- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[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
------------------------------------------------
Exact Name of Registrant as Specified in its Charter;
Commission State of Incorporation; Address of Principal I.R.S. Employer
File Number Executive Offices; and Telephone Number Identification No.
- ----------- ----------------------------------------------- -----------------
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
- ---------- ------------------- ----------------
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 of Preferred Capital Securities
TXU Corp.
TXU Capital II, 8.70% Trust Originated New York Stock Exchange
a subsidiary of Preferred Securities
TXU Corp.
Securities registered pursuant to Section 12(g) of the Act: None
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
-- ---
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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EXPLANATORY NOTE
This Form 10-K/A supplements Item 15. "Exhibits, Financial Statement Schedules
and Reports on Form 8-K" contained in the Annual Report on Form 10-K for the
year ended December 31, 2002 (the "2002 Form 10-K") filed by TXU Corp. on March
12, 2003, to include the audited financial statements of Pinnacle One Partners,
L.P. (Pinnacle), a telecommunications joint venture in which TXU Corp. has a 50%
voting interest, which were not available at the time of filing the 2002 Form
10-K and which are permitted to be filed by amendment pursuant to the provisions
of Regulation S-X. Item 15 is the only portion of the 2002 Form 10-K being
supplemented or amended by this Form 10-K/A.
As noted in Management's Discussion and Analysis of Financial Condition and
Results of Operations under "Off Balance Sheet Arrangements" in the 2002 Form
10-K, for the year ended December 31, 2002, Pinnacle was an unconsolidated
entity, the financial statements of which are required to be filed pursuant to
the provisions of Rule 3-09 of Regulation S-X, such requirement arising because
of the significance of financial results related to Pinnacle as compared to TXU
Corp.'s consolidated financial results for the 2002 period.
TABLE OF CONTENTS
Page
----
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Documents filed as part of this Report -
Audited financial statements of Pinnacle One Partners, L.P. and
subsidiaries as of December 31, 2002 :
Independent Auditors' Report ............................................... 1
Consolidated Statements of Operations and Comprehensive Loss ............... 2
Consolidated Balance Sheets ................................................ 3
Consolidated Statements of Partners' Capital (Deficit) ..................... 5
Consolidated Statements of Cash Flows ...................................... 6
Notes to Consolidated Financial Statements ................................. 7
(b) Reports on Form 8-K: None
(c) Exhibits
Exhibit 23 - Consent of Deloitte & Touche LLP, Independent Auditors
i
INDEPENDENT AUDITORS' REPORT
To the Partners of
Pinnacle One Partners, L.P.
Irving, Texas
We have audited the accompanying consolidated balance sheets of Pinnacle One
Partners, L.P. and subsidiaries ("Pinnacle") as of December 31, 2002 and 2001,
and the related consolidated statements of operations and comprehensive loss,
partners' capital (deficit), and cash flows for the years ended December 31,
2002 and 2001, and the period from May 23, 2000 (date of inception) to December
31, 2000. These consolidated financial statements are the responsibility of
Pinnacle's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 Pinnacle One Partners, L.P. and
subsidiaries at December 31, 2002 and 2001, and the results of its operations
and its cash flows for the years ended December 31, 2002 and 2001, and the
period from May 23, 2000 (date of inception) to December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, Pinnacle changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets".
DELOITTE & TOUCHE LLP
Dallas, Texas
March 21, 2003
1
PINNACLE ONE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
From Date
of Inception
December 31, (May 23, 2000)
---------------------- to December 31,
2002 2001 2000
---- ---- ----
Thousands of Dollars
Operating revenues......................................... $214,709 $207,451 $ 67,930
-------- -------- ---------
Operating costs and expenses
Network operating costs................................. 76,891 95,663 29,901
Selling, general and administrative expenses ........... 109,956 89,330 32,129
Depreciation and amortization........................... 40,990 50,177 17,145
Goodwill impairment charge.............................. 18,000 - -
Asset impairment and restructuring charges.............. 101,390 - -
--------- -------- ---------
-
Total operating costs and expenses................ 347,227 235,170 79,175
--------- -------- ---------
Operating loss............................................. (132,518) (27,719) (11,245)
Other income (expense):
Interest income......................................... 12,702 17,722 7,962
Interest expense........................................ (79,397) (83,593) (36,345)
Preferred return to Zenith ............................. (24,000) (24,000) (6,000)
Amortization of debt discount........................... (5,302) (5,406) (2,014)
Allowance for funds used during construction............ 179 572 368
Gain on sale of property and investments................ 558 6,158 9,511
Partnership income...................................... 2,332 3,151 1,868
Minority interest....................................... 8,048 507 (65)
Other income (expense) - net............................ 489 103 (383)
--------- --------- ----------
Total other expense............................... (84,391) (84,786) (25,098)
--------- --------- ----------
Loss before income taxes................................... (216,909) (112,505) (36,343)
Income tax (benefit) expense .............................. (38,261) (6,304) 339
--------- --------- ----------
Net loss .................................................. (178,648) (106,201) (36,682)
Other comprehensive (loss) income, net of tax-
Minimum pension liability adjustment.................... (6,028) - -
Unrealized (loss) gain on marketable equity securities.. (136) 169 36
--------- -------- ---------
Comprehensive loss......................................... $(184,812) $(106,032) $ (36,646)
========= ========= =========
See Notes to Consolidated Financial Statements.
2
PINNACLE ONE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2002 2001
---- ----
Thousands of Dollars
ASSETS
Current assets
Cash and cash equivalents.................................... $12,427 $ 3,416
Accounts receivable - net of allowance of
$4,817 in 2002 and $2,759 in 2001........................ 18,825 30,374
Short-term investments....................................... 125 105
Prepaid federal income taxes................................. 6,615 1,951
Accounts receivable - affiliates............................. 3,995 5,821
Materials and supplies....................................... 2,379 4,899
Deferred income taxes........................................ 34,145 1,709
Assets held for sale......................................... 8,030 -
Other current assets......................................... 3,116 1,811
-------- ----------
Total current assets................................... 89,657 50,086
-------- ----------
Noncurrent assets
Investments.................................................. 212,982 292,806
Goodwill..................................................... 317,536 335,536
Unamortized debt expense..................................... 8,837 14,139
Prepaid pension cost......................................... 3,669 7,448
Deferred income tax assets................................... 15,709 15,672
Other noncurrent assets...................................... 771 -
-------- ----------
Total noncurrent assets................................ 559,504 665,601
-------- ----------
Property, plant & equipment
Plant in service............................................. 326,243 414,364
Plant under construction..................................... 5,249 34,851
-------- ----------
Total property, plant and equipment.................... 331,492 449,215
Less: accumulated depreciation............................... 90,700 85,816
-------- ----------
Total property, plant and equipment - net.............. 240,792 363,399
-------- ----------
Total assets.................................................... $889,953 $1,079,086
======== ==========
See Notes to Consolidated Financial Statements.
3
PINNACLE ONE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2002 2001
---- ----
Thousands of Dollars
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
-------------------------------------------
Current liabilities
Accounts payable............................................. $ 14,043 $ 24,914
Accounts payable-affiliates.................................. 352 4,484
Advance billings............................................. 3,438 4,154
Customer deposits............................................ 788 843
Current maturities of long-term debt......................... 2,999 3,041
Accrued expenses............................................. 18,259 11,845
Accrued interest............................................. 39,201 35,821
Liabilities related to assets held for sale.................. 2,661 -
Other current liabilities.................................... - 2,015
--------- ----------
Total current liabilities....................... 81,741 87,117
--------- ----------
Long-term debt.................................................. 973,203 979,804
--------- ----------
Other liabilities & deferred credits
Accrued pension and postretirement benefits.................. 28,072 16,663
Deferred federal income tax.................................. 39,458 41,521
Deferred franchise tax - net................................. - 3,611
Other deferred credits and liabilities....................... 5,145 2,178
Regulatory liabilities....................................... 8,807 9,567
--------- ----------
Total other liabilities & deferred credits........ 81,482 73,540
--------- ----------
Total liabilities............................................... 1,136,426 1,140,461
--------- ----------
Minority interest............................................... 1,224 9,272
--------- ----------
Partners' capital (deficit)
Class A LP.................................................... - 75,768
Class B LP.................................................... (241,606) (147,381)
GP............................................................ (132) 761
Accumulated other comprehensive (loss) income................. (5,959) 205
--------- ----------
Total partners' capital (deficit)................... (247,697) (70,647)
--------- -----------
Total liabilities and partners' capital (deficit) ............... $ 889,953 $1,079,086
========= ==========
See Notes to Consolidated Financial Statements.
4
PINNACLE ONE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
Other Comprehensive Income
---------------------------
Limited Partners General Partner
---------------- --------------- Unrealized Unrealized Total
Class A LP Class B LP Pinnacle One Holding Pension Partners' Capital
Zenith Trust TXU Investment GP Gain (Loss) Loss (Deficit)
------------ -------------- ---------- ---------- ---- ---------
Thousands of Dollars
Balance, January 1, 2000................ $ - $ - $ - $ - $ - $ -
Capital contributions from partners... 149,250 496,240 1,500 - - 646,990
Distributions......................... - (598,984) - - (598,984)
Transaction expenses.................. (2,398) (2,398) (24) - - (4,820)
Net loss.............................. (18,249) (18,249) (184) - - (36,682)
Unrealized gain on investments........ - - - 36 - 36
-------- -------- ------ ---- ------ ---------
Balance at December 31, 2000............ 128,603 (123,391) 1,292 36 - 6,540
Capital contributions from partners - 28,845 - - - 28,845
Net loss.............................. (52,835) (52,835) (531) - - (106,201)
Unrealized gain on investments........ - - - 169 - 169
-------- -------- ------ ---- ------ ---------
Balance at December 31, 2001............ 75,768 (147,381) 761 205 - (70,647)
Net loss.............................. (75,768) (101,987) (893) - - (178,648)
Capital contributions................. - 7,762 - - - 7,762
Minimum pension liability adjustment.. - - - - (6,028) (6,028)
Unrealized loss on investments........ - - - (136) - (136)
-------- --------- ------- ------ ------- ---------
Balance at December 31, 2002............ $ - $(241,606) $ (132) $ 69 $(6,028) $(247,697)
======== ========= ======= ======= ====== =========
5
See Notes to Consolidated Financial Statements.
PINNACLE ONE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
From Date
of Inception
Year Ended December 31, (May 23, 2000)
---------------------- to December 31,
2002 2001 2000
---- ---- ----
Thousands of Dollars
Net loss ......................................................... $(178,648) $(106,201) $(36,682)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Deferred income tax.......................................... (38,908) (9,368) 2,910
Depreciation and amortization................................ 46,292 55,583 17,145
Gain on disposition of property.............................. (558) (6,158) (9,123)
Realized gain on marketable equity securities ............... - - (388)
Provision for postretirement benefit......................... 9,160 838 -
Long-lived asset impairments................................. 99,321 - -
Restructuring charges ....................................... 2,069 - -
Goodwill impairment.......................................... 18,000 - -
Partnership income........................................... (2,332) (3,151) (1,868)
Allowance for funds used during construction................. (179) (572) (368)
Minority interest in net loss of subsidiary.................. (8,048) (507) 65
Provision for bad debt losses................................ 10,200 3,981 891
Changes in operating assets and liabilities:
Accounts receivable.......................................... 3,175 (5,323) (10,557)
Inventories.................................................. 2,520 3,048 1,935
Prepaid federal income tax................................... (4,664) 12,299 (10,664)
Other assets................................................. (2,075) 2,688 1,036
Accounts payable............................................. (15,003) (14,543) 38,844
Accrued expenses and other liabilities ...................... 12,637 (1,383) 41,358
Other - net ................................................. (232) (2,839) 790
------- -------- --------
Net cash (used in) provided by operating activities....... (47,273) (71,608) 35,324
------- -------- --------
Investing activities
Capital expenditures.......................................... (27,374) (66,976) (59,235)
Cash and business assets purchased............................ - (2,467) -
Capital contribution to Fibernet ............................ - - (810)
Proceeds from sale-leaseback transaction ..................... 4,814 - -
Proceeds from sale of investments............................. 998 188 -
Proceeds from securities...................................... 81,199 77,351 (336,084)
Proceeds from sale of assets.................................. 290 9,309 11,743
------- -------- --------
Net cash provided by (used in) investing activities........ 59,927 17,405 (384,386)
------- -------- --------
Financing activities
Capital contributions......................................... 7,762 28,845 193,333
Contributions from minority interest members.................. - 2,479 -
Distributions to partners .................................... - - (598,984)
Net borrowings (repayments) under credit facility............. 23,319 40,620 (19,003)
Debt finance and transaction fees ............................ - - (24,408)
Proceeds from notes .......................................... - - 810,000
Repayment of notes............................................ (34,724) (24,619) (1,582)
-------- -------- --------
Net cash (used in) provided by financialactivities........ (3,643) 47,325 359,356
-------- -------- --------
Increase (decrease) in cash and cash equivalents.................. 9,011 (6,878) 10,294
Cash and cash equivalents - beginning............................. 3,416 10,294 -
-------- -------- --------
Cash and cash equivalents - ending................................ $ 12,427 $ 3,416 $ 10,294
======== ======== ========
Supplemental cash flow information:
Interest paid................................................. $ 79,023 $113,445 $ 4,391
Taxes paid.................................................... $ (153) $ (1,333) $ 7,433
Noncash capital leases ....................................... $ 4,761 $ - $ -
Noncash - Book value of assets contributed - net ............. $ - $ - $453,657
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pinnacle One Partners, L.P. ("Pinnacle") is a partnership formed in May 2000
(date of inception) that owns 100% of TXU Communications Ventures Company ("TXU
Com"). TXU Corp. ("TXU Corp.") and Zenith Telecom Trust ("Zenith") each own,
directly or indirectly, a 49.75% limited partnership interest in Pinnacle.
Pinnacle One GP, LLC, the general partner, in which both TXU Corp. and Zenith
own a 50% interest, holds a 0.5% general partnership interest in Pinnacle. In
May 2000, TXU Corp. acquired all of the outstanding stock of Fort Bend
Communication Companies, Inc. ("FBCC") for approximately $161 million in cash
and accounted for the acquisition as a purchase business combination.
Subsequently, TXU Corp. contributed the stock of FBCC and each of the
subsidiaries of TXU Communications Company at their carrying value to Pinnacle,
for $600 million in cash and a 50% voting interest in Pinnacle. Zenith
contributed $150 million in cash for the remaining 50% voting interest.
The Pinnancle agreement provides for a preferred return to Zenith through
August of 2004. The agreement provides that this preferred return represents
a return on invested capital to be borne by Pinnacle.(See Note 8.)
Principles of Consolidation - The consolidated financial statements include the
accounts of Pinnacle and its wholly-owned subsidiaries, Pinnacle One Overfund
Trust ("Overfund Trust"), TXU Com, TXU Communications Services Company
("Services"), TXU Communications Telephone Company ("Telephone"), TXU
Communications Telecom Services Company ("Telecom"), TXU Communications
Transport Company ("Transport"), Fort Bend Telephone Company ("FB Telephone"),
Fort Bend Long Distance Company ("FBLD"), Fort Bend Wireless Company ("FB
Wireless"), Telcon, Inc. ("Telcon"), and FBCIP, Inc. ("FBCIP"). Transport
includes East Texas Fiber Line, Inc. ("ETFL"), a 63% owned affiliate. Also
included is Fort Bend Cellular, Inc. ("FB Cellular"), a wholly owned subsidiary
of FB Telephone. All material intercompany balances and transactions have been
eliminated in consolidation.
Description of Business - TXU Com is the parent company to Services, Telephone,
Telecom, Transport, FB Telephone, FBLD, FB Wireless, Telcon and FBCIP. Pinnacle
has no employees.
Telephone is an incumbent local exchange carrier providing regulated telephone
services to its customers in East Texas. It has 16 exchanges, which serve
approximately 123,000 access lines in Conroe and Lufkin. Telephone also provides
access services to a number of interexchange carriers who provide long distance
services. During 2002, approximately 51% of its revenues were derived from local
and long distance services and other end-user customer charges. During 2002,
approximately 18% of Telephone revenues were derived from access charges to
interexchange carriers. The remaining revenues consist primarily of subsidies,
directory advertising and billing and collections.
FB Telephone is an incumbent local exchange carrier providing regulated
telephone services to its customers in Southeast Texas. FB Telephone has five
exchanges, which serve more than 46,000 access lines in the Houston area. It
also provides access services to a number of interexchange carriers who provide
long distance services. During 2002, approximately 51% of its revenues were
derived from local and long distance services and other end-user customer
charges. During 2002, approximately 19% of FB Telephone revenues were derived
from access charges to interexchange carriers. The remaining revenues consist
primarily of subsidies, directory advertising and billing and collections.
Telecom and FB LD provide competitive local exchange service to more than 26,000
access lines in Texas with a primary focus on business customers. Other services
provided include interexchange long distance service, Internet access, web
hosting service and communication equipment sales and service. Subsequent to
year end 2002, the majority of the assets of these companies were sold (see Note
16 - Subsequent Events).
Transport operates fiber cable systems in Texas, which offer communications
access and transport services to interexchange carriers, wireless telephone
companies, and other major communications customers.
ETFL is a communications transport facility provider, owning and operating
approximately 1,200 miles of fiber optic cable.
Telcon and Services provide information management, human resources, accounting,
executive, and other administrative services to TXU Com affiliate companies.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FB Cellular, FB Wireless, and FBCIP had no significant activity during the year
ended December 31, 2002 and 2001.
Use of Estimates - The preparation of Pinnacle's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts disclosed in the consolidated
financial statements. Due to the prospective nature of estimates, actual results
could differ.
Accounting and Regulatory Guidelines - Telephone and FB Telephone are FCC Class
B companies; however, their account structure currently meets the more detailed
requirements of a Class A company, as prescribed in Part 32-Uniform System of
Accounts for Class A Telephone companies as promulgated by the Federal
Communications Commission ("FCC") with additional guidance and interpretations
from the Public Utility Commission of Texas ("Commission"). This regulated
telephone operation is subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." SFAS No. 71 establishes GAAP for enterprises whose
regulators have the power to approve and/or regulate the rates that companies
may charge for services or products. SFAS No. 71 also establishes GAAP for a
regulated enterprise, including the establishment of GAAP for the capitalization
of allowable costs. Costs that are not allowable under the regulatory process
are generally expensed as incurred. Telephone and FB Telephone are subject to
regulation by the Commission for intrastate ratemaking purposes, which includes
rates for basic local services, intraLATA toll services and access services for
the origination and termination of in-state long-distance calls. Telephone and
FB Telephone initially filed for Chapter 59 alternative regulation on August 18,
1997 and May 12, 2000, respectively. This differs from traditional rate of
return regulation in that prices are capped for the initial period of election,
which is six years. Both companies have the option to renew this alternative
regulation election every two years after the initial election period has
expired. For interstate services, access charges, and other matters, both
companies are subject to the jurisdiction of the FCC. Telephone and FB Telephone
have both elected to remain under rate base rate of return regulation for
interstate services. To this end, they participate in the Carrier Common Line
("CCL") Pool administered by the National Exchange Carrier Association ("NECA")
and file annual tariffs for traffic-sensitive services. Both companies also
receive various federal and state Universal Service Fund ("USF") monies to
subsidize cost of service.
Property, Plant, Equipment and Depreciation - Property, plant and equipment are
stated at historical cost. Allowance for funds used during construction
("AFUDC") is a regulatory 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 telecommunications plant cost. Depreciation is
computed generally on the straight-line method (see Note 2 for the average asset
lives).
Cash Equivalents - Cash equivalents are short-term, highly liquid investments
readily convertible to known amounts of cash and which are so near maturity,
generally 30 days, that there is no significant risk of changes in value
resulting from changes in market interest rates.
Investments - Investments in equity securities that have readily determinable
fair values are categorized as available-for-sale securities and are carried at
fair value. The unrealized gains or losses on securities classified as
available-for-sale are included as a separate component of partners' capital.
Pinnacle uses the equity method of accounting for investments where the ability
to exercise significant influence over such entities exists. Other investments
that do not have readily determinable fair market values are carried at cost.
Goodwill - Amounts paid for assets of other companies in excess of fair value
are charged to goodwill. Goodwill was amortized over its useful life, normally
15 to 40 years.
SFAS No. 142, "Goodwill and Other Intangible Assets", became effective for
Pinnacle 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 Pinnacle's goodwill ($13.6 million in 2001) ceased effective
January 1, 2002.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Pinnacle completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill at that time. An impairment resulted from
the additional evaluation performed using a discounted cash flow methodology in
2002 as of October 1, which has been selected as the annual impairment test
date. In the fourth quarter of 2002, TXU Com recorded a goodwill impairment
charge of $18 million.
Changes in the carrying amount of goodwill for the period December 31, 2001 to
December 31, 2002 is summarized as follows (in thousands):
Balance, December 31, 2001 $ 335,536
Less impairment 18,000
----------
Balance, December 31, 2002 $ 317,536
==========
At December 31, 2002 and 2001, goodwill was stated net of accumulated
amortization of $24.3 million.
The table below reflects what reported net income 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 period (in
thousands):
2002 2001 2000
---- ---- ----
Reported net loss ..................... $(178,648) $(106,201) $(36,682)
Add back goodwill amortization........ - 13,580 5,578
-------- --------- --------
Adjusted net loss...................... $(178,648) $ (92,621) $(31,104)
========= ========= ========
Materials and Supplies - Inventories of materials and supplies are valued at the
lower of cost or market. Cost is determined by a moving weighted average method.
Indefeasible Rights of Use ("IRU") - Both ETFL and Transport have entered into
several agreements that entitle Pinnacle to a long-term lease or an IRU of local
and long-haul dark fiber of another party. Generally each agreement requires
each company to pay an aggregate price consisting of an initial payment,
followed by installments during the construction period based upon achieving
certain milestones (e.g., commencement of construction, conduit installation and
fiber installation). The final payment for each segment will be made at the time
of acceptance.
Additionally, ETFL and Transport have entered into several agreements that
entitle another party to a long-term lease or an IRU of certain local and
long-haul dark fiber of Pinnacle. If the agreement is classified as a service
agreement, revenues are recognized ratably over the life of the lease. If an
exchange of similar fiber has occurred with another transport provider with
similar fiber, no gain or loss is recognized on the like-kind exchange.
Pension and Postretirement Benefits - Pension benefits are provided for
substantially all employees of TXU Com. TXU Com generally funds the pension plan
to the extent that contributions are deductible for federal income tax purposes.
TXU Com also has deferred compensation agreements with the former board of
directors and certain key employees. Postretirement benefits expense is accrued
on a current basis using actuarially determined cost estimates. In addition,
employees may become eligible for certain health care and life insurance
benefits after retirement.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Income Taxes and Deferred Credits - Pinnacle is a non-taxable entity for
which applicable income taxes are the responsibility of the partners. TXU Com is
subject to both federal and state income taxes. Subsequent to August 11, 2000,
TXU Com and its subsidiaries file a separate consolidated federal income tax
return from TXU Corp. Prior to August 11, 2000, TXU Com and its subsidiaries
were included in the consolidated federal income tax return of TXU Corp. ETFL
files a separate federal income tax return. Federal income tax expense or
benefit is allocated to each subsidiary based on separately determined taxable
income or loss.
Income taxes are provided based on taxable income or loss as reported for
financial statement purposes. The provision for income taxes differs from the
amounts currently payable because of temporary differences in the recognition of
certain income and expense items for financial reporting and tax reporting
purposes. Investment tax credits ("ITC") used to offset income tax for tax
reporting purposes are deferred and amortized over the lives of the related
assets for financial reporting.
Deferred federal income taxes are provided for the temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. TXU Com would record a valuation allowance related to its deferred
income tax assets when, in the opinion of management, it is more likely than not
that deferred tax assets would not be realized.
TXU Com has recorded a regulatory liability to recognize the cumulative effects
of anticipated rate making activities. For financial statement purposes,
deferred ITC and excess deferred federal income taxes related to depreciation of
regulated assets are being amortized as a reduction of the provision for income
taxes over the estimated useful or remaining lives of the related property,
plant and equipment.
ETFL had no current or deferred federal income taxes at December 31, 2002, 2001
and 2000.
Revenue Recognition - Revenues are generally recognized and earned when evidence
of an arrangement exists, service has been rendered and collectibility is
reasonably assured. Local telephone service revenue is recorded based on
tariffed rates. Telephone network access and long-distance service revenues are
derived from access and toll charges and settlement arrangements. Revenues on
billings to customers for services in advance of providing such services are
deferred and recognized when earned.
Reclassification - Certain reclassifications have been made in the prior year
financial statements to conform to the 2002 presentation.
Recent Accounting Pronouncements - 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. Pinnacle does not
believe there will be any material impact on its consolidated financial
statements from the adoption of this standard.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective on January 1, 2002. SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. Pinnacle recognized impairment charges of $90.9 million for
the year ended December 31, 2002 (see Note 13 - Impairment and Restructuring
Charges).
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.
Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In
addition, the interpretation requires recording the fair value of guarantees
upon issuance or modification after January 1, 2003. While Pinnacle has various
guarantees included in contracts in the normal course of business, primarily in
the form of indemnities, these guarantees do not represent significant
commitments or contingent liabilities related to the indebtedness of others.
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, Pinnacle is evaluating
the potential impact on its financial position and results of operations.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
December 31, Estimated
2002 2001 Useful Life
---- ---- -----------
Thousands of Dollars
Land.............................. $ 4,433 $ 4,611
Buildings......................... 24,938 22,372 15-35 years
Telephone plant................... 242,934 333,250 5-30 years
Furniture and office equipment.... 45,420 44,058 5-17 years
Automotive and other equipment ... 8,518 10,073 3-7 years
Construction in progress.......... 5,249 34,851
--------------- ------------------
331,492 449,215
Less: accumulated depreciation.... 90,700 85,816
--------------- ------------------
$240,792 $363,399
=============== ==================
Substantially all of FB Telephone's property, plant and equipment totaling $57.1
million is pledged as security for the long-term debt to CoBank ACB ("CoBank").
Depreciation expense was $40.8 million and $36.5 million for the years ended
December 31, 2002 and 2001, respectively, and from the date of inception to
December 31, 2000 was $11.4 million.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
------------------
2002 2001
---- ----
Thousands of Dollars
Senior secured notes (8.83% interest paid semi-annually, due 2004)...... $810,000 $810,000
TXU Corp. revolving credit facility..................................... 144,066 151,678
CoBank mortgage notes (8.15% interest paid monthly)..................... - 1,250
CoBank mortgage notes (7.27% to 8.75% paid monthly, due 2013)........... 18,071 19,715
GE capital leases ..................................................... 4,009 -
Debentures payable (8.5% due in annual installments of $148)............ 56 202
-------- --------
Subtotal................................................................ 976,202 982,845
Less current maturities................................................. 2,999 3,041
-------- --------
Total long-term debt.............................................. $973,203 $979,804
======== ========
In August 2000, 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 Com. Total proceeds (net of
transaction costs), including $150 million received from Zenith, 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 its telecommunications subsidiaries to
Pinnacle, and fund the Overfund Trust in the amount of $336 million. The
Overfund Trust used the cash to invest in TXU Corp. debt securities. These trust
assets, including principal and related interest earned, are being used to pay
interest on the senior secured notes and the investment yield amounts to Zenith.
(See Note 8.)
TXU Corp. provides a $200 million revolving credit facility (the "Revolver") to
TXU Com that expires in 2004. Interest is payable by TXU Com at a rate equal to
the London Interbank Offering Rate ("LIBOR") plus 1.5%, in effect as of the
beginning of each credit facility advance. The interest rate of each advance is
calculated for one-, two-, three-, or six-month periods, as elected by TXU Com,
at the end of which the interest rate is reset to the current LIBOR rate plus
1.5%. The weighted average rate on the December 31, 2002 balance outstanding was
2.92%. Principal is payable at the end of the Revolver's four-year term and may
be prepaid at any time without penalty. At December 31, 2002, $55.9 million was
available for borrowing. TXU Com may borrow under the Revolver only to the
extent its projected cash requirements for any month exceed its projected cash
flows for such month.
Capital contributions to TXU Com came from TXU Investment Company, a subsidiary
of TXU Corp., in the amount of 35% of TXU Com's budgeted capital spending. The
contributions, usually due on the first day of each month, were used to pay down
the Revolver. For the year ended December 31, 2002, TXU Investment Company made
capital contributions to TXU COM in the amount of $7.8 million. In light of TXU
COM's significant capital expenditure reductions from planned amounts, TXU
Investment Company has notified TXU COM that it is re-evaluating the need to
continue these capital contributions.
In October 2002, the 8.15% CoBank mortgage notes were retired. The long-term
debt agreements on the remaining CoBank mortgage notes contain restrictions on
the payment of dividends. The restrictions are related, in general, to FB
Telephone's adjusted net worth and assets as defined in the loan agreements and
the restrictions on investment in affiliates. In addition, the mortgage notes
contain a principal pre-payment penalty. As of December 31, 2002, FB Telephone
was in compliance with the mortgage loan covenants with CoBank.
The GE Capital Lease obligation amount results from the two Master Lease
Agreements with General Electric Capital Corporation ("GE") which are described
below (see Note 7 - Capital Leases).
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled principal maturities on long-term debt subsequent to December 31, 2002
are as follows:
2003............................................ $ 2,999
2004........................................... 956,281
2005........................................... 2,595
2006........................................... 2,653
2007............................................ 1,817
Thereafter..................................... 9,857
---------
Total.................................... $976,202
========
4. FEDERAL INCOME TAXES
The income tax (benefit) expense consists of the following:
From Date of
Year Ended Inception
December 31, (May 23,2000) to
--------------------- December 31,
2002 2001 2000
---- ---- ----
Thousands of Dollars
Current:
U.S. federal......................... $ (3,018) $(1,951) $(3,172)
State................................ (214) 83 909
Deferred:..............................
U.S. federal......................... (31,819) (3,611) 2,706
State................................ (2,766) (310) 204
Amortization of investment tax
credit................................. (231) (301) (55)
Amortization of excess deferred
taxes.................................. (213) (214) (253)
-------- ------- ------
Income tax (benefit) expense........... $(38,261) $(6,304) $ 339
======== ======= ======
The income tax (benefit) expense differs from amounts computed at statutory
rates primarily because of amortization of nondeductible goodwill and the
amortization of excess deferred federal income taxes and investment tax credits.
The following is a reconciliation of the income tax (benefit) expense reported
on the consolidated statements of operations:
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From Date of
Year Ended Inception
December 31, (May 23,2000) to
-------------------------- December 31,
2002 2001 2000
---- ---- ----
Thousands of Dollars
Income tax benefit at US federal statutory
rate...................................... $(44,809) $(10,101) $(1,876)
State income tax (benefit) expense.......... (3,841) (355) 909
State income tax refunds ................... (866) - -
Goodwill amortization....................... - 4,752 1,799
Goodwill impairment ........................ 6,300 - -
Minority interest .......................... (2,817) (177) 19
Amortization of investment tax credit....... (231) (301) (55)
Amortization of excess deferred taxes....... (214) (214) (253)
Increase (decrease) in valuation
allowance................................. 9,080 (270) -
Other....................................... (863) 362 (204)
-------- ------ -------
Income tax (benefit) expense................ $(38,261) $(6,304) $ 339
======== ======= =======
Deferred income taxes reflect the net tax effects of deductible temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising Pinnacle's net deferred income taxes consist of
the following:
December 31,
----------------------
2002 2001
---- ----
Thousands of Dollars
Deferred tax assets
Net operating losses .................................... $19,437 $ 6,450
Allowance for uncollectible accounts receivable ......... 1,831 1,049
Accrued vacations ....................................... 939 660
Postretirement benefits ................................. 12,496 7,255
Long-lived asset impairment ............................. 31,375 -
Deferred franchise tax .................................. 1,666 1,680
Regulatory assets ....................................... (2) 1,102
Other ................................................... 131 106
Total deferred assets ................................. ------- --------
$67,873 $ 18,302
======= ========
The net deferred tax liability is classified on the balance sheet as follows:
Deferred tax liabilities
Franchise tax .......................................... $(3,600) $(3,434)
Partnership investment ................................. (1,151) (1,481)
Basis in investment .................................... (1,632) (1,632)
Depreciation ........................................... (42,004) (39,496)
Total deferred liabilities ........................... ------- --------
$(48,387) $(46,043)
======== ========
Valuation allowance .................................... (9,090) (10)
-------- --------
Net deferred tax asset (liability) ..................... $ 10,396 $(27,751)
======== ========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to an amended federal income tax return that was filed for the year ended
December 31, 2000, TXU Com was able to carry-back net operating losses ("NOL")
originating in 2000 to request a refund of taxes previously paid. Anticipated
refunds from the amended return and the NOL carry-back are approximately $1.3
million.
On March 9, 2002, new tax legislation was enacted which extends the carry-back
period for NOL from two to five years for NOL originating in tax years ending in
either 2002 or 2001. As a result of this change, TXU Com anticipates that it
will be able to utilize NOL originating in 2002 and 2001 to request a refund of
taxes previously paid in the amount of approximately $5.3 million.
ETFL, a non-consolidated subsidiary for federal income tax return purposes, has
NOL carry-forwards of approximately $7.2 million to offset against future
taxable income. The NOLs expire from 2007 to 2022.
TXU Com and its subsidiaries, which file a consolidated federal income tax
return, have NOL carry-forwards of approximately $43 million to offset against
future taxable income. The NOL may be carried forward for 20 years and will
expire from 2020 to 2022, if not utilized.
5. POSTRETIREMENT BENEFIT PLANS
Pension Plan
TXU Com provides pension benefits through the TXU Communications Retirement Plan
("Retirement Plan"), the TXU Communications Supplemental Retirement Plan
("Supplemental Plan") and the TXU Communications Deferred Compensation Plan for
Emerging Businesses ("Deferred Compensation Plan").
The Retirement Plan is a noncontributory defined benefit plan that provides
benefits to substantially all employees. Benefit provisions are subject to
collective bargaining. TXU Com's funding policy for this plan is to contribute
amounts sufficient to meet minimum funding requirements as set forth in employee
benefit and tax laws. Employees who became participants prior to January 1, 2002
earn benefits based on their length of service and final average pay. Employees
who become participants on or after January 1, 2002 earn cumulative benefits
based on their age and a percentage of their monthly pay.
Telcon, FB Telephone, and FB LD adopted participation in the Retirement Plan
effective January 1, 2002. Employees who became participants on or after January
1, 2002 earn cumulative benefits based on their age and a percentage of their
monthly pay.
The Supplemental Plan is a non-contributory pay-as-you-go plan providing
supplementary retirement benefits primarily to higher-level employees.
The Deferred Compensation Plan is a contributory salary deferral plan offered on
a voluntary participation basis primarily to higher-level employees.
Changes to the projected benefit obligation, the fair value of assets, and the
underlying actuarial assumptions for the pension and other retirement plans are
shown below.
Health Care and Life Insurance Benefits: Services, Telephone, Telecom, and
Transport
TXU Com provides certain postretirement health care and life insurance benefits
for employees who retire from TXU Com after reaching age 55 and accruing at
least 15 years of service. Retirees share in the cost of health care benefits.
Benefit provisions are subject to collective bargaining. Funding policy for
retiree health benefits is generally to pay covered expenses as they are
incurred. Post-retirement life insurance benefits are fully insured.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect on operations of principal retiree benefit plans is shown in the
following table.
Pension Benefits Other Benefits
December 31, December 31,
----------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Thousands of Dollars
Benefit obligation at December 31........................... $51,533 $45,256 $ 18,701 $ 14,240
Fair value of plan assets at December 31.................... 35,468 41,397 - -
Funded status............................................... (16,065) (3,859) (18,701) (14,240)
Unrecognized net actuarial loss ........................... 19,291 11,005 4,153 704
Unrecognized prior service costs............................ 443 302 - -
Prepaid (accrued) benefit cost.............................. $ 3,669 $ 7,448 $(14,548) $(13,536)
SFAS No. 87, "Employers' Accounting for Pensions," required TXU Com to record an
additional minimum pension liability of $10.2 million at December 31, 2002. This
liability represents the amount by which the accumulated benefit obligation
exceeded the sum of the fair market value of plan assets and accrued amounts
previously recorded. The additional minimum pension liability was offset by a
$0.5 million intangible asset and resulted in a $6.0 million charge to
comprehensive income, net of related tax benefits of $3.7 million. The
intangible asset is included in other noncurrent assets in Pinnacle's
consolidated balance sheet at December 31, 2002.
Pension Benefits Other Benefits
December 31, December 31,
----------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Assumptions:
Discount rate........................................... 6.75% 7.25% 6.75% 7.25%
Expected long-term return on assets..................... 8.50% 9.25% - -
Compensation increase rate.............................. 4.30% 4.30% - -
For measurement purposes, a 5% annual rate of increase in the cost of
health care benefits was assumed for 2002. This rate was assumed to increase to
12% in 2003 and gradually decrease to 5% by 2009, then remain at that level
thereafter.
Pension Benefits Other Benefits
------------------------ ------------------------
December 31, December 31,
------------------------ ------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Thousands of Dollars
Net periodic benefit cost (credit) ...... $3,404 $1,434 $ (387) $2,132 $1,350 $1,201
Employer contribution ................... - - - 625 544 444
Plan participants' contributions ........ - - - 96 21 29
Benefits paid ........................... 2,191 1,295 9,749 722 565 473
Curtailment loss (gain) ................. 251 - - (494) - -
In 2002, TXU Com recorded a credit to earnings of $243 thousand for pension and
postretirement termination benefits due to a large reduction in workforce. The
credit was the net of a $494 thousand curtailment gain recognized for
postretirement healthcare and life insurance benefits offset by a $251 thousand
curtailment loss due to the recognition of prior service costs related to
pension benefits.
Deferred Compensation Agreements: Services, Telephone, Telecom and Transport
TXU Com has deferred compensation agreements with the former board of directors
of TXU Com's predecessor company, Lufkin-Conroe Communications, and certain
former employees. The benefits are payable for up to 15 years and may begin as
early as age 65 or upon the death of the participant.
TXU Com has purchased life insurance policies on certain former directors and
key employees. The excess of the cash surrender value of life insurance policies
over the notes payable balances related to these policies is reflected in
Pinnacle's financial statements. These plans do not qualify under the Internal
Revenue Code ("IRC"), and therefore, federal income tax deductions are allowed
only when benefits are paid.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Payments relating to deferred compensation agreements were $0.4 million for 2002
and 2001 and $0.2 million for the period from inception to December 31, 2000.
Accrued costs were $0.5 million for 2002, $0.1 million for 2001 and $0.2 million
for the period from inception to December 31, 2000. Accrued liability amounted
to $3.3 million at December 31, 2002 and $3.4 million at December 31, 2001.
401(k) Plans
Nonbargaining: Services, Telephone, Telecom, Transport, Telcon, FB Telephone
and FBLD
TXU Com sponsors a 401(k) plan for all nonbargaining employees ("Nonbargaining
TXU Com Plan") who have completed 90 days of full-time service (or at least
1,000 hours of service in any year) and are age 21 or older. On December 31,
2001 the Nonbargaining 401(k) plan covering Telcon, FB Telephone and FBLD was
merged into this plan. The plan allows participants to contribute up to 15% of
their eligible annual compensation to the plan, up to the maximum permitted by
the IRC. TXU Com matches 100% of the first 3% of employee contributions. TXU
Com's matching contributions to the plan amounted to $0.6 million for 2002 and
2001 and $0.3 million for the period from inception to December 31, 2000.
Bargaining: Services, Telephone, Telecom and Transport
TXU Com sponsors a 401(k) plan for all bargaining employees ("Bargaining TXU Com
Plan") who have completed one year of full-time service (or at least 1,000 hours
of service in any year) and are age 21 or older. The plan allows participants to
contribute up to 15% of their eligible annual compensation to the plan, up to
the maximum permitted by the IRC. For 2001 and 2000, TXU Com matched 40% of the
first 3% of employee contributions. For 2002, TXU Com's matching contribution
increased to 50% of the first 3% of employee contributions, in accordance with
the terms of the collective bargaining agreement. TXU Com's matching
contributions to the plan amounted to $0.1 million for 2002 and 2001 and $0.03
million for the period from inception to December 31, 2000.
Non-Bargaining: Telcon, FB Telephone and FBLD
TXU Com sponsored a 401(k) plan for all non-bargaining employees of Telcon, FB
Telephone and FBLD who had completed at least one month of full-time service and
who were at least 21 years of age. Effective December 31, 2001, the plan was
merged into the 401(k) savings plan for non-bargaining employees of TXU Com.
Participants' accounts and participation eligibility were transferred to the TXU
Com plan effective January 1, 2002. Employees who became eligible on or after
January 1, 2002 participated in the TXU Com plan. The plan allowed participants
to contribute up to 8% of their eligible annual compensation to the plan, up to
the maximum permitted by the IRC. TXU Com matched 50% of the first 8% of
eligible employee contributions. TXU Com's matching contributions to the plan
amounted to $0.7 million for 2001 and $0.2 million for the period from inception
to December 31, 2000.
The plan provided for discretionary company-paid profit sharing contributions of
up to 15% of each eligible employee's total compensation. Discretionary profit
sharing contributions to the plan, which were accrued during the year and paid
following the close of the year, amounted to $0.2 million for 2001 and $0.08
million for the period from inception to December 31, 2000.
6. OPERATING LEASES
Lessor
Pinnacle is the lessor of fiber optic systems, agreements to lease capacity to
customers over fiber optic lines, and until their expiration in early fiscal
2002, microwave towers. The leases, accounted for as operating leases, provide
for minimum future rentals to be received for the remainder of the lease period
and in the aggregate as follows:
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended Fiber Optic
December 31, Systems
----------- ----------
Thousands of Dollars
2003...................................... $ 1,038
2004...................................... 990
2005...................................... 851
2006...................................... 752
2007...................................... 726
Thereafter................................ 3,439
-------
Total minimum future rental income....... $ 7,796
=======
Following is a summary of property on lease:
December 31,
------------
2002 2001
---- ----
Thousands of Dollars
Microwave tower.................... $ - $ 382
Fiber optic system................. 747 7,472
------- -------
7,854
Less: accumulated depreciation..... 502 5,320
------- -------
$ 245 $ 2,534
======= =======
As discussed in Note 13 - Impairment and Restructuring Charges, Pinnacle
recorded impairment charges in 2002 related to its transport assets,
significantly reducing the carrying value of the related assets.
In December 2000, the lessee purchased one fiber system under an operating lease
for $1.5 million, resulting in a pre-tax gain of $0.9 million.
Lessee
TXU Com has executed various building space leases, with terms ranging from 36
to 84 months and monthly payments ranging from $0.1 million to $0.3 million. All
but one of the leases contain provisions for escalation of the monthly payments.
Pinnacle's consolidated financial statements for the year ended December 31,
2002 includes a $0.3 million charge representing obligations on leased
facilities that were sublet to unrelated parties in 2002 for amounts less than
the related obligations. TXU Com also has executed several equipment leases with
varying terms up to 36 months and monthly payments totaling approximately $0.1
million.
The future minimum rental payments required by capital and operating leases are
as follows (in thousands):
2003.................................... $4,871
2004.................................... 3,862
2005.................................... 3,333
2006.................................... 2,657
2007 ................................... 1,635
Thereafter.............................. 5,127
Rent expense on operating leases was $3.6 million for 2002, $2.3 million for
2001 and $0.4 million for the period from inception to December 31, 2000.
7. CAPITAL LEASES
On February 25, 2002 and effective April 1, 2002, TXU Com entered into a
30-month basic term Master Lease Agreement with GE. The agreement covered the
financing of certain specific furniture, fixtures, equipment and leasehold
improvements at TXU Com's corporate headquarters. This agreement was accounted
for as a capital lease arrangement with capitalized costs totaling $2.2 million.
GE will invoice TXU Com monthly for a variable amount, which has both a fixed
and an interest-sensitive component. At the end of the 30-month basic lease
term, TXU Com may elect to purchase the equipment at its fair value by financing
a contractually specified option payment.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also on February 25, 2002 and effective April 1, 2002, Pinnacle entered into a
second Master Lease Agreement with GE totaling $2.7 million. This 30-month basic
term agreement has two separate lease schedules covering the sale and leaseback
of certain specific additional leasehold improvements. The leases covered by
these two schedules were accounted for as capital leases. Under the terms of the
agreement, GE will invoice Pinnacle monthly for the rental expense.
8. INVESTMENTS IN AFFILIATED AND NONAFFILIATED COMPANIES
Investments at December 31, 2002 and 2001 consist of the following
December 31,
------------------------
2002 2001
---- ----
Thousands of Dollars
Short-term investments - marketable equity securities.. $125 $105
======== ========
Noncurrent investments:
Overfund Trust - TXU Corp. debt securities .......... $177,564 $258,733
Equity method investments in entities ............... 26,864 24,843
Investments in securities - at cost ................. 7,151 6,986
Other ............................................... 1,403 2,244
-------- --------
Total noncurrent investments ..................... $212,982 $292,806
======== ========
Marketable equity securities have been categorized as available for sale and, as
a result, are stated at fair value. Such securities are classified as either
current (short-term) or noncurrent assets on the balance sheet depending upon
the purpose for which they are held. Unrealized gains and losses are included as
a component of accumulated other comprehensive income until realized.
For the purpose of determining gross unrealized gains and losses, marketable
securities include the following at December 31, 2002 and 2001:
Realized Gain
Cost Fair Value Unrealized Gains (Loss)
-------------- --------------- ---------------- ---------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Thousands of Dollars
Other marketable equity securities
FB Telephone - (short-term)..... $11 $ 11 $125 $105 $114 $ 94 $ - $(14)
TXU Com - (noncurrent)........... $ - $768 $ - $939 $ - $171 $230 $ -
Upon the formation of Pinnacle in August 2000 as described in Note 3, the
Overfund Trust invested $336 million in TXU Corp. 6.0% fixed rate debt
securities due biannually through August 2004. The trust assets, including
principal and interest earned, are being used to pay interest on the senior
secured notes and the investment yield amounts to Zenith.
All investments in securities are held for noncurrent uses and are classified as
noncurrent assets on the balance sheet.
In May 2002, Pinnacle sold its investment in International Paper Company stock,
resulting in a realized gain of $0.2 million.
The following investments are accounted for using the equity method:
Percentage Owned
December 31,
----------------
2002 2001
---- ----
GTE Mobilnet of South Texas Limited Partnership...... 2.34% 2.34%
GTE Mobilnet of Texas RSA #17 Limited Partnership.... 17.02% 17.02%
Fort Bend Fibernet Partnership....................... 39.00% 39.00%
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2001, Pinnacle sold all of its 18% investment in ALLTEL
Communications Texas RSA#11B Limited Partnership, resulting in a gain of $6.2
million. During 2000, TXU Com sold all of its 18% investment in the GTE Mobilnet
of Texas RSA #11 Limited Partnership, resulting in a gain of $8.3 million.
The investments in securities accounted for using the cost method include the
following:
December 31,
------------------
2002 2001
---- ----
Thousands of Dollars
Rural Telephone Bank stock............. $5,921 $5,921
CoBank, ACB stock...................... 1,230 1,065
The CoBank stock represents purchases of CoBank stock as required by the CoBank
loan agreement and patronage distributions from CoBank in the form of stock. FB
Telephone will begin receiving annual refunds of a portion of this stock once
its stock balance reaches 11.5% of the five-year moving average of its CoBank
loan balance.
Pinnacle owns 5,921 shares of $1,000 par value Class C Rural Telephone Bank,
which is stated at original cost plus a gain recognized at conversion of Class B
to Class C stock.
9. MINORITY INTEREST
During 1990, Transport, in a joint venture with Eastex Celco ("ETC"), formed
ETFL. Transport and ETC own 63% and 37%, respectively, of the outstanding stock
of ETFL. Minority owners' interest in the losses of ETFL was $8.0 million in
2002 and $507 thousand in 2001, and minority owners' interest in income of ETFL
for the period from inception to December 31, 2000 was $65 thousand.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES
Following is a summary of transactions and balances with related parties:
December 31,
----------------------------------------
2002 2001 2000 *
---- ---- ------
Thousands of Dollars
Accounts receivable - TXU Corp ............................. $ 3,951 $ 5,821
Accounts receivable - Fort Bend Fibernet 39% Limited
Partnership ............................................ 44 -
Accounts payable - TXU Corp. ............................... (352) (4,484)
Long-term debt payable - TXU Corp. ......................... (144,066) (151,678)
Accrued interest - TXU Corp. ............................... (3,995) (149)
Investment in TXU Corp. debt securities .................... 177,564 258,733
Interest expense paid to TXU Corp. ......................... 5,059 8,501 $7,084
Billings from TXU Corp. for management fees ................ 3,331 5,594 1,594
Billings from TXU Corp. for services ....................... 2,427 1,885 266
* For period from date of inception (May 23, 2000) to December 31, 2000.
11. COMMITMENTS AND CONTINGENCIES
Pinnacle and its subsidiaries are subject to various claims and lawsuits,
including property damage claims, which arise from time to time in the normal
course of business. It is the opinion of management and counsel that the
disposition or ultimate determination of such claims and lawsuits will not have
a material effect on the financial position of Pinnacle, since Pinnacle has
insurance to cover such claims.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each of the material financial instruments for which it is practicable to
estimate the value:
Cash, Cash Equivalents, and Short-Term Investments - Cash, cash equivalents and
short-term investments are valued at their carrying amounts, which are
reasonable estimates of their fair value because of the short maturity of those
instruments.
Accounts Receivable/Payables - Due to their near-term maturities, the carrying
amounts of accounts receivable and accounts payable are considered equivalent to
fair value.
Long-Term Investments - The fair value of investments is estimated based on the
quoted market price for that investment. Other investments for which there are
no quoted market prices because the stocks are not publicly traded are carried
at cost since reasonable estimates of fair value could not be made without
incurring excessive costs.
Long-Term Debt - The fair value of Pinnacle's long-term debt, including current
maturities, is estimated based on the current rates offered to Pinnacle for debt
of the same remaining maturities.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and estimated fair values of Pinnacle's material financial
instruments are as follows:
Carrying Amount Fair Value
December 31, December 31,
--------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Thousands of Dollars
Long-term investments for which it is:
Practicable to estimate fair value...... $ - $ 1,044 $ - $ 1,044
Not practicable to estimate fair value.. 35,418 33,107 N/A N/A
Investments in TXU Corp. debt securities ..... 177,564 258,733 177,564 258,733
Long-term debt... ............................ 976,202 982,845 976,202 982,845
13. IMPAIRMENT AND RESTRUCTURING CHARGES
In December 2002, Pinnacle revised its business strategy to focus primarily on
its ILEC business and related activities. At that point Pinnacle made a decision
to hold its CLEC and Transport assets for sale. Pinnacle determined the value of
the assets held for sale based on third party sales negotiations and similiar
recent sales transactions and recorded an impairment charge of $90.9 million
($56.6 million after taxes and minority interest) in the fourth quarter of 2002.
In addition, Pinnacle recorded restructuring charges of $2.1 million.
Impairment Charges
- ------------------
CLEC Transport Total
---------------- ------------------ -----------------
Thousands of Dollars
Property, plant and equipment
Net book value ......................... $ 27,512 $ 70,831 $ 98,343
Estimated cost of sale ..................... 232 360 592
---------------- ------------------ -----------------
27,744 71,191 98,935
Less estimated fair market value ........... 947 7,083 8,030
---------------- ------------------ -----------------
Assets held for sale impairment charges .... $ 26,797 $ 64,108 $ 90,905
================ ================== =================
Restructuring Charges
- ---------------------
(thousands of dollars)
Employee separations .................. $ 736
Facility closure costs ................ 916
Other contractual commitments ......... 417
----------
Total.................................. $2,069
==========
Employee separation restructuring charges relate to 55 affected employees. It
is anticipated that the majority of employee separation costs will be paid by
the end of the second quarter 2003. At December 31, 2002, none of the
restructuring charges had been paid.
Earlier in 2002, Pinnacle recorded impairment charges of $8.4 million related to
certain CLEC information technology and collocation assets. The evaluation
occurred in conjunction with exiting certain unprofitable activities and
decommissioning non-strategic collacation sites. The information technology
assets were fully written-off and taken out of service. The collocation assets
were valued at fair market value based on third party pricing. This impairment
occurred prior to the decision to hold those assets for sale.
14. SUBSEQUENT EVENTS
Assets Held For Sale
In 2002, Pinnacle refocused its operations on the core ILEC operations. As a
result, Pinnacle began exploring alternatives for its CLEC and Transport
operations. On January 15, 2003, Pinnacle entered into an agreement to sell
substantially all of the assets related to its CLEC operations conducted by
Telecom and FB LD for a total purchase price of $1.2 million. Pinnacle completed
the sale of its CLEC operations on March 15, 2003. Pinnacle also anticipates
selling its Transport operations in the near term. As a result, the assets and
liabilities related to the operations held for sale have been presented
separately in the assets and liabilities sections of the consolidated balance
sheets. The assets held for sale consist of $8.0 million of property, plant and
equipment recorded at fair market value based on the estimated sales price. The
liabilities represent estimated costs to sell of $0.6 million and restructuring
charges of $2.1 million.
22
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.
By /s/ Biggs C. Porter
-----------------------------------
Name: Biggs C. Porter
Title: Controller and Principal
Accounting Officer
Date: March 28, 2003
23