Agreement, dated as of January 30, 1990, between TXU US
Holdings and Tex-La Electric Cooperative of Texas, Inc.
99(b) 33-23532 4(c)(i) -- Trust Indenture, Security Agreement and Mortgage, dated as
of December 1, 1987, as supplemented by Supplement No. 1
thereto dated as of May 1, 1988 among the Lessor, TXU US
Holdings and the Trustee.
99(c) 33-24089 4(c)-1 -- Supplement No. 2 to Trust Indenture, Security Agreement and
Mortgage, dated as of August 1, 1988.
99(d) 33-24089 4(e)-1 -- Supplement No. 3 to Trust Indenture, Security Agreement and
Mortgage, dated as of August 1, 1988.
99(e) 0-11442 99(c) -- Supplement No. 4 to Trust Indenture, Security Agreement and
Form 10-Q Mortgage, including form of Secured Facility Bond, 1993
(Quarter ended June Series.
30, 1993)
99(f) 33-23532 4(d) -- Lease Agreement, dated as of December 1, 1987 between the
Lessor and TXU US Holdings as supplemented by Supplement No.
1 thereto dated as of May 20, 1988 between the Lessor and
TXU US Holdings.
99(g) 33-24089 4(f) -- Lease Agreement Supplement No. 2, dated as of August 18,
1988.
B-7
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
99(h) 33-24089 4(f)-1 -- Lease Agreement Supplement No. 3, dated as of August 25,
1988.
99(i) 33-63434 4(d)(iv) -- Lease Agreement Supplement No. 4, dated as of December 1,
1988.
99(j) 33-63434 4(d)(v) -- Lease Agreement Supplement No. 5, dated as of June 1, 1989.
99(k) 0-11442 99(d) -- Lease Agreement Supplement No. 6, dated as of July 1, 1993.
Form 10-Q
(Quarter ended June
30, 1993)
99(l) 33-23532 4(e) -- Participation Agreement dated as of December 1, 1987, as
amended by a Consent to Amendment of the Participation
Agreement, dated as of May 20, 1988, each among the Lessor,
the Trustee, the Owner Participant, certain banking
institutions, Capcorp, Inc. and TXU US Holdings.
99(m) 33-24089 4(g) -- Consent to Amendment of the Participation Agreement, dated
as of August 18, 1988.
99(n) 33-24089 4(g)-1 -- Supplement No. 1 to the Participation Agreement, dated as of
August 18, 1988.
99(o) 33-24089 4(g)-2 -- Supplement No. 2 to the Participation Agreement, dated as of
August 18, 1988.
99(p) 33-63434 4(e)(v) -- Supplement No. 3 to the Participation Agreement, dated as of
December 1, 1988.
99(q) 0-11442 99(e) -- Supplement No. 4 to the Participation Agreement, dated as of
Form 10-Q June 17, 1993.
(Quarter ended June
30, 1993)
99(r) 0-11442 4(b) -- Supplement No. 1, dated October 25, 1995, to Trust
Form 10-Q Indenture, Security Agreement and Mortgage, dated as of
(Quarter ended March December 1, 1989, among the Owner Trustee, TXU US Holdings
31, 1996) and the Indenture Trustee.
99(s) 0-11442 4(c) -- Supplement No. 1, dated October 19, 1995, to Amended and
Form 10-Q Restated Participation Agreement, dated as of November 28,
(Quarter ended March 1989, among the Owner Trustee, The First National Bank of
31, 1996) Chicago, As Original Indenture Trustee, the Indenture
Trustee, the Owner Participant, Mesquite Power Corporation
and TXU US Holdings.
99(t) 1-12833 99(bb) -- Syndicated Facilities Agreement, dated February 24, 1999,
Form 10-K among TXU Australia Holdings (Partnership) Limited
(1998) Partnership (the Partnership), certain of its Australia
affiliates (Borrowers) and The Bank of America
National Trust and Savings Association, Deutsche Australia
Limited, National Australia Bank Limited, Toronto Dominion
Australia Limited and the other Banks named therein (Banks).
99(u) 1-12833 99(cc) -- Security Trust Deed, dated February 24, 1999, among the
Form 10-K Partnership, the Borrowers, TXU Corp. and the Banks.
(1998)
B-8
Previously Filed*
-------------------
With File As
Exhibits Number Exhibit
- -------- ------------------ --------
99(v) -- Chief Executive Officer Certificate.
99(w) -- Chief Financial Officer Certificate.
- ---------------------------------
* Incorporated herein by reference.
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
B-9